Tax incentives for NRPs — I

The coalition government of Pakistan Tehreek-i-Insaf (PTI) on February 11, 2021 opted to issue second Presidential Ordinance VI of 2021 [Tax Laws (Amendment) Ordinance, 2021] inserting new provisions and amending the existing ones in all the tax codes—Income Tax Ordinance, 2001, Sales Tax Act, 1990, Customs Act, 1969 and Federal Excise Act, 2015—without any debate in public and bypassing the National Assembly and Senate. The same was done with the first Presidential Ordinance II of 2021 [The Income Tax (Amendment) Ordinance, 2021], issued on January 20, 2021 with retrospective effect (January 1, 2021), just 48 hours before the start of sessions of National Assembly and Senate. Strangely, both were not available on the websites of National Assembly and Ministry of Law of Law (accessed at 7:45 am before submitting this article for publication on February 18, 2021). The version on the website of Federal Board of Revenue (FBR) is thus being relied upon, which though contains request from Ministry of Law and Justice for publication in the official gazette, but notification remained unpublished till the morning of February 18, 2021! The session of National Assembly started on January 22, 2021 and prorogued on February 4, 2021 but Ordinance II of 2021 was not tabled as the record on website of National Assembly shows. Both the Ordinances, being Money Bill, need to be laid down before the National Assembly. By not placing Presidential Ordinance II of 2021 of January 20, 2021 a flagrant violation of Article 89 of the Constitution of Islamic Republic of Pakistan [“the Constitution”] is committed.

In this article, constitutional issues apart, we are just analysing some tax incentives offered to non-resident Pakistanis [NRPs] through Roshan Digital Accounts (RDAs). It would have been better if the name of account was ‘My Pakistani Account’ as many born outside (second and third generation of expatriates may not be aware that Roshan means “bright” or “shining”. The State Bank of Pakistan (SBP) may say ‘naam mein kya rakha hey [what matters in the “name”?]. Though in such products name really matters for attracting expatriate Pakistanis, like, ‘Prosperous Pakistan Digital Account’!

The SBP in a communiqué at its website [https://www.sbp.org.pk/RDA/index.html] titled ‘A New Era of Banking in Pakistan’, announced the scheme as under:

“For the first time in Pakistan’s history, Non Resident Pakistanis (NRPs) are being provided an opportunity to remotely open an account in Pakistan through an entirely digital and online process without any need to visit a bank branch. Opening of the account will require only a basic set of information and documents. Banks have been asked to complete all necessary customer due diligence within 48 hours.

Enabling investment by Non-resident Pakistanis in Naya Pakistan Certificates (NPCs) issued by the Government of Pakistan, in both USD and PKR, at very attractive risk free rates in both conventional and Shariah-compliant forms. (Click for GoP Notification).

On NPC, only a 10% withholding tax on profits is applicable that is full and final. No filling of tax return is required. Resident Pakistanis who have declared assets abroad with FBR can also invest in USD-denominated NPCs. To do so, they can open a Roshan Digital Account in foreign currency by visiting a bank branch in Pakistan”.

Further details and brochure and rate of returns are available at the following links at the website of SBP:

https://www.sbp.org.pk/RDAC/RDA-LEAFLET-ENG.pdf

https://www.sbp.org.pk/NPC/index.html

https://www.sbp.org.pk/RDA/FCRDARP.html

http://www.finance.gov.pk/nayapakistancer_14092020.pdf

According to SBP, RDAs are being offered by banks to provide digital banking solutions to NRPs and to resident Pakistanis who have declared assets abroad with FBR can also invest in USD-denominated NPCs by visiting the branch of nine banks mentioned at its website https://www.sbp.org.pk/NPC/index.html.

According to SBP, NRPs willing to undertake banking, payment and investment activities can do so through digital channels. There are two types of accounts offered under RDAs. These are:

i. Foreign Currency Value Account (FCVA)

ii. NRP Rupee Value Account (NRVA)

These accounts must be credited with remittances received from abroad through banking channels. Funds in an NRVA can also be transferred from the customer’s own Foreign Currency Value Account (FCVA) or other NRVA with the same bank. Moreover, returns on investments and disinvestment proceeds on account of investments made from these accounts can also be credited in these accounts. The account can be credited with remittances received from abroad through banking channels.

As per instruction of SBP: “Feeding from local sources is not allowed”. It further provides that “all banking services allowed through digital channels will be available with the account e.g. internet/mobile banking, ATM/ Debit cards. The bank may also issue a cheque book to the account holder, if required”. These accounts, as per SBP, can be used to “invest in foreign currency-denominated debt securities of the government of Pakistan, notably the USD Naya Pakistan Certificates [both conventional and Shariah compliant available], as well as foreign currency deposit schemes of the banks and profit from these investments and disinvestment proceeds can also be credited in the account”. The SBP further provides:

• Transfer and payment to any person within or outside Pakistan is allowed.

• Cash withdrawal is available in either foreign currency or in equivalent Pak Rupees.

• Funds in the accounts can be repatriated abroad anytime without any prior approval from SBP or the bank in which account is opened.

Further details are provided in FE Circular No. 02 of 2020, issued by the SBP on August 5, 2020.

The following tax benefits have been extended to a non-resident Pakistani individual, holding Pakistan Origin Card (POC) or National ID Card for Overseas Pakistanis (NICOP) or Computerized National ID Card (CNIC) under the Tax Laws (Amendment) Ordinance, 2021, issued on February 11, 2021, in the Income Tax Ordinance, 2001 [hereinafter “ITO, 2001”], who open above mentioned accounts as per scheme of SBP:

• They will not be required to file return or register with FBR as per newly inserted clause (114A), Part IV, Second Schedule to ITO 2001.

• The banking company will withhold 10% tax from capital gain arising on the disposal of debt instruments and government securities and certificates (including Shariah complaint variant) under section 152(1DA)—it may be 152(IDD) when gazette notification is published. Interestingly, parallel provision for resident individuals allowed to open accounts having declared assets outside Pakistan with FBR, have been included though for them it is Pakistan-source income! If it is intentional, then why are others having foreign currency accounts disallowed to open account on the same footing. If it is by mistake, it confirms incompetence that is hallmark of FBR, especially when acting as de facto legislature. Presidential Ordinance must have been approved by Cabinet, after vetting by Law Ministry as per Mustafa Impex case [(2016) 114 TAX 241 (S.C. Pakistan)]. It shows they collectively cannot pick out a mistake that is apparent from mere plain language of the provision.

• Tax withheld under section 152(1DA) shall be final discharge of liability under section 152(1E). Here, the blunder in drafting is a classic example of ineptitude of three institutions, FBR, SBP and Ministry of Law that vetted it before going to Cabinet and finally signed by the President of Pakistan. Section 152(1E) after amendment reads: “The tax deductible under sub-sections (1D) and (1DA) shall be a final tax on the income of the non-resident company arising out of such capital gain. The draftsman in FBR (must be Grade 21 officer and ultimate responsibility lies with Chairman in Grade 22) and all others, even those releasing commentaries on it, before seeing the official gazette copy, claiming to be “real experts” and all-knowing ultimate authority on tax laws of Pakistan, failed to point out that the word “individual” is missing in amended section 152(1E) of ITO, 2001, where benefit is restricted to “non-resident company”! The intention clearly was otherwise than to extend it to individual NRPs!

(To be continued tomorrow)

(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS))

Copyright Business Recorder, 2021