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Business & Finance

The Tax Laws (Amendment) Ordinance, 2021 — I

Chartered Accountants This memorandum gives a brief overview of significant amendments made by the Tax Laws...
Updated 16 Feb 2021

Chartered Accountants

This memorandum gives a brief overview of significant amendments made by the Tax Laws (Amendment) Ordinance, 2021 in the fiscal laws of Pakistan. The Ordinance has been promulgated by the President of Pakistan in exercise of the powers conferred under Article 89 (1) of the Constitution of Islamic Republic of Pakistan.

The Ordinance primarily aims to provide for a simplified concessionary tax regime for overseas and local Pakistanis including those holding POC, who are allowed to open and operate Roshan Digital Accounts under the scheme introduced by the State Bank of Pakistan. The Ordinance has also introduced certain other amendments to give effect to the concessions announced by the Government for Special Technology Zones and electric vehicles. Besides that, the Ordinance provides for reduced withholding/minimum tax regime for the traders, wholesalers and retailers of specified sectors in terms of understanding reached between the trade bodies and Government.

The amendments made through the Ordinance are effective from February 11, 2021 unless otherwise stated for specified provisions.

This memorandum can also be accessed on www.pwc.com/pk

SIMPLIFIED TAX REGIME FOR ROSHAN DIGITAL ACCOUNTS

Through Tax Laws (Amendment) Ordinance, 2021, various amendments have been made in the Income Tax Ordinance, 2001 to provide for simplified tax regime for those local and overseas individuals who are allowed to operate Roshan Digital Accounts (RDA) in terms of the scheme introduced by the State Bank of Pakistan. These accounts are a new initiative of the State Bank of Pakistan in collaboration with the commercial banks to attract investment in Pakistan.

INCENTIVES FOR NON-RESIDENT INDIVIDUALS

Non-Resident Individuals1 (NRI), holding NICOP, POC or CNIC and maintaining a Foreign Currency Value Account (FCVA), or a Non-Resident Pakistani Rupee Value Account (NRVA) with authorized banks in Pakistan are allowed to make investments in the following:

(i) Government debt securities (both conventional and shariah compliant);

(ii) Immovable property-both residential and commercial;

(iii) Listed securities and units of Mutual Funds; and

(iv) Term deposit and other products of the Bank

Through Tax Laws (Amendment) Ordinance, 2021, taxation regime applicable on income arising from above investments has been further streamlined and simplified. The existing law and the changes made therein are summarized as under (changes emphasized in Bold Font).

===============================================================================================================
        Investment                        Taxation                                       Rationale/Implications
===============================================================================================================
1.      Government Securities (both
        Shariah Compliant and
        Conventional):
        -Interest income                  10% withholding on interest income or          Streamlining taxation
                                          capital gains, as the case may be, by a        of capital gains on
        -Capital gains                    banking company considered as full             disposal of government
        on disposal of                    and final discharge of tax liability.          securities with
        government securities                                                            interest income arising
                                                                                         from government
                                                                                         securities
2.      Immovable Property:
        -Purchase                         1% withholding (made by person
                                          responsible for registering
                                          property) treated as final tax
                                          (hence non-refundable). No tax
                                          shall be collected where immovable             Through amendments
                                          property is purchased under the                made under
                                          scheme introduced by Federal or                section 236C and 236K of
                                          Provincial Government for expatriate           the Income
                                          Pakistanis.                                    Tax Ordinance, 2001, a
                                                                                         special tax
                                                                                         regime has been    introduced
                                                                                         for NRIs investing in
                                                                                         immoveable property
                                                                                         through RDA whereby
                                                                                         capital gains on
        -Sale                             1% withholding (made by person                 immovable properties
                                          responsible for registering                    accruing to them would
                                          property) is final tax in lieu of              be subject to final tax
                                          capital gains arising on disposal              by virtue of tax collection
                                          of property. No tax shall be deducted          at the time of purchase and
                                          where property is sold after 4 year.           sale of property.

Individuals are considered as non-resident, if he is not present in Pakistan:

(a) for an aggregate period of 183 days or more in a tax year (July to June basis); or

(b) for an aggregate period of 120 days or more in a tax year, and in aggregate 365 days in 4 years preceding that tax year.

