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Withholding tax response 2011
Withholding tax response 2011
Withholding tax response 2011
Withholding tax response 2011
Withholding tax response 2011
Withholding tax response 2011
Withholding tax response 2011
Withholding tax response 2011
Withholding tax response 2011
Withholding tax response 2011
Withholding tax response 2011
Withholding tax response 2011
Withholding tax response 2011
Withholding tax response 2011
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Withholding tax response 2011

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  • 1. Dr. Sohail Ahmed Fazlani Date: 17-04-2012Assistant Commissioner-IRMonitoring & Audit Cell-02Zone-II, R.T.O.KarachiSUB: MONITORING OF WITHHOLDING TAXES FOR THE TAX YEAR 2011- EXPLANATION REGARDING.Dear Sir,Please refer to your letter No. ACIR/MAC-02/ZONE-II/RTO/2011-12/856 dated 13-04-2012, weare submitting our replies in response to your queries raised through the above referred letter.1) OBSERVATION OF THE OFFICER INLAND REVENUESalary expenses debited (Note 27) of Audited Financial Statement Rs. 122,307,734/-(Figure differs with audited accounts)Less: Amount subjected to withholding tax u/s. 149 of I.T.Ord.2001. Rs. 11,994,480/-Residual amount not subjected to withholding of tax. Rs. 110,313,254/-Please assign reasons for such default of non-deduction of withholding tax u/s.149 of the IncomeTax Ord. 2001 duly supported with cogent documentary evidence.OUR RESPONSE TO THE OBSERVATIONA. The breakup of the areawise wages as per Note No. 27.1 of the audited accounts for the yearended June 30, 2011 is as under:DETAIL KARACHI LAKHRA METING HYDERABAD KHUSHAB PD KHAN TOTAL ………………………………………………………. (Rs.) ………………………………………………………………………… i. MINE INITIAL EXPENSESShaft Incline Exp. 3,343,509.90 89,938.10 3,433,448Progressive 227,000 227,000DevelopmentTOTAL 3,343,509.90 89,938.08 227,000 3,660,448 ii. WATER CHARGES 1
  • 2. Water Charges 9,280 1,600,093 22,700 11,685 235,836.92 1,879,594.92Water Charges 162,447.50 162,447.50KathaWater Charges 486,227.58 486,227.58KalyalTOTAL 9,280 1,600,093 22,700 11,685 883,311.60 2,528,270 iii. MINE CONTROLLERMine Sardar 1,539,445 129,400 688,433 115,980 2,473,258Chowkidar Salary 2,073,268 118,000 183,677 20,250 2,395,195Time Keeper 455,400 326,367 781,767Weighmen Salary 1,200 1,200TOTAL 4,068,112.98 247,400 183,677 1,016,000 136,230 5,651,420 iv. WAGES COAL CUTTINGWages Coal Cutter 26,636,814.18 148,842 18 7,348,746 119,275.50 34,253,695.68Mate Commission 4,668,831.95 18,540 596,500 12,857.50 5,296,729.45Summer Seam 925,656,87 4,238,682 5,164,338.87TOTAL 32,231,302,92 167,382 18 12,183,928 132,133 44,714,764 v. WAGES DRIVAGE & CROSS CUTTINGWages Drivage 9,355,696 172,520 6,876,326 142,825 16,547,367Debris Charges 1,639,947 1,639,947TOTAL 9,355,695.82 172,520 8,516,273 142,825 18,187,314 vi. MINE LIGHTINGWages Safety Lamp 301,380 301,380Over Time 75,564 457,749 51,050 64,995 387,572 1,036,930TOTAL 75,564 457,749 51,050 64,995 688,951 1,338,310 vii. BONUS & EXGRATIABouns 586,973 7,454,964 11,860 110,996 746,858 50,759 8,962,410Gtatuity 227,125 1,410,950 4,200 231,901 29,250 1,903,426TOTAL 814,098 8,865,913.51 11,860 115,196 978,759 80,009 10,865,836 2
  • 3. GRAND TOTAL 898,942 58,996,721.0 762,850.10 375,571 24,495,423 491,197 86,946,362 3(i to vii)B. The breakup of the areawise wages as per Note No. 27.2 of the audited accounts for the yearended June 30, 2011 is as under:DETAIL KARACHI LAKHRA METING HYDERABAD KHUSHAB PD KHAN TOTAL ………………………………………………………. (Rs.) ………………………………………………………………………… i. WAGES, SALARIES & TRANSPORTATION CHARGESCoal Transportation 927,255 66,580 993,835Loss Of Live StockSalaries For 685,432 15,642 65,356 435,670 1,202,100TransportationTOTAL 685,432 15,642 65,356 1,362,925 66,580 2,195,935 ii. WAGES FOR TRANSPORTATIONWages Repair & 159,446.69 1,586,686 1,746,132.69Maint. VehicleWages Rope Way 231,121 231,121Wages Power 350,670 350,670HouseWages Haulage 2,245,419.70 13,100 1,251,169 3,509,688.70Wages Repair & 305,858 11,672 839,533.61 441,109 1,598,172.61Maint.Wages 4,249,184 3,200 4,252,384TOTAL 2,710,724.09 24,772 8,508,363.61 444,309 11,688,169 iii. STORE CONSUMEDStore Consumed 1,432,405.8 7,272,992 198,192.23 418,924 3,475,850.32 224,405 13,022,769.43Vehicle 8 3
