ARTICLE (April 25 2010): It is believed by many that the federal value-added tax is a requirement of time. The value-added tax (VAT) will be enforced and the IMF will only expedite the enforcement of this tax. Since there is no avoidance of value-added tax, therefore, what is being enacted in the name of VAT Act 2010, needs to be carefully studied.
By now, it is common belief that the FBR is trying to use the VAT Act 2010 as a vehicle to acquire and take draconian powers, which are not otherwise required for tax collection, but will only bring harassment and unending corruption channels.
It has been suggested at various forums that the power to arrest defaulters should not be granted to the FBR officials as proposed and is being enacted through Section 72 of the VAT Bill under consideration of the Parliament.
The speakers including Zubair Motiwala, at the Chambers of Commerce and Industry seminar held last week have recommended that the section granting power of arrest like Section 72 should be deleted from the VAT Bill and appropriate amendment should also be made in Sections 69 and 61 of the bill.
The power of arrest or the right to challenge this action in the normal courts provided in Section 87 of the VAT Bill is not the subject of this article. The VAT should be enforced, but excluding the draconian powers of the FBR. Under the VAT Bill, the FBR can very easily impose disputed tax on any person and recover forcefully this disputed tax from his father, mother, brother, sister, spouse, other relations or associates.
The list of persons who can be forced to pay other person's disputed tax, is very large. The bill includes the concept that the disputed tax, imposed on one person, can be recovered from his relatives who may have nothing to do with the business of the person on whom disputed value-added tax has been imposed.
Section 61of the value-added tax bill gives powers to enforce recovery and this section very clearly states that recovery of disputed tax imposed can also be made from the associated persons and the word associated persons has been defined in Section 3 of the bill. When Section 3 reads in conjugation of Section 61 of the bill, it becomes more than clear that the disputed value-added tax, imposed on one person, can be recovered from the relatives of the person and the list of relatives affected is almost unending.
This has been achieved by using the word associated person in Section 61, dealing with the recovery of the disputed tax and defining the word associated person in another Section 3 of the bill, which includes the relatives in the definition of associated persons. This will become clear by reference to the wording of the two sections 61 and 3 of the bill.
"Section 61. Recovery of arrears of tax: (1) Where any amount of tax is due from any person, the officer of Inland Revenue, authorised by the Board or Commissioner in this behalf, may take all or any of the following actions to recover such amount, namely:
-- (a) deduct the amount from any money owing to defaulter at his disposal or under his control or under the control of any other officer of Customs or Inland Revenue; (b) require any person who holds or may subsequently hold any money for or on account of the defaulter to pay the amount; (c) stop removal of any goods from the business premises of the defaulter or the associated person till such time the recoverable amount is paid or recovered in full; (d) require any person to stop clearance of imported goods or manufactured goods; (e) attach bank accounts of the defaulter or his associated person;"
There are other powers also granted by Section 61 for recovery of disputed demand, but for the sake of brevity we will limit it to the above extent. In Section 61 quoted above, which is giving multiple powers to the FBR official for the recovery of disputed VAT, the word "Or An Associated Person" has been used again and again.
This means the disputed VAT tax imposed on one taxpayer can also be recovered from the associate person of the taxpayer. Clause (c) of Sub-Section (1) of Section 61 quoted above empowers the VAT official, which includes the inspector to seal the business premises of the associated person and stop removal of any goods from the business premises of the associated person till such time the disputed tax is paid or recovered in full. This mean the business of the associated person, including his business premises and stock of goods, can be taken over for the recovery of tax imposed on some other person and the affected associated person is even forbidden to challenge this action in the normal court of law as per section 87 of the VAT bill.
Similarly, Clause (e) of sub-section (1) of Section 61 quoted above empowers the VAT official which includes the inspector to attach bank accounts of the associated person till such time the disputed tax imposed on somebody else is paid or recovered in full.
