Preface: The booklet contains notes and comments on the amendments made in the fiscal law by the Finance Act, 2015. Through Tax Memorandum released by our firm on June 6, 2015 also available on www.pwc.com.pk/en/tax-memorandumwe presented general comments, suggestions and effects of the various proposals made in the Finance Bill presented to the National Assembly by the Finance Minister.
This document describes specific changes in the respective provisions alongwith our comments and notes on the matter being virtually an update of the fiscal laws as they would stand on July 1, 2015.
In Chapter 1 of this booklet, for easy reference, a summary of major changes between the provisions as introduced in the Finance Bill and those actually introduced in the Finance Act, 2015 has been made. This Chapter also includes some provisions which were not included in the Finance Bill. Some of the matters in that summary are important and respective industry and kind of taxpayers have to make appropriate representation the government.
Notes and comments in the booklet provide views on certain matter which have generally been made with positive connotation, however readers are requested to seek specific opinions and view on contentious matters arising in certain cases specially for the reason that executive field officers and at times even the appellate and judicial forums apply and interpret the laws on the basis of text ignoring the intention of law.
We consider that readers will find the matter useful and seek appropriate assistance for professional guidance wherever required. We thank the staff which has helped us in preparing this booklet.
Partners A.F. Ferguson & Co
July 1, 2015
Karachi/Lahore/ Islamabad
Chapter 1
Summary of Changes between the contents of Finance Bill and Finance Act.
INCOME TAX
1) Through the Finance Bill, 2015, the rate of tax on companies other than banking companies was proposed to be reduced to 32% for tax year 2016 as against 33% which was applicable for tax year 2015. In the Finance Act, the corporate tax rates for tax years 2017 and 2018 have now also been prescribed at 31% and 30% respectively. This positive policy of reduction of the corporate tax rate is the demonstration of meeting the commitment as made by the Finance Minister in 2013 whereby the rate of tax for companies is to be brought to 30% in a phased manner over five years (from tax years 2014 to 2018). Notwithstanding all other aspects this resolves many accounting issues, specially relating to deferred taxation, which arose on account of a proposed change in subsequent years not legislatively incorporated
2) The proposal of levying tax on undistributed reserves of a public company (other than modaraba, schedule bank and Government-owned companies) has been substantially amended in line with suggestion made in our tax memorandum. As suggested there will be no incidence of tax on undistributed reserves if a public company distributes lower of 40% of the profit for the year or 50% of the paid up capital, Such distribution is to made within 6 months of end of tax year; except for tax year 2015 for which distribution can be made before due date of filing of return of income.The exemption from payment of tax on undistributed reserves provided to public company, in which not less than 50% shares are held by Government has now also been extended to power generation companies qualifying for exemption under Clause (132) Part I of the Second Schedule.
3) The proposal to revamp the tax regime for profit on debt (interest income) has appropriately been corrected. The presumptive tax regime will not be applicable on companies. Companies will continue to be liable to pay tax on profit on debt as is presently being paid, whereas all non-corporate taxpayers will be liable to pay tax on gross interest income on presumptive basis at the following rates:
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S.No Profit on Debt Rate of tax
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1. Where profit on debt does not
xceed Rs 25,000,000 10%
2. Where profit on debt 2,500,000 + 12.5% of the
exceedsRs 25,000,000 but amount exceeding
does not exceed Rs 50,000,000 Rs 25,000,000
3. Where profit on debt exceeds Rs 5,625,000 + 15% of the
Rs 50,000,000 amount exceeding
Rs 50,000,000
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4) In the Finance Bill, it was proposed that exporters be given a one time, irrevocable option to be taxed under normal regime. In the Finance Act, the said proposal to give an irrevocable option to exporters to be taxed under normal regime has been approved, with the amendment that this option is to be exercised 'every year' at the time of filing of income tax return.
5) It was proposed in the Finance Bill, 2015 that tax deductible on services rendered or provided by a company shall not be minimum tax. This provision was proposed to take effect from tax year 2009 being the year in which the minimum tax provisions were originally introduced.There was effectively no change in the law since provisions to that effect were already contained in clause (79) of Part IV of the Second Schedule to the Ordinance. Thus, in essence, the contents of the clause were proposed to form part of the substantive provision of the law.
In the Finance Act, 2015 this essential and vital corrective amendment has not be carried and at the same time Clause (79) has also been deleted. As a result of totally undesired action,companies in service sector like telecom, hotels etc are now also subject to minimum tax provisions like other taxpayers. The rate of minimum tax would be as under:
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Service provider Filer Non-Filer
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Company 8% 12%
Other than Company 10% 15%
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This is a totally undesirable situation and such companies will never be able to absorb such incidence of tax. The corrective measure is immediately required, which may be:
1. Reinstatement of Clause 79 after seeking approval as is now required under the law; or
2. Introduction of Income Tax (Amendment) Act, 2015 where this correction is made with full disclosure of all the event in the preamble of the said Act.