===============================================================================================================
        Investment                        Taxation                                       Rationale/Implications
===============================================================================================================
3.      Listed Securities and
        Mutual Funds:
        - Dividend income                 Tax deducted at following rates is full
                                          and final discharge of tax liability:
                                          (a) 7.5% (in case of IPPs where
                                          dividend is a pass through item)
                                          (b) 15% (Mutual funds and other                Taxation regime
                                          than (a) & (c)                                 in line with the     resident
                                                                                         persons.
                                          (c) 25% (If dividend is received from
                                          a company exempt from tax or
                                          where tax is not payable due to
                                          losses/tax credit)
        - Capital Gains                   Tax deducted by NCCPL at following
                                          rates is considered as full and final
                                          discharge of tax liability (no tax is to be
                                          deducted if holding period is more than
                                          4 years):
                                          (a) 15% (Listed securities)                    Taxation regime in line
                                          (b) 10% Mutual Funds other than (c)            with the resident
                                          (c) 12.5% (stock fund if dividend              persons.
                                          receipt of fund is less than capital
                                          gains)
4.      Interest income from
        FCVA and                          Exempt from tax including                      Exemptions available
        NRVA (including                   withholding tax with no                        under clause (78) and (79),
        term deposit/                     requirement to obtain exemption                Part I of the Second Schedule
        allied products of                certificate                                    were previously restricted
        banks)                                                                           only to certain
                                                                                         Foreign Currency Accounts
                                                                                         and Pakistan Rupee Accounts
                                                                                         of citizens of Pakistan
                                                                                         residing abroad. Exemption
                                                                                         after the amendment is
                                                                                         broadly available to
                                                                                         Foreign Currency accounts
                                                                                         maintained by non-resident
                                                                                         individuals, association of
                                                                                         persons, and companies, and
                                                                                         Rupee Accounts maintained
                                                                                         by non-resident individuals.

ADDITIONAL INCENTIVES/CONCESSIONS FOR NRIs INVESTING THROUGH FCVA/NRVA

  1. NRIs investing through FCVA/NRVA are now not required to obtain National Tax Number and file tax return in Pakistan if such person has no Pakistan-source income other than those as discussed above. NRIs who are eligible for tax treaty benefits in excess of what is now provided in the simplified tax regime as stated above, may opt to avail the treaty benefits following the normal course laid down in the law. However, we consider that the simplified scheme laid down in the law is more attractive in terms of practicalities involved in applying for the treaty benefits.

  2. Tenth Schedule would also not apply on NRIs investing through FCVA/NRVA (Under the Tenth Schedule, a person not filing tax return is subject to tax withholding at 100% higher rate than the applicable rate, with other consequential implications).

  3. Following withholding taxes would also be not applicable on NRIs operating FCVA/NRVA, which are otherwise applicable on a person not filing a tax return in Pakistan:

    ================================================================================================ Section 231A - Cash withdrawal from bank Section 231AA - Sale of banking instrument or online transfer of money etc.

    Section 236P - All banking transactions, other than cash

NOTE:

All the concessions stated above were previously available to certain extent, subject to certain restriction and conditions. The Tax Laws (Amendment) Ordinance, 2021 has removed all such restrictions and provide for a complete and clear simplified tax regime as stated above.

Certain practical problems may arise for banking companies operating RDA (e.g. identifying/verifying tax residential status of an individual, based on number of days spent in Pakistan). Furthermore, in case of purchase and sale of immoveable property, transaction values in certain cases may not be aligned with FBR’s notified values, on which tax has been collected at the time of purchase and sale of immoveable property. FBR is expected to issue appropriate clarification on these matters.

