Finance Act 2017 has abolished the concept of making a provisional assessment on failure to furnish a return of income on a notice from the commissioner under section 114(3) or 114(4) of the Income Tax Ordinance and replaced it with the concept of "Best Judgment Assessment" under section 121, in such circumstances.
According to the comments of Amir Alam Khan & Co Chartered Accountants on Finance Act 2017, the best judgment assessment deals with the section 121(1)(ab). Hitherto non-furnishing of return of income on a notice from the commissioner under section 114(3) or 114(4), the only remedy available to the commissioner was to proceed for making a provisional assessment under section 122C. Consequent upon withdrawal of concept of provisional assessment under section 122C, now the commissioner has also been empowered to make a 'Best Judgment Assessment' where a taxpayer fails to furnish a return of income on a notice from the commissioner under section 114(3) or 114(4).
The concept of making a provisional assessment on failure to furnish a return of income on a notice from the commissioner under section 114(3) or 114(4) has been omitted and replaced by making 'Best Judgment Assessment' under section 121, in such circumstances.
The CA firm has explained in detail the comments, effects and implications of the amendments brought in the Income Tax Ordinance, 2001, Sales Tax Act, 1990, Sales Tax Rules, 2006, Sales Tax Special Procedure Rules, 2007, Sales Tax Special Procedure (Withholding) Rules, 2007 and Islamabad Capital Territory (Tax on Services) Ordinance, 2001 through the Finance Act, 2017 and notifications are issued in this respect. These are now the final amendments as approved by the Parliament and the President of Pakistan.
Tax Credit for Enlistment - Section 65C: Tax credit for enlistment of a company on a stock exchange in Pakistan is available at the rate of 20 percent of the tax payable for the tax year in which the company is enlisted. Now, a further tax credit will also be available at the rate of 10 percent of the tax payable of the succeeding two years.
Principals of Taxation of Companies - Section 94(3): Prior to amendment made by Finance Act, 2015, dividend received from a "resident" company was chargeable to tax as income subject to separate charge and dividend received by resident person from a non-resident company was chargeable to tax as a component of total/taxable income.
Through Finance Act, 2015, sub-section (2) of section 94 was amended and dividend received from a company (whether resident or non-resident) was chargeable to tax as income subject to separate charge. However, corresponding change in sub-section (3) of section 94 was not made which provided that dividend received by resident person from a non-resident company was chargeable to tax as a component of total/taxable income. This lacuna in the law has been resolved by omitting sub-section (3) of section 94 and dividend received from a company (whether resident or non-resident) will be chargeable to tax as income subject to separate charge.
Special Provisions relating to the Production of Oil and Natural Gas, and Exploration and Extraction of other Mineral Deposits - Section 100(2): Profits and gains and tax payable thereon of exploration and production of petroleum, natural gas, refineries, pipeline operations of exploration and production companies, manufacture and sale of liquefied petroleum gas or compressed natural gas is governed by rules contained in Part I of the Fifth Schedule.
Sub-section (2) provides for an exception to the above in respect of profits and gains attributable to the production of petroleum including natural gas discovered before the 24th day of September, 1954, which also included SUI gas field.
Amendment has been made to exclude SUI gas field from the above exception retrospectively from tax year 2017. Accordingly effective tax year 2017, the profits and gains and tax payable thereon of SUI gas field will be governed by rules contained in Part 1 of the Fifth Schedule.
Tax Credit for Certain Persons - Section 100C: Specified non-profit organisations, trusts and welfare institutions enjoy 100 percent tax credit equal to the tax payable subject to fulfillment of following conditions:
(a) return has been filed;
(b) tax required to be deducted or collected has been deducted or collected and paid; and
(c) withholding tax statements for the immediately preceding tax year have been filed.
A further condition has been added to avail this credit, which reads as under:
(d) the administrative and management expenditure does not exceed 15 percent of the total receipts.
However, the newly inserted condition will not apply to a non-profit organization, if-
(a) charitable and welfare activities of the non-profit organization have commenced for the first time within last three years; and
(b) total receipts of the non-profit organization during the tax year are less than one hundred million rupees.
Amir Alam Khan & Co Chartered Accountants understands that in many cases to draw a line between expenses incurred for the objects (charitable and welfare) of the non-profit organization and administrative and management expenditure will be very difficult and a moot point for litigation.
We also understand that in the exception for applicability of newly inserted condition the words "trust" and welfare institutions" are missing, which implies that the exception is only for "non-profit organization" as defined in section 2(36).
Another very important amendment with respect to taxation of specified non-profit organizations is the taxation of their "surplus funds" at the rate of 10 percent.
For this purpose the term "surplus funds" has been defined to mean funds or monies:
(a) not spent on charitable and welfare activities during the tax year;
(b) received during the tax year as donations, voluntary contributions, subscriptions and other incomes;
(c) which are more than twenty-five percent of the total receipts of the non-profit organization received during the tax year; and
(d) are not part of "restricted funds".
The term "restricted funds" has also been defined to mean any fund received by the organization but could not be spent and treated as revenue during the year due to any obligation placed by the donor.
The definition of the term "surplus fund" is very confusing. We (CA Firm) understand that the sequence of clauses (a) and (b) needs to be changed, Amir Alam Khan & Co. Chartered Accountants said.
Further, in clause (a) the words "management and administrative expenses" are conspicuously missing in the presence of specific words "not spent on charitable and welfare activities". Thus, a point of contention whether "surplus funds" means before or after "management and administrative expenses".
In the newly inserted provision relating to taxation of surplus funds the words "trust" and "welfare institutions" are missing, which means that these provisions would not apply to "trust" and "welfare institutions" and are only applicable to the "non-profit organization" as defined in section 2(36), Amir Alam Khan & Co. Chartered Accountants added.