  • 4. Store ConsumedRope WayStore Consumed 98,802.05 98,802.05Power HouseStore Consumed 24,827 55,739.18 80,566.18Work ShopStore Consumed 2,306,910.95 80,946.92 3,291,159.06 5,679,016.93HaulageStore Consumed 166,292 3,581.70 298,722.71 3,996 472,592.41Misc.TOTAL 1,432,405.8 9,771,021.95 282,720.85 418,924 7,220,273.03 228,401 19,353,747 8GRAND TOTAL 1,432,405.8 13,167,178.3 323,134.85 484,280 17,091,561.93 739,290 33,237,851 8 4(i to iii)C. The breakup of the area wise expenses of wages as per Note No. 27.3 of the audited accountsfor the year ended June 30, 2011 is as under:DETAIL KARACHI LAKHRA METING HYDERABAD KHUSHAB PD KHAN TOTAL ………………………………………………………. (Rs.) ………………………………………………………………………… i. WAGES REPAIR & MAINTENANCEWages Repair & 244,026 2,573,139.10 40,564 6,378,355.17 9,236,084.27Maint. R & MWages Repair & 5,113,976.13 30,720 3,778,912 248,664 9,172,272.13Maint. MineWages Repair & 111,124 288,593 41,157 440,874Maint. BuildingWages Repair & 10,410 10,410Maint. RoadsWages Repair & 1,287,445.60 1,200 682,473 1,971,118.60Maint. Misc.TOTAL 244,026 9,096,094.83 31,920 40,564 11,128,333.17 289,821 20,830,759 ii. STORE CONSUMEDAir Compressor 29,607.76 29,607.76 4
  • 5. Air Compressor OilAir Compressor 11,550 11,550KhbStore Consumed 401,095.62 401,095.62Lighting & BuildingStore Consumed 109,355 25,683.17 54,037.45 35,467 224,542.62BuildingStore Consumed 643,750 643,750RoadsTOTAL 109,355 55,290.93 1,110,433.07 35,467 1,310,546GRAND TOTAL 353,381 9,151,385.7 31,920 40,564 12,238,766.24 325,288 22,141,305 6(i to ii)D. The breakup of the salaries, house rent allowance, provident fund, EOBI, medical allowance,staff welfare, compensation, bonus, gratuity as per Note No. 28.1of the audited accounts for theyear ended June 30, 2011 is as under:SALARIES AND OTHER BENEFITS Amount (Rs.)Salaries 14,830,092House Rent 2,348,986AllowanceOther Allowances 3,456,625Provident Fund 1,489,297E.O.B.I 2,109,074Medical Allowance 1,410,172Staff Welfare 3,354,624Compensation 387,364GratuityTOTAL 29,386,234EXPLANATORY NOTES 5
  • 6. Our Company is engaged in business of extraction of coal from LAKHRA (SINDH), METING(SINDH), KHUSHAB (PUNJAB) AND P.D.KHAN (PUNJAB). Coal mining operations arepurely based on manual work. We have 550 workers in Lakhra Mines, 290 workers in KhushabMines, 17 workers in Meting Mines and 20 workers at P.D Khan Mines.To extract the coal these workers include coal cutters, katcha workers, mine repair &maintenance workers, mine sardars, chowkidar, haulage drivers etc. Payments to these workersare made from time to time, which remains below taxable limit in each case, as far as theirmonthly and annual wages are concerned. Therefore, being below taxable limit, no withholdingtax is deducted from their payments, because section 149 combined with clause 1A of FirstSchedule of Income Tax Ordinance, 2001 mentions that no withholding tax will be deducted ifthe taxable income on account of salaries or wages does not exceed Rs. 300,000 per annum.As the coal is extracted from mines with the help of manual labor, therefore, the main proportionof the overall expenditure comprises of wages payments in the form of coal cutting wages of coalcutters, wages katcha work, wages of repair and maintenance of mines, wages of repair andmaintenance of roads