EXECUTIVE SUMMARY Within third month of passage of Finance Act, 2021, the Government felt the need of introducing amendments in the Tax Laws. These amendments are primarily directed towards broadening of tax base besides providing concessions to certain sectors.
Effect of major amendments are as under:
1) Companies are now allowed to make payment for their expenses of Rs 25,000 or above (under a single account head) only through digital means, from their declared bank account, otherwise such expense will not be deductible for tax purposes. It appears that henceforth existing modes of payments through paper based instruments like cross cheques or pay orders are not acceptable for tax purposes. This amendment is effective forthwith i.e., from September 15, 2021. The Government should consider allowing certain time frame after which such restrictions should be made applicable, with certain incentives for using digital modes of payments instead of altogether not recognising the existing modes of payments through verifiable banking channels.
2) FBR has been empowered to order discontinuation of utility connection and use of mobile phone if a person required to file income tax return has not filed the tax return. Likewise, utility connections will be discontinued for those not registering or integrating their systems with FBR for sales tax purposes, besides enhancing penalties for such persons.
3) Additional advance tax will be collected through electricity bills, ranging from 5% to 35%, from those professionals operating their businesses from residential premises and are not the active taxpayers.
4) NADRA has been allowed to share its records and any information with the Board for broadening of tax base or for carrying out the purposes envisaged under the income tax law. NADRA is also allowed to compute 'indicative income' and 'tax liability' of any person by use of artificial intelligence, mathematical or statistical modelling etc., which shall be communicated by the FBR to the respective person. Such person will be provided an option to either pay such taxes with reprieve of additional taxes or penalties etc or in instalments as may be prescribed by the FBR. A person not opting for such basis of taxation will be subject to normal process of tax assessment.
5) To promote payments through digital modes, retailers integrating their systems with FBR will be allowed to charge lower rate of sales tax of 16%. Besides, certain business to business transaction (to be notified by FBR) will be subject to lower rate of sales tax of 16.9% if payments are made for such transactions through digital mode.
6) Incentives have been provided for the following sectors:
Zero rating of sales tax for fat filled milk sold in retail packing under a brand name or trademark.
Sales tax exemption on import of credit / debit cards terminals and retailer cash register.
Import of electric vehicle in CBU condition will be subject to 5% sales tax.
Reduced rate of withholding tax and minimum tax on turnover for distributors, retailers etc. of steel sector at 0.25% besides reducing sales tax rate to 14% for import of re-meltable scrap if imported by steel melters.
Minimum tax on turnover will not apply to mobile phone manufacturers engaged in the local manufacturing of mobile phone devices.
Payment of business expenditures through digital modes
Companies are now required to make all payments for their expenses above Rs 25,000, except for salary and some other specified payments through digital means. The existing paper- based modes of payments being cross cheques, pay orders etc are no longer acceptable for tax purposes.
Brief background / overview of the relevant provision is as under:
In 1998, provisions were introduced for first time whereby certain business expenditures incurred by a taxpayer other than through permissible banking channels were not allowed for tax purposes. The provision has undergone various amendments from time to time. As per latest position, the same was applicable on business expenditure relating to an account head exceeding Rs 250,000 and the permissible modes of payment are as under:
a) Crossed cheque drawn on a bank;
b) Crossed bank draft;
c) Crossed pay order;
d) Any other crossed banking instrument showing transfer of amount from the business bank account of the taxpayer;
e) Online transfer of payment from the business account of the payer to the business account of payee; and
f) Payments through credit card.
The last two categories are subject to the condition that such transactions are verifiable from the bank statements of the respective payer and payee.
The above provisions are, however, not applicable on expenditure not exceeding Rs 25,000, payments on account of utilities, freight, travel fare, postage and payment of taxes, duties and other similar statutory obligations.
Furthermore, under clause (12) of Part IV of the Second Schedule, the above requirements are not applicable where agriculture produce is purchased directly from the grower of such produce subject to a provision of a certificate by the grower in prescribed format.
