COMMENTS ON FINANCE BILL 2017

Transcription

1 COMMENTS ON FINANCE BILL 2017 Offices at: Karachi Lahore Faisalabad Islamabad Suite No. 1601, Kashif Centre, Shahra-e-Faisal, Karachi. Tele: Amin Building, 65-The Mall, Lahore. Tele: , Business Centre, 1 st Floor, New Civil Line, Faisalabad. Tele: Apartment No. 12 Abu Dhabi Tower, F 11 Markarz, Islamabad. Tele: Website:

2 COMMENTS ON FINANCE BILL 2017 This memorandum has been prepared for the convenience, guidance and general knowledge of our valued clients and staff members and may be used as a ready reference to the proposed amendments mentioned in the Finance Bill 2017 (Bill). The memorandum contains Budget at a glance, salient features and comments on the changes proposed through this Bill in the taxation laws of the country. All changes are effective from July 01, 2017 unless otherwise specified in these comments. The comments on the Bill represent our interpretation and understanding of the proposed amendments as contained therein. We recommended that the actual text of the Bill should be read in conjunction with the comments for a better understanding of the proposed changes and for considering the precise effect of a particular change. Further, reference should also be made to the specific wording in the relevant statute. These are general comments on the proposed amendments, which shall be enacted when the Bill is passed by the National Assembly; accordingly, for specific application of any part of this information, guidance / advice may be obtained separately in order to avoid any risk. The firm therefore accepts no liability for any action taken as a result of this information. We would be glad to entertain any further clarification regarding our comments. The comments on Finance Bill 2017 can also be accessed on / downloaded from the website of our firm - Dated: May 27, 2017 KRESTON HYDER BHIMJI & CO. CHARTERED ACCOUNTANTS 1

3 TABLE OF CONTENTS Sr. no. Particulars Page no. 1 Budget 2017 at a glance 3 2 Salient Features of amendments proposed in Income Tax Ordinance, Comments on amendments proposed vide Finance Bill 2017 in The Income Tax Ordinance, Salient Features of amendments proposed in Sales Tax Act, 1990 and rules made thereunder 39 5 Comments on amendments proposed vide Finance Bill 2017 in The Sales Tax Act, Salient Features of amendments proposed in Federal Excise Act, Comments on amendments proposed vide Finance Bill 2017 in The Federal Excise Act,

4 BUDGET AT A GLANCE Budget Revised Description Rs. in billion % Rs. in billion % Revenue Tax revenue 4, , Non-tax revenue , , Public accounts receipt - Net , , Less: Provincial share 2, , Net revenue 3, , Expenditure Development 1, Current 3, , , , Deficit 2, , Financed by Domestic debt on bank Domestic debt non bank Foreign debts / grants Privitization proceeds Surplus from provinces , ,

5 SALIENT FEATURES OF AMENDEMENT PROPOSED IN INCOME TAX ORDINANCE, EFFECTIVE FROM JULY 01, 2017 EXCEPT PROVIDED OTHERWISE Relief Measures The corporate tax has finally been reduced to 30% for the Tax Year 2018 onward, which was being 1% every year for the last four years. Withholding tax for mobile phone subscribers is being reduced from 14% to 12.5%. Introducing concept of start ups which is defined as a business set-up by an individual, AOP or a company having turnover upto Rs.100 Million, registered and certified by the Pakistan Software Export Board (PSEB) as an information technology entity engaged in offering technology driven products or services to any sector of the economy. A tax exemption including turnover tax and withholding tax is accorded to such entity for a period of three years. In order to promote digital payments in the country and to assist in the realization of the long term vision of Universal Financial Inclusion in Pakistan, exemption is being accorded to branchless banking agents operating under the Asaan Mobile Account Scheme from withholding tax on cash withdrawals made for the purpose of making payments to their respective customers. Exemption of 3% withholding tax is being proposed to vehicles leased under the Prime Minister s Youth Loan Scheme. Enhancement in limit for importing raw material by manufacturers without collection of income tax at the import stage from 110% to 125% of the raw materials imported and consumed in the previous tax year. In order to provide relief and to facilitate small taxpayers, the threshold for payment of advance tax on the basis of latest assessed taxable income is being enhanced from Rs.500,000 to Rs.1,000,000. Further relief on tax credit for education expenses whereby the threshold of taxable income for individuals is being increased from Rs.1,000,000 to Rs.1,500,000 taxable income. The threshold for collection of advance tax from non-filers engaged in Life Insurance Business is being enhanced from Rs. 200,000 to aggregate amount of Rs. 300,000 per annum on Life Insurance Premium. 4

