Important: Query about Claims and Refunds

[irfan.mansoor]

Comments of experts and experience members are required.

Case

My company has taken over a running sole proprietorship concern organization, for this purpose we have signed a taking over agreement and completed the process.

However, the said proprietorship concern organization was a vendor unit of PSMCL and could not stop its transaction during handover process due to this sales tax output stands. Now the question arises here is,

i) We can't claim cash payment from FBR, because the entity has not been liquidated and the condition given in the sales tax ordinance is only in the condition where the item destroyed or lost etc

ii) what would be the best possible way to get refund or transfer the balance into the company which has taken over the proprietorship concern

Your answers and views will be highly appreciated.

[kamranACA]

Subsection (2) of Section 49 of the Sales Tax Act 1990 states

“In the case of sale or transfer of ownership of a taxable activity or part thereof to another registered person as an ongoing concern, sales tax chargeable on taxable goods or part thereof shall be accounted for and paid by the registered person to whom such sale is made or ownership is transferred.”

Now, your company is bound to account for and pay the sales tax chargeable on the goods acquired as a result of take-over. To settle the issue of already recorded output and input taxes, you can either recover the net amount from the seller of the business (as the benefit of such transactions has been passed on to them); or file an application with the Sales Tax authorities to

- either permit your company to use same Sales Tax Registration Number that was previously given to the sole-proprietorship as same business has been taken over.;

- Or, permit you to account for the output and input taxes outstanding on previous Registration Number, after which the previous number can be blocked or de-registered.

I hope Company's Memorandum of Association must be carrying a reference to the take-over agreement with the sole proprietorship. The MOA along with Take-Over agreement can be filed as a proof along with the application.

This process looks difficult but quite recently some companies (which took-over businesses from Sole-proprietorships or partnerships) have followed it and got the issue resolved.

Don’t you have similar issues with bank balances, income tax, customs, utility connections, State Bank of Pakistan etc?

Regards,

[irfan.mansoor]

As far as the mater of income tax and bank balances are concerned here, they will be carried forward to the balance sheet of the company which acquired the running business. since the organization has been taken over by our entity, it is our asset, whereas, in case of sales tax it has not really defined rules in such circumstances that we are facing here "What to do with input Balance" Should Be claimed If Yes the rule says only Destroyed or Lost goods can be reclaimed or return in form of cash. on the other hand the amount of income tax recorded as asset can be claimed from FBR by presenting Taking over agreement. and the balance can be set off against the current tax provisions

[irfan.mansoor]

Kamran Bhai! Whats your opinion in this case[?]

[kamranACA]

Income tax paid by sole-proprietorship cannot as such become your asset since it is neither an amalgamation defined in the Companies Ordinance, 1984 nor a conversion of sole-proprietorship into a company under the required approvals. Advance tax consists of three things mainly; (i) the tax deducted by other parties against which they provide tax payment challans as proof of deduction (ii) tax paid on utility bills against which the business holds the paid utility bills as proof of payment (iii) tax paid by the business itself as quarterly advance tax under section 147 of the Income Tax Ordinance, 2001 for which it holds the paid tax challans as proof of payment. For treating any advance tax as your asset, you need to hold the aforesaid payment proofs. Now, since all such advance tax was paid by (or deducted on behalf of) the Sole-Proprietorship against its name and NTN, your company cannot claim it as its own asset. So, here again you will face similar issues as you are perceiving with respect to Sales Tax claims.

The bank accounts transferred (if any) would also similarly be in the name of Sole-Proprietorship or the Sole-proprietor. So, either you have to transfer the funds with the consent of previous owners (as they would be the signatories of such accounts as well instead of you) into company’s new bank accounts. (The previous accounts may be closed then). Or, to change the ‘Titles’ and ‘Signatories’ of such existing accounts with the consent of the previous signatories/owners. This would again entail same issues and process.

Quite similarly, you will also have to manage the issue of Utility connections which would obviously be in the name of previous owners. This would be necessary as you have to claim the utility expenses (and tax thereon) in company’s books of account. Further, you also have to establish your right on the security deposits given by previous owners against such utility connections.

If you are into imports or exports, you also have to deal with SBP and Customs for change of name, particulars etc, as indicated in my previous post.

These all things entail similar efforts and process as I have narrated with respect to sales tax.

Regards

[irfan.mansoor]

It is really glad to me that U R giving me attention personally I am really thank full to you. Let me define you brief scenario

PSI was a sole proprietorship concern organization for the purpose to convert the same running business in a private limited company was formed at that time there were to options with us either we liquidate the running business and start in form of company or to form another company with the similar name and take over the running business by all means this is possible to do. we have closed our existing business finalized the account executed the taking over agreement and submitted the copies of the same documents to all authorities now we are going to submit the same copy to PRAAL (FBR)


the matter here is the Income tax paid in advance against the import of raw material U/s 153 1A that is totally refundable is part of current assets that is transferred at the time of taking over.

and regarding the bank account it has done in the same manner as you described in the post above.

[admin]

<font color="blue"><b>Due to the nature of the query, this thread is being moved to the Taxation Forum.</b></font id="blue">

[irfan.mansoor]

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica, san" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by Admin</i>
<br /><font color="blue"><b>Due to the nature of the query, this thread is being moved to the Taxation Forum.</b></font id="blue">
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

Dear admin,


This topic is relevant with the accounting treatment of taxation in case of a taking over of a business as same in the case of amalgamation, liquidation and mergers Etc.