BUDGET BRIEFING 2020: Comments on Finance Bill 2020-I

ARTICLE: Income Tax

1. Self assessment

Section 120 Sub-section (2A)

The most significant feature of the Ordinance to date is the "self-assessment" scheme, whereby a complete return of income filed by a taxpayer is treated to be an assessment order issued by the tax authorities in respect of the income declared and tax thereon. The Bill however proposes to bring a paradigm shift in the concept of self- assessment whereby the return of income filed by the taxpayer would now be processed through automated system to arrive at correct amounts of total income, taxable income and tax payable by making adjustments for any arithmetical error in the return, any incorrect claim, disallowance of any loss, deductible allowance or tax credit, disallowance of carry forward of any loss under section 182A.

It has however been stated that no adjustment shall be made unless the taxpayer has been provided with an opportunity of being heard. The adjustments shall be incorporated if the taxpayer fails to respond within thirty days from the issuance of the notice. The Bill also provides that if no adjustments have been made within six months of the filing of the return, the return declared by the taxpayer shall be deemed to have been taken as adjusted.

For the purposes of this Section:-

"arithmetical error" includes any wrong or incorrect calculation of tax payable including any minimum or final tax payable

"an incorrect claim apparent from any information in the return" shall mean a claim, on the basis of an entry, in the return

• Item which is inconsistent with another entry

• Tax payments not verifiable from the system

• In respect of deduction where such deduction exceeds specified statutory limits

1. Amendment of assessment

Section 122

The provisions of Section 122, since their inception have been the subject of controversies between the taxpayers and the tax authorities. They contain two separate sets of provisions viz. sub-section (5) and sub-section (5A). Under the former, the Commissioner is authorized to amend an assessment based on 'definite information' "acquired from an audit or otherwise" that -

• any income chargeable to tax has escaped assessment; or

• total income has been under-assessed, or assessed at too low a rate, or has been the subject of excessive relief or refund; or

• any amount under a head of income has been mis-classified.

It is pertinent to point out that the above provisions are borrowed from Section 65 of the Income Tax Ordinance, 1979 (since repealed) where they were taken from Section 34 of the erstwhile Income Tax Act, 1961. However, the concept of audit has been introduced via the Ordinance and therefore, the acquisition of 'definite information' was also linked to audits conducted by the tax authorities in addition to from any other source. As such, in order to make amendment in assessment in terms of sub-section (5) of Section 122, possession of 'definite information' either through audit or otherwise, is a pre-requisite.

The Bill proposes to amend the provisions of sub-section (5) of Section 122 to the effect that even if after an audit, definite information could not be acquired by the Commissioner, he can still amend the assessment on the basis of his best judgement and make disallowances without specific supporting evidence.

1. Alternative Dispute Resolution

Section 134A

The provisions of this Section were completely revamped through the Finance Act, 2018 as a result whereof, the forum of Alternative Dispute Resolution (ADR) was converted into another appellate forum whose findings are however, not challengeable. The reason being that the order passed by the FBR in ADR proceedings has been made final for both the taxpayers and the tax authorities rather than being an option for a taxpayers to seek alternate remedy. In case, the recommendations made by the Committee formed for ADR purposes are not acceptable, the taxpayer was allowed to pursue the matter at other legal forums. The amendments made through the Finance Act, 2018 were generally criticized by businesses as well as professional forums and it was emphasized that the mechanism under ADR before such amendments should be restored.

In order to address the above concerns, the Bill proposes to make key amendments to the ADR mechanism. It is proposed that the taxpayer would no longer be required to withdraw his appeal pending before the appellate forum immediately after the constitution of the Committee. Instead, the taxpayer shall withdraw the appeal pending before the appellate forum only if he is satisfied with the decision of the Committee/ FBR. It is further proposed that the decision of the Committee/ FBR shall not be binding on the taxpayer but shall be binding on the Commissioner, provided that the order of withdrawal of appeal is communicated to the Commissioner within 60 days of the service of decision of the FBR upon the taxpayer. The amendments so proposed are welcome amendments that various industries and professional bodies have been seeking for the past two years.

Currently, the Committee for ADR consists of an officer of Inland Revenue not below the rank of a Commissioner, a person nominated by the taxpayer from a panel notified by the FBR and a retired judge nominated through consensus by the other two members. Furthermore, the Committee decides the dispute by majority. The Bill now proposes that the Committee shall comprise of the Chief Commissioner having jurisdiction over the case and two persons from a panel notified by the FBR. Conversely, the Committee shall decide the dispute through consensus rather than majority.

The Bill also proposes that the Committee may, in case of hardship, stay the recovery of tax payable in respect of the dispute pending before it for a period not exceeding 120 days in aggregate or till the decision of the Committee or its dissolution, whichever is earlier.

Corresponding amendments in this regards should also be introduced in Rule 231C of the Rules

1. Agreed assessment in certain cases

Section 122D

The Bill proposes to insert a new Section to the Ordinance to provide for agreed assessment in case where a notice under sub-section (9) of Section 122 has been issued to the taxpayer. The proposed Section 122D contains a complete code of agreed assessment, the salient features whereof are as under -

(a) A taxpayer after issuance of a notice for amendment of assessment may file an offer of settlement in the prescribed form before the Assessment Oversight Committee (AOC) in addition to filing a reply to the Commissioner. The definition of AOC however, has not been proposed by the Bill however, it has been proposed that the FBR may make rules regulating the procedure and other related matters connected with or incidental to the proceedings of the AOC;

(b) The AOC after examining the offer made by the taxpayer as aforesaid, may call for the record of the case and after affording opportunity of being heard to the taxpayer, may decide to accept or modify such offer through consensus and communicate its decision to the taxpayer;

(c) Where the taxpayer is satisfied with the decision of the AOC, he shall -

(i) Deposit the amount of tax payable including any amount of penalty and default surcharge as per decision of the AOC;

(ii) the CIR shall amend assessment in accordance with the decision of the AOC after having satisfied that the tax as determined by the AOC has been paid by the taxpayer;

(iii) the taxpayer shall waive the right to prefer appeal against such amended assessment; and

(iv) no further proceedings shall be undertaken under the Ordinance in respect of the issues decided by the AOC unless the tax as per clause (i) above has not been deposited by the taxpayer.

(d) Where the AOC has not been able to arrive at a consensus or where the taxpayer is not satisfied with the decision of the AOC, the case shall be referred back to the CIR for decision on the basis of reply of the taxpayer made by him to the CIR notwithstanding proceedings or decision, if any, of the AOC;

(e) The AOC shall comprise of the following income tax authorities having jurisdiction over the taxpayer:

(i) the Chief Commissioner;

(ii) the Commissioner; and

(iii) the Additional Commissioner.

(f) It is lastly provided that in cases where concealment of income or where interpretation of question of law is involved having effect on other cases, the procedure of agreed assessment shall not be available.

1. Tax credit for NPOs, trusts and welfare institutions

Section 2(36), Section 100C and Clause (66), Part I of the Second Schedule

Through Clause (36) of Section 2 of the Ordinance, Non-Profit Organization ("NPO") has been defined to mean any person other than an individual which has been established for religious, educational, charitable, welfare or development purposes, or for the promotion of an amateur sport. The Bill has proposed to bring about a change in the above definition to remove the phrase "or development purposes" from the above definition and replace it with the expression "purposes for general public". This appears to be an attempt to rationalize the definition of NPO. The impact of the above proposed change would be that only the person (other than an individual) which have been established for benefit of general public and is involved in various activities listed above (excluding development purposes) would fall within the ambit of NPO.

The provisions of Section 100C of the Ordinance provides for a tax credit equal to one hundred percent of the tax payable, to an NPO, trust and welfare institution, subject to fulfillment of certain conditions. This section has undergone various amendments since its introduction in the Ordinance via the Finance Act, 2015 bringing in new conditions to be fulfilled by the entities falling therein.

The Bill, apart from bringing some editorial changes, proposes to make the following amendments in Section 100C -

(a) A statement of voluntary contributions and donations received in the immediately preceding year, in the prescribed form and manner, is required to be submitted. Keeping in view the country's culture and the religious sentiments where the donors (except corporate donors) prefer not to declare their name and identity, in our view, this condition may become impractical. Even where donation is deposited over the counter in banks, the donees' identification is not identifiable for, cash is deposited in the bank account directly;

(b) Currently, surplus funds of an NPO is subject to tax @10%. The scope of such taxation is proposed to be extended to the surplus funds of 'trusts and welfare institutions as well'; and

(c) For the purposes of computing surplus fund, amounts or monies that form part of restricted funds are excluded. The term 'restricted fund' means any fund received but could not be spent and treated as revenue during the year due to any obligations placed by the donor. The Bill proposes to replace the term 'donor' with the phrase 'a donor not being an associate of the organization'. This would mean that if this amendment is approved, only restrictions placed by a donor who is not an associate of the donee would be taken into consideration as restricted funds to oust from the purview of surplus funds.

Apart from the above, Clause (66) of Part I of the Second Schedule to the Ordinance exempts any income derived by certain non-profit institutions, trusts and welfare organizations. The Bill proposes to replace this Clause by bifurcating the list into two sets of entities. The first list comprise of entities including relief funds established by governments and government sector welfare entities whose incomes (from whatever source) will remain exempt from tax without fulfillment of any conditions as before the proposed amendment. The second list mainly consist of NPOs, trusts and welfare institutions which are mainly involved in actives of welfare for general public. Such entities have been proposed to be subject to the provisions of Section 100C of the Ordinance in order to qualify for the exemption in terms of Clause (66) referred above. However, a concession is proposed that this requirement of meeting the pre-requisites of Section 100C would apply from 01 July 2021.

1. Taxpayer's profile

Sections 114A, 182 and 182A

In order to update and synchronize the taxpayers particulars, the Bill proposes to add a new Section 114A wherein following persons are required to furnish the tax profile in the prescribed form along with relevant annexures, statements or documents:

• every person applying for registration under Section 181;

• every person deriving income under the head "Income from Business"

• every person whose income is subject to final taxation

• any non-profit organization as per Clause (36) of Section 2

• any trust or welfare institution

• any other person prescribed by the Board

The particulars that are required to be submitted include bank accounts, utility connections, business premises including all manufacturing, storage or retail outlets operated or leased by the taxpayer, types of businesses and other prescribed information.

The deadline for furnishing the aforesaid profile is as follows:

In case of a person registered before 30September, 2020 - on or before 31 December, 2020

In case of a person not registered before 30 September, 2020 - within ninety days of registration.

In case there is a change in particulars, the profile is expected to be updated within ninety days of such change.

The Bill also provides a penalty of PKR 2,500 for each day of default, subject to minimum penalty of PKR 10,000, in case of non-furnishing of such profile. Further, non-furnishing of the tax profile may lead to non-inclusion of the name of the taxpayer in the ATL. However, the person shall be included in the active taxpayers' list subject to filing of profile after the due date and payment of surcharge as under:

• PKR 20,000 in case of a company;

• PKR 10,000 in case of an association of persons; and

• PKR 1,000 in case of an individual.

1. Return of Income and Statement of Final Taxation

Section 114 and Section 115

Persons whose entire income is governed under the FTR are required to file a statement in lieu of return of income pursuant to Section 115(4) of the Ordinance.

The Bill now seeks to mandate such taxpayers to file the complete return of income pursuant to Section 114 of the Ordinance instead of the statement as above.

Consequential amendments are proposed to be made throughout the text of the Ordinance to give effect to this amendment.

Also, the Bill now proposes to empower the FBR to prescribe different forms of return for different classes of income or persons including persons subject to final taxation. As a result of the above, the privileges available to such persons who only filed statement under section 115(4) in the past like no requirement to file proper accounts appear to have been withdrawn in view of the fact, that almost the entire final tax regime has been converted into minimum tax regime whereby comparison of taxes withheld and actual tax liability based on profits of the person is now required.

Similarly, in relation to revision of return of income, the Bill proposes to require the CIR to grant approval in case of a bonafide omission or wrong statement.

1. Tax audit

Section 177

Conventionally, tax audits are conducted physically whereby the CIR calls for records and documents which he deems appropriate including books of account etc. either in paper or electronic form, from a taxpayer, in respect of a particular tax year. Considering the advent of technology and its revolutionizing impact on every facet of life, it has become imperative that other means of gathering information and conducting audit of the tax affairs of a person may be explored.

Accordingly, a new sub-section (2A) is proposed to be inserted in Section 177 of the Ordinance which empowers the CIR to conduct audit proceedings of a taxpayer electronically through video links or any other facility as may be prescribed by the FBR. We understand that for this purpose, the FBR would introduce a mechanism.

