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Huzaima Bukhari & Dr. Ikramul Haq
The coalition government of Pakistan Tehreek-i-Insaf (PTI) on February 11, 2021 opted to issue second Presidential Ordinance VI of 2021 [Tax Laws (Amendment) Ordinance, 2021] inserting new provisions and amending the existing ones in all the tax codes—Income Tax Ordinance, 2001, Sales Tax Act, 1990, Customs Act, 1969 and Federal Excise Act, 2015—without any debate in public and bypassing the National Assembly and Senate. The same was done with the first Presidential Ordinance II of 2021 [The Income Tax (Amendment) Ordinance, 2021], issued on January 20, 2021 with retrospective effect (January 1, 2021), just 48 hours before the start of sessions of National Assembly and Senate. Strangely, both were not available on the websites of National Assembly and Ministry of Law of Law (accessed at 7:45 am on February 18, 2021 before submitting this article for publication on February 19, 2021). The version on the website of Federal Board of Revenue (FBR) is thus being relied upon, which though contains request from Ministry of Law and Justice for publication in the official gazette, but notification remained unpublished till the morning of February 18, 2021! It was finally published having the same version available on FBR’s website. The session of National Assembly started on January 22, 2021 and prorogued on February 4, 2021 but Ordinance II of 2021 was not tabled as the record on website of National Assembly shows. Both the Ordinances, being Money Bill, need to be laid down before the National Assembly. By not placing Presidential Ordinance II of 2021 of January 20, 2021 a flagrant violation of Article 89 of the Constitution of Islamic Republic of Pakistan [“the Constitution”] is committed. The same position prevails about second Presidential Ordinance VI of 2021 [Tax Laws (Amendment) Ordinance, 2021] issued on February 11, 2021 and not presented in the ongoing session of National Assembly.
In this article, constitutional issues apart, we are just analysing some tax incentives offered to non-resident Pakistanis [NRPs] through Roshan Digital Accounts (RDAs). It would have been better if the name of account was ‘My Pakistani Account’ as many born outside (second and third generation of expatriates may not be aware that Roshan means “bright” or “shining”. The State Bank of Pakistan (SBP) may say ‘naam mein kya rakha hey [what matters in the “name”?]. Though in such products name really matters for attracting expatriate Pakistanis, like, ‘Prosperous Pakistan Digital Account’!
The SBP in a communiqué at its website [https://www.sbp.org.pk/RDA/index.html] titled ‘A New Era of Banking in Pakistan’, announced the scheme as under:
“For the first time in Pakistan’s history, Non Resident Pakistanis (NRPs) are being provided an opportunity to remotely open an account in Pakistan through an entirely digital and online process without any need to visit a bank branch. Opening of the account will require only a basic set of information and documents. Banks have been asked to complete all necessary customer due diligence within 48 hours.
Enabling investment by Non-resident Pakistanis in Naya Pakistan Certificates (NPCs) issued by the Government of Pakistan, in both USD and PKR, at very attractive risk free rates in both conventional and Shariah-compliant forms. (Click for GoP Notification).
On NPC, only a 10% withholding tax on profits is applicable that is full and final. No filling of tax return is required. Resident Pakistanis who have declared assets abroad with FBR can also invest in USD-denominated NPCs. To do so, they can open a Roshan Digital Account in foreign currency by visiting a bank branch in Pakistan”.
Further details and brochure and rate of returns are available at the following links at the website of SBP:
http://www.finance.gov.pk/naya_pakistan_cer_14092020.pdf
According to SBP, RDAs are being offered by banks to provide digital banking solutions to NRPs and to resident Pakistanis who have declared assets abroad with FBR can also invest in USD-denominated NPCs by visiting the branch of nine banks mentioned at its website https://www.sbp.org.pk/NPC/index.html.
According to SBP, NRPs willing to undertake banking, payment and investment activities can do so through digital channels. There are two types of accounts offered under RDAs. These are:
- Foreign Currency Value Account (FCVA)
- NRP Rupee Value Account (NRVA)
These accounts must be credited with remittances received from abroad through banking channels. Funds in an NRVA can also be transferred from the customer’s own Foreign Currency Value Account (FCVA) or other NRVA with the same bank. Moreover, returns on investments and disinvestment proceeds on account of investments made from these accounts can also be credited in these accounts. The account can be credited with remittances received from abroad through banking channels.
