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Court summons FBR chief in tax case

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ISLAMABAD:

The Lahore High Court (LHC) on Tuesday summoned the Federal Board of Revenue (FBR) chairman in a case of imposing 20% deemed income tax on the real estate sector as it found legal and constitutional issues in implementing the major tax measure.

A single-bench of the provincial court issued a short order the day FBR Chairman Asim Ahmad told a parliamentary committee that a contraction in imports could compromise revenues in the months ahead.

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The chairman’s statement underscores the multiple challenges that have turned current fiscal year’s tax target of Rs7.470 trillion unrealistic.

“Let Chairman FBR and Federal Secretary Ministry of Law and Justice appear on 17.11.2022 to answer hardship, ibid, and assist the court, about rationale behind omitting Section 7 from Finance Act 1989 after 18th Amendment in Constitution and taxation of immovable property as deemed income and Entry 47, instead of Entry 50, of the Constitution,” read the LHC’s short order.

The real estate sector has filed petitions against Section 7E introduced to impose taxes on those people who derive income equal to 5% of the fair market value of capital assets situated in Pakistan, who will be charged 20% tax.

However, Section 7E faces serious constitutional challenges as many argue that the government may find it difficult to defend the legal provision in courts that falls within the purview of provincial taxation under the constitution.

The LHC wrote in its interim order that Section 7E taxation has been done on the basis of “speculative value of the property”, which appears to be in contradiction to Section 116 that deals with the wealth statement being submitted by a taxpayer along with the tax return.

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“In this court’s opinion, the declaration under Section 116 becomes part of deemed assessment order under Section 120. If argument of learned additional attorney general is accepted as submitted, the court after reading down the deemed provision will have to look into conflict between Section 116 and 7E,” said the interim order.

“The court is not convinced with the arguments that this being a procedural matter cannot be looked into. If this court attempts to reconcile both the sections, the yardstick of fair market value being speculative and in conflict with the accepted declaration under Section 116 will be a hurdle,” the court wrote.

The LHC single-judge bench stated that if the court eventually attempts to read down the number of clauses in Section 7E, the same would amount to rewriting of the impugned provision.

Petitioners were of the view that Section 7E was in violation of the constitution and introduced in haste without determining the procedure for taxation.

The additional attorney general submitted before the court that based on the principle of interpretation, the court should strive hard to save legislation and the impugned provision could be read down to harmonise it with the competence available under Entry 50.

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He reiterated that the actual incidence of taxation was 5% of the fair market value of a capital asset and the term asset included immovable property. However, the court appeared to have not accepted his argument, suggested the short note.

The FBR now faces a gigantic task of collecting Rs965 billion in taxes in December, which it has set on the assumption that new taxes in the budget will help fetch around Rs200 billion in the month. Sources said that serious legal challenges had put a question mark over realising the Rs965 billion monthly target, particularly at a time when Pakistan was under pressure from the International Monetary Fund (IMF) to impose more taxes.

The government has not ruled out a mini-budget in private discussions but the FBR has not yet endorsed it publicly.

Meanwhile, in a meeting of the National Assembly Standing Committee on Finance, the FBR chairman stated that a steep reduction in imports was undermining the FBR’s revenue efforts.

Asim Ahmad said that due to the fall in imports, the revenue collection had been affected that, in coming months, might put pressure on domestic taxes as well.

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Imports fell by 17% in October and they might fall by 20% in the current month, he said, adding that the FBR was not considering any new proposal.

Ahmad declared that the FBR would try to cover any revenue shortfall in the coming months with administrative measures. So far, Rs15 billion has been generated through administrative measures against Rs5 billion in the same period of last fiscal year.

However, sources said that the IMF had traditionally been against relying on the administrative measures and had always asked for filling the revenue gap with new taxes.

The FBR chairman revealed that nearly 2.6 million income tax returns had been submitted in the current fiscal year, a sharp fall of 1.2 million, or nearly 32%, over the previous year.

He pointed out that Rs56 billion had been paid in taxes along with the returns in the current year against Rs52 billion in the last fiscal year. One lakh new taxpayers filed returns in the fiscal year.

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Published in The Express Tribune, November 16th, 2022.

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Privatisation fails to meet objectives

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ISLAMABAD:

The success of Pakistan’s privatisation programme has remained limited to only generating $11 billion in sale proceeds, as the country could not achieve the post-privatisation objectives of improving efficiency and competition, says a new independent study.

The findings come amid the International Monetary Fund’s (IMF) push for approval of the State-Owned Enterprises (SOEs) Bill to improve efficiency and management of public sector firms. The finance ministry has requested the holding of a joint session of parliament to approve the law, after the bill was rejected by the Senate.

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In a study titled “Public Sector Enterprises (PSEs) in Post-Privatisation: Evidence from Pakistan”, authors Naseem Faraz and Dr Ghulam Samad concluded that the key objectives of the privatisation programme had remained unfulfilled. The study has been published in the Journal of Applied Economics.

“Our main finding is that the performance of firms has improved in the post-privatisation period but (it is) statistically insignificant,” said the authors. Privatisation has been carried out with the motive of reducing the fiscal burden and increasing the efficiency of the inefficient PSEs. Since 1991, the sale of PSEs has raised revenues of Rs649 billion, or $11 billion.

The $11 billion has been worked out by applying the exchange rate of the year when a privatisation transaction took place.

Pakistan is one of the developing countries where privatisation of a large number of PSEs has taken place, but the post-privatisation effect is yet to be analysed. Second, rather than focusing on one or a few sectors, the study considers all the privatised PSEs.