Though, this is a right step, implementation of a secure and effective system which is also acceptable to all stakeholders would be a challenging task for the FBR. Further, effective controls would also be required to be in place to ensure transparency and confidentiality of the information accessed through online systems.

It has also been proposed that where a taxpayer fails to furnish records, documents, books of accounts, has furnished incomplete records or is unable to provide sufficient explanation regarding any defects in the records, the CIR may determine its taxable income on the basis of sectoral benchmark ratios.

The sectoral benchmark ratios are defined as standard business sector ratios based on comparative cases, as notified by the FBR, and includes financial ratios, production ratios, gross profit ratio, net profit ratio, recovery ratio, wastage ratio etc.

1. Appeals to appellate authorities

Sections 127, 129 and 131

Pursuant to the proposed introduction of sub-section (2A) to Section 120 of the Ordinance providing for processing of a return of income through automated system, which would result in passing of an assessment order in terms of section 120 of the Ordinance, Section 127 of the Ordinance, which provides for an appeal to the CIR (Appeals), has also been proposed to be amended. The amendment proposed in Section 120 would provide for filing of an appeal in case the assessment so passed is not acceptable to the taxpayer.

The Bill also proposes to enhance fees for filing appeals with the CIR (Appeals) and with the ATIR. The below table depicts the existing fees and the proposed fees -

===========================================================================

Authority Individual/ AOP Company

        Appeal against                    Appeal against

       assessment order    Other order   assessment order   Other order

              PKR              PKR              PKR                 PKR

===========================================================================

                               CIR (Appeals)

Existing 1,000 200 1,000 1,000

Proposed 2,500 1,000 5,000 5,000

             ATIR

Existing 2,000 2,000 2,000 2,000

Proposed 2,500 2,500 5,000 5,000

===========================================================================

It is not understandable as to what is the reason behind the proposal of enhancing the appeal fees for, the increase may not have substantial impact on revenue generation neither it would likely result in reduction in the number of appeals being filed owing to arbitrary assessments being framed.

In addition to the above, another set of amendments has been proposed in Section 127 and 131 of the Ordinance. Somewhat similar amendments were made in the repealed Ordinance when through the Finance Act, 1994, Sections 129 and 134 were amended which respectively dealt with filing of appeals before the CIR (Appeals) and the ATIR. The amendments so made related to mandatory payment of partial tax demands arising from the impugned orders. However, those amendments were omitted via the Finance Act, 1996. Thereafter, the Finance Ordinance, 2000 again amended Section 129 of the repealed Ordinance to the above effect however, with the advent of the Ordinance in the year 2003, such provisions were done away with. It is, after the lapse of almost 17 years that the Bill has proposed to amend Section 131 of the Ordinance which deals with the procedure of filing of appeals with the ATIR. The proposed amendments suggest that in order for an appeal with the ATIR to be admitted, the taxpayer would be required to deposit ten percent of the tax as upheld by the CIR (Appeals), the proof whereof has to be provided at the time of filing the appeal by the taxpayer. A related amendment has also been proposed in Section 127 of the Ordinance requiring the CIR (Appeals) to specify in his order, the amount of tax upheld by him.

The aforesaid amendments give rise to a serious issue of depriving the taxpayers of the right of appeal. Another ambiguity that arises is that the proposed amendment requiring payment of tax has been couched in such a manner that it refers to payment of the 'tax upheld' instead of the 'related tax demand'. In all fairness, this needs to be dropped from the table at the time of converting the Bill into an Act of Parliament.

1. Unexplained income or assets

Section 111

Currently, under Section 111 of the Ordinance, if the CIR is of the opinion that the taxpayer is unable to providea satisfactory explanation on account of the following items with respect to the nature and source of their investment, he may tax such items to the extent they are not adequately explained under the head 'income from other sources'. The Bill has now proposed a significant amendment with respect to the head of income under which such unexplained source of income/ investment/ expense would be taxed. A comparison of which is tabulated below -

========================================================================================

S.No. Particulars Current head Proposed head

                                                        of taxation      of taxation

========================================================================================

1. Amount credited in a person's books of account Income from No change

                                                       other sources       proposed
   

2. Investment/ ownership of money or valuable article -do- -do-

3. Expenditure incurred -do- -do-

4. Suppressed production/ sales -do- Income from

                                                                           business
   

5. Any other suppressed item/ receipt liable to tax -do- -do-

========================================================================================

The proposed change aims to rationalize the taxation of relevant items under the respective heads to which they relate.

1. Capital gains on disposal of immoveable property

Section 37

The taxation of capital gains arising from disposal of capital assets is governed by Section 37 of the Ordinance. A separate mechanisms for computation of capital gain on disposal of (i) open plot, and (ii) constructed property was introduced through the Finance Act, 2019. The capital gain was eligible for reduction of 25% based on holding period exceeding one year up to eight years for open plots and one year up to four years for constructed property. Furthermore, the gain arising after holding period of eight years in case of open plot and four years in case of constructed property was taken as zero.

In order to incentivize economic activity in the real estate sector, the Bill seeks to eliminate the separate mechanism for taxation of capital gains on immovable property by revamping the taxability of such capital gains and proposing as under:

(a) Eliminating classification of immovable property into open plots and constructed property.

(b) Reducing the holding period for 100 percent reduction in gain to four years.

(c) Progressive reduction in the amount of gain based on each year of the holding period.

The existing and proposed mechanism for taxation of capital gain on immovable property is as follows:

===============================================================================

                         Existing

Holding Period Reduction Holding Period for Reduction in

for Open Plot in gain Constructed property gain

===============================================================================

Does not exceed one year 0% Does not exceed one year 0%

Exceeds one year 25% Exceeds one year but 25%

does not exceed two years 25%

Exceeds eight years 100% Exceeds four years 100%

                         Proposed

===============================================================================

Holding Period for Reduction

immoveable property in gain

===============================================================================

Does not exceed one year 0%

Exceeds one year but does not

Exceed two years 25%

Exceeds two years but does not

exceed three years 50%

Exceeds three years but does not

exceed four years 75

Exceeds four years 100%

===============================================================================

A new Clause (114AA) has also been proposed to be introduced in Part I of Second Schedule to the Ordinance, whereby any capital gains derived by a resident individual from the sale of constructed residential property shall be treated as exempt from tax, if the following conditions are met:

(a) at the time of sale, the residential property is being used for the purpose of personal accommodation by the resident individual, spouse or dependents of the individual, and for which any of the utility bills is issued in the name of such individual;

(b) the land area of the property does not exceed 500 square yards in case of a house and 4000 square feet in case of a flat; and

(c) such exemption has not been previously claimed by the individual, spouse or dependents of the individual.

1. Payment to non-residents

Section 152

The Finance Act, 2018, introduced the concept of Cohesive Business Operations to bring into the ambit of Pakistan taxation, any supply of goods from outside Pakistan, if an associate of the non-resident supplier is also engaged in the installation or commission of such goods. This created significant hurdles for projects in relation to remittance of payments due to the non-resident suppliers. In order to address the issue, the Finance Act, 2019 introduced sub-section (4B) which allowed the Commissioner to permit payment after deduction of tax equivalent to 2.1 percent (being thirty percent of the tax chargeable on such payment). The Bill now proposes to reduce the rate to 1.4 percent (being twenty percent of the tax chargeable on the payment to the non-resident supplier).

The Bill also proposes that the tax withheld, under sub-section (2A), from payments made to a permanent establishment of a non-resident shall be a minimum tax, except where payments are received for the sale of goods by a company being a manufacturer of such goods. This proposed amendment aims to rationalize the provisions of section 152 with the provisions of section 153, and create a level playing field for both resident companies and permanent establishments of non-residents.

Similarly while rationalizing the provisions relating to tax on services under section 153 of the Ordinance, through Finance Act, 2019, certain sectors were allowed a reduced rate of tax at 3% instead of a higher general rate of 8/10% of gross value of services. However, similar provisions were not adopted for permanent establishments of non-residents dealing in similar services. The Bill now seeks to provide similar mechanism for services rendered by permanent establishments of non- residents. However, it is pertinent to note that while introducing these provisions, engineering services which were part of the selected sectors has not been enlisted and in fact is also proposed to be abolished for resident service providers under section 153.

The Bill also includes various rationalization measures by proposing that:

(1) the tax deducted from payment for advertisement services to a non-resident media person relaying from outside Pakistan is a minimum tax;

(2) that the exemption application made by a permanent establishment under sub-section (4A) is made in a prescribed form; and

(3) that the exemption application made by a payer shall include such other particulars as may be prescribed.

1. Restriction on deduction of profit on debt payable to associated enterprise

Section 106A

In line with Action Plan 4 of the OECD's recommendations on BEPS, the Bill proposes to introduce a new section which imposes a restriction on deduction of profit on debt payable to associated enterprise. The salient features of the new section are:

• Deduction of foreign profit on debt in excess of fifteen percent of taxable income before depreciation, amortization and foreign profit on debt shall be disallowed to a foreign controlled resident company (other than an insurance or banking company);

• The section shall not apply if the total foreign profit on debt claimed as a deduction is less than PKR 10 million for a tax year;

• Where the foreign profit on debt cannot be fully adjusted against the taxable income for a tax year, the excess amount shall be added to the amount of foreign profit on debt for the following tax year and shall be treated to be part of that deduction, or if there is no such deduction for that tax year, be treated as the deduction for that tax year and so on for three tax years following the year in which the foreign profit on debt was claimed as an expense;

• This section shall apply in respect of foreign profit on debt accrued with effect from the first day of July, 2020, even if debts were contracted before the first day of July, 2020;

• Foreign-controlled resident company means a resident company in which fifty percent or more of the underlying ownership of the company is held by a non-resident person either alone or together with an associate or associates; and

• Foreign profit on debt means interest paid or payable to a non-resident person or an associate of a foreign-controlled resident company, and includes a wide variety of financial instruments, including instruments which in substance are in the nature of financial instruments, and also includes fees, expenses and exchange gains / losses related to such instruments.

The section also discusses the interplay between its provisions and the provisions of section 106 relating to Thin Capitalization rules. However, the provisions are incomplete, and their intention is not comprehensible in the current proposed state. In all probability this will be clarified in the Finance Act.

It is important to note that the provisions of the proposed section are far more onerous than the existing Thin Capitalization rules, since the latter only apply when the foreign debt to foreign equity ratio exceeds 3:1 and the foreign debt is obtained from a foreign related party where the profit on debt is either exempt from tax in Pakistan or is subject to tax at a rate lower than the corporate tax rate. The restriction under the proposed section on the other hand, would become applicable on all foreign profit on debt payments; even those obtained from third party lenders, so long as the borrower is a foreign controlled resident company and the profit on debt exceeds the monetary threshold of PKR 10 million.

1. Applicability of minimum tax on permanent establishment of non-resident persons Section 113

Section 113 of the Ordinance levies minimum tax on a person based on his turnover where such person is not liable to pay tax due to various reasons listed therein. However, the levy of minimum tax in case of corporate taxpayers, is only applicable on resident companies. This means that foreign companies having a permanent establishment in Pakistan (including a branch) are not subject to minimum tax. The Bill has now proposed to include non-resident companies having a permanent establishment in Pakistan under the domain of minimum tax on turnover.

Consequently, such companies would be required to compute minimum tax under Section 113 of the Ordinance for determination of their ultimate tax liability. It may be noted that in the matter of levy of tax on non-resident persons, as per Section 107 of the Ordinance, the provisions of the DTA between Pakistan and the respective country would prevail over the provisions of the Ordinance. It needs to be appreciated that in most of the DTAs Pakistan has signed with other countries, a permanent establishment of a non-resident in Pakistan would be taxable only on net income basis. Therefore, the applicability of minimum tax in case of a non-resident person having a permanent establishment in Pakistan may be put to a question where a DTA prevails.

1. Deductions against Income from Property

Section 15A

Section 15A provides for deductions in computing income chargeable under the head Income from Property.

Presently a deduction in respect of 'income from property' is allowed on account of expenditure incurred for collecting rent and other expenditures of administrative nature is subject to the threshold of 6% of rent chargeable to tax in respect of such property. The Bill now proposes to reduce the said threshold to 2%.

Presently, individuals and AOPs deriving income under the head 'Income from Property' above PKR 4 Million have an option either to be taxed on gross amount or opt for net income taxation by claiming expenses under Section 15A of the Ordinance. The Bill proposes to omit the threshold for availing the said option with the result that now all individuals and AOPs have an option either to be taxed on gross amount or net income basis in respect of income chargeable to tax under the head 'Income from Property'.