The action suggested is to be incorporated with effect from July 1, 2015.
6) In the Finance Bill, 2015, retailers registered under the sales tax law were proposed to be subject to automatic selection for audit of their income tax affairs under section 177 of the Ordinance under specified circumstances. This condition has now been carried in the Finance Act, 2015.
7) Through the Finance Act, 2015, it is now provided that every person shall be automatically selected for audit of income tax affairs for a tax year (after expiry of 90 days from the due date) if:
-- Complete return of income is not filed within the due date or extended due date; or
-- Tax payable as per return has not been paid.
It has,however,been provided that such automatic selection for audit shall not be applicable if the person, within 90 days from the due date, files the tax return and:
-- 25% higher than last year's tax liability has been paid; or
-- 2% tax on turnover or tax payable under Part I of the First Schedule, whichever is higher, has been paid alongwith a return, by a person who in the preceding year has either not filed the return or had declared income below taxable limit. Where return was filed for immediately preceding tax year, turnover declared for the tax year should not be less than the turnover declared in immediately preceding tax year.
The retailers registered under Rule (4) of Sales Tax Special Procedural Rules, 2007, should remain on sales tax active taxpayers list throughout the tax year, otherwise, such retailers will be automatically selected for audit under section 177.
By virtue of above amendment, the scheme of universal self-assessment, fundamentally prevailing since promulgation of 2001 Ordinance, has been curtailed and now every person is subject to compulsory audit under section 177 unless that person meets specified conditions. It may, however,be noted that the personswho qualify for immunity from audit shall remain subject to selection for audit through computer balloting (as provided in section 214C of the Ordinance) or by the Commissioner (under section 177 of the Ordinance). 10) The highest slab rate of income tax applicable to an Association of Person that is a professional firm prohibited from incorporating by any law or the rules of the body regulating their profession is prescribed to be 32% applicable from the year 2016.This positive amendment will require two additional steps viz:
-- Rate of tax prescribed be applicable to members of AOP; and
-- Appropriate clarification that under Section 92 of the Ordinance the taxable entity is the member of AOP not being an AOP.
8) At present, Mutual fund or Collective Investment Scheme are required to deduct Capital Gains Tax, at the following rates, on redemption of securities:
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Holding period Rate of tax
=================================
0 - 12 months 12.5%
12 - 24 months 10%
Over 24 months 0%
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In the Finance Bill, 2015, it was proposed that Mutual fund or Collective Investment Scheme or a REIT scheme will deduct capital gains tax on redemption of securities at the following rates:
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CATEGORY FILER NON-FILER
Stock Others Stock Others
Fund Fund
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Individuals and
Association of persons 10% 10% 17.5% 17.5%
Company 10% 25% 25% 25%
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The above proposal to introduce the concept of filer and non-filer while deducting capital gains tax on redemption of securities has not been ratified and the following flat rates have been prescribed in the Finance Act, 2015:
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CATEGORY Stock Fund Others
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Individuals and Association
of persons 10% 10%
Company 10% 25%
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9) The rate of tax withholding applicable on dividend in case of filers, which was inadvertently kept unchanged @ 10% despite increase in related tax liability to 12.5%, has now been corrected in the Finance Act, 2015. Tax withholding for filer is now brought in line with the rate of tax liability (ie, 12.5%).Others S
10) The rate of tax applicable on dividend received by a person from a mutual fund, which was prescribed in the Finance Bill, 2015 to be the same as the general rate of 12.5% on dividend income, has been prescribed in the Finance Act, 2015 to be 10%, in line with withholding rates.
11) Tax rate applicable to dividend received from certain stock funds was proposed in the Finance Bill, 2015 to be increased from 12.5% to 15% but such increase has not been ratified. Consequently, the presently enacted rate of 12.5% will continue to apply.
12) Prior to the Finance Act, 2015, tax withholding was not required on payments to electronic and print media in respect of advertising services, by virtue of the exemption available under clause (16A) of Part IV of Second Schedule to the Income Tax Ordinance, 2001. Through the Finance Act, 2015, the rates of tax withholding required from payments to electronic and print media for advertising services have been prescribed as under:
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Service provider being Filer Non-Filer
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Company 1% 12%
Other than Company 1% 15%
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13) Tax credit of 10% is available to a company under section 65B of the Income Tax Ordinance, 2001 on investment in the purchase of plant and machinery for the purposes of extension, expansion, balancing, modernization and replacement of the plant and machinery. Tax credit was allowed on plant and machinery purchased and installed at any time between July 1, 2010 and June 30, 2015. Through the Finance Act, 2015, the eligibility for tax credit has been extended to plant and machinery purchased and installed by June 30, 2016.
