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Newsletter 26.10.11

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Huzaima Ikram News Letter

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									                                                                                              Huzaima & Ikram
Daily Tax News (DTN)                                                                           October 26, 2011



Daily Tax News (DTN) is a                          This issue contains:
special email service from
Tuesday to Friday, part of your                        •   TAX NEWS
subscription, aims at keeping you                          Sindh Sales Tax on Services Act:
informed about changes taking                              ICAP to organise workshop on November 1
place in tax laws in real time. It
also contains in-depth articles,                           Claims galore: What's wrong with ERS?
analyses and changes taking place                          Steps to reduce tax gap:
all over the world. On Saturday                            policy group actively analysing reports
evening we send Weekly Tax
Journal (WTJ) online which you                             FBR Member IR submits his tax return
can read till Monday at your                               along with Annex-D
convenience                                                SECP publishes guidebook for listing of companies
                                      • CASE LAW
For more information about
huzaimaikram.com publications           FOREIGN
and activities, please visit our        The Commissioner of Income Tax v.
website.                         www.imranghazi.com
                                        Naishadh V. Vachharajani
“This alert email service will be discontinued
by 31 December 2011 as we are posting the
same       material     on     our     website
www.huzaimaikram.com on daily, weekly and
monthly basis. Please regularly visit our
website and send us your invaluable
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                                                   Kind regards

                                                   Editorial Team
Disclaimer:
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not intended to be advice on any particular
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Tax News                                                    TN. 647

Sindh Sales Tax on Services Act: ICAP to organise
workshop on November 1
Institute of Chartered Accountant of Pakistan (ICAP) is going to
organise one-day workshop on “Sindh Sales Tax on Services Act,
2011” on November, 01 2011.
Nazar Hussain Mehar, Chairman, Sindh Revenue Board will be
the chief guest and Asif Kasbati, FCA, Director, A.F.Ferguson &
Co, Saud-ul-Hassan, Senior Manager, Ernst & Young Ford Rhodes
Sidat Hyder, Ghazanfar Siddiqui, Manager, Shekha & Mufti,
Mazhar Saleem Shah, Senior Manager, KPMG Taseer Hadi & Co,
Mumtaz Shaikh, Member (Legal), Sindh Revenue Board and Syed
Najmul Hussain, FCA, CPD Convenor, SRC will be the speakers at
the workshop.
Pursuant to the 7th NFC award and 18th Amendment in the
Constitution, the Government of Sindh decided to impose and
collect sales tax on services.
Accordingly, the Sindh Revenue Board [SRB] was established after
promulgation of Sindh Revenue Board Act, 2010.
On 06 June 2011, the Sindh Assembly unanimously passed the
Sindh Sales Tax on Service Act, 2011 (the Act) to levy, assess,
collect and generally administer sales tax on services provided,
rendered, initiated, received or consumed in the province of Sindh.
Besides bringing excisable services falling under the Federal
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Excise Act, 2005 into sales tax net, the newly enacted Act has also
taxed certain new services such as services of restaurants, hotels,
ship management, freight forwarders, property developers,
construction services and services in nature of contractual
execution of work.
This has brought to light various tax issues both in the minds of
existing as well as prospective taxpayers. – Courtesy Business
Recorder.


Claims galore: What's wrong with ERS?
Some of the Regional Tax Offices have expressed concern over the
sudden increase in the sales tax refund claims under the
Expeditious Refund System, reflecting that something is seriously
wrong with the system.
Sources told here on Tuesday that few Chief Commissioners have
apprehended misuse of the ERS and the system needs to be checked.
Tax Review                                                     2011




                            For more material visit www.imranghazi.com
TN. 648                                                     Tax News

One of the Chief Commissioners of Regional Tax Office had
informed the last Chief Commissioner Conference that around 50
percent of the refund payments have been made through the ERS.
It is interesting to note that no system alerts are available to RTO
to block suspected refunds under the ERS.
However, there is a major increase in sales tax refund claims
under the new system.
Beside, few Chief Commissioners of the RTOs, similar kind of
discrepancy in the ERS were pointed out by the then Chief
Commissioner Muhammad Raza Baqir Regional Tax Office,
Karachi.
He said that the sales tax refunds paid through the system have
shown a steep increase of 220 percent against export growth of 62
percent in some patches of 2010-11, showing abnormal trend in
payments.
In zero-rated sectors, refund is generally claimed on packing
material, few chemicals and stores.
Historically, refund on zero-rated/ export sale was around one
percent, whereas in the expeditious refund system there is no
benchmark.
There are also apprehensions of the inflated refunds as there is
substantial increase in the refund of ERS claimants, sources said.
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Chief Commissioner further pointed out that in the ERS
anomalous refund claimed are visible in the electronic system.
For example, some of the risky areas in the ERS showed that the
purchase/consumption of inputs after the date of export is not
checked.
The full input tax adjustment claimed against fixed assets/capital
goods instead of instalments as per the law.
The refund processed on invoices of insurance premium on
cars/theft/fire.
The relevance of tax invoices with the finished goods is not
checked.
Under the electronic system details of partially deferred amount
was not provided to RTO for further processing of refund claims.
Sources said that the recovery option is available with the refund
claimants instead the option should be system-oriented to make
the payment after deduction of arrears.
2011                                                      Tax Review