1. Deductions not allowed in computation of Income from Business

Section 21

Section 21 of the Ordinance prescribes a list of expenditures that are not allowed as a deduction when computing Income from Business. This includes certain expenditures that are not made through banking channels if they exceed the prescribed thresholds.

The Bill now proposes to enhance the threshold of aggregate expenditure under a single account head from PKR 50 thousand to PKR 250 thousand, not made through banking channels, that would be allowed as a deduction when computing Income from Business.., Further the relaxation of a single cash transaction in the above limit has been enhanced from PKR 10 thousand to PKR 25 thousand. Similarly, the threshold of salary, not paid through banking channels, has been proposed to be increased from PKR 15 thousand to PKR 25 thousand.

Similar to the provisions of the sales tax laws, the Bill also proposes to introduce a new Clause whereby an industrial undertaking would not be entitled to claim a deduction for any expenditure attributable to sales made to persons required to be registered but not registered under the Sales Tax Act, 1990 computed according to the following formula, namely;

(A/B) x C

Where -

A is the total amount of deductions claimed;

B is the turnover for the tax year; and

C is the total amount of sales exclusive of sales tax and federal excise duty to persons required to be registered but not registered under the Sales Tax Act, 1990 where sales equal or exceed rupees 100 million per person.

Provided that disallowance of expenditure under this Clause shall not exceed twenty percent of total deductions claimed and that the FBR may, by notification in the official Gazette, exempt persons or classes of persons from this Clause on the basis of hardship.

Another Clause is also proposed to be inserted under which any expenditure on account of utility bills in excess of prescribed limits and conditions would not be allowed as a deduction.

1. Depreciation deduction

Section 22

Section 22 of the Ordinance provides for computation and claim of deduction in respect of depreciation.

Currently, the Ordinance allows a tax payer to claim full years depreciation in respect of an asset acquired during the year. Conversely, no depreciation is allowed in the year of disposal.

The bill now seeks to restrict the claim of depreciation to 50% of full year depreciation in the year of acquisition. Similarly, in relation to disposal of an asset, depreciation would be available to the extent of 50% of full year deprecation in the year of disposal.

1. Tax credit on charitable donations

Section 61

Currently, donation paid to any board of education, university, educational institution, hospital or an NPO is entitled to tax credit under Section 61 of the Ordinance based on the following formula:

(A/B)*C

Where

A is the amount of tax assessed

B is the person's taxable income for the tax year

C is the lesser of

Total amount of donation including the fair market of property

Thirty percent of the taxable income of the person for the year in case of an individual and association of persons

Twenty percent of the taxable income of the person for the year in case of Company

Incase where the donation is given by an associate, the Bill proposes to reduce the limits provided in component C of the formula as follows:

Fifteen percent of the taxable income of the person for the year in case of an individual and association of persons

Ten percent of the taxable income of the person for the year in case of Company

1. Advance tax

Section 147,Sub-section (4)

Section 147 provides that every taxpayer shall be liable to pay quarterly advance tax and in accordance with sub-section (4), the same is required to be calculated on the basis of the turnover of the quarter. The Finance Act, 2018 inserted a proviso to sub-section (4) where advance tax liability in the case of a company or AOP, where it fails to provide the turnover for the quarter, or it is not known, the liability shall be worked out by taking the value of turnover for the quarter as being 1/4th of 110% of the turnover of the latest tax year, for which a return has been filed. The Bill now seeks to insert another proviso in sub-section (4) where in the FBR may prescribe procedure for filing and calculation of turnover for the quarter through an automated system.

1. Special provisions relating to builders and developers

Sections 2(29C), 100D and Eleventh Schedule

The rapid spread of COVID-19 in the country has brought economic activity to a near-halt. Most of the country has been under lockdown. The closure of non-essential businesses and domestic supply chain disruptions are having a significant impact on all businesses and sectors of the economy.

In order to bring economic stability in the country and to promote Government's efforts to support low-cost housing projects for the masses in urban areas, special tax relief and incentives have been introduced for businesses/ industries related to construction sector by insertion of Section 100D along with the Eleventh Schedule to the Ordinance through the Tax Laws (Amendment) Ordinance, 2020.

The aforesaid provisions introduced a separate tax regime for builders and developers who get themselves registered with the FBR for the purposes of the above scheme by 31 December 2020. The Government now proposes to enact the above amendments through the Bill. We have already shared our detailed comments on the proposed amendments vide our briefing dated 20 April 2020.

Additionally, effective 01 May 2020, builders and developers are proposed to be included in the ambit of an 'industrial undertaking' for the purpose of import of plant and machinery for building and development activity.

1. Withholding tax on receipts of resident persons

Section 153

A) Toll manufacturing

The terms 'toll manufacturing' refers to an arrangement, where a company with specialized equipment processes raw materials or unfinished goods for a different company and converts it into a finished good. Accordingly, it can safely be said that receipts on account of toll manufacturing represents service receipts. Therefore, currently such receipts are subject to withholding of under Section 153(1)(b) of the Ordinance. However, in contrast to the above, the Bill has proposed that receipts on account of toll manufacturing would be included with as sale of goods under section 153(1)(a) of The Ordinance.

The rationale behind above change in application of withholding tax on toll manufacturing is to align the amendments made in the ST Act, wherein toll manufacturing is explicitly provided to constitute supply and hence subjected to sales tax under the Federal domain.

B) Minimum tax on receipts

Through the Finance Act, 2019, withholding tax on entire receipts of resident companies was made minimum tax on such receipts except in the following cases -

(i) Where payments are received on account of sale or supply of goodsby a -

• company being a manufacturer of such goods; or

• public company listed on a registered stock exchange in Pakistan

(ii) Payments received by a public company listed on a registered stock exchange in Pakistan on account of execution of contracts.

This was done by way of insertion/ change in specific Clauses in relation to each category of withholding of tax under sub-section (3) of Section 153 of the Ordinance. To streamline and simplify the above, the Bill has now proposed that tax deductible under section 153 would be minimum tax excluding the exceptions mentioned above. This would result in simplification of the law and may result in clearance of various ambiguities which were prevailing due to complexity and repetitiveness. However, effectively the position of taxability remains the same.

C) Exemption certificate for non-withholding of tax

Sub-section (4) of Section 153 of the Ordinance empowers the CIR to issue an exemption certificate for non-withholding of tax, if the tax deductible under sub-section (1) is not minimum tax, provided that such persons has discharged its tax liability for the tax year by way of payment of advance tax. The above Section, however, does not provide any timeline within which the CIR may process such application made by the taxpayer. The Bill has now proposed to insert a proviso under sub-section (4) which states that incase of listed companies, the CIR would be required to issue an exemption certificate within fifteen days from the date of filing of an application if the advance tax liability has duly been discharged. It further proposes that incase if the certificate is not issued by the CIR within the stipulated fifteen days, it shall be deemed to be issued by the CIR and automatically processed by IRIS. However, it is also proposed to empower the CIR to modify or cancel the certificate issued by automatically by IRIS on the basis of reasons to be recorded in writing after providing an opportunity of being heard to the taxpayer.

The above proposed change is a positive shift and would require the CIR to take prompt action on applications made by the taxpayers. In line with the above proposed change, such a facility shall be introduced for all class of taxpayers to avoid unnecessary delays in issuing exemption certificates.

D) Threshold for becoming withholding agent under Section 153

Presently, following persons are treated as withholding agents based on the threshold of their turnover. The Bill has now proposed to enhance the thresholds to be as under -

============================================================================================

S.No. Particulars Current Threshold Proposed Threshold

                                of Turnover PKR              of Turnover PKR

============================================================================================

1. Association of Persons 50 million or above in any 100 million or above in any

                               of the preceding tax year    of the preceding tax year
   

2. Individual 50 million or above in any 100 million or above in any

                               of the preceding tax year    of the preceding tax year
   

3. Person registered under the No threshold prescribed Having turnover of

   Sales Tax Act, 1990 100 million or above

============================================================================================

This appears to be a positive change whereby small businesses would be relived from the responsibility of acting as withholding agents.

1. Tax paid at import stage

Section 148 and the Twelfth Schedule

Clause 72B of Part-IV of Second Schedule to the Ordinance

Clause 56 of Part-IV of Second Schedule to the Ordinance

A) Rate of tax

Section 148 of the Ordinance requires collection of income tax by the Collector of Customs at the time of import of goods. Presently such tax collected at import stage is treated as a minimum tax in respect of the income arising out of such imports except under the following circumstances:

• Raw material, plant & machinery, equipment and parts imported by an industrial undertaking for its own use;

• Motor vehicles in complete built unit (CBU) condition imported by manufacturer of motor vehicles;

• Import by large import houses; and

• A foreign produced film imported for the purposes of screening and viewing.

The Bill now seeks to introduce a new Schedule as the Twelfth Schedule to the Ordinance wherein all the goods imported into Pakistan may be classified under either of the three categories viz Part I, Part II and Part III based on PCT code wise listing of goods given in each part. Whilst Part III of the said Schedule prescribes the general rate of 5.5% to apply, the rate is reduced to 1% and 2% respectively for goods falling under Part I and II.

B) Broadening scope of minimum tax

The Bill proposes to enhance the scheme of minimum tax to apply to all categories of import except by industrial undertaking importing goods subject to collection of tax either at 1% or 2%, pursuant to Part I or Part II of the Twelfth Schedule. Accordingly, by virtue of the proposed amendment, all other categories of imports would now fall under the minimum tax scheme.

C) Value of goods

The Bill also proposes to amend the definition of the expressions Value of Goods which would be considered for the purpose of calculating income tax at import stage. The expression value of goods would now represent:

(a) in case of goods chargeable to tax at retail price under the Third Schedule of the ST Act, the retail price of such goods increased by sales tax payable in respect of the import and taxable supply of the goods; and

(b) in case of all other goods; the value of the goods as determined under the Custom Act, as if the goods were subject to ad valorem duty increased by the customs duty, federal excise duty and sales tax, if any, payable in respect of the import of the goods.

D) Exemption from collection of tax on import of raw material by an industrial undertaking

Presently, by virtue of Clause (72B) of Part-IV of Second Schedule to the Ordinance, a taxpayer has an option to obtain exemption certificate for non-collection of tax on the imports of raw material by an industrial undertaking on fulfilment of certain conditions and discharging its advance tax liability for the current tax year.

Since the general rate of tax to be collected on imports by industrial undertaking for its own consumption has been substantially reduced from 5.5% to 1% or 2% for goods falling in Part I and II of the Twelfth schedule , the Bill now seeks to omit the aforesaid Clause 72B. Hence, exemption would no longer be available in respect of tax collected under Section 148 of the Ordinance to an industrial undertaking. Although there is substantial reduction in rate of collection of tax, as a result of withdrawal of such exemption, the taxpayer operating on margins lower than the rate of advance tax collected on imports or having adjustable losses/tax credits or enjoying tax exemption may still face liquidity hitches.

E) Exemption from collection of tax on import

Clause (56) of Part IV of the Second Schedule currently list down goods that are exempt from collection of tax under Section 148 of the Ordinance, on fulfillment of specified conditions. Simultaneously, a SRO 947(I)/2008 also identifies persons/classes of persons and goods/classes of goods that may claim exemption from the application of Section 148 of the Ordinance under certain circumstances. The Bill proposes to capture the exemption available under the SRO 947(I)/2008 within the scope of Clause 56 of Part Four of the Second Schedule.

1. Omission of certain advance tax provisions

Sections 235B, 236D, 236F, 236J, 236R, 236U and 236X

The Bill proposes to withdraw the collection / deduction of tax at source in relation to the following:

• Advance tax on steel melters, and composite units;

• Advance tax on functions and gatherings;

• Advance tax on cable operators and other electronic media;

• Advance tax on dealers, commission agents and arhatis, etc

• Advance tax on education related expenses remitted abroad;

• Advance tax on insurance premium; and

• Advance tax on tobacco.

1. Advance tax on private motor vehicles

Section 231B

The Bill proposes to insert an explanation through which it is clarified that a motor vehicle does not include a rickshaw, motorcycle-rickshaw and any other motor vehicle having engine capacity upto 200cc.

1. Advance tax on electricity consumptions

Section 235

Section 235 prescribes that advance tax is collected on the amount of electricity bill of a commercial or industrial consumer. Currently, the law empowers the Commissioner to issue an exemption certificate to a person whose income is exempt from tax.

The Bill now proposes that an exemption certificate can also be issued to a person who has discharged his advance tax liability for the year.

1. Advance tax at the time of sale by auction

Section 236A

Section 236A states that any person making sale by public auction or auction by tender shall collect advance tax at the rate of ten percent from the person to whom such property or goods are being sold.

