Issuance of Exemption Certificate

Issuance of Exemption Certificate

Issuance of Exemption Certificate: With the passage of time the issue of exemption certificate has been thrashed out at the level of Higher Courts of Pakistan. The whole issue took a new dimension when exemption certificate was fortified with the induction of Lower Rate Certificate.

There are different advance tax sections in Income Tax Ordinance, 2001, which does not directly provide for any kind of exemption from their operation nor there any exemption from such provisions in Second Schedule of Income Tax Ordinance, 2001.

One of such examples is Section 235, 235B and other such Advance Transitional Sections but by the induction of word Lower Rate Certificate the Honourable Lahore High Court while interpreting Section 235 of Income Tax Ordinance, 2001 took another dynamic approach and held that while this section, section 235 can be struck down being ultra viries to the constitution but there could be another option and proceeded to decide the case and held in para 46, 47 and of judgment 2010 PTD 2502.

“46.​ ​Under​ ​section​ ​159(1)​ ​of​ ​the​ ​Ordinance​ ​(See​ ​Schedule-B)​ ​the​ ​Commissioner​ ​upon​ ​application​ ​in​ ​writing​ ​by​ ​the​ ​taxpayer​ ​can​ ​issue​ ​a​ ​lower​ ​rate​ ​certificate.​ ​The​ ​lower​ ​rate​ ​certificate​ ​in​ ​theory​ ​can​ ​also​ ​be​ ​a​ ​0%​ ​rate​ ​certificate​ ​or​ ​a​ ​nil​ ​rate​ ​certificate.​ ​Rule​ ​40​ ​of​ ​the​ ​Income​ ​Tax​ ​Rules​ ​2001,​ ​provides​ ​as​ ​under:-


Exemption​ ​or​ ​lower​ ​rate​ ​certificate​ ​under​ ​section​ ​159.—​ ​(1)​ ​An​ ​application​ ​for​ ​a​ ​certificate​ ​under​ ​subsection​ ​159​ ​shall​ ​be​ ​made​ ​in​ ​the​ ​form​ ​specified​ ​in​ ​Part-VII​ ​of​ ​the​ ​First​ ​Schedule​ ​to​ ​these​ ​rules.

(2)​ ​A​ ​certificate​ ​issued​ ​by​ ​Commissioner​ ​under​ ​subsection​ ​(1)​ ​of​ ​section​ ​159​ ​shall​ ​be​ ​in​ ​the​ ​form​ ​specified​ ​in​ ​Part​ ​VIII​ ​of​ ​the​ ​First​ ​Schedule​ ​to​ ​these​ ​rules.

The​ ​form​ ​of​ ​application​ ​to​ ​be​ ​made​ ​to​ ​the​ ​Commissioner​ ​under​ ​section​ ​159(1)​ ​of​ ​the​ ​Ordinance​ ​is​ ​specified​ ​in​ ​Part-VII​ ​of​ ​the​ ​Schedule​ ​of​ ​the​ ​Rules​ ​in​ ​the​ ​following​ ​manner:


Application​ ​for​ ​Certificate​ ​of​ ​Exemption​ ​from​ ​deduction​ ​of​ ​tax​ ​or​ ​deduction​ ​at​ ​a​ ​lower​ ​rate​ ​under​ ​section​ ​159.​ ​(1)​ ​An​ ​application​ ​for​ ​a​ ​certificate​ ​under​ ​the​ ​section​ ​159​ ​shall​ ​be​ ​made​ ​in​ ​the​ ​following​ ​form,​ ​namely​ ​​ ​APPLICATION​ ​FOR​ ​CERTIFICATE​ ​UNDER​ ​SECTION​ ​159​ ​OF​ ​THE​ ​INCOME​ ​TAX​ ​ORDINANCE,​ ​2001

The​ ​Commissioner,​ ​​ ​I________​ ​of​ ​_________​ ​hereby​ ​declare​ ​that​ ​I​ ​am​ ​entitled​ ​to​ ​nil/reduce​ ​rate​ ​withholding​ ​tax​ ​certificate,​ ​on​ ​the​ ​following​ ​basis,​ ​in​ ​accordance​ ​with​ ​the​ ​provisions​ ​of​ ​the​ ​Income​ ​Tax​ ​Ordinance,​ ​2001​ ​for​ ​the​ ​tax​ ​year

(i)​ ​was​ ​less​ ​than​ ​the​ ​minimum​ ​liable​ ​to​ ​tax;​ ​​ ​(i)​ ​​ ​amounted​ ​to​ ​Rs.______​ ​on​ ​which​ ​tax​ ​is​ ​chargeable​ ​at​ ​the​ ​rate​ ​of

