BUDGET BRIEFING 2015: Comments on Finance Bill 2015
- Excess reserves of public company to suffer tax
1. Excess reserves of public company to suffer tax
Section 5(A) It may be recalled that excess reserves of a public company were earlier taxed vide introduction of sub section (9A) of Section 12 of the Repealed Ordinance by the Finance Act, 1999. The said provision remained applicable till 30 June 2002 but was not made part of the Ordinance, effective from 01 July 2002. The Bill now seeks to reintroduce taxation of excess reserves by proposing insertion of Section 5A in the Ordinance.
By virtue of the proposed amendment, tax shall be imposed on a public company that derives profits for a tax year but does not distribute cash dividends within six months of the end of the said tax year or distribute dividends to such an extent that its reserves are in excess of hundred percent of its paid-up capital.
By implication therefore, it would mean that a loss making company in any income year shall not be exposed to this additional imposition even if its reserves exceed the stipulated limit of hundred percent.
Tax shall be charged at the rate of ten percent of so much of the reserves as exceed hundred percent of the company's paid-up capital. The Bill proposes a proviso to subsection (1) of Section 5A whereby for tax year 2015, cash dividends may be distributed before the due date for filing of the return for tax year 2015. Although if enacted, the proposed section would be effective from the tax year 2016, it appears from the proviso that retrospective effect for tax year 2015 may also be envisaged.
Subsection (3) of the proposed Section 5A defines the term "reserves" which includes amounts set-aside out of revenue or other surpluses excluding capital reserves, share premium reserves and reserves required to be created under any law, rules or regulations.
This section shall not apply to a public company being a scheduled bank, modaraba or a public company in which fifty percent or more shares are held by the Government.
It should be noted that the proposed section aims to levy a charge on income which has already been subject to corporate tax as part of the company's profit for the year. Hence the proposed section, in effect, creates a double tax on the company's income; first on the company's profits through the provision of normal taxation and then again as part of its reserves. Furthermore, it should be observed that on account of the manner of drafting of the proposed section, there may be multiple tax charges on the same reserves which have not been paid out in subsequent years. This arises because the proposed section does not charge tax on the additional reserves arising during the year but instead levies a charge on the entire amount in excess of hundred percent of paid up capital.
The proposed insertion of Section 5A in the Ordinance would tend to slow down growth of corporate businesses as the profits instead of being reinvested in the business would be distributed among the shareholders due to imposition of the suggested tax on excess reserves. It is perhaps for this reason that the said provision when originally introduced in the repealed Ordinance was not included in the Ordinance.
2. Super tax for rehabilitation of temporary displaced persons
Section 4B A one-time super tax has been proposed to be levied on all persons for the tax year 2015 invariably on all types of income whether taxable under the normal law or under the Final Tax Regime (FTR). To remove any sort of ambiguity, it has been stated that the super-tax will apply to income from all sources and on all persons including income of insurance companies, oil and gas and mineral companies, banking companies and on capital gains of listed securities.
Corresponding amendments have also been proposed in the Fourth, Fifth, Seventh and Eight Schedules to the Ordinance to provide for applicability of section 4B to incomes falling in the respective Schedules.
For charging super-tax on such persons who are subjected to tax under FTR, the concept of imputable income has been reintroduced which has been defined through insertion of Clause (28A) in section 2 of the Ordinance. The super tax is proposed to be charged as follows -
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Banking company 4% of income
Person other than a banking
company having income equal
to or exceeding Rs 500 million 3% of income
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The super tax is required to be paid at the time of filing the return of income and in case it is not paid, the Commissioner is empowered to collect the same by passing an order in writing.
3. Capital gain on disposal of securities
Section 37A, Fourth Schedule Presently gain on disposal of securities is taxable where the security is held for a period less than 2 years.
The Bill now seeks to tax capital gain on securities that are held for a period less than 4 years. Rates of tax based on the holding period of securities are-
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Tax year
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Holding period 2015 2016
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Less than 12 months 12.5% 15%
12 months or more but less than 24 months 10% 12.5%
24 months or more but less than 4 years 0% 7.5%
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Corresponding amendments have also been made in the Fourth Schedule to the Ordinance to amend the capital gain tax rates in line with the above.
The Bill further seeks to provide that if a company holds a debt security and derives any capital gain on its disposal, such gain shall be chargeable to tax at the applicable corporate tax rate.
The Bill also proposes that a mutual fund or a collective investment scheme or a REIT scheme would be required to deduct capital gain tax on redemption of securities in the following manner -
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Category Filer Non-filer
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Individuals and AOP 10% 17.5%
Company 10% for stock funds 25%
25% for others
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It is further provided that where dividend receipts of a stock are less than capital gains, the rate of tax deduction would be 12.5%.
4. Exemptions and tax concessions - Second Schedule
Sections 53 and 159 Presently the Federal Government is empowered to amend the Second Schedule to the Ordinance in order to provide or takeaway exemptions and tax concessions or to provide conditions in respect thereof. Such powers are exercised by the Board under delegated authority of the Federal Government which at times is criticized by certain quarters on the touchstone of discretion exercised by the Federal Government.
The Bill proposes to takeaway the discretion available to the Federal Government and thus relocate the authority of granting exemptions or concessions to the legislature ie the Parliament.
However the Federal Government, subject to approval of the ECC of the Cabinet, can still amend the Second Schedule if the following circumstances exist -
-- national security issues
-- natural disaster
-- national food security in emergency situations
-- protection of national economic interests in situations owing to abnormal fluctuation in international commodity prices
-- removal of anomalies in taxes
-- development of backward areas
-- implementation of bilateral/ multilateral agreements
Similarly, the Bill proposes to withdraw the powers of the Board available under section 159 to amend the rates of withholding tax, exempt persons, classes of persons, goods or classes of goods form withholding tax under the Ordinance.
5. Profit on debt now taxable as a separate block for all taxpayers, including companies
Section 7B and Section 151 As per Section 151 of the Ordinance, profit/yield on certain categories of debt is subject to withholding tax at the gross amount, after deduction of zakat. The tax deducted under this section is generally construed as a final discharge of tax liability for all categories of taxpayers, other than companies.
The Bill proposes to introduce a separate scheme of taxation in respect of profit on debt derived by all categories of taxpayers, including corporate taxpayers. Such profit on debt, is to be taxed through the newly proposed Section 7B at the following rates:
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S.No Profit on Debt Rate of Tax
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(1) (2) (3)
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1 Where profit on debt 10%
does not exceed Rs 25,000,000
2 Where profit on debt 2,500,000 + 12.5%
exceeds Rs 25,000,000 of the amount exceeding
but does not exceed Rs 50,000,000 Rs 25,000,000
3 Where profit on debt exceeds Rs 5,625,000 + 15%
Rs 50,000,000 of the amount exceeding
Rs 50,000,000
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Consequently, it would appear that the tax deducted under Section 151 will be adjustable against the tax determined pursuant to the proposed Section 7B.
The amendments proposed by the Bill in respect of profit on debt would be welcomed by the corporate sector, which is currently taxable at the applicable corporate tax rates. However, under the proposed amendments, companies would no longer be able to allocate expenses against its interest income.
Amendments rationalizing the proposed insertion of Section 7B have also been suggested in the provisions of Section 151. However, in the proposed amendments to the provisions of Section 151 reference has inadvertently been made to Section 5A (tax on excess reserves) instead of Section 7B.
6. Commissioner empowered to issue reduced/nil withholding tax certificate to a permanent establishment of a non-resident
Sub-section (4A) of Section 152 It would be recalled that previously, payments for goods and services made to a Permanent Establishment (PE) of a non-resident person were captured within the ambit of Section 153. The provisions of Section 153(4) permit the Commissioner to issue a nil or reduced withholding certificate in certain specific circumstances.
Pursuant to the amendments made by the Finance Act, 2012, the withholding requirements on payments made to a PE of a non-resident person were transferred to Section 152. However, no corresponding powers were given to the Commissioner in respect of providing a nil or reduced withholding certificate in respect of such payments. Therefore, presently, PEs of non-resident persons, which have already paid sufficient taxes or have significant brought forward losses, cannot obtain a nil or reduced withholding tax certificate since the same cannot be issued in such circumstances under Section 159, and no other powers exist for the provision of such a certificate. This has resulted in significant financial burdens for such taxpayer.
In order to address the above issues, the Bill now proposes to introduce sub section (4A) in Section 152 which confers powers to the Commissioner to provide nil or reduced withholding tax certificates in appropriate circumstances to PEs of non-resident persons.
7. Tax credit on industrial investments
Section 65 Sections 65B, 65D and 65E provide tax credit for industrial investment against the tax payable by an industrial undertaking including on account of minimum tax and final tax payable under the Ordinance. The claim of tax credits against the tax liability under FTR was disputed by the tax authorities on the premise that section 169 provides that no tax credits are available against taxes impose under FTR. However, subsequently the FBR issued a clarification that the tax credit being specific is allowable against FTR.
In order to remove any ambiguity, a new sub section (6) is proposed to be inserted in section 65 that provides general guidance with regard to claim of tax credits. The proposed amendment seeks to provide that in case of tax credits under section 65B, 65D and 65E, the restriction of non-allowance of tax credit under section 169 that treats the tax withheld under various provisions of the Ordinance as a final tax will not be applicable.
The Bill also seeks to provide that the condition for charge of minimum tax under Clause (d) of sub section (1) of section 113 ie due to applicability of tax credits to a taxpayer shall not apply, in case of tax credits for industrial investment availed under the above referred sections. Accordingly, such taxpayer will not be liable to pay minimum tax under section 113 of the Ordinance.
8. Tax credit for enlistment
Section 65C Presently, a company is allowed a tax credit equal to 15% of the tax payable for the tax year in which the company is enlisted on a registered stock exchange in Pakistan.
The Bill proposes to enhanced the tax credit from 15% to 20% of the tax payable.
9. Tax credit for industrial undertakings
Section 65E The existing provisions allow a tax credit to a company setup in Pakistan before 1 July 2011 which invests any amount with 100% new equity raised through issuance of new shares, in the purchase and installation of plant and machinery for an industrial undertaking including corporate dairy farming for the purpose of expansion of the existing plant and machinery installed or undertaking a new project. This is however subject to certain conditions to be met by the company.
The tax credit admissible against the tax payable of the tax year in which the plant or machinery is installed and for the subsequent 4 years.
The Bill proposes to allow the tax credit for a period of 5 years beginning from the date of setting up on commencement of commercial production from the new plant or expansion project whichever is later.
10. Advance payment of tax
Section 147 Presently a company or an AOP is required to pay advance tax in 4 equal instalments on a quarterly basis. Where they estimate that the tax payable for the relevant tax year is likely to be more than the amount based on latest assessed income and tax liability they can make an estimate at any time before the last instalment is due and pay the advance tax accordingly.
The Bill now seeks to require the above taxpayers to estimate the tax payable for the relevant tax year at any time before the second instalment is due ie even before completion of half year after such estimation. The proposed amendment requires payment of 50% of the estimated advance tax by the due date of the second quarter of the relevant tax year . The remaining 50% is required to be paid in the 3rd and 4th instalments.
11. Tax credit for employment generation by manufacturers
Section 64B A new tax credit is proposed to be introduced whereby a taxpayer being a company set up a new manufacturing unit between 1 July 2015 to 30 June 2018. The tax credit will be available for a period of 10 years at the rate of 1% for every 50 employees registered with EOBI and Employee Social Security Institution of the provincial government during a tax year subject to the following conditions -
-- A new company is incorporated in Pakistan and manufacturing unit is setup between 1 July 2015 and 30 June 2018
-- Employs more than 50 employees in a tax year and get them registered with EOBI and Employee Social Security Institution of the provincial government
-- The manufacturing unit is not established by the splitting up or reconstruction of an undertaking already in existence or by transfer of machinery or plant from an existing undertaking
It is further provided that the manufacturing unit shall be treated to have been setup on the date on which the manufacturing unit is ready to go into either trial or commercial production.
12. Tax credit for investment in shares and life insurance premium paid
Section 62 This section provides for tax credit to encourage investment in shares and life insurance by a resident person other than a company. A tax credit in the ratio of a persons assessed tax to the person's taxable income in a tax year is presently allowed upto lessor of the cost of acquiring the shares/ premium paid or
20% of the person's taxable income for the year or Rs 1 million.
The Bill now seeks to enhance the limit of Rs 1 million to Rs 1.5 million.
13. Deductible allowance for profit on debt
Section 64A Presently a person is entitled to a tax credit in respect of any profit or share in rent/ share in appreciation for value of house which is paid on a loan given by a bank or NBFI or by government or local government or a public company listed on the stock exchange. The tax credit is available if the loan is utilized for construction of a new house or acquisition of house. The tax credit is presently available at the average rate of tax of the person on the lessor of the total amount paid or 50% of the person's taxable income for the year or Rs 750,000.
The Bill seeks to omit section 64 and insert a new section 64A in the same Part X of Chapter III which deals with tax credits. Although this section caters to almost the same benefit on the amount paid for the purpose of construction a new house or acquisition of a house, however, instead of allowing a tax credit, the proposed section seeks to allow a deductible allowance to the individual. All other aspects and threshold for eligibility remain the same as discussed above except that the ceiling of Rs 750,000 is proposed to be enhanced to Rs 1 million. It needs to be appreciated that effectively, the benefit to the taxpayer is enhanced as per the proposed amendment since section 64 which is now proposed to be omitted provided for a tax credit at the average rate of tax whilst the deduction from income would reduce the tax at the top rate applicable to the individual.
It is however, suggested that the new section 64A be placed in Part IX of Chapter III which is meant for deductible allowances.
14. Exports
Section 154 Presently the tax deductible on proceeds of an exporter or an indenting commission agent and payments by a direct exporter to an indirect exporter is considered final tax on such transactions.
The Bill now seeks to provide an irrevocable option to such person to opt out of final taxation at the time of filing the return. However, the option suggests that the tax deducted under this section shall be treated as minimum tax instead of a final tax of the person opting out of FTR.
This effectively means that the taxpayer so opting out could be taxed at normal tax rate based on his profits and the tax so deducted would be adjustable against his ultimate tax liability. However, it needs to be appreciated that in case the tax liability works out to less than the amount of tax withheld, then in such a case the tax withheld will be considered as minimum tax liability.
It appears that the exporters will not opt out of FTR for the following reasons -
(a) The exporter is still required to pay the amount of tax withheld which will be treated as minimum tax and therefore he will not benefit from opting out of FTR.
(b) It should be noted that the current rate of minimum tax under section 113 is also 1% for all taxpayers except for certain classes of persons that have been allowed a reduced rate of less than 1%. Therefore, unless a reduce rate of minimum tax is provided in section 113 for exporters, there would not be any benefit of opting out of FTR.
15. Taxpayers registration
Section 181 The government is keen to broaden the tax base by increasing the number of taxpayers which is insignificant considering the country's population and as a result, the tax to GDP ratio is not at the desired level.
The Bill proposes to adopt, effective tax year 2015, in the case of individuals, Computerized National Identity Cards issued by the National Database and Registration Authority as NTN. This would mean that every CNIC holder would become NTN holder regardless of the fact whether he has taxable income or not. Accordingly, such an individual will be required to file a tax return since under section 114 of the Ordinance, the requirement of filing a return of income is also on a person who has obtained NTN.