There has been significant uncertainty on whether the provisions of this Section apply to a renewal of licenses issued to telecom companies. Furthermore, since the payment of license fee by the telecom companies is spread over multiple years, there was also ambiguity on whether the advance tax is to be levied in its entirety at the time of the auction, or spread out over the payments.

In order to put an end to such disputes, it is proposed that an explanation is inserted in Section 236A, whereby it is clarified that the expression "sale by public auction or auction by a tender" includes a renewal of a license previously sold by public auction or auction by a tender. It is also proposed that where payment is received in installments, advance tax is to be collected with each installment.

1. Advance tax on sale or transfer of immovable property

Section 236C

Currently, advance tax under section 236C is not collected if the immovable property has been held for a period exceeding five years.

The Bill proposes to reduce this limitation to four years, in order to bring it in line with the proposed exemption of capital gains tax on sale of immovable property which will not be applicable to property held for a period exceeding four years.

1. Collection of advance tax by educational institutions

Section 236I

Currently, Section 236I prescribes that advance tax at the rate of five percent shall be collected by educational institutions from all persons, where the annual fee exceeds PKR 200 thousand. It is now proposed that the advance tax shall only be collected from persons not appearing in the ATL.

1. Advance tax on payment to residents for use of machinery and equipment

Section 236Q

Section 236Q deals with the withholding tax on payment to residents for use of machinery and equipment. Currently, the tax deducted at the time of making payment is a final tax on the income of such person.

The Bill now proposes that the tax deducted shall be a minimum tax on the income of such person.

1. Real-time access to information and databases

Section 175A

For broadening of the tax base and effective monitoring of tax evasion, the Bill seeks to insert a new Section dealing with the provision of real-time access of information and database of various organizations to the FBR. Such organizations and the related information is as follows:

============================================================================================

Organization Information

National Database and Details pertaining to National Identity

                                          Card, Pakistan Origin Card, Overseas

Registration Authority Identity Card, Alien Registration Card,

                                          and other particulars contained

                                          in the Citizen Database.

Federal Investigation Agency Details of international entry and exit of all

                                          persons and information pertaining

                                          to work permits, employment visas

                                          and immigration visas.

Bureau of Emigration and Detail of international entry and exit of all

                                          persons and information pertaining

Overseas Employment to work permits, employment visas and

                                          immigration visas.

Islamabad Capital Territory, Record-of-rights including digitized

                                          edition of record-of-rights, periodic record,

Provincial and local and record of mutations and report of

record and development authorities acquisition of rights.

Islamabad Capital Territory and Details regarding registration of vehicles,

Provincial Excise and Taxation Departments transfer of ownership and other

                                          associated record.

All electricity suppliers and gas Particulars of a consumer, the units

transmission and distribution companies consumed and the amount of bill

                                          charged or paid, Name and CNIC

                                          of the owner and user in cases where

                                          the connection is shared or used by

                                          a person other than the owner,

Any other agency, authority, institution Any information and detail notified by

or organization notified by the FBR the FBR

============================================================================================

The Bill further proposes that all electricity suppliers and gas transmission and distribution companies shall make arrangements by 01 January, 2021, for allowing the consumers to update the ratio of sharing of a connection and the particulars of users. It is also proposed that the FBR shall make arrangements for laying the infrastructure for real-time access to information and databases described above and aligning it with its own database. The information and record received under this section shall be used only for tax purposes and kept confidential.

Keeping in view the fact that the establishment of such real-time infrastructure by the FBR, as well as the concerned organizations, may take significant time and may be subject to various constraints, the Bill also proposes that until real-time access to information and database is made available, such information and data shall be provided periodically in any other form and manner as may be prescribed.

1. Jurisdiction of income tax authorities

Section 209

The Bill proposes to insert a proviso after sub-section (2) of Section 209 whereby, FBR may also confer upon or assign to any Officer of Inland Revenue all or any of the powers and functions conferred upon or assigned to the Commissioner through Automated Case Selection System. Another proviso is also proposed according to which the FBR may make rules for conferment or assignment of such powers and functions through Automated Case Selection System.

The Bill also proposes to insert an explanation under which, for the purpose of this sub-section, the expression "Automated Case Selection System" means an algorithm for randomized allocation of cases by using suitable technological modes.

1. Delegation

Section 210

In order to undo the judgement of the Lahore High Court, in the case of Asia Poultry Feeds (Pvt.) Limited vs. the Federal Board of Revenue (W.P. 8466 of 2015) dated 23 June 2015, the Finance Act, 2019inserted a new sub-section in Section 161 whereby the Commissioner was empowered to amend or further amend an order of recovery already passed under section 161, and recover the tax that escaped at the time of passing of the said earlier order, if he considers that the order passed earlier is erroneous in so far it is prejudicial to the interest of revenue.

The Bill now proposes an amendment in sub-section (1A) of Section 210, through which the power of amendment of an order of recovery under sub-section (3) of Section 161 can now be delegated to an Additional Commissioner of Inland Revenue.

1. Definition of Integrated enterprise

Clause (30A), Section 2

The Bill seeks to introduce the definition of 'Integrated enterprise" by adding new Clause (30A) in section 2 of the Ordinance which means a person integrated with the FBR through approved fiscal electronic device and software and who fulfills obligations and requirements for Integration as may be prescribed.

1. Offences and Penalties:

Section 182

Currently, in terms of Section 181AA, any application for a commercial or industrial connection of electricity or gas, as the case may be, shall not be processed unless the person applying is registered for tax purposes under Section 181 of the Ordinance. The Bill now, seeks to introduce penalty for non-compliance of the provision of the Section 181AA amounting to PKR 10,000 for each connection provided to an un-registered person.

1. Default Surcharge

Section 205

This section provides for the levy of default surcharge in case of non and/or late payment of tax. Default surcharge is generally calculated from the due date of payment to the actual date of payment. It follows that if the payment is not made for any reason then technically default surcharge could not be levied as the terminal date is not available/present.

The Bill seeks to add a new sub-section (7) whereby it is proposed that the Commissioner, at his discretion, may make assessment of default surcharge for the period of default or part thereof, even in a case the due tax has not actually been paid.

1. Definition of IRIS

Section 2(30AC)

Although the online portal 'IRIS' has been in place from the tax year 2014, however, a formal reference thereof is neither available in the Ordinance nor in the Income Tax Rules. The Bill has now proposed to introduce the definition of 'IRIS' portal in the Ordinance through insertion of a new Clause in Section 2, in the following manner -

"A web based computer program for operation and management of Inland Revenue taxes administered by the Board"

Pursuant to the above proposed definition, the term "IRIS" is now being proposed to be referred to in various Sections of the Ordinance.

1. Definition of Local Government

Section 2(31A)

Through the 18th Amendment in the Constitution of Pakistan, precincts of provincial autonomy were revamped by abolishing all items from the Concurrent List - the list of legislative subjects which appeared in the Fourth Schedule to the Constitution. This mandated that thesubjects mentioned therein could now be legislated on by the Provincial legislatures. Subsequent to the above, each province has legislated their own laws to establish an elected local government system. Therefore, to reflect the above change, the definition of 'Local Government' has been proposed to be updated, which would refer to the definition contained in the Acts enacted by each province and the Islamabad Capital Territory.

1. Limit on deductions on account of lease payments

Section 28

It may be noted that Clause (a) of sub-section 12 of Section 22 of the Ordinance restricts the costs of passenger transport vehicle not plying for hire up to PKR 2.5 million i.e. if the costs of such vehicle exceeds PKR 2.5 million, for the purpose of computing tax depreciation, it would be deemed to be PKR 2.5 million. The Bill has proposed to bring about a similar change in section 28 of the Ordinance which provides for deduction inter alia, on account of lease rentals paid by a person in respect of an asset acquired under lease. The Bill has proposed that in case of passenger transport vehicle not plying for hire, the deduction on account of lease rental payments would be restricted to the extent of cost not exceeding PKR 2.5 million.

However, it appears that the language of the proposed amendment is not properly worded as it gives an impression that only the deduction on account of principal payment would be restricted up to a maximum of PKR 2.5 million. This will be more complicated to apply in case of Islamic mode of financing where the installments do not comprise of principal and mark up portions rather they are counted as lumsum installments/rentals.

It also needs to be appreciated that due to depreciation of currency and prevailing inflation, the price of vehicles has been increased manifold. To cater to such situation, instead of increasing the limit from PKR 2.5 million for purpose of claim of depreciation, the government has circumscribed the deduction on account of lease rentals for vehicles purchased under lease.

1. Tax on shipping of a resident person

Section 7A

Section 7A deals with the taxation of resident persons engaged in the business of shipping. The Bill seeks to introduce a new Clause (c) which states that a Pakistan resident ship owning company registered with the Securities and Exchange Commission of Pakistan after the 15th day of November, 2019 and having its own sea worthy vessel registered under Pakistan Flag shall pay tonnage tax of an amount equivalent to seventy five US Cents per ton of gross registered tonnage per annum.

The Bill also seeks to extend the applicability of Section 7A till 30th June, 2023 from its current cessation date of 30th June, 2020.

1. Tax credit for enlistment

Section 65C

Section 65C provides a tax credit, equal to 20% of the tax payable for the tax year, to companies opting for enlistment on a stock exchange in Pakistan for the year in which the Company is listed, and for the following three years. The Bill now proposes to restrict the tax credit to companies that opt for enlistment till the 30th day of June, 2022.

1. Wealth Statement

Section 116

Currently, If an individual, who has furnished a wealth statement, discovers any omission or misstatement therein, he can furnish a revised wealth statement along with the revised wealth reconciliation by identifying the reasons for revision, at any time before the receipt of the notice under Section 122(9) of the Ordinance.

The Bill now seeks to make revision of a wealth statement subject to prior approval of the concerned CIR. The Bill also proposes that the CIR shall grant approval in case of a bona fide omission or wrong statement. The Bill further proposes to restrict the revision of wealth statement of a particular tax year up to the expiry of five years from the due date of filing of the return of income for that tax year.

1. Recovery of tax out of property and through arrest of taxpayer

Section 138

Section 138 empowers the CIR to recover any tax due by a taxpayer, if the taxpayer fails to pay such tax within the time allowed by the CIR in the notice, through the following modes:

• attachment and sale of any movable or immovable property of the taxpayer;

• appointment of a receiver for the management of the movable or immovable property of the taxpayer; and

• arrest of the taxpayer and his detention in prison for a period not exceeding six months.

In order to make recovery of taxes more efficient and effective, the Bill proposes to empower the CIR to also exercise the powers provided in Section 48 of the ST Act for recovery of the outstanding tax liability. Such powers include the following:

• deduct the amount from any money owing to the taxpayer and which may be at the disposal or in the control of such officer or any officer of Income Tax, Customs or Central Excise Department;

• require by a notice in writing any person to stop clearance of imported goods or manufactured goods or attach bank accounts; and

• seal the business premises till such time the amount of tax is paid or recovered in full.

1. Tax on local purchase of cooking oil or vegetable ghee by certain persons

Section 148A

Section 148A of the Ordinance states that the manufacturers of cooking oil or vegetable ghee shall be chargeable to tax at the rate of 2% on purchase of locally produced edible oil, which is a final tax on the income accruing from locally produced edible oil.

The Bill seeks to omit Section 148A of the Ordinance, which means that the income of such persons will subsequently be taxed under the Normal Tax Regime.

1. Withholding tax statements

Section 165

Every person collecting or deducting tax from various payments as required under the Ordinance (including salary payments) is obliged to file withholding tax (WHT) statements on a biannual basis (in the prescribed format) giving particulars of each transaction; including name, address, National Tax Number, address of the recipient, the amount paid and tax deducted/ collected therefrom. Previously, such WHT statements were required to be submitted on a monthly basis, and the frequency of filing was amended from a monthly basis to a biannual basis through the Finance Supplementary (Second Amendment) Act, 2019 dated 09 March, 2019.

The Bill now proposes that the WHT statements should be filed on a quarterly basis. The due dates for such filings are proposed to be as under:

=================================================================================

(a) in respect of quarter ending on 31 March - by 20 April next following

(b) in respect of quarter ending on 30 June - by 20 July next following

(c ) in respect of quarter ending on 30 September - by 20 October next following

(d) in respect of quarter ending on 31 December - by 20 January next following

=================================================================================

The Bill also seeks to insert a new sub-section (1A), which would make it obligatory for every person involved or engaged in economic transactions, as prescribed by the FBR, to furnish a quarterly statement to the CIR in the prescribed form and manner.