As per instruction of SBP: “Feeding from local sources is not allowed”. It further provides that “all banking services allowed through digital channels will be available with the account e.g. internet/mobile banking, ATM/ Debit cards. The bank may also issue a cheque book to the account holder, if required”. These accounts, as per SBP, can be used to “invest in foreign currency-denominated debt securities of the government of Pakistan, notably the USD Naya Pakistan Certificates [both conventional and Shariah compliant available], as well as foreign currency deposit schemes of the banks and profit from these investments and disinvestment proceeds can also be credited in the account”. The SBP further provides:
- Transfer and payment to any person within or outside Pakistan is allowed.
- Cash withdrawal is available in either foreign currency or in equivalent Pak Rupees.
- Funds in the accounts can be repatriated abroad anytime without any prior approval from SBP or the bank in which account is opened.
Further details are provided in FE Circular No. 02 of 2020, issued by the SBP on August 5, 2020.
The following tax benefits have been extended to a non-resident Pakistani individual, holding Pakistan Origin Card (POC) or National ID Card for Overseas Pakistanis (NICOP) or Computerized National ID Card (CNIC) under the Tax Laws (Amendment) Ordinance, 2021, issued on February 11, 2021, in the Income Tax Ordinance, 2001 [hereinafter “ITO, 2001”], who open above mentioned accounts as per scheme of SBP:
- They will not be required to file return or register with FBR as per newly inserted clause (114A), Part IV, Second Schedule to ITO 2001.
- The banking company will withhold 10% tax from capital gain arising on the disposal of debt instruments and government securities and certificates (including Shariah complaint variant) under section 152(1DA). Interestingly, parallel provision for resident individuals allowed to open accounts having declared assets outside Pakistan with FBR, have been included though for them it is Pakistan-source income! If it is intentional, then why are others having foreign currency accounts disallowed to open account on the same footing. If it is by mistake, it confirms incompetence that is hallmark of FBR, especially when acting as de facto legislature. Presidential Ordinance must have been approved by Cabinet, after vetting by Law Ministry as per Mustafa Impex case [(2016) 114 TAX 241 (S.C. Pakistan)]. It shows they collectively cannot pick out a mistake that is apparent from mere plain language of the provision.
- Tax withheld under section 152(1DA) shall be final discharge of liability under section 152(1E). Here, the blunder in drafting is a classic example of ineptitude of three institutions, FBR, SBP and Ministry of Law that vetted it before going to Cabinet and finally signed by the President of Pakistan. Section 152(1E) after amendment reads: “The tax deductible under sub-sections (1D) and (1DA) shall be a final tax on the income of the non-resident company arising out of such capital gain”. The draftsman in FBR (must be Grade 21 officer and ultimate responsibility lies with Chairman in Grade 22) and all others, even those releasing commentaries on it, before seeing the official gazette copy, claiming to be “real experts” and all-knowing ultimate authority on tax laws of Pakistan, failed to point out that the word “individual” is missing in amended section 152(1E) of ITO, 2001, where benefit is restricted to “non-resident company”! The intention clearly was otherwise than to extend it to individual NRPs!
- FBR keeps drafts of proposed laws/amendments “secret”, never making them public and commits blunders when the same are promulgated as Ordinances by President of Pakistan and even passed by National Assembly that passes Money Bills after comments from Senate!
- In the present case, blame is equally to be shared by SBP, Law Ministry and Cabinet as a whole. This shows either casual attitude or extreme incompetence, or both! In democracies such vital laws are debated in public, experts give their inputs and all stakeholders are consulted. However, it is shocking that institutions like FBR, SBP and Ministry of Law, even after Article 19A of the Constitution providing unfettered right to information assuring participatory democracy, think “secrecy” is their fundamental right and parliamentarians and judges of higher courts after taking oath to protect the Constitution show apathy, rather than punishing offenders who do not share even draft laws meant for public. After this they complain about absence of rule of law in society.
- Another bigger gaffe is imposing 1% tax final tax on purchase of immovable property by NRPs in lieu of capital gain under section 37 of the ITO, 2001. It is adjustable for residents. Is it an incentive or punishment for investing in Pakistan? How purchase (investment) in immovable property can be considered as “gain”? The genius of FBR in drafting the Ordinance, endorsement by SBP, Law Ministry and signature by President have made us a laughing stock as many who wanted to invest ask: “What kind of law is this?” This is not a drafting error, it shows pathetic understanding of law by FBR, SBP and others, even lack of common sense that gain or loss always takes place in the hands of seller of immovable property and not purchasers.
