Federal Tax Ombudsman (FTO) has detected serious flaws in withholding tax deductions on the purchase/lease of vehicles by individuals/businesses, depriving the buyers to claim tax credits of advance tax paid by them on registration/sales of such vehicles.
This is an own motion investigation initiated by the FTO to investigate lack of symmetry committed by the FBR filed formations in the management of credit of withholding taxes under section 231B of the Income Tax Ordinance, 2001 in respect of leased vehicles.
FTO’s order revealed that the record of withholding statements filed by car manufacturers, tax credit u/s 231-B claimed by various banks and the details regarding treatment meted out to them were called for from the tax department.
Details of the issue revealed that adjustable advance tax u/s 231-B on private motor vehicles is collected by the provincial registration authority of Excise & Taxation department u/s 231-B(1) on the manufacture of motor vehicles under Section 231-B(3) on registration and sale respectively. The subject tax is adjustable in terms of sub-section (5) and the owner can claim credit of this tax against his yearly tax liability.
A sizeable number of vehicles are purchased by individuals as well as businesses owned by firms and companies on lease, either from different commercial banks or leasing companies. A sale invoice is issued by car manufacturers in the name of lessor, i.e. bank or leasing company. Therefore, tax u/s 231-B (3) is withheld and deposited in their name by the car manufacturer.
Although it is called withheld tax but the manufacturer is not extending credit to the ultimate buyer but it is being recovered in the name of the lessor (banks or leasing companies) and then deposited in the government treasury. Factually the lessor is making payment to the manufacturer at the time of purchase & the entire cost is recovered from the lessee, along with interest.
Whereas the advance tax u/s 231-B is in fact recovered from the lessee, even before the execution of the lease agreement in some instances. Therefore, the tax u/s 231-B is paid by the lessee and only he is entitled to take credit of this tax against his tax liability. As the tax is deposited by the manufacturer in the name of the lessor, the credit is wrongfully allowed to him as it neither belonged to him nor has he borne the burden of this tax.
On the other hand, the actual buyer is not only deprived of his due credit but double jeopardy is caused to him at the termination of the lease when he goes to the registration authority for registration of his vehicle. Section 231 B (4) provides for the exclusion from withholding of tax by registration authority u/s 231 -B(l) if the person produces evidence that tax u/s 231-8(3) was charged by the manufacturer from the same person.
As the tax is deposited in the name of lessor (Bank or leasing Co), the registration authority again charges the tax on the same vehicle on which he has already paid tax to lessor Therefore, the malpractice of erroneous allowance of tax credit to lessors/ denying of due credit to actual buyers and unlawful dual charge of tax to actual buyers is in practice due to negligence, inefficiency, incompetence of officers of FBR in the performance of their duties.
“It has been observed that the tax is deposited in the name of the lessor (banks or leasing companies), but the financial burden is borne by the lessee (individuals or businesses). As a result, the lessor receives the tax credit, although they do not bear the actual cost of the tax. When the lessee goes for vehicle registration, they are charged the advance tax again because the registration authority does not recognize the initial payment made in the name of the lessor; hence double jeopardy”, FTO order said.
FTO has recommended the FBR to direct the Member IR (Operations) to devise a mechanism to ensure that the advance tax u/s 231-B(3) is credited to the lessee’s account, who is the actual payer of the tax. This can be achieved by requiring manufacturers to document and report the lessee’s details along with the tax payment.
The manufacturers should be mandated to issue a certificate or document to the lessee indicating the advance tax paid u/s 231-8(3) in the lessee’s name. The registration authority should accept this certificate as proof of tax payment to avoid double taxation at the time of registration, FTO directed.
FBR has also directed the Member IR (Operations) to implement a digital system that integrates data from manufacturers, lessors, and registration authorities which should verify the advance tax payment and ensure it is correctly credited to the lessee, FTO order added.
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