The insurance and reinsurance premium paid to overseas insurance companies would be liable to 5 percent withholding tax at the time of remittance of such payments abroad. Despite uniform withholding tax rate of 2 percent, the imports of gold, mobile telephone sets and silver would be liable to 1 percent withholding tax of the import value under clause (13G) of Part II of the Second Schedule of Income Tax Ordinance 2001.
An income tax circular issued on Monday clarified various withholding tax changes and rationalisation of the levy at the import stage in budget 2008-09. The reinsurance premium paid to overseas companies was Rs 10.157 billion in 2007.
The premium of life and goods insurance from Pakistan is being remitted to overseas insurance companies operating from abroad but this part of their income from Pakistan is not subject to tax. However, the commission paid to non-insurance companies is subjected to withholding tax.
Following the amendment in Income Tax Ordinance 2001, insurance and reinsurance premium paid to overseas insurance companies would now be subjected to 5 percent withholding tax at the time of remittance by invoking provision of sub-section (1AA) of section 152 of the Ordinance. The Fourth Schedule and section 169 of the Ordinance have accordingly been amended, to make this charge a final tax.
The government has also empowered the FBR to exempt persons, class of persons, goods or class of goods or payments etc from the application of any provisions of the Income Tax Ordinance relating to withholding taxes. The main objective of this amendment is to allow relief in hardship cases at Board's level. The necessary amendments were made in sub-section (3) of section 159 of the Ordinance.
Explaining the rationalisation of withholding tax, the FBR said that the withholding tax rate was 5 percent on imports under erstwhile provisions of section 148. Tax so deducted was final tax in cases of commercial importers. However, withholding tax @ 1 percent on raw material and capital goods imported for own use, collected from manufacturers was adjustable, subject to the provisions of the Ordinance.
The direct and indirect exporters covered under the Duty and Tax Remission for Export (DTRE) scheme and manufacturer exporters could import goods without payment of withholding tax. There were consistent complaints of misuse of exemption certificate and low withholding tax rate for manufacturers who reportedly sell the imported goods in open market instead of their own use putting the commercial importers in a disadvantageous position.
The withholding tax regime has been reviewed as a whole and a uniform rate of 2 percent withholding tax has been provided for commercial as well as manufacturer importers, being final tax in the case of former and adjustable in the case of latter. It will not only curb the tendency of misuse of this facility by the manufacturer resulting in the loss of revenue but would also provide a level playing field to all the stakeholders.
For the convenience of the importers, relevant provisions of Part II, III and IV of the Second Schedule to the Ordinance are explained hereunder to state the changes brought about in the WHT regime for imports:
Under clause (9) of Part II of the Second Schedule, tax under section 148 was payable @ 1 percent on the import of fibres, yarn and fabric, but, "pure cotton or its yarn or its fabrics" were exempt from this levy. To give equal treatment to various items in textile sector, tax at a uniform reduced rate of 1 percent shall also be collected on the aforesaid items ie pure cotton or its yarn or its fabrics, at import stage.
Under clause (13) of Part II of the Second Schedule, tax under section 148 was payable @ 1 percent on the import of capital goods and raw material imported exclusively for own use by a manufacturer registered with Sales Tax Department. The aforesaid clause has been omitted. Now the importer of capital goods and raw material even if imported for own use by a manufacturer shall be liable to WHT @ 2 percent.
Under clause (13A) of Part II of the Second Schedule, providing reduced rate of 1 percent on the import of phosphatic fertiliser has been omitted to collect WHT @ 2 percent at import stage.
The clause (13B) of Part II of the Second Schedule providing 2 percent levy on import of certain items has been omitted because it had become redundant as general rate on import has been fixed at 2 percent instead of 5 percent. Under clause (13G) of Part II of the Second Schedule, tax payable @ 1 percent on the import of the items mentioned at sub-clauses (i) to (xxiv).
The subclauses (i) to (iii) and (viii) to (xxiv) have been omitted. Tax @ 2 percent shall be collected on the items, falling under the aforesaid clauses (i) to (iii) and (viii) to (xxiv) instead of reduced rate. However, gold, mobile telephone sets and silver imported under sub-clauses (iv) to (vi) respectively shall continue to pay tax @ 1 percent of the import value.
Clause (13H) of Part II of the Second Schedule has been omitted because reduction in general rate on import from 5 percent to 2 percent has rendered this clause redundant.
Clause (56) of Part IV of the Second Schedule has been substituted. The provisions of section 148, regarding withholding tax on imports shall not apply to the following items: Goods classified under Pakistan Customs Tariff falling under Chapters 27, 86 and 99; goods imported by direct and indirect exporters which are covered under sub-chapter 7 of Chapter XII of Pakistan Customs Laws read with SRO.450(I)/2001 and goods temporarily imported into Pakistan for subsequent exportation are exempt from income tax which are exempt from customs duty and sales tax under SRO.1065 (I)/2005.