- The NRPs will also pay 1% on gross value of sale/disposal of immovable property in lieu of “capital gains” [section 37 of ITO 2001] even in case of loss or where tax is less than 1% under the normal tax rates. They could have given them an option to claim it as adjustable or final, whichever is more beneficial. Filing of return should also be optional as many from USA, Canada, EU and other countries where income taxation is to pay tax on even Pakistan-source income and take benefit of Avoidance of Double Taxation with Pakistan, wherever applicable.
- The amended clause (78), Part I, Second Schedule to ITO 2001 exempts from tax “any profit on debt derived from foreign currency accounts held with authorised banks in Pakistan, or certificate of investment issued by investment banks in accordance with Foreign Currency Accounts Scheme introduced by the State Bank of Pakistan, non-resident individuals, non-resident association of persons and non-resident companies [there is a typographical error in the version variable at the website of FBR as “non” appears as “no”. It may be corrected in gazette notification]. Same exemption under clause (79) Part I, Second Schedule to ITO 2001 is extended to “profit on debt derived from a rupee account held with a scheduled bank in Pakistan by a non-resident individual holding a Pakistan Origin Card (POC) or National ID Card for Overseas Pakistanis (NICOP) or Computerized National ID Card (CNIC)], where the deposits in the said account are made exclusively from foreign exchange remitted into the said account.
- The NRPs are given exemption from filing of tax returns and withholding tax in respect of section 231A [cash withdrawal from a bank], 231AA [Advance tax on transactions in bank] and 236P [Advance tax on banking transactions otherwise than through cash] of ITO through clause (112A), Part IV of the Second Schedule to the ITO 2001 but in all these the fundamental condition is of being “non-resident”.
- The provision of zero rate of deduction is provided in clause (5A), Part II, Second Schedule to ITO 2001, but the issue is determination of ‘residential status.
The crux of the matter is that who will determine the “residential status” of an individual in any tax year on the basis of section 82 of ITO 2001, which reads as under:
“Resident individual.– An individual shall be a resident individual for a tax year if the individual–
(a) is present in Pakistan for a period of, or periods amounting in aggregate to, one hundred and eighty-three days or more in the tax year;
(ab) 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; or
(c) is an employee or official of the Federal Government or a Provincial Government posted abroad in the tax year.
Any non-resident Pakistani may become resident as per above definition after opening the RDA.
The above fact finding can only be done by the concerned Commissioner of Inland Revenue having jurisdiction in the case. Section 159(2) of ITO 2001 says:
“A person required to collect advance tax under Division II of this Part or deduct tax from a payment under Division III of this Part or deduct or collect tax under Chapter XII] shall collect or deduct the full amount of tax specified in Division II or III or Chapter XII], as the case may be, unless there is in force a certificate issued under sub-section (1) relating to the collection or deduction of such tax, in which case the person shall comply with the certificate”.
The above cited clauses providing exemptions or reduced rate of tax in the hands of NRPs through RDS where deposits are made exclusively from foreign exchange remitted into the said accounts must also be given waiver from obtaining exemption certificates These exemptions are available subject to fulfillment of certain conditions, the most pivotal one in the case of individuals is “non-resident”. It is only the Commissioner who can ascertain whether this condition is fulfilled or not. The bank has no mechanism to check it. As withholding agent they are barred by law to allow waiver from withholding provisions unless an exemption certificate from Commissioner is produced.
If NRPs are from USA, UK, Canada and the EU and avail the above benefits, they will not be required to pay tax on sale of immovable assets, if Avoidance of Double Taxation Agreements [DTAs] with Pakistan apply. On many incomes, they will have to pay no tax as SBP and FBR have not taken into account the impact of Avoidance of Double Taxation Agreements and reporting requirements under Exchange of Information and Mutual Legal Assistance treaties under OECD. Therefore, it should have been optional for them to file return or not. FBR and SBP must know about Foreign Account Tax Compliance Act (FATCA) by USA but they have ignored the same in tax incentives.
Before the promulgation of Ordinance, FBR and SBP did offer the draft for input from experts and stakeholders to improve it and place it under an independent Chapter to mitigate local and international tax issues/conflicts highlighted above. Closed-door drafting of such laws and not seeking input from all who matter is the root cause of many typos, grammatical errors and conceptual blunders etc.
It is hoped that when the Presidential Ordinance VI of 2021, Tax Laws (Amendment) Ordinance, 2021, will be considered by the National Assembly to make it an Act of Parliament, the above-cited lacunae, drafting blunders and conceptual inconsistencies will be removed and to improve it further the Standing Committees of Senate and National on Finance and Revenue will consult experts for their comments. Though Senate does not approve Money Bill, but its comments under the Constitution are mandatory to be considered by the National Assembly, though not binding.
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The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)