14) The proposal contained in the Finance Bill to dispense with the condition of obtaining prior approval from the Commissioner for filing a revised return, if the revised return is filed within 60 days of filing of the original return, has been ratified. Through the Finance Act, 2015, another significant amendment has been made to the effect that the revision request will be deemed to be approved after expiry of 60 days from date of request if the Commissioner does not decide on the request within the prescribed period.
15) Presently the e-filing of income tax return is mandatory by a person whose salary income for the tax year is Rs 500,000 or more. The tax return of such person is also required to be accompanied by wealth statement as well as proof of deduction or payment of tax. Through the Finance Act, 2015, the Federal Board of Revenue (FBR) has been empowered to amend the condition for e-filing of tax return, wealth statement and proof of deduction or payment of tax or to relax this condition for a particular tax year.
16) The proposal contained in the Finance Bill, 2015 to eliminate the discretionary powers of the Federal Government and FBR for granting concessions and exemptions has been ratified. In order to avoid unnecessary litigation and disputes at field level, protection / savings for the substantive provision have now been introduced through the Finance Act, 2015 to the effect that SROs already issued shall continue to remain in force unless rescinded by FBR through notification in the official Gazette.
17) Provisions of section 113C, relating to Alternative Corporate Tax (ACT),have been rationalised and clarified. ACT is now applicable on company in respect of income subject to tax at corporate rate as provided in Division II, Part I of the First Schedule, if such tax or Minimum Tax payable under section 113 is less than 17% of accounting income. Income subject to tax under Final Tax Regime, or separate block of income are not subject to ACT
18) Under section 236H, tax is collected from sale of specified goods to retailers. Through the Finance Act, 2015, an amendment is made in section 236H, whereby such tax will also be collected on sale of specified goods by every distributor or dealer to another wholesaler.
19) Through Federal Budget 2015, a presumptive tax regime was introduced, applicable on payment to resident person for use or right to use industrial, commercial and scientific equipment. In that situation a presumptive tax would have been applicable on all leasing business and the same aspect was identified in the tax memorandum issued by the firm. This aspect has been acknowledged. Now by virtue of amendment through the Finance Act, 2015, such tax will not be applicable on payment for use or right to use agricultural machinery and machinery leased by leasing company, investment bank, modaraba, schedule bank or development financial institution.
20) Collection of tax by Pakistan Mercantile Exchange Limited on certain transaction is now adjustable, instead of minimum tax originally proposed through Finance Bill.
WORKERS' WELFARE FUND
21) Mutual funds and collective investment schemes including National Investment (Unit) Trust or REIT Scheme, have been excluded from the definition of 'industrial establishment' subject to Workers' Welfare Fund (WWF) under the Workers' Welfare Fund Ordinance, 1971 (WWFO). There was a view that these entities were subject to payment of WWF, after the amendment made in WWFO through Finance Act 2008. Mutual Funds in particular had challenged the levy of WWF that it cannot be imposed on them as they donot have any workers, and they are being operated by Asset Management Companies. Further, the levy was challenged on the ground that Federal Government has no right to levy WWF as 'Labour' is a Provincial subject after 18thamendment to the Constitution of Pakistan.
INCOME TAX
Consumer Goods and Fast Moving Consumer goods
Section 2(13AA) and 2(22A)
The term "consumer goods" been defined to mean goods used by end consumers. End consumption has been defined to be the stage where such items are not subjected to any further production process.
"Fast moving consumer goods' (FMCG) have been defined as those consumer goods which are supplied in retail marketing. Supply in the retail marketing has been related to replenishment on the basis of daily demand of the consumers. This implies that there is a regular replenishment of supply on the basis of demand from the consumers. These may include milk, cigarettes, mineral water, aerated beverages etc. Practical difficulties are expected to arise in certain cases on account of the use of the concept of replenishment on daily demand by the consumers.
This definition has been introduced for the practical reasons that rate of minimum tax on persons dealing in FMCG.
REIT Scheme, Developmental REIT Scheme and Rental REIT Scheme
Section 2(47A), (17D) and 2(47C)
REIT Scheme for the purposes of income tax laws will be those which are so defined under the Real Estate Investment Trust Regulations 2015 issued by the Securities & Exchange Commission of Pakistan.
