All
 

 

Just in:  

You are here: Home»Budget»Proposals 2012-13»SECP Income Tax Proposals for Finance Bill 2011

secp-logo

TEXT:

1. Corporate Income Tax rate should be reduced for Companies and listed companies.

EXISTING PROVISION

Schedule I, Part I, of Income Tax Ordinance, 2001

Division IB

The rate of tax imposed on the taxable income of Association of Persons for the tax year 2010 and onward shall be 25%.

Division II

(i) The rate of tax imposed on the taxable income of a company for the tax year 2007 and onward shall be 35%.

PROPOSED AMENDMENT/PROVISION

Schedule I, Part I, of Income Tax Ordinance, 2001

Division IB

The rate of tax imposed on the taxable income of Association of Persons for the tax year 2010 and onward shall be 25%.

Division II

(i) The rate of tax imposed on the taxable income of an Association of Persons (AoP), an Unlisted public and private company and a listed company from July 1, 2011 shall be as under:-

 

 


========================================================


Tax Year         Partnership   Unlisted public    Listed


(AOP)      and private    Company


Company


========================================================


2011                     27%         34%             33%


2012                     29%         33%             31%


2013                     31%         32%             29%


2014                     33%         31%             27%


2015 & onwards           35%         30%             25%


========================================================


 

 

RATIONALE FOR THE PROPOSAL

Rate of corporate income tax in Pakistan (35%) is highest if compared to global/regional rates.

Corporate tax rates worldwide continued to fall and moved from an average of 27.3% in 2007 to 24.99% in 2010.

Regional segments reflect the average corporate tax rate of OECD 24.94% and Asia 24.3%. In Asia all countries except Japan, have corporate tax rate lower than Pakistan as under;

 

 


=====================================================


S#      Name of Country                     Corporate


Tax Rate%


=====================================================


1       Bangladesh                               27.5


2       China                                      25


3       Hong Kong                                16.5


4       India                                   33.99


5       Indonesia                                  25


6       Japan                                   40.69


7       Kazakhstan                                 20


8       Korea                                    24.2


9       Malaysia                                   25


10      Philippines                                30


11      Singapore                                  17


12      Sri Lanka                                  35


13      Taiwan                                     17


14      Thailand                                   30


15      Average of 14 countries above           26.46


-----------------------------------------------------


Source: KPMG's Corporate and Indirect Tax Survey 2010


=====================================================


 

 

The corporate tax rate of 35% when compared to AoP tax rate of 25% is an incentive for converting limited companies into association of persons.

Listed companies reflect expansion and growth of businesses and should be incentivized to adhere to stringent reporting and disclosure standards under the Law.

Proposed increase in the rate of income tax for AoPs and reduction for companies (private and listed) will encourage corporatization and documentation of the economy.

Keeping all figures constant at tax year 2009 level, the resultant loss to national exchequer till tax year 2015,due to increase in tax rates for AOPs and decrease in rates for companies will be Rs. 24,104 million. (appendix-I)

Potential loss to the national exchequer will be offset against the increasing number of companies leading to enhanced government revenue through capital gain tax, increased collection of withholding taxes, dividend taxation and federal excise duty.

2. Amendment in section 62 of Income Tax Ordinance, 2001-Tax Credit on Investment in new shares

EXISTING PROVISION

Investment in shares. - (1) A person other than a company shall be entitled to a tax credit for a tax year in respect of the cost of acquiring in the year new shares offered to the public by a public company listed on a stock exchange in Pakistan where the person other than a company is the original allottee of the shares or the shares are acquired from the Privatization Commission of Pakistan.

(2) The amount of a person's tax credit allowed under sub-section (1) for a tax year shall be computed according to the following formula, namely: -

(A/B) x C

where -

A is the amount of tax assessed to the person for the tax year before allowance of any tax credit under this Part;

B is the person's taxable income for the tax year; and

C is the lesser of -

(a) the total cost of acquiring the shares referred to in sub-section (1) in the year;

(b) ten per cent of the person's taxable income for the year; or

(c) three hundred thousand rupees.

(3) Where -

(a) a person has been allowed a tax credit under sub-section (1) in a tax year in respect of the purchase of a share; and

(b) the person has made a disposal of the share within twelve months of the date of acquisition, the amount of tax payable by the person for the tax year in which the shares were disposed of shall be increased by the amount of the credit allowed.

PROPOSED AMENDMENT/PROVISION

Investment in shares. - (1) A person other than a company shall be entitled to a tax credit for a tax year in respect of the cost of acquiring in the year new shares offered to the public by a public company listed on a stock exchange in Pakistan where the person other than a company is the original allottee of the shares or the shares are acquired from the Privatization Commission of Pakistan.