16. Advance tax on banking transaction otherwise than through cash
Section 236P In order to enhance the incidence of taxation on non-filers using the banking system, the non-cash Banking transaction of such persons are now also proposed to be exposed to collection of tax @ 0.6% at the time of issuing -
-- Demand draft
-- Pay order
-- Special deposit receipt
-- Cash deposit receipts
-- Short term deposit receipts
-- Call deposits receipts
-- Rupees traveler cheque
-- Sale of any instrument
It is further proposed that tax may be collected from non-filers on transfer of any sum through -
-- Cheque or clearing
-- Interbank or intra bank transfers through cheques
-- Online transfer
-- Telegraphic transfer
-- Mail transfer
-- Direct debit
-- Payment through internet
-- Payment through mobile phone
-- Account to account fund transfer
-- Third party account to account fund transfer
-- Real time account to account fund transfer
-- Real time third party account fund transfer
-- Automated teller machine (ATM) transfers
-- Any other mode of electronic or paper base transfer
The tax is required to be collected @ 0.6% on the total payments for all transactions above exceeding Rs 50,000 in a day.
It is further proposed that tax will not be collected in the case of Pakistan Real-time Interbank Settlement Mechanism (PRISM) or to payments made for federal, provincial and local government tax.
17. Collection and exchange of information
Section 107 subsection (1), (1A) and (1B)
Section 165B The past few years have seen a concentrated global initiative towards information sharing and exchange for the purposes of combating tax evasion and avoidance. The precursor to this initiative was the Foreign Account Tax Compliance Act (FATCA), introduced by the United States of America and aimed at disclosure of information by foreign financial institutions (FFIs) and other financial intermediaries with a view to prevent tax evasion by US citizens and residents through use of offshore accounts.
Following the success of FATCA, the Organization for Economic Co-operation and Development (OECD) developed Common Reporting Standard (CRS), formally referred to as the Standard for Automatic Exchange of Financial Account Information, an information standard for the automatic exchange of information (AEoI). On 6 May 2014, the OECD Declaration on Automatic Exchange of Information in Tax Matters was endorsed by 34 member countries along with several nonmember countries. More than 65 jurisdictions publicly committed to implementation, with more than 40 having committed to a specific and ambitious timetable leading to the first AEoI by 2017.
In affirmation of this global trend, the Bill proposes to amend Section 107 and introduce a new Section 165B to deal with the powers of the revenue in respect of exchange of financial information. The Bill proposes that by virtue of Section 107, the Federal Government may now also enter into agreements for the exchange of information including AEoI. The Bill further proposes to empower the Board to obtain and collect information when solicited by another country under such agreements.
The Bill also proposes to insert a new Section 165B whereby every financial institution would be required to provide information to the Board in respect of non-resident persons.
The information received under both the proposed amendments may be used only for tax and related purposes and is required to be kept confidential.
18. Dividend
Section 94& the First Schedule The rate of tax on dividends for all tax payers has been increased from 10% to 12.5%. The reduced rate of tax of 7.5% applicable to dividends paid by certain specified companies remains unchanged.
Under the existing scheme of taxation, dividend income derived by an investor, whether from a resident company or a foreign company, is taxable on the gross amount in accordance with Section 5. However, Section 94, while dealing with the principles of taxation of companies provides that dividends received from a resident company will be taxed in accordance with Section 5 whereas dividends received from a foreign company will be taxed either under the head "income from business" or "income from other sources". Therefore, there was a conflict between the provisions of Section 5 and Section 94 vis-à-vis dividend income derived by a resident person from foreign companies.
The Bill proposes to rationalize the provisions of Section 94 with the existing scheme of taxation under Section 5 by omitting the word "resident" in sub section (2). However, the provisions of sub section (3), dealing with dividends paid by foreign companies, have still not been omitted. Although taxability of dividend income would still ultimately be governed by Section 5, a conflict between the various provisions will continue to exist until sub section (3) of Section 94 is also omitted.
19. Revision of return
Section 114 Section 114 specifies the persons who are obliged to file a return of income for a tax year and the mode and manner in which the return is to be filed. The section also authorizes revision of a return already filed in certain circumstances subject to certain conditions. One such condition recently prescribed is obtaining approval of the Commissioner in order for a return to be revised.
The Bill now proposes that where a return of income is revised within 60 days of its filing, the condition of obtaining prior approval from the Commissioner will not be applicable.
20. Grant of stay by Commissioner (Appeals)
Section 128 The Commissioner (Appeals) is empowered to grant stay from recovery of tax demand to a taxpayer for an aggregate period not exceeding 30 days. It is experienced that in certain cases while the stay was granted, the appeal remained undecided beyond 30 days in which case the taxpayers had to approach the Appellate Tribunal or the High Court for further stay.
The Bill now proposes to grant powers to the Commissioner (Appeals) to grant stay from recovery of tax demand for a further period of 30 days subject to the condition that the appeal shall be decided within the extended period of 30 days.
21. Due date for payment of tax demand
Section 137 Under the Income Tax Ordinance, 1979 (since repealed) as well as when the Ordinance was promulgated, 30 days' time was provided for payment of tax demand arising from an order passed by the tax authorities, from the date the order was communicated to the taxpayer. The Finance Act, 2008 shortened the period of 30 days to 15 days.
The Bill now proposes to revert to the earlier position whereby 30 days would be available for payment of tax demand arising from an order passed by the tax authorities.
22. Withholding tax on services rendered by companies
Section 153, Clause (79), Part IV, Second Schedule Through the Finance Act, 2009, an amendment was made to make the tax withheld on payment against services rendered as a minimum tax. However, there was ambiguity on the interpretation of this provision whereby applicability of such minimum tax on the corporate sector was unclear. However, in the circular issued by the Board on amendments introduced via the Finance Act, 2009, it was clarified that tax withheld from payments relating to services rendered would only be considered minimum tax in case of non-corporate taxpayers. Subsequently, Clause (79) was inserted in Part IV of the Second Schedule via SRO 1003 (I)/2011 dated 31 October 2010 for the purpose. The matter however, remained in dispute at various forums.
To clarify this position, the Bill now seeks to substitute Clause (b) in the proviso to sub section (3) of section 153 to provide that in case of companies, the tax so deducted is adjustable effective from the tax year 2009 and that in case of a person other than a company, the tax so withheld will be a minimum tax. Correspondingly, the Clause (79) ibid, is proposed to be deleted.
23. Payment to residents for use of machinery and equipment
Section 236Q The provisions of the Ordinance at present, do not specifically provide for withholding of tax from payments to residents on account of hire of machinery and/ or equipment. Accordingly, there have been different views on withholding of tax from such payments. Certain quarters are of the view that on such payments tax is deductible under section 153(1)(b) ie on account of services rendered while some are of the view that withholding of tax from such payment is governed by section 153(1)(c) ie on account of execution of contract.
The Bill proposes to insert a new section which provides for withholding of tax @ 10% from payments to a resident person for use of or right to use industrial, commercial and scientific equipment as well as on account of rent of machinery. It is further proposed that the tax deducted under this section shall be final tax of the person. The obligation to withhold tax under this section has been proposed on a "prescribed person" as per the definition given in section 153(7) of the Ordinance.
24. Collection of tax on remittance of education expenses abroad
Section 236R The Bill proposes to insert a new section 236R requiring collection of advance tax @ 5% on the amount of education expenses remitted abroad. Education expenses have been defined to include tuition fee, boarding and lodging expenses, any payment for distant learning to any institution or university in a foreign country and any other expense related or attributable to foreign education.
The obligation to collect tax from education related expenses is on banks, financial institutions, foreign exchange companies or any other person responsible for remitting foreign currency from the payer of education related expenses.
The tax collected under this section is proposed to be advance tax which would be available for adjustment against the tax liability of the payer of education related expenses.
25. Concept of whistleblower
Section 227B One of the biggest challenges that the current government faces in improving economy of the country is an alarmingly small tax base. It is undoubtedly a bitter fact that even in this modern era where the access of information is now more readily available, there still remains a substantial revenue in Pakistan which is outside the ambit of tax net. The stakeholders ie the tax officials at the Federal Government and tax professionals have been struggling for years in devising methodologies enabling people at large to pay their due taxes voluntarily. However, unfortunately the level of voluntary compliance is still negligible due to variety of reasons including fear of harassment and corruption.
In view of this backdrop, the Bill seeks to propose a new concept of whistleblower in the following tax laws:
-- Income Tax Ordinance, 2001
-- Sales Tax Act, 1990
-- Federal Excise Act, 2005
The Bill defines whistleblower separately under each of the above laws as a person who reports concealment or evasion of tax/duty leading to detection or collection of tax/duty, corruption or misconduct, to the competent authority having power to take action against the person or a income tax, sales tax or federal excise authority committing fraud, corruption, misconduct, or involved in concealment or evasion of tax/duty.
With the introduction of the proposed new concept of whistleblower, the Bill also proposes to add a new section under the respective laws dealing with reward to whistleblowers. It is proposed that Board may sanction reward to whistleblowers in cases of concealment or evasion of tax/duty, corruption or misconduct providing credible information leading to such detection of evasion of tax/duty.
It is proposed that the procedure for sanction of award and its apportionment is to be notified in the official Gazette by the Board. It is also proposed that the claim of reward by the whistleblower shall be rejected in the following circumstances-
(a) the information provided is of no value;
(b) the Board already had the information;
(c) the information was available in public records; or
(d) no collection of duties is made from the information provided from which the Board can pay the reward.
26. Collection of tax by Pakistan Mercantile ExchangeLimited
Section 236T The proposedSection 236T obliges PMEX to collect tax @ 0.1% from its members (i) on purchase and sale of futures commodity contracts, and (ii) ) on purchase and sale of futures commodity contracts in lieu of tax on the commission earned by such members. It is proposed that the tax so collected shall be a minimum tax. PMEX has been defined in the proposed Clause (42A) of Section 2 of the Ordinance to mean Pakistan Mercantile Exchange Limited a futures commodity exchange company incorporatedunder the Companies Ordinance, 1984 and islicensed and regulated by the SECP.
27. Audit
Sections 121, 176, 177, 210 and 211 Under the existing provisions of Section 177, the Board is inter-alia, empowered to appoint a firm of Chartered Accountants or a firm of Cost and Management Accountants to conduct tax audit of any person or classes of person within the parameters as determined by the Board.
The Bill now proposes to insert sub section (11) to provide for appointment of special audit panels by the Board for the purpose of conducting tax audit including a forensic audit of a person or classes of person within the parameters as determined by the Board.
The special audit panels so appointed will comprise of 2 or more members among the following -
(a) an officer or officers of Inland Revenue;
(b) a firm of Chartered Accountants;
(c) a firm of Cost and Management Accountants; or
(d) any other person as directed by the Board.
It is also proposed that the special audit panel will be headed by a Chairman who will be an officer of Inland Revenue. The officer or officers Inland Revenue being members of the special audit panel (duly authorized by the Commissioner) will be authorized to exercise the power available under Section 175 and 176 of the Ordinance for the purpose of conducting tax audit under the proposed provisions. In case where the person being audited fails to comply with the requirements of the audit, best judgment assessment can be framed under Section 121 of the Ordinance against the person. It is further provided that if any member of the special audit panel, other than the Chairman is absent from the audit proceedings, the audit may continue and such audit will not be invalid or called in question due to absence of the member. It is also proposed that functions performed during the audit by an officer or officers of Inland Revenue as members of special audit panel shall be treated to have been performed by the special audit panel. The Board will be authorized to prescribe the mode and manner of constitution, procedure and working of the special panel.
Corresponding amendments have also been proposed in the following sections -
(a) section 176 - to provide for authorizing the special audit panel to enter the business premises of a taxpayer in order to obtain any information, require production of any record and to exercise the powers as are vested in a Court under the Code of Civil Procedure, 1908
(b) section 210 - to provide for authorizing the Commissioner to delegate to a special audit panel or to a firm of Chartered Accountants or a firm of Cost And Management Accountants to conduct audit under section 177
(c) section 211 - to provide for enabling the special audit panel to exercise the powers as are available to a Commissioner for conducting the audit.
Taking all the above amendments together it appears that the Board has been empowered to constitute a joint team of Inland Revenue Officers and professionals and has given a framework of the proposed special audit panel(s). However, yet again the proposal fails to answer the lingering questions of selection of cases. It is still unclear as to who is authorized to select cases and assign them to the special audit panel.
28. Automatic selection for audit of retailers
Section 214D A new section is proposed to be inserted for selection of cases for audit of retailers. It is proposed that retailers who are registered under Rules (4) and (6) of Sales Tax Special Procedures Rules, 2007 ie large retailers either operating as unit of a national or international chain of stores, operating an air-condition mall, retailer who has a credit and debit card machine, retailer whose annual preceding electricity bill exceeds Rs.600,000 and a wholesaler-cum-retailer engaged in bulk import and other retailers who pay sales tax on electricity bills. The aforesaid retailers a proposed to be automatically selected for audit if they do not fulfill the following conditions -
(a) enlistment on the active taxpayer list in case of large retailer registered under Rule (4)
(b) Complete return of income furnished within time
(c) The tax payable alongwith the return has been duly paid
(d) 2% tax is paid under section 113 ie on turnover basis in case of small retailer registered under Rule (6) who files the return below taxable limit and in the preceding tax year has either declared income below taxable limit or not filed the return
(e) In case of small retailer who has declared taxable income in previous year he must pay 25% higher tax than the previous tax year
The proposed section provides that the scheme will become effective from the date notified by the Board in the official Gazette.
Based on past history where we understand that after abolition of minimum tax on retailers, most of them have not filed their returns, the conditions enumerated above for avoiding an audit by retailers seem to be tough and it would be difficult to assess whether those retailers who are non-filers at present would agree to file their returns.
29. Single rate of tax for all incomes of banking companies
Seventh Schedule
At present, the Seventh Schedule applicable to banks provides for taxation of dividend income and capital gains at reduced rates of tax. Besides this, the Finance Act, 2014 also introduced the concept of proration of expenses between dividend income, capital gains and income taxable at the full rate of tax.
The Bill now proposes to abolish the reduce rate of tax on dividend income and capital gains. In line with these proposed amendments, the provisions relating to proration of expenses between different sources of income have also been proposed to be abolished. Consequently, income derived by a banking company from all sources including dividend and capital gain is proposed to be taxed @ 35%.
Consequent to proposed Section 4B introducing super tax on certain taxpayer, amendments have also been proposed in the Seventh Schedule to levy super tax on banking companies @4%. It may be noted that unlike the threshold of income of Rs.500 million for a tax year for the purpose of levy of super tax on taxpayers other than banking companies, there is no threshold proposed in the Seventh Schedule.
30. Deductions against income from property
Section 15A Section 15A provides for deductions in computing income chargeable under the head income from property. Presently a deduction not exceeding 6% of the rent chargeable to tax in respect of property is allowed on account of expenditure incurred for the purpose of collecting rent. However, presently any administrative expenses like salaries etc incurred by the owner of property are not explicitly deductible against income from property.
The Bill now proposes to enhance the deduction allowed to also cover expenses incurred including administration expenses subject to the threshold of 6% of rent chargeable to tax in respect of such property.