The Amendment Ordinance has made certain amendments whereby the above provisions will now only apply on taxpayers not being a company. For a taxpayer being a company, a new provision is added, whereby the only permissible mode of payment for an admissible business expenditure has been kept as 'digital means from business bank account of the taxpayer notified to the Commissioner under section 114A'.
The provisions of section 114A were added by the Finance Act, 2021 whereby the taxpayers are required to declare to the Commissioner the bank account utilised by the taxpayer for business transactions. All exceptions with regard to expenditure not exceeding Rs 25,000, payments on account of utilities, freight, travel fare, postage and payment of taxes, duties and other similar statutory obligations will apply on companies as well; however, no corresponding amendment has been made in clause (12) of Part IV of the Second Schedule with regard to purchase of agriculture produce.
There has been no definition of 'digital means' within the tax laws; hence, there is a need to have clarity on its meaning and scope. In the absence of any definition, the same could be construed to exclude all paper based traditional modes of payments, such as crossed cheques, pay orders, bank drafts, etc. Further, the provision has become applicable immediately with effect from the date of promulgation of the Ordinance (i.e., September 15, 2021) whereas certain transitional period may be allowed to the taxpayers for implementation of these provisions within their systems.
Salary payments through digital mode
Currently, any salary payment exceeding Rs 25,000 per month is required to be made through a crossed cheque or direct transfer of funds to the employee's bank account so as to qualify as admissible business expenditure. Henceforth, salary payments through digital modes will also qualify as admissible expense.
Powers to enforce filing of returns by disabling mobile sims and utility connections
Through a newly inserted section 114B, the FBR is empowered to issue general order in respect of persons who are not appearing on Active Taxpayers List but are liable to file return. The order may entail any or all of the following consequences: -
a) Disabling mobile phones or mobile phone sims;
b) Discontinuance of electricity connection; and
c) Discontinuance of gas connection.
The above action will, however, only be taken after following a due procedure specified in law and the connections will be restored on compliance by the respective taxpayer.
Like income tax, amendment has also been made under the sales tax law for disconnecting utility connections for those not registering or integrating their systems with FBR for sales tax purposes.
Broadening of tax base through NADRA
Another provision section 175B is added whereby National Database and Registration Authority (NADRA) has been allowed to share its records and any information with the Board for broadening of tax base or carrying out any other purpose.
Besides specifying the extent of information which may be shared by NADRA and its use by the tax authorities, NADRA is also allowed to compute 'indicative income' and 'tax liability' of any person by use of artificial intelligence, mathematical or statistical modelling or any other modern device or calculation method which shall be communicated by the FBR to the respective person having an option to pay the determined demand on such terms and conditions as may be prescribed by the FBR.
The provisions relating to appeal and other remedies to be available for the aggrieved person needs to be introduced particularly where a case involves misuse of CNIC number without a person's knowledge.
Additional Advance tax from Electricity Bills of professionals not appearing on Active Taxpayers List (ATL)
An additional advance tax will be collected from professionals not appearing on ATL and operating from residential premises having domestic electricity connections from electricity distribution companies. The professionals include accountants, lawyers, doctors, dentists, health professionals, engineers, architects, IT professionals, tutors, trainers and other persons engaged in provision of services. The rate of additional advance tax in such cases is prescribed at 5% (for electricity bill exceeding Rs 10,000) to 35% (for bill amount exceeding
Rs 75,000), depending upon the amount of electricity bill. Practical modalities for implementing this new provision in an effective manner may need to be further discussed.
Rate of tax for Distributors & retailers of Steel Sector
The facility of reduced rate of withholding tax and minimum tax on turnover at 0.25% in case of distributors & retailers, etc. appearing on ATL of income tax and sales tac currently available to certain sectors has also now been extended to Steel sector.
Minimum tax waiver for Mobile phone manufacturers
Minimum tax on turnover under section 113 will not apply to mobile phone manufacturers engaged in the local manufacturing of mobile phone devices.