A 'Developmental REIT Scheme' will be that particular kind of REIT. Under the REIT Regulations there can be two kinds of REIT schemes. Those engaged in development of properties for sale are classified as developmental REIT whereas those engaged in acquisition and construction of immovable properties for renting are termed as 'rental REITs'.
These definitions have been introduced for the reason that special provisions and rates of tax, as the case may be, have been introduced for REIT Schemes. Furthermore, within REITs certain provisions are limited to developmental REIT Schemes only.
'Imputable Income'
Section 2(28A)
The term imputable income has been defined. This means that income which will be deemed to there by way of imputation if in certain cases an amount is taxed on presumptive tax basis.
As per this definition imputable income has been related to presumptive tax. For example if imports of Rs 100 are subjected to a presumptive tax equal to 5 percent (or Rs 5) of the value of import than imputed income from such import will be Rs 16.2 (5x32/100). Income of Rs 16.2 shall give rise to tax equal to Rs 5 if taxes at the rate of 32 percent.
This definition has been inserted inter alia for the purposes of levy of one time super tax on income above Rs 500 million as such tax is also payable by persons subject to presumptive tax.
ONE-TIME SUPER TAX
Section 4B
A one-time super tax for tax year 2015 has been levied on (i) banking companies; and (ii) all other taxpayers having income of Rs 500 million or above. The general rate of super tax is 3% while the rate of tax for banking companies shall be 4%.
As specifically stated in the relevant provision, this 'tax' is for the rehabilitation of temporary displaced persons.
The term 'income' for the purpose of this section shall be the taxable income under section 9 of the Income Tax Ordinance, 2001 (excluding exempt income) and also includes profit on debt, dividend, capital gains, brokerage and commission, even if taxable under the special provisions of the Ordinance. In the cases subject to presumptive regime, such income will represent 'imputable income' as newly defined under section 2(28A) of the Ordinance which has been explained earlier.
Income for the purposes of this section represent taxable income for the year determined in after taking into account taxable losses for the earlier years.
One time super tax shall also be payable on persons subject to special tax regimes like insurance companies (Fourth Schedule), entities engaged in exploration and production of petroleum and mineral deposits (Fifth Schedule), Banking companies (Seventh Schedule) and persons earning capital gains on listed securities (Eighth Schedule). Nevertheless, in case of companies engaged in the extraction and production of petroleum and mineral deposits such tax shall be payable only if such companies are taxable at the rate prescribed under the Ordinance not being those subject to tax under the respective overriding Agreements with Government of Pakistan.
The 'income' from profit on debt, dividends and brokerage and commission are susceptible to be included separately as well as under the imputable income basis, however intention of law does not envisage double addition.
Super tax is payable for tax year 2015 which includes cases having special tax years other than June 30, 2015 such as banking companies, insurance companies, sugar companies, etc. Tax year 2015 for the entities which follow special tax year under the law, such as banking companies, textile companies etc, has already ended before the enactment of Finance Act, 2015.
This effectively represents retrospective charge in the cases where financial statements have already been finalised. One time super tax shall be payable alongwith the tax to be paid alongwith the return of income for tax year 2015.
Commissioner of income tax has been empowered to issue order for the recovery of one time super tax.
Board will make rules for the recovery of one time super tax.
TAX ON UNDISTRIBUTED RESERVES
Section (5A)
Undistributed reserves of a public company (other than a modaraba, a scheduled bank, companies where Government owns more than 50 percent of shares and companies engaged in power generation) have been taxed with effect from tax year 2015.
This effectively represents re-introduction of similar levy imposed under section 12(9A) of repealed Income Tax Ordinance, 1979 vide Finance Act 1999.
Such tax is payable at the rate of 10% on the whole amount of undistributed reserves as are in excess of 100% of paid up capital of the company after the distribution of cash dividend within six months of the end of tax year. However no such tax shall be payable if the public distributes 'profit' equal to lower of forty percent of its after tax profits for the year or fifty percent of its paid up capital. Since distribution is made out of accounting profits or reserves the term profit as used in the provision will refer to the sum as determined under the Companies Ordinance, 1984.
As stated above distribution of dividend which shall be accounted for whilst ascertaining the incidence of tax under this section will be the one released within six months of the end of the end of financial year. However by way of a special dispensation in respect of tax year 2015 any cash distribution before the date of filing the return shall be considered as distribution for tax year 2015. This means that companies which have ended their financial year before June 30, 2015 or those where the income year is ending on June 30, 2015 distribution of dividend to the extent prescribed, if any will absolve the company from the incidence of tax under this section.