31. Tax on shipping business carried on by resident person
Section 7A and Clause (21) of Part II of the Second Schedule Taxability of shipping business carried on by a resident person is currently governed by as Clause (21) of Part II of the Second Schedule of the Ordinance. The Bill proposes to transfer the provision to the main text of the Ordinance as a newly inserted Section 7A.
32. Tax credit for non-profit organizations
Section 100C Section 100C deals with tax credits available to welfare trust, charitable and non-profit organizations on fulfilment of specified conditions. The Bill proposes to make editorial amendments to the said section in order to rationalize availability of tax credits.
33. Minimum tax on builders
Section 113A The said section was introduced through the Finance Act, 2013. In the Finance Bill, 2013, minimum tax at the rate of Rs.25 per square foot as per the construction or site plan had been proposed. However, at the time of enactment, the rate of minimum tax was not incorporated in the legislation and instead the rate was deferred until notification in the official gazette. To date we are not aware of any such notification that may have been issued by the Federal Government.
The Bill now proposes insertion of sub section (3) which states that the provisions of Section 113A shall not be effective till 30 June 2018. It should be noted that in the absence of a notification specifying the rate of minimum tax, the existing provisions were, for all practical purposes, not operational. Hence the proposed amendment to the said section simply appears to resolve the apprehension of builders in respect of levy of minimum tax until 2018.
34. Minimum tax on land developers
Section 113B The Finance Act, 2013 introduced the concept of minimum tax on land developers. In the Finance Bill, 2013 minimum tax at the rate of Rs.50 per square yard as per the layout or site plan had been proposed. However, at the time of enactment, the rate of minimum tax was not incorporated in the legislation instead, the rate was deferred until notification in the official gazette.
The Bill now proposes to levy minimum tax at the rate of two percent of the value of land notified by any authority for the purpose of stamp duty.
35. Power of the Board to exempt goods from collection of income tax at import stage withdrawn
Section 148 Under the existing provision of Section 148, the Board has the power to exempt certain goods or persons from collection of income tax at the time of import. The Bill now proposes to withdraw such power.
36. Tax on local purchase of cooking oil or vegetable ghee
Section 148A, Section 169
The Bill seeks to introduce a new Section 148A whereby the manufacturers of cooking oil or vegetable ghee shall be chargeable to tax at the rate of two percent on purchase of locally produced edible oil. Such tax shall be final tax in respect of income accruing from locally produced edible oil.
Being a final tax, corresponding amendment has also been made in Section 169.
37. Reduction in the rate of default surcharge in case of failure to pay tax collected or deducted
Sub-section (1B) of Section 161 Section 161 applies where a person fails to collect or deduct tax as required under the Ordinance or where having collected or deducted the tax fails to deposit the same with the Government Treasury. This section empowers the tax authorities to collect such tax from the withholding agent by treating him as an assessee in default under specific circumstances. The said section also imposes a default surcharge on the amount of tax not collected, deducted or paid at the rate of eighteen percent. The Bill proposes to reduce the rate of default surcharge payable by such a person to twelve percent.
38. Advance tax on private motor vehicles
Section 231B Presently, every manufacturer of motor car or jeep is required to collect advance tax at the time of sale. However, the Bill seeks to broaden the scope of advance tax collection under this section by replacing the words "car or jeep" with "vehicle ". As per the proposed amendment motor vehicle includes car, jeep, van, sports utility vehicle, pickup trucks, caravan automobile, limousine, wagon or any other automobile used for private use. The Bill also proposes to insert the definition of the expression "date of first registration" for different modes of acquisition of vehicles.
39. Tax on motor vehicles
Section 234 Presently, any person collecting motor vehicles tax is required to also collect advance tax on motor vehicles. The word motor vehicle is not defined in the Ordinance. The Bill has proposed to define the term "motor vehicle" by making reference to the newly proposed definition inserted through sub section (7) of Section 231B.
40. Advance tax on telephone and internet user
Section 236
Presently, under Section 236 advance tax is collected on telephone bill, prepaid card and sales of units through electronic medium. Now the Bill seeks to include internet bills and prepaid card for internet within the ambit of this section. Tax is to be collected at the rate of fourteen percent of the amount of bill.
41. Advance tax on purchase of domestic air tickets
Section 236B Currently, advance tax on purchase of domestic air ticketsis collected under this Section irrespective of flight routes. Now the Bill seeks to provide exemption from collection of advance tax on purchase of domestic air ticket for the following routes:
-- Baluchistan coastal belt
-- Azad Jammu and Kashmir
-- FATA
-- Gilgit-Baltistan and Chitral
Furthermore, the exemption available to Federal Government, Provincial Government and the person who produces certificate of exemption of income from collection of advance tax under thissection is proposed to be deleted from this section but to be consolidated in a newly proposed Section 236O.
42. Advance tax on sale or transfer of immovable property
Section 236C Currently, Federal Government, Provincial Government and Local Government enjoy exemption from collection of advance tax on sale or transfer of immovable property under this Section. The exemptions have now been proposed to be relocated to Section 236O. However, the latter section does not provide any exemption for the local government.
43. Advance tax on sale to retailers and wholesalers
Section 236H Presently, every manufacturer, distributor, dealer, wholesaler or commercial importer of various items listed in this section including fertilizer are required to collect advance tax on sale to a retailer. Now the Bill seeks to exclude sales of fertilizer from collection of advance tax under this section.
Furthermore, the Bill, in order to broaden the scope of collection of advance tax under this section, proposes to include sale to wholesalers along with sale to retailers under this section. It should be noted that the sale to wholesaler by manufacturers or commercial importers of the specified items is already captured in Section 236G. Hence the proposed amendments may lead to double collection of advance tax from wholesalers in case of sales made by manufacturers, both under Sections 236G and 236H. If the intent of the legislation is to broaden the collection of advance tax by including sales to wholesalers made by distributors and dealers, the law should be rationalized by omitting wholesalers from the provisions of Section 236G to avoid double collection of tax from the wholesalers.
44. Collection of advance tax by educational institutions
Section 236I& Clause 89 to Part-IV of Second Schedule Currently, as per Clause (89)of Part-IV of the Second Schedule, following persons are exempted from collection of advance tax by educational institutions:
a) the Federal Government or a Provincial Government
b) an individual entitled to privileges under the United Nations (Privileges and Immunities) Act, 1948 (XX of 1948)
c) a foreign diplomat or a diplomatic mission in Pakistan
d) a person who is a non-resident and he:
i. furnishes copy of passport as an evidence to the educational institution that during previous tax year, his stay in Pakistan was less than one hundred eighty-three days;
ii. furnishes a certificate that he has no Pakistan-source income; and
iii. fee is remitted directly from abroad through normal banking channels to the bank account of the educational institution.
The bill proposes to retain the above exemptions only for persons specified in (a)(c) and (d) above by inserting sub section (6) of Section 236I and Section 236O. Consequentially, Clause (89) of Part-IV of the Second Schedule has been proposed to be deleted.
45. Advance tax on purchase or transfer of immovable property
Section 236K The exemptions available to the Federal Government, Provincial Government,Local Government and Foreign Diplomatic mission in Pakistan from collection of advance tax on purchase or transfer of immovable property under this section is proposed to be deleted from this section. However, a similar exemption is sought to be provided to the Federal Government and Provincial Government under the newly proposed Section 236O.
46. Advance tax under Chapter XII
Section 236O As highlighted above, exemptions available to various persons under Sections 231A, 231AA, 236B, 236C, 236D, 236I and 236K are proposed to be deleted from their respective sections. The bill proposes to insert a new Section 236O, whereby the following persons shall be exempted from collection of advance tax under the entire chapter XII:
a) the Federal Government or a Provincial Government
b) a foreign diplomat or a diplomatic mission in Pakistan
c) a person who produces a certificate from the Commissioner that hisincome during the tax year is exempt.
It should be noted that in providing the exemption, Section 236O uses the words "the advance tax under this chapter shall not be collected in the case of withdrawals made by.....". It may be observed that the specific drafting of the proposed section may in practice restrict its applications. It is, therefore, proposed that the Section 236O should appropriately be re-drafted to avoid any adverse inferences at a later stage.
47. Default surcharge
Section 205 The rate of default surcharge, for failure to pay any tax or advance tax by the due date or payment of atleast 90% of the advance tax liability, is presently 18% per annum. The Bill now proposes to reduce the rate of default surcharge to 12% per annum.
48. Additional payment for delayed refunds
Section 171 The compensation rate for delay in refunds payable by the Revenue to the tax payer, is presently fifteen percent per annum of the amount of refund. The Bill now proposes to change the rate of compensation to KIBOR plus 0.5% per annum.
49. Offences and penalties
Section 182 Penalties for non-compliance had been consolidated in Section 182 via the Finance Act 2010. The Bill now seeks to amend S.No (1A) and (1AA) of Section 182 of the Ordinance in the following manner:
a) Minimum penalty of Rs.50,000 is proposed to be reduced to Rs.10,000 for failure to file final tax statement under Section 115, withholding tax statement under Section 165 or failure to furnish information under Section 165A. Such a reduction had previously been offered by virtue of Clause (16) of Part III of the Second Schedule which has now been proposed to be incorporated in the provisions of Section 182. The aforementioned clause has correspondingly been proposed to be deleted.
b) Penalty for failure to furnish wealth statement or wealth reconciliation statement under Section 116 has been proposed to be charged at 0.1% of the taxable income per week or Rs.20,000, whichever is higher instead of Rs.100 for each day of default.
50. Prosecution for making false or misleading statements
Section 195 An editorial amendment is sought by the Bill. The Bill seeks to substitute reference to sub section (3) of Section 187 with "Entry against S.No 10 in column (2) of theTable in sub section (1) of section 182" as Section 187 was already omitted by the Finance Act 2010.
51. Income Tax Authorities
Section 207 Consequent to the proposal of Section 177 whereby "special audit panel" shall be appointed, the Bill also seeks to insert a new clause in section 207 whereby "special audit panel" shall also be treated as a tax authority.
52. Dividend in specie
Section 236S The Bill proposes to insert a new section viz. section 236S which provides for collection of tax from the gross amount of dividend in specie @ 12.5%. The tax so collected shall be final tax in terms of section 5 of the Ordinance.
THE FIRST SCHEDULE
53. Rates of tax for individuals and Association of Persons The rates of tax chargeable for the tax year 2016 (corresponding to the income year ending at any time between 01 July 2015 to 30 June 2016) have been revised as under. The basic threshold has remained unchanged:
Salaried taxpayers
==========================================================================
Salaried taxpayers Rate
==========================================================================
Upto Rs.400,000 Nil
Rs.400,001 - 500,000 2% of excess over Rs.400,000
Rs.500,001 - 750,000 Rs.2,000 + 5% of excess over Rs.500,000
Rs.750,001 - 1,400,000 Rs.14,500 + 10% of excess over Rs.750,000
Rs.1,400,001 - 1,500,000 Rs.79,500 + 12.5% of excess over Rs.1,400,000
Rs.1,500,001 - 1,800,000 Rs.92,000 + 15% of excess over Rs.1,500,000
Rs.1,800,001 - 2,500,000 Rs.137,000 + 17.5% of excess over Rs.1,800,000
Rs.2,500,001 - 3,000,000 Rs.259,500 + 20% of excess over Rs.2,500,000
Rs.3,000,001 - 3,500,000 Rs.359,500 + 22.5% of excess over Rs.3,000,000
Rs.3,500,001 - 4,000,000 Rs.472,000 + 25% of excess over Rs.3,500,000
Rs.4,000,001 - 7,000,000 Rs.597,000 + 27.5% of excess over Rs.4,000,000
Over Rs.7,000,000 Rs.1,422,000 + 30% of excess over Rs.7,000,000
==========================================================================
Non-salaried taxpayers
==========================================================================
Non-Salaried taxpayers Rate
==========================================================================
Upto Rs.400,000 Nil
Rs.400,001 - 500,000 7% of excess over Rs.400,000
Rs.500,001- 750,000 Rs.7,000 + 10% of excess over Rs.500,000
Rs.750,001- 1,500,000 Rs.32,000 + 15% of excess over Rs.750,000
Rs.1,500,001 - 2,500,000 Rs.144,500 + 20% of excess over Rs.1,500,000
Rs.2,500,001 - 4,000,000 Rs.344,500 + 25% of excess over Rs.2,500,000
Rs.4,000,001 - 6,000,000 Rs.719,500 + 30% of excess over Rs.4,000,000
Over Rs.6,000,000 Rs.1,319,500 + 35% of excess over Rs.6,000,000
==========================================================================
54. Association of Persons
Association of persons continues to be taxed as per the rate card of non-salaried taxpayers for the tax year 2016.
55. Tax year
Tax year means a period of twelve months ending on 30 June and corresponds to the period to which the income of the taxpayer relates.
56. Salaried taxpayer Salaried taxpayer is a person having salary income in excess of 50% of his/her taxable income.
57. Reduction in tax liability A senior citizen of Pakistan, being a taxpayer, aged sixty years or more on the first day of the relevant tax year, is allowed a rebate of 50% of the tax payable if his/her taxable income in that tax year is Rs.1,000,000/- or less. The said rebate continues and the rule, that in determining the threshold as above, income under final tax regime shall be excluded, also remains unchanged.
In addition, the relief as above shall also be available to an individual who, irrespective of his age, is registered as a disabled person according to his/her Computerized National Identity Card.
58. Rates of tax for companies The rates of tax for companies, for tax year 2016, have been revised, and are as under:
=================================================
Companies Tax Year
=================================================
2015 2016
=================================================
Public and Private 33 32
Cooperative and Finance Society 33 32
Banking 35 35
Small 25 25
=================================================
The threshold on capital for small Companies is proposed to be enhanced for a maximum Rs.25 million to Rs.50 million.
59. Rate of Super tax for rehabilitation of temporarily displacedpersons
The rate of super tax for rehabilitation of temporarily displacedpersons have been proposed as under:
=================================================
Taxpayer Rate %
=================================================
Banking Company 4
Person, other than a banking company,
having income of Rs.500 million or more 3
=================================================
60 Rate of tax on dividend income
The rate of tax on dividend received by all taxpayers for tax year 2016 have been revised and are as under:
===============================================================
Dividend from Tax Year
===============================================================
2015 2016
===============================================================
Companies owning power project privatized
by WAPDA, companies set-up for power
generation and companies supplying coal,
exclusively to power generation projects 7.5 7.5
Others 10 12.5
Stock fund, if dividend receipts
are less than capital gains 12.5 15
===============================================================
Dividend received by a company from a collective investment scheme, REIT Scheme or a mutual fund, other than a stock fund, shall be taxed at the rate of 25%.
However, if a Developmental REITScheme with the object of development and construction of residentialbuildings is set up by 30thJune, 2018, dividend received by a person from such Developmental REIT Scheme shallbe reduced by fifty percent for three years from 30thJune, 2018.