INCENTIVES FOR RESIDENT CITIZEN OF PAKISTAN

SBP’s scheme also allows resident citizen of Pakistan to make investments in Naya Pakistan Certificates and other government securities through FVCA, provided the resident person has declared foreign assets to FBR. Interest income of such resident persons from Government debt securities (whether conventional or Shariah compliant) would be subject to tax withholding at the rate of 10%, which shall be considered as full and final discharge of tax liability. Previously, such interest income was taxable at following rates under section 7B of the Ordinance:

======================================================================
S.No.  Profit on Debt                                      Rate of tax
======================================================================
1      Where profit on debt does not exceed Rs. 5,000,000          15%
2      Where profit on debt exceeds Rs. 5,000,000 but does not exceed
Rs. 25,000,000                                            17.5%-(Note)
3      Where profit on debt exceeds Rs. 25,000,000 but does not exceed
Rs. 36,000,000 *                                            20%-(Note)
======================================================================
  • Where profit on debts exceeds Rs. 36,000,000, tax was applicable on the entire amount of profit at the rate of 35%.

Note: The rate of 17.5% was applicable on the entire amount (and not on amount exceeding Rs. 5 million). Likewise, rate of 20% is applicable on entire amount of profit on debt.

INCENTIVES FOR WHOLESALER, DEALER AND RETAILERS OF SPECIFIED SECTORS

REDUCED WITHHOLDING TAX/MINIMUM TAX RATE FOR TRADE CHAIN OF SPECIFIED SECTORS

Dealers and sub-dealers of sugar, cement and edible oils are allowed reduced withholding tax rate (and the consequential minimum tax) of 0.25% under section 153 on their receipts.

Following amendments are made in this regard:

(i) The above concession has been extended to wholesalers and retailers as well;

(ii) Sectors/goods covered would include fertilizer and fast-moving consumer goods. The term ‘fast moving consumer goods” has been defined to mean consumer goods, which are supplied in retail marketing as per daily demand of a consumer excluding durable goods;

(iii) The above concession would be available only if the dealer and sub-dealer, wholesaler or retailer is already registered under the Sales Tax Act, 1990 or get themselves registered within sixty days of the promulgation of the Amendment Ordinance, 2021 i.e. by April 11, 2021.

Dealers and sub-dealers of sugar, cement and edible oils are also allowed minimum tax rate of 0.25% under section 113 (as against standard rate of 1. 5% applicable on their turnover), provided they are active taxpayers in terms of relevant provisions of both the Income Tax Ordinance, 2001 and Sales Tax Act, 1990.

Following amendments are made in this regard:

(i) The above concession has been extended to wholesalers and retailers as well;

(ii) Sectors/goods covered would include fertilizer and fast-moving consumer goods; and

(iii) The above concession would be available only if the dealer and sub-dealer, wholesaler or retailer is already registered under the Sales Tax Act, 1990 or get themselves registered within sixty days of the promulgation of the Amendment Ordinance, 2021 i.e. by April 11, 2021.

It appears that dealer, distributor and wholesaler of certain specified sectors like cement, sugar and fertilizer would be subject to advance tax collection on their purchases (under section 236G) as well as on their sales to withholding agent (under section 153). Tax withholding under section 153 shall be minimum tax.

REDUCTION IN RATE OF ADVANCE TAX FOR DISTRIBUTORS/WHOLESALERS OF FERTILIZERS

Every manufacturer or commercial importer of fertilizers is required to collect advance tax from distributors, dealers and wholesalers under section 236G at the rate of 0.7%.

The said rate has been reduced to 0.25% if the distributor/dealer/wholesaler is already registered under the Sales Tax Act, 1990 or get themselves registered within sixty days of the promulgation of the Amendment Ordinance, 2021 i.e. by April 11, 2021. Those registered after April 11, 2021 will be subject to advance tax at the rate of 0.7%.

Tax collection under section 236G is adjustable for dealer, distributor and wholesaler of the specified sectors.

TAXATION OF DISTRIBUTORS, DEALERS, WHOLESALERS AND RETAILERS OF MOBILE PHONE DEVICES

It is provided that with effect from July 1, 2020, the provisions of withholding tax under section 153 (1) (a) shall not apply to distributors, dealers, wholesalers and retailers of locally manufactured mobile phone devices as withholding agent.

As a result of exemption of withholding tax on supplies within the supply chain, all these persons would now be subject to tax on their net income.

(To be continued tomorrow)

Copyright Business Recorder, 2021