After passage of IT (2nd Amend) Bill: Actual impact of tax exemptions withdrawal won’t be over Rs30-40bn: experts

ISLAMABAD: After the passage of ‘The Income Tax (Second Amendment) Bill, 2021’ income tax exemptions available to Modaraba companies, Real Estate Investment Trusts (REITs), Pakistan Mortgage Refinance Company, Venture Capital Funds and IT services and IT enabled services will be withdrawn.

However, the IT services and IT enabled services would be allowed to avail 100 percent tax credit at the time of filing of income tax returns.

Sources told Business Recorder that the corporate income tax exemptions to the tune of Rs70-140 billion would be withdrawn. But according to the independent experts, the actual impact of withdrawal of these exemptions would not be more than Rs30-40 billion.

One of the major facilitative measures to be introduced through the Income Tax (Second Amendment) Bill, 2021 is that the government will abolish 1.5 percent turnover tax or minimum tax applicable on the exempt entities. This would enable many sectors to avail the tax credits in their income tax returns.

Another big relief being provided through the Income Tax (Second Amendment) Bill, 2021 is reduction in the turnover tax rate from 1.5 percent to 0.25 percent to the dealers, sub-dealers, wholesalers and retailers of the locally manufactured mobile phones.

The Federal Board of Revenue (FBR) will give 100 percent tax credit to the “IT Services” include software development, software maintenance, system integration, web design, web development, web hosting, and network design, and “IT enabled services” include inbound or outbound call centres, medical transcription, remote monitoring, graphics design, accounting services, HR services, telemedicine centers, data entry operations, locally produced television programs and insurance claims processing.

According to sources, the government has made 78 changes in the Income Tax Ordinance 2001 regarding exemptions and concessions.

Out of 78 changes in the exemption schedule, 24 withdrawal of exemptions would have significant revenue impact. The withdrawal of 10-12 income tax exemptions would have a nominal revenue impact.

A total of 41 exemptions to be withdrawn through the Income Tax (Second) Amendment Bill 2021 would have zero or very negligible revenue impact.

Out of 78 exemptions to be withdrawn, there are around 37 income exemptions which have been re-written for simplification of tax laws.

Around 5-6 those exemptions have been withdrawn where beneficiaries have stopped taking exemption benefits under the Income Tax Ordinance 2001.

There are 9-10 time-bound exemptions which have been expired.

Through the bill, the FBR has also introduced changes pertaining to the exemptions available to the non-profit organizations.

Sources said that with the bill, income tax exemptions available to Modaraba Companies will be withdrawn. This clause would be deleted from the Second Schedule of the Income Tax Ordinance 2001: Any income, not being income from 10 [manufacturing or] trading activity, of a Modaraba registered under the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980, for any assessment year commencing on or after the first day of July, 1999.

Sources said that the income tax exemption available to the existing Independent Power Producers (IPPs) would continue. The income tax exemption would also be available to those IPPs which would sign letter of intent (LOI) with the government of Pakistan by June 30, 2021.

Similarly, the government would also grant income tax exemption to those refineries which would sign agreements with the government for up-gradation by December 31, 2021.

Source said that the exemption would be withdrawn from the venture capital companies and venture capital funds and private equity funds.

Under the law, exemption is available to the profits and gains derived between the first day of July 2000 and the thirtieth day of June 3, 2024 both days inclusive, by a venture capital company and venture capital fund registered under Venture Capital Companies and Funds Management Rules, 2000 and a Private Equity and Venture Capital Fund.

In the bill, it has also been proposed to withdraw exemption available to the Pakistan Mortgage Refinance Company. Under the law, exemption is available to any gain by a person on transfer of a capital asset, being a bond issued by Pakistan Mortgage Refinance Company to refinance the residential housing mortgage market, during the period from July 1, 2018 till June 30, 2023.

The government may withdraw exemption available to the newly established industrial undertakings under section 65D of the Income Tax Ordinance, 2001.

Copyright Business Recorder, 2021