The term 'reserves' has been defined in sub-section (3) of newly inserted Section 5A of the Ordinance. As per that definition reserves shall be the amount 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. Since distribution and ascertainment of reserves relates to Financial Statements as prepared under the Companies Ordinance, 1984, therefore for practical purposes the term reserves for the purposes of this provision would reflect the amount as ascertained under the Companies Ordinance, 1984. Under the Companies Ordinance, 1984 'Capital Reserves' being an exclusion from reserves for the determination of tax incidence has not been defined, however in the disclosure requirements as per the Fourth Schedule there is an inclusive definition that encompasses 'or any reserves not regarded free for distribution by way of dividend'.
This provision, in essence, levies a tax on entire undistributed accumulated reserves in excess of paid up capital. This tax is effectively chargeable on reserves that have arisen out of already taxed income. Such incidence can only be avoided if there is distribution in cash during the year out of current year's profit to the extent laid down in the law.
Tax on shipping of a resident person
Section (7A) and Clause (21) of Part 11 of the Second Schedule
Income of resident persons engaged in business of shipping are taxable on presumptive basis under Clause (21) of Part II of the Second Schedule to the Ordinance. Through Finance Act, 2015 such provisions have now been replaced in Section (7A) of the Ordinance.
Tax on Profit on Debt
Section (7B)
Profit on debt received by persons other than companies is subject to presumptive by way of application of provisions of clause (b) of sub-section (1) of Section 169 of the Ordinance.
This provision has now been replaced by way of separate section 7B of the Ordinance.
Now all persons other than companies shall be subject to special regime laid down in Section 7B of the Ordinance. Under that provision following tax rates applied on the gross amount of profit on debt shall be the tax liability in respect of profit on debts:
(i) Where profit on debt does not exceed Rs 2.5 million : 10 %
(ii) Where profit on debt exceeds Rs 2.5 million but does not exceed Rs 5 million : 12.5 percent on amount exceeding 2.5 million;
(iii) Where profit on debt exceeds Rs 5 million: Rs 5,625, 000 and 15% of amount exceeding 15 %.
Incidence of tax is now not necessarily related to withholding made under Section 151 of the Ordinance. Total tax liability in respect of such income is that prescribed under Section 7B. Nevertheless withholding provisions as applicable earlier remain applicable.
INCOME FROM PROPERTY
Section (15A(h)
An important amendment has been made in respect of income from property. Expenses incurred to the extent of 6% of rent chargeable wholly and exclusively for the purpose of deriving rent are admissible against rental income. Previously, such expenses were limited to 'collection charges' only.
Now any expenditure wholly or exclusively for the purposes of deriving rent including administration and collection charges shall be admissible.
First Year Allowance
Section (23A)
Companies engaged in the manufacturing of cellular phones which also qualify for exemption under the newly inserted Clause (126N) shall be eligible to First Year Allowance under the Third Schedule to the Ordinance.
Capital Gain on Disposal of Securities
Section (37A) and Division VII of Part 1 of the First Schedule
Prior to the amendment introduced by the Finance Act, 2015 capital gains on disposal of securities under Section 37A was taxable only if such securities were held for a period less than twelve months. Through Finance Act, 2015 the limitation of right of taxation where the holding period is less than twelve months has been removed. Now there is no holding period prescribed in the substantive law for taxing capital gain on securities.
A revised status of tax on Capital Gains on disposal of 'securities' under section 37A has been prescribed as under:
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Holding period Tax Year
2016 2015
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Less than 12 months 15% 12.5%
12 months to less than 24 months 12.5% 10%
24 months to less than 48 months 7.5% 0%
More than 48 months 0% 0%
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This revision has two dimensions. Firstly the rate have been revised upwards. Secondly the holding period for taxable gains has been enhanced. Enhancement of holding period for taxable instances will effectively apply retrospectively as gains for holding period between 24 to 48 months which were exempt from tax prior to Finance Act, 2015 will fall under taxable incidence.
Specific rates have also been prescribed for withholding tax on redemption of securities by a mutual fund or a collective investment scheme or a REIT scheme. These are:
In case if recipient is an individual or an association of person the rate of withholding shall be 10 percent both for stock fund or any other fund whereas if the recipient is a company such rate shall be 10 percent for stock fund and 25 for other funds. Nevertheless in all situations in case of a stock fund if dividend receipts of the said fund are less than capital gains then the rate shall be 12.5 percent.
There shall be no withholding on capital gains on securities which are not taxable on account of the fact that the holding period is more than 48 months.