6 The lower limit of tax credit available to individuals and AOPs driving income from salary or business and a filer as well, is being increased from Rs.100,000 to Rs. 150,000, on a proportionate basis. The withholding tax rates are being reduced on registration and transfer of motor vehicles having engine capacity upto 850cc, 851cc to 1000cc and 1001cc to 1300 cc from existing Rs.10,000, Rs.20,000 and Rs.30,000 to Rs.7,500, Rs.15,000 and Rs.25,000 respectively. At present interest free loan exceeding Rs. 0.5 Million provided by an employer to an employee is treated as a perquisite and is subjected to tax in the hands of the employee. In order to provide relief to such employees it is proposed to enhance this limit of interest free loans from the existing 0.5 Million to 1 Million. At present, upon enlistment of a company in the stock exchange, 20% tax credit for a period of two tax years is available on the tax payable by such company. In order to further incentivize the enlistment of companies on the stock exchange such tax credit is being extended for another two tax years, however, such tax credit shall be of the tax payable for each of these subsequent two tax years. The minimum tax on services rendered by the Pakistan Stock Exchange is being reduced from 8% to 2% on its services. Limit for sales promotion expenses such as advertisement and publicity and other promotional activities incurred by pharmaceutical companies is proposed to be enhanced from 5% to 10% of turnover. In order to promote and incentivize Islamic Banking, special provisions have been introduced whereby tax neutrality has been accorded in the case of Musharika financing by extending the benefit of depreciation on assets co-owned in the case of a Musharika arrangement. In order to facilitate Hajj Group operators, the fixed tax of Rs.5000 per Haji is being extended for the Tax Year Exemption is proposed on income of all political parties registered with the Election Commission of Pakistan under the Political Parties Order, In order to encourage non profit/charitable institutions, income of the following charitable organization/non- profit organizations is proposed to be exempted: (a) Gulab Devi Chest Hospital (b) Pakistan Poverty Alleviation Fund (c) National Academy of Performing Arts 5

7 At present, there is exemption from tax on the undistributed reserves of a public company, other than a banking company or a modaraba if the lesser of at least 40% of after tax profit or 50% of the paid up capital is distributed as dividend. In order to protect the interest of small investors and to promote payment of dividends the condition regarding distribution of 50% of paid up capital is being omitted. The concept of provisional assessment is being done away with. A new provision is being introduced enabling taxpayers to revise withholding tax statements suo-moto within 60 days of the filing of withholding tax statements. The Chief Commissioners are being empowered to revise an order by a Commissioner refusing to grant such extension in filing of an income tax return or a wealth statement. REVENUE MEASURES The rate of tax on dividend is proposed to be increased to 15% from 12.5%; and in case of mutual funds it is being enhanced from existing 10% to 12.5%. The incidence of tax upon persons earning lesser interest income is being revised by following new slabs, as under: Where mark-up does not exceed Rs. 5 M 10% Where mark-up exceeds Rs.5 M but does not exceed Rs.25 M 12.5% Where mark-up exceeds Rs.25 M 15% The rate of minimum tax is being enhanced from 1% to 1.25% of turnover. It is proposed that the normal tax regime be reintroduced for land developers and builders. The levy of super tax on the income of Banking Companies and other persons is being extended to the tax year Every distributor, dealer, wholesaler while making sales to retailers on sales of various items such as electronic goods, cigarettes, etc. is required to collect withholding tax at the rate of 0.5% of the amount of sales. The scope of this withholding tax is being extended to batteries

8 COMMENTS ON AMENDMENTS PROPOSED VIDE FINANCE BILL 2017 IN THE INCOME TAX ORDINANCE, FAST MOVING CONSUMER GOODS CHANGES IN DEFINTION AND REDUCTION IN TAX WITHHOLDING RATE. Section 2 (22A) & First Schedule Part III Division III 1.1 The definition of fast moving consumer goods have been proposed to be amended to exclude durable goods supplied in retail marketing as per daily demand of consumers. 1.2 The rate of with-holding (on sale / supply of fast moving consumer goods) is presently 3% and 3.5% respectively for companies and non-companies distributors of fast moving consumer goods. In these cases, the rate of tax with-holding is proposed to be reduced to 2% and 2.5% respectively. 2. EXTENSION OF SCOPE OF OFFICER OF INLAND REVENUE. Section 2 (38A), Sections 207 & The definition of Officer of Inland Revenue has been proposed to be extended to include new income tax authorities. Presently the officer of Inland Revenue means any Additional Commissioner Inland Revenue, Deputy Commissioner Inland Revenue, Assistant Commissioner Inland Revenue, Inland Revenue Officer, Inland Revenue Audit Officer or any other officer, however designated or appointed by the Board for the purposes of this Ordinance. The Bill seeks to include District Taxation Officer, Assistant Director Audit, as well in the ambit of Officer of Inland Revenue. 2.2 The Bill further proposed to insert two new income tax authorities in Section 207 and 208 to include: (a) (b) District Taxation Officer, and Assistant Director Audit 7

9 3. INTRODUCTION OF CONCEPT OF START UP Section 2 (62), Second Schedule Part I Clause (144), Part IV Clause (11A) sub-clause (xxix) 3.1 A new definition of Startup is being introduced which means a business of resident individual, AOP or a company incorporated or registered in Pakistan on or after first day of July, 2012 and the person is engaged in or intends to offer technology driven products or services to any sector of the economy provided that the person is registered with and duly certified by the Pakistan Software Export Board (PESB) and having turnover of less than one hundred million in each of the last five tax years. 3.2 Tax exemption is being accorded to profits earned by such start-ups for a period of three years ion Clause (144) of Part I of Second Schedule. 3.3 Moreover, exemption from levy of minimum tax is provided in Part IV Clause (11A) sub-clause (xxix). 3.4 Furthermore exemption from withholding tax (as recipient) is also being accorded to such start-ups in Clause (43F) of Part IV of Second Schedule. 4. CONTINUATION OF THE APPLICABILITY OF SUPER TAX TO TAX 5. YEAR 2017 AS WELL BESIDE TAX YEAR 2015 AND Section 4B 5.1 Vide Finance Act 2015, Super Tax was levied for the Tax Year 2015 for rehabilitation of temporarily displaced persons being a one-time tax payable for the Tax year 2015 only. Again, vide Finance Act 2016, the levy was extended for the Tax Year 2016 as well and now vide Finance Bill 2017, the levy of Super Tax has been extended for Tax Year 2017 as well. 5.2 The levy is applicable to a banking 4% of the income and also to persons, other than a banking company, having income equal to or exceeding Rs % of income. The income for this purpose is arrived at after deduction depreciation and brought forward losses. 5.3 The continuation of this tax for rehabilitation of temporarily displaced person on the part of the Government shakes its confidence of taxpayers as this amount is not likely to be incurred for the purpose for which it is being appropriated. 8

