INTERVIEW WITH TARIQ HUSSAIN, DIRECTOR INSURANCE, SECP.
PAGE: COULD YOU PLEASE TELL US SOMETHING ABOUT YOURSELF?
TARIQ HUSSAIN: Currently, I am working at the Securities and Exchange Commission of Pakistan as Director Insurance. Prior to that I have held senior positions i.e Director Finance at SITE Ltd, Group C.F.O at Manhill Group and Head of Internal Audit at Pakistan Defence Housing Authority. I am an active member at the Institute of Cost and Management Accountants of Pakistan and Institute of Corporate Secretaries and have been an office bearer of various Committees. I have done my masters in commerce and MA in Economics. I have also earned a degree of MBA in finance. I pursued my studies in cost and management accountancy and am currently an FCMA as well as FCIS.
PAGE: THE DOUBLE TAXATION OF DIVIDENDS APPLIES ONLY TO DIVIDENDS PAID BY CORPORATIONS TO INDIVIDUALS. PLEASE COMMENT ON THE DOUBLE (AND MULTIPLE) TAXATION OF DIVIDENDS PAID BY ONE FIRM TO ANOTHER - INTER-CORPORATE DIVIDENDS.
TARIQ HUSSAIN: When the company pays dividend in the first instance tax should be deducted from the net profit of the company and the dividend declared from the after tax profit, so the amount earned by the company taxed in the hand of the company with the applicable corporate tax rate i.e. may vary depending upon the size and the sector of which the company relates. Similarly, when the individual receives dividend against pay tax @ 10 per cent under the final tax regime and create double taxation impact the shareholder of the company as they are paying tax twice of the same income.
On the other hand, when the corporate dividend is received by another entity it will have to pay 5 per cent dividend, but the advantage of the inter corporate dividend is that the tax amount may be adjusted against the carry forward losses and this sort of dividend does not fall under the ambit of Final Tax regime (FTR), hence the double taxation impact is nullified due to the adjustment of tax. This mechanism encourages the cooperate for inter-corporate investments and that will ultimately create a healthy and positive impact on the economy
PAGE: WHAT ARE YOUR COMMENTS ON THE ESTABLISHMENT OF THE PAKISTAN REVENUE AUTOMATION LIMITED (PRAL)?
TARIQ HUSSAIN: Federal Board of Revenue (FBR) is introducing a new auto-clearance system under e-customs wherein paperless filing of goods declaration (GD) for imported containerized goods has started functioning. The software of the new auto-clearance system had been prepared by Pakistan Revenue Automation Ltd (PRAL) and is going to replace the existing system whose intellectual property rights (IPR) belong to a foreign company. The new software introduced in the recent past at Pakistan Automation Computerised Clearance System (PaCCs), will deal with clearance of all containerised imports. The system will take on loop all the three container terminals o Pakistan International Container Terminal (PICT), Karachi International Container Terminal (KICT) and Qasim International Container Terminal (QICT) for auto-clearance of boxes.
However, it is being apprehended that the system, being introduced without test run and in haste, may create problems for trade and industry. The system and the concept is good but the PRAL should ensure that it will clear containers at a faster pace so that the space problem and congestion at the port be avoided so that the cost of export may remain at lower level. The FBR has notified the staff for the e-customs and their strength has been almost reduced by 50 per cent from the present number. It will be headed by a collector with two additional collectors and ten deputy and assistant collectors. There will be seven principal appraisers, 21 appraising officers and 20 examining officers. We hope that the technology driven approach using by the FBR, if the system will run with the intention to the service for the Nation would be a great help for the exporters etc.
PAGE: WHAT ARE YOUR VIEWS ABOUT INTER-CORPORATE DIVIDEND REBATE:
TARIQ HUSSAIN: Under the Simplified Imputation System, a company that receives dividend is treated in a very similar manner to an individual receiving a franked distribution. Sub- section 19 of section 2 of the Income Ordinance defines the Dividends Section 5 of the Income tax ordinance 2001 i.e. Tax on dividends - (1) Subject to this Ordinance, a tax shall be imposed, at the rate specified in Division III of Part I of the First Schedule, on every person who receives a dividend from a company or treated as dividend under clause (19) of section 2 (2) The tax imposed under sub-section (1) on a person who receives a dividend shall be computed by applying the relevant rate of tax to the gross amount of the dividend. (3) This section shall not apply to a dividend that is exempt from tax under this Ordinance.
