In order to document big distributors, the Federal Board of Revenue (FBR) would not allow input tax adjustment to those manufacturers who would sell Rs 10 million goods on a monthly basis to unregistered buyers.
Explaining salient features of the Tax Laws (Second Amendment) Ordinance 2019, FBR Member Inland Revenues (Policy) Dr Hamid Ateeq Sarwar briefed reporters at the FBR House that the objective of this amendment through Presidential Ordinance is to bring major distributors into the documented regime.
Dr Hamid Ateeq Sarwar said that the big distributors who made purchases from Rs 10 million on monthly basis to Rs 100 million on annual basis, the manufacturers would not be granted input adjustments if they would sell their products to unregistered persons.
Under the Tax Laws (Second Amendment) Ordinance 2019, the FBR has reduced sales tax on few categories of mobile phones, lower rate of income tax at the import stage on certain categories of mobile phones, reduction in minimum tax rate from 1.5% to 0.5% for traders (turnover up to Rs 100 million), exemption from withholding agents for traders having turnover up to Rs 100 million, exemption from collection of advance tax on banking transactions of Special Convertible Rupee Accounts (SCRA) maintained by non-resident companies having no permanent establishment in Pakistan, non-payment of advance tax by non-resident company having no permanent establishment in Pakistan investing debt instruments and government securities through SCRA, exemption from collection of income tax on their electricity bills for five export oriented sectors and rationalization of minimum tax in the case of traders of yarn.
About the Point of Sale (POS), he said that the FBR planned to install POS software system at 20,000 big retailers' falling within the tier-1 category. So far 4,750 retailers have come into the system.
FBR Member IT Asim Ahmed informed that under newly launched POS campaign they had brought 186 retailers and integrated 5000 POS with the FBR system. So far 40 shops have started sharing online data with the FBR.
Dr Hamid Ateeq Sarwar said that the FBR was targeting purchases of affluent segment of the society as they used to buy branded clothes from brands shops and they did not have any problem to provide 17 percent sales tax on purchasing of expensive suiting in thousands of rupees.
He said that the FBR is planning to introduce 5 percent cash payback scheme for encouraging customers to get receipt. One proposal is provide them reward scheme and another one is to re-file scheme but in Punjab it was found that the car gift came out on names of employees of the restaurants because they cut and provided receipts on the name of their employees. Salient Features of the Ordinance for the Second Amendment in the Tax Laws 2019:-
SALES TAX
1. Definition of Greenfield Industry: Many queries have been received seeking clarification of the term "Greenfield industry". A definition of this term in section 2 of the Sales Tax Act, 1990 has now been inserted in clause 12A.
2. Penalty for Persons who violate FBR Integrated Software for Sale or Track and Trace System: In order to ensure that persons who are required to integrate with the FBR or have been integrated, either do not get themselves integrated or do not make proper compliance and tamper with the systems so installed so as to avoid reporting and recording of production and sales, it has been provided to amend section 33 of the Act to declare such act as an offence and punishable with imprisonment and fine both.
3. Penalty for violation of printing requirement of Retail Price Sales tax is levied on the basis of retail price on the items specified in the Third Schedule to the Act. Such retail price is required be printed with retail price. In order to ensure compliance in this respect, and to safeguard revenue associated therewith, it is penalty has been provided and also confiscation of contravening goods by amending section 33 of the Act.
4. Penalty for violation of Section 40D - To document further supplies from
AJK In order to safeguard industry in Pakistan and to prevent misuse of exemption, a new section 40D in the Act has been added and amendment in this regard has also been made in section 33 relating to penalties and offences, so as to provide for powers to prescribe documentation in relation to such goods and to examine and check vehicles coming from tax-exempt areas such as AJ&K, Gilgit-Baltistan and Tribal Areas.
5. Amendment in Section 73-Manufacturers to sell goods to Registered
Persons Section 73 has been amended to provide that a registered manufacturer shall make all taxable supplies to a registered person excluding supplies not exceeding a value of rupees hundred million in a financial year and rupees 10 million in a month.
6. Enhancement of rate of Imported Cotton: Sales tax on the imported cotton has been enhanced from 5 % to 10 % to remove disparity.
7. Correction of PCT of Brick Kilns: PCT heading of bricks had been inadvertently mentioned as "6901.1000", whereas the correct PCT heading is "6901.0000". Tenth Schedule has been amended to correct the PCT heading.
8. Amendment in the 12th Schedule: Manufacturers using plant and machinery for in house installation have now been excluded from the purview of the 12th, further refund of 3% value addition tax may not be barred if paid on goods used in making of zero-rated supplies.
9. Chargeability of Mobile Phones: Sales tax on the mobile phones up to the value of 30 US dollars has been reduced from Rs 130 to Rs 100 and phones having value up to 100 US Dollars from Rs 1320 to Rs 200
10. Broadening the Scope of Tier 1 Retailer: Definition of tier-1 retailer has been amended in section 2(43A), whereby the Federal Board of Revenue is empowered to add any other category of retailers to tier-1.
