Dealing of non-resident, resident taxpayers: experts raise query on income tax circular

A legal ambiguity has been raised by tax experts in the income tax circular on banking sector whereby the payment and taxability of ''Profit on Debt'' under the Income Tax Ordinance, 2001 is being dealt separately for the non-resident and resident taxpayers.
Commenting on the recently issued income tax circular 9 of 2011 on banking sector, a leading tax lawyer told Business Recorder here on Saturday that the provisions of section 151 of the Income Tax Ordinance 2001 deal with the withholding of tax on payments of ''Profit on Debt'' to a resident person by banks, Federal or Provincial Governments and others.
The rate of tax deduction is prescribed at 10 percent of the gross amount and also is considered full and final discharge of tax liability for all resident taxpayers, except where the recipient is a company. However, section 151 is not applicable on the non-resident persons, who are governed under section 152 (2) read with clause 5A of Part IV of the Second Schedule to the Ordinance 2001.
For example, if a non-resident person makes investment in government securities in Pakistan, he will be subject to 10 percent withholding tax under section 152 (2) read with clause 5A of Part IV of the Second Schedule to the Ordinance 2001. On the other hand, the income tax circular has stated that the non-resident shall be exempt from withholding tax, which is contrary to the above mentioned provisions of the Income Tax Ordinance 2001.
The FBR should clearly specify the treatment to be accorded to a non-resident investor, in Pakistan, to avoid any sort of confusion. As per section 152 (2) of the Ordinance payment of ''profit on debt'' to a non-resident person is to be subject to withholding of tax @ 20 percent of the gross amount.
However, the provisions of Clause 5A of Part IV of the Second Schedule to the Ordinance prescribe a reduced rate of withholding tax on the profit of debt paid to a non-resident person @ 10 percent of the gross amount.
It has been observed that Clause 19 of Part IV of the Second Schedule to the Income Tax Ordinance states that non-residents have been exempted from withholding tax u/s 151 of the Ordinance, whereas Section 151 of the Ordinance does not apply to non-resident persons.
Similarly, a comprehensive Circular No 09/2011 on the issue of withholding and exemptions from tax on Profit on Debt paid has been issued whereby it has been reiterated that the profit on debt paid to non-resident persons is exempt from tax [Para 2 (II) (V) of the Circular].
The above-mentioned situation has created an anomaly which requires to be clarified as to whether the profit on debt paid to no-resident persons is taxable in Pakistan or not. It is urged that an early clarification will help resolve the ambiguity so created by two different provisions allowing exemption and reduced rate of taxation, tax lawyer added. It is important to mention that as per circular 9 of 2011, ''Profit on debt'' paid to the following recipients is exempt from deduction of tax at source:
This included non-resident, (excluding local branches or subsidiaries or offices of foreign banks, companies, associations of persons or any other person operating in Pakistan), in respect of their profit on debt from Pak rupees denominated Government and corporate securities and redeemable capital, as defined in the Companies Ordinance, 1984, listed on a registered stock exchange, where the investment is made exclusively from foreign exchange remitted to Pakistan through a Special Convertible Rupees Account maintained with a bank in Pakistan. Clause (19), Part IV, 2nd Schedule of the income tax circular said.