(2) The amount of a person's tax credit allowed under sub-section (1) for a tax year shall be computed according to the following formula, namely: -

(A/B) x C

where -

A is the amount of tax assessed to the person for the tax year before allowance of any tax credit under this Part;

B is the person's taxable income for the tax year; and

C is the lesser of -

(a) the total cost of acquiring the shares referred to in sub-section (1) in the year;

(b) ten twenty percent cent of the person's taxable income for the year; or

(c) three Ten hundred thousand rupees.

(3) Where -

(a) a person has been allowed a tax credit under sub-section (1) in a tax year in respect of the purchase of a share; and

(b) the person has made a disposal of the share, within thirty-six months of the date of acquisition, the amount of tax payable by the person for the tax year in which the shares were disposed of shall be increased by the amount of the credit allowed.

Provided that tax payable by the person shall not be increased if the amount received on such disposal is simultaneously transferred to an Approved Pension Fund or Approved Income Payment Plan or is invested in a collective investment scheme for remaining period.

RATIONALE

Extension in the holding period to thirty-six months from twelve months will encourage long-term investment in redeemable investments such as mutual funds.

The amount of investment is also proposed to be increased to Rs. 1,000,000 and percentage of the person's taxable income for the year to 20% to encourage investment.

3. Tax Credit for Enlistment on a Stock Exchange in Pakistan

EXISTING PROVISION

Section 65C of Income Tax Ordinance, 2001

1) Where a taxpayer being a company opts for enlistment in any registered stock exchange in Pakistan, a tax credit equal to five per cent of the tax payable shall be allowed for the tax year in which the said company is listed.

PROPOSED AMENDMENT/PROVISION

Section 65C of Income Tax Ordinance, 2001

1) Where a taxpayer being a company opts for enlistment in any registered stock exchange in Pakistan, a tax credit equal to fifteen per cent of the tax payable shall be allowed for the tax year in which the said company is listed and subsequent four tax years.

RATIONALE FOR THE PROPOSAL

The existing tax credit incentive to a new listing company makes effective tax rate 33.25% only for one year.

The amount of this tax credit for enlistment is proposed to be raised to at least 15% of the tax payable, which will mean an effective tax rate of 29.75% instead of 35%.

Further, the tax credit should be for at least first five years of enlistment.

4. Exemption of Capital Gain Tax on gain on sale of any instrument of redeemable capital

EXISTING PROVISION

"--"

PROPOSED AMENDMENT/PROVISION

Clause 110 of Part I of Second Schedule of Income Tax Ordinance

"Any income chargeable under the head "capital gains", being income from the sale of any instrument of redeemable capital as defined in the Companies Ordinance, 1984 (XLVII of 1984), listed on any stock exchange in Pakistan derived by a taxpayer upto tax year ending on the thirtieth day of June, 2013."

RATIONALE FOR THE PROPOSAL

In order to develop corporate debt and the sukuk market, the capital gain tax applicable on gain on sale of the instruments of redeemable capital like TFCs, PPTFCs, Sukuk may be exempted till 2013.

5. Reduction in Withholding tax rate on Gold at import stage, if imported through Pakistan Mercantile Exchange Limited

EXISTING PROVISION

Clause (13G) (iv) of Part II of Second Schedule to the ITO, 2001.

(13G) Tax under section 148 on the following item shall be collected @ 1% of their import value as increased by customs-duty, sales tax and federal excise

duty, if any levied thereon:

iv. Gold;

v. Mobile telephone sets;

vi. Silver;

PROPOSED AMENDMENT/PROVISION

Clause (13G) (iv) of Part II of Second Schedule to the ITO, 2001.

(13G) Tax under section 148 on the following item shall be collected @ 1% of their import value as increased by [customs-duty, sales tax and federal excise

duty], if any levied thereon:

iv. Gold;

v. Mobile telephone sets;

vi. Silver;

Provided that if gold is imported by any corporate member of any commodity/mercantile exchange of Pakistan (the Commodity/Mercantile Exchange) for the purpose of trading at the Commodity/Mercantile Exchange then tax under section 148 on the import of gold shall be collected at the rate of 0.1 % of the import value.

RATIONALE FOR THE PROPOSAL

The tax on import of gold was imposed in FY 2006-07 @1% of the import value. Since the imposition of this tax, the volume of gold imported through proper channel has decreased drastically and the amount of tax collected under this head is also insignificant. Import of gold and related tax revenue of some years is as under;

 

 


===========================================================================


Description                 FY 06           FY 07        FY 08        FY 09


(till Jan)


===========================================================================


Quantity (Tola)         2,938,199         665,249        1,364          857


Value (Rs.)        36,332,800,685   8,827,722,883   26,579,920   19,993,920


Cust. Duty (Rs.)       86,475,649      19,249,900       39,786       12,500


Income Tax (Rs.)        5,926,157      90,661,341      265,949      199,939


Total taxes (Rs.)      92,401,806     109,911,241      305,735      212,439


---------------------------------------------------------------------------


Source: ICG, Karachi Airport, Karachi.