Section 8 of the Income tax Ordinance 2001 defines the general provisions relating to taxes imposed under sections 5, 6 and 7. Subject to this Ordinance, the tax imposed under Sections 5, 6 and 7 shall be a final tax on the amount in respect of which the tax is imposed and - (a) such amount shall not be chargeable to tax under any head of income in computing the taxable income of the person who derives it for any tax year; (b) no deduction shall be allowable under this Ordinance for any expenditure incurred in deriving the amount; (c) the amount shall not be reduced by - (i) any deductible allowance; or (ii) the set off of any loss;
(d) the tax payable by a person under sections 5, 6 or 7 shall not be reduced by any tax credits allowed under this Ordinance; and (e) the liability of a person under sections 5, 6 or 7 shall be discharged to the extent that - (i) in the case of shipping and air transport income, the tax has been paid in accordance with section 143 or 144, as the case may be; or (ii) in any other case, the tax payable has been deducted at source under Division III of Part V of Chapter X [Provided that the provision of this section shall not apply to dividend received by a company. So it is clear from the above interpretation of the law that the corporate has the benefit not only to pay the low tax i.e. 5 per cent but also does not fall under FTR and can be adjusted against the carry forward loss if any.
PAGE: DO YOU THINK RETURNS SHOULD BE FILED VIA THE NATIONAL TAXATION NUMBER (NTN) AGAINST AMOUNT DEPOSITED IN THE BANK ACCOUNT?
TARIQ HUSSAIN: I donit think that we need to mention NTN in the deposit slip as it will achieve nothing more than the confusion and anomaly for the account holder and banks as well, because all amount deposited into the bank account may not be revenue or receipt from salary etc and may be coming from other sources like transfer from one account to another to maintain the funds requirements in the account or money collected against loan or even savings by the account holder.
PAGE: IN PAKISTAN, A REDUCED RATE OF 20 PER CENT FOR CORPORATE TAXATION WAS INTRODUCED FOR SMALL COMPANIES. DO YOU THINK THE DIFFERENTIAL OF 15 PER CENT VIS-A-VIS GENERAL CORPORATE RATE DISCOURAGED CORPORATISATION AND EXPANSION OF COMPANIES? SHOULD DIFFERENTIAL IN CORPORATE TAX BE REDUCED WITH IMMEDIATE EFFECT?
TARIQ HUSSAIN: The World Bank "Pakistan Tax Policy Report" jointly prepared by Federal Board of Revenue and the Andrew Young School of Public Policy, Georgia State University has analysed the cost of reduction in corporate income tax rates and how this could be offset and proposed different slabs on the basis of turnover bases. Tax Policy Report states that general directions for reforms should be to broaden the tax base, mainly by rationalising tax incentives and exemptions and lowering the statutory tax rate. Many countries have been able to increase or maintain tax revenues in recent years through general reforms strategy of reducing corporate income tax rates and broaden the tax bases. In particular, old small companies, with turnover of less than Rs250 million that existed already prior to the introduction of the small company concept in the country in year 2005, could formally be reconstituted.
PAGE: ENTITIES THAT PROVIDE DOCUMENTATION OF THEIR TRANSACTIONS OR DEAL ONLY WITH ORGANISED SUPPLIERS AND CUSTOMERS SHOULD BE GIVEN FIVE PER CENT REBATE IN INCOME TAX AMONG OTHER INCENTIVES TO ENCOURAGE WIDER ADOPTION OF THIS GOOD PRACTICE. DO YOU THINK DOCUMENTATION SHOULD BE MADE MANDATORY FOR ALL SECTORS?
TARIQ HUSSAIN: The FBR should have a long term strategy and should encourage documentation and the documented economy should be given some preferable treatments. Section 65 A and C of the Income Tax Ordinance 2001 already has a provision for the incentive for those who fall under the documented regime Section 65 A of the Income Tax Ordinance provide the following 65A. Tax credit to a person registered under the Sales Tax Act, 1990. o (1)
Every manufacturer, registered under the Sales Tax Act, 1990, shall be entitled to a tax credit of two and a half per cent of tax payable for a tax year, if ninety per cent of his sales are to the person who is registered under the aforesaid Act during the said tax year. (2) For claiming of the credit, the person shall provide complete details of the persons to whom the sales were made. (3) No credit will be allowed to a person whose income is covered under final tax or minimum tax.