Powers of Federal Government
Section (53)
Federal Government has the power to issue notification inter alia to amend Second Schedule to the Ordinance that relates to exemptions from tax. The manner of enforcement of such power has been prescribed. Under the new scheme Federal Government can exercise such power only on the basis of the approval of the Economic Co-ordination Committee of the Cabinet (ECC). It has been further provided that ECC shall exercise such powers where circumstances exists to take immediate action for the purpose of national security, natural disaster, protection of national economic interest in situations arising out of abnormal fluctuation in international commodity prices, removal of anomalies in taxes, development of backward areas and implementation of bilateral and multilateral agreements. In substance, all situations where such notification have been brought within the ambit of this new set of regime. Only change therefore is that there will be a decision of ECC before every notification under this section.
A new sub-section (4) has been inserted whereby any notification issued after July 1, 2015 shall be rescinded on the expiry of the financial year in which it is issued. This effectively means that if not incorporated in the following Finance Act any notification issued even with the approval of ECC will automatically rescind.
Contribution to an Approved Pension Fund
Section (62)
Contribution to the approved pension fund has been increased form rupees one million to one and a half million.
Deductible allowance for profit on debt
Section (64A)
In case any individual a deduction shall be allowed for an amount not exceeding fifty percent of total income or rupees one million whichever is lower in respect of:
-Profit or share in rent; or;
-- Share in appreciation for value of house paid in respect of loan obtained for the construction of a new house or acquisition of house.
If paid to a scheduled bank or non-banking finance institution regulated by the Securities and Exchange Commission of Pakistan or Government or Local Government, Provincial Government or a statutory body or a public company listed on a stock exchange.
TAX CREDIT FOR EMPLOYMENT GENERATION
Section (64B)
Any company formed for establishing and operating a new manufacturing unit between July 1, 2015 to June 30, 2018 shall be allowed a tax credit of 1% of tax payable for every 50 employees registered with EOBI and social security schemes.
The maximum tax credit shall, however, not exceed 10% of the tax payable and the tax credit for a period of ten years.
Tax Credits
Section (65)
Entitlement of tax credit under Sections 65B, 65D and 65E has been corrected through this amendment. Henceforth for whilst determining minimum taxes shall not be payable if there is a no tax is payable for the reason of tax credits under aforesaid sections
Furthermore presumptive tax shall be determined after deducting tax credit under the aforesaid sections.
Tax Credit for Investment
Section (65B)
Tax credit for investment in extension, expansion, balancing modernisation and replacement of plant and machinery has been extended to June 30, 2016
MINIMUM TAX ON LAND DEVELOPERS
Section (113B)
Enabling provisions to collect minimum tax on land developers were introduced through the Finance Act, 2013. Federal Government was supposed to prescribe the rate of tax. Since no rate has so far been prescribed, therefore, land developers were not subject to minimum tax. Now, a minimum tax @ 2% of value of land notified by the authorities for stamp duty has been levied on land developers.
Alternative Corporate Tax (ACT)
Section (113C)
Through this amendment certain provisions relating to ACT have been clarified. ACT is payable as minimum tax. By way of two amendments made in sub-section (1), sub-section (2) and sub-section (8(ii)) it has been clarified that ACT shall be ascertained on the basis of Corporate Tax as determined under the First Schedule or the minimum tax payable under Section 113.
ACT shall be determined only any tax payable under the Ordinance, by company, other than that is payable on net income basis (being 32 percent for tax year 2015 for cases other than small companies) as laid down in Division II of Part 1 of the First Schedule to the Ordinance shall not be taken into account whilst calculating incidence of ACT. There is substantive change as a result of these amendments as same concept was derived from the provisions which have not been deleted.
Exemption from ACT for companies which are subject to tax rate of 20 percent under the provisions of Clause 18A of Part 1 of the Second Schedule has been omitted.
Newly inserted Section 64B relating to tax credit on employment generation shall be accounted for whilst determining the incidence of ACT.
FILING OF REVISED RETURNS
Section (114)
The condition of obtaining prior approval from the Commissioner for filing a revised return is dispensed with if the revised return is filed within 60 days of filing of the original return.
STAY BY THE COMMISSIONER (APPEALS)
Section (128)
Commissioner (Appeals) has been empowered to grant a stay for a further period of 30 days and is required to decide the appeal within such extended period. Now the period of stay against demand that can be made by the Commissioner (Appeals) is 60 days from the date when the amount was payable.
Based on interpretation of Article 199 of the Constitution of Islamic Republic of Pakistan, this implies that the stay shall continue to be operative until the appeal is disposed of.
PAYMENT OF TAX ON DEMAND
Section (137)
The time period of 30 days instead of 15 days has been prescribed for payment of tax demand pursuant to an order.
Time period of payment of demand in respect of provisional assessment has been reduced from 60 to 45 days.