61. Rate of tax on profit on debt
The existing rate of tax on profit on debt is 10%. The proposed rates of tax are as under:
===============================================================
Tax payer Rate %
===============================================================
Upto Rs.25,000,000 10%
Rs.25,000,001 -50,000,000 Rs.2,500,000+ 12.5% of the
amount exceeding Rs 25,000,000
Over Rs.50.000,000 Rs 5,625,000 + 15% of the
amount exceeding Rs 50,000,000
===============================================================
62. Rates of tax on capital gains on securities
The rate card for levying tax on capital gains arising on sale of securities (other than Companies), as referred to in Section 37A have been proposed as under:
===============================================================
Holding period Tax Year
===============================================================
2015 2016
===============================================================
Less than 12 months 12.5 15.0
More than 12 months but less than 24 months 10.0 12.5
More than 24 months but less than 48 months - 7.5
===============================================================
The rate for companies in respect of debt securities shall be as specified in Division II of Part I of First Schedule which is proposed to be 32%
However, mutual fund or a collective investment scheme or aREIT scheme shall deduct, onredemption of securities,capital gains tax at the revised rates as specified below:
====================================================
Taxpayer Rate (%)
Filer Non-Filer
====================================================
Individual and AOP 10% for stock funds 17.5
10% for others
Company 10% for stock funds 25
25% for others
====================================================
In case of a stock fund if dividend receipts of the fundare less than capital gains, the rate of tax deduction shall be 12.5%
63. Rate of tax on capital gain on immovable property
The rate of tax on capital gain on immovable property remained unchanged and are as under:
====================================================
Holding period of immovable property Rate %
====================================================
Upto 1 year 10
More than 1 year but not more than two years 5
More than 2 years -
====================================================
64. Minimum Tax
The rates of minimum tax as a percentage of the taxpayers' turnoverhave remained unchanged and are as under:
========================================================
Taxpayer Rate %
========================================================
Oil marketing companies, oil refineries,
Sui Southern Gas Company Limited
and Sui Northern Gas Pipelines Limited
(where annual turnover exceeds Rs. 1 billion.) 0.5
Pakistan International Airlines Corporation
Poultry industry including breeding, broiler
production, egg production, feed production
Dealers or distributors of fertilizers
Distributors of pharmaceutical products,
fast moving consumer goods and cigarettes 0.2
Petroleum agents and distributors
registered under the Sales Tax Act, 1990
Rice mills and dealers
Flour mills
Motorcycle dealers registered
under the Sales Tax Act 1990 0.25
In all other cases 1
========================================================
65. Advance tax on imports
The Bill proposes to enhance the scope of the table and has specified separate tax rates for filer and non-filer and now the table reads as under:
==============================================================================
Taxpayer Rate % (of import
value as increased
by customs duty,
sales tax and
federal excise duty)
==============================================================================
Filer Non-filer
==============================================================================
Industrial undertaking importing remeltable
steel (PCT Heading 72.04)
and directly reduced iron for its own use 1 1.5
Persons importing plastic fertilizers in
pursuance of Economic Coordination
Committee of the cabinet's decision No.
ECC-155/12/2004 dated 9 December 2004
Persons importing urea
Manufacturers covered under Notification No.
S.R.O. 1125(I)/2011 dated 31 December 2011
Proposes to insert Persons importing Gold; and
Proposes to insert Persons importing Cotton
Persons importing pulses 2 3
Commercial importers covered under Notification
No. S.R.O. 1125(I)/2011 dated 31 December 2011 3 4.5
Ship breakers on import of ships 4.5 6.5
Industrial undertakings not covered above 5.5 8
Companies not covered above 5.5 8
Persons not covered above 6 9
==============================================================================
66. Advance tax on dividends
The Bill proposes to enhance the rate of withholding tax on dividend for non-filer to 17.5% from existing 15%.
However, a collective investment scheme, REIT Scheme and mutual fund would deduct tax on payment to a non-filer as per the following table:
===========================================
Stock Fund Money market
fund, Income
Fund or any
other fund
===========================================
Individuals 10 10
Company 10 25
AOP 10 10
===========================================
Further, the Bill proposes to reduce the withholding rates of taxes to 50% on the dividend paid by the Developmental REIT scheme set up to 30th June 2018 for development and construction of residential buildings for three years from 30 June 2018.
However, in the case of stock fund, if dividend receipts are less than the capital gains, the rate of tax to be deducted shall be 15% instead of the existing 12.5%.
67. Advance tax on profit on debt
The advance tax rate for recipients who are non filers is proposed to be 17.5% from 15% if the yield or profit paid exceeds Rs. 500,000.
68. Advance income tax on payment to non-residents
The Bill proposes to segregate the rates of withholding taxes between corporate and others on account of making payment to a permanent establishment (PE) and brings the rate of withholding in line with the rates applicable to a resident person which are as under:
==================================================================================
Rate of tax
==================================================================================
Corporate Non-Corporate
==================================================================================
Filer Non- Filer Non-
filer filer
==================================================================================
For supply of goods 4 6 4.5 6.5
For services other than transport services 8 12 10 15
For execution of contract 7 10 7.5 10
==================================================================================
The Bill also seeks to include the payment to a sportsperson under the ambit of execution of contract by PE on which the rate of withholding tax at 10% of the gross amount payable.
69. Advance income tax on payment to resident on payments for goods and services
The Bill seeks to introduced the rate of withholding tax for non-filer when making payments on account of goods and services, which are as under:
==================================================================================
Rate of tax
==================================================================================
Corporate Non-Corporate
==================================================================================
Filer Non Filer Non
filer filer
==================================================================================
For supply of goods 4 6 4.5 6.5
For services other than transport services 8 12 10 15
For execution of contract 7 10 7.5 10
==================================================================================
The Bill seeks to treat the payment of sportsperson under the ambit of execution of contract at 10% as final tax effective from the tax year 2013.
70. Collection of advance income tax on petroleum products
The Bill seeks to introduce the rate of collection of tax for non-filer which at 15% of gross amount for every person selling petroleum products to a petrol pump operator. However, the withholding rates for a filer remain unchanged at 12% of the gross amount.
71. Collection of advance income tax on Brokerage and Commission
The Bill seeks to enhance the rate of collection of tax from advertising agents along with introduction of rate of collection of taxes from a non-filer which are as under:
============================================================
Rate of tax
============================================================
Filers Non-filers
============================================================
For advertising agents 10% 15%
Other than advertising agents 12% 15%
============================================================
72. Collection of advance income tax on goods transport vehicles
Vide Finance Act, 2012 a tax was introduced on goods transport vehicles at the rate of Rs.5 per KG of the laden weight. Now the Bills seeks to reduce the rates of collection of tax on goods transport vehicles which are as under:
================================================================
Amount of tax
================================================================
Filers Non-filers
================================================================
Amount of tax on per KG of laden weight Rs. 2.5 Rs. 4
================================================================
73. Collection of advance income tax on passenger transport vehicles
The Bill seeks to revise the rate of collection of tax on passenger transport vehicles plying for hire for on the basis of seating capacity which are as under:
================================================================
Capacity Rs. Per seat
per annum
================================================================
Filers Non-filers
================================================================
Four or more persons but less than ten Rs. 50 Rs.100
Ten or more persons but less than twenty Rs.100 Rs.200
Twenty persons or more Rs.300 Rs.500
================================================================
74. Collection of advance income tax on private motor vehicles
The Bill also seeks to revise the rate of collection of advance income tax payable for tax year 2016 at the time of paying annual motor vehicle tax, in the case of private motor vehicles as under:
===========================================================
Engine capacity Amount of tax
===========================================================
Filers Non-filers
===========================================================
Upto 1000 cc Rs.800 Rs.1,200
1001 cc - 1199 cc Rs.1,500 Rs.4,000
1200 cc - 1299 cc Rs.1,750 Rs.5,000
1300 cc - 1499 cc Rs.2,500 Rs.7,500
1500 cc - 1599 cc Rs.3,750 Rs.12,000
1600 cc - 1999 cc Rs.4,500 Rs.15,000
2000 cc & above Rs.10,000 Rs.30,000
===========================================================
75. Motor vehicle tax when collected in lump sum
The rate of collection of taxes on a lump sum basis are the same and not proposed to be changed.
76. Advance tax on electricity consumption
The rate of collection of advance tax on electricity bills continues to remain the same as previously introduced.
77. Advance tax on telephone users
The Bill seeks to levy the tax on internet bill of a subscriber and pre-paid cards for internet at the rate of 14%.
78. Advance tax on cash withdrawal
The Bill proposes to enhance the rate of collection of advance tax on cash withdrawal by non-filer from 0.5% to 0.6% for transactions exceeding Rs. 50,000 per day.
79. Advance tax on transactions in bank
The Bill proposes to introduce the rate of collection of advance tax on banking transactions other than cash transactions by a non-filer to 0.6% if the amount exceeds Rs. 25,000 in a day.
80. Advance tax on purchase, registration and transfer of Motor Vehicles
The Bill proposes to enhance the scope of section 231B and now the rates of collection of income tax leviable on registration and sale by a manufacturer, are proposed to be charged as per the following rates:
===========================================================
Engine capacity Amount of tax
===========================================================
Filers Non-filers
===========================================================
Up to 850 cc Rs.10,000 Rs.10,000
851 cc - 1000 cc Rs.20,000 Rs.25,000
1001 cc - 1300 cc Rs.30,000 Rs.40,000
1301 cc - 1600 cc Rs.50,000 Rs.100,000
1601 cc - 1800 cc Rs.75,000 Rs.150,000
1801 cc - 2000 cc Rs.100,000 Rs.200,000
2001 cc& 2500cc Rs.150,000 Rs.300,000
2501 cc& 3000cc Rs.200,000 Rs.400,000
Above 3000cc Rs.250,000 Rs.450,000
===========================================================
Further, the Bill proposes to introduce separate rates of collection of taxes on transfer of motor, as per the following rates which would be reduced by 10% each year from the date of first registration in Pakistan:
===============================================
Engine capacity Amount of tax
===============================================
Filers Non-filers
===============================================
Up to 850 cc - Rs.5,000
851 cc - 1000 cc Rs.5,000 Rs.15,000
1001 cc - 1300 cc Rs.7,500 Rs.25,000
1301 cc - 1600 cc Rs.12,500 Rs.65,000
1601 cc - 1800 cc Rs.18,750 Rs.100,000
1801 cc - 2000 cc Rs.25,000 Rs.135,000
2001 cc& 2500cc Rs.37,500 Rs.200,000
2501 cc& 3000cc Rs.50,000 Rs.270,000
Above 3000cc Rs.62,500 Rs.300,000
===============================================
81. Advance tax on sale to distributors, dealers or wholesalers
The rate of collection of advance tax on sale to distributors, dealers or wholesalers has been proposed to be enhanced as under:
===========================================
Category of Sale Rate of Tax
===========================================
Filers Non-filers
===========================================
Fertilizer 0.7% 1.4%
===========================================
82. Advance tax on domestic electricity consumption
The Bill seeks to propose collection of advance tax on domestic electricity consumption at the rate of 7.5% if monthly bill exceeds Rs. 75,000 which is currently leviable where the bill exceeds Rs. 100,000 monthly.
83. Advance tax on international air ticket
The Bill seeks to propose the following amount of advance income tax collectible on the type of ticket which is currently leviable at the rate of 4% on other than economy class. Proposed amount of taxes are as under:
================================================
Type of ticket Rs. Per person
================================================
First/Executive Class 16,000
Others excluding Economy 12,000
Economy -
================================================
84. Advance tax on Banking transactions otherwise than through cash for non-filer
The rate of collection of advance tax for tax year 2016 banking transaction for non-filer are proposed to be leviable at the rate of 0.6% of the transaction for non-filer if the total transactions in a day exceeds Rs. 50,000.
85. Rate of collection of tax by Pakistan Mercantile Exchange Limited
The rate of collection of tax by Pakistan Mercantile Exchange Limited are proposed as under:
=========================================================================
Type Rate
=========================================================================
Sale or purchase of future commodity contract from its member 0.1%
Commission on sale or purchase of future commodity
contract from its members on commission earned by them 0.1%
=========================================================================
86. Advance tax on the payment to residents for use of machinery and equipment
The rate of deduction of tax is proposes at 10% of the gross amount of payment for the use or the right to use industrial, commercial and scientific machinery and equipment.
87. Collection of advance tax on remittances of education expenses
The bill proposes to collect tax at the rate of 5% from the amount remitted abroad on account of education related expenses.
THE SECOND SCHEDULE
PART-I
88. Exemption to Inter-corporate Dividend
Clause (103A)
The Finance Act, 2007 introduced the concept of group taxation and group relief by inserting Sections 59AA and 59B in the Ordinance respectively.
Section 59AA of the Ordinance specifies that wholly owned group companies shall be construed as one fiscal unit for the purpose of group taxation subject to certain conditions to be met as specified.
Section 59B of the Ordinance permits a subsidiary company, subject to certain conditions as mentioned therein, to surrender its assessed losses (excluding capital loss) for the tax year (other than brought forward losses and capital losses) either to its holding company or to another subsidiary of the same holding company.
Consequentially, inter corporate dividend within the group companies entitled to group taxation to which Section 59AA or Section 59B applies is exempt from tax by virtue of Clause (103A) of Part-I of the Second Schedule.
Recently the Taxation Authorities opined that inter-group dividend can only be exempt under Clause (103A) when group companies actually opt for group taxation (Section 59AA) or group relief (Section59B) ie group return has actually been filed. However, it was the contention of the taxpayer that the word "entitled" signifies that any taxpayer which is entitled to invoke Section 59AA or Section 59B of the Ordinance, the benefit of the above Clause could be availed. There is no mention in Clause (103A) of the Ordinance that for availing the benefit of exemption, the group companies are required to actually opt for it. The Appellate Tribunal Inland Revenue (ATIR), in a case reported as 2012 PTD (Trib) 911 (where only application of Section 59AA was involved), also fortified the view point of the taxpayers with the observation that had the legislature intended to make compliance to the requirements of Section 59AA of the Ordinance [pre-condition to availing of the benefit under Clause (103A)], it would have said it in so many words. Such being not the position, the word "entitled" would signify that any company which was entitled under Section 59AA of the Ordinance could avail the benefit of the said Clause.
The Bill seeks to put a condition in Clause (103A) that inter-corporate dividend can only be exempt subject to the condition that return of the group has been filed for the tax year. It follows that this amendment (which would be applicable from the tax year 2016) has been proposed to undo the above decision of the ATIR. However, the amendment fortifies the view of the taxpayer that before this amendment, the exemption from inter-corporate dividend could be availed without actually opted for the group taxation or group relief.
89. Deletions
The Bill proposes to omit the following Clauses.
============================================================
Clause Description
============================================================
(20) This Clause exempted any income received by a
person from an annuity issued under the
Pakistan Postal Annuity Certificate Scheme on
or after the 27 July 1977, not exceeding ten
thousand rupees per annum.
(113) Under the said Clause, exemption was provided
to capital gain on sale of shares of certain
industrial undertakings which qualified for
exemption under Clause (126) of this Schedule
for a particular time period.
Clause (126) was omitted through the Finance
Act, 2014 as the exemption period provided
therein expired and the relief became
infructuous. The Bill accordingly proposes to
omit Clause (113) being redundant.
(126F) This Clause exempted, uptil the tax year 2012,
profits and gains derived by a taxpayer, other
than one involved in manufacturing and
supplying cement, sugar, beverages and
cigarettes, located in the most affected and
moderately affected areas of Khyber
Pakhtunkhwa, FATA. The Bill proposes to delete
the said Clause since the time limit prescribed
therein has expired and the Clause has
consequently become redundant.
============================================================
90. Tax credit in respect of donations to The Indus Hospital, Karachi
Clause (61)
The above Clause contains a list of names of approved donees, to whom donation made is exempt from tax. The name of "The Indus Hospital, Karachi" has been proposed to be added to the said list.
