An Analysis of the Finance Act 1990

By Hasan, M. G. | Economic Review, July 1990 | Go to article overview

An Analysis of the Finance Act 1990


Hasan, M. G., Economic Review


An Analysis of the Finance Act 1990

Lord Summer said in one of his celebrated judgments that the way of tax payers is hard and that the Legislature does not go out of its way to make it any easier. The Finance Bill, 1990 had generated so much heat and become so controversial that the Federation of Chamber of Commerce and Industry had threatened to give a call for country-wide strike unless major changes were made in the Finance Bill to meet their viewpoint. But the tax proposals which have now become, with minor amendments, law, would affect all categories of tax-payers who will have to pay more in order to meet the huge deficit in the Budget.

A number of substantive changes in the Income Tax Ordinance, 1979 have been made to raise additional revenues by imposing new taxes, increasing the existing rates of taxes, withdrawing exemptions and curbing widespread tax evasion. In this article an effort is made to assess the effectiveness and impact of these changes.

Deemed Income

Normally, income-tax is charged on income which accrues or arises or is received in Pakistan, but very often certain income does not accrue or arise or is not received in the technical sense, but the taxpayer derives full benefit of such income in an indirect way. In such cases, the law requires that the amounts be deemed to be income which has accrued or arisen to an assessee and be charged to tax like other taxable income.

Section 12 of the Ordinance deals with such deemed income. In 1987, sub-section (18) was added to this Section in order to tax cash loans received by an assessee in excess of Rs. 50,000 in any income year from any person other than a bank or a financial institution. The sub-section deemed such loans to be income accruing or arising to an assessee and charged them to tax. The idea was to encourage tax-payers to use Bank Accounts for major financial transactions so that documentation of the economy could be introduced and use of fictitious names for hiding income discouraged. However, the sub-section (18) soom became ineffective when the CBR, under pressure from the trade and industry, issued SRO 838(1)87 on 26.10.1987. It is submitted that issuing of this SRO was ultra-vires of the powers of CBR as it was not competent to over-rule the National Assembly which had already approved the provision.

The Finance Act 1990 now revives sub-section (18) in a modified form, substituting Rs. 100,000 for Rs. 50,000 and at the same time withdrawing SRO 838(1)87 in Part IV of the Second Schedule.

Although, attempts will be made to defeat this provision by, for example, splitting up of the cash loans in smaller amounts, yet the main objective of documentation would be achieved to a certain extent.

Sub-section (18) of Section 12 provides that the loan in excess of Rs. 100,000 should have been received by a crossed cheque drawn on a bank. The expression "crossed cheque" should be amplified to include other instruments through which transfers of money take place. Similarly, the word "bank" should be defined in accordance with the provisions of Banking Law.

Directors' Remuneration

A new clause (cc) in Section 24 is proposed to be introduced to restrict the salaries of directors' of a domestic company (as from a public company) to 20 per cent of the total income of such company before the deduction of directors' salaries from the total income. In the case of an individual director, the aggregate amount of salary is not to exceed Rs. 360,000 for a period exceeding eleven months or Rs. 30,000 per month where the income relates to a period of less than eleven months.

The intention behind this new provision appears to be to prevent reduction of tax liability of the private companies through the device of paying huge sums of money as remuneration and commission to their directors whenever there are bumper profits. The average tax rate in the case of individuals is much lower than the private companies. …

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