The definition of 'Active Tax Payers List' (ATL) has been added into Section 2 of the Income Tax Ordinance to specify that the ATL shall be the list issued by the FBR and it also includes the one issued by Azad Jammu and Kashmir Council Board of Revenue and Gilgit-Baltistan Council Board of Revenue.
Explaining the Finance Bill 2019, a tax expert said that this means that the filers of one territory would now be considered as filers by all three boards which would make it simpler and similar withholding of taxes for tax payer falling under one Board and receiving payments from a person falling in other Board jurisdiction. Further, the definition of filer and non-filer as given in Section 2 (23A) & 35 (C) has been deleted.
Under the Finance Bill 2019-20, it is proposed that to settle the outstanding refunds of the tax payers, a system be developed that the same are paid without delay. At the moment the FBR does not have funds to pay the refunds and has a huge target to collect. In view of this, a provision has been introduced wherein promissory notes would be issued to claimants at their option by a newly formed company called the FBR Refund Settlement Company Limited. The bonds will have a maturity period of three years after which the taxpayer shall return the promissory note to the Board and the Board shall make payment of amount due under bonds along with profit due to the bond holders. Whether this will be an option exercised by the taxpayer or not will depend on the terms and acceptability of the same as collateral in money market.
To deal with offshore assets and companies, a complete code of definitions has been introduced in Section 2 of the Ordinance. The definition of offshore assets, enabler and evader with specified and unspecified jurisdiction has been suggested to bring the same in line with international tax laws.
The provisions of Section 4B of the Ordinance are being amended to include that the unabsorbed depreciation and brought forward losses shall not be made part of the income on which Super Tax will be levied on the income that is computed under the Fourth, Fifth, Sixth, Seventh and Eighth Schedules to the Ordinance.
The rate of advance withholding tax on payment of profit on debt is being enhanced from 10% to 15%. Furthermore, the separate rates applicable u/s 7B of the Ordinance for profit on debt shall now be up to Rs 36 million and for amounts exceeding Rs 36 million the profit on debt will be made part of the total income and taxed at normal rates.
An insertion in Section 21 is proposed whereby Clause (ca) is to be inserted which restricts any amount of commission paid or payable in respect of supply of products listed in the Third Schedule of the Sales Tax Act, 1990, if exceeds 0.2 percent of gross amount of supplies thereof unless the person to whom commission is paid or payable, as the case may be, is registered under the Sales Tax Act, 1990 and is appearing in the active taxpayer list under this Ordinance." This means that the distributors and wholesalers will now have to be registered as filers if they intend to work with corporate set up.
Gain on immovable property whether in shape of open plots or built-up will now be exempt from tax if the holding period is ore than 10 & 05 years respectively; earlier on immovable property was not so identified and was not liable to tax if held for more than three years.
The condition of filer to claim Tax Credit u/s 62A of the Ordinance (health insurance) has been removed.
A new Section 75A to the Ordinance is being introduced which restricts a person to purchase immovable and other property in cash if the fair market value is more than five million rupees and one million rupees respectively. The incentive is to do such transaction through banking channel or else the same shall not be considered for depreciation, initial allowance or pre commencement allowance.
The definition of a resident individual has been changed to consider a person resident if he or she is present in Pakistan for a period of, or periods amounting in aggregate to, ninety days or more in the tax year and who, in the four years preceding the tax year, has been in Pakistan for a period of, or periods amounting in aggregate to, three hundred and sixty-five days or more. Currently a person is considered resident if he or she stays in Pakistan for more than 183 days or more in a year; this was in line with international tax laws.
The Section 100BA is being introduced along with 10th Schedule to the Ordinance which will govern the collection or deduction of advance income tax, computation of income and tax payable thereon. The basic purpose is to force persons to become filers of income tax returns. In case the person is not appearing on the ATL the tax collected/withheld or payable shall be increased by 100 % of the prescribed rate in First Schedule.
It seems that the FBR has an impression that the banks do not offer for taxation the provisions which were previously allowed but later on reversed, therefore, it is proposed that the reversal of provisions already allowed is to be made taxable by inserting the following explanation in the Seventh Schedule:-
"Explanation.- For removal of doubt, it is clarified that-
(i) provision for advances and off balance sheet items allowed under this clause, at the rate of 1 percent or 5 percent, as the case may be, shall be exclusive of reversals of such provisions;
(ii) reversal of "bad debts" classified as "doubtful" or " loss" are taxable as the respective provisions have been allowed under this clause; and
(iii) with effect from tax year 2020 and onward; reversal of "bad debts" classified as " loss" are taxable as the respective provisions have been allowed under this clause."
Banks are also allowed to claim deduction in respect of provisions classified as "doubtful" and "loss"; now only deductions in respect of provisions classified as "loss" will be allowed.
The expert was of the opinion that it is also an impression that the banks are earning substantial profits on account of incremental exposure to government securities; therefore, profit from such government securities as is in excess of twenty percent of total profit before tax is to be taxed separately at the rate of 37.5%. This may result into disinvestment by banks.
With these changes and removals/insertions of certain exemptions from and into the Second Schedule to the Ordinance, it seems that the changes are to increase the tax base but surely it seems a difficult endeavour for the banking sector as there incomes are likely to be lower due to increase in base rate/ lower lending.
The charge of Super Tax is also going to be an impediment for banking sector and the other specific industries like insurance, oil exploration and others, he added.