91. Exemption to The Indus Hospital, Karachi
Clause (66)
The Bill proposes to grant exemption to the income of "The Indus Hospital, Karachi" by inserting its name in the list of institutions and entities whose income is exempt from tax.
92. Sale of immoveable property to a REIT Scheme
Clause (99A)
The above Clause grants exemption to profits and gains accruing to a person on sale of immoveable property to REIT Scheme upto 30 June 2015. The Bill proposes to enhance the period of sale to 30 June 2020 in case of sale of immoveable property to a Developmental REIT Scheme with the objective of development and construction of residential buildings.
93. Exemption to the income derived by China Overseas Port Holding Company Limited
Clause (126A)
The income derived by China Overseas Port Holding Company Limited from Gwadar port operations presently enjoys exemption from tax for a period of twenty years beginning 06 February 2007. The Bill proposes to extend the exemption period from 20 years to 23 years.
94. Income of Manufacturer of certain Plant, Machinery & Equipment
Clause (126I)
A new Clause is being proposed to be inserted as a consequence of which profits and gains derived by a taxpayer from an industrial undertaking set-up by 31 December 2016, which is engaged in the manufacturing of plant, machinery, equipment and items with dedicated use (no multiple uses) for generation of renewable energy from sources like solar and wind for a period of five years beginning from 01 July 2015.
95. Income of Warehousing or Cold Chain facilities
Clause (126J)
A new Clause is being proposed to be inserted as a consequence of which profits and gains derived by a taxpayer from an industrial undertaking set-up between 01 July 2015 and 30 June 2016 which is engaged in operating, warehousing or cold chain facilities for storage of agriculture produce for a period of three years beginning with the month in which the industrial undertaking is set-up or commercial operations are commenced whichever is later.
96. Income from operating Halal Meat production
Clause (126K)
A new Clause is being proposed to be inserted as a consequence of which profits and gains derived by a taxpayer from an industrial undertaking set-up between 01 July 2015 and 31 December 2016 which is engaged in operating halal meat production and has obtained halal certification for a period of four years beginning with the month in which the industrial undertaking is set-up or commercial production is commenced whichever is later.
97. Income from industrial undertaking set-up in KPK
Clause (126L)
A new Clause is being proposed to be inserted as a consequence of which profits and gains derived by a taxpayer from a manufacturing unit set-up in KPK Province between 01 July 2015 and 30 June 2018 for a period of five years beginning with the month in which the industrial undertaking is set-up or commercial production is commenced whichever is later. However, the exemption is subject to the following conditions:
- The manufacturing unit is set-up between 01 July 2015 and 30 June 2018 both days inclusive.
- The manufacturing unit is not established by splitting up or reconstruction or reconstitution of an undertaking already in existence or by transfer of machinery of plant from an undertaking established in Pakistan at any time before 01 July 2015.
98. Income from Transmission Line Project
Clause (126M)
A new Clause is being proposed to be inserted as a consequence of which profits and gains derived by a taxpayer from transmission line project set-up in Pakistan between 01 July 2015 and 30 June 2018. The exemption is applied to projects:
- Owned and managed by a company formed for operating the said project and registered under the Companies Ordinance, 1984 and having its registered office in Pakistan;
- Not formed by the splitting up, or the reconstruction or reconstitution, of a business already in existence or by transfer to a new business of any machinery or plant used in a business which was being carried on in Pakistan at any time before the commencement of the new business; and
- Owned by a company fifty percent of whose shares are not held by the Federal Government or Provincial Government or a Local Government or which is not controlled by the Federal Government or a Provincial Government or a Local Government.
99. Exemption to LNG Terminal Operators and Terminal Owners
Clause (141)
A new clause is being proposed to be inserted by virtue of which profits and gains derived by LNG Terminal Operators and Terminal Owners will be exempt from tax for a period of five years from the date of commencement of commercial operations.
100. Exemption to income from social security contribution
Clause (142)
A new clause is being proposed to be inserted as a consequence of which income from social security contributions derived by Employees' Social Security Institutions of Balochistan, Khyber Pakhtunkhwa, Punjab and Sindh shall be exempt from tax. However, income other than income from social security contributions would remain taxable.
PART-II
101. Deletions Following is the itemized listing of clauses of Part II of the Second Schedule which have been proposed to be deleted. This is due to these being becoming infructuous due to efflux of time as well as changes brought about by the Bill.
===============================================================
Clause Description Reduced
===============================================================
Rate of Tax
===============================================================
(13C) Purchase of locally produced edible 2% of the
oil by manufacturers of cooking oil or purchase
vegetable ghee or both. price
(14) Advance tax under Section 234 in Rs.2 per
case of goods transport vehicle. kilogram of
the laden
weight.
(14A) Advance tax under Section 234 in Rs.250 per
case of passenger transport vehicle seat per
plying for hire with a registered annum.
seating capacity of twenty persons or
more.
(14B) Advance tax under Section 234 in Rs.2 per
case of goods transport vehicle for kilogram of
the period from 01 July 2012 to 17 the laden
November 2013. weight.
(21) Clause (21) was inserted through the
Finance Act, 2002 providing the basis
for determining tax of a resident
engaged in shipping business on
presumptive basis in the following
manner.
i. Ships and all floating crafts
including tugs, dredgers, survey One US$ per
vessels and other specialized gross
crafts registered in Pakistan; registered
tonnage per
ii. Ships and all floating crafts annum
including tugs, dredgers, survey
vessels and other specialized
crafts not registered in Pakistan; Fifteen US
Cents per
The Bill now seeks to withdraw the gross
above concession which was registered
otherwise available upto 30 June tonnage per
2020. annum
===============================================================
PART-IV
102. Exemption from minimum tax to KAPCO
Clause (11A), Sub-clause (iv)
Exemption provided to income arising to the purchaser of KotAddu Power Station from owning and operating the power station under Clause (138), Part I of the Second Schedule to the Ordinance, was withdrawn through the Finance Act, 2008.
The Bill now proposes to omit sub-clause (iv) of Clause (11A), which provided exemption from levy of minimum tax to KAPCO under section 113 of the Ordinance, being redundant provision.
103. Coal Mining Project in Sindh - Exemption from minimum tax
Clause (11A), Sub-clause (xviii)
Profits and gains derived by a taxpayer from coal mining project in Sindh, supplying coal exclusively to power generation projects is exempt from tax under Clause (132B) of Part-I of the Second Schedule to the Ordinance which was introduced vide Finance Act, 2014. The Finance Act, 2014 also inserted reference of Clause (132B) in Sub-clause (v) of Clause (11A) of the Part-IV of the Second Schedule to the Ordinance exempting from levy of minimum tax, under Section 113 of the Ordinance receipts from sale of electricity, which was not appropriate since Clause (132B) exempts profits and gains from coal mining projects. The Bill has now rectified the situation and proposes to delete the reference of Clause (132B) from Sub-clause (v) of Clause (11A). The Bill proposes to exempt coal mining projects from levy of minimum tax under Section 113 of the Ordinance.
104. Exemption from minimum tax and alternate corporate tax to LNG Terminal Operators and Terminal Owners
Clause (11A), Sub-clause (xix) & Clause (11D)
With the proposed exemption from tax to profits and gains derived by LNG Terminal Operators and Terminal Owners under Clause (141), Part I of the Second Schedule to the Ordinance, the Bill also proposes to exempt such LNG Terminal Operators and Terminal Owners from the levy of minimum tax under section 113 of the Ordinance.
In line with the above proposed exemptions to LNG Terminal Operators and Terminal Owners, the Bill also seeks to provide exemption from the levy of Alternative Corporate Tax under section 113C of the Ordinance.
105. Exemption from minimum tax for businesses in KPT, FATA & PATA
Clause (11A), Sub-clause (xx)
Clause 126F, Part I of the Second Schedule to the Ordinance provided exemption to profits and gains derived by a taxpayer, excluding manufacturers and suppliers of cement, sugar, beverages and cigarettes, located in the most affected and moderately affected areas of Khyber Pakhtunkhwa, FATA and PATA for the tax years 2010, 2011 and 2012.
Consequent amendment has now been proposed to be brought in Clause (11A) by way of inserting a new sub-clause (xx) wherein exemption from the levy of minimum tax under section 113 of the Ordinance is being proposed.
The proposed amendment would have a retrospective impact being related to tax years 2010, 2011 and 2012. However, the Bill does not provide for any mechanism as to how such amendment would be applied in cases where minimum tax has already been charged and paid for the above tax years. The viable medium to avail the benefit of such exemption would either be revision of return already filed or, in cases where assessments have been amended, rectification of the amended assessment orders passed for the relevant tax years.
106. Rice Mills - Exemption from minimum tax for the tax year 2015
Clause (11A), Sub-clause (xxi)
SRO 57(1)/2012 dated 24 January 2012 inserted Clause (13) in Part-III of the Second Schedule to the Ordinance whereby rice mills were subject to a reduced rate of minimum tax, under Section 113 of the Ordinance at 0.2% of the turnover. The Bill now proposes to exempt the levy of minimum tax in case of rice mills for the tax year 2015.
107. Exemption from minimum tax
Clause (11A), Sub-clause (xxii), (xxiii), (xxiv) & (xxv)
With the proposed exemption from tax on profits and gains derived by a taxpayer from the following industrial undertakings, under respective Clauses of Part-I of the Second Schedule to the Ordinance, the Bill also proposes to exempt such projects from the levy of minimum tax under Section 113 of the Ordinance.
======================================================
Relevant Clauses of
Industrial Undertaking Part-I of the Second
Schedule
======================================================
Income of Manufacturer of
equipment with dedicated used for 126I
generation of renewable energy
Income of Warehousing or Cold
126J
Chain Facilities
Income from Operating Halal Meat
126K
Production
Income from Industrial Undertaking
set-up in KPK 126L
======================================================
108. Exemption from withholding of tax for advertisement services
Clause (16A)
Under the aforesaid Clause, exemption was provided from withholding of tax under section 153(1)(b) of the Ordinance in respect of payments to electronic and print media for advertisement services. The exemption therein has been proposed to be withdrawn in the Bill.
109. Exemption from withholding of tax while making payment to PE of a non-resident E&P companies
Clause (46)
Earlier, payments in respect of supply of goods, rendering of services and execution of contracts to a permanent establishment (PE) of a non-resident person were subject to withholding of tax under section 153(1) of the Ordinance. Clause (46), Part IV of the Second Schedule to the Ordinance provided for exemption from withholding of tax under section 153(1) in respect of payment received by an oil distribution company or an oil refinery or a PE of non-resident Petroleum Exploration and Production (E&P) Companies.
Through the Finance Act, 2012, payment to a PE of non-resident was excluded from the purview of section 153(1) and a new sub section (2A) was inserted in section 152 of the Ordinance, providing for withholding of tax in respect of above payments to a PE of non-residents.
However, corresponding change was not brought into Clause (46), Part IV of the Second Schedule to the Ordinance resulting in withdrawal of exemption from withholding of tax on account of payment received by a PE of non-resident Petroleum Exploration and Production (E&P) Companies.
The Bill now proposes to introduce amendment in the aforesaid clause by inserting reference to section 152(2A) to account for the above anomaly and restore exemption from withholding of tax to the above companies.
110. Exemption from payment of tax at import stage under Section 148
Clause (56)
The goods classified under Pakistan Custom Tariff falling under Chapter 27 is presently exempted from payment of tax at import stage. The Bill seeks to withdraw the said exemption.
Likewise all goods classified under Chapter 99 of Pakistan Custom Tariff are also presently exempted from payment of tax at import stage. The Bill seeks to withdraw said exemption from goods falling under PCT heading 9918.
The Bill also proposes to exempt from payment of tax at import stage in case of certain petroleum products imported by oil marketing companies and oil refineries as under:
- Petroleum oils and oils obtained from bituminous minerals crude
- Furnace Oil
- High Speed Diesel Oil
- Motor split
- JP-1
- Base Oil for Lubricating oil
111. Deletion
The following Clauses are proposed to be omitted since the time limits prescribed therein have expired and the clauses have consequently become redundant:
========================================================
Clause Description
========================================================
(56B) Under the aforesaid Clauses, the
& exemption was provided in respect of
(56H) collection of tax at import stage under
Section 148 on the imports of potatoes
subject to certain conditions, for a
particular time period.
(59) Sub- Sub-clause (iii) of Clause (59) provides
clause (iii) exemption from withholding of tax on
profit on debt in respect of Pak rupee
accounts or certificates referred to
Clause (83), Part I of the Second
Schedule to the Ordinance. Clause (83)
of Part-I was omitted through the Finance
Act, 2008
(72A) Under the aforesaid Clause, exemption
was provided in case of a Hajj group
operator in respect of Hajj operations
from the applicability of Clause (1) of
Section 21, Section 113 and Section 152
of the Ordinance subject to certain
conditions, for tax years 2013 and 2014.
(83) Under the aforesaid Clause, exemption
was provided from the filing of wealth
statement for the tax year 2013 to a
person other than company or a member
of an association of persons, subject to
certain conditions.
========================================================
112. Large Trading Houses
Clause (57)
Large Trading Houses, subject to certain conditions, are exempt from payment of minimum tax under Section 113 of the Ordinance and are not subject to withholding of tax under Section 153 of the Ordinance. The Bill seeks to propose to insert a further explanation to Clause (57) to clarify that in-house preparation and processing of food and allied items for sale to customers shall not disqualify a company from being treated as a Trading House, provided all other conditions as mentioned therein are fulfilled and sale of such items does not exceed 2% of total sales.
113. Deduction of tax from cash withdrawal by exchange companies
Clause (61A) and (28B) of Part-II
The Bill proposes to omit Clause (61A) which grants exemption from withholding of tax under Section 231A in respect of cash withdrawal by exchange companies duly licensed and authorized by the SBP on bank accounts exclusively dedicated for authorized business related transactions, subject to certain conditions.
However, Clause (28B) has been proposed to be inserted in Part II of the Second Schedule to the Ordinance wherein a reduced rate of 0.15% has been proposed on cash withdrawals by such exchange companies.
114. Exemption from invocation of Section 111
Clause (86)
The above Clause was inserted in the Ordinance through SRO 1065(I)/2013 dated 20 December 2013, whereby the investment made by an individual, AOP or company in a Greenfield industrial undertaking was granted exemption, subject to certain conditions as specified therein, from probe of source of investment under Section 111 of the Ordinance. One of the condition is that the investment has to be made on or after 01 January 2014 and commercial production of the said industrial undertaking has to be commenced on or before 30 June 2016. The Bill proposes to extend the period of commencement of commercial production from 30 June 2016 to 30 June 2017.
115. Collection of advance tax on functions and gathering
Clause (90)
The aforesaid clause provided exemption from collection of advance tax on functions and gatherings under section 236D of the Ordinance to Federal Government, Provincial Government, an individual entitled to privileges under the United Nations (Privilege and Immunities) Act, 1948 and a foreign diplomat or a diplomatic mission. The Bill now proposes to withdraw the above exemptions by omitting the above clause.
116. Exemption from payment of tax at import stage under Section 148
Clause (91) and (92)
The Bill proposes to exempt payment of tax at import stage at the time of import of certain equipment as under [Clause (91)]:
- Tillage and seed bed preparation equipments.
- Seeding or planting equipments.
