04-13-2007, 05:43 PM
Dear Mr. Mahmood,
As stated by you, the wording of section 153 is very much clear about which amount is subject to deduction of income tax at source. Its sub-section 1 states that every presecribed person while making payment in full or in part or by way of advnace to resident person or permanent establishment of a non-resident person in respect of
(a) for the sake of goods.
(b) for the rendering of or providing of services and
(c) for the execution of a contract )other than a contract for the sale of goods or rendering of services)
shall deduct tax at source (as per rates prescribed.
This is very much clear that payment under discussion that has been made subject to dedcution of tax must be for goods, services or contract value.
This section is silent for re-imbursable or out of pocket expenses.
In my view since only the subject matter is the payment against delivery either of goods, services or contract, therefore there was no need to explain anything relating to reimbursable expenses.
Reimbursable expenses are incurred on behalf of the contractee or buyer of services. If company "ABC" will incur certain expenses, like travelling, entertainment, or boarding/lodging expenses , would it deposit tax against all such expenses? The reply is NO. Tax is deducted or deposited only on those items where it is prescribed. For example, if GSM JAZZ connection is in the name of company ABC and its consultant is using it and he purchases scratch card he would be paying income tax on such scratch card as a part of purchase price. When he will get reimbursment the company ABC will not deduct tax from his expenses reimbursment. Rather, if possible, it will get the JAZZ card to claim the tax in its return or get certificate of collection at source from GSM company. But no tax would be deducted from consultant's claim.
Now if due to lack of planning or whatever, connection remained in the name of the consultant and he has deposited tax as part of its purchase price etc or as part of cost of cards used by him, it cannot be claimed by ABC company. Normally consultants come from abroad and they do not claim such advance taxes in their return (that is incorrect actually). The company will have to make full payment to consultant unless some thing was agreed at the outset.
There is no requirement to deduct tax from reimbursable expenses claimed by service providers. However, as a matter of arrangement, if ABC has already agreed with its consultants, the payment of reimbursment expenses could be reduced to the extent of any taxes included in their claims as reimbursable expenditure which are likely to be claimed by them in their return.
This reduction/dedcution would be the income (decrease in expense) for ABC limited and would not be a deduction of tax at source. This depends upon agreement and not on tax law.
I understand that there is no specific provision in Income Tax Ordinance 2001 discussing reimbursable expenses to be paid to service providers and in my view the circumstances do not grant a necessaity for having such a provision.
However, somewhat in past, I have read some case laws where this matter was brought under discussion/appeals and where reimbursbale expenses were excluded from deduction of tax at source as per decision of ITAT and honourable high courts.
If you will need such case law, I will search it for you but it will require some time to go back to office library and search for such case law.
Hope you will find this explanation in line with your professional opinion as well. If you find anything contrary, please enlighten me as well.
Best regards,
Kamran.
As stated by you, the wording of section 153 is very much clear about which amount is subject to deduction of income tax at source. Its sub-section 1 states that every presecribed person while making payment in full or in part or by way of advnace to resident person or permanent establishment of a non-resident person in respect of
(a) for the sake of goods.
(b) for the rendering of or providing of services and
(c) for the execution of a contract )other than a contract for the sale of goods or rendering of services)
shall deduct tax at source (as per rates prescribed.
This is very much clear that payment under discussion that has been made subject to dedcution of tax must be for goods, services or contract value.
This section is silent for re-imbursable or out of pocket expenses.
In my view since only the subject matter is the payment against delivery either of goods, services or contract, therefore there was no need to explain anything relating to reimbursable expenses.
Reimbursable expenses are incurred on behalf of the contractee or buyer of services. If company "ABC" will incur certain expenses, like travelling, entertainment, or boarding/lodging expenses , would it deposit tax against all such expenses? The reply is NO. Tax is deducted or deposited only on those items where it is prescribed. For example, if GSM JAZZ connection is in the name of company ABC and its consultant is using it and he purchases scratch card he would be paying income tax on such scratch card as a part of purchase price. When he will get reimbursment the company ABC will not deduct tax from his expenses reimbursment. Rather, if possible, it will get the JAZZ card to claim the tax in its return or get certificate of collection at source from GSM company. But no tax would be deducted from consultant's claim.
Now if due to lack of planning or whatever, connection remained in the name of the consultant and he has deposited tax as part of its purchase price etc or as part of cost of cards used by him, it cannot be claimed by ABC company. Normally consultants come from abroad and they do not claim such advance taxes in their return (that is incorrect actually). The company will have to make full payment to consultant unless some thing was agreed at the outset.
There is no requirement to deduct tax from reimbursable expenses claimed by service providers. However, as a matter of arrangement, if ABC has already agreed with its consultants, the payment of reimbursment expenses could be reduced to the extent of any taxes included in their claims as reimbursable expenditure which are likely to be claimed by them in their return.
This reduction/dedcution would be the income (decrease in expense) for ABC limited and would not be a deduction of tax at source. This depends upon agreement and not on tax law.
I understand that there is no specific provision in Income Tax Ordinance 2001 discussing reimbursable expenses to be paid to service providers and in my view the circumstances do not grant a necessaity for having such a provision.
However, somewhat in past, I have read some case laws where this matter was brought under discussion/appeals and where reimbursbale expenses were excluded from deduction of tax at source as per decision of ITAT and honourable high courts.
If you will need such case law, I will search it for you but it will require some time to go back to office library and search for such case law.
Hope you will find this explanation in line with your professional opinion as well. If you find anything contrary, please enlighten me as well.
Best regards,
Kamran.
