Payment to non-residents: ITC approval condition dropped

The Federal Board of Revenue (FBR) has withdrawn a condition, mandatory for businessmen, to obtain approval of commissioners on making payments to non-resident companies or foreign investors without payment of withholding tax, under avoidance of double taxation conventions.
The decision would be instrumental in promoting bilateral trade with countries where avoidance of double taxation agreements provide exemption or a reduced rate of tax on payments to non-residents.
The board issued an 'explanatory circular' here on Monday to clarify issues pertaining to income tax introduced through Finance Act 2008. According to the circular, an amendment has been made in sub-section (5) of section 152 of the Income Tax Ordinance 2001 in budget (2008-09).
Before this amendment, any person making payment to a non-resident person without deduction of tax, was required to give complete particulars of the non-resident as well as nature and amount of the payment, to the Commissioner of Income Tax. Following approval by the concerned commissioner, the person was allowed to make payments to non-residents without deduction of withholding tax. Such exercise, however, was futile where avoidance of double taxation agreements provide exemption or a reduced rate of tax for a particular payment.
Now, the conditions would not be applicable where payments are subjected to "nil" or "reduced tax rate" as per the provisions in the avoidance of double taxation treaty. This measure would reduce the unnecessary hassle of the taxpayers of getting exemption certificate for remittance of such amounts with deduction of tax or deduction as per the provision of the treaty, the FBR added.
The board further clarified that one percent withholding tax would be applicable on all kinds of exports. Details show that a reduced tax rate regime was provided under section 154 read with clauses (14) and (15) of Part II of the 2nd Schedule to the Ordinance, whereby export of branded rice, canned fish, precious and semiprecious stone etc was subjected to reduced rate of 0.75 percent against normal rate of 1 percent.
The discrimination in tax rates had not only been objected to by different export houses but such treatment was also considered as unfair. To remove this distortion and provide level playing field to the entire export sector, the clauses (14) and (15) of Part II of the Second Schedule have been omitted, by virtue of which withholding tax on all exports under section 154 would be subjected to tax @ 1 percent. However, it would remain as final tax for such exports as before.