The Finance (Supplementary) Bill 2023: an analysis
INCOME TAX: CAPITAL GAIN ON DISPOSAL OF SECURITIES OTHER THAN THROUGH STOCK EXCHANGE/NCCPL
Capital gains arising on disposal of ‘securities’, which inter alia include shares of a listed company, vouchers of PTC, instruments of redeemable capital, units of mutual funds, modaraba certificates, debt securities and derivatives, are taxed as per the applicable slab rates, depending upon nature of instrument, acquisition date and holding period. Collection of tax on transactions settled through NCCPL is generally undertaken by NCCPL through a specified mechanism.
It is proposed that capital gains arising on disposal of ‘securities’ which is executed otherwise through stock exchange and are not settled through NCCPL, shall be taxed under section 37 of the Ordinance at applicable slab rates for non-corporate shareholders and corporate tax rate for corporate shareholders, as the case maybe.
A bare reading of the proposed amendments suggests that the taxation under section 37A would apply where the securities are either (a) executed through stock exchange; OR (b) settled through NCCPL. In case both the conditions specified in (a) and (b) do not apply, then capital gains would be taxable under section 37 of the Ordinance.
It appears that the intention of the proposed amendment is to merely exclude off-market transactions not settled through NCCPL from the scope of section 37A, which shall be subjected to withholding provisions being introduced under section 37 of the Ordinance as discussed below. However, if the Bill is passed in the manner proposed, capital gains arising on disposal of open-ended mutual funds and unlisted REITs would also be taxed under section 37 as their units are neither traded through stock exchange nor the transaction is settled through NCCPL. We expect that appropriate amendments would be made to bring the proposed amendments in line with the intended objective.
ADVANCE TAX ON PURCHASE OF SHARES IN A COMPANY
Consideration paid for acquisition of shares in a company, other than securities taxable under section 37A, is presently not subject to any withholding income tax except in certain cases of non-resident sellers where general withholding tax provisions of section 152(2) are applicable.
It is now proposed that the buyer should withhold and deposit adjustable advance tax at the rate of 10% of the fair market value (FMV) of shares being acquired. Value of such shares is proposed to be the FMV as prescribed for indirect transfer of Pakistan assets provided for under section 101A of the Ordinance, without reduction of liabilities. For the purpose of determination of FMV under section 101A, a specific Rule 19H is prescribed in Income Tax Rules 2002 which is expected to be followed for the purpose of this newly introduced withholding tax provision.
The proposed enabling provisions in this respect are:
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Reporting of the disposal by the seller to the Commissioner Inland Revenue, within 30 days of the disposal.
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Exemption/reduced rate order by the CIR on an application from the seller.
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Application of the provisions relating to recovery, prosecution, penalty and default surcharge in case of non-compliance.
We suggest that certain threshold may be provided for application of the above withholding provisions.
COLLECTION OF ADVANCE TAX ON FUNCTIONS AND GATHERINGS
Advance tax on function and gatherings has been re-introduced, which was earlier omitted through the Finance Act, 2020. The re-introduced provision provides for collection of adjustable advance tax at the rate of 10% of total amount of bill, including bill for food, services or any other facility whether arranged by the withholding agent or not.
The owner, lease-holder, operator/manager of marriage hall, marquee, hotel, restaurant, commercial lawn, club, community place etc. are proposed as withholding agent for the purpose of this provision.
The tax collection will be made from the person arranging the functions and gatherings related to wedding, seminar, workshop, session, exhibition, concert, show, party or any other gathering for such purpose.
SALES TAX INCREASE IN TAX RATE FROM 17% TO 18%
The standard rate of sales tax has been increased from 17% to 18% through SRO 179(I)/2023 dated February 14, 2023. The amendment through SRO 179 is not applicable on goods subject to sales tax at retail price as specified in the Third Schedule to the Sales Tax Act, 1990. The SRO is dated February 14, 2023, in view of which it seems that enhanced rate is applicable from February 14, 2023.
However, in view of the fact that the SRO was made public on February 15, 2023, keeping in view the principles laid down by Supreme Court of Pakistan in its judgement reported as 2022 PTD 232, the applicability of SRO from February 14, 2023 can be questioned. Furthermore, the legitimacy of increase of rate through SRO can also be questioned in view of various judgments which have ruled that power to levy tax remains with the Parliament.
The Finance (Supplementary) Bill, 2023 besides incorporating the effect of SRO 179, has also proposed to increase sales tax rate from 17% to 18% for the goods specified under the Third Schedule which will be effective from the date on which the Act comes into effect.
It has further been proposed that Federal Government may by notification in the Official Gazette, charge sales tax, on goods specified in Third Schedule, on such higher rates as may be specified. It is expected that a separate notification in this respect will be issued later for certain goods specified in Third Schedule.