- Irrigation, drainage and agro - chemical application equipments.
- Harvesting, threshing and storage equipments.
- Post-harvest handling and processing equipments.
The Bill further proposes to exempt payment of tax at import stage while importing [Clause (92)]:
- Aircraft whether imported or acquired on wet or dry lease.
- Maintenance kit for use in trainer aircrafts.
- Spare parts for use in aircrafts, trainer aircrafts or simulators.
- Machinery, equipment and tools for setting up maintenance, repair and overhaul workshops.
- Operational tools, machinery, equipment and furniture and fixtures on one time basis for setting up Greenfield airports.
- Aviation simulators.
117. Exemption from collection of tax on exports
Clause (93)
With the proposed exemption from tax to profits and gains derived by industrial undertaking from operation of Halal Meat production under Clause (126K) of Part-I of the Second Schedule to the Ordinance, the Bill seeks to propose to exempt collection of tax on exports under Section 154(1) of the Ordinance made by such undertaking.
SALES TAX
i. Active taxpayer
Section 2(1)
The Bill proposes to introduce the concept of an active taxpayer by inserting a new definition of this term. Sub- section (1) of section 2 defines an active taxpayer to mean a registered person who does not fall in any of the following categories:
- Who is blacklisted or whose registration is suspended or blocked under section 21
- Who fails to file the monthly tax return under section 26 by the due date for consecutive two tax periods
- Who fails to file the income tax return under section 114 or statement under section 115 of the Income Tax Ordinance, 2001 by the due date
- Who fails to file two consecutive monthly withholding tax statements or an annual withholding tax statement under section 165 of the Income Tax Ordinance, 2001.
It is imperative to note that a person would be ousted from the list of active taxpayers, if he does not file his returns for two consecutive tax periods within the due date. Further, the status of an active taxpayer has also been linked with the fulfilment of filing requirements, as provided under the Income Tax Ordinance, 2001.
The concept of "Active Taxpayers list" is similar to the one introduced in last year under the income tax law in order to identify the "Filers" and "Non-Filers". Under the sales tax law, it will distinguish the active taxpayers from the suspended and blacklisted persons. The power to issue the Active Taxpayers List is assigned to the Board under the newly proposed section 21A, alongwith the power to issue rules for imposing restrictions and limitations on non-active taxpayers.
ii. Cottage industry
Section 2(5AB)
Cottage industry is already defined as a manufacturer whose annual turnover from taxable supplies made in any tax period during the last twelve months does not exceed five million rupees or whose annual utility (electricity, gas and telephone) bills during the last twelve months do not exceed seven hundred thousand rupees.
The Bill proposes to increase the limit of seven hundred thousand to eight hundred thousand rupees. The amendment is aimed to give effect to the increase in the prices of the utilities in the recent years. Previously , this limit was enhanced from rupees six hundred thousand to rupees seven hundred thousand vide Finance Act, 2008.
iii. Retailer
Section 2(28)
The definition of "retailer" inter alia states that "the total turnover per annum shall be taken into account for the purposes of registration of the retailer under section 14". The concept of annual turnover has become redundant, since the scheme of registration and charging of sales tax by the retailers is no more linked or based on turnover.
iv. Supply - Toll manufacturing
Section 2(33)
The Bill seeks to enlarge the scope of the definition of "supply". It is proposed that the transfer or delivery of goods manufactured by the toll manufacturers (who manufacture goods from the raw material not belonging to them, on charges basis) to the owners or their nominated persons would be considered as supply.
The amendment is aimed to provide the legal coverage to the provisions of SRO 1125(I)/2011 dated 31 December 2011, which requires the toll manufacturers of the five sectors (leather, textile, carpet, surgical and sports goods) to pay the sales tax on their conversion charges at the rate of 2%.
The provincial sales tax authorities/ boards consider the activities of the toll manufacturers as "Services" and have levied sales tax thereon at the standard rate. Whereas, through the proposed amendment, it is intended to charge tax on the activities of toll manufacturers under the Sales Tax Act, 1990. Unless the matter is resolved between the Federal and Provincial tax authorities, the said amendment will result in levy of tax on the toll manufacturing activities twice.
2. Scope of tax- Further tax
Section 3
This is a charging section and lays down the various tax rates leviable under the ST Act. Further tax was levied at the rate of one percent on the taxable supplies made to a person who has not obtained registration number by introducing sub section 1(A) in section 3 vide Finance Act, 2013. The rate of further tax is now proposed to be enhanced to two percent. The measure is aimed to increase the cost of doing business of un-registered persons and to push them to get registration.
3. Time and manner of payment
Section 6(1)
This sub section deals with time and manner of payment of sales tax in case of goods imported into Pakistan. Under this sub-section sales tax is collected by the Customs Authorities, as it is a customs duty payable under the Customs Act, 1969 by applying the relevant sections related to collection, payment and enforcement. Now the Bill seeks to include the powers of recovery as well to the Customs authorities. The proposed amendment will empower the customs authorities to recover subsequently the short payments or non-payments. However, this may create difficulties in cases, where the goods imported have been used in the taxable supplies and the registered persons have paid the sales tax thereon.
4. Determination of tax liability
Section 7(2)
This section provides the mechanism for determination of tax liability by prescribing the amount of claimable input tax against output tax.Sub-section 2 of section 7 specifies conditions for entitlement to deduct input tax from the output tax. Clause (ii) of the said sub section states that the registered person is entitled to claim the input tax on goods imported, if he holds a bill of entry or goods declaration in his name, showing his sales tax registration number which is duly cleared by the customs under section 79,dealing with declaration and assessment for home consumption, or section 104of the Customs Act, 1969, dealing with clearance of bonded goods. However, the taxpayers were denied the claim of input tax paid on goods imported and cleared on provisional basis under section 81 of the Customs Act, 1969. The Bill now proposes to include section 81 ibidin clause (ii) of sub section (2) of section 7, which will enable the registered persons to claim adjustment of input tax paid in the aforementioned manner.
5. Tax credit not allowed
Section 8(1)
This section prescribes the situations under which the credit of input tax is not allowed. Through the Finance Act, 2014, four new situations were added; out of which, one, inserted under clause (h) of sub-section (1) of section 8, imposed restriction of input tax credit on goods used in, or permanently attached to, immoveable property, such as building and construction materials, etc. It is now proposed to amend the said clause (h) by excluding the pre-fabricated buildings from this list. As a result, any input tax paid on pre-fabricated buildings will be available for input tax adjustment.
It is also proposed to restrict the claim of input tax under the following circumstances:
- services in respect of which input tax adjustment is barredunder the respective provincial sales tax law;
- import or purchase of agricultural machinery or equipmentsubject to sales tax at the rate of 7% under Eighth Scheduleto the Sales Tax Act, 1990; and
- from the date to be notified by the Board, such goods and services whichhave not been declared by the supplier in his return at the time of filing of return by the buyer.
6. Joint and several liability of registered persons in supply chain where tax unpaid
Section 8A
This section deals with the joint and several liability of a registered buyer for payment of any un-paid amount in case of default in payment of tax by the supplier. The Bill seeks to make the department liable to prove that in case any tax remains unpaid in a supply chain, the buyer was aware or in knowledge of the said fact. The amendment is proposed in the light of verdict of the Lahore High Court wherein the honorable Court concluded that while invoking the provisions of section 8A, it is the responsibility of the department to prove that the buyer was in knowledge of the fact that the seller will not pay the tax to the government treasury.
7. Exemptions
Section 13
This section deals with the exemption from tax granted to import/ supply of goods through the Sixth Schedule and various notifications issued from time of time. Under clause (a) of Sub Section (2) of this section, the Federal Government is empowered to issue notifications in order to exempt any taxable supply or import and under clause (b) of sub-section (2), the Board by special order in each case can exempt any import or supply of goods.
The Bill now proposes to withdraw the powers of the Board to issue any order for granting the exemption by omitting the clause (b) of sub section 2. Further, the Bill also seeks to amend the clause (a) of sub-section (2) by placing following restrictions on the Federal Government in order to issue the notifications under this section.
- the notifications shall be issued pursuant to the approval of the Economic Coordination Committee of Cabinet
- the notifications shall be issued in the following circumstances:
• to take immediate action for thepurposes of national security, natural disaster, national foodsecurity in emergency situations,
• for protection of national economic interests in situations arising out of abnormalfluctuation in international commodity prices,
• for removal ofanomalies in taxes, and
• for development of backward areas andimplementation of bilateral and multilateral agreements.
It is also proposed to place all the notifications before the National Assembly issued in a financial year under section 13. Further, the Bill also proposes that the notifications issued by the Federal Government in the aforesaid manner shall stand rescinded on the expiry of the financial year, if not rescinded earlier. So effectively, all the notifications issued under section 13 will be repealed at the close of the financial year in which these were issued; and, in order to continue the status of exemption on such products during the subsequent period, either the said exemption be inserted in law or a fresh notifications will be issued.
The aforementioned proposed amendments were earlier made part of the Sales Tax Act, 1990, through the Finance (Amendment) Ordinance, 2015 promulgated on 30 April 2015. Now the Bill seeks to incorporate these amendments through the legislative process of the parliament.
8. Registration
Section 14
Historically the title of Section 14 was "Requirement of Registration", wherein a list of persons was provided who were liable for registration. Further, section 15 to 20 dealt with various other matters related to registration. Vide Finance Act, 2004, the title of Section 14 was replaced with the "Registration" and Board was empowered to regulate the rules related to the registration. Section 15 to 20 were also omitted and the matters dealt therein with respect to compulsory registration, change of registration, transfer of registration, etc were made part of the rules. This section is now witnessing a reversal and the Bill now seeks to amend the Section 14 in a manner that the list of persons required to be registered is proposed to be once again incorporated in Section 14. By and large the list of persons required to be registered is same as provided in Rule 4 of the Chapter I of the Sales Tax Rules, 2006. It is assumed that after making amendments in Section 14, the rule related to registration will be deleted/ amended to avoid duplication. As per the proposed amendment every person who is engaged inmaking taxable supplies in Pakistan, including zero-rated supplies and falling in any of the following categoriesis required to be registered under the Sales Tax Act, 1990:-
- a manufacturer who is not running a cottage industry;
- a retailer who is liable to pay sales tax under the Act or rules made thereunder, excluding such retailer required to pay sales tax through his electricity bill under sub-section (9) of section 3;
- an importer;
- an exporter who intends to obtain sales taxrefund against his zero-rated supplies;
- a wholesaler, dealer or distributor; and
- a person who is required, under any other Federal law or Provincial law, to be registered for the purpose of any duty or tax collected or paid as if it were a levy of sales tax collected under the Act.
9. Access to record, documents, etc.
Section 25(3)
This section deals with the access to record and documents, especially for the Audits conducted by the department. It is proposed to delete the reference of section 36 as appearing in sub section (3) of section 25, since the matters dealt in section 36 were made part of section 11 vide Finance Act, 2013 and accordingly section 36 was omitted. Hence, the reference of section 36 appearing in section 25 was superfluous and has rightly been proposed to be deleted.
10. Special audit by Chartered Accountants or Cost Accountants
Section 32A
This section authorizes the Board or the Commissioner to appoint a Chartered Accountant or a Cost and Management Accountant or a firm of such accountants to conduct audit of records and refund claims of the registered persons.
The aforesaid provisions are proposed to be substituted while empowering the Board to appoint as many special audit panels as may be necessary, comprising two or more members from the following -
(a) an officer or officers of Inland Revenue;
(b) a firm of Chartered Accountants as defined under the Chartered Accountants Ordinance, 1961 (X of 1961);
(c) A firm of Cost and Management Accountants as defined under the Cost and Management Accountants Act, 1966 (XIV of 1966); or
(d) Any other person as directed by the Board.
The special audit panel is formed to conduct audit of a registered person or persons, including audit of refund claims and forensic audit and the scope of such audit shall be determined by the Board or the Commissioner Inland Revenue on a case-to-case basis. It is also proposed that the Board may, where it considers appropriate, also get such audit conducted jointly with similar audits being conducted by provincial administrations of sales tax on services.
The Bill proposes for the appointment of the Chairman who shall be an officer of Inland Revenue for the purpose of heading each special audit panel. It is also proposed that in the event any one member of the special audit panel, other than the Chairman, is absent from conducting an audit, the proceedings of the audit may continue and audit conducted shall not be invalid or be called in question merely on the ground of such absence.
The Bill also proposes that the Board may prescribe Rules in respect of constitution, procedure and working of special audit panel. It is also proposed that every member of the special audit panel shall have the powers of officers of Inland Revenue.
11. Offence and penalties
Section 33
This section deals with the general and specific penalties under specified circumstances. The penalty for late filing of the sales tax return or for late deposit of tax is at a concessional rate of Rupees 100 per day provided the delay does not exceed fifteen days. Higher penalties are attracted after the expiry of fifteen days. The Bill now proposes to restrict the availability of the concessional rate of Rs. 100 per day to a delay of upto ten days only by making amendment is Sr. No. 1 and 5 of the Table.
12. Monitoring or tracking byelectronic or other means
Section 40C
Section 40C was inserted vide Finance Act, 2013, whereby the Board was authorized to issue notification in order to specify any registered person or class of registered persons or any goods or class of goods in respect of which monitoring or tracking of production, sales,clearances, stocks or any other related activity may be implemented through electronic or other means.
Sub section (2) prescribes that in such cases, no taxable goods shall be removed or sold by the manufacturer or any other person without affixing tax stamp, banderole, stickers, labels, etc in any such form, style and manner as may be prescribed by the Board.
The Bill now seeks to amend sub section (2) by inserting the word "barcode" after the word "labels", meaning thereby, the Board may also impose the condition of affixing barcodes on the said goods for the monitoring purposes.
The Bill also seeks to add sub-section (3), which provides that the aforementioned tax stamps, banderoles, stickers, labels, barcodesetc, shall be acquired by the registered person from a licensee appointed by the Board. The licensee shall also install the related required equipment in the premises of the saidregistered person. The price of the equipment and tax stamps, banderoles, stickers, labels, barcodesetc supplied by the licensee shall be fixed by the Board.
13. Agreement for the exchange of information
Section 56A & 56B
As a consequence of the Eighteenth amendment to the Constitution of Islamic Republic of Pakistan whereby each province is empowered to levy tax on identifiable services, it has become imperative for the tax regulatory authorities in Pakistan to exchange information in order to check the tax evasion and avoidance by the taxpayers. Hence, Section 56A has been proposed to be introduced by the bill whereby the federal government is empowered to enter into multilateral and bilateral agreement with the provincial government for exchange of the required information.
At the same time, the said section also empowers the federal government to exchange information with a foreign government under a multilateral and bilateral agreement. Such an approach, it appears, is in line with the global initiative towards information sharing and exchange for the purposes of combating tax evasion and avoidance. The precursor to this initiative was the Foreign Account Tax Compliance Act (FATCA), as introduced by the Inland Revenue Services (IRS) and the more recent Common Reporting Standard (CRS) developed by the Organization for Economic Co-operation and Development (OECD) that are aimed at disclosure of information by foreign financial institutions (FFIs) and other financial intermediaries with a view to prevent tax evasion by the tax payers residing in the other jurisdictions.
The information received under both the proposed amendments may be used only for tax and related purposes and is required to be kept confidential as proposed under section 56B.
