General These notes provide comments on the changes proposed in the Finance Bill 2023 by the Finance Minister. This amends the Finance Bill earlier presented in the Assembly. The Finance Bill 2023, after incorporating these amendments, becomes the Finance Act 2023.
The notes in the following paragraphs are restricted to comments on the amendments in the Income Tax Ordinance, 2001.
We will be issuing comprehensive comments on the overall Finance Act 2023 very shortly after the publication of the gazette.
Windfall Income Tax
In the Finance Bill 2023 an additional tax was proposed for income or profit on account of unexpected income.
This new section 99D has been redrafted and a better version has been introduced in the changes proposed. Now this tax will be charged on ‘Windfall income or profit’ which is a generally acceptable term in the international tax spheres.
The word “windfall” originally referred to fruit blown down from a tree by the wind, which could be easily collected from the ground. Its use evolved to describe any kind of economic godsend or good fortune, and the term “windfall profit” is often used in a manner that implies undeserved good fortune.
What is a windfall tax?
A tax on excessive profits. A windfall tax is an additional tax applied to big companies registering sudden and significant increases in their profits due to external circumstances or events such as a war or a pandemic.
It is only applied to companies with excessive profits, above a normal level. This is calculated by comparing profits in a previous period or based on an estimation of real costs.
History & examples:
Windfall taxes are not new. In the World War I and World War II, for example, windfall taxes brought in significant revenue to help governments rebuild and stop wartime profiteering. In 1981, the UK Conservative Party under Margaret Thatcher imposed an extraordinary levy on the windfall profits of banks that were making large margins on their loans due to very high-interest rates. The pandemic and now the inflation crisis have revived the idea of taxing excess profit.
Economists like Nobel laureate Joseph Stiglitz and international organisations like the United Nations have called for a windfall tax. Across the world, governments are taking steps to implement windfall taxes in some sectors.
In the UK, Prime Minister Rishi Sunak introduced the 25% Energy Profits Levy in May 2022 when he was chancellor. In the 2022 Autumn Statement, the current Chancellor, Jeremy Hunt, said the levy would increase to 35% from January 2023, and run until March 2028. India has also levied Windfall profit tax on energy businesses; however, the same have been levied through indirect taxes.
It is considered that a Windfall profit tax is always retrospective. This means that it is the tax on profits which have been earned. This retrospectivity has a meaning. It is for the event that has already taken place during the year. If that event does not continue in the future period then though in the law the windfall tax is not applicable.
Nevertheless, in Pakistan, this law has been incorrectly understood. Under the amended position a Windfall profit tax (called additional tax) up to 50% of Windfall profit can be levied with respect to any three (3) year preceding Tax Year 2023. In the original bill this term was five (5) years. In our view, this additional tax can only be levied for Tax Year 2023 and for any future year if the conditions for windfall persist. There is no legal validity for a Windfall Tax on any year prior to Tax Year 2023. The profits earned before the introduction of the Finance Act, 2023 cannot be subjected to Windfall Tax. It is therefore desired that the internationally accepted practice, which requires a certain procedure, be adopted.
A new clause has been inserted in the proposed section which provides that notification for the levy of Windfall Tax shall be presented to the National Assembly. This presumes that parliamentary sanction will be sought for the charge of this tax. This provision has been inserted to safeguard the challenge to this tax on the basis that the same is not included in the charging provisions.
Notwithstanding this aspect, the legal validity of this tax is not correct for any charge of Windfall Tax on any income prior to Tax Year 2023.
Increase in the tax rates for non-company cases
General rate of taxes for non-company cases, both salaried and others, has been increased and schedules for that purpose have been amended.
Review of the aforesaid amendment reveals that there is no increase in the maximum tax rate of 35% both for salaried and non-salaried cases.
However, an increase of 2.5% has been made with respect to taxable income gradually exceeding Rs 600,000 but not exceeding Rs 3,000,000 in non-salary cases and Rs 2,400,000 to Rs 12,000,000 for salary class.
There may be rationale for the manner adopted however there was no need for this change.
Impact of Revised Tax Slabs on Salary Taxation
Finance Act 2023-24
Monthly Annual Tax FY 2023 Tax FY 2024 Difference Monthly
Income Income Incremental
50.000 600.000 - - - -
100.000 1,200,000 15.000 15.000 - -
150,000 1,800,000 90,000 90.000 - -
200,000 2,400,000 165.000 165,000 - -
225.000 2.700.000 225.000 232.500 7.500 625
250.000 3.000.000 285.000 300.000 15.000 1.250
300.000 3.600.000 405.000 435.000 30.000 2.500
325,000 3.900,000 480,000 517,500 37,500 3,125
400.000 4.800.000 705,000 765.000 60.000 5,000
500,000 6,000.000 1.005.000 1.095.000 90,000 7.500
525.000 6.300.000 1.102.500 1.200.000 97.500 S.125
600,000 7.200.000 1.395.000 1.515.000 120.000 10.000
700,000 8,400,000 1,785,000 1,935.000 150,000 12,500
800.000 9.600.000 2.175.000 2.355.000 180.000 15.000
1.000.000 12.000.000 2.955.000 3.195.000 240.000 20.000
1.100.000 13.200.000 3,375,000 3,615.000 240,000 20,000
1.200.000 14.400.000 3.795,000 4,035.000 240.000 20,000
Tax on Deemed Income
This tax which was levied in the Finance Act, 2022 is on the value of immovable capital assets especially plot and houses. This is a sort of pseudo wealth tax on the immovable property at a deemed valuation. This tax has been challenged before higher courts and the ultimate decision is pending before the Supreme Court.
Two major changes have been proposed in the amendments proposed. Firstly, the exemption from this tax as prescribed under subsection (2) shall be applicable only if the person appears in Active Taxpayers’ List.