In view of the higher tariff rates of electricity the conditions to qualify for a Tier 1 retailer have been amended so as to increase the threshold of electricity consumption from Rs 600,000 to Rs 1200,000.
Income Tax Salient Features of the Tax Laws (Second Amendment) Ordinance 2019:
1. Enabling sharing of information with the financial monitoring unit: The Financial Monitoring Unit is the central agency in Pakistan responsible for receiving and analyzing Suspicious Transaction Reports and disseminating the same to the relevant authorities for further investigation or regulatory action in respect of cases relating to money laundering and terrorist financing. Section 216 of the Income Tax Ordinance, 2001 accords confidentiality to tax records and proceedings and has overriding effect over all other laws for the time being in force. Requisite amendment has been made in order to enable sharing of information between FBR and FMU in order to facilitate FMU to perform its functions as laid down in the Anti-Money Laundering Act, 2010 and to enable compliance with certain FATF regulations.
2. Measures for encouraging documentation and broadening of the tax base:
(I)The standard rate of minimum tax under section 113 of the Income Tax
Ordinance, 2001 is being reduced from 1.5% to 0.5% in the case of traders having turnover upto Rs 100 M for the Tax Year 2020.However, traders having turnover up to Rs 100 Million who have filed their returns for the Tax Year 2018 will be obliged to pay tax equal to or more than the tax paid for the Tax Year 2018 for the Tax Years 2019 and 2020. Moreover, a trader has been defined as an individual engaged in the buying and selling of goods in the same state including a retailer and a wholesaler, however, distributors have been ousted from the scope of this definition.
(II) Under section 153 of the Ordinance, individuals having turnover of Rs 50 Million or above in any of the preceding Tax Years are obliged to act as withholding tax agents whilst making payments for supply of goods, rendering of services or for execution of contracts. Henceforth traders, being individuals and having turnover up to Rs 100 Million shall not be required to act as a withholding agent under section 153 of the Ordinance.
3. Simplification OF Tax Regime for Non-Residents Investing in Pakistan's Debt Market:
The existing foreign exchange framework of the country allows non-residents to invest in debt securities and Government securities through Special Convertible Rupee Accounts (SCRA's) maintained with banks in Pakistan. There is no restriction on repatriation of funds from SCRA's which incentivises investment in the local debt market by non-resident investors. Several amendments for encouraging investment in the local debt market and simplifying the tax regime for non-resident companies have been introduced which are summarized hereunder:-
(i) Capital gains emanating from the disposal of debt instruments and government securities (including treasury bills and Pakistan Investment Bonds) to nonresident companies (not having a permanent establishment in Pakistan) who have made investments in such debt instruments/securities exclusively through a Special Convertible Rupee Account (SCRA) maintained with a bank in Pakistan shall be subject to withholding tax @ 10% by banks/financial institutions which shall constitute final discharge of tax liability.
(ii) Enhanced rate of withholding tax for persons not appearing on the active taxpayers list under the Tenth Schedule to the Ordinance shall not apply to capital gains and profit on debt earned by non-resident companies, not having a permanent establishment in Pakistan, which invest in local debt instruments/securities through SCRA maintained with a bank in Pakistan.
(iii) Special Convertible Rupee Accounts (SCRA) being maintained by non-resident companies having no permanent establishment in Pakistan shall be exempt from collection of advance tax on banking transactions otherwise than through cash under section 236P of the Ordinance.
(iv) A non-resident company having no permanent establishment in Pakistan investing debt instruments and government securities through SCRA shall not be required to pay advance tax under section 147 of the Income Tax
Ordinance, 2001 in respect of capital gains arising to it.
(v) Requirement for filing a statement of final taxation under section 115(4) of the Income Tax Ordinance, 2001 and registration under section 181 of the
Ordinance shall not apply to a non-resident company having no permanent establishment in Pakistan solely by reason of Capital Gain or Profit on Debt earned from investments in debt securities and Government securities through Special Convertible Rupee Account maintained with a banking company or financial institution in Pakistan.
4. Procedure and affairs of the appellate tribunal to be streamlined: Section 130 of the Income Tax Ordinance, 2001 provides for the establishment of an Appellate Tribunal Inland Revenue. In order to streamline the affairs of the Tribunal and to impart greater efficiency and transparency in the working of the Tribunal for ensuring maximum disposal of cases the constitution, functioning of benches and procedure of the Appellate Tribunal shall henceforth be regulated by rules which the Prime Minister may prescribe. The scope of qualifications for eligibility as a judicial member has also been enlarged.
