Bogus Refund Claims
through self-assessed declarations
A taxpayer may compute total income for the tax year while filing the declaration to this effect. Total income is sum of all incomes under various heads of income. A taxpayer may have total income only under the head salary. If a taxpayer has income from salary as well as from property during the tax year, the total income will be sum of income from the heads salary and property. Similarly, if a taxpayer has income from business, property, capital gains or other sources, then total income will be income from all these heads.
If a taxpayer has paid zakat, workers’ welfare fund or workers’ participation fund during the tax year, (s)he is allowed to subtract that contribution from total income to work out taxable income. Tax on taxable income is to be calculated by applying the prescribed rate of tax given in the Schedules of the Income Tax Ordinance, 2001. This tax amount may be more or less than the amount of tax withheld at source during the tax year.
Normally, if tax withheld at source is greater than the due amount of tax on taxable income, the excess tax is refunded to the taxpayer. If tax withheld at source is less than the tax computed on taxable income, the taxpayer has to deposit the difference.
However, Income Tax Ordinance, 2001, is not so simple. Not all taxes withheld at source are to be adjustable and refundable. There are three kinds of withholding taxes in the Income Tax Ordinance, 2001, viz. normal or adjustable withholding taxes, minimum withholding taxes and final withholding taxes.
If all taxes withheld at source are adjustable and exceed tax payable on taxable income, the amount of tax withheld at source over and above tax payable is refundable to the taxpayer.
If tax withheld at source is minimum tax under the provisions of the Income Tax Ordinance, 2001, and is more than the tax payable on taxable income, no refund on account of minimum tax is due to the taxpayer.
If tax withheld is final tax, the taxpayer has to pay tax on taxable income. Taxpayer cannot claim credit of final tax against tax payable on taxable income and hence there will be no question of refund of tax on account of final tax.
A taxpayer may manipulate self-assessment scheme and may claim bogus refund through self-assessed declarations as illustrated below:
Example 1: A taxpayer may, in the tax returns e-filed for a tax year, claim tax deducted under sections 148 and 153(1)(a) of the Income Tax Ordinance, 2001, as adjustable, which resulted in refundable income tax. However, as per audited accounts e-filed for that tax year, the taxpayer’s principal business activity is of trading. In the taxpayer-registration profile, the taxpayer has declared business activity as other service activities and not manufacturer. Tax deductions at source under sections 148 and 153(1)(a) of the Income Tax Ordinance, 2001, are adjustable if the taxpayer is a manufacturer as per sections 148(7) and 153(3) of the Income Tax Ordinance, 2001. The taxpayer has tried to defeat the self-assessment scheme to create refund of tax deducted under sections 148 and 153(1)(a) of the Income Tax Ordinance, 2001, which was full and final discharge of tax liability of the taxpayer.
Example 2: Another taxpayer, a private limited company, engaged in the business of manufacturing of chemical products, filed income tax returns for a tax year. The taxpayer may not charge minimum tax under the provisions of section 113 of the income Tax Ordinance, 2001, for the tax year to maximize refund.
Example 3: As per audited accounts e-filed for tax year, the taxpayer, a private limited company, incorporated with the primary object to set up steel and re-rolling and to carry on business of iron founders, has filed statement of final taxation under section 115(4) for the tax year 2019 wherein tax deducted under section 148 as final discharge of tax liability. However, the taxpayer has e-filed income tax return for tax year and claimed refund of the said tax. As per audited accounts e-filed for tax year 2020, the taxpayer company has declared 2 employees. Therefore, the taxpayer company was not an industrial undertaking in terms of section 2(29C) of the Income Tax Ordinance, 2001, for tax year and due to this reason, the taxpayer company was not entitled to claim credit of tax deduction u/s 148 of the Income Tax Ordinance, 2001, which was minimum tax in terms of section 148(7)(a) of the ITO 2001.
Example 4: The taxpayer company has claimed refund on account of tax deductions under section 148 of the ITO 2001. The taxpayer company has made huge imports but has not declared any significant corresponding turnover/supplies. Whereas sub-section (7) of section 148 (before amended by Finance Act 2020) provides that “the tax required to be collected under this section shall be minimum tax on the income of the importer arising from the imports subject to sub-section (1) and this sub-section shall not apply in the case of import of raw material, plant, machinery, equipment and parts by an industrial undertaking for its own use.”
Example 5: A taxpayer revised tax return for tax year to claim tax deducted under section 148 as adjustable. However, perusal of GDPs reveals, the tax deducted on imports was final/minimum and the taxpayer company was not entitled to claim such tax as adjustable.
The author is serving as Additional Commissioner Inland Revenue at Federal Board of Revenue, Pakistan. He can be contacted at firstname.lastname@example.org