===========================================================================


 

 

It is proposed to tax the gold at the import stage @ of 0.1% of the import value provided that the gold is imported by a corporate member for trading at the Commodity Exchange. The proposed reduction in tax rate will encourage legally imported gold viable to compete with illegally imported gold.

As the Commodity Exchange provides a regulated market place to buy and sell gold at transparent market prices, it would discourage manipulation by gold traders in the open market.

It would promote documentation of trading of gold, in comparison to the current huge parallel economy in undocumented trading and resultantly, would increase Government revenues from documented import of gold.

6. Removal of CVT on Purchase of Instruments of Redeemable Capital

EXISTING PROVISION

Para 1 of Circular No. 6 of 2004 dated July 1, 2004:

"A registered stock exchange in Pakistan shall collect Capital value Tax (CVT) at the rate of 0.01% on transactions with effect from July 01, 2004, of the Purchase value of any modaraba certificates, or any instrument of redeemable capital as defined in the Companies Ordinance, 1984, or shares of a public company listed on a registered stock exchange in Pakistan transacted through its automated trading system in ready, future, provisional and other counter(s)."

PROPOSED AMENDMENT/PROVISION

Para 1 of Circular No. 6 of 2004 dated July 1, 2004:

Levy of Capital value Tax (CVT) on the Purchase of any modaraba certificates, or any instrument of redeemable capital imposed vide Circular No. 6 of 2004 is suggested to be withdrawn through a circular as done with respect to shares vide Circular No. 4 of 2009 dated July 18, 2009

RATIONALE FOR THE PROPOSAL

A registered stock exchange was obliged to collect CVT @ 0.01% on transactions w.e.f. July 01, 2004, of the Purchase value of any modaraba certificates, or any instrument of redeemable capital as defined in the Companies Ordinance, 1984, or shares of a public company listed on a registered stock exchange in Pakistan transacted through its automated trading system.

Circular No. 4 of 2009 dated July 18, 2009 withdraw the Capital Value Tax only on shares traded on the stock exchanges has been w.e.f. 1.7.2009.

To provide a level playing field and encourage trading in modaraba certificates and instruments of redeemable capital, the CVT on purchase of modaraba certificate and instruments of redeemable capital of a public company listed on a registered stock exchange should also be withdrawn.

The proposal has nominal effect on revenue receipt as trading in modaraba certificates and instruments of redeemable capital is nominal compared to trading in shares. Month-wise traded volume of Modaraba Sector and Total Volume at KSE is presented below:

 

 


========================================================


Months      Total Traded   Traded Volume   Traded Volume


Volume       Modarabas      Modarabas/


Total traded


Volume


========================================================


Jul-09     3,938,205,612       6,868,508           0.17%


Aug-09     3,198,696,215       7,543,288           0.24%


Sep-09     5,087,840,205      17,306,879           0.34%


Oct-09     4,714,774,494      11,408,855           0.24%


Nov-09     2,395,244,780       6,296,366           0.26%


Dec-09     2,699,999,192      13,208,534           0.49%


--------------------------------------------------------


Total     22,034,760,498      62,632,430           0.28%


========================================================


 

 

Total traded value of Modarabas for above mentioned 6 months is Rs. 129,716,844. CVT @ 0.01% on traded value of Rs. 129,716,844 comes to Rs. 12,971. (Source of traded value: www.khistocks.com)

 

 


==================================================


TRADING VOLUME & VALUE OF TFCs TRADED THROUGH BATS


==================================================


Month              Volume   Value (Rs.)     Amount


of CVT


==================================================


September 2010         45       196,173      19.62


October 2010           60       261,490      26.15


November 2010       1,002     4,984,853     498.49


December 2010      12,127    61,997,268   6,199.73


January 2011            -             -          -


February 2011           -             -          -


--------------------------------------------------


Total              13,234    67,439,784      6,744


==================================================


 

 

7. Amendment in the definition of "Mutual Fund" to include "Collective Investment Scheme" and National Investment (Unit) Trust

EXISTING PROVISION

Section 2 (35A) of Income Tax Ordinance, 2001

"Mutual Fund" means a mutual fund registered or approved by the Securities and Exchange Commission of Pakistan;

PROPOSED AMENDMENT/PROVISION

"Mutual Fund" or "collective investment scheme" means a mutual fund registered or approved by the Securities and Exchange Commission of Pakistan and National Investment (Unit) Trust;

RATIONALE FOR THE PROPOSAL

To synchronize the definition with the terms used in ITO.

Term "Collective Investment Scheme (CIS)" and NI(U)T has been used in following clauses of Second Schedule;

57(2) of Part 1;

47B of Part IV,

clause 11A (i) of Part IV

However, the existing definition does not cover CIS and NI(U)T.

Tax neutral proposal

8. Amendment in Part I, Division VII of First Schedule of Income Tax Ordinance, 2001

EXISTING PROVISION

[Table]

Part I, Division VII of First Schedule Provided that a mutual fund or a collective investment scheme shall deduct Capital Gains Tax at the rates as specified above, on redemption of securities as prescribed.