and building, salaries of staff relating to mines, wages of vehicles staff andworkshop etc. Normally 65% to 70% of the total expenses of any coal extraction area, comprisesof wages of labor, whose annual wages do not exceed taxable limit and therefore, there is noquestion of any withholding tax u/s.149.All the payments on account of wages made to the workers are supported by salary registers andwages sheets signed by them. Complete detail of wages paid to coal cutters, daily wage rateworkers, katcha workers of Lakhra and Khushab areas are available in our coal mining areas.CNIC No’s of workers whether monthly rated, daily rated or piece work employed are alsoavailable in our record. The no. of workers, employees working in the coal mining areas arearound eight hundred seventy seven.Further it may be noted that: - Medical allowance as per clause (139) of Second Schedule of the Income Tax Ordinance, 2001 is exempt from payment of withholding tax. Therefore, no withholding tax was deducted from payment of medical allowance to the employees. - No withholding tax was deducted from payment of gratuity to the employees in accordance with sub clause iv of clause 13 of Second Schedule, which states that no withholding tax to be deducted on the payment of gratuity which is 50% of the amount receivable or Rs.75,000 whichever is less. - Staff welfare / Compensation expenses of workers and contribution to recognized Provident Fund and EOBI also do not come within the deduction of withholding tax from these payments. - Bonus and House rent allowance was included in the salary while deducting withholding tax from the employees. 6
  • 7. i. Directors’ remuneration amounting to Rs.5,974,838 was subjected to withholding tax duly deducted from the payment of salaries to working directors and deposited as per income tax challans attached herewith.ii. The bonus amounting to Rs.8,962,410 paid to workers does not fall within the preview of deduction of withholding tax because the payment of wages including bonus per individual worker remained below taxable limit of Rs.300, 000.iii. The gratuity amounting to Rs.1,903,426 was paid to workers. No withholding tax was deducted from these payments because payment to each worker was within the exemption limit under clause (13) sub clause (iv) of Part-I of the Second Schedule to the Income Tax Ordinance, 2001.iv. Accordingly, a sum of Rs.1,545,475 was deducted as withholding tax from the payments of salaries of Rs.11,994,480 to the employees. The remaining amount of salaries was below taxable limit i.e. Rs. 300,000/- per annum per employee and therefore, no withholding tax u/s.149 was required to be made.v. Salaries of all the Senior and Junior employees of all six areas are verifiable from the salary register, salary sheets, accounts books etc and wherever withholding tax u/s.149 was applicable, has not only been deducted but has also been deposited as per the challans / evidences submitted and also disclosed in the annual statement filed u/s.165 / 149 of Income Tax Ordinance, 2001.vi. As for as salaries and other benefits under Note No. 27.1 are concerned, an amount of Rs.1,545,475 was deducted as withholding tax from salaries payments of Rs.11,994,480. Whereas withholding tax was not deducted from the remaining payments of salaries due to being below able taxable limit of Rs.300,000. Withholding Tax was deducted from all those senior and junior employees who came in the ambit of deduction of withholding tax on account of payment of salaries and other benefits.It may be noted that company has already filed with you all the relevant annual statements ofwithholding tax, inter-alia including salary; commission; rent; supplies; contracts; services, etc.alongwith evidences of tax deduction and deposit into Government account. Further, as desired,even audited financial statements for year ended 30.06.2011 corresponding to Tax Year 2011have been filed with you.From audited financial statements, you have picked up figures of various heads of expensesunder profit and loss account, on which 100% en-block withholding tax is required by you.You have not considered whether withholding tax provisions are attracted or not in certain casesand/or exemption of recipients and/or payments within the threshold of exemption limit of 7
