The Income Tax Amendment Ordinance 2022: govt’s plan to promote industries

[These notes have been prepared on the basis of draft of the law as provided by Super Law Updates]

General

A draft of the Income Tax (Amendment) Ordinance, 2022 has been issued on March 2, 2022.

This Ordinance has been introduced to give effect in the Income Tax Ordinance, 2001, to the incentives and concessions provided by the Government of Pakistan under the Promotion Plan for Industry which has been approved by the Cabinet.

In relation to income tax laws three concessions and incentives have been provided in the said Ordinance. These are;

• Immunity from the probe for the sources of funds for investments in industrial undertakings;

• Tax credit for investments by nonresident Pakistanis and others from outside Pakistan; and

• Acquisition and set off of losses of ‘sick industries’.

All these measures are expected to increase the flow of investment in the industrial sector. It is good that these incentives are inter alia restricted to industrial investments in large and medium scale sectors. There is an immediate need to boost activity in this particular segment of the economy.

Immunity and amnesty from tax as provided under the law is a reflection of the hard fact that our tax system has not been able to create an environment where accumulation of such wealth is curtailed.

The salient features of the law as enunciated are described in the following paragraphs.

Immunity from probe for investment in industrial undertaking

A new subsection 100F has been introduced in the Income Tax Ordinance, 2001 whereby an immunity from probe of source of income is provided for investment in industrial undertakings.

Under this provision, immunity from tax under the Income Tax Ordinance, 2001 is available to all funds which end up as cash in a dedicated bank account for the purposes of industrial investment as laid down under this Ordinance. This means that if Mr A has an undeclared account or assets in Pakistan or outside Pakistan; then Mr A can liquidate such asset / transfer the proceeds to the dedicated account under the law and claim immunity from all income tax in Pakistan on payment of 5% of the value of such amount.

This concession is available to all ‘persons’ as defined in the Income Tax Ordinance, 2001 except a listed company.

This immunity is subject to the following conditions:

1. The statement to make such investment is filed before September 30, 2022;

2. There is a payment equal to 5% of the amount of such investment to the tax department;

3. The amount invested is above Rs 50 million and the said amount is deposited in a dedicated bank account;

Investment entitled under this provision can be made in a new company formed for establishing an industrial undertaking or Balancing, Modernization and Replacement (BMR) in an existing undertaking (from funds which have not been declared in the tax returns filed up to December 31, 2021).

The industrial undertaking arising from such investment is required to commence commercial production before June 30, 2024.

Following industries will not be eligible for this provision of law:

1. Arms and ammunitions;

2. Explosives;

3. Sugar;

4. Cigarettes;

5. Aerated beverages;

6. Flour mills;

7. Vegetable ghee;

8. Cooking oil manufacturing excluding extraction units;

This scheme is for individuals who are eligible persons and does not specifically exclude any other person such as a private company or a partnership as defined under the Ordinance.

Following eligible persons are not entitled to the benefits of the law:

1. Holders of public office, their spouses and dependent children;

2. A public company as defined in Clause (47) of Section 2 of the Income Tax

Ordinance, 2001;

1. A person who has filed declaration under Voluntary Declaration of Domestic Asset Act, 2019, The Foreign Asset (Declaration) Act, 2018 or the Asset Declaration Act, 2019;

2. A person declared as a bank defaulter; or

3. A director of a company that has been declared as a bank defaulter.

Generally immunity from taxation is understood to be provided for individuals only, however under this scheme companies are also eligible for immunity (other than listed companies)

All declarations made under this provision shall be confidential.

The immunity as provided in the law shall be treated as invalid if:

1. If there is no commercial production in that industrial undertaking by June 30, 2024;

2. There is change in ownership before June 30, 2026;

3. Newly-formed company disposes of the assets before June 30, 2026.

There is no rationale to provide for a condition of continued ownership.

This scheme emanates from the Income Tax Ordinance, 2001 therefore its benefits are limited to the provisions of this law only. Unlike assets declaration laws of 2018 and 2019 immunity from other laws is not available which needs to be provided if the scheme is to be made really successful. The other relevant law is the Foreign Exchange Regulation Act 1947.