Immunity for incoming foreign remittances
Immunity from explanation for sources is available for any amount of foreign exchange remitted from outside Pakistan through normal banking channels not exceeding Rs 5 million in a tax year that is encashed into local Rupees by a Scheduled bank and a certificate from such bank is produced by the taxpayer.
The tax authorities were interpreting these provisions to deny the benefit in cases where remittances were made through alternate channels otherwise permitted by the State Bank of Pakistan. Various appeals were pending at different levels on this issue. Besides representations were also made to FTO, in pursuance of which certain directions were issued also endorsed by the office of President of Pakistan. In furtherance thereof, FBR issued a Circular in August 2021 whereby on receipt of clarification from the SBP, FBR endorsed a lenient view for accepting remittance through alternate channels.
In order to provide a legal sanctity to the above, an Explanation has been added through the Amendment Ordinance to the relevant provision of section 111, whereby it is clarified that the remittance through money service bureaus, exchange companies, and money transfer operators such as Western Union, Money Gram and Ria Finance or other like entities shall qualify as foreign remittance for the purpose of aforesaid immunity. Being an explanation, the amendment seems to have a retrospective effect.
Banking companies - taxable income attributable to investment in government securities
The Finance Act, 2021 introduced enhanced tax for taxable income of banking companies attributable to investment in government securities for which there were certain thresholds for assets to deposit ratio. The word 'assets' is now being amended to be replaced by the word 'gross advances', which was perhaps the original intention.
Non- profit organisations
At present donations paid to the organisations listed in the Thirteenth Schedule to the Ordinance are eligible for tax credit, in addition to those which have obtained approval under section 2(36) or are education or hospitals or relief funds etc established or run by Government.
are certain other organisations, which are non-profit and listed in Clause (66) contained in Part I of the Second Schedule (in view of which their entire income is exempt from tax) . Some of these organisations are also listed in the Thirteenth Schedule (as a result of which donations paid to these organisations are eligible for tax credit) However there are certain organisations which are listed in Clause (66) but are not part of Thirteenth Schedule [as a result of which donations paid to them are not automatically eligible for tax credit unless such organisations obtain approval under section 2(36)].
Through the Amendment Ordinance, an omnibus clause has been added whereby all the above organisations listed in clause (66) shall be also considered as part of and listed in the Thirteenth Schedule.
Besides the above , Pakistan Mortgage Refinance Company Limited (PMRC) has been added in clause (66) whereby it has been exempted from income tax. PMRC was also exempt from these taxes prior to Tax Laws (Second) Amendment Ordinance promulgated on March 22, 2021. The amendment has, therefore, restored the tax exempt status of PMRC.
SALES TAX Online marketplace
The Finance Act, 2021 introduced a withholding tax regime for operators of online marketplace whereby they were made liable to withhold sales tax of third parties who trade goods through their platform. The said withholding is applicable at the rate of 2 percent for those third parties not appearing on the Active Taxpayers List. Through SRO No. 984 dated August 4, 2021; the withholding regime has been made effective from September 1, 2021.
The above-referred amendments made through the Finance Act, 2021 were introduced in the Eleventh Schedule, without making enabling amendments in section 3(7). Due to the absence of corresponding amendment in relevant provisions, there was an anomaly which has now been rectified through the Tax Laws (Third Amendment) Ordinance, 2021.
Business integration by retailers with FBR
The FBR has been empowered to require any person or classes of person to integrate their invoice issuing system machines with the FBR's computerised system for real time reporting of sales in the prescribed manner.
A specific penalty provision has been introduced for those persons who are required to integrate their invoice issuing system with FBR's system but either fail to register for sales tax or if registered, fail to integrate their system. Such persons will be subject to penalty as under:
=============================================== In case of Penalty =============================================== First default Rs 500,000 Second default after 15 days of an order for first default Rs 1,000,000 Third default after 15 days of an order for Second default Rs 2,000,000 Fourth default after 15 days of an order for third default Rs 3,000,000 ===============================================
In case of failure to integrate system within 15 days of order for the fourth default, the business premises of the taxpayer shall be sealed. Furthermore, if the taxpayer is able to integrate his system within 15 days of first default, the amount of penalty relating thereto can be waived by the Commissioner.