                             For more material visit www.imranghazi.com
Tax News                                                   TN. 649

The invoices of unconsumed stock/carry forward amount are not
subsequently checked, if suppliers are suspended later, ERS will
not stop the payment against such invoices.
Chief Commissioner has also pointed out that the negative List
generated is 2- 3 years old, needs to be updated to ensure the
payment of refund against actually deposited sales tax.
There is an immediate need for countrywide analysis for invoice
verification for which the RTOs can get developed computerised
input tax verification module.
These anomalies in the ERS need to be addressed by the Board on
top priority basis, sources added. – Courtesy Business Recorder.


Steps to reduce tax gap: policy group actively analysing
reports
The Tax Policy Group of the Tax Reform Co-ordination Group
(TRCG) is actively analysing the reports on the tax gap in
Pakistan with the mandate to suggest taxation measures to
considerably reduce the gap between the tax potential and actual
payment of taxes.
Sources told here on Tuesday that the Tax Policy Group would
study the Tax Gap reports and conduct analysis to bridge the gap.
The Group would also carry out analysis of the existing Tax Gap in
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the country.
The Group would also provide comments on the World Bank report
to make use of the analysis given in the report for increasing
revenue.
The Group would also develop long-term tax policies and budget
proposals to be finalised by March/April.
The vision of two taxes would be taken forward under the tax
policy proposals being submitted by the Group.
In this connection, Tax Policy Group of the Tax Reform Co-
ordination Group (TRCG) has decided to analyse the tax models of
Sri Lanka, Turkey, Brazil and Taiwan, etc, where tax-to-GDP ratio
has shown major jump for chalking out a long-term tax policy for
Pakistan for increasing revenue collection.
Sources said that the Chairman of Federal Board of Revenue
(FBR), Salman Siddique, had reportedly informed the National
Assembly and Senate Standing Committees on Finance that there
Tax Review                                                    2011




                            For more material visit www.imranghazi.com
TN. 650                                                    Tax News

is 79 percent gap (Rs 796 billion) between tax collections and
actual revenue potential, as highest gap of 70 percent had been
detected in withholding taxes.
A study conducted with the local and World Bank technical
support in 2008 showed that tax gap in Pakistan was 79 percent,
or Rs 796 billion, compared to 22 percent in US.
This was the gap between tax potential and actual payment of
taxes.
In USA, the tax gap is around 22 percent whereas in UK it is
around 9 percent.
On working out 79 percent tax gap in Pakistan, FBR Chairman
said that the report had applied some methodology for assessment
of the tax gap in the country.
If the authentic documented report identified 79 percent as the tax
gap, there was a need to identify the areas where the tax gap
exists.
Within the direct taxes, the tax gap is 74 percent which is much
larger as compared to indirect taxes.
The tax gap within the corporate sector is 70 percent and tax gap
within the individual category is about 4 percent.
According to sources, the Tax Policy Group would conduct an in-
                          tax administrations where tax-to-GDP
depth study on the bestwww.imranghazi.com
ratio has shown major jump during the last few years.
The purpose of the study is to analyse reasons behind such a major
increase in Tax-to-GDP ratios in these countries. – Courtesy
Business Recorder.


FBR Member IR submits his tax return along with Annex-D
Federal Board of Revenue Member Inland Revenue Shahid
Hussain Asad has submitted his income tax return form along
with Annex-D to give details of personal expenditure for Tax Year
2011.
It is learnt here on Tuesday that the FBR Member Inland Revenue
and Director General Intelligence and Investigation Inland
Revenue has also submitted the Annex-D (Details of Personal
Expenses for Individual) including personal and household
expenses.


2011                                                     Tax Review




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Tax News                                                     TN. 651

This disclosure of the details of expenditure by a senior Grade-21
official of the FBR is an example for all government officials to
honestly disclose the details of expenditure as required under the
Annex-D of the income tax return form.
It is also a requirement under the law to submit details of the
expenditure as per new income tax return form.
Shahid Hussain Asad has taken the initiative to submit complete
details of his personal expenditure with the return form, which has
also encouraged other senior officials of FBR to follow the same.
If the tax managers are ready to disclose their personal
expenditure, the other government officials have to follow the law
to submit this information as required under the law.
The persons who are liable to file returns in the private sector
have to follow the same procedure.
The income tax return-filers would have to provide details of
personal expenditure of residence electricity bills, residence
telephone/mobile/internet bills, residence gas bills, residence
rent/ground      rent/property      tax/fire    insurance/security
services/water bills, education of children/spouse/self, travelling
(foreign and local), motor vehicle in use (whether owned or not)
running and maintenance including lease rentals and insured,
Club membership fees/bills, total personal expenses and number of
family members/dependants, etc. – Courtesy Business Recorder.
                         www.imranghazi.com

