RSM Pakistan

Brief Overview - Voluntary Taxpayers Compliance Scheme (VTCS)

BACKGROUND

Pakistan has constantly faced the problem of revenue collection due to problems in bringing its citizens under the tax net. The largest untapped sector consist of traders who historically have never declared their income and paid the tax due thereon. Trader bodies attributed this gap mainly to the high level of complexity of income tax return system and the intricacies of the tax laws.

In order to document and trace the activity of an individual trader, the government recently instituted a measure for this purpose of charging tax on banking transactions at the rate of 0.6 percent of the amount of transaction. This measure significantly impacted the largest sector, the trading sector which has numerous banking transactions on a daily basis thereby creating resentment and dissatisfaction in the business community and consequently they went on a strike demanding the withdrawal of such tax on banking transactions. Due to the high pressure exerted by the business lobby, the government reduced the rate from 0.6 percent to 0.3 percent and further, when the protest continued, the Government had to suspend the application of this tax until consensus with traders community was reached which translated into providing a onetime opportunity to traders who were persistent non-filers or underreporting their income to whiten their undeclared business assets by paying a nominal tax and thereby bring them into the tax net.

For this very purpose Ministry of Finance has introduced an amnesty scheme through Income Tax (Amendment) Act, 2016. This scheme has been given the name of Voluntary Taxpayers Compliance Scheme (VTCS).

SALIENT FEATURES OF VTCS

  • Traders have been given the option to be assessed either under VTCS or in the normal manner where all provisions of Income Tax Ordinance, 2001 are applied.
  • Only incomes from trading activities under head of “Income from Business” shall be eligible to be assessed under VTCS.
  • No adjustment shall be available for any withholding tax or refund due, with respect to trading activity.
  • No adjustment of any tax paid or refund any type of tax credit shall be available to under VTCS.
  • The trader complying with VTCS shall not be a required to withhold tax from payments of goods & services received by him.
  • The trader complying with VTCS and whose income for the year is less than Rs. 1 million, is not required to file wealth statement and wealth reconciliation statement.
  • The provisions of section 177 (Audit), 214C (Selection of Audit by the Board) and 214D (Automatic Selection for Audit) of Income Tax Ordinance shall not apply to traders for tax years 2015 to 2018. However, the return may be subject to amendment under section 122 of ITO (amendment of assessment), where “definite information” comes into the knowledge of Commissioner.
  • The taxpayer shall file a single page return according to the format prescribed under VTCS and acknowledgment of the return would automatically place new taxpayer trader on ATL within seven days after filing of return.
  • In case the return for any tax year from 2016 to 2018 is not filed, the trader shall not be “Qualified” under this scheme for any tax year from 2015 to 2018 and all provisions of ITO shall apply.

APPLICATION AND PROCEDURE

Scheme has been restricted only to traders who can avail the opportunity from this amendment. The act defines the traders as follows:

“A trader has been defined as a person individual or an AOP buying goods or merchandise and selling the same without further processing and providing business related after sales services by doing repair jobs.

The persons providing professional services including accountants, architects, dentists, doctors, engineers, interior decorators and lawyers, have been excluded from the definition of the Trader. The following retailers, who are registered under Sales Tax Act, 1990, are also excluded from the definition of Traders:

  1. retailer operating as a unit of a notional or international chain of stores;
  2. retailer who has a credit or debit card machine (currently is in abeyance);
  3. retailer operating in an air-conditioned shopping mall, plaza or centre, excluding kiosks;
  4. retailer whose cumulative electricity bill during the immediately preceding 12 month exceeds Rs 600,000; and
  5. wholesaler-cum-retailer, engaged in bulk import and supply of consumer goods on wholesale basis to the retailers as well as on retail basis to the general body of the consumers.”

The act further differentiate between old and new taxpayers and prescribes different methods of assessment for the two. The brief details of assessment procedure are as under:

New tax payers scheme

A person who has not filed a return of income during any of the previous ten tax years before 31st December, 2015 and has working capital not exceeding 50 million rupees is treated as new taxpayer and would be assessed in following manner:

Tax year 2015

Pay 1% tax on working capital which is not exceeding 50 million rupees.

Tax year 2016

The taxpayer will declare turnover which should not be less than three times the working capital declared in tax year 2015 and pay tax according to slab rates which ranges from 0.2% to 0.1% of the turnover.

Tax year 2017 & 2018

The taxpayer shall pay at least 25% more tax than paid in immediately preceding year.

Taxpayer complying under this scheme shall be entitled to take credit of imputable income for the purpose of wealth statement.

Old taxpayer’s scheme

A taxpayer who has NTN but has filed return during any previous ten tax years shall be assessed under VTCS in the following manner:

Tax year 2015:

The higher of:

  1. 25% higher than paid in tax year 2014
  2. Turnover tax according to slab rates under VTCS scheme
  3. 30,000 Rupees.

Tax year 2016 to 2018

The higher of:

  1. 25% higher than paid in previous tax year
  2. Turnover tax according to slab rates under VTCS scheme

A trader who have already filed his income tax return for tax year 2015 will also be entitled to avail benefit of VTCS by complying the following conditions.

Pay the tax which is higher of

  1. 10 % more than tax paid as per original return
  2. Turnover tax according to slab rates under VTCS scheme

Taxpayer complying under this scheme shall be entitled to take credit of imputable income for the purpose of wealth statement. Where the actual declared income exceeds the imputable income the taxpayer can take the extra income by paying tax at the rate of one percent of the difference along with the return.

There exist certain matters which are still raising concerns over VTCS:

Powers of Commissioner under section 122 remain intact:

The commissioner may when becoming aware of “definite information” amend the return filed under VTCS subject to the prior approval of the board. This power would remain a hanging sword over the taxpayers which would render the VTCS of no benefit.

Threshold of Rs 50 million: The VTCS may be exploited by individuals or AOPs by distributing their working capital among several associated persons to whiten their maximum wealth. For example an individual having working capital of Rs 500 million may file 10 different returns under names of related persons (sons, daughters, spouse, etc) and avail the scheme.

Imputable Income: The provisions relating to Imputable Income needs further clarification as in case the imputable income falls short as compared to working capital declared. The wealth reconciliation could not be reconciled with that short amount and will prima facie attract provision of section 111 and would be added to undisclosed asset.

Time Limit for Compliance: As the time limit for compliance under the VTCS has been extended up to March 31, 2016 (which will probably extend further keeping in view the history of granting extensions), there is a chance that taxpayers under normal tax structure will also delay the filing of their returns to further defer their tax payments.

Poor success history

The recent two schemes introduced in 2008 and in 2013 failed to bring the expected benefit to the exchequer and broaden the tax base. There still exist a perception that this would not bring any material benefit to the government given the history of the earlier amnesty schemes.

Disclaimer: This publication gives an overview of Voluntary tax compliance scheme Introduced vide Income tax (first amendment) Act, 2016; is prepared for the general use of our clients/other users, and shall not be a construed as an expert advice relating to a particular matter. No representation and/or warranty (written or inferred) are extended as to the completeness of contents. You should not act upon or take decision(s) on the basis of the information without soliciting professional advice. Further the commentary is based on present state of the scheme which may subject to change after this publication. We owe no responsibility for updating this commentary after its issue.

How can we help you?

Contact us by phone +92 (42) 3587 2731/2/3 or submit your questions, comments, or proposal requests.

Email us