The government has provided an option to the importers, exporters and contractors to be assessed under the normal tax regime instead of the presumptive tax régime (PTR). Taking to Business Recorder here on Friday, Syed Naved Andrabi a leading tax expert explained the important amendments in the Income Tax Ordinance 2001 brought through the Finance Bill (2012-2013).
He said that the definition of Total Income is being changed by bringing in changes in Section 10 of the Income Tax Ordinance 2001. It is proposed that the exempted income shall also be included in the total income; correspondingly the definition of taxable income has been amended to clearly state that only the income under all heads of income under the Income Tax Ordinance 2001 shall be the taxable income.
He stated that the dividend received from money market funds and Income Funds by a banking company shall be taxed at the rate of 25 percent for tax year 2013 and at the rate of 35 percent for tax years 2014 and onwards. This means that the leverage at the hands of the banks has been eliminated and they will now pay tax on full rates on all the dividend income earned from mutual funds.
As per Section 13 (7) of the Ordinance, concessional loans from the employer in the hands of the employees were considered as a perquisite by working out the difference in profit on debt paid by the employee as compared to the bench mark rate; into the income of the employee. This created hardship and excessive taxation. The proposal is now to cap the bench mark rate to a maximum of 10 percent and also exclude the loans of up to PKR 500,000/- outside the ambit of concessional loans and a perquisite in terms of Section 13(7) of the Ordinance, he said.
A new sub-section 1A is proposed to be added to Section 37 of the Ordinance 2001 whereby capital gains arising from the sale of immovable property held for not more than two years shall be taxable in the hands of a taxpayer. In case the sale of immovable property is made within one year the tax payable shall be 10 percent of the capital gain and where the sales after one year but not more than two years the tax payable on capital gains shall be 5 percent of the capital gains. The amendments brought into the Constitution of Islamic Republic of Pakistan, 1973 by the 18th Amendment has opened the gates for the federal government to tax capital gains on immovable property. The proposed amendment seeks to tax the capital gains from selling of immovable property within a period of two years from the buying. Let it be clear that the business income from sale of immovable property was already taxable under the Ordinance. An appropriate amendment in Section 37 (5) of the Ordinance has also been made to include immovable property within the definition of capital asset, he explained.
Naved Andrabi said that the provisions of Section 37A of the Ordinance relating to capital gains on disposal of securities have also been proposed to be amended. The following changes are being proposed;
1) Gain on securities that was exempted under the Ordinance is to be excluded specifically;
2) A formulae for determining the capital gain has been given by insertion of Sub- Section 1A to Section 37A of the Ordinance whereby the cost of acquisition of the security will be allowed to be reduced from the consideration received on sale of the security.
3) Section 100B is being added to tax the gain as under the provisions of Eighth Schedule that is also being added to the Ordinance.
4) The special provisions shall not apply to certain persons, ie, a mutual fund; a banking company, a non-banking finance company, and an insurance company subject to tax under the Fourth Schedule; a modaraba; a foreign institutional investor being a person registered with NCCPL as a foreign institutional investor; and any other person or class of persons notified by the Board;
5) For this purpose definition of National Clearing Company of Pakistan has also been added in Section 2 of the Ordinance by insertion of Clause 35AA. He further said that the compensation on delayed refunds was being paid by the Federal Board of Revenue under the Ordinance; Sales Tax Act, 1990 & Federal Excise Duty Act, 2005. This compensation was falling in grey area of taxability. It was at times being interpreted as capital return; hence not taxable. Section 39 is now being amended to include compensation paid under any law on delayed refunds as " Income form Other Sources" and taxed accordingly.
Moreover, the limits for availing tax credit on investment in shares and insurance are being proposed to be enhanced. The person will now be allowed to invest up to 20 percent of his taxable income or Rs 1 million; whichever is less. Further, the limit of holding period has also been reduced from three years to two years after which the investments in shares may be disposed off.
Naved Andrabi stated that an amendment in Section 65B of the Ordinance is being proposed to allow tax credit for investment on account of BMR against minimum tax & final taxes payable under the Income Tax Ordinance. Section 65D of the Ordinance is also proposed to be amended and allow "corporate dairy farming" the benefit of tax credit by considering it as an industrial undertaking.
For the purposes of determining the cost of an asset and consideration received on disposal of asset the Board has proposed amendments in Section 76 & 77 of the Ordinance so as to allow itself to make Rules in this regard. He said that the geographical source of income in terms of determination of dividend income is now to include definition of dividend income as per Section 2 (19) (f) of the Ordinance; ie, 'remittance of after tax profit of a branch of a foreign company operating in Pakistan'. For this purpose an appropriate amendment is being proposed in Section 101(6) of the Ordinance.