SECP publishes guidebook for listing of companies
The Securities and Exchange Commission of Pakistan (SECP) has
published a guidebook titled “Guide for Listing of Companies
through Initial Public Offerings (IPOs)”. As a part of its
developmental efforts, SECP aims at facilitating the issuers and
their lead manager, consultants, advisors, book runners and the
underwriters to make their IPOs smoothly and efficiently.
The guidebook is a useful tool to understand the process of
approval of the SECP for issue, circulation and publication of
prospectus and listing of a company on a stock exchange. It
describes benefits of listing and the minimal requirements for
seeking approval for listing of a company. It refers to various
provisions of the applicable laws, rules and regulations and
contains a checklist of the disclosures of an equity prospectus, the
format of applications to obtain the SECP’s approval and a stock
exchange for issue of prospectus. – Courtesy Pakistan Today.
Tax Review                                                      2011




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Caselaw Section (Foreign)                                               CL. 1169
                        2011 PTR 1169 (H.C. Bom.)

                       HIGH COURT OF BOMBAY

               J.P. Devadhar and K.K. Tated, JJ.

             The Commissioner of Income Tax – 25, Mumbai
                                  v.
                     Naishadh V. Vachharajani


                                               _________________________
                                                                FACTS/HELD
     1.   Despite high volume & short holding period, shares gain
          is STCG
     2.   The assessee, a marine consultant, offered income by way of
          LTCG, STCG, speculative profit & profit from futures trading.
          The AO held that as the volume of transactions was high (222), the
          period of holding of the STCG shares was short (2 -5 Months) & there
          was speculation & F&O profit, the LTCG & STCG was assessable as
          business profit. On appeal, the CIT and Tribunal upheld the
          assessee’s claim on the basis that (a) As the LTCG shares were
          held for several years, the assessee acted as investor, (b) the
          STCG shares were assessable as such because (i) there was no
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          intra-day trading, (ii) most of the shares were held for a period of 2
          to 5 months, (iii) In the preceding AY, the AO did not assess the
          STCG as business income and on the principles of consistency, a
          different view cannot be taken on the same facts, (iv) the assessee has
          no borrowings and (v) merely because there was a speculative business
          does not mean that even delivery based transactions of shares
          should be assessed under the head business. On appeal by the
          department, HELD dismissing the appeal:
                  The Tribunal recorded the finding that in a number of
                  cases the assessee had held the LTCG shares for more
                  than 10 years and that the purchase and sale of shares
                  within a period of one year had been offered as
                  STCG. In the preceding AY, the AO accepted this. As
                  per Gopal Purohit 228 ITR 582 (Bom) (SLP dismissed) it
                  is open to an assessee to trade in the shares and also to
                  invest in shares. When shares are held as investment,
                  the income arising on sale of those shares is
Tax Review                                                                  2011




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CL. 1170                                            Caselaw Section (Foreign)

                 assessable as LTCG/STCG. Accordingly, the decision
                 of the Tribunal in holding that the income arising on sale
                 of shares held as investment were liable to be assessed as
                 LTCG/STCG cannot be faulted.
                                                         Appeal dismissed.
Income Tax Appeal (L) No. 1042 of 2011.
Decided on: 22nd September, 2011.
Present at hearing: Suresh Kumar, for Appellant.
                                                            JUDGMENT
P.C. :
    1. Whether the Income Tax Appellate Tribunal was justified in
holding that the income arising on transfer of shares were liable to be
assessed as short term capital gains / long term capital gains instead of
assessing the same as business income, is the question raised in this
appeal.
       2. The assessment year involved herein in AY 200607.
     3. The assessee is a marine consultant. He had carried on the
business of trading in shares and had also made investments in shares.
In the assessment year in question, the assessee had sold certain shares
held as investments and gains arising on account of sale of these shares
were offered as long term capital gains / short term capital gains, as the
case may be. The assessing officer held that the said income were liable to
be assessed under the head ‘business income’.
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     4. The Tribunal in para 6 and 7 of its judgment has recorded a
finding that in a number of cases the assessee had held the shares for
more than 10 years and wherever the assessee has purchased and sold
the shares within a period of one year, income arising therefrom have
been offered to tax as short term capital gains in the assessment year
200506 and the same have been assessed accordingly.
    5. This Court in the case of Commissioner of Income Tax vs. Gopal
Purohit reported in 228 ITR 582 (Bom) has held that it is open to an
assessee to trade in the shares and also to invest in shares and wherever,
the shares are held as investment, then the income arising on sale of
those shares are liable to be assessed as long term / short term capital
gains.
     6. In these circumstances, in the facts of the present case, the
decision of the Income Tax Appellate Tribunal in holding that the income
arising on sale of the shares held as investment were liable to be assessed
as long term capital gain/short term capital gain cannot be faulted. In the
result, the appeal is dismissed with no order as to costs.
                                 _______________

2011                                                             Tax Review




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