14. Prize scheme to promote tax culture
Section 56C
The proposed new section is aimed to broaden the tax base whereby, the Board is allowed to introduce prize schemes to encourage the general public to makeprocurement only from the registered persons who issues tax invoices.
15. Amendments in the Fifth Schedule- Zero Rate Goods
The Fifth Schedule to the Act lists goods that are zero rated. The Bill proposes the following amendments in this Schedule:
Supply of specified locally manufactured plant and machinery to Export Processing Zones (EPZ) which is included under serial No. 6 of the Fifth Schedule is proposed to be shifted to a newly inserted serial No. 6A and the zero rating of such plant and machinery would be subject to conditions, restrictions and procedure which are detailed therein.
The Bill further proposes to amend serial 9 of the Fifth Schedule which deals with exempted goods that are exported by a manufacturer involved in local supplies of both taxable and exempted goods. Currently the benefit of zero rating is conditional ie applicable for only those manufacturers who are making local supplies of both taxable and exempt goods. The Bill now proposes to remove the above condition which would mean that any manufacturer who exports exempted goods can avail the benefit of zero rate of sales tax regardless of the fact the manufacturer is involved in local supplies of both taxable and exempted goods.
The Bill has further proposed the omission from zero rating of the following items covered under serial No. 12-
======================================================
Clause No. Description PCT Heading
======================================================
(ix) Flavored milk 0402.9900
(x) Yogurt 0403.1000
(xi) Cheese 0406.1010
(xii) Butter 0405.1000
(xiii) Cream 04.01 and 04.02
(xiv) Desi ghee 0405.9000
(xv) Whey 04.04
(xvi) Milk and cream, concentrated
and added sugar or other 0402.1000
sweetening matter
======================================================
The above items are proposed to be included in the Sixth Schedule thereby making them exempt instead of zero rated. This would mean that the eligibility of claim of input tax would no longer be available to suppliers of the above mentioned goods. Moreover if the aforesaid goods are sold in retail packing under a brand name, the same would be subject to a reduced rate of sales tax of 10% under the Eighth Schedule.
16. Sixth Schedule- Exemptions
The Sixth Schedule deals with exemption of goods from the levy of sales tax . The Bill has proposed withdrawal of the following exemptions :
Table 1 (on import and local supply)
==================================================================
S.No. Description Heading Nos. of the First
Schedule to the Customs Act,
1969 (IV of 1969)
==================================================================
28 Poultry feed and cattle 2301.2090, 2305.0000,
feed including their all 2306.2000, 2306.3000,
ingredients except 2306.4100, 2306.5000,
soyabean meal of PCT [2309.9090, 2936.2100,
heading 2304.0000 and 2936.2200, 2936.2300,
oil-cake of cottonseed 2936.2400, 2936.2500,
falling under PCT 2936.2600, 2936.2700 and
heading 2306.1000. 2936.2800]
39 Incinerators of disposal 8417.8000, 8430.2000 and
of waste management, 8479.8990
motorized sweepers and
snow ploughs.
56 Re-importation of foreign 99.18
origin goods which were
temporarily exported out
of Pakistan subject to
similar conditions as are
envisaged for the
purposes of applying
zero-rate of Customs
Act, 1969 (IV of 1969).
==================================================================
The aforesaid goods have now been proposed to be separately subject to a reduced rate of sales tax under the Eighth Schedule.
Table 2 (on local supply only)
=====================================================================
S.No. Description Heading Nos. of the First
Schedule to the Customs Act,
1969 (IV of 1969)
=====================================================================
13 Reclaimed lead, if Respective headings
supplied to recognized
manufacturers of lead
batteries
14 Waste paper Respective headings
=====================================================================
Table 3 (Annexure)
====================================================================
S.No. Description Heading Nos. of the First
Schedule to the Customs Act,
1969 (IV of 1969)
====================================================================
10 Machinery, equipment, Respective headings
raw materials,
components and other
capital goods for use in
buildings, fittings,
repairing or refitting of
ships, boats or floating
structures imported by
Karachi Shipyard and
Engineering Works
Limited.
16 Plant, machinery, Respective headings
equipment and specific
items used in production
of bio-diesel.
====================================================================
The proposed amendments aims to include the following goods in the Sixth Schedule :
Table 1 (on import and local supply)
========================================================================
Sr. No. Description Tariff Heading
========================================================================
117 Appliances for colostomy 3006.9100
118 Colostomy and urostomy bags 3926.9050
119 Tubular day lighting devices (TDDs) 8539.3930
120 Various diagnostic kits or equipment. 3822.0000
121 Blood Bag CPDA-1 with blood Respective headings
transfusion set pack in aluminum
foil with set.
122 Urine drainage bags Respective headings
123 Aircraft, whether imported or acquired 8802.2000,
on wet or dry lease 8802.3000,
8802.4000
124 Maintenance kits for use in trainer Respective headings
aircrafts of PCT headings8802.2000
and 8802.3000
125 Spare parts for use in aircrafts, Respective headings
trainer aircrafts or simulators
126 Machinery, equipment and tools for Respective headings
setting up maintenance, repair and
overhaul (MRO)
workshop by MRO company
recognized by Aviation Division
127 Operational tools, Respective headings
machinery, equipment and furniture
and fixtures on one-time basis
for setting up Greenfield airports by
a company authorized by
Aviation Division
128 Aviation simulators imported by airline Respective headings
company recognized by
Aviation Division
========================================================================
Table 2 (on local supply only)
=======================================================================
Sr. No. Description Tariff Heading
=======================================================================
17 Raw and pickled hides and skins, wet 41.01,
blue hides and skins 41.02,
41.03,
4104.1000,
4105.1000,
4106.2100,
4106.3000,
4106.9000
18 Supplies made by manufacturers of Respective headings
marble and granite having
annual turnover less than five
million rupees even if their annual
utility bill is more than eight hundred
thousand rupees
19 Bricks (up to 30th June, 2018) 6901.1000
20 Crushed stone (up to 30th June, 2517.1000
2018)
=======================================================================
The exempt goods mentioned in the sixth schedule as prescribed in the schedule below shall be substituted:
TABLE - I
=====================================================================
Sr. Description Substituted through Tariff Heading
No. Finance Bill 2015
=====================================================================
73 Milk and cream Milk 04.01
73A - Milk and cream, 04.01 and
concentrated or 04.02
containing added
sugar or other
sweetening matter,
excluding that
sold in retail
packing under a
brand name
74 Flavored milk Flavored milk, 0402.9900
excluding that
sold in retail packing
under a brand
name
75 Yogurt Yogurt, 0403.1000
excluding that
sold in
retail packing
under a
brand name
76 Whey Whey, excluding 04.04
that sold in retail
packing under a
brand name
77 Butter Butter, 0405.1000
excluding that
sold in
retail packing
under a
brand name
78 Desi ghee Desi ghee, 0405.9000
excluding that
sold in retail
packing under a
brand name
79 Cheese Cheese, 0406.1010
excluding that
sold in
retail packing
under a
brand name
80 Processed Processed 0406.3000
cheese not cheese not
grated or grated or
powdered powdered
,excluding that
sold in retail
packing under a
brand name
=====================================================================
17. Amendments in the Eighth Schedule
The Eighth Schedule deals with items that are liable to sales tax at reduced rates.
The Bill proposes enhancement in the rates of sales tax for the following goods listed in Table I to the Eighth Schedule -
=====================================================================
S.No. Description Existing Rate Proposed
of Sales Tax Rate of
Sales Tax
=====================================================================
1 Soyabean meal 5% 10%
4 Oilseeds meant for 5% 10%
sowing
6 Plant and machinery
not manufactured 5% 10%
locally and having no
compatible local
substitutes.
=====================================================================
The Bill proposes the addition of the following goods in Table -1 to the Eighth Schedule-
====================================================================================
Sr. No. Description Tariff Heading Rate Condition
====================================================================================
7 Flavoured milk 0402.9900 10% Sold in retail
packing
under
a brand
name
8 Yogurt 0403.1000 10% Sold in retail
packing
under
a brand
name
9 Cheese 0406.1010 10% Sold in retail
packing
under
a brand
name
10 Butter 0405.1000 10% Sold in retail
packing
under
a brand
name
11 Cream 04.01 and 10% Sold in retail
04.02 packing
under
a brand
name
12 Desh ghee 0405.9000 10% Sold in retail
packing
under
a brand
name
13 Whey 04.04 10% Sold in retail
packing
under
a brand
name
14 Milk and cream, 0402.1000 10% Sold in retail
concentrated and packing
added sugar or under
other a brand
sweetening name
matter
15 Poultry feed, Various Tariff 5%
cattle Headings
feed, and their
ingredients
except
soya bean meal
of PCT heading
2304.0000 and
oilcake
of cottonseed
falling under PCT
heading 2306 .1000
16 Incinerators of 8417.8000, 5%
disposal of waste 8430.2000
management, and
motorized 8479.8990
sweepers and
snow ploughs
17 Re-importation of 99.18 5% Subject to
foreign origin similar
goods which were conditions
temporarily exported as are
out of Pakistan envisaged
for the
purposes
of customs
duty
under the
Customs
Act,1969.
18 Reclaimed lead Respective 5% If supplied to
headings Recognized
manufacturers
of lead and
lead batteries
19 Waste paper 47.07 5%
20 Plant, machinery, Respective 5%
equipment and headings
specific items
used in production The
of biodiesel Alternative
Energy
Development
Board
(AEDB),
Islamabad
shall certify in
the prescribed
manner and
format as per
Annex-B, as
given in the
Sixth Schedule .
21 1205.0000, 16% On import by
Rapeseed, sunflower seed 1206.0000 solvent extraction
and canola seed industries
22 Soya bean seed 1201.1000 6% On import by
solvent
extraction
industries,
subject to the
condition that
no refund of
input tax shall
bead missible.
23 6309.0000 5%
Second hand and worn
clothing or foot wear
25 Agricultural tractors 8701.9020 10%
26 Tillage and Various Tariff 7%
seedbed preparation Headings.
equipment.
27 Seeding or Various Tariff 7%
Headings.
planting equipment
28 Irrigation, drainage Various Tariff 7%
Headings.
and agro-
chemical application
equipment.
29 (i) Harvesting, Various Tariff 7%
threshing and Headings.
storage equipment
30 Post-harvest
handling and
processing &
miscellaneous
machinery:
(i) Vegetables 8437.1000
and fruits 7%
cleaning and
sorting or
grading equipment
(ii) Fodder and 8433.4000
feed cube
maker equipment
====================================================================================
The Bill proposes enhancement in the rate of sales tax for the following goods listed in Annexure of Table-2 to the Eighth Schedule -
=====================================================================
S.No. Description Existing Proposed Rate
Rate of of Sales Tax
Sales Tax
=====================================================================
1 Machinery and 5% 10%
equipment for
development of grain
handling and storage
facilities.
5 Complete plants for 5% 10%
relocated industries.
6 Machinery, equipment
and other capital goods
meant for initial
installation, balancing, 5% 10%
modernization, replacement or
expansion of oil refining,
petrochemical and
petrochemical
downstream products.
=====================================================================
The Bill proposes the omissions of following goods from the relevant Table -1 and 2 of the Eighth Schedule-
========================================================================
S.No. Description Tariff Heading
========================================================================
Table -1
========================================================================
3 Directly reduced iron. 72.03
Table- 2
3 Items imported by Call Centers, Various
Business Processing Outsourcing Headings
facilities duly approved by the Pakistan
Telecommunication Authority
7 Proprietary Formwork System for Various
building / structures of a height of 100 ft Headings
and above and its various items and
components
========================================================================
The above goods would now be taxable at the standard rate of 17% instead of the concessional rate of 5%.
18. Amendments in the Ninth Schedule
The Bill proposes enhancement in the rates of sales tax for the goods listed in the Table to the Ninth Schedule-
========================================================================
Description Sales Tax on Import Sales Tax at the time of
registration of IMEI
========================================================================
Existing Proposed Existing Proposed
Rate of Rate of Rate of Rate of
Sales Sales Tax Sales Tax Sales Tax
Tax
========================================================================
A. Low priced Rs.150 Rs.300 Rs.150 Rs.300
Cellular Mobile
Phones or
Satellite Phones
B. Medium Rs.250 Rs.500 Rs.250 Rs.500
priced Cellular
Mobile Phones or
Satellite Phones
C. Smart Rs.500 Rs.1000 Rs.500 Rs.1000
Cellular Mobile
Phones or
Satellite Phones
========================================================================
19. Certain Sales Tax and Federal Excise measures announced in the salient features of the budget documents
Through the salient features it was observed that certain measures were taken in sales tax and federal excise duty however coverage of the same was not provided under the Finance Bill. It appears that since the SRO's have not been issued with the Budget, therefore the below listed measures in sales tax and federal excise duty would be covered when the related SRO's are issued-
- Rationalization of sales tax on steel sector melters, re- rollers and ship breakers.
- Sales Tax Rules regarding temporary registration are being introduced to facilitate the importers- cum- manufacturers.
- The electronic monitoring system is proposed to be introduced to monitor the production of specified sector ie cigarettes, beverages, cement, fertilizer and sugar; and also to monitor the sales of restaurants etc.
- The provisions of temporary registration being inserted in the Sales Tax Rules, 2006, whereby a manufacturer shall be able to import machinery etc without having to wait for completion of procedural formalities.
20. Amendments in the Islamabad Capital Territory (Tax on Services) Ordinance, 2001
Sales tax on services was originally levied through four separate Provincial Sales Tax Ordinances, 2000 through which identical services were subjected to sales tax. Subsequently the Islamabad Capital Territory (Tax on Services) Ordinance, 2001 was also introduced wherein similar services such as hotels, clubs, advertisement on T.V. and radio, courier were subject to sales tax. The administration and collection of the provincial as well as Islamabad Capital Territory sales tax was with the Federal tax authority.
Subsequently the scope of tax was expanded by including additional services under the Federal Excise Act, 2005 such as telecommunication, banking and insurance services, franchise services, etc.
In pursuance of the 18th amendment to the Constitution of Pakistan and the 7th NFC award the Provinces of Sindh, Punjab and Khyber Pakhtunkhwa established their respective Revenue Authorities to administer and collect sales tax on services. Accordingly the respective Provincial Sales Tax Ordinances of 2000 were repealed and replaced with the Provincial Sales Tax on Services Act wherein significant additional services were brought into the tax net.
The impact of the above was that a wide range of services became taxable in the provinces of Sindh, Punjab and KPK, however the same services were not being taxed in Islamabad Capital Territory. The Bill now proposes to rectify this position by amending the existing Schedule to the Islamabad Capital Territory Ordinance, 2001 to include a wide range of services that are being taxed in other provinces.
Through the proposed amendment the services of contractual execution of work, technical scientific and engineering consultants, business support services etc have been proposed to be included in the Schedule of taxable services with effect from 1 July 2015 along with the respective rate of sales tax.
However definitions or Rules / procedures for the said services have not been provided thereby leaving it open to interpretation. Moreover the services that are already taxable under the Federal Excise Act, 2005 such as telecommunication, banking and insurance services, franchise services, etc are not included in this Ordinance and will continue to be taxable under the Federal Excise Act, 2005.