The study showed that the performance of a few firms improved in the post-privatisation period but it largely remained negative.

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“In particular, the privatised PSEs in energy, cement and chemical sectors do not show positive gains in the post-privatisation period. However, the telecom and textile sectors have experienced a positive change in the performance of the privatised PSEs.” “Similarly, the results also showed that the efficiency of firms did not increase significantly.”

The authors said that according to their assessment through the Key Informant Interviews, the malfunctioning of regulatory environment led to the market failure that eventually resulted in market exploitation.

Regulations and regulators are captured by the market, bureaucrats, judiciary and politicians. An effective regulatory environment does not exist to force the privatised entities to have higher efficiency and develop a competitive environment.

Government intervention in the regulatory sphere is dominant. Every regulatory authority has a board member from the government. This practice is clearly not aligned with the privatisation regulations.

The government intervention (secretary sitting as a board member) creates conflict of interest by having ownership and management together.

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The privatised banking and energy companies have failed to bring in the benefits of sell-off, according to the study. The process of privatisation and rewards distribution favoured mainly the buyers, while the government faced risk and cost.

According to the authors, the privatised companies earned a higher average rate of return on assets compared to their fully government-owned counterparts, as measured by the total net profits-to-sales ratio.

The higher returns on assets suggest a favourable effect of privatisation. On the contrary, the profitability or productivity measure (net profits-to-sales ratio) was relatively higher for the privatised firms but it was statistically insignificant compared to the period when the firms were fully government owned.

“The privatised firms experience a mild increase in productivity compared to their pre-privatisation period. This difference in performance is not statistically significant.”

Privatisation also did not enhance the efficiency of the privatised firms in terms of increase in sales. It suggested that the efficiency improvement was merely coming through the reduction in cost of production.

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The study identified weak regulators as a reason for the failure to achieve the privatisation objectives.

“Unfortunately, the regulator Pakistan Telecommunication Authority (PTA) did not influence PTCL and other related entities to work in a regulated market environment.”

The role of the PTA is limited to overseeing the determination of market prices. PTCL’s privatisation was not a fair deal. It lost $800 million and also did not improve the market in terms of competition.

“The government sold 26% shares to Etisalat and also transferred the management, which is against the rule, which requires 51% shares,” emphasised the authors.

The government had agreed that Etisalat would pay $2.6 billion by making upfront payment of $1.4 billion and the remaining $1.2 billion in nine installments of $33 million each. For the deal, the government received only $1.8 billion and the remaining $800 million was never paid.

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“The monopoly of the telecom sector persisted despite the privatisation and drove away billions of dollars.”

The privatisation of KESC, now KE, also did not achieve the objectives. Though the main reason of the privatisation was to get rid of the loss-making enterprise, unfortunately the government is paying more after privatisation, according to the study.

Published in The Express Tribune, November 24th, 2022.

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Tractor maker faces legal action over fraud

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KARACHI:

The Federal Tax Ombudsman (FTO) has ordered legal action against a tractor manufacturing company as the Federal Board of Revenue (FBR) reported a fraud of more than Rs10 billion.

According to FBR sources, the tractor company has allegedly committed a fraud of over Rs10 billion under the previous government’s initiative to provide tractors at a lower cost to the farmers.

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As part of the subsidy scheme, the government gave billions of rupees to the deserving and underprivileged farmers for the purchase of tractors.

Sources said that the tractor manufacturer had claimed sales tax refunds on fake documents and flying invoices. The FBR then referred the case to the FTO.

They added that the FBR recommended the application of the Benami Transactions Act while taking legal action against the tractor manufacturer.

“The respondent company misused pay orders of the complainant by issuing bogus and fake sales tax invoices to other persons for obtaining fraudulent adjustment and refund,” a notification of the FTO office read.

The FBR has initiated legal proceedings against the owners and dealers of the tractor manufacturing company for the recovery of money obtained through fraudulent means.

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The Directorate General of Intelligence and Investigation, Inland Revenue has been tasked with investigating the fraud and tax evasion case.

Published in The Express Tribune, November 24th, 2022.

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G7 looking at Russian oil price cap of $65-70

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BRUSSELS:

The Group of Seven nations (G7) are looking at a price cap on Russian sea-borne oil in the range of $65-70 per barrel, a European Union (EU) diplomat said on Wednesday.

Views in the EU are split, with some pushing for a much lower price cap and other arguing for a higher one. The G7, including the United States, as well as the whole of the EU and Australia, are slated to implement the price cap on sea-borne exports of Russian oil on December 5.

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“The G7 apparently is looking at a $65-70 per barrel bandwidth,” the EU diplomat said.

“Poland, Lithuania and Estonia consider this too high because they want the price set at the cost of production, while Cyprus, Greece and Malta find it too low, because of the risk of more deflagging of their vessels, which might mean the G7 has found a good middle-ground,” the diplomat said.

Some 70%-85% of Russia’s crude exports are carried by tankers rather than pipelines.

The idea of the price cap is to prohibit shipping, insurance and re-insurance companies from handling cargos of Russian crude around the globe, unless it is sold for no more than the maximum price set by the G7 and its allies.

Because the world’s key shipping and insurance firms are based in G7 countries, the price cap would make it very difficult for Moscow to sell its oil – its biggest export item accounting for some 10% of world supply – for a higher price.

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At the same time, because production costs are estimated at around $20 per barrel, the cap would still make it profitable for Russia to sell its oil and in this way prevent a supply shortage on the global market.

Brent crude front-month future oil prices initially fell to $86.54 from $87.30 on the news.

Published in The Express Tribune, November 24th, 2022.

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