INCOME TAX: BONUS SHARES: Through the Finance Bill, 2014, bonus shares were proposed to be taxed in the hands of the shareholder. In our Memorandum on Finance Bill, it was stated that bonus shares do not represent income in the hands of either the company or the shareholder. Now certain amendments have been made in the proposed bill inter alia to overcome that aspect and to provide mechanism for collection of tax on bonus shares, taxable in the hands of the shareholders. Two sections viz. 236M and 236N now relate to tax on bonus shares in the hands of shareholders, to be collected by listed and unlisted companies respectively.
Brief outline of the new mechanism is as under:
a) Issuance of Bonus shares by a company quoted on the Stock Exchange
-- A company which is quoted on the Stock Exchange and issues bonus shares to its shareholders will withhold bonus shares, at the rate of 5% of the bonus shares issued on the first day of closure of books. The bonus shares so withheld will be deposited with the Central Depository Company of Pakistan Limited (CDC).
-- Bonus shares so deposited by the Company will be disposed of by the CDC and the proceeds shall be paid, on behalf of the shareholders, by way of credit to the Federal Government.
b) Issuance of Bonus shares by a company not quoted on the Stock Exchange
-- A company which is not quoted on the Stock Exchange and issues bonus shares to its shareholders will deposit tax, within 15 days of the closure of the books, at the rate of 5% of the value of the bonus shares on the basis of day-end price on the first day of closure of books, whether or not tax has been collected from the shareholders by the Company. A clarification is desired from FBR to determine day-end price for unquoted shares.
-- Before the issuance of bonus shares, the company liable to deposit tax shall be entitled to collect and recover the amount of tax deposited from the shareholder on whose behalf the tax is deposited.
-- In case a shareholder neither makes payment of tax to the company nor collects his bonus shares, within 3 months of the date of issuance of bonus shares, the company may proceed to dispose of bonus shares to the extent it has paid tax on his behalf.
We reiterate that validity of taxing bonus shares, value to be taxed and manner of collection is expected to be tested in courts and the case laws in the comparative jurisdictions support the view that bonus share do not per se represent income under the Ordinance.
A hybrid tax system has been introduced where company, shareholder and the custodian of listed shares, being CDC has been involved in the collection of tax process. Under a specific sub-section, it has been stated that value of bonus shares shall be deemed to be the income of the shareholder and the tax so collected shall be final liability for the shareholder.
In addition to the same, the matter that needs to be resolved specially in the case of listed companies is the right of surrender of certain part of shares to CDC and disposal of shares for the payment of tax for such purposes and the manner of collection where shares are not dealt through CDC.
In case of unlisted companies, the corporate law consequences for disposal of shares to collect tax on bonus shares, if shareholders do not pay tax on bonus shares, need to be thrashed out.
RATE OF TAX FOR COMPANIES
The Finance Minister in his Budget Speech whilst presenting the Finance Bill 2013 had stated that the rate of tax for Companies will be reduced by 1% for each year to bring it down to the level of 30%. Although the 'Salient Features' issued along with the Budget documents for 2014 reiterated the aforesaid position and stated that the applicable rate of tax for Companies for the tax year 2015 shall be 33%, however pertinent amendment to that effect was inadvertently missed out in the Finance Bill.
The above omission has now been corrected and it has now been proposed to reduce the corporate tax rate for tax year 2015 to 33%. However, this relief in tax rate will not be available to banking companies, which will be taxed at the rate of 35%.
DATE OF APPLICABILITY OF AMENDMENTS
It was mentioned in the Finance Bill that all changes therein are to be effective from July 1, 2014. However, it is now proposed that amendments in the First and Second Schedules to the Customs Act, 1969 as well as the amendments in Fifth, Sixth, Eighth and Ninth Schedules to the Sales Tax Act, 1990 are effective from the next day of the assent to the Bill by the President. This procedure for collection of tax is in line with the last year's order of the Supreme Court of Pakistan wherein it was held that collection of taxes cannot be made through Finance Bill, unless the same is approved by National assembly.
ALTERNATIVE CORPORATE TAX (ACT)
Through the Finance Bill, 2014, a new concept of Alternative Corporate Tax (ACT) was introduced, applicable from Tax Year 2014.
The Finance Bill proposed that the ACT is not applicable to exempt income, income taxable under FTR and income subject to 100% tax credit on account of equity investment.
It has now been proposed that ACT will also not be applicable to the following:
-- income of non-profit organisations, trusts or welfare institutions to whom tax credit is available under Section 100C of the Ordinance; and
-- income of a company setting up an industrial undertaking between July 1, 2014 to June 30, 2017, to whom reduced rate of tax is available under clause (18A) of Part II of the Second Schedule.
FBR is expected to clarify certain practical issues relating to ACT, including those relating to advance tax liability for tax year 2014, which has already been discharged before the passage of Finance Act 2014.