Second amendment, which has been placed under Section 236C of the Ordinance whereby a condition has been prescribed that no transfer of immovable property, will be registered unless it is ensured that liability under Section 7E has been discharged. This is a very appropriate prescription.
The second amendment is very important in the sense that a lot of properties are held by the persons who do not appear in the active taxpayers list or are eligible to exemptions provided in the law.
The condition that there will be no transfer without discharging this liability is a good step. It is however strongly suggested that this provision be used to broaden the tax base and any person who pays tax under this section be necessarily required to file the income tax return.
Procedures are required to be prescribed to ensure discharge of tax liability under Section 7E of the Ordinance. An automated coordination between the property registration and tax authorities can be designed for this purpose.
Capital on Disposal of Listed Securities
Capital gains on disposal of listed securities are governed by a special system, which is effectively applicable only for the transaction routed through NCCPL, which is also the tax collection agent. These provisions are governed by Section 37A read with Section 100B.
Now it has been provided that only those transactions will qualify under this section (37A), which are effectively settled through NCCPL. If they do not fall under that classification then provisions of Section 37, which provides for a different rate of tax, shall apply.
Another very important change has also been made in the schedule relating to tax on capital gain on listed shares. This is effectively the correction of a mistake in the law as stood before the Finance Bill 2023. The mistake has, however, been partly removed.
As stood before the proposed amendment any capital gain on disposal of listed securities is subject to zero percent tax rate if the holding period is more than five years. Nevertheless, this provision is applicable only for shares acquired on or after July 1, 2022. For any shares acquired before July 1, 2022 the rate of tax was prescribed at 12.5%. In our view, this is a wrong and discriminatory law.
These changes propose a rectifactory amendment in this provision. Now it is proposed that the rate of tax will be zero if the shares are acquired before June 30, 2013.
For the period of acquisition between July 1, 2013 and June 30, 2022 the rate of tax of 12.5% has been retained. This does not make sense. There has to be a reason why the period from July 1, 2013 to June 30, 2022 is discriminated against for the purposes of levy of tax.
The perpetual tax amnesty available under Section 111(4) of the Ordinance, which was limited to a sum of Rs 5 million for remittance from outside Pakistan in a tax year, was proposed to be increased to USD 100,000 has been removed. The amnesty is now available at the old limit of Rs 5 million.
Alternate Dispute Resolution
Reasonable amendments have been introduced in Section 134 of the Ordinance relating to Alternate Dispute Resolution Mechanism (ADR). Whole section has been redrafted.
Since the inception of ADR regime there has been an issue relating to ADR with respect to the condition of withdrawal of taxpayers’ appeal before the appellate forum whilst invoking ADR forum.
This time a new procedure has been prescribed. The condition of withdrawal of appeal by the taxpayer has been removed; however, the ADR order, which will be available before the withdrawal of appeal by the taxpayer, will be applicable or enforceable only when the taxpayer withdraws the appeal.
This is an appropriate step as in almost every case the taxpayers were hesitant to resort to the ADR mechanism if the right of appeal is withdrawn.
It appears that the procedure adopted is too lucrative as all the taxpayers will be inclined to adopt ADR for the reason that they will have two avenues to redress their grievance.
In this situation, it appears that there should be clarity as to the subject whether all the taxpayers who desire for an ADR mechanism will be eligible to refer the matter to ADR. This concern arises on account of the fact that the word used in the section is ‘may’ for the Board to form an ADR. This raises the question whether or not all persons in dispute for amounts above the threshold are entitled to ADR. The words should have been ‘the board shall’.
The membership of ADR has also been changed. Now it will be a three-member committee consisting of a retired High Judge or equivalent, the concerned Chief Commissioner and a member selected by the taxpayer from the approved penal.
It has been prescribed that only the matter where the tax liability is above Rs 100 million will be taken to ADR.
All matters whether they relate to questions of law or facts can be taken to ADR. The law, as prescribed, states that once ADR is formed the demand under the order in appeal will be stayed.
Advance Tax on Construction Business
A new advance tax has been introduced on construction, development and disposal of commercial and residential business. This advance tax will be collected on a Project-to-Project basis.
Advance Tax on Purchase of Immovable Property
Through the Finance Bill a concession was proposed to persons of Pakistani origin from the collection of advance tax on purchase of immovable property. This concession is proposed to be removed. This is not a correct step as such persons are generally not taxable in Pakistan and tax paid is not adjustable against income in Pakistan.
This definition is relevant for non-resident persons taxable in Pakistan. In the proposed bill an incorrect deletion of the word ‘fixed’ was proposed. This has been removed.
Furthermore, a new kind of permanent establishment has been introduced, which relates to ‘virtual business’. For that purpose a definition has been inserted. The definition inserted is technically correct; however, the same has to be in line with the OECD mechanism as most of the tax treaties have adopted that definition with respect to virtual business.
It is further stated that this all encompassing definition may be subject to abuse by the taxation officers. Pakistan, which is in dire need of foreign exchange/investment, should allow virtual businesses to progress without any upfront confrontation with the regulators.
In the definition the words ‘an entity’ after the word ‘personnel’ as introduced in the Finance Bill have been retained. This is not the correct application of law. Permanent Establishment (PE) is always determined for a legal entity. One entity cannot be the PE of another entity.
It appears that this amendment has been intentionally made to overcome the cases where there are instances of an entity’s personnel for another project. It appears to be the intention of this amendment. This is an erroneous perception. The learned Justice Syed Mansoor Ali Shah has settled this matter in the Supreme Court in the case of Snamprogetti.
Exemption for tax on income: Tribal Areas
This exemption was valid up to June 30, 2023. The extension proposed has been removed. Now there is no such exemption.
Copyright Business Recorder, 2023