UPWARD ESTIMATE FOR ADVANCE TAX
Section 147
Advance tax to the extent of 50% of the 'estimate' if higher than the latest assessed basis is to be paid by the due date of second instalment for that particular year.
Presently taxpayers, other than banks, are not mandatorily required to discharge advance tax liability to the extent of 90% of the tax payable based on an estimate before the last instalment is due.
This effectively means that whilst discharging the quarterly liability on the basis of estimate, not being latest assessed basis, the taxpayer has ensure that out of total estimated liability at least 50 percent is paid by the due date of the second instalment. Incidence of default, will commence from the date of payment of second instalment instead of the last instalment under the previous regime.
RESTRICTION ON POWERS OF FEDERAL GOVERNMENT TO ISSUE SROs FOR TAX EXEMPTIONS AND CONCESSIONS
Section [148(2)]
The Finance Act has deleted sections 148(2) and 159(3), (4) and (5) of the Ordinance. Under these sections Federal Government has been empowered to issue tax exemptions and concessions in respect of various provisions of the Ordinance.
The relevance of the SROs already in force prior to omission of this section will be validated by way of a special section inserted in the relevant sections. Accordingly any notification issued under the said sub-section and for the time being in force shall remain in force, unless rescinded by the Board through notification in the official gazette.
Special rate of tax on local purchase of cooking oil or vegetable ghee for manufacturers at the rate of 2 percent has been placed under a special provision. Such tax shall be final tax in respect of such activity.
Payments to non-residents
Section 152(4A)
Upto June 30, 2012, the Commissioner Inland Revenue was allowed to issue exemption certificates in cases of residents and permanent establishments (PE) of non-resident companies. Through Finance Act, 2012, some withholding provisions applicable to PEs of non-residents were transposed in section 152 where the entire withholding tax provisions relating to non-residents were consolidated.
In this process, the enabling provisions for the issue of exemption certificates were missed out. As a corrective measure, a new sub-section (4A) has been introduced in section 152 to empower the Commissioner to issue exemption certificates in eligible cases of non-residents.
Tax Deducted on payments to sportsman
Section (153)
Tax deducted from sportsman under Section 153 shall now be final tax in respect of such income with effect from tax year 2013. Receipts by sportsman are classified as execution of contract for withholding tax purposes.
OPTION FOR NORMAL TAX REGIME FOR EXPORTERS
Section (154)
The exporters are subject to tax at the rate of 1% of export proceeds. This collection of tax is also the discharge of final tax liability in respect of income from such exports. Under clause 41AA of Part IV of the Second Schedule which was inserted by Finance Act, 2012 and omitted by Finance Act, 2014 exporters were entitled to opt out on a year to year basis from the presumptive tax regime subject to minimum payment of tax.
The right to opt out of presumptive tax regime for exporter has been reinstated. This right has been allowed for the tax year 2015 and the following years.
Right to opt out of presumptive tax regime shall be exercised on year to year basis and shall be undertaken at the time of filing the return of income under Section 114.
Nevertheless the amount deducted at source shall be the minimum tax liability on income from such exports.
Since the tax deducted is being treated as minimum tax under this provision which is otherwise equal to minimum tax therefore for practical purposes economic benefit shall inter alia accrue only in relation to losses (if any) arising from export business, which could be set off and carried forward (including the rights available under the group relief provisions).
Furthermore this option will also assist the exporters if the same are subject to anti-dumping and other proceeding in the importing countries on account of pre:
TIME OF DEDUCTION OF TAX
Section (158)
Deduction of tax at source is to be made on the 'amount actually paid' other than the cases where such deduction is made at the time of credited to the account of the recipient. Board has been empowered to define the term 'actually paid'.
Notwithstanding the rights vested to Board for such definition same cannot be in deviation from the substance of the transaction.
RATE OF DEFAULT SURCHARGE & COMPENSATION
Section (161)
The rate of default surcharge in case of failure to pay tax deducted or collected has been reduced from 18% to 12%. Similarly, the rate of statutory compensation on delayed refund is proposed to be reduced from 15% to KIBOR plus 0.5%.
Furnishing information by Financial Institutions including banks
Section (165B)
A new section 165B has been introduced to requiring every financial institution to make arrangement to provide information regarding to non-resident persons to the Board in the prescribed form and manner for the purposes of automatic exchange of information under bilateral or multilateral convention.
Term financial institutions as used in this provision will include banks.
This provision is to be read in conjunction with the extension of powers of the Government of Pakistan to enter into bilateral or multilateral agreements with other country or countries as the case may be as described under Section 107 of the Ordinance.