5. Exemption from collection of tax on electricity bills for five export oriented sectors to be continued: In terms of clause (66) of Part-IV of the Income Tax Ordinance, 2001 exemption from collection of advance tax under section 235 of the Ordinance on the electricity bills of commercial and industrial consumers was available to the five export oriented sectors who fulfill the twin conditions of falling under the zero rated regime of sales tax and being registered in sales tax as exporters or manufacturers. The zero rating regime for the five export-oriented sectors has now been abolished, therefore, consequent amendment in clause (66) of Part-IV of the Second Schedule has been made enabling the five export oriented sectors to continue to be eligible for exemption from collection of income tax on their electricity bills.
6. Facilitation for manufacturers availing exemption certificate for income tax collected at the import stage in respect of raw materials: In order to facilitate manufacturers, a Commissioner, under the auspices of clause (72B) of Part-IV of the Second Schedule to the Ordinance has the mandate to issue exemption certificate in respect of collection of tax under section 148 of the Ordinance at the import stage in respect of raw materials being imported by industrial undertakings subject to various conditions. However, no time limit has been prescribed under the law or rules for disposal of such exemption certificate by the Commissioner. In order to complement efforts being made towards ease of doing business if a Commissioner fails to issue such certificate within the time period prescribed under the Income Tax Rules, 2002 the certificate shall be automatically processed and issued by IRIS and shall be deemed to have been issued by the Commissioner. However, the Commissioner shall have the mandate to modify or cancel the certificate issued automatically by IRIS on the basis of reasons to be recorded in writing after providing an opportunity of being heard to the taxpayer.
7. Incentivising financial inclusion: Prior to the promulgation of the Tax Laws (Second Amendment) Ordinance, 2019 the rate of withholding income tax on the import of mobile phones was Rs 730 in case of a mobile phones having value exceeding 30 UD dollars and up to 100 US Dollars. In order to complement the efforts of the government towards promotion of financial inclusion , ecommerce etc , income tax at the import stage in respect of mobile phones having value exceeding 30 US dollars and up to 100 US dollars has been reduced from Rs 730 to Rs 100 per mobile phone .
8. Definition of Greenfield industrial undertaking:
Under the Second Schedule to the Income Tax Ordinance, 2001 exemption is available to the profits and gains of a company from a Green Field Industrial Undertaking for a period of five years. Likewise, exemption from minimum tax is also available to Greenfield Industrial Undertakings. However, the term "Greenfield Industrial Undertaking" was not defined in the Income Tax Ordinance, 2001. In order to avoid multifarious interpretations of the said term as well as preclude leakage of revenue through incorrect claim of tax exemptions the term "Greenfield Industrial Undertaking" has now been defined under the Income Tax Ordinance, 2001.This definition shall be applicable from 1st July, 2019 onwards.
9. Implementation of requirement of obtaining business license: In order to document business activity section 181D of the Ordinance was inserted through the Finance Act, 2019 whereby it was made mandatory for every person engaged in any business, profession or vocation to obtain and display a business license as prescribed by the board. In order to complement efforts towards implementation of this scheme the Commissioner is being empowered to impose a fine of Rs 20,000 in the case of a taxpayer deriving income chargeable to tax under the Ordinance and Rs 5,000 in all other cases. Moreover, the Commissioner shall also be empowered to cancel a business license after providing an opportunity of being heard if a person fails to notify any change in particulars within 30 days of such change or if a person is convicted of any offence under any Federal Tax Law.
10. Procedure for conducting transfer pricing audit: The Director General of International Tax Operations has been empowered to select and conduct transfer pricing audit of cases under section 230E of the Ordinance. Previously, there was no provision which specified the procedure to be adopted for conducting transfer pricing audit of taxpayers. It has now been specified that transfer pricing audit of cases selected by the Director General of International Tax Operations shall be conducted as per procedure laid down in 177 of the Ordinance. Moreover, the right to conduct transfer pricing audit under section 230E of the Ordinance shall not
prejudice the right of the Commissioner to determine transfer price at arms length in transactions between associates while conducting audit under section 177 or 214C of the Ordinance or whilst making amendment under section 122 of the Ordinance.
11. Rationalization of minimum tax in the case of traders of yarn: The rate of minimum tax under section 113 of the Ordinance for the Tax Year 2020 shall be 0.5% in the case of a trader of yarn, being an individual, irrespective of the date of registration in sales tax. Moreover, rate of deduction of withholding tax in respect of yarn traders making sales/supplies or rendering services to the five export oriented sectors shall henceforth be 0.5%.
12. Expeditious disposal of cases automatically selected for audit under section 214d of the ordinance: In order to facilitate expeditious disposal of cases automatically selected for audit under section 214D of the Ordinance the Board has been empowered to prescribe procedure for conclusion of audit of income tax affairs of a person automatically selected for audit under section 214D of the Ordinance .Such procedure may include acceptance of declared income of a taxpayer subject to the condition specified therein.