This law will not apply if the proceeds relate to crime, corruption, money laundering and terror financing. This matter requires consideration as under the present laws relating to money laundering evasion of tax is also a predicate offence under the Anti-Money Laundering Act 2010. There can be an argument for the contradictory position between the two laws however, it is our opinion that if any sum on which tax has been evaded is made immune under the provision of the income tax law, as has been made under this act, then on such sums the provisions of Anti-money law will not apply.

Tax Credit for Foreign Investment

A new kind of tax credit equal to 100% of the amount of investment has been introduced for investment in industrial undertakings in a company formed on or after March 31, 2022 by the following persons:

1. Pakistani citizens who are non-resident for tax purposes continuously for more than five years; and

2. A resident person who has declared foreign assets in his wealth statement.

This means that any industrial undertaking formed through foreign investment in rupees will be eligible for a tax credit equal to 100% of equity invested against the profits and gains from such industrial undertakings.

The applicable conditions are:

1. Funds are remitted from outside Pakistan and deposited in a dedicated account;

2. Investment is more than Rs 50 million;

3. The industrial undertaking commences commercial production before June 30, 2024;

4. The unavailed tax credit can be carried forward for a period of five years.

There is no reason for making this provision inapplicable for any other persons if investment is being made in rupees from foreign exchange remitted to Pakistan (Pakistani citizen or non-Pakistani citizen)

Relief for Carry Forward of business losses of the Sick industrial units

A provision similar to Group Relief already in existence under Section 59B of the Income Tax Ordinance, 2001 has been provided for surrender of losses of sick industrial units acquired by any other company.

There is no time limit for this section and this provision is expected to continue as a constant provision under the Ordinance. However, the time of revival as contained in this section by June 2026 creates an impression that this provision is applicable only for acquisition up to a certain period which ends on June 30, 2026.

This aspect is required to be clarified.

Under the prescribed procedure any company that ‘acquires’ any sick industrial company as defined under this provision other than by way of a scheme of amalgamation or merger, then the acquirer will be entitled to set off the brought forward business losses against the income of the acquiring company. There is no rationale for exclusion of acquisition by way of a scheme of amalgamation.

The right to set off losses will be available where there is an acquisition of majority shares of sick industrial units. The right to set off of losses will be equal to the proportionate holding of the acquiring company in the sick industrial unit.

Losses include business losses excluding capital losses. Business losses include unabsorbed depreciation under the law.

A sick industrial unit has been defined as a company being an industrial undertaking where:

1. Business losses for continued three years prior to July 1, 2022 to the extent that they have erased the equity and reserves of that company; or

2. That the company has defaulted towards repayment of outstanding debts owing to banking companies or non-banking financial institutions for a consecutive period of three years immediately before acquisition; or

3. Any other entity as declared by the Federal Government.

The definition of sick unit requires reconsideration.

The sick industrial unit will be revived with a certification to this effect from Engineering Development Board of the Government of Pakistan to be filed along with the return for the tax year 2026. Other conditions are:

1. There is continued ownership for five years starting from June 30, 2023 and there is no change in the share capital of the acquiring company. [This should have been shareholding of acquiring company in the sick unit not the shareholding of the acquiring company];

2. The assets of acquired company are not sold up to June 30, 2026;

3. The acquired company continues the same business till June 30, 2026.

Dissemination of information relating to income tax law

Section 216 of the Income Tax Ordinance 2001 declares that information relating to taxation matters shall not be disclosed by public servants. There is no ambiguity on this subject. However, following two issues have recently arisen in this regard:

1. Whether or not such provisions also include the National Accountability Ordinance, 1999, the Federal Investigation Agency Act, 1974 and Right of Access of Information Act, 2017; and

2. Whether or not information contained in Voluntary Declaration of Domestic Assets Act 2018, Assets (Declaration & Repatriation) Act, 2018 and the Asset Declaration Act 2019 is included within the purview of this section.

By way of a specific amendment in subsection (2) of Section 216 both these questions have been answered. This means that tax information including the information disclosed in the asset declaration law cannot be disseminated in any manner to any authority.

This is a commendable act which should have been done much earlier.

Copyright Business Recorder, 2022