The rate of minimum tax u/s113 of the Ordinance is being reduced to 1/2 percent of the gross turn over as against 1 percent. Further, it is now being clarified that the tax paid under final tax régime shall not be adjustable against minimum tax. He said that the provisions regarding revising of return u/s 114 (6) of the Ordinance are being tightened and it is suggested that taxable income declared should not be less than and loss declared is not more than income or loss, as the case may be, determined by an order issued under sections 121, 122, 122A, 122C, 129, 132, 133 or 221 of the Ordinance. This is a step to stop persons from demolition the façade created by the department under the said provisions. It is also being suggested through a proviso that if any of the conditions are not fulfilled, the return furnished shall be treated as an invalid return as if it had not been furnished.
Time limit for the purposes of issuing notice for calling short documents of the return filed is being enhanced by further 180 days from the end of the financial year in which the return of income was filed. The lapses of the department are time and again being covered by enhancing the time limits.
The sanctity to 'Best Judgement Assessments' is being given by making an amendment and to state that the assessment, if any, treated to have been made on the basis of return or revised return filed by the taxpayer shall be of no legal effect. This means that once the best judgement assessment is made there is no provision of revision but remedy is in filing of appeal, he said.
The provisions of Section 122 are being amended to include the amending powers of the Commissioner in case of a provisional assessment order passed u/s 122C of the Ordinance. Also the powers to amend assessments passed under the Repealed Ordinance are being withdrawn mainly due to limitation. The powers u/s 122(5A) of the Ordinance are further being enhanced to allow the Commissioner to amend the assessment after making, or causing to be made, such enquiries as he deems necessary. He further explained that a correctional amendment in Section 122C of the Ordinance is being proposed to state as to what documents along with a return are to be filed by an Individual & an Association of Person and a Company so as to foil the effect of the provisional assessment.Naved Andrabi further said that the Appellate Commissioner is specifically being given power to allow stay of demand in compelling circumstances after allowing the Commissioner who has passed the order an opportunity of being heard. This stay shall not exceed 30 days in aggregate. Similarly the time limitation for finalising the appeal hearing and order has been removed. Now the appeal can be decided without any time limitations.
It is further proposed that a Commissioner Inland Revenue or Appellate Commissioner having three years of experience as a Commissioner can now be appointed as an Accountant Member of the Tribunal; earlier the condition was of five years. This means Commissioners with less experience can also act as Accountant Members of the Appellate Tribunal. The condition that ordinarily a 'Judicial Member' be appointed as a Chairman of the Tribunal is also proposed to be removed. This means an Accountant Member on deputation form the FBR shall also be eligible to be the Chairman. This move shall further bring the Appellate Tribunal under the influence of the FBR. The independent character of the Appellate Tribunal will be damaged by this move.
In section 151; 152, 153; 154 & 156 the tax deducted is being replace by tax deductable. This means that the default; if any would be determined if the tax was deductable and not if it was not deducted. Similarly, in section 148(7) the words required to be are being added to hold that not only the tax collected but the tax required to be collected will be a final tax. Thus, even if the tax has not been collected for any reason the person will have to pay the same as it was required to be collected, he said.
A new section is being introduced to create a new category under the withholding régime. Section 153A is being introduced to make a manufacturer a withholding agent. Any sales made to distributors, dealers and wholesalers shall be subjected to 1 percent of the gross sales amount. This tax will be adjustable against the Income of the distributor, dealer or wholesalers, he explained.
The rate of default surcharge is proposed to be de-linked from KIBOR rate + 3 percent to a fixed rate of 18 percent. Similarly the compensation rate is also fixed at 15 percent of the refund due. Naved Andrabi further said the tax rates for individuals; Association of Persons and salaried individuals are being revised. The income less than 400,000 shall not be taxable. The new slabs introduce do not tax the exempted amount of 400,000 as was the case earlier. This will encourage people to come into taxable limits without any fear of excessive taxation. The direct 25 percentage of taxation for an AOP has been omitted and they have been brought in line with the Individuals as was the case earlier.
The salaried individual drawing salary more than 2.5 million shall be paying more tax than before as compared to earlier years. The salaried individuals are likely to be taxed more with the new slab rates. Taxation rates for CGT have also been revised for both categories; ie, less than six months and less than one year, Naved Andrabi added.