10 5.4 It is more pertinent that if any tax is levied and collected for any specific purpose that is to say that for temporarily displaced persons the funds collected and utilized should be made public after audit which will facilitate and motivate participation of this tax regime and enhanced transparency. 6. TAX ON UNDISTRIBUTED RESERVES Section 5A Vide Finance Act 2015, tax on undistributed reserves was levied on every public company other than a scheduled bank or a modaraba, that derives profits for a tax year but does not distribute cash dividends within six months of the end of the said tax year or distributes dividends to such an extent that its reserves, after such distribution, are in excess of hundred percent of its paid up capital, so much of its reserves as exceed hundred per cent of its paid up capital. The provision was not applicable in case a public company which distributes profit equal to either forty per cent of its after tax profits or fifty per cent of its paid up capital, whichever is less, within six months of the end of the tax year. The Bill proposes that for tax year 2017 and onwards, a tax shall be imposed at the rate of ten percent, on every public company other than a scheduled bank or a Modaraba, that derives profit for a tax year but does not distribute at least forty percent of its after tax profits within six months of the end of the tax year through cash or bonus shares. The Bill therefore seeks two changes; (a) (b) that the condition of having reserve of more than share capital is replaced with the condition of distribution of at-least 40% of after tax profits within six months of the end of tax year; and the issue of bonus shares have been included in the ambit of distribution. This change is likely to have a positive impact on the stock exchange as the companies are likely to distribute its profits amongst the shareholders and small shareholders are likely to have cash inflow in the shape of dividends. 7. TAXATION OF BUILDERS & LAND DEVELOPERS: Sections 7C, 7D and Vide Finance Act 2016, a fixed tax on builders and developers was levied on the basis of developed or built up area at different rates for various cities across the country. Now the Bill proposes that the normal tax regime be replaced for land developers and builders. 9

11 7.2 Amendment also provides and restricts the scope for applicability in the case of projects undertaken for development and sale of residential, commercial or other plots initiated and approved. (a) (b) (c) during tax year 2017 only; for which payment under rule 13S of the Income Tax Rules, 2002 has been made by the developer during tax year 2017; the Chief Commissioner has issued online schedule of advance tax installments to be paid in accordance with rule 13ZB (in the case of Builder) or 13U (in the case of Developer) of the Income Tax Rules, TAXATION OF SOFT LOANS TO EMPLOYEES BY EMPLOYERS Section 13 sub-section (7) 8.1 A present soft loan (free of interest / markup) exceeding Rs. 500,000 provided by an employer to an employee is treated as a perquisite and is subjected to tax in the hands of the employee. 8.2 The Bill proposes to enhance this limit of interest free loans from the existing Rs. 500,000 to 1 million rupees. 9. CAPPING ON MARKETING EXPENSES OF PHARMACEUTICAL MANUFACTURERS Section 21 Clause (o) 9.1 Vide Finance Act 2016 a new provision of law providing for capping of marketing expenses incurred by pharmaceutical manufacturers were introduced with the upper limit of being in excess of 5% of its turnover were introduced stating that is any expenditure in respect of sales promotion, advertisement and publicity in excess of five per cent of turnover incurred by pharmaceutical manufacturers. 9.2 The Bill proposes to increase the limit for expenditure incurred by such companies on sales promotion, advertisement and publicity from 5% to 10% of turnover. 10. DEPRECIATION ALLOWANCE ON JOINTLY OWNED DEPRECIABLE ASSETS. Section 22 (15) The Bill introduces to provides tax neutrality of depreciation on jointly owned assets by a taxpayer and an Islamic institution licensed by the state Bank of Pakistan or Securities and Exchange Commission of Pakistan. 10

12 It provides that where a depreciable asset is jointly owned by a taxpayer and an Islamic financial institution licensed by the State Bank of Pakistan or Securities and Exchange Commission of Pakistan, as the case may be, pursuant to an arrangement of Musharika financing or diminishing Musharika financing, the depreciable asset shall be treated to be wholly owned by the taxpayer. Thus depreciation thereon will be available to the taxpayer. 11. EMPOWERING FBR. Explanation to Section 53(2) 10.1 Heretofore, the Federal Government was empowered pursuant to the approval of the Economic Coordination Committee to take immediate action for the purposes of national security, natural disaster, national food security in emergency situations, protection of national economic interests in situations arising out of abnormal fluctuation in international commodity prices, removal of anomalies in taxes, development of backward areas implementation of bilateral and multilateral agreements or granting an exemption from any tax imposed under this Ordinance including a reduction in the rate of tax imposed under this Ordinance or a reduction in tax liability under this Ordinance or an exemption from the operation of any provision of this Ordinance to any international financial institution or foreign Government owned financial institution operating under an agreement, memorandum of understanding or any other arrangement with the Government of Pakistan, by notification in the official Gazette, make such amendment in the Second Schedule by (a) (b) (c) adding any clause or condition therein; omitting any clause or condition therein; or making any change in any clause or condition therein, as the Government may think fit, and all such amendments shall have effect in respect of any tax year beginning on any date before or after the commencement of the financial year in which the notification is issued The Bill seeks to empower the Board with the approval of Minister Incharge of the Federal Government to exercise such power. Thus beside other, the Board may issue notifications with regard to shortage of its targeted budget Thus instead of vesting of power to the National Assembly, the Federal Government has delegated this power to the FBR with the approval of Minister Sub-Section (4) of this Section provides any notification issued under sub- Section (2) of Section 53 after the commencement of the Finance Act, 2015, shall, if not earlier rescinded, stand rescinded on the expiry of the financial year in which it was issued. 11