WEALTH STATEMENT
By way of SRO No. 978(I)/2013 dated November 13, 2013, relaxation from filing of wealth statement for only Tax Year 2013 was allowed to an individual or member of AOP whose last declared or assessed income, or declared income for the year is less than Rs 1 million. The same relaxation is proposed to be extended for Tax Year 2014.
INITIAL ALLOWANCE ON BUILDINGS
The rate of initial allowance of Buildings was proposed in the Finance Bill to be reduced from 25% to 10% which is now proposed to be reduced to 15%.
MINIMUM TAX ON DISTRIBUTORS OF FAST MOVING CONSUMER GOODS
Finance Bill 2014 whilst revamping the rates of Minimum Tax, did not incorporate the reduced rate of 0.2% available to Distributors of Fast Moving Consumer Goods, provided in Clause (8) of Part III of the Second Schedule. The proposed amendment has now reinstated the earlier position, and Distributors of Fast Moving Consumer Goods will continue to be liable to Minimum Tax, at the rate of 0.2% of turnover.
COLLECTION OF TAX ON PURCHASE OF INTERNATIONAL AIR TICKET
Through the Finance Bill, it was proposed that every airline, operating in Pakistan, will collect advance tax on the gross amount of international air tickets issued to the passengers booking one-way or return for Pakistan. Enhanced rates were prescribed for non-filers. It is now proposed that tax at the following rates shall be collected without any distinction between filers and non-filers:
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S. No. Type of Ticket Rate
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(1) (2) (3)
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1. Economy 0%
2. First/Business/Club class 4%
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COLLECTION OF ADVANCE TAX ON SALE TO DEALERS, DISTRIBUTORS & WHOLESALERS
Previously, a uniform rate of 0.1% for collection of advance tax was applicable on sale to distributors, dealers or wholesalers of items specified in Section 236G. Advance tax is now proposed to be collected as under:
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Category of Sale Rate
Filer Non-Filer
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(1) (2) (3)
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Fertilisers 0.2% 0.4%
Other than fertilisers 0.1% 0.2%
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EXEMPTION / LOWER RATE CERTIFICATES FOR NPOs, TRUSTS ETC ENTITLED FOR TAX CREDIT UNDER SECTION 100C
Prior to Finance Bill 2014, NPOs, trusts or welfare institutions were exempt from tax. Through the Finance Bill , such entities have been placed under zero rated [100 tax credit scheme]. Previously, exemption status entitled such entities to obtain Nil withholding certificates on receipts, wherever applicable.
In order to allow eligibility of exemption, under zero-rated scheme, a sub-section has been inserted in the respective provision of law (Section 159) whereby facility of obtaining exemption certificate is now also extended to the non-profit organisations, trusts or welfare institutions to which tax credit is available under Section 100C of the Ordinance.
Procedural aspects for the same have to be clarified.
ADVANCE TAX AT IMPORT STAGE
Finance Bill 2014 increased the general rate of tax collection at import stage for industrial undertaking (other than specified) from 5% to 5.5%, effective July 1, 2014. In terms of Clause (72B) of Part IV of the Second Schedule, the concerned Commissioner was empowered to issue exemption certificate if the tax liability for the current tax year, on the basis of determined tax liability for any of the preceding two tax years, whichever is the higher, has been paid.
Now it is proposed that aforesaid exemption certificate shall only be issued by the Commissioner if an application for the said certificate is filed before the Commissioner, in the manner and after fulfilling the conditions as specified in a circular issued by the Board for the purpose of the clause.
COLLECTION OF ADVANCE TAX ON REGISTRATION OF MOTOR VEHICLES
Through the Finance Bill, it was proposed that taxes shall be collected by the Excise and Taxation department on registration of new locally manufactured motor vehicle and also on transfer of registration or ownership of private motor vehicle. It is now proposed that:
-- the word 'new locally manufactured' be deleted which inter alia means that tax collection will also be required on the registration of imported motor vehicles.
-- no tax will be collected on transfer of registration or ownership of private motor vehicle after 5 years from the date of first registration in Pakistan.
-- the rate of advance tax on transfer of registration or ownership of a private motor vehicle be reduced by 10% each year from the date of first registration in Pakistan.
EXEMPTION TO PUBLIC SECTOR UNIVERSITIES
Through the Finance Bill, exemption from income tax was specifically reinstated for public sector universities. It has further been clarified that the exemption will be available only to those public sector universities which are established solely for educational purposes and not for the purpose of profit.
Such exemption is proposed to be effective from July 1, 2013.
This retrospective amendment appears to have been made to provide exemption to certain entities which were generally exempt from tax under the omitted provisions of Clause (92) of Part I of the Second Schedule to the Income Tax Ordinance, 2001 and were not covered under Clause (58A) of the said schedule.
TAX ON STEEL MELTERS AND RE-ROLLERS ETC.
