Offshore digital services may be taxed 20%

ISLAMABAD:

The government may impose a 20% income tax on offshore digital services, introducing a 10-year prison sentence for sales tax fraud, and empowering junior Federal Board of Revenue (FBR) officers to arrest suspects without prior approval from higher authorities.

The government is also considering empowering FBR officers with the power to request placing individuals involved in tax fraud on the Exit Control List (ECL) during investigations, preventing them from fleeing the country.

Government sources reveal that further amendments to the Tax Laws Amendment Bill 2024 are being considered to increase penalties for tax fraud, non-filers, and ineligible individuals. Under the proposed changes, ineligible persons—who were previously barred from purchasing homes and cars—may also be prohibited from buying agricultural tractors, according to the latest proposals under review.

Finance Minister Muhammad Aurangzeb introduced the bill in the National Assembly last month, and it is awaiting the final vote. The National Assembly Standing Committee on Finance is set to discuss these amendments today (Tuesday).

Sources suggest that, pending approval from the Pakistan Peoples Party (PPP)—a key ally—the government may introduce new amendments to the Tax Laws Amendment Bill before it is passed by the National Assembly.

One of the key proposals is to double the income tax rate on fees for offshore digital services from 10% to 20%. The current tax rate is classified under "any other fee," but the government has proposed creating a new category called "fee for offshore digital services." This category would apply to services such as online advertising, website design and maintenance, digital content creation, email marketing, online computing, and e-commerce operations targeting Pakistani users.

Last month, the government introduced a bill to penalise those who evade taxes or pay less than the legally required amount. The bill proposes barring such individuals from making significant purchases. These restrictions would not apply to motorcycles, rickshaws, or other three-wheeled vehicles, motor vehicles with engine capacities up to 800 CC, electric vehicles with battery capacities up to 50 kWh, and investments in securities up to limits specified by the FBR.

Initially, the government proposed that ineligible persons could purchase agricultural tractors, but the latest amendments would exclude this exemption. If passed, ineligible persons would no longer be allowed to buy tractors, subject to approval by the National Assembly.

Settling old tax cases

Sources indicate that the government is also considering the formation of a Review Committee of experts to resolve longstanding tax cases pending in high courts across Pakistan.

"The Committee shall review all reference applications whether pending in High Courts before the commencement of this Act or which in the opinion of the Commissioner, required to be filed under this section and after examination shall make recommendations to the Commissioner in writing communicate its concurrence or otherwise on filing of new reference applications or withdrawal of the previously filed pending applications as the case may be", reads the proposal.

The committee's recommendations would be binding on the commissioner of the FBR.

New definition of tax fraud

The FBR may propose a new definition of "tax fraud" that includes a wide range of fraudulent actions, including understating or underpaying taxes, overstating tax credits or refunds, submitting false returns or documents, and withholding correct information.

Tax fraud could also involve manipulating the return filing system, making fictitious entries in sales tax returns, declaring supplies of goods or services not related to taxable activities, or making fraudulent payments.

The government has proposed that anyone who knowingly generates or files false purchases or sales—such as falsifying invoices or declaring transactions that do not reflect actual goods or services—could face imprisonment for up to 10 years, fines up to Rs10 million, or both, upon conviction by a Special Judge.

Expanded definition of abettors

The government has proposed a new definition of an "abettor," which refers to anyone who aids or conspires in tax fraud. Abettors would face the same penalties as perpetrators, including up to 10 years in prison and fines of up to Rs10 million.

Power to arrest

A key element of the proposed amendments is granting junior FBR officers the authority to arrest suspects in tax fraud cases without prior approval from the FBR commissioner, but with post-arrest checks and balances.

"Where an officer of Inland Revenue is of the opinion that a delay in arrest will enable the accused to evade the process of law or circumstances exist in which obtaining prior approval of the Commissioner is not practicable, he may arrest accused without prior approval of the Commissioner and immediately report the arrest of the accused to the Commissioner", reads the new proposal.

The commissioner may, however, order the release of the suspect if the arrest is found to be unwarranted or made with malicious intent. In such cases, the commissioner would initiate disciplinary action against the officer responsible.

Furthermore, the commissioner can request that an accused person be placed on the ECL during the investigation to prevent them from fleeing the country.