13 10.5 Further, the Bill seeks to insert two provisos to sub-section (4) to read as: "Provided that all such notifications, except those earlier rescinded, shall be deemed to have been in force with effect from the first day of July, 2016 and shall continue to be in force till the thirtieth day of June, 2018, if not earlier rescinded: Provided further that all notifications issued on the first day of July, 2016 shall continue to be in force till the thirtieth day of June, 2018, if not earlier rescinded 10.6 Thus the Bill seeks to provide the enforceability of the notification issued on first day of July 2016 to continue till 20 th day of June 2018 instead of its expiry on the respective year end as provided in sub-section (4) before the amendments proposed by the Bill. 12. SHIFITING OF SECTION 64A AND 64B IN THE CLASSIFICATION OF DEDUCTIBLE ALLOWENACES FROM TAX CREDIT. Section 64A AND 64B The Bill seeks to shift the provision of Section 64A and 64B relating to deductible allowance for admissibility of profit on debt for house loan and deductible allowance for education expenses from the classification of Tax Credit to Deductible Allowances in order to bring it in the proper classification. The Bill further proposes to increase the threshold of deductible allowances on tuition fee paid by individuals from Rs. One million to Rs. One and half million. It is important to note that this benefit is not available to those who fall in final tax regime or where minimum tax applies. On the other hand, they are subjected to pay tax while incurring education expenses where they have to pay tax on tuition fee exceeding Rs. 200,000 in a year on each child. 13. TAX CREDIT LIMIT FOR HEALTH INSURANCE INCREASED Section 62A 13.1 Vide Finance Act, 2016 tax credit in respect of investment in health insurance was announced whereby a resident person other than a company is entitled to a tax credit for a tax year in respect of any health insurance premium or contribution paid to any insurance company registered by the Securities and Exchange Commission of Pakistan under the Insurance Ordinance, 2000 (XXXIX of 2000), provided the resident person is deriving income chargeable to tax under the head salary or income from business and the amount of a person s tax credit allowed under sub- Section (1) for a tax year is to be computed according to the following formula, namely: (A/B) x C 12

14 where A B is the amount of tax assessed to the person for the tax year before allowance of tax credit under this Section; is the person s taxable income for the tax year; and C is the lesser of (a) the total contribution or premium paid by the person referred to in sub- Section (1) in the year; (b) five per cent of the person s taxable income for the year; and (c) one hundred thousand rupees. ; 13.2 The Bill seeks to increase the threshold of maximum of Rs. 100,000 to Rs. 150, This benefit is of no use for individuals who falls in final tax regime or where minimum tax in compulsory in the respective cases of taxpayers e.g. income from dividend, profit on debt, commission, supply of goods, execution of contracts, exports etc. 14. TAX CREDIT TO A PERSON REGISTERED UNDE THE SALES TAX ACT, Section 65A At present 3% tax credit is available to a manufacturer registered under Sales Tax who is making over 90% sales to Registered Sales Tax Persons. The Bill proposes to omit this Section and thus withdrawing the above benefit. 15. EXTENSION OF PERIOD FOR TAX CREDIT UPON ENLISTMENT. Section 65C At present tax credit on new enlistment at the stock exchange equal to 20% of tax payable is available for is available for 2 years. The Bill seeks to extend this period to 3 years. However this tax credit will be subject to 20% in the first year and 10% in the second and third year. 13

15 16. NO CHANGES IN THE VAUATION OF PROPERTIES AT VALUE FIXED BY THE FBR. Section 68 There are no changes proposed in the Bill with respect to the fair market value of any property or rent, asset, service, benefit or perquisite at a particular time is defined as the price which the property or rent, asset, service, benefit or perquisite would ordinarily fetch on sale or supply in the open market at that time and rule 228 of the Income Tax Ordinance 2002 provided guidelines regarding the valuation of assets. 17. DIVIDENDS PAID BY NON-RESIDENT COMPANY TO RESIDENT PERSONS NOT TO BE TREATED AS INCOME FROM BUSINESS OR INCOME FROM OTHER SOURCES Section 94 Companies earning dividends are allowed special tax rates which are classified as Income from other sources; however dividends of resident companies from a nonresident investee companies were allowed to classify dividends income under the head income from Business or Income from other Sources as the case may be. The Bill proposes to withdraw this provision and this will eliminate anomaly of tax rates applicable to business income which is higher than tax rate applicable to dividends. 18. SPECIAL PROVISIONS RELATED TO THE PRODUCTION OF OIL AND NATURAL GAS Section 100 Under the provisions of sub-section (2) of Section 100 of the Income Tax Ordinance, 2001 profits and gains attributable to the production of petroleum including natural gas discovered before 24 th day of 1954 from Sui Gas field was not calculated in accordance with Rules as contained in Part I of the Fifth Schedule of Income Tax Ordinance, The proposed deletion of sub-section (2) of Section 100 of the Income Tax Ordinance, 2001 will now bring the taxability of reserves of petroleum and natural gas discovered before 24 th day of 1954 from Sui Gas field are being brought at par, in order to provide level playing field. 19. TAX CREDIT FOR CERTAIN PERSONS Section 100C Approved Non-Profit Organizations are allowed a tax credit equal to 100% of the tax payable including minimum and final taxes under the law if they are compliant of tax return filing, with-holding tax deduction and collection and statements filing, however in order to check proper utilization of funds, it has been proposed that the administrative and management expenses of that NPO should not exceed 15% of the 14