CUSTOMS
Customs Act, 1969
1. General Powers to Exempt Customs Duties
Section 19 & 20
Under section 19 the Federal Government may, by notification in the official Gazette, exempt any goods or class of goods from the whole or any part of customs duty leviable under the Act and may remit any fine, penalty, charge or any other amount recoverable under the Act.
Further under section 20 grants power to the Board who in exceptional circumstances may by special order, exempt any goods from the payment of the whole or any part of the duty leviable under the Act.
The Bill now seeks to withdraw the powers of the Board granting exemption by deleting section 20. Moreover the power of the Federal Government to grant exemption is pursuant to the approval of the Economic Coordination Committee of Cabinet. This approval is sought for whenever circumstances arise to take immediate action for the purposes of national security, natural disaster, national food security in emergency situations arising out of from abnormal fluctuation in international commodity prices, removal of anomalies in duties, development of backward areas and implementation of bilateral and multilateral agreements.
The Bill proposes that all notifications by the Federal Government for providing exemption shall be placed before the National Assembly in a financial year. It is also proposed that any notification issued under Sub-section (2) of Section 16 of the Act after 1st July 2015 shall, if not earlier rescinded, stand rescinded on the expiry of the financial year in which the said notifications were issued.
2. Untrue statements, error etc.
Section 32 Sub-section (3)
In terms of Section 32(3) of the Act, the custom authorities are empowered to recover any duty or charge not levied/short levied/erroneously refunded due to an inadvertence, error or misconstruction by issuing a show cause notice within three years from the relevant date. However, in a case, the recoverable amount is less than one hundred rupees, the customs authorities shall not initiate any action under this section.
Now, it is proposed that the lower limit of exception to the recoverable amount of duty is increased from Rs.100 to Rs.20,000.
3. Transshipment of goods
On application by the owner of any goods imported to any customs-station as for transshipment to some other customs-station or foreign destination, the custom authorities may grant leave to transship the same without payment of duty and entry of goods at the custom-station of destination and such goods will be subject to taxes and duties at their port of destination.
Now, for further clarification for collection of duties on goods under transshipment, following amendments being proposed under Sections 79, 121 and 123 of the Act :
i. Declaration and assessment for home consumption or warehousing
Section 79 Sub-section (1)
For the purposes of declaration and assessment of goods under Section 79 of the Act for home consumption or warehousing, it is proposed that goods under transshipment would also be covered under the scope of the Section 79 of the Act.
Moreover, an explanation proposed to be added in Section 79 of the Act which clarifies that the assessment of duty, taxes and other charges on goods under transshipment shall be changes/levied at the port of destination.
ii. Transshipment of goods without payment of duty
Section 121 Sub-section (1)
It is proposed to introduce a proviso after sub section (1) of Section 121 of the Act whereby the computerized system may automatically authorize transshipment of goods to other customs-station subject to risk selectivity criteria.
iii. Entry, etc, of transshipped goods
Section 123
An explanation is also proposed to be added after Sub section (2) of Section 123 of the Act which provided that in case of import of goods through a LCL (less than a container load) for transshipment to another destination, the custom station of first entry shall be the custom-station where the goods are de-consolidated.
4. Punishment for Offences
Serial No.1(ii) of Table of Section 156
It is proposed to introduce a new penalty of not more than Rs.50,000 being imposed on the person who contravenes the requirement of placement of invoice and packing list inside the import of container or consignment. It seems that this penalty is introduced with the objective to avoid under-invoicing at import stage whereby importers avoid the requirement of placing the invoice of supplier and list of goods with the consignment so that, they are able to provide a duplicate invoice (generally a fake invoice) with very low import value thereby avoiding payment of duties and taxes on much higher actual import values.
5. First Schedule - Significant changes in rates of custom duty
Section 1
The following significant changes have been proposed in the custom duties of various items:
• Various items are presently liable to duty at the rate of 1%, it is proposed that such rate be increased to 2%;
• The maximum rate of duty of 25% is proposed to be reduced to 20%;
6. Fifth Schedule- Import of Plant and Machinery etc.
See Section 18
The Fifth Schedule to the Act provides the reduced rate/exemption with certain conditions or limitations from levy to customs duty on import of plant and machinery for various sectors. The following significant propositions are being introduced:
• Customs duty on import of agriculture machinery be reduced from existing rate of 5% - 20% to 2%;
• Customs Duty on import of used construction machinery by construction companies who are registered with Pakistan Engineering Council and SECP be reduced to 10%;
• Reduced rate of customs duty available at the rate of15% to Call Centers and Business processing outsourcing facilities is being withdrawn;
• Reduced rate of customs duty on complete plant for relocated industries is being withdrawn;
• 10% rate on import of machinery and equipment by an industrial concern is being increased upto 15%; and
• New exemption from levy of custom duty is being introduced through Part V to the Fifth Schedule which covers the Aviation industry. Import of Aircraft and parts thereof will be made 0% custom duty subject to certain conditions laid down under the Table.
Note:
The proposed amendments discussed at point no.7 and 8 above shall haveeffect from the following day the assent is given by the President to the Finance Bill 2015-16.
FEDERAL EXCISE
1. Exemptions
Section 16
Under Sub section (2) of Section 16, the Federal Government may, by notification in the official Gazette, exempt any goods or class of goods or any services or class of services from the whole or any part of the duty leviable under this Act.
Further under Sub section 3 of Section 16, the Board may by special order, exempt from the payment of the whole or any part of the duty leviable under this Act, any goods or services on which such duty is leviable.
The Bill now seeks to withdraw the powers of the Board granting exemption from the levy of the FED as provided in Sub-section (3) of Section 16. In view of the proposed withdrawal of powers of the Board, the Federal Government is only vested with the powers to grant exemption for levy of FED on any goods or class of goods or any services or class of services as the case may be, subject to the approval of the Economic Coordination Committee of Cabinet. This approval is sought for whenever circumstances exist to take immediate action for the purposes of national security, natural disaster, national food security in emergency situations arising out of abnormal fluctuation in international commodity prices, removal of anomalies in duties, development of backward areas and implementation of bilateral and multilateral agreements.
The Bill proposes that all notifications by the Federal Government for providing exemption shall be placed before the National Assembly in a financial year. It is also proposed that any notification issued under Sub-section (2) of Section 16 after 1st July 2015 shall, if not earlier rescinded, stand rescinded on the expiry of the financial year in which the said notifications was issued.
2. Power of Board or Commissioner to pass certain orders
Section 35(1)
Under Sub-section (1) of Section 35, the Board or the Commissioner is authorized to take suo moto action to call for and examine the records of any proceedings under this Act, or for verifying the legality or propriety of any decision or order passed by a subordinate officer and may pass such order as he may think fit. The Bill now seeks to expand the scope of this section whereby the actions by the Board or the Commissioner, as the case may be taken under sub section (1) on application by the aggrieved person in addition to their suo moto action.
3. Monitoring or tracking by electronic or other means
Section 45A
Section 45A was inserted by the Finance Act, 2013, whereby the Board may, by notification in the official Gazette, specify any registered person or class of registered persons or any goods or class of goods in respect of which monitoring or tracking of production, sales, clearances, stocks or any other related activity may be implemented through electronic or other means as may be prescribed. In such cases, no excisable goods shall be removed or sold by the manufacturer or any other person without affixing tax stamp, banderole, stickers, labels, etc in any such form, style and manners as may be prescribed by the Board.
The Bill now seeks to expand the affixation requirements under the FE Act and proposes to include "barcodes" before sale and removal of excisable goods by the manufacturer.
The Bill also proposes to insert a new Sub-section (3), whereby such tax stamps, banderoles, stickers, labels, barcodes etc., shall be acquired by the registered persons referred to in Sub-section (2) from a licensee appointed by the Board for the purpose, against price approved by the Board. The price shall include the cost of equipment installed by such licensee in the premises of the said registered person.
4. Departmental Audit
Section 46
The heading of Section 46 reads as "Departmental Audit". The Bill seeks to amend the aforesaid heading whereby the word "Departmental" is proposed to be omitted with the result that the proposed new heading is to be read as "Audit".
Sub-Section 4 of section 46 authorizes the Board to appoint a Chartered Accountant or a Cost and Management Accountant or a firm of such accountants to conduct audit of a person liable to pay duties under this Act in such manner and subject to such conditions it may specify.
The aforesaid provisions are proposed to be omitted and now the Board may appoint as many special audit panels as may be necessary, comprising two or more members from the following -
(e) an officer or officers of Inland Revenue;
(f) a firm of Chartered Accountants as defined under the Chartered Accountants Ordinance, 1961 (X of 1961);
(g) A firm of Cost and Management Accountants as defined under the Cost and Management Accountants Act, 1966 (XIV of 1966) or
(h) Any other person as directed by the Board.
The special audit panel is formed to conduct audit of a registered person or persons, including audit of refund claims and forensic audit and the scope of such audit shall be determined by the Board or the Commissioner Inland Revenue on a case-to-case basis. It is also proposed that the Board may, where it considers appropriate, also get such audit conducted jointly with similar audits being conducted by provincial administrations of sales tax on services.
The Bill also proposes to add new Sub-sections (5), (6), (7) and (8), whereas the existing Sub-section (5) has been proposed to be renumbered as Sub-section (9).
The Bill proposes for the appointment of the Chairman who shall be an officer of Inland Revenue for the purpose of heading each special audit panel. It is also proposed that in the event any one member of the special audit panel, other than the Chairman, is absent from conducting an audit, the proceedings of the audit may continue and audit conducted shall not be invalid or be called in question merely on the ground of such absence.
The Bill also proposes that the Board may prescribed Rules in respect of constitution, procedure and working of special audit panel. It is also proposed that every member of the special audit panel shall have the powers of officers of Inland Revenue under sections 23 and 45 and Sub-sections (1) to (3) of Section 46.
5. Agreements for the exchange of information
Section 47A
The Bill proposes to insert a new Section 47A, whereby the Federal Government may enter into bilateral or multilateral agreements with provincial governments or with governments of foreign countries for the exchange of information, including electronic exchange of information, with respect to excise duty imposed under this Act or any other law of Pakistan, or under the corresponding laws of that country and may, be notification in the official Gazette, make such provisions as may be necessary for implementing such agreements.
It is also proposed that the provisions of Section 107 of the Income Tax Ordinance, 2001 shall, mutatis mutandis, apply to this section
6. Disclosure of Information by a Public Servant
Section 47B
The Bill proposes to insert a new Section 47B. This Section places restrictions regarding information acquired under any provisions of this Act, or in pursuance of a bilateral or multilateral agreement or tax information exchange agreement is to be treated as confidential and no public servant shall disclose any such information, except as provided under section 216 of the Income tax Ordinance, 2001.
7. Rate of duty on aerated waters enhanced
First Schedule, Table I
The rate of duty on aerated waters, as mentioned in serial Nos. 4, 5 and 6 of Table I of the First Schedule to the FE Act, have been proposed to be enhanced from "nine percent of retail price" to "twelve percent of retail price".
========================================================================
S.No. Description Rate of Duty
========================================================================
4 Aerated waters 12 % of retail
price
5 Aerated waters, containing added sugar 12 % of retail
or other sweetening matter or flavoured price
6 Aerated waters if manufactured wholly 12 % of retail
from juices or pulp of vegetables, food price
grains or fruits and which do not contain
any other ingredient, indigenous or
imported, other than sugar, colouring
materials, preservatives or additives in
quantities prescribed under the West
Pakistan Pure Food Rules, 1965
========================================================================
8. Rate of duty on cigarettes modified
First Schedule, Table I
The rate of duty on cigarettes have been proposed to be changed by substituting serial Nos.9 and 10 of Table I of the First Schedule to the FE Act along with the description of goods. Proposed entries are as follows:
=========================================================================================
Existing Provision Proposed Provision
=========================================================================================
Table Relevant entry Description Rate Description Rate
No. in Table of duty of duty
=========================================================================================
I 9 Locally Rupees Locally Rupees
produced 2,632 per produced 3,030 per
cigarettes if thousand cigarettes if thousand
their on-pack cigarettes their on-pack cigarettes
printed retail printed retail
price exceeds price exceeds
rupees two rupees three
thousand seven thousand three
hundred and hundred and
six per fifty per
thousand thousand
cigarettes cigarettes
I 10 Locally Rupees Locally Rupees
produced 1,085 per produced 1,320 per
cigarettes if thousand cigarettes if thousand
their on-pack cigarettes their on-pack cigarettes
printed retail printed retail
price does not price does not
exceed rupees exceed rupees
two thousand three
seven hundred thousand three
and six per hundred and
thousand fifty per
cigarettes thousand
cigarettes
=========================================================================================
9. Levy of duty on filter rod for cigarettes
First Schedule, Table I
The following good is proposed to be brought under the purview of excisable goods by including the same in Table I of the First Schedule to the FE Act.
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Heading
Entry No. Description of goods /sub-heading Rate of duty
Number
=======================================================================
56 Filter rod for cigarette 5502.0090 Rs. 0.75 per
filter rod
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10. Withdrawal of duty on socio-economic routes
First Schedule, Table II
The rate of duty of Rs.500 on services provided or rendered in respect of travel by air of passengers on "Socio-economic routes" excluding journeys along the Balochistan coastal belt, as mentioned in sub-clause (iii) of clause (a) in serial no 3, is proposed to be deleted.
11. Amendments in the Third Schedule
The Third Schedule to the FE Act lists goods and services that are exempt from duty of excise whether conditionally or otherwise. Currently, some of the exemptions are also available through various notifications issued by the Board from time to time. The proposed amendment in the Third Schedule aims to include the exempt goods and services mentioned in the notifications within the body of the Third Schedule as described in the table below. It is likely that the respective SROs will be rescinded with effect from 01 July 2015.
TABLE - I (GOODS)
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Entry Description of goods Heading / sub-
No. heading Number
========================================================================
Items listed in SRO 474(I)/2009 dated 13 June 2009
proposed to be incorporated in Table I of the Third
Schedule
18 White cement 25.23
19 Motor cars and other motor 87.03
vehicles principally designed
for the transport of persons
including station wagons and
racing cars of cylinder capacity
exceeding 850cc.
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TABLE - II (SERVICES)
========================================================================
Entry Description of goods Heading
No. /sub-heading
Number
========================================================================
9 Services provided or rendered 98.03
in respect of travel by air of
passengers on "socio
economic routes", which
means the shortest part of
journeys starting from or
ending at an airport located in
Markran coastal region, FATA,
Azad Jammu and Kashmir,
Gilgit-Baltistan or Chitral
Services exempt under Rule 41A of the special
procedures for excisable services of Federal Excise
Rules, 2005 proposed to be incorporated in Table II
of the Third Schedule
10 Services provided or rendered 9803.1000
in respect of travel by air of
passengers on international
journeys from Pakistan to:
(a) Hajj Passengers;
(b) Diplomats; and
(c) Supernumerary crew
Services listed in SRO 802(I)/2009 dated 14
September 2009 and SRO 81(I)/2010 dated 13
February 2010 proposed to be incorporated in Table
II of the Third Schedule
11 Advertisements in newspapers 9802.4000
and periodicals
Services listed in SRO 474(I)/2009 dated 13 June 2009
proposed to be incorporated in Table II of the Third
Schedule
12 Services provided or rendered 98.13
by banking companies and
non-banking financial
companies in respect of Hajj
and Umrah, cheque book,
insurance, Musharika and
Modaraba financing and utility
bill collection.
I (GOOD
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