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The concept of advance tax

“If we don’t do something to simplify the tax system, we’re going to end up with a national police force of internal revenue agents.”

— Leon Panetta

The law of income tax principally envisages tax to be paid annually after determining the correct quantum of income earned and amount of tax liability incurred during the fiscal year (from 1 July to 30 June in Pakistan). Thus, a person can concentrate on his work for the full 12 months; generate enough finances to meet his ends and contribute towards the exchequer as part of his constitutional obligation, being a citizen of this country.

In other words, the ideal situation is that till the time a person files his return of income, he should not be worried about paying this tax in any form, rather focus his energies on increasing and improving economic activities. Such efforts would yield better results in the form of higher profits and thus better tax revenues for the government.

One can argue that in some cases it is prudent to pay your taxes as you move along as it then relieves one of the burdens of paying a heavy chunk of money at the end of the year. This may be applicable in the case of salaried individuals who could be inclined to consuming their entire wages in one month and may not be able to save any in order to pay their tax liability. Another instance could bethose persons who lack awareness about tax laws due to ignorance and are caught unawares when a legal notice is served on them. If some amount of tax is compulsorily withheld in their case then perhaps they may be forced to pay attention to this aspect. Besides, forceful withholding can help them avoid unnecessary confrontation with the authorities in addition to discharge of their legal liabilities.

All this sounds very good and logical but if the same law is stretched beyond practical boundaries, it can also be a source of much anguish especially in the case of those heavily taxed persons who are compelled to pay advance tax under section 147 of the Income Tax Ordinance 2001. Those who are obliged to pay this tax include association of persons, individuals (other than salaried persons), having annual income of Rs. 500,000 or more; and all companies. They have to deposit tax in quarterly and in the case of banks, monthly installments equal to the latest year’s tax liability.

Thus, during the year, the government not only earns tax revenue for the current tax year but also takes into account tax revenue of the next fiscal year. Since this is an ongoing matter, it may not be so important as far as revenue collection is concerned but the stringency of the law is quite testy for many. Many ledger accounts have to be maintained, exact dates of payment need to be remembered, cash has to be set apart for timely payments, in case of online payment supply of electricity and existence of a good server are necessary.

Of course, adjustment of other advance taxes already paid is allowed but it definitely requires an immaculate maintenance of accounts. In addition, there is the important requirement of providing a statement as well. Since any deviation from rules, default in payment, late payment or laxity in submission of relevant statement is dealt with imposition of penalty and default surcharge so all those taxpayers who fall in this category have to remain alert throughout the year with respect to advance tax.

The most lamentable aspect of this piece of legislation is the fact that the government is quick to penalise default of a single day with a heavy rate of interest but does not compensate the taxpayer for utilising his funds that he deposits in advance.

A historical perspective of advance tax shows that after the Second World War, it was introduced as a measure to combat inflation and to withdraw part of the unprecedented amount of money then in circulation, but, like many other innovations in tax legislation, it has outlived the exigency which gave it birth. A good measure would be to do away with this tax, relieving the taxpayers of an unnecessarily heavy burden and resorting to hunting down chronic tax evaders to make up for revenue dearth. A more positive attitude towards increasing compliance and expanding the tax base can help to generate the much-needed funds in order to run the government’s machinery efficiently.

The ideal situation is for the government to live within its own means, not yours.

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