16 total receipts. In case of breach of threshold of 15%, the approved NPO may not be able to enjoy 100% tax credit and may be subjected to tax as applicable to the companies. In our view, it is harsh and discouraging for the cause of Philanthropy and NPO s operating for social development of the country employing several qualified and experienced personnel in education and health sectors. Furthermore, NPO s are subjected to 10% if it possesses surplus funds which are defined as under: (1A) notwithstanding anything contained in sub-section (1), surplus funds of nonprofit organization shall be taxed at a rate of ten percent. (1B) For the purpose of sub-section (1A), surplus funds mean funds or monies: (i) not spent on charitable and welfare activities during the tax year; (ii) received during the tax year as donations, voluntary contributions, subscriptions and other incomes; (iii) or more than twenty five percent of the total receipts of the non-profit organization received during the tax year; (iv) are not part of restricted funds: Explanation: For the purpose of this subsection, restricted funds 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. In our view, taxing NPO s on the basis of surplus funds which are retained for capacity building purposes like constructions of Hospitals, educational and vocational facilities that is spread over several number of years will be discouraged. 20. INCREASE IN MINIMUM TAX RATES Section 113 Minimum tax chargeable on declared turnover of business has been increased from 1% to 1.25%. Reference of 1% as appearing in Section 113(1)(e) of the Ordinance 2001 has been brought in line with 1 st Schedule. 21. PROVISIONAL ASSESSMENTS AND ITS EXPRESSIONS IN OTHER SECTIONS Section 114, 115, 116(2A), 121, 122, 122C, 127 and 137 The Commissioner was empowered to frame provisional assessment to the best of his judgment where a person fails to furnish his return of income under the provision of Section 122C of the Income Tax Ordinance, This provision was originally introduced vide Finance Amendment Ordinance, 2009 and amended from time to time and created plethora of appeals and disputes which un-necessarily burdened the appellate forums with undue work load and was a failed revenue measure that has also been admitted in the budget speech. Since, the tax officials created huge tax 15

17 demands under Section 122C on ex-parte decisions on the basis of banks/property transactions without verifying the tax returns/wealth statements of the existing tax payers which created a situation of double jeopardy. The Bill proposes to omit the provision with respect to provisional assessment under Section 122C and its expression in other relevant Sections. In our view, the proposed deletion of Section 122C along with referred expressions in Section 114 (Returns of Income), Section 116(2A) (Wealth Statement), Section 121(1)(ab) (Best Judgment Assessment-Enabling Power to frame assessments for non-filers despite issuance of notice to file returns). Section 122 (Amendment of Assessments), Section 127 (Commissioner Appeals) and Section 137(2) (Proviso and sub-proviso), (Due date for payment of tax with respect to assessment framed under Section 122C) will pave the way in promoting and encouraging existing taxpayers besides will reduce tendency of creating frivolous tax demands and undue litigation. 22. PERSONS NOT REQUIRED TO FURNISH RETURN OF INCOME Section 115 Under the provisions of Section 114(1)(b) of the Ordinance, 2001, among others, the following persons are required to furnish tax returns, if owns: (iv) (v) (vi) Immovable property with a land area of 500 sqr. or more in a rating area Flat having covered area of 2500 square feet or more located in rating area Owns a motor vehicle having engine capacity of above 1000 CC The proposed amendment in Section 115(3) of the Ordinance, also allowed exemptions in the above cases to the following persons: a widow, an orphans below 25 years of age, a disabled person, and ownership of immovable property of a non-resident person, with respect to immovable property with land area of 250 square yards or more within municipal limits /cantonment area. 16

18 23. WEALTH STATEMENTS Section 116 Under the provision of Section 116(3) of the Ordinance, a person is allowed to revise his wealth statement with specified conditions at any time before an assessment for the tax year to which it relates is framed under sub-sections (1) or (4) of Section 122. The proposed amendment in Section 116(3) now limits the revision option before the issuance of show cause notice under Section 122(9) of the Ordinance, In our view, the proposed amendment will discourage voluntary revision. 24. EXTENSION OF TIME FOR FURNISHING RETURNS AND OTHER DOCUMENTS Section 119 The proposed insertion of proviso in Section 119(4) of the Ordinance allows right of review before the Chief Commissioner where the Commissioner has not granted extension for furnishing returns for the reasons of: (a) Absence from Pakistan, (b) Sickness or other misadventure or (c) Any other reasonable cause, 25. APPOINTMENT OF THE APPELLATE TRIBUNAL Section 130 Composition of Appellate Tribunal Inland Revenue comprises of a Judicial Member and an Accountant Member. Provision of Section 130(3)(c) of the Ordinance allowed appointment of a Judicial Member from the Inland Revenue Service in BS-20 or above. Proposed deletion of sub-clause (c) of sub-section (3) of Section 130 now prohibits such appointment. This was the demand of Bar Associations which seems to have been accepted. 26. RECOVERY OF TAX FROM PERSONS ASSESSED IN AZAD JAMMU & KASHMIR Section 146 Consequent upon annexation of Gilgit-Baltistan within the Federal Territory of Pakistan, the tax provisions as applicable to Azad Jammu & Kashmir under the provision of Section 146 of the Ordinance will also be applicable in Gilgit-Baltistan. 17