(ii)​ ​is​ ​under​ ​the​ ​Agreement​ ​for​ ​Avoidance​ ​of​ ​Double​ ​Taxation​ ​signed​ ​by​ ​the​ ​Government​ ​of​ ​Pakistan​ ​with​ ​the​ ​Government​ ​of​ ​the​ ​country​ ​of​ ​my​ ​residence,​ ​not​ ​liable​ ​to​ ​Pakistan​ ​tax/chargeable​ ​to​ ​Pakistan​ ​at​ ​the​ ​rate​ ​of_____

(iii)​ ​was​ ​held​ ​exempt​ ​under​ ​clause_____​ ​of​ ​the​ ​Second​ ​Schedule​ ​or​ ​is​ ​exempt​ ​under​ ​clause​ ​_____​ ​of​ ​the​ ​Second​ ​Schedule.

(iv)​ ​That​ ​income​ ​is​ ​not​ ​likely​ ​to​ ​be​ ​chargeable​ ​to​ ​tax​ ​in​ ​view​ ​of​ ​tax​ ​credits​ ​or​ ​unabsorbed​ ​losses,​ ​or

(v)​ ​Or,​ ​in​ ​any​ ​case,​ ​since​ ​advance​ ​tax​ ​under​ ​section​ ​147​ ​has​ ​been​ ​duly​ ​paid​ ​already,​ ​or​ ​​ ​(vi)​ ​The​ ​goods​ ​imported​ ​are​ ​for​ ​manufacturing​ ​purposes​ ​at​ ​own​ ​factory/mills/unit.

(vii)​ ​For​ ​any​ ​other​ ​reasons​ ​(to​ ​be​ ​specified).

I,​ ​therefore,​ ​request​ ​that​ ​certificate​ ​may​ ​be​ ​issued​ ​to​ ​the​ ​person​ ​responsible​ ​for​ ​paying​ ​profit​ ​on​ ​securities/dividends/royalties/other​ ​amounts​ ​particulars​ ​of​ ​which​ ​are​ ​given​ ​in​ ​the​ ​Schedule​ ​annexed​ ​thereto,​ ​or​ ​to​ ​a​ ​person​ ​responsible​ ​for​ ​collecting​ ​tax​ ​at​ ​source,​ ​authorizing​ ​him​ ​not​ ​to​ ​deduct​ ​tax​ ​at​ ​the​ ​rate​ ​of​ ​________​ ​at​ ​the​ ​time​ ​of​ ​payment​ ​of​ ​such​ ​amount​ ​or​ ​to​ ​exempt​ ​from​ ​withholding​ ​tax​ ​at​ ​source.​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​Signature​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​Name​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​Nationality​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​Address​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​Date

47.​ ​The​ ​said​ ​application​ ​clearly​ ​shows​ ​that​ ​nil​ ​tax​ ​certificate​ ​can​ ​be​ ​issued​ ​for​ ​the​ ​taxpayer,​ ​in​ ​case​ ​where​ ​advance​ ​tax​ ​under​ ​section​ ​147​ ​had​ ​already​ ​been​ ​paid.​ ​Once​ ​the​ ​nil​ ​tax​ ​certificate​ ​is​ ​issued​ ​under​ ​section​ ​235,​ ​the​ ​chargeability​ ​of​ ​section​ ​remains​ ​intact​ ​but​ ​the​ ​rate​ ​of​ ​tax​ ​is​ ​reduced​ ​resulting​ ​in​ ​reading​ ​down​ ​section​ ​235​ ​and​ ​making​ ​it​ ​ineffective​ ​when​ ​the​ ​advance​ ​tax​ ​has​ ​been​ ​fully​ ​paid.​ ​Nil​ ​rate​ ​tax​ ​certificate​ ​does​ ​not​ ​offend​ ​section​ ​235(3)​ ​of​ ​the​ ​Ordinance​ ​and​ ​can​ ​easily​ ​co-exist​ ​with​ ​the​ ​same.​ ​This​ ​reconciles​ ​both​ ​the​ ​provisions​ ​and​ ​there​ ​is​ ​no​ ​need​ ​to​ ​declare​ ​section​ ​235​ ​unconstitutional. 

In another judgment which is latest on the topic the Honorable Lahore High Court, Lahore deprecated another tendency of the department. It has been long drawn view of the department that exemption certificate has to be claimed in every case by the taxpayer, even for such concessions as given by Income Tax Ordinance, 2001 through Second Schedule or different SRO’s but Honourable LHC has held that a formal exemption certificate is not required where exemption has been provided through an SRO or exemption Clause. This issue has been resolved in Writ petition no. 122177 of 2017.