However, the Bill has not indicated the kind of economic transactions that would fall within the ambit of the proposed amendment. It appears that the intention of the proposed amendment is to gather information pertaining to various economic transactions, which do not currently fall within the scope of WHT statements filed under Section 165.

1. Furnishing of information by banks

Section 165A

The Finance Act, 2013, introduced a separate section requiring banking companies to furnish information about the banking transactions of their customers to the tax authorities. The law provides an overriding effect to the Protection of Economic Reforms Act, 1992, the Banking Companies Ordinance, 1962, the Foreign Exchange Regulation Act, 1947, and the regulations made under the State Bank of Pakistan Act, 1956.

Apart from seeking particulars of deposits and card transactions, the law also introduced a requirement through the Finance Supplementary (Amendment) Act, 2018 to provide a list of persons who received profit on debt in excess of PKR 500,000 during the preceding financial year.

The Bill proposes to eliminate the limit of PKR 500,000, thereby making it mandatory for Banking Companies to furnish a list of all persons receiving profit on debt.

1. Refunds

Section 170

A taxpayer who has paid tax in excess of the amount chargeable to tax under the Ordinance, may apply to the CIR for a refund as per the provisions laid out in Section 170 of the Ordinance. However, the present system of manually verifying and processing refunds is outdated and prone to inefficiencies.

In order to facilitate taxpayers, impart transparency and efficiency and promote ease of doing business, the Bill seeks to empower the FBR to make rules to enable expeditious processing and automatic payment of refunds directly into the bank account of the taxpayers through a centralized processing system. The effective date of implementation of such a system is also proposed to be determined by the FBR.

1. Power to enter and search premises

Section 175

The Ordinance grants certain powers to the CIR or any officer authorized by him, in order to enforce the provisions of the Ordinance. These powers include, among others, the power to have access to premises, making or extracting copies of documents, impounding any accounts, documents or computer disk, and making inventory of any articles found in the premises of the taxpayer.

However, it has been observed that the powers granted to the CIR are not in line with the electronic means of storage of information/data currently utilized by most taxpayers. This is particularly true in the case of large technology based taxpayers, who retain and store the bulk of their data on electronic media. In view of the above, the Bill seeks to grant the CIR the power to have real-time electronic access to the information maintained by the taxpayers.

The Bill further proposes to insert sub-section (9) in Section 175, which would enable the FBR to make rules relating to electronic real-time access for audit or a survey of persons liable to tax.

FIRST SCHEDULE

PART I

1. Rates of tax for Individuals and Association of Persons

The rates of tax chargeable for individuals and AOPs for the tax year 2021 (corresponding to the income year ending at any time between 01 July 2020 to 30 June 2021) and basic threshold have remain unchanged which are as under:

Individuals (except salaried) and Association of persons

===============================================================================

Taxable income Rate of tax

===============================================================================

Up to Rs.400,000 0%

Rs.400,001-600,000 5% of amount exceeding Rs. 400,000

Rs.600,001-1,200,000 Rs.10,000 + 10% of amount exceeding 600,000

Rs.1,200,001-2,400,000 Rs.70,000 + 15% of amount exceeding 1,200,000

Rs.2,400,001-3,000,000 Rs.250,000 + 20% of amount exceeding 2,400,000

Rs.3,000,001-4,000,000 Rs.370,000 + 25% of amount exceeding 3,000,000

Rs.4,000,001-6,000,000 Rs.620,000 + 30% of amount exceeding 4,000,000

Amount exceeding Rs.6,000,001 Rs.1,220,000 + 35% of amount

                             exceeding 6,000,000

Individuals (salaried)

================================================================================

Taxable income Rate of tax

================================================================================

Up to Rs.600,000 0%

Rs.600,001-1,200,000 5% of amount exceeding 600,000

Rs.1,200,001-1,800,000 Rs.30,000 + 10% of amount exceeding 1,200,000

Rs.1,800,001-2,500,000 Rs.90,000 + 15% of amount exceeding 1,800,000

Rs.2,500,001-3,500,000 Rs.195,000 + 17.5% of amount exceeding

                              2,500,000

Rs.3,500,001-5,000,000 Rs.370,000 + 20% of amount exceeding 3,500,000

Rs. 5,000,001-8,000,000 Rs.670,000 + 22.5% of amount exceeding

                              5,000,000

Rs.8,000,001-12,000,000 Rs.1,345,000 + 25% of amount exceeding

                              8,000,000

Rs.12,000,001-30,000,000 Rs.2,345,000 + 27.5% of amount exceeding

                              12,000,000

Rs.30,000,001-50,000,000 Rs.7,295,000 + 30% of amount exceeding

                              30,000,000

Rs.50,000,001-75,000,000 Rs.13,295,000 + 32.5% of amount exceeding

                              50,000,000

Amount exceeding Rs.75,000,000 Rs.21,420,000 + 35% of amount exceeding

                              75,000,000

================================================================================

1. Rates of tax for companies

Rates of tax for companies remains unchanged which are as under:

================================================================================

Companies Rate

Existing Tax Year 2023

                Tax Year 2020    Tax Year 2021    Tax Year 2022  and onwards

================================================================================

Public and Private 29% 29% 29% 29%

Cooperative and

Finance Society 29% 29% 29% 29%

Banking 35% 35% 35% 35%

Small 23% 22% 21% 21%

================================================================================

1. Rate of Super tax for rehabilitation of temporarily displaced persons

The levy of super tax for rehabilitation of temporarily displaced persons under Section 4B is retained up to tax year 2021 for banking companies only. The rate remains unchanged for tax year 2021 which is as under:

===================================================================

Person Rate of Super Tax

                              Tax Year 2020       Tax Year 2021

===================================================================

Banking Company 4% 4%

===================================================================

1. Rate of tax on dividend income

The rate of tax on dividend income remains unchanged for tax year 2021, which are as under:

=================================================================================

Dividend from Rate

=================================================================================

Independent Power Producers where such tax on

dividend is a pass through item under an Implementation

Agreement or Power Purchase Agreement or Energy Purchase

Agreement and is required to be reimbursed by Central Power

Purchasing Agency (CPPA-G) or its predecessor or successor entity. 7.5%

Mutual funds and others 15%

Company where no tax is payable by such company due to exemption

of income or carry forward of business losses under Part VIII

of Chapter III or claim of tax credits under Part X of

Chapter III 25%

=================================================================================

1. Rate of tax on profit on debt

The rates of tax on profit on debt for the tax year 2021 remains unchanged which are as under:

=============================================================================================

Profit on debt Rate

Where profit on debt does not exceed Rs.5,000,000 15%

Where profit on debt exceeds Rs.5,000,001 but does not exceed Rs.25,000,000 17.5%

Where profit on debt exceeds Rs.25.000,000 but does not exceed Rs.36,000,000 20%

=============================================================================================

1. Rate of Tax on Return on investments in Sukuks received from a special purpose vehicle.

Rate of tax on return on investments in Sukuks received from a special purpose vehicle for the tax year 2021 remains unchanged which are as under:

====================================================================

Sukuks Holder Amount of return on investment Rates

Company Any amount 25%

Individual or AOP More than one million 12.5%

Individual or AOP Less than one million 10%

====================================================================

1. Rates of tax for non-resident taxpayers for certain transactions

The applicable rates of tax on certain income of non-residents for tax year 2021 remains unchanged, which are as under:

==================================================

Type of payment Rate (%)

Fee for offshore digital services 5%

Technical services fee 15%

Royalty 15%

Shipping income 8%

Air transport income 3%

==================================================

1. Rate of tax on Income from property

The rate of tax on income from property in the case of individual and AOPs for tax year 2021 remains unchanged which are as under:

===========================================================================

Gross amount of rent Rate

===========================================================================

Up to Rs.200,000 Nil

Rs.200,001 to 600,000 5% of the amount exceeding Rs.200,000

Rs.600,001 to 1,000,000 Rs.20,000 plus 10% of the amount exceeding

                          Rs.600,000

Rs.1,000,001 to 2,000,000 Rs.60,000 plus 15% of the amount exceeding

                          Rs.1,000,000

Rs.2,000,001 to 4,000,000 Rs.210,000 plus 20% of the amount exceeding

                          Rs.2,000,000

Rs.4,000,001 to 6,000,000 Rs.610,000 plus 25% of the amount exceeding

                          Rs.4,000,000

Rs.6,000,001 to 8,000,000 Rs.1,110,000 plus 30% of the amount exceeding

                          Rs.6,000,000

Over Rs.8,000,000 Rs.1,710,000 plus 35% of the amount exceeding

                          Rs.8,000,000

===========================================================================

The above rates also apply for the purpose of withholding of tax from the payment for rent of immovable property paid to an individual or AOP.

The withholding tax rate in the case of a Company remains unchanged at 15%.

1. Rates of tax on capital gains on securities

The rate of tax on income from capital gain on securities remains unchanged, which are as under:

===========================================================================================

                                                                      Tax Year

                                                           2018, 2019, 2020 and onwards

                                                  Security acquired            Security

                                                    before 01 July          acquired on

Holding period 2016 or after 01 July

                                                                                   2016

===========================================================================================

Less than 12 months 15% 15%

More than 12 months but less than 24 months 12.5%

More than 24 months but then security was acquired

on or after 01 July 2013 7.5%

Where the security was acquired before 01 July 2013 0% 0%

Future commodity contracts entered into by the

members of Pakistan Mercantile Exchange. 5% 5%

===========================================================================================

1. Rate of tax on capital gain on immovable property

The Bill seeks to reduce the rate of capital gain tax on disposal of immovable property as prescribed under Division VIII of the Part I of the First Schedule to the Ordinance which are as under:

=============================================================================

Amount of Gain Existing rate Proposed rate

                                                  of tax           of tax

=============================================================================

Where the gain does not exceed Rs.5 million 5% 2.5%

Where the gain exceeds Rs. 5 million but

does not exceed Rs. 10 million 10% 5%

Where the gain exceeds Rs. 10 million but

does not exceed Rs. 15 million 15% 7.5%

Where the gain exceeds Rs. 15 million 20% 10%

=============================================================================

1. Minimum Tax

The rates of minimum tax remains unchanged as under:

=============================================================================

Taxpayer Rate (%)

=============================================================================

(a) Oil marketing companies, oil refineries, Sui Southern Gas Company

Limited and Sui Northern Gas Pipelines Limited (where annual turnover

exceeds Rs.1 billion)

(b) Pakistan Airlines; and

(c) Poultry industry including breeding, broiler production,

egg production, feed production 0.75%

(d) Dealers or distributors of fertilizers; and

(e) person running an online marketplace as defined in clause (38B)

of section 2

(f) Distributors of pharmaceutical products, fast moving consumer goods

and cigarettes

(g) Petroleum agents and distributors registered under the Sales

Tax Act, 1990 0.25%

(h) Rice mills and dealers

(i) Flour mills

Motorcycle dealers registered under the Sales Tax Act 1990 0.3%

In all other cases 1.5%

=============================================================================

PART II

1. Advance tax on imports

The Bill proposes to replace the existing rate table by providing different rates for Part I, II & III mentioned in newly proposed Twelfth Schedule to the Ordinance which are as under:

===============================================================================================

Persons Rate % (of import value

                                                                    as increased by customs

                                                                    duty, sales tax and

                                                                    federal excise duty)

Person importing goods classified on Part I of the Twelfth Schedule 1%

Person importing goods classified on Part II of the Twelfth Schedule 2%

Person importing goods classified on Part III of the Twelfth Schedule 5.5%

===============================================================================================

The Bill also proposes:

• a reduced rate of 1% to be collected on goods covered under rescinded SRO 1125(I)/2011 dated 31 December 2011.

• rate of collection of tax at 4% on import of finished pharmaceutical products that are not manufactured otherwise in Pakistan as certified by the Drug Regulatory Authority of Pakistan.

The Bill also proposes to replace the existing table of rate of collection of advance tax on imports of mobile phone by providing separate rates for mobile phones imported in CBU condition and CSK/SKD condition, which are as under:

====================================================================================

S.No. C&F Value of Mobile Phone Tax in Rupees

    (USD)                            In CBU condition       In CSK.SKD condition

                                   PCT Heading 8517.1219        PCT Heading

                                                                 8517.1211

====================================================================================

1. Up to 30                                70                       0
   

2. Exceeding 30 and up to 100              730                      0
   

3. Exceeding 100 and up to 200             930                      0
   

4. Exceeding 200 and up to 350             970                      0
   

5. Exceeding 350 and up to 500            3,000                   5,000
   

6. Exceeding 500                          5,200                   11,500
   

====================================================================================

PART III

1. Advance tax on Dividend

The rate of withholding tax on payment of dividend remains same except that the Bill seeks to provide rate of withholding of tax on payment of dividend at 25% to a person receiving dividend from a Company where no tax is payable by such company, due to exemption of income or carry forward of business losses under Part VIII of Chapter III or claim of tax credits under X of Chapter III. The proposed change will remove the difference in the withholding tax rates and the charging rate on payment of dividend.