19 27. ADVANCE TAX PAID BY THE TAXPAYER- THRESHOLD OF TAXABLE INCOME IN CASE OF INDIVIDUAL Section 147 The Bill seeks to relax the application of provisions of advance taxation under Section 147 for individuals by increasing basic threshold of five hundred thousand rupees to one million rupees. After the proposed amendment individuals having latest assessed taxable income of less than one million rupees will not have to pay quarterly advance tax under Section 147. Nevertheless the provisions of this Section are inapplicable in the cases of taxpayers whose income is liable to tax under final tax regime. 28. IMPORTS OF FERTILIZER BY FERTILIZER MANUFACTURERS Section 148 Presently tax deducted under Section 148 is adjustable advance tax in case of import of fertilizer by fertilizer manufacturers but now the Bill seeks to omit this item (import of fertilizer by fertilizer manufacturer) from the exclusion clause of sub- Section (7) of Section 148 and thus henceforth the tax deducted at import stage in case of fertilizers by fertilizer manufacturers will also be final tax. 29. PAYMENTS TO NON-RESIDENTS Section 152 Certain amendments in Section 152 Payments to non- residents have been proposed, i.e., 29.1 In sub-section (1AAA) reference of Division IIIA is proposed to be replaced as Division IIA in order to correct an earlier typographical error A new proviso is proposed to be inserted in sub-section (1B) to be read as follows; Provided that the provisions of this sub-section shall not apply in respect of a non-resident person unless he opts for the final tax regime. Currently tax deducted on payments made to non-resident on execution of contracts falls under final tax regime; however with the insertion of this proviso non-residents executing contracts in Pakistan will fall in the normal tax regime and tax withheld at source in case of such non-residents under clause (1A) of Section 152 shall be adjustable advance tax unless any nonresident opt for the same to be treated as final tax. 18

20 29.3 Serial number of clauses of sub-section (2A) of Section 152 are proposed be replaced as (a), (b) and (c) in place of (i), (ii) and (iii) At present a person making payments to non-resident in respect of execution of contract is required to deduct tax the specified rates and there is no provision under which a non-resident can obtain exemption from withholding of same or deduction of tax at reduced rate. The Bill seeks to address same for non-resident contractors executing contracts through their permanent establishment in Pakistan, by substituting sub-section (4A) as follows: The Commissioner may, on application made by the recipient of payment referred to in sub Section (1A) having permanent establishment in Pakistan, or by a recipient of payment referred to in sub-section (2A), as the case may be, and after making such inquiry as the Commissioner thinks fit, allow by order in writing, in cases where the tax deductible under sub-section (1) or sub-section (2A) is adjustable, any person to make the payment without deduction of tax or deduction of tax at a reduced rate." Proposed substitution includes reference of recipient of payment under sub- Section (1A), i.e., non-resident person receiving payment on the execution of; (a) (b) (c) a contract or sub-contract under a construction, assembly or installation project in Pakistan, including a contract for the supply of supervisory activities in relation to such project; or any other contract for construction or services rendered relating thereto; a contract for advertisement services rendered by T.V. Satellite Channels, This insertion will allow non-resident person executing contract to opt for exemption of withholding tax if they have a permanent establishment in Pakistan. This seems to have been inserted in light of CPEC. 30. PAYMENTS FOR RENDERING OR PROVIDING OF SERVICES Section 153 The Bill proposes to insert a proviso after clause (c) of sub-section (1) of Section 153 as follows in order to bring into ambit of withholding taxes the services charges being paid to an agent / third person for collecting payment on behalf of person rendering or providing services; Provided that where the recipient of the payment under clause (b) receives the payment through an agent or any other third person and the agent or, as the case may be, the third person retains service charges or fee, by whatever name called, from the payment remitted to the recipient, the agent or the 19

21 third person shall be treated to have been paid the service charges or fee by the recipient and the recipient shall collect tax along with the payment received. ; Through the insertion of this Section a person receiving payment from an agent or third person shall be liable to collect the tax on services charges or other amounts being paid to that third person services charges at the time of receiving payment in respect of services rendered or provided by him. 31. WITHHOLDING TAX STATEMENTS Section 165 A new sub-section (2A) is proposed to be inserted in Section 165 (2A) Any person who, having furnished statement under sub-section (1) or sub-section (2), discovers any omission or wrong statement therein, may file a revised statement within sixty days of filing of statement under sub-section (1) or sub-section (2), as the case may be. ; Currently under Section 165 a person withholding taxes under the Ordinance is required to file monthly withholding tax statement in the prescribed form within fifteen days of end of each month with the commissioner and there is no option of voluntary rectification of errors or omissions in the statement filed with commissioner. With the insertion of this sub-section, the withholding agents may now file revised statement within sixty days of filing of original statement. 32. FURNISHING OF INFORMATION BY FINANCIAL INSTITUTIONS INCLUDING BANKS Section 165B In order to widen the scope of information required to be submitted by the financial institutions words "or any other reportable are also proposed to be inserted in sub-section (1) of Section 165, after the word "non-resident". Further sub-section (3) is proposed to be inserted read as follows; "(3) for the purpose of this Section, the terms "reportable person" and "financial institution" shall have the meaning as provided in Chapter XIIA of the Income Tax Rules, Currently financial institutions are required to make arrangements to provide information regarding non-resident persons to the Board in the prescribed form and manner for the purpose of automatic exchange of information under bilateral agreement or multilateral convention. Through the proposed amendment financial institutions may be required to provide information for other persons as may be defined by the Board in addition to non-residents. 20

