The federal government has suggested levying a sales tax on products purchased via an online marketplace.
According to the Federal Board of Revenue’s (FBR) proposal in the Finance Bill 2021-22 (FY22), an individual who operates an online marketplace, whether or not it is owned by him, will be liable for sales tax.
An online marketplace is an electronic interface, such as a marketplace, e-commerce platform, portal, or similar means, that facilitates the sale of goods, including those sold by third parties, by controlling the terms and conditions of sale; authorising a charge to customers for supply; and ordering or delivering goods.
The FBR’s plan includes additional steps to make e-commerce marketplaces accountable for VAT/GST on sales made by online traders, as well as data exchange and greater collaboration between tax authorities and online marketplaces.
These new provisions give governments the tools they need to ensure that internet platforms contribute to tax collection. They will also level the playing field for retailers on high streets and in malls, who have been forced to compete against tax-exempt online competitors.
The significance of these measures is underscored by a report by the Organization for Economic Co-operation and Development (OECD), which indicates that online marketplaces account for two-thirds of all cross-border e-commerce sales.
By making these online marketplaces liable for VAT/GST and exchanging data, tax authorities may focus their compliance efforts on a relatively limited number of platforms rather than on the millions of small traders that use them.
Taxation in advance
In terms of advance taxation, the federal government has recommended eliminating it on cash withdrawals and banking activities.
Currently, a 0.6pc tax is deducted when a non-active person withdraws cash in excess of Rs50,000 in a single day.
Similarly, tax is deducted at a rate of 0.6pc on banking transactions by a non-active person exceeding Rs50, 000 in a single day.
However, the bill proposes that each Excise and Taxation (E&T) department motor vehicle registering authority collect advance tax on new locally manufactured motor vehicles based on engine capacity at the time of registration, in addition to collecting advance tax from buyers who sell locally manufactured vehicles within 90 days of delivery.
The tax was established to discourage Pakistan’s ‘on money’ mentality, which has been a major cause in recent auto price increases.
The value of a gifted capital asset
According to the Finance Bill FY22, when a person acquires a capital asset as a result of a gift from a relative, the cost of the asset is determined by its fair market value on the date of transfer.
The bill proposes that if a capital asset acquired as a gift is disposed of within two years of purchase and the gift is made as part of a tax avoidance plan, the cost of the asset in the recipient’s hands is equivalent to the cost of the asset in the donor’s hands.
For instance, a person paid Rs20 million for shares in a private limited business. Five years later, the shares’ fair market value increased to Rs30 million. The individual then transfers these shares to his son. Currently, pursuant to Section 79 of the law, the son will register these shares as Rs30 million on his wealth statement. If the son sells these shares for Rs32 million after six months, he will earn Rs2 million in capital gains.
However, under the proposed amendment, because he sold the shares within two years of receiving them, the government will have the authority to treat the cost of the shares as Rs20 million rather than Rs30 million and may impose a capital gain tax of Rs12 million rather than Rs2 million on the capital gain.
Income concealment
The bill proposes to include a definition of ‘concealment of income’ in Section 2 of the ITO via a newly proposed provision (13A).
The word is defined as the withholding of any taxable item in whole or in part, or the failure to report taxable income.
“If the person fails to explain the nature and source of the credit or the investment, money, valuable article, or funds from which the expenditure was made, the Commissioner may suppress any production, sales, any amount chargeable to tax, or any item of receipt liable to tax, or if the person’s explanation is deemed unsatisfactory by the Commissioner.
Additionally, the bill proposes to add an explanation to the definition, clarifying that the Commissioner’s mere disallowance of any exempt income declared or expenditure claimed does not constitute income concealing unless the taxpayer’s act was deliberate.
Bank account for the business
Additionally, the bill proposes to define a business bank account as one that is used by the taxpayer for business transactions.
Additionally, the bank account must be declared via form 181 on the FBR’s IRIS system.
Additionally, the law adds failure to declare business bank accounts on the registration form, amended registration form, or income or wealth statement return to the list of offences punishable by a fine or imprisonment for a term not exceeding one year, or both.
Additionally, tax officials may prohibit payments from any unregistered company bank account on the grounds that the payments were not made through a legitimate account.