1. Advance tax on profit on debt

The advance tax rates deducted on profit of debt remains unchanged. At present, the rate of withholding tax on payment of profit up to Rs.500,000/- is 10% despite of the fact the taxability of such profit is at 15%. The Bill seeks to propose that the bank will deduct tax at the rate of 10% on the payment of profit up to Rs.500,000/- after obtaining a certificate from the recipient that during the tax year the profit on debt would remain less than Rs.500,000/-.

1. Advance tax on return on investments in Sukuks received from a special purpose vehicle.

The rate of withholding tax on payment of return on Sukuk received from a special purpose vehicle remains same except that the Bill seeks to increase the rate of withholding of tax on return on Investment in Sukuk in case of a Company from 15% to 25%. The proposed change will remove the difference in the withholding tax rates and the charging rate on of return on sukuk investment for a company. The rates of withholding on return on Sukuk are as under:

======================================================================================

Sukuks Holder Existing Rates (%) Proposed Rates (%)

Company 15% 25%

Individual or AOP (More than one million) 12.5% 12.5%

Individual or AOP (Less than one million) 10% 10%

======================================================================================

1. Payments to non-residents

The withholding tax rates on payments to non-residents remains unchanged, except that the Bill seeks to provide parity between withholding tax rates applicable to permanent establishment of non-resident persons and resident persons.

The revised rates of withholding of tax on payments to non-residents are as under:

==================================================================================================

Types of Payment Existing Rate Proposed Rate

                                                                   (%)                     (%)

==================================================================================================

Technical services fee 15% No Change

Royalty 15% No Change

Fee for offshore digital services 5% No Change

Shipping income 8% No Change

Air transport income 3% No Change

Execution of a contract

• contract or sub-contract under a construction, assembly

or installation project in Pakistan,

including a contract for the supply of supervisory activities

in relation to such project.

• any other contract for constructions or services rendered

relating thereto or a contract

for advertising services rendered by T.V settle lite channels. 7% No Change

Insurance premium/re-insurance premium 5% No Change

Others (excluding those specifically mentioned herein) 20% No Change

Advertisement services to a media person relaying from

outside Pakistan 10% No Change

Receipt on account of sale of goods by a PE of a

non-resident in Pakistan No Change

• Company 4%

• Other Taxpayers 4.5%

Receipt on account of rendering of transport services

through a PE of non-resident 2% 3%

Receipt on account of rendering of following services

through a PE:

Freight forwarding services, air cargo services, courier

services, manpower outsourcing services, hotel services,

security guard services, software development

services, IT services

and IT enabled services as defined in clause (133) of Part I

of the Second Schedule, tracking services, advertising services

(other than by print or electronic media), share registrar

services, car rental services, building maintenance services,

services rendered by Pakistan

Stock Exchange Limited, Pakistan Mercantile Exchange

Limited and inspection and certification, testing

and training services. 8% 3%

Receipt on account of rendering of services through a PE

• Other than above mentioned services (if company) 8% No Change

• Other than above mentioned services (other than company) 10%

Receipt on account of execution of contract through a PE

other than a contract for sale of goods or rendering of services

• Sports person 10% No change

• Other person 7%

Capital gain arising on the disposal of debt instruments

and Government securities including treasury bills

and Pakistan investment bonds invested through

special convertible rupee account (SCRA) 10% No change

==================================================================================================

1. Advance income tax on payment to resident on payments for goods, services and execution of contract

The rate of withholding tax on account of sale of rice, cotton seed or edible oils and supplies made by the distributor of fast moving consumer goods remains unchanged as under:

=============================================================================

Types of Payment Rates (%)

Sale of rice, cotton seed or edible oils 1.5%

Supplies made by distributors of fast moving consumer goods

• Company

• Other than company 2%

                                                                2.5%

=============================================================================

The Bill seeks following changes:

• to include toll manufacturing under the category of supply of goods whereas the rate of withholding applicable on supply on goods would now be applicable on toll manufacturing; and

• exclude engineering services from the category of services on which reduced rate of 3% is applicable. Hence, receipt on account of engineering services would now be subject to withholding tax at the normal rate of 8% (10% for non-corporate tax payers).

The revised withholding tax rates for making payments on account of goods, services and contracts are proposed to be as under:

==============================================================================================

Types of Payment Rate of tax (%)

For supply of goods (including toll manufacturing)

o Company 4%

o Other than company 4.5%

Transport services, freight forwarding services, air cargo services,

courier services, manpower outsourcing services, hotel services, security

guard services, software development services, IT services and IT enabled

services as defined in clause (133) of Part I of the Second Schedule,

tracking services, advertising services (other than by print or electronic

media), share registrar services, car rental services, building maintenance

services, services rendered by Pakistan Stock Exchange Limited, Pakistan

Mercantile Exchange Limited and inspection and certification, testing

and training services 3%

Rendering of or providing of services including engineering services

o Company 8%

o Other than company 10%

Electronic and print media advertising services 1.5%

On the execution of contract

o Sports person 10%

o Company 7%

o Other than company 7.5%

==============================================================================================

1. Royalty paid to resident persons

The rate of withholding of tax applicable on royalty paid to resident person remains unchanged.

1. Exports

Rate of collection of advance tax for exports, indenting commission and services to export house remains unchanged as under:

=======================================================================================

Types of Payment Rate

=======================================================================================

Export proceeds

Proceeds from sale of goods to an exporter under an inland

back-to-back

letter of credit or any other arrangement 1% of export proceeds

Export of goods by an industrial undertaking located in an

Export Processing Zone 1%

Collection by collector of customs at the time of clearing

of goods exported 1%

Indenting commission 5%

=======================================================================================

1. Tax on prize and winnings

The rate of withholding tax on prize bond, cross-word puzzle and prize on winnings remains unchanged, which are as under.

===============================================================================================

Description Rate (%)

===============================================================================================

Prize on prize bond and cross-word puzzle 15%

Winnings from a raffle, lottery, prize on winning a quiz, prize offered by a

company for promotion of sale 20%

===============================================================================================

1. Tax on Petroleum Products

The rate of withholding tax on Petroleum Products remain unchanged, which are as under:

====================================================

Description Rate (%)

Petroleum products 12%

====================================================

1. Tax on CNG Station

The withholding tax rate in the case of a Compressed Natural Gas station remain unchanged at 4%, whereas, the categorized rate of non-filer is proposed to be abolished.

PART IV

1. Collection of advance income tax on Brokerage and Commission

The rate for collection of advance tax remains unchanged as under:

===========================================================================

Description Rate (%)

===========================================================================

For advertising agents 10%

Life insurance agent where commission received is less than

Rs.500,000 per annum 8%

Persons not covered above 12%

===========================================================================

1. Collection of tax by NCCPL

The rate of collection by NCCPL on profit or markup or interest earned by the member, margin financier or securities lender remains unchanged at 10%.

1. Collection of tax on motor vehicles

The rate of collection of tax remains unchanged as under,

=================================================================================================

Passenger transport vehicle having Capacity PKR per seat per annum

Four or more persons but less than ten persons. 50

Ten or more persons but less than twenty persons 100

Twenty persons or more 300

Private motor vehicle Engine Capacity Rate PKR

Upto 1000cc 800

1001cc to 1199cc 1,500

1200cc to 1299cc 1,750

1300cc to 1499cc 2,500

1500cc to 1599cc 3,750

1600cc to 1999cc 4,500

2000cc to & above 10,000

Motor vehicle having Engine Capacity (collected in lump sum) Rate PKR

Upto 1000cc 10,000

1001cc to 1199cc 18,000

1200cc to 1299cc 20,000

1300cc to 1499cc 30,000

1500cc to 1599cc 45,000

1600cc to 1999cc 60,000

2000cc to & above 120,000

=================================================================================================

1. Collection of tax on electricity consumption

The rate for tax on the gross amount of electricity bill has remained unchanged as under.

===========================================================================================

Description Tax Amount PKR

does not exceed Rs.400 0

exceeds Rs.400 but does not exceed Rs. 600 80

exceeds Rs.600 but does not exceed Rs. 800 100

exceeds Rs. 800 but does not exceed Rs.1,000 160

exceeds Rs.1,000 but does not exceed Rs.1,500 300

exceeds Rs.1,500 but does not exceed Rs.3,000 350

exceeds Rs.3,000 but does not exceed Rs.4,500 450

exceeds Rs.4,500 but does not exceed Rs.6,000 500

exceeds Rs.6,000 but does not exceed Rs. 10,000 650

exceeds Rs.10,000 but does not exceed Rs.15,000 1,000

exceeds Rs.15,000 but does not exceed Rs.20,000 1,500

exceeds Rs.20,000 i. At the rate of 12%

                                                               for commercial consumers

                                                                  ii. At the rate of 5%

                                                               for industrial consumers

===========================================================================================

1. Collection of Advance Tax on Telephone Users

The rate of withholding tax on subscriber of internet, mobile telephone and pre-paid internet or telephone card have remained unchanged as under.

============================================================================================

Description Rate (%)

============================================================================================

Telephone subscriber where the amount of monthly bill

exceeds Rs.1,000 10% of exceeding amount

Subscriber of internet, mobile telephone and pre-paid

internet or telephone card. 12.5% of the amount

                                                                 of bill or sales price

============================================================================================

1. Collection of tax on cash withdrawal from bank

The rate of collection of tax on cash withdrawal from bank remains unchanged at 0.6% for persons whose name is not appearing in the active taxpayer list.

1. Collection of advance tax on transactions through banking channels

The rate of collection of tax on transaction through bank channels remains unchanged at 0.6% for persons whose name is not appearing in the active taxpayer list.

1. Advance tax on purchase, registration and transfer of Motor Vehicles

The advance tax on purchase and registration of Motor Vehicles remains unchanged as under:

======================================

Engine capacity Amount of Tax PKR

Up to 850cc 7,500

851cc-1000cc 15,000

1001cc-1300cc 25,000

1301cc-1600cc 50,000

1601cc-1800cc 75,000

1801cc-2000cc 100,000

2001cc-2500cc 150,000

2501 cc-000cc 200,000

Above 3000cc 250,000

======================================

Further, the rates of collection of taxes on transfer of motor vehicles have also remained unchanged as under:

=====================================

Engine capacity Amount of Tax PKR

=====================================

Up to 850 cc -

851 cc-1000 cc 5,000

1001 cc-1300 cc 7,500

1301 cc-1600 cc 12,500

1601 cc-1800 cc 18,750

1801 cc-2000 cc 25,000

2001 cc & 2500cc 37,500

2501 cc & 3000cc 50,000

Above 3000cc 62,500

=====================================

1. Advance tax at the time of sale by auction

The rate of collection of advance tax remains unchanged at the rate of 10% except for sale of immovable property. The Bill seeks to provide rate of collection of tax of 5% on sale price of immovable property sold through auction.

1. Advance tax on purchase of air tickets

The rate of collection of tax remains unchanged at 5% of the gross amount of air ticket.

1. Advance tax on sale/transfer of immovable property

The rate of advance tax to be collected on sale/ transfer of immovable property remains unchanged at 1%.

1. Advance tax on sale to distributors, dealers or wholesalers

Advance tax on sale to distributors, dealers or wholesalers remain unchanged as under:

================================================================

Category of sale Rate of tax (%)

Fertilizers 0.7%

Other than fertilizers 0.1%

================================================================

1. Advance tax on sale of retailers

The rate of tax on sale of retailers remains unchanged as under:

================================================================

Category of sale Rate of tax (%)

Electronics 1%

Others 0.5%

================================================================

1. Advance tax on sale of certain petroleum products

The advance tax to be collected by person selling petroleum products to a petrol pump operator or distributer, where such operator or distributer is not allowed a commission or discount remains unchanged at the rate of 0.5%.

1. Collection of advance tax by educational institutions

The rate of collection of tax remains unchanged at 5% except for persons whose name is appearing in the active taxpayers list,

1. Advance tax on purchase of immovable property

The rate of advance tax to be collected on purchase of immovable property under section 236K remains unchanged at 1% of the Fair Market Value.

1. Advance tax on domestic electricity consumption

The rate of advance tax collection remains unchanged at 7.5% if the monthly bill is Rs.75,000 or more.