PROPOSED AMENDMENT/PROVISION

[Table]

Part I, Division VII of First Schedule Provided that a mutual fund or a collective investment scheme shall deduct Capital Gains Tax at the rates as specified above, on redemption of securities as prescribed.

RATIONALE FOR THE PROPOSAL

To provide a level playing field in investment channels, the mutual funds/ CIS should not be obligated to deduct and withhold CGT on redemption of securities in line with the requirements applicable on the investment made through the channel of brokers.

Rule 13H (1) &(3) of Part III, Chapter -II of IT Rules, 2002 require investors to calculate and pay CG tax on net capital gains after adjustment of losses against gains at year end (section 37A(5) of ITO 2001).

An AMC cannot verify to allow adjustment if there are any loss on redemption of securities of other mutual funds/companies. Thus deduction of CGT without adjusting losses is unfair to investors of mutual funds that create regulatory arbitrage, incentivizing investors to invest through broker vis-à-vis mutual funds since brokers neither are nor obligated to deduct CGT on redemption of securities.

Tax neutral proposal

9. Amendment in section 63(2) of Income Tax Ordinance, 2001- Tax credit for contribution in VPS

EXISTING PROVISION

The amount of a person's tax credit allowed under sub-section (1) for a tax year shall be computed according to the following formula, namely: -

(A/B) x C

Where.-

A is the amount of tax assessed to the person for the tax year, before allowance of any tax credit under this Part;

B is the person's taxable income for the tax year; and

C is the lesser of -

(i) the total contribution or premium referred to in sub-section (1) paid by the person in the year; or

(ii) twenty per cent of the eligible person's taxable income for the relevant tax year; Provided that an eligible person joining the pension fund at the age of forty-one years or above, during the first ten years starting from July 1, 2006 shall be allowed additional contribution of 2% per annum for each year of age exceeding forty years. Provided further that the total contribution allowed to such person shall not exceed 50% of the total taxable income of the preceding year; or

(iii) five hundred thousand rupees.]

PROPOSED AMENDMENT/PROVISION

The amount of a person's tax credit allowed under sub-section (1) for a tax year shall be computed according to the following formula, namely: -

(A/B) x C

Where.-

A is the amount of tax assessed to the person for the tax year, before allowance of any tax credit under this Part;

B is the person's taxable income for the tax year; and

C is the lesser of -

(i) the total contribution or premium referred to in sub-section (1) paid by the person in the year; or

(ii) twenty per cent of the eligible person's taxable income for the relevant tax year; Provided that an eligible person joining the pension fund at the age of forty-one years or above, during the first ten years starting from July 1, 2006 shall be allowed additional contribution of 2% per annum for each year of age exceeding forty years. Provided further that the total contribution allowed to such person shall not exceed 50% of the total taxable income of the preceding year; or

(iii) five hundred thousand rupees.]

RATIONALE FOR THE PROPOSAL

To provide a level playing field to retirement schemes; VPS vis-a-vis employer sponsored schemes by removing rupee restriction of Rs. 500,000..

The existing cap on contribution to VPS (lesser of 20% of income or Rs. 500,000) render VPS a non-competitive alternative for the following tax free contribution permissible to employer in the retirement schemes:-

Superannuation Fund: Up to 20% of employee's salary -rule 110(1) of IT Rules.

Gratuity fund: 8.33 % of employee's salary -rule 117(1) of IT Rules.

Provident Fund: up to 10% of salary or Rs 100,000, which-ever is lower- clause 3(a) of Part I of Sixth Schedule of ITO, 2001.

Tax free Contribution to these schemes could be even higher than 30% in a particular year if the actuarial valuations so require.

Tax neutral proposal

10. Insertion of a new clause 13A in Part 1, Second Schedule of Income Tax Ordinance, 2001 to allow transferability of funds in retirement schemes

EXISTING PROVISION

None

PROPOSED AMENDMENT/PROVISION

13A. Any transfer of accumulated balance from an approved gratuity fund or approved superannuation fund to an approved pension fund or an approved income payment plan or approved annuity plan on winding up of the gratuity fund or superannuation fund, or vice versa;

RATIONALE FOR THE PROPOSAL

To allow tax free transferability of funds (accumulated balance) from employer sponsored retirement schemes (gratuity and superannuation funds) to VPS and vice versa considering the fact that change of retirement scheme does not involveny withdrawal of funds.

Employer's preference to offer defined contribution scheme (VPS) instead of defined benefit schemes (gratuity and superannuation schemes) to enable determination of exact employer liability at any point in time.

Currently, Tax is applied on transferring funds to defined contribution schemes in terms of Clause 2(b) of Part II and clause 2(b) of Part III of Sixth Schedule, ITO that restricts withdrawal of money from superannuation fund or gratuity fund before termination or retirement of employee.

To encourage a competitive market for retirement schemes giving a choice to employers and employees to join a better scheme.