AMENDMENT IN EIGHTH SCHEDULE (GOODS TAXABLE AT REDUCED RATE)
Through Finance (Supplementary) Bill, 2023, reduced sales tax rates specified for the following are also proposed to be increased as under:
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Description Existing Proposed
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Locally produced coal
(Sr. No. 47) Rs 700 per metric tonne or 17%
ad valorem, whichever is higher Rs 700 per metric
tonne or 18% ad
valorem, whichever is higher
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Potassium Chlorate (KCLO3)
(Sr. No. 56) 17% along with 18% along with
Rs 60 per KG Rs 60 per KG
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AMENDMENT IN NINTH SCHEDULE
Through Finance (Supplementary) Bill, 2023, sales tax applicable on import of cellular mobile phones in CBU form is proposed to be increased as under:
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S NO Value Rate %
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Existing Proposed
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(i) Exceeding US$ 200 but not exceeding US$ 350 17 18
(ii) Exceeding US$ 350 but not exceeding US$ 500 17 18
(iii)Exceeding US$ 500 17 25
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FEDERAL EXCISE DUTY FIRST SCHEDULE AERATED WATERS
The Bill proposes to increase the rate of FED as applicable on different categories of aerated waters as under:
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S.No. Description of Goods Tarif Rate of Federal Excise Duty
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Heading Existing Proposed
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4 Aerated waters 2201.1020 Thirteen percent Twenty percent
of retail price of retail price
5 Aerated waters, 2201.1010 price Twenty per cent
containing added of retail price
sugar or other
sweetening matter or
lavored
6 Aerated waters if Respective Thirteen per cent Twenty per cent
manufactured wholly headings of retail price of retail price
from juices or pulp of
vegetables, food grains
or fruits and which do
not contain any other
ingredient, indigenous
or imported, other than
sugar, coloring
materials, preservatives
or additives in quantities
prescribed under the West
Pakistan Pure Food Rules,
1965.
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LOCALLY MANUFACTURED CIGARETTES
The Bill proposes to increase the rate of FED on locally produced cigarettes as under:
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S.No. Description of Goods Tarif Rate of Federal Excise Duty
Heading
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Existing Proposed
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9 Locally produced cigarettes where 24.02 Rupees 6,500 per Rupees 16,500 per
onpack printed retail price exceeds: thousand cigarettes thousand cigarettes
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Existing threshold Proposed threshold
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6,660 per 9,000
thousand cigarettes thousand cigarettes
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10
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Locally produced ciggretes where on pack 24.02 Rupees 2,050 per Rupees 5,050 per
thousand cigarettes thousand cigarettes
printed retail price does not exceed
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Existing threshold Proposed threshold
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Rs 6,660 Rs 9,000
per thousand cigarettes per thousand cigarettes
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It is appropriate to mention here that the above increase in FED rates was earlier notified vide SRO 178(I)/2023 dated February 14, 2023. SRO is generally applicable from the date of SRO unless otherwise specified. This notification does not mention any effective date and was posted on FBR’s website on February 15, 2023. It is worth mentioning that the Supreme Court of Pakistan in a judgement cited as 2022 PTD 232 has directed FBR to publish all notifications in the official gazette and also post on their website. In view of the directions of SC, a clarification will be required from FBR as to the effective date of this notification.
Currently there is a restriction of minimum retail price of 45 per cent of the above referred existing threshold. It is now proposed to increase the minimum retail price restriction to 60 per cent of the proposed threshold.
SUGARY FRUIT JUICES
Through the Bill, the Government has imposed FED on following:
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S.No Description of Goods Tarif Heading Proposed duty
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59 Sugary Fruit juices, syrups and squashes, Respective headings Ten percent of
whether or not containing added sugar or the retail price
artificial sweeteners excluding mineral
and aerated waters
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INCREASE IN FED ON EXCISABLE GOODS AND SERVICES
The Bill proposes to increase FED on the following excisable goods/services:
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Description of Goods
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Rate of Federal Excise Duty
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Tarif Heading Existing Proposed
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Portland cement, aluminous cement, slag cement, 25.23 Rs 1.50 per kilogram Rs 2 per
super sulphate cement and similar hydraulic kilogram
cements, whether or not colored or
in the form of clinkers
Services provided or rendered in respect of travel 98.03 Rs 50,000 20 per cent of the gross
by air of passengers embarking on international amount of ticket or Rs 50,000
journey from Pakistan in Club, per ticket, whichever is
business and first class. higher, on air tickets
issued on or after the date of
commencement of the Finance
(Supplementary) Bill, 2023
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Copyright Business Recorder, 2023
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