  • 8. withholding tax on payments to individual parties, salaries / wages, other expenses etc., and hasthrown full burden of reconciliation of same on the company.It may be noted that such burden on the company for reconciling each and every head of profitand loss account to prove, on which amount withholding tax was deductible and accordingly,deducted and the balance amount was not attracting provisions of withholding tax, isextraordinary burden which otherwise can be verifiable from books of accounts / ledgers andvouchers produced.The learned Appellate Tribunal has in number of cases held that the collection of tax is basicallyfunction of the Revenue Officer and not that of deducting authorities who have been maderesponsible to deduct tax as Government agents under the law and therefore, revenue officermust proceed very judicially before penalizing the assessee.In yet another case, ITAT has observed that the provisions of S.50 read with S.52 and otherrelated sections such as S.139, S.140 and S.142 of Income Tax Ordinance, 1979 are harsh andextraordinary burden on taxpayers, who are providing services without a charge. As suchinvoking S.52 by treating assessee-in-default seems more an effort of making immediaterecovery than to create a legal and just charge is not justified as a routine order.2) OBSERVATION OF THE OFFICER INLAND REVENUEFollowing “Administrative Expenses” enumerated in Note 28 of the financial statements, wereliable to deduction of withholding tax. A tentative picture of rate applicable and deductibleamount for each head of expenditure is depicted as under:Sr. Description of Expenses Amount Claimed Tentative Rate Tentative AmountNo. Applicable of Tax Deductible1 Travelling & Conveyance 2,018,391 6% 121,1032 Repair & Maintenance 22,439,869 6% 1,346,392 (Figure differs with audited accounts)3 Stationery/ Office Supplies 526,264 3.5% 18,4194 Advertisement 63,900 6% 3,8345 Professional Charges 1,110,400 6% 66,6246 Others. 5,030,892 6% 301,853 (Figure differs with audited accounts)7 Rent/Rates/Taxes 1,180,300 As per Sch. 80,0308 Mark-up Interest. 898,760 6% 53,9269 Profit On Debts. 537,486 6% 32,24910 Other Expenses 33,249,236 6% 1,994,954 8
  • 9. (Figure differs with audited accounts) Total 4,019,384Sr. Description Initial Allowances and Addition Rate Taxable AmountNo. Amortization (Purchases Assets)1 Building (all types) 1,719,621 3.5% 60,1872 Motor Vehicle 235,000 3.5% 8,2253 Machinery and plant ( not otherwise 246,257 3.5% 8,619 specified)4 Computer hardware including printer 163,300 3.5% 5,715 and allied items. Total 82,746You are advised to justify for short deduction of tax together with complete details of paymentsand amount of tax deduction under each head of expenditure separately duly substantiated withcopy of paid challans/ CPR in original.OUR RESPONSE TO THE OBSERVATIONA. TIMBER & GENERAL STORESAreawise timber consumed in the coal mines during the year ended June 30, 2011 is as under: Amount (Rs.)Lakhra 8,995,054Meting 210,117Khushab 4,225,785P D Khan 64,349TOTAL 13,495,305Timber is purchased from forest department and growers of the timber whose income is basicallyexempt from income tax because timber is a agricultural produce and its income is exempt fromincome tax. Therefore, no withholding tax was deducted from payments to the timber growers.We refer SRO 586 (1) 91 dated 30/06/1991 (Serial No. V). According to this circular, nowithholding tax should be deduced while making payments to those who produce timber.B. GENERAL STORE CONSUMED 9
