Tax payable by persons not appearing in the ATL

Tax payable by persons not appearing in the ATL: Collection of tax, computation of income and tax payable of persons not appearing in the ATL Section 100 BA, the Tenth Schedule

Prior to the Finance Act, 2019, a concept of non-filer existed in the Ordinance whereby higher tax rates of withholding were prescribed for persons who were nonfilers. Such non-filers could claim adjustment of the higher tax collected at the time of fi ling of income tax returns. The aim was to compel the non-filers to file their returns of income.

However, it was observed that the non-filers, even though subjected to higher withholding rates, still had a propensity not to file their returns. This proved detrimental to the exercise of expansion or tax base. This was due to the absence of an explicit provision specifying a standard procedure for action against such persons.

Through the Finance Act, 2019, the concept of “Non-Filers” has been done away with and a new concept regarding persons not appearing in the active taxpayers’ list has been introduced.

This concept is a major paradigm shift from the erstwhile non-filer higher tax regime in that it not only penalizes those persons not appearing in the ATL but also introduces an effective mechanism for enforcing returns from such persons.

WhaT happens when Tax payable by persons not appearing in the ATL?

In this regard, a new section 100BA has been introduced which provides that collection or deduction of advance income tax, computation of income and tax payable thereon shall be determined in accordance with the rules in the newly introduced “The Tenth Schedule” which envisages the entire path to be adopted by the Inland Revenue Department to enforce returns from persons who make financial transactions yet choose not to file their returns of income.

The salient features of this scheme are as under:-

1. Whose names are not appearing in the ATL will be subjected to hundred percent increased rate of tax.
2. Where a withholding agent is of the opinion that hundred percent increased tax is not required to be collected on the basis that the person was not required to file return, the withholding agent shall furnish a notice to the Commissioner having jurisdiction over withholding agent setting out—
   1. the name, CNIC or NTN and address of the person not appearing in the ATL;
   2. the nature and amount of the transaction on which tax is required to be collected or deducted; and
   3. reason on the basis of which it is considered that the person was not required to file return or statement, as the case may be.

• The Commissioner shall accept or reject the contention on the basis of existing law within thirty days. In case the Commissioner fails to respond within thirty days, permission shall be deemed to be granted not to deduct tax at hundred percent increased rate. Withholding agent shall however be responsible for any inaccurate furnishing of such information and penal action may be undertaken against diligent withholding agents.

1. Where the person’s tax has been deducted or collected at hundred percent increased rate and the person fails to file return of income for the year for which tax was deducted, the Commissioner shall make a Provisional Assessment within sixty days of the due date for filing of return by imputing income so that tax on imputed income is equal to the hundred percent increased tax deducted or collected from such person and the imputed income shall be treated as concealed income. However, the imputable income so calculated or concealed income so determined shall not absolve the person so assessed, from requirement of filing of wealth statement under subsection (1) of section 116, the nature and source of amounts subject to deduction or collection of tax under section 111, selection of audit under section 177 or 214C or subsequent amendment of assessment as provided in rule 8 and all the provisions of the Ordinance shall apply.
2. The provisional assessment shall abate if the person files its return within forty five days of completion of provisional assessment. Where the return is not filed within forty five days of provisional assessment, it shall be treated as final assessment and the Commissioner shall initiate penalty proceedings for concealment of income.

This is illustrated through the following examples:-

Example 1.

Mr.A is not appearing in the active taxpayers’ list. Mr. A purchases a plot on 25.07.2019 having FBR value of Rs.12,500,000. Tax under section 236K was deducted at Rs.250,000 at the rate of 2% [the rate is 1% but 100% increased rate is prescribed under rule 1 of the Tenth Schedule] on FBR value of Rs.12,500,000. The due date for filing of return is 30.09.2020. However, Mr.A does not file return of income till the date of provisional assessment.

The Commissioner makes a provisional assessment on 20.11.2020 as under:-

Tax collected Rs.250,000

Imputable income for tax amount of Rs.250,000 as per paragraph (1) of Division I of the First Schedule Rs.2,400,000

Tax payable Rs.250,000

Tax paid Rs.250,000

Net tax payable on provisional assessment Nil

Mr.A does not file return of income for the tax year 2020 within 45 days i.e., by 04.01.2021 so the provisional assessment is finalized.

However, the imputed income of Rs.2,400,000 is less than the total amount of Rs.12,500,000 on which tax was deducted. As per rule 8 of Tenth Schedule Commissioner may amend an assessment order where the imputed income is less than the amount on which tax was deducted or collected under rule 1 or on the basis of definite information acquired from an audit or otherwise, therefore if the Commissioner is satisfied that any income chargeable to tax has escaped assessment or total income has been under-assessed, or assessed at too low a rate, or has been the subject of excessive relief or refund or any amount under a head of income has been misclassified then the Commissioner can amend the assessment under rule 8, after providing opportunity of being heard, in the following manner:-

Total unexplained investment to be added in income Rs.12,500,000

Tax payable Rs.3,495,000

Less paid Rs.250,000

Balance payable Rs.3,245, 000

The Commissioner may initiate penalty and prosecution proceedings under the Ordinance.

Example 2

Mr.A is not appearing in the active taxpayers’ fist. Mr. A purchases a plot on 25.07.2019 having FBR value of Rs.12,500,000. Tax under section 236K was deducted at Rs.250,000 at the rate of 2% [the rate is 1% but 100% increased rate is prescribed under rule 1 of the Tenth Schedule] on FBR value of Rs.12,500,000. The due date for filing of return is 30.09.2020. However, Mr.A does not file return of income till the date of provisional assessment.

The Commissioner makes a provisional assessment on 20.11.2020 as under:-

Tax collected Rs.250,000

Imputable income of tax of Rs.200,000 as per paragraph (1) of Division I of the First Schedule Rs.2,400,000

Tax payable Rs.250,000

Tax paid Rs.250,000

Net tax payable on provisional assessment Nil

After the provisional assessment, Mr.A files returns of income and wealth statements for the tax years 2018 & 2019 within 45 days i.e., by 04.01.2020 so the provisional assessment is abated and the return filed is treated as assessment under section 120(1) of the Ordinance.

If the source of investment in the wealth statement is explained, no further action for purchase of property shall be initiated. If it is not explained, the assessment shall be amended as explained in Example 1 above.

As per section 165, every person deducting or collecting tax is required to furnish to the Commissioner a biannual statement in the prescribed form giving the name, ON IC, NTN and address of the person from whom tax has been collected or deducted.

As hundred percent increased tax is to be deducted or collected from persons not appearing on the active taxpayers’ list, consequential amendment has been made in section 165 to provide that the information of tax deducted or collected under the Tenth Schedule shall also be provided along with tax deducted or collected under other provisions.

These explanations have been issued by FBR after the Finance Act 2019 approved / passed from the parliament of Pakistan.