Through Finance Bill 2014, a new tax regime was introduced for steel melter, steel re-roller, composite steel unit registered under the Sales Tax Act. Under the scheme, tax at the rate of Re 1 per unit of electricity consumed was proposed to be collected by the person preparing electricity consumption bill.
The aforesaid collection was proposed to be treated as tax on the payment of local purchase of scrap only and was non-adjustable and credit shall not be allowed to any person.
It has now been proposed that steel melters, steel re-rollers and composite steel units may opt to pay tax under the aforesaid scheme for tax years 2012 and 2013 as well, if tax liability for the said tax years is paid by June 30, 2014.
PASSENGER TRANSPORT VEHICLES
In the case of Passenger Transport Vehicles plying for hire, with registered seating capacity of 20 persons or more, tax under section 234 of the Ordinance is to be collected at the reduced rate of Rs 250 per seat per annum, in terms of Clause (14A) of Part II of the Second Schedule (effective October 4, 2013).
It is now being proposed that owners of Passenger Transport Vehicles may also pay the aforesaid reduced tax for the period July 1, 2012 to June 30, 2013, by June 30, 2014. It has also been provided that tax already paid from July 1, 2012, as per original rate of Rs 500 per seat per annum, shall not be refunded.
INPUT TAX ADJUSTMENT
Finance Bill 2014 restricted the allowability of input tax to the extent of following, by introducing clause (iiia) in sub-section (2) of section 7:
-- Goods imported or purchased for the purpose of sale or re-sale by / to registered person;
-- Direct raw material, ingredient, part, component or packing material used in the manufacture or production of taxable goods;
-- On electricity, natural gas and other fuel consumed directly in the declared business premises for the manufacture, production or supply of taxable goods; or
-- Plant, machinery and equipment used in the declared business premises for the manufacture, production or supply of taxable goods.
It is now proposed to withdraw the aforesaid sub-clause (iiia), resulting that a substantial restriction for input adjustment has been withdrawn.
As observed in our memorandum dated June 4, 2014 this amendment was regressive in character and was not required. Through the proposed amendment the insertion in the Act that was totally unwarranted has rightly been omitted.
SALES TAX ON SUBSCRIBER IDENTIFICATION MODULE (SIM) CARDS
Prior to the Finance Bill, 2014 sales tax at the rate of Rs 250 is to be charged, collected and paid by Cellular Mobile Operators (CMOs) at time of supply of SIM Cards. Such tax was charged by way of SRO 460(I)/2013. Whilst placing such SRO, by way of Ninth Schedule, this entry was omitted. In the amended Finance Bill, the said entry for the payment of sales tax for an amount of Rs 250 on the sale of SIM card has been reinstated.
In addition to the same, the concept of payment of sales tax at the fixed amount on registration of IMEI number by the CMO has been clarified in the amended provisions of the Ninth Schedule.
The consolidated position appears to be a fixed sales tax of Rs 150, Rs 250 and Rs 500 by the importer for the respective kinds of mobile phones, a fixed tax of Rs 250 on registration of IMEI number by the CMO and Rs 250 on sale of SIM card by CMO.
TABLE 3 OF SIXTH SCHEDULE AND TABLE 2 OF EIGHTH SCHEDULE
Conditions specified for exemption / concession on import of certain plant and machinery / goods have been rationalised.
Through the Finance Bill, increase was proposed in GIDC rates for Fertilizer sector (fuel stock), CNG sector, Independent Power Plants, WAPDA / KESC / GENCOs, Industrial consumers and Captive Power Producers whereas levy of GIDC was proposed on Commercial (including Ice Factories) and Cement sectors.
The proposed enhanced rates have now been revised downward whereas the proposal to levy GIDC on Commercial (including Ice Factories) and Cement sectors has been withdrawn. A comparative analysis of the rates of GIDC before Finance Bill, rates proposed in the Finance Bill and the rates now proposed in the Amended Finance Bill is as under:
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S. No. Sector Maximum rate of cess
(Rs/MMBTU)
Present Proposed Proposed
in in Amended
Finance Bill Finance Bill
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(1) (2) (3) (4) (5)
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1. Fertiliser - Feed Stock 300 300 300
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2. Fertiliser - Fuel Stock 100 300 100
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3. Compressed Natural Gas (CNG)
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- Region-I: 263.56 300 300
KPK, Balochistan
& Potohar region
(Rawalpindi, Islamabad &
Gujarkhan)
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- Region-II: 200 300 300
Sindh & Punjab
(excluding Potohar region)
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4. Industrial 100 300 100
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5. Captive Power 100 300 150
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6. WAPDA / KESC / GENCOs 100 300 100
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7. Independent Power Plants (IPPs) 100 300 100
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8. Commercial including Ice Factories - 300 -
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9. Cement - 300 -
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10. Liberty Power Plant - - -
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11. Domestic - - -
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