(4) Carry forward of any amount where full credit may not be allowed against the tax liability for the tax year, shall not be allowed.
65C. Tax credit for enlistment. - (1) Where a taxpayer being a company opts for enlistment in any registered stock exchange in Pakistan, a tax credit equal to five per cent of the tax payable shall be allowed for the tax year in which the said company is enlisted. The investment opportunities are there and need to be publicized in a manner that will be known by every one.
PAGE: PAKISTAN HAS ONE OF THE HIGHEST RATES OF CORPORATE TAX IN THE REGION. THIS DISCOURAGES INVESTORS FROM COMING IN THE COUNTRY AS REGIONAL COMPETITORS NOT ONLY OFFER LOWER RATES BUT ALSO BETTER SECURITY AND INFRASTRUCTURE FACILITIES. DO YOU THINK THAT THE CORPORATE TAX RATE BE GRADUALLY REDUCED FROM 35 TO 28 PER CENT OVER THE PERIOD OF TIME TO MAKE IT COMPATIBLE WITH OTHER COUNTRIES IN THE REGION (AVERAGE IS BELOW 30 PER CENT)? REBATES AND TAX CREDITS ARE PROVIDED TO ENCOURAGE REINVESTMENT OF CAPITAL IN THE BUSINESS. YOUR VIEWS.
TARIQ HUSSAIN: As we have already discussed, only the reduction of tax rate does not inspire the foreign investor to invest because so many measures have already taken by the government to boost the economy like initial year and first year depreciation will create great impact on investments and there is almost no effect due to reduction in tax rates. But another most important factor ignored deliberately or otherwise was to create ample and equal opportunities for all investors, take appropriate measures against smuggling, improve documentation of economy to tap new avenues like tax on agriculture, retailers, real estate, doctors and to improve law and order situation etc.
PAGE: UPFRONT DUTIES AND TAXES ON THE IMPORT OF PLANT EQUIPMENT AND MACHINERY, SPARES AND RAW MATERIALS NOT LOCALLY AVAILABLE HAMPER INDUSTRIAL GROWTH BY LIMITING THE AMOUNT OF FOREIGN DIRECT INVESTMENT AND SUPPRESSING THE EXPORT POTENTIAL OF INDUSTRIES BY RAISING COSTS. YOUR VIEWS:
TARIQ HUSSAIN: The government has already been giving the incentives for import of the plant and machinery and in most of the cases the custom duty is very minimal or zero. The other factor affecting the export is that the research and development is very rare in the companies which help in effective cost cutting measures and also internal and external processes need to be improved to reduce the percentage of wastage during manufacturing process. It is necessary to find alternative opportunities of energy, improve the law and order situation and image building of the nation as whole, adopt new business dynamics and new business model will not only improve the net wealth of the existing business but also attract the foreign investments. Similarly untaxed areas should be brought into the tax net like agriculture tax is the tax of the day, tax on real estates enterprises, broaden the tax net of retailers, smuggling and parallel economy to be minimised and promote the formal and documented economy.
PAGE: WHAT ARE YOUR VIEWS ABOUT BROADENING THE TAX BASE, IMPROVING TAX COLLECTION AND ENHANCING THE INVESTMENT ENVIRONMENT?
TARIQ HUSSAIN: Here, I would like to add that the income tax officers should be honest with the nation. Professionals should be hired on market-based remuneration to eliminate the element of corruption. By eliminating corruption, we can achieve tax-base by more than 500 per cent. Tax should be based on the principles of ability to pay. Everyone who has a source of income should contribute towards the economy and no sector should be exempted like agriculture, real estate etc. Documentation of economy is compulsory. There should be a mechanism in place to reinforce border security to prevent leakages such as smugglings, tax and duties on the smuggled item may be reduced to negligible percentage so that the smuggling becomes worth less.
No one should be allowed to hold public offices unless he has paid appropriate taxes. Common database should be created in the banking sector. And all bank accounts held in various banks by individuals should be treated as single bank account and the CNIC number should be the account number. An individual who has accounts in other banks should be treated as sub account with reference to the particular CNIC. Competition among the auditors may be brought in by compulsory rotation of auditors after specific period and by allowing other professions to conduct audit like CMAs along with the CAs after having certain minimum experience. All professions should be brought under the tax net including health professionals.