Tax neutral proposal

11. Insertion of new clause 23B in Part I, Second Schedule of Income Tax Ordinance, 2001

EXISTING PROVISION

None

PROPOSED AMENDMENT/PROVISION

23B. Any withdrawal of accumulated balance from approved pension fund that represent the transfer of balance of approved provident fund to any approved pension fund under the voluntary pension system rules.

RATIONALE FOR THE PROPOSAL

The employee contribution to provident fund is after tax payment and the provident fund income in excess of government rate is also taxed.

The Income Tax Rules allow withdrawal of contributed funds from provident fund to be transferred to VPS (approved pension funds).

Proposal seeks that accumulated balance of provident fund transferred to approved pension fund should be separately marked and any withdrawal representing this marked balance should be exempt from tax and be treated as if that is withdrawn from provident fund (i.e. tax free).

Therefore, the beneficiary should be given different treatment from those who are give tax credit at the time of contribution to VPS.

Tax neutral proposal

12. Amendment in clause 11(A) (i) of Part IV of Second Schedule to exempt VPS from minimum tax

EXISTING PROVISION

11(A) (i). National Investment (Unit) Trust or a collective investment scheme authorized or registered under the Non-banking Finance Companies (Establishment and Regulation) Rules, 2003 or a real estate investment trust approved and authorized under the Real Estate Investment Trust Rules, 2006, or any other company in respect of turnover representing transaction in shares, or securities listed on a registered stock exchange.

PROPOSED AMENDMENT/PROVISION

11(A)(i). National Investment (Unit) Trust or a collective investment scheme authorized or registered under the Non-banking Finance Companies (Establishment and Regulation) Rules, 2003 or a real estate investment trust approved and authorized under the Real Estate Investment Trust Rules, 2006, or a pension fund registered under the Voluntary Pension System Rules, 2005 or any other company in respect of turnover representing transaction in shares, or securities listed on a registered stock exchange.

RATIONALE FOR THE PROPOSAL

To encourage long-term investments in VPS and bring parity in minimum tax treatment of VPS vis-à-vis other investment options like mutual funds/CIS, NI(U)T and REITs.

Minimum tax when restored in 2009 exempted the investments made in mutual funds/CIS, REITs etc. as was available before 2008.

VPS (launched in 2008) are long-term saving vehicles and deserve at least tax treatment equal to relatively short term savings and investment vehicles like mutual funds and REITs and should also be exempted in line with the exemption available to other investment funds.

Marginal tax impact

13. Amendment in section 156B (1) (b) of Income Tax Ordinance, 2001 to synchronize provisions of section 156B and clause 23A f Part I of Second schedule

EXISTING PROVISION

156B. Withdrawal of balance under Pension Fund. - (1) A pension fund manager making payment from individual pension accounts, maintained under any approved Pension Fund, shall deduct tax at the rate specified in sub-section (6) of section 12 from any amount -

(a) withdrawn before the retirement age:

[Provided that the tax shall not be deducted in case of the eligible person suffering from any disability as mentioned in sub-rule (2) of rule 17 of the Voluntary Pension System Rules, 2005 which renders him unable to continue with any employment at the age which he may so elect to be treated as the retirement age or the age as on the date of such disability if not so elected by him.

Provided further that the tax shall not be deducted on the share of the nominated survivor of the deceased eligible person and would be treated as if the eligible person had reached the age of retirement.

(b) withdrawn, if in excess of 25% of his accumulated balance at or after the retirement age:

Provided that the tax shall not be deducted in case, the balance in the eligible persons' individual pension account is invested in an approved income payment plan of a pension fund manager or paid to a life insurance company for the purchase of an approved annuity plan or is transferred to another individual pension account of the eligible person or the survivors' pension account in case of death of the eligible person maintained with any other pension fund manager as specified in the Voluntary Pension System Rules, 2005.

PROPOSED AMENDMENT/PROVISION

156B. Withdrawal of balance under Pension Fund. - (1) A pension fund manager making payment from individual pension accounts, maintained under any approved Pension Fund, shall deduct tax at the rate specified in sub-section (6) of section 12 from any amount -

(a) withdrawn before the retirement age:

[Provided that the tax shall not be deducted in case of the eligible person suffering from any disability as mentioned in sub-rule (2) of rule 17 of the Voluntary Pension System Rules, 2005 which renders him unable to continue with any employment at the age which he may so elect to be treated as the retirement age or the age as on the date of such disability if not so elected by him.

Provided further that the tax shall not be deducted on the share of the nominated survivor of the deceased eligible person and would be treated as if the eligible person had reached the age of retirement.

(b) withdrawn, if in excess of 25% 50% of his accumulated balance at or after the retirement age:

Provided that the tax shall not be deducted in case, the balance in the eligible persons' individual pension account is invested in an approved income payment plan of a pension fund manager or paid to a life insurance company for the purchase of an approved annuity plan or is transferred to another individual pension account of the eligible person or the survivors' pension account in case of death of the eligible person maintained with any other pension fund manager as specified in the Voluntary Pension System Rules, 2005.