1. Advance tax on international air ticket

The rate of collection of advance tax remains unchanged as under

=============================================================

Type of Ticket Rate PKR

First/Executive class 16,000 per person

Others excluding economy 12,000 per person

Economy Class 0

=============================================================

1. Advance tax on bank transactions

The advance tax to be collected on banking transaction otherwise through cash remains unchanged, to be collected at 0.6% for persons who are not appearing in the Active Taxpayer List except for non-resident company having no permanent establishment in Pakistan maintaining SCRA account.

1. Payment to a resident person for right to use machinery and equipment

The rate of tax remains unchanged at 10%.

1. Advance tax on extraction of minerals

Currently, Section 236V requires collection of tax at 5% from a person not appearing on the ATL on the value of minerals extracted, produced, dispatched and carried away from the licensed or leased area of the mines. The Bill proposes to extend such collection to persons appearing on the ATL as well.

1. Advance tax on amount remitted abroad through credit, debit or prepaid cards

The tax to be collected on transfer of any sum remitted outside Pakistan, on behalf of any person who has completed a credit card transaction, a debit card transaction, or a prepaid card transaction with a person outside Pakistan remains unchanged at 1% of the gross amount remitted abroad.

1. The Bill proposes to omit the following collection of advance tax:

==============================================================================

Section Reference Heads of advance tax collection

236D Advance tax on functions and gatherings

236F Advance tax on cable operators and other electronic media

236J Advance tax on dealers, commission agents and arhatis

236R Advance tax on education related expenses remitted abroad

236U Advance tax on insurance premium

==============================================================================

SECOND SCHEDULE

PART - I

1. Withdrawal of balance under Pension Fund

Section 156B and Clause (23A)

Presently, a pension fund manager making payment from individual pension accounts, maintained under any approved Pension Fund, is required to deduct tax at an average rate of tax of preceding three tax years, in accordance with Section 12 (6) of the Ordinance from any amount:

• withdrawn before the retirement age;

• withdrawn, if in excess of 50% of his accumulated balance at or after the retirement age.

Similarly, pursuant to Clause (23A) of the Part I of the Second Schedule, accumulated balance up to 50% received from voluntary pension system offered by a pension fund manager under the Voluntary Pension System Rule, 2005 is exempt at the time of eligible person's:

(a) retirement;

(b) disability rendering him unable to work ; or

(c) death by his nominated survivors.

The Bill proposes to omit the provisions of Section 156B of the Ordinance and replicate the same by inserting a proviso in Clause (23A), Part I of the Second Schedule. Overall, the impact of such omission of Section 156 and inclusion of a proviso to Clause (23A) does not entail any tax implications but appears to be an attempt to harmonize the exemption and the requirement for deduction of due tax.

1. Exemption on donations

Clause (61)

This Clause provides exemption to any amount paid as donation to the various specified institutions, subject to fulfillment of identified conditions. The Bill proposes to introduce the following institutions as well into the list:

• The Prime Minister's COVID - 19 Pandemic Relief Fund 2020;

• Ghulam Ishaq Khan Institute of Engineering Sciences and Technology (GIKI);

• Lahore University of Management Sciences;

• Dawat-e-Hadiya, Karachi;

• Baitussalam Welfare Trust;

• Patients' Aid Foundation; and

• Alkhidmat Foundation.

Further, in line with the amendments proposed in Section 61 of the Ordinance, the Bill also seeks to insert a proviso to cap the amount of donations given by an associate to the extent of:

(a) in the case of an individual or association of persons, 15% of the taxable income of the person for the year; and

(b) in the case of a Company, 10% of the taxable income of the person for the year.

The Bill also provides the major shift of the mode of payment of donations by proposing that provisions of the above Clause shall apply only on donations paid by a crossed cheque drawn on a bank.

1. Exemption to income of certain charitable and other institutions

Clause (66)

Clause (66) provides exemption from tax to any income of certain charitable and other institutions specified therein. The Bill proposes to substitute the existing list of institutions provided therein by the following tables which includes existing institutions as well as certain new institutions. The income of institutions specified in Table 1 is proposed to be fully exempt without any condition therein. On the contrary, the income derived by the institutions specified under Table 2 are proposed to be exempt, subject to compliance with the provisions of Section 100C of the Ordinance with effect from 01 July 2021

Table 1

========================================================================================================

S.No. Name

========================================================================================================

(i) International Islamic Trade Finance Corporation

(ii) Islamic Corporation for Development of Private Sector

(iii) National Memorial Bab-e-Pakistan Trust.

(iv) Pakistan Agricultural Research Council

(v) The corporatized entities of Pakistan Water and Power Development Authority from the

            date of their creation up to the date of completion of the process of corporatization

            i.e. till the tariff is notified.

(vi) The Prime Minister's Special Fund for victims of terrorism

(vii) Chief Minister's (Punjab) Relief Fund for Internally Displaced Persons (IDPs) of NWFP.

(viii) The Institutions of the Agha Khan Development Network (Pakistan) as contained in

            Schedule 1 of the Accord and Protocol, dated November 13, 1994, executed

            between the

            Government of the Islamic Republic of Pakistan and the Agha Khan

            Development Network.

(ix) Pakistan Council of Scientific and Industrial Research.

(x) The Pakistan Water and Power Development Authority established under the

            Pakistan Water

            and Power Development Authority Act, 1958 (W. P. Act XXXI of 1958).

(xi) WAPDA First Sukuk Company Limited

(xii) Pension of a former President of Pakistan and his widow

(xiii) State Bank of Pakistan and State Bank of Pakistan Banking Services Corporation.

(xiv) International Finance Corporation established under the International Finance

            Corporation Ac

            (XXVIII of 1956) and provided in section 9 of Article VI of Articles of Agreement 1955 as

            amended through April 1993.

(xv) Pakistan Domestic Sukuk Company Ltd.

(xvi) ECO Trade and Development Bank.

(xvii) The Islamic Chamber of Commerce and Industry under the Organization of Islamic

            Conference (OIC).

(xviii) Commission on Science and Technology for Sustainable Development in the South

            (COMSATS) formed

            under International Agreement signed on 5th October, 1994.

(xix) WAPDA on issuance of twenty billion rupees TFC's/SUKUK certificates for consideration

            of

(xx) Diamer Bhasha Dam Projects.

(xx) Federal Board of Revenue Foundation

(xxi) WAPDA Second Sukuk Company Limited.

(xxii) Pakistan International Sukuk Company Limited

(xxiii) Second Pakistan International Sukuk Company Limited.

(xxiv) Third Pakistan International Sukuk Company Limited.

(xxv) Asian Infrastructure Investment Bank and persons as provided in Article 51 of Chapter

            IX of the Articles of

            Agreement signed and ratified by Pakistan and entered into force on the 25th

            December, 2015.

(xxvi) Supreme Court of Pakistan - Diamer Bhasha & Mohmand Dams - Fund.

(xxvii) National Disaster Risk Management Fund.

(xxviii) Deposit Protection Corporation established under sub-section (l) of section 3 of Deposit

            Protection Corporation Act, 2016 (XXXVII of 2016).

(xxix) SAARC Energy Centre

(xxx) The Asian Development Bank established under the Asian Development Bank

            Ordinance, 1971 (IX

(xxxi) The Prime Minister's COVID-19 Pandemic Relief Fund-2020

(xxxii) Saarc Arbitration Council (SARCO).

(xxxiii) International Parliamentarians' Congress.

Table 2

========================================================================================================

S.No. Name

========================================================================================================

(i) Abdul Sattar Edhi Foundation.

(ii) Al-Shifa Trust.

(iii) Bilquis Edhi Foundation

(iv) Fatimid Foundation.

(v) Pakistan Engineering Council.

(vi) The Institution of Engineers.

(vii) Liaquat National Hospital Association.

(viii) The Citizens Foundation.

(ix) Sindh Institute of Urology and Transplantation, SIUT Trust and Society for the

            Welfare of SIUT.

(x) Greenstar Social Marketing Pakistan (Guarantee) Limited.

(xi) Indus Hospital, Karachi

(xii) Gulab Devi Chest Hospital.

(xiii) Pakistan Poverty Alleviation Fund.

(xiv) National Academy of Performing Arts.

(xv) Pakistan Sweet Homes Angels and Fairies Place.

(xvi) National Rural Support Programme

(xvii) Pakistan Bar Council.

(xviii) Pakistan Centre for Philanthropy.

(xix) Pakistan Mortgage Refinance Company Limited.

(xx) Aziz Tabba Foundation.

(xxi) ShaukatKhanum Memorial Trust.

(xxii) Layton Rahmatullah Benevolent Trust (LRBT).

(xxiii) The Kidney Centre Post Graduate Training Institute

(xxiv) Pakistan Disabled Foundation.

(xxv) Forman Christian College

(xxvi) Habib University Foundation

(xxvii) Begum AkhtarRukhsana Memorial Trust Hospital.

(xxviii) Al-Khidmat Foundation

(xxix) Dawat-e-Islami Trust.

(xxx) Sardar Trust Eye Hospital, Lahore

(xxxi) Akhuwat.

(xxxii) Audit Oversight Board

(xxxiii) Patient's Aid Foundation

(xxxiv) Al-Shifa Trust Eye Hospital

(xxxv) Saylani Welfare International Trust

(xxxvi) SARMAYA-E-PAKISTAN LIMITED

(xxxvii) Lahore University of Management Sciences, Lahore.

(xxxviii) Dawat-e-Hadiya, Karachi.

(xxxix) Ghulam Ishaq Khan Institute of Engineering Sciences and Technology

(xl) Society for the Promotion of Engineering Sciences and Technology

            in Pakistan (SOPREST).

(xli) Businessmen Hospital Trust.

(xlii) Baitussalam Welfare Trust.

========================================================================================================

1. Profits and gains on sale of immovable property to a developmental REIT scheme

Clause (99A)

Profits and gains on sale of immovable property to a developmental REIT scheme with the object of development and construction of residential buildings is exempt up to 30 June 2020. The Bill proposes to extend the said exemption up to 30 June 2021.

1. Exemption to income derived by certain companies

Clause (126A)

Income derived by the certain Companies from Gwadar Port operations are exempt from tax for a period of 23 years with effect from 6 February 2007. The Tax Laws (Amendment) Ordinance, 2019 has extended the scope of operations for exemption from "Gwadar port" to "Gwadar port and Gwadar Free Zone".

The Bill has proposed the above insertion with the object of enactment effective from 1 June 2020.

1. Exemption to foreign lenders and local banks

Clause (126AB)

Profit on debt derived under a Financing Agreement with China Overseas Ports Holding Company Limited by foreign lenders or local banks (where the Government or State Bank of Pakistan holds more than 75% shares in such local bank) is exempt from tax. The Tax Laws (Amendment) Ordinance, 2019 has inserted the following companies to extend the scope of exemption.

• China Overseas Port Holding Company Pakistan (Private) Limited;

• Gwadar International Terminals Limited;

• Gwadar Marine Services Limited; and

• Gwadar Free Zone Company Limited .

The Bill proposes to enact the amendments effective from 1 June 2020.

1. Exemption to income derived by contractors and sub-contractors of certain companies

Clause (126AC)

Income from Gwadar Port operations earned by contractors or sub-contractors of the following Companies is exempt from tax for a period of 20 years effective from 1 July 2016. The Tax Laws (Amendment) Ordinance, 2019 has extended the scope of operations for exemption from "Gwadar port" to "Gwadar port and Gwadar Free Zone".

The Bill proposes to enact effective from 1 June 2020.

1. Income of zone enterprise in Special Economic Zone Clause (126E)

Income derived by a zone enterprise is exempt for a period of 10 years reckoned from the date the developer certifies that the zone enterprise has commenced commercial operations and for a period of 10 years to a developer of zone starting from the date of signing of development agreement in Special Economic Zone.

The Bill proposes to insert a proviso by virtue of which exemption under the above Clause will be available to co-developers as defined under the EPZ Rules 2013 subject to the condition that a certificate has been furnished:

(a) by the developer that he has not claimed exemption under this clause and has relinquished his claim in favour of the co-developer; and

(b) by the Special Economic Zone Authority validating that the developer has not claimed exemption under this clause and has relinquished claim in favour of the co-developer.

1. Income of Federal Government Employees Housing Authority

Clause (147)

The Bill proposes to insert a new clause (147) whereby any income derived by the federal Government Employees Authority shall be exempt from tax for the tax year 2020 and the following four tax years.