In another judgment in 2014 PTD 1939, the concept of advance tax and unjust enrichment was explained at para 14 of the judgment in following words.

“14. Without prejudice to the above, impugned recovery made from a payee or the deductor-assessee, in spite of the advance tax having been paid, without deducting allowable tax credit, in a particular quarter, amounts to depriving the taxpayer (payee) or the deductor (withholding agent) of their property for a year without any plausible justification. This deprivation results in unjustly enriching and benefiting the department. Unjust enrichment is retention of a benefit by a person that is unjust or inequitable. The Supreme Court of Canada has recently taken the opportunity of reviewing the law regarding unjust enrichment in Garland v. Consumers’ Gas Co6. 2004 SC 25, wherein Iacobucci J held: “As a general matter, the test for unjust enrichment is well established in Canada. The cause of action has three elements: (1) an enrichment of the defendant; (2) a corresponding deprivation of the plaintiff; and (3) an absence of juristic reason for the enrichment …” Thus, for recovery to lie, something must have been given, whether goods, services or money. The thing which is given must have been received and retained by the defendant, and the retention must be without juristic justification7. One of the more prominent statements of the principle of unjust enrichment includes the early and oft-repeated dictum of Lord Mansfield in Moses v. Macferlan8 : “the gist of this kind of action is, that the defendant, upon the circumstances of the case, is obliged by the ties of natural justice and equity to refund the money9.” Another is that of Lord Wright in Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd10: “… any civilized system of law is bound to provide remedies for cases of what has been called unjust enrichment or unjust benefit, that is to prevent a man from retaining the money of or some benefit derived from another which it is against conscience that he should keep11.” The American Restatement of the Law of Restitution: Quasi Contracts and Constructive Trusts, 1937, states the principle of unjust enrichment in the following simple terms: “A person who has been unjustly enriched at the expense of another is required to make restitution to the other.” And, one of the leading Commonwealth texts on restitution elaborates on the notion as follows: “[The principle of unjust enrichment] presupposes three things. First, the defendant must have been enriched by the receipt of a benefit. Secondly, that benefit must have been gained at the plaintiff’s expense. Thirdly, it would be unjust to allow the defendant to retain that benefit…12” “Unjust enrichment occurs when a person retains money or benefits which in justice, equity and good conscience, belong to someone else…The doctrine of unjust enrichment, therefore, is that no person can be allowed to enrich inequitably at the expense of another. A right of recovery under the doctrine of “unjust enrichment” arises where retention of a benefit is considered contrary to justice or against equity.13 Reliance with advantage is also placed on Messrs Pfizer Laboratories Limited v. Federation of Pakistan and others (PLD 1998 SC 64). Unjust enrichment is, inter alia, anchored in our fundamental premabular constitutional value of economic justice. Our constitution abhors any form of economic exploitation. In this case, the prime tax regulator is trying to recover an amount of tax which has already been paid (and there is no reason to suspect the same). In any case if there is shortfall at the end of the year, it can be recovered with a heavy default surcharge from the payee/deductee. FBR has given no plausible or legal justification for suspecting that the amount of advance tax, paid by the payee, is in any way short or insufficient because the enhancement or reduction of advance tax at the end of the tax year has no co-relation with the amount of advance tax paid in a quarter. The impugned notice for recovery promotes unjust enrichment and offends the constitutional principle of economic justice. For reference, reliance is placed on Ikram Bari and 524 others v. National Bank of Pakistan through President and another (2005 SCMR 100) and Pakistan Tobacco Company Ltd. and another v. Federation of Pakistan through Secretary, Ministry of Commerce, Islamabad and 3 others (1999 SCMR 382).”

Bare reading of the above observations of Honorable Lahore High Court, Lahore makes it clear that where advance tax have been paid by f the recipient, no further tax liability u/s 161 can be imposed on such taxpayer for non deduction of tax. However default surcharge can be recovered.

Another aspect of the proceedings u/s 161 of Income Tax Ordinance, 2001 is regarding limitation for invocation of such proceedings, whereas the income tax department is of the view that there is no limitation. The Honourable Lahore High Court held that the notice u/s 161 can be issued within such time where a taxpayer is bound to maintain its books of accounts in its judgment.

As the practice the department is levying penalties for non filing of statements u/s 165, 149 of Income Tax Ordinance, 2001, regarding withholding taxes. The Honorable Lahore High Court, Lahore has also held in such cases that only such penalties are maintainable where there is a wilful default not otherwise. Reference is made to Honorable Lahore High Court, Lahore judgment 2017 PTD 2050.

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