Accelerated deprecation, tax credit: Companies required to pay 17 percent ACT of accounting profits

The companies claiming accelerated deprecation, tax credit and bringing forward losses shall be paying Alternative Corporate Tax (ACT) on the basis of their accounting income. A tax expert told Business Recorder here on Wednesday that the accelerated deprecation included situations where 100 percent tax allowance/credit is admissible under the Income Tax Ordinance 2001.
Previously, such companies were only paying turnover tax at the specified rates. After introduction of ACT through Finance Act 2014, they would now have to pay 17 percent tax of their accounting profits. This means that the deprecation, tax credit and brought forward losses may not be allowed to companies declaring losses. Hence, the provisions of the Income Tax Ordinance 2001 will become redundant for them.
The imposition of the ACT on accounting income of companies would force these particular companies to pay ACT or corporate tax whichever is higher. It is estimated that the companies declaring losses would be discouraged to avoid such practices of tax evasion, expert added.
The FBR said that a new concept of ACT has been introduced. As the name suggests, it will only be applicable to companies. A company shall be required to pay the higher of the ACT or the corporate tax. Corporate tax has been defined in the section to mean total tax payable by the company, including on account of minimum tax and final taxes payable, under any of the provisions of the Income Tax Ordinance 2001 but not including those mentioned in section 8, under section 161, 162 and any amount charged or paid on account of default surcharge or penalty and the tax payable under this section. The ACT has been defined to mean the tax at a rate of 17 percent of a sum equal to accounting income less the amounts, as specified in sub-section (8), which include exempt income, income chargeable under section 650, 65E, 100C, income subject to tax under section 37A, income subject to final tax chargeable under sub-section (7) of section 148, section 150, sub-section (3) of section 153, sub-section (4) of section 154, section 156 and sub-section (3) of section 233 and income subject to clause (18A), Part II of the Second Schedule to the Ordinance.
Similarly, ACT shall not apply to taxpayers chargeable to tax in accordance with the provisions contained in the Fourth, Fifth and Seventh Schedules to this Ordinance. Accounting income has also been defined to mean the accounting profit before tax for the tax year as disclosed in the financial statements. If ACT is greater than the corporate tax, the excess shall be carried forward to the following tax year and shall be adjusted against taxable income (not including accounting income) for that year. However, the excess cannot be carried forward beyond 10 tax years. An explanation has also been added to this new section, whereby the right to carry forward minimum tax under section 113 has been allowed, the FBR added.