RATIONALE FOR THE PROPOSAL

To synchronize the provisions of section 156B and clause 23A of second schedule.

Clause 23A of Part 1 of Second Schedule (amended through Finance Act, 2009) exempts withdrawal of 50% of Accumulated Balance under pension fund from Income Tax.

Corresponding amendment was not made in section 156B (1)(b) of Income Tax Ordinance, 2001.

Tax neutral proposal

14. Deletion of Section 39 clause (1)(l) of Income Tax Ordinance, 2001

EXISTING PROVISION

39 (1)(l). Any amount received by a person from Approved Income Payment Plan or Approved Annuity Plan under Voluntary Pension System Rules,2005 will fall under the head of "Income from Other Sources" and will be taxable

PROPOSED AMENDMENT/PROVISION

39 (1)(l). Any amount received by a person from Approved Income Payment Plan or Approved Annuity Plan under Voluntary Pension System Rules,2005 will fall under the head of "Income from Other Sources" and will be taxable

RATIONALE FOR THE PROPOSAL

To bring parity in tax treatment of employers' sponsored pension schemes and VPS.

To encourage long-term savings through VPS and provide a medium of financial security to older segment of society.

Pension received from employer is tax exempt (clause (8) of Second Schedule of ITO), however, the periodic payment received from VPS are subjected to tax.

Proposal envisages tax relief for periodic pension payment from VPS only to bring uniformity between retirement schemes. The withdrawal of entire amount from VPS on retirement shall be taxed under section 156B. No change, in section 156B, is being proposed.

At present no tax impact.

15. Insertion of new clause 57 (3) (x) in Part I, Second Schedule of Income Tax Ordinance, 2001

EXISTING PROVISION

None

PROPOSED AMENDMENT/PROVISION

57 (3) (x) Any amount received by a person from Approved Income Payment Plan or Approved Annuity Plan under Voluntary Pension System Rules,2005

RATIONALE FOR THE PROPOSAL

The amendment is consequential to the amendment proposed in section 39(1) (l) whereby the payment received from VPS is proposed to brought at par with the payment received from an employer sponsored retirement scheme.

At present no tax impact.

16. Insertion of a new section 29B in Income Tax Ordinance, 2001 to allow tax deductible provisioning for NPL expense to NBFCs as allowed to banking companies under clause 1(c) of 7th Schedule of I.T. ordinance

EXISTING PROVISION

Nil

PROPOSED AMENDMENT/PROVISION

Insertion of new Section i.e. 29 (B):

Provision regarding non performing loans.

Provisions created by Non-Banking Finance Companies against advances and off balance sheet items shall be allowed up to a maximum of 1% of total advances; and provisions for advances and off-balance sheet items shall be allowed at 5% of total advances for small and medium enterprises (SMEs) provided a certificate from the external auditor is furnished by the non-banking finance company to the effect that such provisions are based upon and are in line with the Non-Banking Finance Companies and Notified Entities Regulations 2008. Provisioning in excess of 1% would be allowed to be carried over to succeeding years:

Provided that if provisioning is less than 1% of the advances, then actual provisioning for the year shall be allowed.

Explanation: "SME loans" means loans made by Non-Banking Finance Company or the House Building Finance Corporation to a Small and medium enterprise amounting to maximum Rs.300,000.

Small and medium enterprise shall have the same meaning as defined in Companies Ordinance, 1984.

RATIONALE FOR THE PROPOSAL

i. Commercial banks are allowed to create provisions for advances and off-balance sheet items upto a maximum of 1% of total advances; and provisions for advances and off-balance sheet items are allowed at 5% of total advances for consumers and SMEs (Ref clause 1(c ) of the 7th Schedule of ITO)

ii. NBFCs like commercial banks also extend normal advances as well as advances to SMEs.

 

 


===========================================================================


Year                      2005     2006     2007     2008     2009     2010


===========================================================================


Disbursement to SME     15,817   13,391   15,957    7,040    6,068    6,954


Total Disbursement      41,091   41,138   35,532   33,950   22,074   19,324


Disbursement to SME %      38%      33%      45%      21%      27%      36%


===========================================================================


 

 

iii. NBFCs are required under Non-Banking Finance Companies and Notified Entities Regulations 2008 to maintain provision against non-performing loans and advances

iv. The proposed section 29B shall provide a level playing field to the NBFCs vis-a-vis commercial banks.

Marginal tax impact

17. Amendment in clause 8(1) of Seventh schedule of Income Tax Ordinance 2001.

EXISTING PROVISION

8. Exemptions-(1) Exemptions and tax concessions under the Second Schedule to this Ordinance shall not apply to income of a banking

Company computed under this Schedule.

PROPOSED AMENDMENT/PROVISION

8. Exemptions-(1) Exemptions and tax concessions under the

Second Schedule to this Ordinance shall not apply to income of a banking

Company computed under this Schedule.