A reduced rate of 16% is being prescribed for supplies made from retail outlets integrated with the FBR's computerised System for real time reporting of sales, if the payment is made through digital mode. This amendment is not applicable on supplies of certain textile and leather items which are already subject to 10% sales tax subject to certain conditions with regard to value addition threshold.
Discontinuance of gas and electricity connection
Following the amendment made in income tax law, FBR has also been empowered under the sales tax law, to pass an order for directing the gas and electricity distribution companies for discontinuing the gas and electricity connections of any person falling within the following categories:-
a) Failure to obtain sales tax registration;
b) Notified Tier-1 retailers who are registered but failed to integrate their system with FBR.
The above action will be taken through a general or special order to be passed by the FBR and upon registration or integration, as the case may be, the connections will be restored.
Zero rating of fat filled milk
The Finance Act, 2021 included fat filled milk (excluding that sold in retail packing under a brand name or trademark) within the list of items subjected to zero rating under the Fifth Schedule. Furthermore, a reduced rate of 10% was prescribed for sale of fat filled milk sold in retail packing under a brand name or trademark.
Through an amendment, this zero rating facility is now also extended to fat filled milk sold in retail packing under a brand name or trade mark, which was earlier being taxed at reduced rate of 10%.
1) The exemption from sales tax on imports of edible fruits whether fresh, frozen or otherwise preserved but excluding those bottled or canned is now also being extended to the fruits imported from Afghanistan.
2) The exemption from levy of sales tax on import of auto disable syringes and certain specified raw materials used for their manufacturing expired on June 30, 2021. Such exemption is now being extended upto December 31, 2021. Furthermore, exemption is being allowed on certain specified raw materials imported by registered manufacturers of auto disabled syringes with quota determined by IOCO and subject to NOC from Ministry of National Health Services Regulation and Coordination.
3) The Finance Act, 2021 exempted the import of POS machines for installation on retail outlets as are integrated with the FBR's system for real-time reporting of sales. Such exemption is now also being extended to import of credit / debit card terminals and retailer cash registers.
Reduced rate of sales tax
1) A reduced rate of 14% is being specified for import of re-meltable scrap if imported by steel melters.
2) Import of electric vehicle in CBU condition will be subject to 5% sales tax.
3) A special rate of 16.9% will apply on business to business transactions to be specified by the FBR through a notification subject to the condition that payment is made through digital mode.
CUSTOMS DUTY Right of appeal against the order of Director General Valuation
The Finance Act, 2021 substituted the provisions of section 25D of the Customs Act to empower the Director General Valuation to rescind or determine the value of any goods imported or exported. The appeal against such order could have been filed before the Appellate Tribunal.
An amendment is now made whereby the aggrieved person can file an appeal against such order before the Member Customs (Policy) within thirty days of communication of the order. The order of Member can be further contested through filing of a Reference before the High Court.
Checking of goods declaration by the Customs
The reassessment of goods to duty, taxes and other charges levied thereon besides any other actions is possible under section 80 of the Act, if during the checking of goods declaration, it is found that any statement in such declaration or document or any information so furnished is not correct. An amendment is now made in this provision to have an overriding effect over other provisions of the Act and also to extend such powers to a period of three years within the clearance of goods for home consumption.
Provisional determination of liability
For provisional determination of liability in certain circumstances, the importer is inter alia required to furnish bank guarantee for the additional amount of duty determined. This requirement is now being replaced by corporate guarantee. Furthermore, no provisional determination of value shall be allowed in those cases where valuation ruling is in field, irrespective of pendency of any review or revision against such valuation.
Copyright Business Recorder, 2021