ISLAMABAD: The Finance Bill 2020 has made several amendments in the Income Tax Ordinance 2001 to issue new/revised definitions of integrated enterprise, industrial undertaking and local government.
Under the Finance Bill 2020, the definition of Industrial undertaking as given in Section 2 (29C) of the Income Tax Ordinance, 2001(Ordinance) has been amended to give the construction business the status of 'Industrial Undertaking' for the purposes of import of plant and machinery to be utilised in the said activity, subject to conditions laid down by the Board. This means the tax benefits at the time of imports shall be available to builders.
According to the tax experts, a new definition has been inserted in Section 2 of the Ordinance to define 'Integrated Enterprise. This means a person integrated with the Board through approved fiscal electronic device and software, and who fulfils obligations and requirements for integration. The Rules for this will be provided by the FBR. This basically would lead to integration of data bank of FBR with certain organisations which will lead to effective taxation and broadening of tax base. A new Clause 30AC is being introduced to define IRIS which is a web based computer programme for operation and management of Inland Revenue taxes administered by the Board.
The definition of Local Government has been amended to include the 'Islamabad Capital Territory'. This means the status of Local Government shall now also be applicable to ICT. The definition of 'Non-Profit Organisation has also been amended so as to broaden the scope by including the expression 'purposes for general public' in sub-clause (a) and by including NPO registered under a law rather than by a law only. The scope is thus proposed to be widened.
In Section 7A of the Ordinance Clause (c) is proposed to be inserted in Sub-Section 1 to include a Pakistan resident ship owning company registered with the Securities and Exchange Commission of Pakistan after the November 15, 2019 and having its own sea worthy vessel registered under Pakistan Flag to pay tonnage tax of an amount equivalent to seventy five US Cents per ton of gross registered tonnage per annum. Thus, bringing Pakistan Resident Company owning ships in the presumptive tax regime. Further, the regime has been extended to June 30 2023.
The provisions of Section 15A of the Ordinance dealing with deductions in computing the Income from Property have also been amended. The expenditure allowed unto 6% of the rent is proposed to be curtailed to 2% of the gross rent, including collection charges. The allowance of expenditure to Individuals and AOP's deriving income from property more than PKR 4.0(M) was permissible if they opted for this regime. The condition of PKR 4.0(M) is proposed to be omitted and option is now available to all individuals and AOP's irrespective of the quantum of rent received.
Restrictions given in Section 21 of the Ordinance in allowing expenditure against 'business income' are relaxed as under;
1) The limit given in Section 21 (l) for an expenditure under single head which in aggregate exceeds fifty thousand rupees to be paid by banking instrument has been enhanced to PKR 250,000/- further this clause will not apply now expenditures not exceeding twenty five thousand rupees. This is an incentive given to small business but surely a drive away from documentation of economy.
2) Salaries paid more than PKR. 15,000/- were to be paid by banking transaction. This is now proposed to be enhanced to PKR 25,000/- This means salary upto PKR 25,000/- paid in cash will now be an admissible expense.
3) Expenditure on account of utility bill in excess of such limits and in violation of such conditions as may be prescribed. This means Board intends to put some restrictions on allowing the claim of utility bills paid by a business man.
4) It is proposed that an Industrial Undertaking should make sales to a person who is liable to be registered. In case they do not then the expenditure on the basis of sales equal to or exceeding 100 (M) per un-registered persons, liable to be registered shall be curtailed by giving the formula; provided that the disallowance shall not exceed 20% of the total deductions claimed under the said part. The Board may also give exemption from this provision through a notification.
The provisions for allowance of depreciation are also being proposed to be amended. A proviso to Section 22 (2) of the ordinance is proposed whereby a depreciable asset when is used in the person's business for the first time in a tax year commencing on or after the 1st day of July, 2020, the depreciation deduction shall be reduced by fifty percent.
Another provision to Section 22 (8) of the Ordinance is proposed whereby a depreciable asset is used in the person's business for the first time in a tax year commencing on or after the 1st day of July, 2020, depreciation deduction equal to fifty percent of the rate specified in Part I of the Third Schedule shall be allowed in the year of disposal.
A provision to Section 28(1)(b) is proposed to restrict the lease rentals. It is suggested that for the purpose of determining the deduction on account of lease rentals the cost of a passenger transport vehicle not plying for hire to the extent of principal amount shall not exceed two and a half million rupees.
The Finance Bill proposes changes under the head of income 'Capital Gains' for property income. Earlier the constructed property and open plots had different rates of taxation on the basis of holding period. It is proposed to consider constructed property and open plots as'Immovable Property and taxation only if the holding period is less than four years. If less than one year 100% gain is taxable. If holding period is more than one year and less than two the 75% of the gain is taxable; if the holding period is more than two years but less than three years 50% of the gain is taxable and if the holding period is more than three years but less than four; the 25% of the gain is taxable. More than four years the gain is not taxable under ahead 'Capital Gains".
The tax credit allowed to a company and an individual on giving charitable donations u/s 61 of the ordinance is now restricted to the extent of 10% & 15 % of the taxable income of the Company and individual as against 20% & 30 % respectively.
An amendment in Section 65C of the Ordinance is proposed to restrict the allowance of Tax Credit on enlistment made unto June 30th 2022. Earlier there was not time restriction.