Provided that a banking company shall be subject to same tax treatment as other companies on sale of immovable property to a REIT Scheme.

RATIONALE FOR THE PROPOSAL

The proposal shall bring uniformity in tax treatment across all persons on sale of immovable property to a REIT Scheme.

Clause 99A of Part I of Second Schedule gives exemption from income tax on gains earned by a person on sale of immovable property to a REIT Scheme.

Clause 8 of Seventh Schedule excludes a banking company from the applicability of exemptions available under Second Schedule.

The proposed amendment shall allow tax exemption to a banking company on sale of immovable property to a REIT Scheme.

No tax impact at present

18. To define the private equity and venture capital fund, insertion of new subsection 45A in section 2 of the Income Tax Ordinance 2001

EXISTING PROVISION

Nil

PROPOSED AMENDMENT/PROVISION

2(45A) Private Equity and Venture Capital Fund means a fund registered with the Securities and Exchange Commission of Pakistan under the Private Equity and Venture Capital Fund Regulations, 2008

RATIONALE FOR THE PROPOSAL

This proposal seeks insertion of definition of 'Private Equity and Venture Capital Fund' to provide context to the terms used in different parts of the Ordinance in light of the notified Private Equity and Venture Capital Fund Regulations, 2008.

Tax neutral proposal

19. The Tax Rate for charging Capital Gains as Compared to other Sectors of the Economy should be similar to the Insurance Industry

EXISTING PROVISION

Capital gain tax where holding period of security is less than six months, rate for Insurance Companies as per Rule 6B of the Fourth Schedule to the Income Tax Ordinance 2001and for Other Sector as per Division VII, Part 1 of the First Schedule to the Income Tax Ordinance 2001:

 

 


================================


Year      Rates for    Rates for


Insurance        Other


Companies       Sector


================================


2011            10%          10%


2012          12.5%          10%


2013            15%        12.5%


2014          17.5%          15%


2015          17.5%        17.5%


================================


 

 

Where the holding period of a security is more than six months but less than twelve months:

 

 


================================


Year      Rates for    Rates for


Insurance        Other


Companies       Sector


================================


2011             8%         7.5%


2012           8.5%           8%


2013             9%         8.5%


2014           9.5%           9%


2015            10%         9.5%


================================


 

 

PROPOSED AMENDMENT/PROVISION

Capital gain tax for Insurance Companies as per Rule 6B of the Fourth Schedule to the Income Tax Ordinance 2001 where holding period of a security is less than six months.

 

 


====================


Year           Rates


====================


2011             10%


2012             10%


2013           12.5%


2014             15%


2015           17.5%


====================


 

 

Where holding period of a security is more than six months but less than twelve months.

 

 


====================


Year           Rates


====================


2011            7.5%


2012              8%


2013            8.5%


2014              9%


2015            9.5%


====================


 

 

RATIONALE FOR THE PROPOSAL

Capital gain tax on listed securities of insurance companies is currently charged at a higher rate which needs to be brought at par with companies in other sectors of the economy to remove the discrepancy.

This would increase investors' confidence resulting in increased investment in the shares/stocks of insurance companies.

20. Amendments in provisions of the Fourth Schedule of the Income Tax Ordinance 2001, to clarify provision as a result of proposed changes in the Accounting Regulations contained in the Securities and Exchange Commission [Insurance] Rules 2002

EXISTING PROVISION

Rule 2 of the Fourth Schedule under the Income Tax Ordinance 2001:

"The profits and gains of a life insurance business shall be the current year's surplus appropriated to profit and loss account prepared under the Insurance Ordinance 2000 (XXXIX of 2000), as per advice of the Appointed Actuary, net of adjustments under Sections 22(8), 23(8) and 23(11) of the Insurance Ordinance 2000 (XXXIX of 2000) so as to exclude from it any expenditure which is, under the provisions of Part IV of Chapter III, allowed as a deduction in computing profits and gains of a business to the extent of the proportion of surplus not distributed to policyholders".

PROPOSED AMENDMENT/PROVISION

It is proposed to replace this by the following:

"The profits and gains of a life insurance business shall be the current year's surplus appropriated to the Shareholders' Fund as disclosed in the profit and loss account prepared under Section 46(1)(a)(ii) of the Insurance Ordinance 2000 (XXXIX of 2000), as per advice of the Appointed Actuary, net of adjustments under Sections 22(8), 23(8) and 23(11) of the Insurance Ordinance 2000 (XXXIX of 2000) so as to exclude from it any expenditure other than expenditure which is, under the provisions of Part IV of Chapter III, allowed as a deduction in computing profits and gains of a business to the extent of the proportion of surplus not distributed to policyholders.

For the purpose of this Rule any surplus arising in the Statutory Funds set up under Section 14 of the Insurance Ordinance 2000 (XXXIX of 2000) shall not be considered except to the extent that it is transferred to the Shareholders' Fund and disclosed in the profit and loss account".