Part - II

1. Profit on debt earned by non-resident individual Clause (5AA)

A new clause (5AA) is proposed to be inserted by virtue of which tax to be deducted under sub-section (2) of Section 152 from payment to an individual on account of profit on debt earned from a debt instrument, whether conventional or shariah compliant, issued by the Federal Government under the Public Debt Act, 1944 and purchased exclusively through a bank account maintained abroad, a non-resident rupee account or a foreign currency account maintained with a banking company in Pakistan shall be 10% of the gross amount paid. It is provided that the tax deducted on such profit on debt shall be final tax.

1. Supplies to Utility Store Corporation of Pakistan Clause (24CA)

It would be recalled that on 7 April 2020 a new clause (24CA) was inserted whereby Utility Stores Corporation of Pakistan making payment on account of supply of tea, spices, salt, dry milk, sugar, pulses, wheat flour and ghee was required to withhold tax at the rate of 1.5% to a person other than a Company. The clause was timebound upto 30 June 2020. The bill proposes to extend the timelines upto 30 September 2020.

Part - III

1. Housing projects by Naya Pakistan Housing and Development Authority

Clause (9B)

The Bill seeks to insert a new clause (9B) whereby tax on income, profits and gains of low cost housing projects developed or approved by Naya Pakistan Housing and Development Authority or under the Ehsaas Programme shall be reduced by 90%.

Part-IV

1. Exemption from deduction of tax on payment of scrap steel purchase by steel melters

Clause 9A

Currently the steel melters are absolved form the responsibility of withholding tax under Section 153(1)(a) of the Ordinance in respect of payment made on account of purchase of scrap provided that due tax is collected under Section 235B of the Ordinance.

The Bill now seeks to omit this clause of the Ordinance. Subsequently, the payment of scrap steel purchase by steel melters would be subject to deduction of tax under Section 153(1)(a) of the Ordinance at the applicable rate as provided under the Ordinance.

1. Exemption from application of Minimum Turnover Tax - Section 113

Clause 11A

Clause 11A of Part-IV of the Second Schedule to Ordinance contains the list of persons who are not liable to pay minimum tax under Section 113 of the Ordinance. The list included a modaraba registered under the Modaraba Companies and Modaraba (Flotation and Control) Ordinance, 1980. In order to bring clarity to the exemption, the bill proposes that only such modaraba would be exempt from the mischief of Section 113 who qualify for exemption under Clause (100) of Part I of the Second Schedule to the Ordinance.

The Bill also seeks to provide the benefit of Clause 11 A to the following:

• The Prime Minister's COVID-19 Pandemic Relief Fund-2020; and

• the Federal Government Employees Housing Authority for the tax year 2020 and the following four tax years.

1. Exemption from collection of tax on import of medical and surgical supplies

Clause 12B

In order to fight a universally unprecedented challenge in the shape of Novel Corona Virus Pandemic, the Government introduced a SRO 236(I)/2020 dated 20 March 2020 wherein, the import of certain medical and surgical supplies have been exempted from the collection of tax under Section 148 of the Ordinance.

The Bill proposes to enact Clause 12B of Part IV of the Second Schedule effective from 20 March 2020 till 30 September 2020.

1. Exemption from collection of tax on import of pulses

Clause 12C

Vide SRO 287(I)/2020 where pulses has have been exempted from the collection of tax under Section 148 of the Ordinance by inserting a Clause 12B to the Part IV of the Second Schedule to the Ordinance.

The Bill seeks to enact the said Clause effective from 07 April 2020 till 30 September 2020.

1. Payments not subject to withholding of tax under Section 153 of the Ordinance

Clause 46AA

SRO 586(I)/91 dated 30 June 1991 specifies a list of persons who are / may seek an exemption from withholding of tax under Section 153 of the Ordinance. In order to harmonize the provision of the Ordinance, the Bill seeks to insert a new clause in Part IV to the Second Schedule of the Ordinance by specifying all the persons which are listed in the aforesaid SRO. Following are the list of the persons who are proposed to be excluded from the provision of Section 153 of the Ordinance:

• A provincial government

• A local authority

• Persons who are residents of Azad Kashmir and execute contracts in Azad Kashmir only and produce a certificate to this effect from the concerned income tax authority.

• Persons receiving payments from a company or an association of persons having turnover of fifty million

• rupees or more or from an individual having turnover of fifty million rupees or more exclusively for the supply of agriculture produce including fresh milk, fish by any person engaged in fish farming, live chicken, birds and eggs by any person engaged in poultry farming and by an industrial undertaking engaged in poultry processing which has not been subjected to any process other than that which is ordinarily performed to render such produce fit to be taken to market.

• Companies receiving payments for the supply of electricity and gas.

• Companies receiving payments for the supply of crude oil.

• Hotels and restaurants receiving payments in cash for providing accommodation or food or both, as the case may be.

• shipping companies and air carriers receiving payments for the supply of passenger tickets and for the cargo charges of goods transported

Certain categories of person like oil marketing companies and persons receiving the amounts below the threshold on which the withholding of tax provision invokable are already part of the Ordinance.

Redundant Clauses of the Part IV of the Second Schedule to the Ordinance

In line with the amendments brought vide the Finance Act, 2019 whereby the scheme of final taxation has been abolished to a greater extent, the Bill now proposes to omit the following clauses from Part IV of the Second Schedule to the Ordinance as a consequential amendment:

• Clause 56C

• Clause 56D

• Clause 56E

• Clause 56G

1. Institution deemed to be approved as NPO

Clause (63)

Previously Dawat-e-Hadiya, Karachi and Lahore University of Management Sciences (LUMS), Lahore were deemed to be approved as a non-profit organization by the CIR under Section 2(36) of the Ordinance.

The Bill now seeks to omit the aforesaid Clause 63 Part IV of Second Schedule to the Ordinance, since the names of the above institutions are proposed to be included in Clause 66 Part I of the Second Schedule to the Ordinance. Consequently, to avoid redundancy the above mentioned institutions have been removed from here.

1. Exemption from deduction of tax to Non-resident Hajj Group Operator

Clause 72AA

The bill seeks to insert a new clause to provide exemption from the application of provisions of Section 152 of the Ordinance whereby no deduction of tax would be required on payment made to a non-resident Hajj Group Operator in respect of Hajj operations.

1. Exemption from application of Section 231A, 231AA, and 236P of the Ordinance

Clause 101AA

The Bill seeks to insert a new clause to provide exemption from deduction of tax under following Section from a Pak Rupee Account to the extent of foreign remittances credited into such account in a tax year:

• Tax deducted under Section 231A of the Ordinance on cash withdrawal of amount exceeding Rs.50,000 in single day;

• Tax deducted under Section 231A of the Ordinance on banking instruments exceeding Rs.25,000 in single day; and

• Tax deducted under Section 236P of the Ordinance on banking transactions otherwise than through cash exceeding Rs.50,000 in a single day.

1. Exemption from application of Section 233 of the Ordinance

Clause 102

The Bill seeks to insert a new clause to provide exemption from deduction of tax under Section 233 of the Ordinance in respect of a commission received by a retail branch less banking agent on any amount disbursed by the Ehsaas Emergency Cash Transfer Programme for the period commencing on 16 April 2020 and ending on 30 September 2020.

1. Persons not appearing in the Active Taxpayers' List (ATL)

Clause 111A

The Finance Act, 2019 introduced a separate schedule in the Ordinance to deal with persons who do not appear on the Active Taxpayer List (ATL) i.e. who are not in the tax net and are not filing their declaration so far. In this connection, Section 100BA was also introduced vide Finance Act, 2019 which governs the collection or deduction of advance income tax, computation of income and tax payable by such persons.

The Tenth Schedule generally provides that where ever tax is required to be deducted or collected under any provisions of the Ordinance from a person whose name is not appearing in the ATL, the rate of withholding will be doubled in case of deduction or collection from such persons (with some exceptions).

The Bill now proposes to insert a new clause whereby any payment made to a Non-Resident on account of dividend shall not attract the provisions of Tenth Schedule to the Ordinance. Accordingly any non-resident whose name does not appears on ATL, provisions of the Tenth Schedule would not be applicable on dividend paid to such non-resident.

1. Exemption from application of Section 231A, 231AA, and 236P of the Ordinance

Clause 112A

The Bill seeks to insert a new Clause 112A of Part IV of Second Schedule to the Ordinance whereby the provisions of Section 236P of the Ordinance relating to tax deducted on banking transactions otherwise than through cash exceeding Rs.50,000 in a single day do not apply to a non-resident rupee account repatriable (NRAR) or a foreign currency account maintained with a banking company in Pakistan of a non-resident individual investing in a debt instrument issued by the Federal Government under the Public Debt Act, 1944.

1. Exemption to a non-resident from getting registered and filing of income tax return

Clause 114

The Bill seeks to insert a new Clause whereby a non-resident individual would not be required to get the tax registration and file its return of income solely by reason of earning profit on debt from a debt instrument, whether conventional or shariah compliant, issued by the Federal Government under the Public Debt Act, 1944 and purchased exclusively through a bank account maintained abroad, a non-resident rupee account repatriable (NRAR) or a foreign currency account maintained with a banking company in Pakistan.

1. Exemption from application of Section 151, 231A, 231AA, and 236P of the Ordinance

Clause 116

The Bill seeks to insert a new Clause 112A of Part IV of Second Schedule to the Ordinance whereby the following taxes shall not apply to The Prime Minister's COVID-19 Pandemic Relief Fund-2020:

• Tax deducted under Section 151 of the Ordinance on profit on debt;

• Tax deducted under Section 231A of the Ordinance on cash withdrawal of amount exceeding Rs.50,000 in single day;

• Tax deducted under Section 231A of the Ordinance on banking instruments exceeding Rs.25,000 in single day; and

• Tax deducted under Section 236P of the Ordinance on banking transactions otherwise than through cash exceeding Rs.50,000 in a single day.

1. Exemption from application of Section 236P of the Ordinance

Clause 117

The Bill seeks to insert a new Clause 117 of Part IV of Second Schedule to the Ordinance whereby no tax is required to be deducted under Section 236P of the Ordinance in respect of banking transactions otherwise than through cash at the time of transfer of any sum to The Prime Minister's COVID-19 Pandemic Relief Fund- 2020.

Seventh Schedule

1. Applicability of Super Tax under Section 4B of the Ordinance

Presently, the Super tax for rehabilitation of temporarily displaced persons is applicable to banking companies until the tax year 2020. The Bill now seeks to extend the applicability of such Super Tax on banking Companies for the tax year 2021 as well.

Tenth Schedule

1. Exemption to certain payment to non-resident from application of Tenth Schedule

The Tenth Schedule generally provides that where ever tax is required to be deducted or collected under any provisions of the Ordinance from a person whose name is not appearing in the ATL, the rate of withholding will be doubled in case of deduction or collection from such persons. However, the schedule provides exception in case of the several payments on which provisions of the Tenth Schedule do not apply. The Bill now seeks to provide such exception to the following payments made to non-residents:

• Payment of royalty and fee for technical services made to non-resident on which tax is required to be deducted under Section 152(1) of the Ordinance;

• Payment of insurance and reinsurance premium made to non-resident on which tax is required to be deducted under Section 152(1AA) of the Ordinance;

• Payment of other general expenses not covered specifically and attract withholding of tax under Section 152(2) of the Ordinance.

In addition to the above, currently the payment made by a resident person to a permanent establishment of a non-resident in Pakistan in respect of supplies of goods on which tax is required to be deducted under Section 152(2A)(a) of the Ordinance does not attract the provisions of the tenth Schedule. However, the Bill proposes to bring such payments also under the mischief of Tenth Schedule. Accordingly, any payment made to a permanent establishment of a non-resident in Pakistan who is not appearing on ATL would attract the provisions of the Tenth Schedule.

1. Redundant Clauses of the Tenth Schedule

In line with the proposed omission of various Sections of the Ordinance in respect of withholding of tax on various payments, the Bill now proposes to omit the following clauses from the Tenth Schedule as a consequential amendment:

• Sub-rule k of Tenth Schedule - Tax on steel melters and composite units

• Sub-rule n of Tenth Schedule - Advance tax on functions and gatherings

• Sub-rule o of Tenth Schedule - Advance tax on cable operators and other electronic media

• Sub-rule q of Tenth Schedule - Advance tax on dealers, commission agents and arhatis etc

• Sub-rule u of Tenth Schedule - Collection of advance tax on education related expenses remitted abroad

• Sub-rule v of Tenth Schedule - Advance tax on insurance premium

• Sub-rule w of Tenth Schedule - Advance tax on extraction of minerals

• Sub-rule x of Tenth Schedule - Advance tax on tobacco

(To be Continued tomorrow).

Copyright Business Recorder, 2020