  • 10. The areawise consumption of the stores consumed, parts consumed and machinery accessoriesand tools consumed etc. in our mines of various areas are as under. Amount (Rs.)Lakhra 4,867,493Meting 84,186Khushab 1,702,576TOTAL 6,654,255Taxpayer Company is engaged in operation of coal extraction in Lakhra, Meting, Khushab andPind Dadan Khan. Where stores are consumed in abundance in the mines, haulage enginesinstalled at the mouth of the mines, rail lines, roads, buildings, vehicles, wire ropes, dieselgenerators, mining lamps, mining machinery etc. As the coal mines are located in the far off hillyarea, therefore, wear and tear, oil and lubrication, breakage, depreciation of mining machineryand coal transportation is on very high side as regards expenses.It may be noted that the above stores consumed includes 60% to 70% diesel / oil purchased forvehicles and for generators, because in coal mining business of extraction of coals, in absence ofelectricity connection, full time generators are used where diesel is an essential requirement.Similarly, for transportation of coal, diesel is used in vehicles and no tax deduction is to be madefrom payments of petroleum products, including diesel and oil, as they are exempt fromwithholding tax.Further, withholding tax was duly deducted and deposited from those suppliers who suppliedgoods of value above Rs. 25,000/- per annum. No withholding tax was deducted from thoseparties who supplied goods below Rs. 25,000/- per annum, as per SRO 586(1)/91 dated 30-06-1991 and SRO 826(1) / 91 dated 24-08-1991 (clause xii).The imported goods supplied in same condition by M/s Cummins Sales and Services Pakistanand M/s Cables and Conductors did not come under withholding tax because they imported theitems on which tax has already been paid by them at source u/s.148 and therefore, they areexempt from second time withholding tax u/s.153.Withholding tax of Rs.549,473/- was deducted from payment aggregating to Rs. 8,036,013/- onaccount of purchases of goods under this head, the remaining amount did not attract withholdingtax because each party as it remained below taxable limit. The amount on which withholding taxwas not deducted belongs to those suppliers/shopkeepers from whom items of store arepurchased on day to day basis in cash in very small amounts. The number of these suppliers/shopkeepers is in hundreds, supported by their bills, cash memos, invoices etc.C. FREIGHT & CARRIAGEThe areawise payments of the freight & carriage are as under: Amount (Rs.)Karachi 5,420 10
  • 11. Lakhra 877,866Meting 112,023Hyderabad 492Khushab 440,008P D Khan 16,440TOTAL 1,452,249Section 153(1) (b) mentions that withholding tax @ 2% (transportation services) will bededucted from each party. However, if total services per annum of each individual party is belowRs. 10,000/- per annum, then no deduction is required. Further, it may be noted that Freight andcarriage expenses of all areas comprises of very small amount say Rs.2,000/-, Rs.5,000 and Rs.6,000 etc.However, withholding tax was duly deducted from all those payments following in the taxablelimit for purpose of withholding tax. We are enclosing challans of withholding tax during theyear ended June 30, 2011.D. REPAIR & MAINTENANCEThe areawise expenditures of repair & maintenance of office equipments and furniture are asunder: Amount (Rs.)Lahore 61,020Lakhra 9,400Hyderabad 2,850Khushab 22,922TOTAL 96,192These expenses were incurred on the repair & maintenance of office equipments and