RATIONALE FOR THE PROPOSAL

Life insurance companies are required to produce two sets of financial statements, the formats for these being prescribed under the Securities and Exchange Commission Insurance Rules 2002.

Presently, both the Regulatory Returns and Published Financial Statements consist of similar statements including a profit and loss account. There is a current initiative, however, under the auspices of an Insurance Committee of the Institute of Chartered Accountants of Pakistan, to modify the contents of the Published Financial Statements so as to produce a single statement of Comprehensive Income instead of two separate statements for the shareholders' fund (Profit and Loss Account) and Statutory Funds (Revenue Accounts). As a result it is necessary to clarify, in order to avoid confusion, that the reference to "profit and loss account" in Rule 2 of the Fourth Schedule of the Income Tax Ordinance 2001 relates to the statement required to be produced under Section 46(1)(a)(ii) of the Insurance Ordinance 2000.

Tax neutral proposal

21. Introduction of Tax Credit for life insurance premiums/takaful contributions paid by individuals

EXISTING PROVISION

None.

PROPOSED AMENDMENT/PROVISION

It is proposed that a section 63A be inserted to the Income Tax Ordinance 2001 to be worded as follows:

Section 63A Contribution to a Life Insurance or Takaful Policy:

(1) An individual person deriving income chargeable to tax under the head "Salary" or the head "Income from Business" shall be entitled to a tax credit for a tax year in respect of any Life Insurance Premium or Family Takaful contribution paid in the year by the person on a qualifying policy to a life insurance/family takaful company registered by the SECP under Section 6 of the Insurance Ordinance 2000.

(2) The amount of a person's tax credit allowed under sub-Section (1) for a tax year shall be computed according to the following formula, namely:

(A ÷ B) x C

Where -

A is the amount of tax assessed to the person for the tax year, before allowance of any tax credit under this Part;

B is the person's taxable income for the tax year; and

C is the lesser of

(i) The total contribution or premium referred to in sub-section (1) paid by the person in the year; or

(ii) ten per cent of the taxable income for the relevant tax year; or

(iii) two hundred thousand rupees.

RATIONALE FOR THE PROPOSAL

Insurance penetration in Pakistan (life and non-life) is 0.7% of the GDP on the basis of 2005 gross premium numbers.

The investors (policyholders) confidence will be enhanced by reforming the regulatory framework and introducing tax reforms. It will also increase insurance penetration which will yield more revenues viz. FED, FIF, income tax.

Other countries in the region (e.g. India, Bangladesh, Malaysia and Sri Lanka) with more developed life insurance industries give fiscal incentives to encourage long term savings and personal provision of a safety net for the untimely death or disability of the breadwinner.

Pakistan's income tax regime already has fiscal incentives for investment of savings in mutual funds and retirement benefit schemes in the form of Tax Credit for investment in VPS funds.

22. Federal Insurance Fee (FIF) on Health Insurance Services to be exempted

EXISTING PROVISION

Non-life insurance companies are required to pay FIF @ 1 % on all kind of insurance including health insurance, while life insurance companies are exempt from FIF for health insurance.

PROPOSED AMENDMENT/PROVISION

Health insurance policies issued by Non-life Insurance companies should also be exempted from the levy of FIF.

RATIONALE FOR THE PROPOSAL

A Federal Insurance Fee @ 1% of the Gross Premium Payable on all types of insurance was levied in the Finance Act 1989 under the head Economic Regulation Fees realized under the Insurance Act 1938. However, the said fee was withdrawn on life insurance w.e.f. 1 July 1991 by the Finance Division.

Health insurance is carried out by both life and non-life companies. While the fee was withdrawn entirely for life insurance, it continues to be applicable on the health insurance business transacted by general insurance companies.

The removal of the anomaly in FIF will support the growth of health Insurance business being carried out by non-life insurance companies by making it affordable to individuals.


 



 
Index Closing Chg%
Arrow DJIA 16,408.54 0.10
Arrow Nasdaq 4,095.52 0.23
Arrow S&P 1,864.85 0.14
Arrow FTSE 6,625.25 0.62
Arrow DAX 9,409.71 0.99
Arrow CAC-40 4,431.81 0.59
Arrow Nikkei 14,417.53 0.01
Arrow H.Seng 22,760.24 0.28
Arrow Sensex 22,628.84 1.58





where to buy

cheap wedding dresses

online - weddingdresstrend.com

Buy cheap Nike Mercurials cleats at mercurialscleats.com
cheap wedding dresses on SiteSteer.com - Best Online Wedding Store


Banking Review 2013


Buy direct from

China free shipping trade platform

Annual2012/13
Foreign Debt $60.9bn
Per Cap Income $1,368
GDP Growth 3.6%
Average CPI 7.5%
MonthlyFebruary
Trade Balance $-1.433 bln
Exports $2.167 bln
Imports $3.600 bln
WeeklyApril 14, 2014
Reserves $9.713 bln