The provisions of Section 100C of the Ordinance relating to the income of Non-Profit Organisations is proposed to be regulated by inserting Clause (g) to Section 100C(1). The insertion requires a Non Profit Organisation to file a statement of voluntary contributions and donations received in the immediately preceding tax year in the prescribed form and manner. This will give the department a list of donors.
The provisions of Section 100D inserted through Tax Laws (Amendment) Ordinance, 2020 are proposed to be made part of the Ordinance by way of Finance Act, 2020 to give perpetuity to the incentives given to the construction industry for the boosting of economy after the pandemic.
Section 106A is proposed to be inserted in the Ordinance, whereby foreign profit on debt claimed by a foreign-controlled resident company (other than an insurance company, or a banking company) during a tax year, shall be disallowed according to proposed formula. The foreign controlled resident company shall be the one which is owned by a resident company in which fifty per cent or more of the underlying ownership of the company is held by a non- resident person either alone or together with an associate or associates. This provision is being inserted to avoid taxation in Pakistan non-residents.
Section 111 dealing with unexplained income and assets is being window dressed to give effect to term investment and sales separately and independent of each other.
For the purposes of charge of minimum tax u/s 113 of the Ordinance the term 'permanent establishment' of the non-resident company is being added.
Section 114 of the Ordinance is being amended to include a person to file a tax return as against a statement, whose income falls under Final Tax Regime. This means the person under Final Tax Regime will have to file a complete return as against a simple statement of amount chargeable under the said regime.
A new Section 114A to the Ordinance is proposed whereby a person registered under the Ordinance or requires to get registration u/s 181 of the Ordinance shall file a Tax Profile to the Commissioner on a prescribe format whereby certain information will be provide, i.e. the relevant particulars of bank accounts, utility connections; business premises including all manufacturing, storage or retail outlets operated or leased by the taxpayer; types of businesses; and such other information as may be prescribed.
The concept of deemed order u/s 120 of the Ordinance on filing of the tax return is proposed to be done away with. It is proposed through insertion of sub-Section 2A to examine the return whereas earlier there was no such provision. A return of income furnished under sub-section (2) of section 114 shall be processed through automated system to arrive at correct amounts of total income, taxable income and tax payable by making adjustments for-
(i) any arithmetical error in the return;
(ii) any incorrect claim, if such incorrect claim is apparent from any information in the return;
(iii) disallowance of any loss, deductible allowance or tax credit under Parts VIII, IX and X respectively of Chapter III; and
(iv) disallowance of carry forward of any loss under clause (b) of sub-section (1) of section 182A:
This would be examining of the return as was done under the erst while Ordinance and the taxpayer shall now be more at the mercy of the FBR as all automated systems are run manually.
The provisions of Section 12 (5) of the Ordinance are proposed to be changed so as to amend an order on the basis of audit or having acquired definite information. Earlier it was to be amended on the basis of definite information acquired from audit or otherwise. This is a pardime shift and gives arbitrary powers to audit officer in concluding the amended assessment which earlier on was not possible without proving the definite information available.
Section 122D is being proposed to be added to include the concept of Agreed assessment after issuance of notice u/s 122(9) of the Ordinance. This matter will be handled by an oversight committee headed by Chief Commissioner. The addition is apparently to reduce litigation, however, the committee is surely not an independent and likely to support the department rather than the tax payer.
The return of income processed through automated system will be appealable and for filing of any appeal; prescribed fee has been raised to Rs. 5,000/- for company and Rs. 2,500/- for others. Similarly, a taxpayer will now have to make at least 10% of the demand upheld by the Commissioner Appeals if he decides to file an appeal against the order before the Appellate Tribunal. This is another measure for forced collection of revenue.
The provisions of Section 134A of the Ordinance relating to Alternate Dispute Resolution are proposed to be amended to include the issues pending before any court of law or appellate authority. Further, the constitution of the committee has also been changed to include Chief Commissioner. The committee may grant interim relief but not more than 120 days in case of hardship. The final order if not passed with 120 days the committee shall be dissolved and the matter decided by court where the appeal was pending.
Tax on purchase of local cooking oil by manufacturer of cooking oil has been omitted.
A few changes in payments to non-resident persons u/s 152 of the Ordinance are being proposed. The tax collected non-resident media persons is now a minimum tax. Similarly, tax collected from a permanent establishment of a non-resident person on account of sales of goods, for rendering of services or execution of contract is now a minimum tax. Similarly, for a cohesive contract the rate is lowered to 20% as against 30% of the tax chargeable.
The statements u/s 165 were to be filed bi-annually, however, they are now proposed to be filed quarterly. Similarly, in Section 165A (1) (d) the exceeding limit of Rs. 500,000/- off profit on debt has been removed.
The concept of Final tax is slowly being removed and concept of filing tax returns is being made mandatory. This is another step towards documentation of economy and taxation accordingly.
The Board is being given powers to enter and search 'real time electronic access' for which amendments are proposed in Section 175 of the Ordinance.
The Board has realised that due to cover pandemic the proceedings in the tax Office may not be possible; therefore, proceedings, especially for audit can now be conducted through video link. Amendments in Section 177 are proposed.
For the purposes of collection of advance tax u/s 231B of the Ordinance motor cycle, rickshaw and other motor vehicles upto 200cc engine capacity are excluded.
Withholding Tax u/s 236C has been reduced to 4%; whereas tax u/s 236D; 236F, 236J, 236R, 236U & 236X of the Ordinance has been deleted.
Withholding tax u/s 236I of the Ordinance will now be collected from a person not appearing on the active taxpayers' list.
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