22 33. OBTAIN INFORMATION OR EVIDENCE APPOINTMENT OF COST AND MANAGEMENT ACCOUNTANTS Section 176 At present under Section 176 (1) (c) the Federal Board of Revenue may only appoint a firm of Chartered Accountants to conduct audit under Section 177 or obtain information. The Bill proposes to insert words or a firm of cost and management accountant as defined under the Cost and Management Accountants Act, 1966 (XIV of 1966) in clause (c) of sub-section (1) of Section 176 in addition to firm of chartered accountants. Consequently henceforth the Board or Commissioner can also appoint a firm of cost and management accountants to carry out tax audit or other information / evidence collection assignments. 34. OFFENSES AND PENALTIES:- RECORDS AND INFORMATION UNDER SECTION 108 & 165 Section 182 Through the Bill new insertions are proposed in the table of Section 182 in order to specify penalties in respect of following; Any person who fails to maintain records of transaction between associates under Section 108 Any person who fails to furnish the information required or to comply with any other term of the notice served under Section 108 (transactions with associates) Any reporting financial institution or reporting entity who fails to furnish information or country-bycountry report to the Board as required under Section 107, 108 or 165B within the due date Any person who fails to keep and maintain document and information required under Section 108 or Income Tax Rules, 2002 Penalty of ten thousand rupees or five per cent of the amount of tax on income whichever is higher. Penalty of Twenty-five thousand rupees for the first default and fifty thousand rupees for each subsequent default. Penalty of two thousand rupees for each day of default subject to a minimum penalty of twenty five thousand rupees. 1% of the value of transactions, the record of which is required to be maintained under Section 108 and Income Tax Rules, Section 108 proposed to be inserted after Section 174 Section 108 proposed to be inserted after Section 176 A new clause 17 added to cover Section 107, 108 and 165B A new clause 18 added These penalties are aimed at monitoring related party and oversees transaction that may have been used for manipulations, tax evasions etc. 21

23 35. PROSECUTION FOR NON-COMPLIANCE WITH CERTAIN STATUTORY OBLIGATIONS Section 191 Amendments in clauses (a) and (c) of sub-section (1) of Section 191 are proposed whereby following persons shall also be treated to have committed an offence punishable on conviction with a fine or imprisonment for a term of not exceeding one year or both; a) A person who fails to comply with notice under sub-section (4) of Section 114, i.e., a person who fails to file return if required by the commissioner. b) A person who fails to comply with obligations under Chapter XII of the Income Tax Ordinance. 36. DEFAULT SURCHARGE TAX PAYER HAVING SPECIAL TAX YEAR Section 205 Section 205 (1B) explains the mechanism for calculation of default surcharge which addresses particularly the taxpayers having normal tax year ; however for persons having special tax year this becomes confusing therefore a proviso is proposed in sub-section (1B) of Section 205 namely: Provided that in the case of person having a special tax year, the default surcharge shall be calculated on and from the first day of the fourth quarter of the special tax year till the date on which assessment is made or the last day of special tax year, whichever is earlier. ; This proviso will remove the ambiguity in respect of calculation of default surcharge in case advance tax under Section 147 paid by a person having special tax year is less than ninety percent of tax chargeable for the relevant tax year. 37. ADVANCE RULING NON-RESIDENT HAVING PERMANENT ESTABLISHMENT Section 206A Currently there is a provision that the Board may issue advance ruling on application of non-resident and this ruling shall have priority in case there is inconsistency between a circular and the advance ruling except in case of non-resident having permanent establishment in Pakistan. This Proviso in sub-section (3) of Section 206A related to exclusion of non-resident with permanent established is proposed to be omitted. With this omission sub-section (3) will be applicable in same spirit as for all the non-resident including those having permanent establishment in Pakistan. 22

24 38. INCOME TAX AUTHORITIES Section 207 & 208 The Bill seeks to introduce two new designations i.e., District Taxation Officer and Assistant Director Audit in sub-section (1) of Section 207 Income Tax Authorities in addition to the line of authorities already mentioned in the Section. Relevant insertions at other subsection of Section 207 Section 208 are also prosed for the sake of consistency in the relevant provisions of law. 39. DISCLOSURE OF INFORMATION BY PUBLIC SERVANT Section 216 Information provided under the Income Tax Ordinance 2001 is treated as confidential and no public servant is allowed to disclose the same except in the specified circumstance. Sub-Section (3) of Section 216 specifies the persons, circumstances and information that may be disclosed. A new clause (k) is proposed to be inserted in sub-section (3) to be read as; Employees Old Age Benefit Institution in respect of information regarding salaries in statements furnished under Section 165; Further insertion of words "Minister Incharge of" is proposed in clause (b) of sub- Section (5), to specify the representative of Federal Government with whose approval the Board may publish any information / particular. 40. REWARD TO OFFICERS AND OFFICIALS OF INLAND REVENUE Section 227A An amendment is proposed in Section 227A whereby officer may be allowed reward not only in the cases involving concealment or evasion of income tax and other taxes but also in case of other meritorious services. Accordingly following insertions are proposed in Section 227A, in sub-section (1), (a) (b) after the word cases, occurring for first time, the figure "(i)" shall be inserted; and after the word "cases", occurring for the second time, the expression "and (ii) for other meritorious services" shall be inserted; 23