From the above, it become very clear that as per Section 61 of the Bill the disputed VAT imposed on one taxpayer can be recovered by attaching the bank account of any person associated with the taxpayer or the VAT officer can seal the business premises of the associated person and stop the removal of any goods from the business premises of the associated person till such time the disputed amount is paid or recovered in full.
Now the question is what is meant by the word "Associated person" under the VAT Bill 2010 and for this we have to refer to Section 3 of the bill, which includes all the blood/ancestral relation, besides common partners and others into the definition of the word Associated Person. This cannot become clear without reference to the wording of Section 3 of the VAT Bill 2010 which is quoted as under:
"3. Associated persons: (1) For the purpose of this act, two persons are "associated persons" if the relationship between them is such that one can reasonably be expected to act in accordance with the intentions of the other, or both can reasonably be expected to act in accordance with the intentions of a third person.
(2) The following are presumed to be "associated persons" (a) an individual and a relative of the individual; and (4) "relative" in relation to an individual, means:
-- (a) An ancestor, a descendant of any of the grandparents, or an adopted child, of the individual;
-- (b) an ancestor, a descendant of any of the grandparents, or an adopted child, of a spouse of the individual; or
-- (c) a spouse of the individual or of any person specified in sub-paragraph (a) or (b)."
Section 3 of the Bill defines the word Associated Person and it is very lengthy and includes many more persons in the definition of Associated person, but for the sake of brevity we will limit it to the above extent Associated person includes a person or the spouse's relations by blood as per the definition of the word Associated Person quoted above as given in Section 3 of the bill.
It is known that the FBR has drafted this bill and FBR is trying to take powers, which have nothing to do with the efficiency of the bill for collection of tax, but the FBR is trying to get a bill enacted through which it has the power to harass the people which, in turn, will make this bill extremely prone to corruption. For this, one has to refer only to the definition of the word Associated Person who has been made responsible to make the payment of disputed tax imposed upon another person or relative.
The disputed tax imposed can be recovered from the individual or any relative of the individual while the relative means (a) an ancestor, a descendant of any of the grandparents, or an adopted child, of the individual; (b) an ancestor, a descendant of any of the grandparents, or an adopted child, of a spouse of the individual; or (c) a spouse of the individual or of any person specified in aforesaid (a) or (b).
This means each and every relative or their spouses as associated persons are exposed and any time their bank accounts can be ceased or if any one of them is in business, the stock or business of the such relative can be sealed or confiscated. or their imports can be stopped.
This is a law for imposing disputed tax and then makes all the relatives under the sun to pay the disputed amount of tax of a distant relative, who may not even have met for years. As per the VAT Act 2010, the command is that "Thou shall pay thy relative's disputed value-added tax," well that is what the law says.
Should the law permit such a clause in any tax law where you will be made to pay the disputed tax of any of your relatives, The answer is a big no. Not only all relatives from any side and their spouses have been made responsible for the payment of disputed tax of a distant relative and one can have personal bank account ceased any time or have the business sealed because somebody from ones own or wife's side relative has to pay some tax to the FBR. Can any sane person allow this law to be made. Yes it will be made if voice is not raised now.
The definition of the word associated person does not stop here at relatives. It also includes many more persons in the category of Associated Persons as given in Section 3 of the VAT Bill and the following are also "associated persons".
ASSOCIATED PERSONS OTHER THAN RELATIVES
"- (a) A member of an association of persons and the association, if the member, either alone or together with an associate or associates under another application of this section, controls 50 percent or more of the rights to income or capital of the association.
-- (b) A trust and any person who benefits or may benefit under the trust.
-- (c) A shareholder in a company and the company, if the shareholder, either alone or together with an associate or associates under another application of this section, controls either directly or through one or more interposed persons(i) 50 percent or more of the voting power in the company.
-- (d) two companies, where a person, either alone or together with an associate or associates under another application of this section, controls either directly or through one or more interposed persons (i) 50 percent or more of the voting power in both companies."
