Provisions of Section 153 (1) (a) of ITO 2001: FBR clarifies special exemption allowed to certain categories

The Federal Board of Revenue has clarified special exemption allowed from the provisions of section 153(1)(a) of the Income Tax Ordinance, 2001, to certain categories of taxpayers including purchasers of agricultural produce, oil tankers and steel melters. In this connection, the FBR has issued Circular No 10 of 2011 explaining the benefits granted under SRO.787(I)/2011 here on Saturday.
While explaining the rationale behind the exemption allowed under SRO.787(I)/2011, tax experts said that it is clarified that since the agricultural income is exempt in the hand of grower under section 41 of the Income Tax Ordinance, 2001, therefore, question to deduct income tax against supply of agricultural produce does not arise. Resultantly, in the light of SRO.787 read with Circular No 10 of 2011 any purchase of agricultural produce directly from grower has been exempted from provisions of withholding tax under section 153(1)(a) of the Income Tax Ordinance, 2001.
The circular further explained that the provisions of section 153(1)(a) shall not apply where agricultural produce is purchased directly from the grower of such produce, subject to provision of a certificate by the grower to the withholding agent in the prescribed format.
The certificate to be filed by the grower of agricultural produce would specify the CNIC Number of the person who has sold agricultural produce. The information would also include name of agricultural produce like wheat, rice, cotton, sugar cane, etc.
The quantity, total price and land identification would also be submitted in the form, however, in the circular 10 of 2011 the condition regarding measurement and identity of agricultural land has been relaxed and it has been made optional on the end of the grower, in case of non- providing this information department shall not insist the grower to provide this information, expert said.
The said exemption has also been specifically extended to taxpayer working as Ginner. Cotton purchased by ginners from the growers shall also be exempted form tax deduction subjected to the condition ginner shall provide a copy of certificate furnished by the grower to the concerned RTO/LTU and the said certificate shall be verified by the IR authorities within one year.
In case no verification has been received from IR authorities within one year, the ginner shall not be asked by the RTO/LTU authorities about the non-deduction of that tax. For the purposes of monitoring the whole transaction the responsibility has been fixed on the shoulders of Chief Commissioners.
It has also been explained that agricultural produce if purchased through a commission agent, income tax @ 10% shall be deducted on account of commission paid to agent/trader/dealer; however, income tax u/s153(1)(a) shall not be deducted on such transaction. The condition of certificate shall also stand abolished if grower supplied agricultural produce through commission agent, tax expert said.
Besides this specific exclusion allowed from provision of Section 21(L) of the Income Tax Ordinance, 2001, has also been explained that purchaser of agricultural produce may make payment in cash and such payments though made in cash shall not be treated as inadmissible deduction under section 21(L).
In case of exemption allowed to owners of oil tankers from provisions of withholding tax under section 153(1)(a) of the Income Tax Ordinance, 2001, against cash payments made for meeting the incidental expenses of a business trip to the crew of oil tanker. It has been explained that any expenses incurred under any other head of account shall not qualify for exemption u/s153(1)(a).
Regarding exemption granted to steel melters to deduct withholding tax at reduced rate of one percent under section 153(1)(a) of the Income Tax Ordinance, 2001, on account of local purchases of steel scrap. The conditions attached with the said benefit under SRO 787 have been elaborated. The exemption is available subject to fulfilment of condition to opt Sales Tax Special Procedure and filing of tax returns under the Special Procedure Scheme regularly, tax expert added.
According to the text of the circular, Clause (12) of Part-IV of Second Schedule to the Income Tax Ordinance 2001 (XLIX of 2001) has been substituted through SRO 787(l)/2011 dated 22nd August 2011, in order to allow specific exemptions/concessions in withholding tax deductible under clause (a) of sub-section (1) of section 153 to the following categories. On sales, made by growers of agricultural produce, the incidental expenses to be incurred by owners/contractors of oil tankers and on local purchase of scrap steel by steel melters.
Since the agricultural income as defined in Section 41 is exempted under the Ordinance, subjecting the growers to the withholding regime under section 153(1)(a) on sale of agricultural produce would have been an anomaly and unfair. Therefore, their sale receipts from agricultural produce have been exempted from withholding tax.
The expenditure on purchase of agricultural produce from its grower has also been exempted from the applicability of clause (I) of section 21, which requires payment through crossed banking instruments / banking channel. The grower in order to avoid payment of withholding tax shall be required to provide a certificate to the person making payment directly to the growers as prescribed in the said notification.
In view of the peculiar characteristics of Cotton crop, it has been decided by the Board that the ginner purchasing cotton from the grower will be required to forward a copy of the certificate furnished by the grower to the concerned RTO/LTU. The authenticity of the particulars provided in the said certificate may be verified by the relevant Inland Revenue authority within one year, and no question shall be asked from the ginners after lapse of one year after the date the certificate was received by such authority.
The concerned RTOs/ LTUs are required to set up a special cell for obtaining and processing the information /documents regarding transactions of agricultural produce. It will be the responsibility of the concerned Chief Commissioner to ensure that all the Commission Agents/traders of agricultural produce whose receipts have been subjected to withholding tax are borne on tax roll and filing their returns of income.
The provision of particulars as prescribed in the certificate about the measurement and identity of agricultural land is optional for the growers, and department shall not insist on this requirement. The person purchasing agricultural produce through a commission agent shall be required to deduct advance tax @ 10% on the amount of commission paid to the agent and tax u/s 153(1)(a) shall not be deductible on such transactions. The grower making sales through such commission agent shall not be required also to furnish the prescribed certificate.
Exemption provided under sub-clause (a) of clause (12) of Part-IV of Second Schedule to the Ordinance, is not available to the traders of agricultural produce and withholding tax shall be deductible from them at the prescribed rates. Payments made by the owners / contractors of oil tankers for meeting necessary incidental trip expenses paid to crew of oil-tankers, have also been exempted from the provisions of clause (a) of sub-section (1) of section 153.
However, this exemption shall not be allowed to the owners of oil tankers made under any other head of their business expenditure. The rate of deduction withholding tax under clause (a) of sub-section (1) of section 153 has been reduced from 3.5% to 1%, in case of local purchases of scrap steel made by the steel melters who have opted for the Sales Tax Special Procedure Rules 2QD7 relating to steel melters, and are regularly filing returns under the said scheme. The benefit of this reduction in rate of tax cannot be allowed to those steel melters who are outside the ambit of Sales Tax Special Procedure Rules 2007, or who have failed to file Sales Tax Returns regularly, it added.