officefurniture. Those expenditures are incurred on day to day basis in small amounts. No withholdingtax was deducted from the payments of bills of repair & maintenance which individually andseparately do not cross the taxable limit of Rs.10,000 per annum.E. LEGAL & PROFESSIONAL AND AUDIT FEEi. A sum of Rs.65,000 was paid to auditors of the company M/S Daudally Lalani & Co. for conducting the audit of our company for the year ended June 30, 2011. Withholding tax of 6% on payment made to them was deducted and deposited into the Govt. treasury. Photocopy of the payment receipt is enclosed herewith. 11
  • 12. ii. An amount of Rs.933,000 was paid to the legal consul of the company viz ABS & Company Advocates, Akram Associates and Qazi Mohammad Aslam Advocate, Khushab for contesting the legal cases of the company. We deducted withholding tax of 6% on payment made to them was deducted and deposited into the Govt. treasury. The payments receipts of withholding tax are being enclosed with this letter. An amount of Rs.33,900 was paid on account of purchasing legal documents and court expenses in small amounts. So, withholding tax was not deducted on these amounts due to being small amounts.iii. A sum of Rs.52,000 was paid to legal consultant of the Company Chaudhary Umar Hayat, Advocate for contesting he legal cases of the company. We duly deducted withholding tax at the rate of 6% on payments which was deposited into Govt. treasury.iv. We paid a sum of Rs.21,500 as professional fee in the account of the Excise & Taxation Office, Govt. of Sindh. This amount was Govt. levy. No withholding tax was deducted on this amount because payment of Govt. dues does not attract provisions of withholding tax.v. We paid an amount of Rs.45,000 to M/S Akber G Merchant & Co. Chartered Accountants as income tax consultancy fee. Withholding tax of 6% on payment made to them was deducted and deposited into the Govt. A/c.vi. Our company deducted withholding tax from all payments of legal and professional charges which were above taxable limit of Rs.10,000 per individual per annum. So withholding tax was duly deducted in the light of SRO 586 (1) 91 dated 30/06/1991 and SRO 826 (1) 91 dated 24/08/1991 (clause XII).We are producing herewith extract of books of accounts comprising of all the cash books,ledgers, salary registers, original vouchers / evidences and wages sheets / register, etc. for yourverification in support of our all above contentions and then return to us.We hope that above explanation will suffice your purpose of monitoring of withholding tax andin case, you desire any further document / evidence / explanation, please let us know.NOTE:Our company has paid Rs.39,950,434 (Rs.35,352,530: 30/06/2010) to Govt. Exchequer in theform of Sales Tax and Central Excise Duty. This payment can be verified from the auditedaccounts for the year ended June 30, 2011 and FBR Web Portal.Thanking you. 12
  • 13. Yours faithfullyMOHAMMAD AZAMCHIEF ACCOUTANTMOHAMAD AMIN BROS. (PVT) LTD.ATTACHMENTS 1. Annual Statement of Deduction of Income Tax from Salary under Rule 44(1). 2. Annual Statement of Collection or Deduction of Income Tax under Section 165 (2). 3. Copies of exemption certificates issued during the year ended 30/06/2011. 4. Photocopies of withholding tax challans deducted from those deriving salaries / wages above the taxable limit for the year ended 30/06/2011. 13
  • 14. 5. Photocopies of tax challans deducted from supplies, services, commission, rent paid for the year ended 30/06/2011 are enclosed.6. Wages / salaries payment sheets of our main coal extraction areas viz Lakhra and Khushab for the months of December 2010 and June 2011 are enclosed to support our above mentioned replies. 14

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