So the concept of Associated Person as defined in the bill makes a large number of persons as liable for the payment of disputed tax imposed on others. Section 61 and Section 3 if read separately do not elaborate the full meaning of the concept of making the associated person as the person from whom the disputed tax can be recovered. When Section 3 is read together with Section 61, it hits the point that disputed tax demand of a very distant relative can be recovered from you or your spouse even if you are living in another country and have nothing to do with the business of your relative.
But one can say that it has been committed and the VAT Act has to be enacted so what is the solution. It is, therefore, advised that the word Associated person, appearing twice in Section 61 should be deleted along with the addition of a proviso in section 61 and the definition of the Word" Associated Person" given in section 3 of VAT Act should be reworded and Section 3 and Section 61 should read as under:
"(3)Associated persons: (1) For the purpose of this Act two persons are "associated persons" if the relationship between them is such that one can reasonably be expected to act in accordance with the intentions of the other, or both can reasonably be expected to act in accordance with the intentions of a third person.
(2) Whether or not sub-section (1) applies, the following are "associated persons":
-- (a) A member of an association of persons and the association, if the member, controls fifty per cent or more of the rights to income or capital of the association.
-- (b) A trust and any person who benefits or may benefit under the trust.
-- (c) A shareholder in a company and the company, if the shareholder, controls:
(i) Fifty percent or more of the voting power in the company;
(ii) Fifty percent or more of the rights to dividends; or
(iii) Fifty percent or more of the rights to capital;
-- (d) two companies, where a person, , controls either directly or through one or more interposed persons:
(i) Fifty percent or more of the voting power in both companies;
(ii) Fifty percent or more of the rights to dividends in both companies; or
(iii) Fifty percent or more of the rights to capital in both companies.
(3) Two persons are not associated persons solely because one of them is an employee of the other or both are employees of a third person."
So to make the VAT Bill enforceable, amend the definition of the word "associated person" with the definition as given above and the problem will dilute without affecting the efficiency to collect tax by the tax man. With this simple amendment, you will have more tax and much less corruption and you will not be called upon to pay somebody else's value added tax. But to achieve this objective without any lacuna, Section 61 will also have to be re-worded as given below.
"61. Recovery of arrears of tax: (1) Where any amount of tax is due from any persona as per return filed or as per the invoices issued or otherwise, the officer of Inland Revenue authorized by the Board or Commissioner in this behalf, may take all or any of the following actions to recover such amount, namely after giving 30 days notice to the person:-
-- (a) deduct the amount from any money owing to defaulter at his disposal or under his control or under the control of any other officer of Customs or Inland Revenue;
-- (b) require any person who holds or may subsequently hold any money for or on account of the defaulter to pay the amount;
-- (c) stop removal of any goods from the business premises of the defaulter till such time the recoverable amount is paid or recovered in full;
-- (d) require any person to stop clearance of imported goods or manufactured goods;
-- (e) attach bank accounts of the defaulter;
-- (f) seal the business premises of the defaulter till such time the recoverable amount is paid or recovered in full;
-- (g) attach and sell or sell without attachment any moveable or immovable property including taxation goods of the defaulter; or
-- (h) recover such amount by attachment and sale of any moveable or immovable property including taxable goods of the guarantor, person, company, bank or financial institution where a guarantor or any other person, company, bank or financial institution fails to make payment under such guarantee, bond or instrument.
Provided that clauses (c) to (g) of sub-section (1) will not be applicable unless the appeal filed by the person against the order imposing tax has been decided by the Commissioner."
Unless these bare minimum amendments in Section 3 and Section 61 as suggested above are made the Value-Added Tax Act will only mean harassment and corruption The civil society, media, the legal fraternity and the business community have to wake up and approach the right quarters so that one relative is not made to pay somebody else's tax and the FBR is only granted powers, which are necessary for tax collection and not for harassment.
(The writer is Chief Consultant, Osmani & Afzal Associates)
Source: http://www.brecorder.com/index.php?id=1049303&currPageNo=1&query=&search=&term=&supDate=
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