25 41. REWARD FOR WHISTLEBLOWERS Section 227B Previously, under Section 227B of the Income Tax Ordinance, 2001, there were four grounds upon which claim for reward for whistleblowers could be rejected. However, the Bill has brought about an additional ground to be included as (aa) in sub-section (3) which states the following: The claim for reward by the whistleblower shall be rejected, if (aa) the information is not supported by any evidence. 42. CONSTITUTION OF DIRECTORATE-GENERAL FOR DIFFERENT FUNCTIONS Sections 230D and 230E The Bill has introduced two new Sections, Section 230D and 230E regarding the constitution of Directorate-Generals, which would be administering the following departments; I. Broadening of Tax Base; and II. Transfer Pricing The Sections stipulate that the Directorate-Generals for both the aforementioned departments shall consist of a Director-General and as many Directors, Additional Directors, Deputy Directors, Assistant Directors and such other officers as the Board may, by notification in the official Gazette, appoint. Furthermore, the Directorate- General of transfer pricing would be required to perform the transfer pricing audit. For elaboration, transfer pricing audit refers to the audit for determination of transfer price at arm's length in transactions between associates and is independent of audit under Section 177, 214C or 214D which is audit of the income tax affairs of the taxpayer. 43. ADVANCE TAX ON PRIVATE MOTOR VEHICLES Section 231B Formerly, Section 231B of the Income Tax Ordinance 2001 had defined a few institutions responsible for the collection of advance tax (3% of the value of the motor vehicle) at the time of leasing of a motor vehicle to a non-filer. By virtue of the amendment introduced by the Bill, the following changes have been made: Non-banking finance institutions are now also required to collect advance tax at the aforementioned rate upon leasing motor vehicles to non-filers; and 24

26 Both Shariah compliant and conventional institutions are covered in the ambit of this Section as tax withholding agents by reason of this amendment; and Both nature of leases, whether ijara or conventional, are covered in the ambit of this Section for the purpose of collection of advance tax. 44. COLLECTION OF TAX BY STOCK EXCHANGE REGISTERED IN PAKISTAN Section 233A Section 233A of the Income Tax Ordinance 2001 stipulates that stock exchanges registered in Pakistan are required to collect advance tax from its members on purchase and sale of shares in lieu of the commission earned by such members. Heretofore, this tax was considered as adjustable. However, by virtue of the Bill, it will now be treated as final tax. Conversely, the treatment of such tax as final is ironic to the premise that it is still referred to as advance tax in sub-section (1) of Section 233A, which also needs to be properly rephrased to avoid any legal ambiguity. 45. ADVANCE TAX COLLECTABLE FROM CNG STATIONS Section 234A Section 234A of the Income Tax Ordinance 2001 states that CNG stations are required to pay advance tax at the specified rates on the amount of gas consumption bills charged. This tax is to be considered as the full and final discharge of liability. By virtue of this amendment, electricity bill paid by a CNG station will now also be treated as a final tax on the income of CNG station. Furthermore, an explanation has also been provided which elucidates that tax on income arising from consumption of gas is to be the tax which is inclusive of sales tax and all incidental charges. 46. ELECTRICITY CONSUMPTION Section 235 Section 235 of the Income Tax Ordinance, 2001 stipulates that advance tax should be collected at the specified rates on the amount of electricity bills of commercial and industrial consumers. The Bill clarifies that electricity consumption bill to be charged should be inclusive of sales tax and all incidental charges. Previously, in case of AOP and individual, tax collected on bills up to Rs 30,000 per month was treated as minimum tax. However, this requirement has now been relaxed by permitting tax collected on bills up to Rs 360,000 per annum to be considered as 25

27 minimum. Therefore, regardless of the monthly bills, summation of the annual bill will be taken into account further on. 47. DOMESTIC ELECTRICITY CONSUMPTION Section 235A Section 235A of the Income Tax Ordinance, 2001 requires that advance tax shall be collected on the amount of bill charged to domestic consumers at the following rates. The rate of tax to be collected under Section 235A shall be--- (i) 7.5% if the amount of monthly bill is Rs. 75,000 or more; and (ii) 0% the amount of monthly bill is less than Rs. 75,000. The Bill proposes to insert an explanation that the electricity bill to be charged to consumers should be inclusive of sales tax and all incidental charges. 48. ADVANCE TAX ON SALE, PURCHASE OR TRANSFER OF IMMOVABLE PROPERTY Sections 236C and 236K Section 236C and 236K of the Income Tax Ordinance, 2001 stipulate that persons responsible for registering and attesting the transfer of immovable property shall collect advance tax from the purchasers and sellers of property at the time of registration and attestation. By virtue of this amendment, now the authorities recording the transfer or sale are also required to collect advance tax at the time of recording the transfer. Moreover, if the property was disposed in the same year in which it was acquired in, the tax collected would be minimum tax. For the purpose, the following explanation is also added: Explanation: For the removal of doubt, it is clarified that the person responsible for registering, recording or attesting transfer includes person responsible for registering, recording or attesting transfer for local authority, housing authority, housing society, co-operative society and registrar of properties. In our view, this has widened the scope of collection of advance tax on purchase and sale of real estates as now land developers will also be required to perform as withholding agent. The proposed amendment is likely to generate additional tax revenues for the government and will discourage speculative trading of property files. 26