Non-residents exposed to taxes

Scores of non-resident Pakistanis accidentally become residents due to travel curbs

ISLAMABAD:

Scores of non-resident persons, who got stuck in Pakistan due to suspension of air travel in the aftermath of Covid-19, have accidentally become resident Pakistanis for tax purposes, exposing them to taxes on their world income.

Under the Income Tax Ordinance 2001, a person will be treated as a resident Pakistani, if he stays in Pakistan for 120 days or more in a tax year.

In June last year, an amendment had been introduced in the income tax law by former Federal Board of Revenue (FBR) chairman Shabbar Zaidi to reduce the stay period for individuals from 182 days to 119 days aimed at expanding the web for offshore assets.

Sources said that many Pakistanis, who were working in the Middle East and Europe, were affected by the legal change. They got stuck in Pakistan for months due to suspension and restrictions imposed by various countries on air travel to contain the deadly pandemic.

Sources said Special Assistant to Prime Minister on Overseas Pakistanis Syed Zulfiqar Ali Bokhari had also taken up the issue with the FBR.

A non-resident Pakistani is exempt from payment of taxes, which a resident Pakistani is obliged to pay, except on the income that is sourced in Pakistan. A resident Pakistani will have to pay taxes on his global income, provided there is no avoidance of double taxation treaty with the other country.

The income tax law authorises the board to condone the time limit in emergency and unseen situations like Covid-19, said Dr Ikramul Haq, a leading tax expert.

Haq said that under Section 214-A, the FBR could condone the cases of those who were non-resident Pakistanis for tax purposes but got stuck.

Prior to the Finance Act 2019, an individual was treated as a “resident individual” for a tax year if the person was present in Pakistan for a period of 183 days (over six months) or more in a tax year.

Not only that, Section 82 (ab), inserted into the Income Tax Ordinance in 2019, has made the matter more complicated for non-resident Pakistanis.

“An individual shall be a resident individual for a tax year if the individual is present in Pakistan for a period of, or periods amounting in aggregate to, one hundred and twenty days or more in the tax year and, in the four years preceding the tax year, has been in Pakistan for a period of, or periods amounting in aggregate to, three hundred and sixty five days or more.”

Instead of giving effect to these legal changes from 2023, the FBR has made the changes about preceding four years effective from tax year 2016, which according to some experts is against the spirit of the constitution that discourages taxation retrospectively.

The FBR could not invoke the condition of 365 days, if a person stayed in Pakistan for 119 days, said Haq.

He said that Section 82 (ab) should be read simultaneously and condition of staying in Pakistan for 365 days in the past four years would only be applicable, if a person stayed in Pakistan for more than 120 days in tax year 2020.

Some tax experts argue that only procedural changes could be made effective from the past while others say that certain taxation-related changes can be made from the past, if it is stated explicitly.

However, Section 82 (ab) does not explicitly state tax year 2016 and is vague, according to FBR officials.

Tax returns

The FBR has also failed to bring all 6.5 million Pakistanis who have valid National Tax Numbers (NTNs) in the tax net in tax year 2020. But the tax machinery on Wednesday defended its poor performance.

“A total of nearly 1.8 million returns have been filed together with an amount of about Rs22 billion. Last year at this time, 1.73 million returns were filed while about Rs13.5 billion was deposited as income tax. Comparatively, the returns are higher by 4% and the tax deposited is higher by 63%,” according to a statement issued by the FBR.

The government had decided not to extend the final deadline of December 8, 2020 with a view to restoring the credibility and predictability of the final date, and to promote tax discipline, it added.

However, in tax year 2019, the FBR had received a total of 2.975 million income tax returns. There was a reduction of 40% or 1.18 million in the number of return filers, which should be a matter of concern for Prime Minister Imran Khan.

Before coming to power, PM Imran had a strong belief that an “honest leadership” could convince people to pay taxes and become a tax-compliant nation. However, his government struggled to motivate the people to adopt tax culture.

He had promised to double the tax collection to Rs8 trillion, which seems impossible by looking at the numbers of the first two years in power.

The FBR said that at least 300,000 taxpayers had sought extension in the date for filing returns, thus taking the number of potential returns to 2.1 million. But the 2.1 million return filers will still be 870,000 or 29% less than the tax year 2019. There are 6.5 million people who hold NTN and the FBR failed to bring them to the tax net despite making tall claims and running advertisements.

Published in The Express Tribune, December 10^th, 2020.

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