By way of application of this section financial institutions will be required to automatically disseminate information regarding a non-resident person that may be required by any other country under a bilateral or multilateral agreement entered into with the Government of Pakistan. It appears that such dissemination of information can be undertaken without the consent or approval of that person if such information is required under the respective bilateral or multilateral agreement. Nevertheless such information shall be used for tax purposes and remain confidential.
These amendments have apparently been made to cater for reporting and other requirements introduced in various countries such as US FATCA regulations.
A similar provision in respect of resident person is prescribed under Section 165A. That provision is being contested on constitutional provisions.
Tax Collected or Deducted as a Final Tax
Section (169)
A corrective amendment has been made whereby taxes 'paid' under Section 148 in addition to taxes collected shall also form part for determination final tax liability.
This amendment has apparently been made to cater for payment of taxes in relation to imported goods if the same is recovered subsequent to clearance at the port. The reason may be post-clearance audit.
SPECIAL AUDIT BY PENALS
Sections [176(1A)], [177]
A new concept of formation of panel for conducting special audit has been introduced.
Under these provisions, a panel comprising of two or more persons will be empowered to conduct an audit including a forensic audit of income tax affairs of a taxpayer.
The Panel shall consist of an Officer of Inland Revenue or a Firm of Chartered Accountant or Cost and Management Accountant or any other person as directed by the FBR.
The procedure prescribed envisage that member of the Panel other than Officer of the Inland Revenue shall effectively provide the support function only. The legal and procedural aspects for conducting such audit shall be undertaken by the member of the panel being the Officer of Inland Revenue.
This process is supposed to overcome practical and legal difficulties that arose when the process of audit by the firms of Accountants was introduced under the repealed Ordinance.
A framework in consultation with the professional institutes governing firms of Chartered Accountants and Cost and Management Accountants will have to be designed for the purposes of audit by the penal.
COMPUTERISED NATIONAL IDENTITY CARD (CNIC) NUMBER
Section (181)
Through this amendment, it is proposed that in the case of an individual, CNIC number shall replace NTN.
In practical sense, this amendment also implies that henceforth, there is no requirement for an individual to obtain an NTN for filing the return of income. Now, a return of income can be filed with reference to the CNIC of that person. Through this amendment the process of obtaining NTN for filing of return is no more required.
This section does not imply in any sense that every person having a CNIC is required to file return of income.
Offences and Penalties
Section (182)
Minimum penalty for non-filing of statement has been reduced from fifty to ten thousand rupees. Furthermore penalty for non-furnishing wealth statement and or wealth reconciliation statement which was earlier Rs 100 per day of default has been brought to 0.1 percent of the taxable income per week or
Rs 20,000 whichever is higher.
Prosecution for making false or misleading statement
Section (195)
Misleading statement for the purposes of prosecution has been related to the conditions laid down in the sections laid down for the levy of penalty. Previous entry had become redundant on account of deletion of section 187 of the Ordinance.
Default Surcharge
Section 205
Rate of default surcharge has been reduced from 18 to 12 percent.
AUTOMATIC SELECTION FOR AUDIT
Section (214D)
Every person, other than persons registered as retailers under Sales Tax Special Procedures Rules 2007, shall be subject to automatic selection for audit under section 177 of the Ordinance if:
(a) Complete return of income has not been filed within the due date;
(b) Tax payable as per return has not been paid;
Proceeding for automatic audit shall commence after 90 days of the date when the tax was due.
However automatic selection of audit shall not be made if a person within sixty (60) days of date when the return of income was due has paid:
(a) tax at the rate of two percent of turnover or tax at the rates prescribed under the First Schedule whichever is higher; In case of persons who have filed the return in the immediately preceding year concession for not being selected for automatic audit would be available only if the turnover for the year is more than the one declared in immediately preceding year; or
(b) 25% higher than last year's tax liability has been paid
Now an effective immunity from automatic audit is on payment of tax in excess of 25% of last year's tax liability or 2 percent of the turnover.
This is the introduction of another form of presumptive income tax and self-assessment scheme.
This regime shall be applicable from the date to be notified by the FBR.
Retailers registered under Sales Tax Special Procedures Rules 2007 shall not be subject to the provisions of automatic selection of audit, selection of audit under Section 177 and selection of audit by the Board under Section 214C of the Ordinance.
Reward for whistleblowers
Section (227B)
A new concept of 'whistleblower' has been introduced. This empowers the Board to reward persons in addition to its officers who provide information regarding concealment or evasion of tax/duty, tax fraud, corruption or misconduct.
Advance tax on banking transaction otherwise than through cash
Section (236P)(231A) and (231AA)
Under this provisions all banking companies shall collect advance tax at the rate of 0.6 percent on all transactions from an account either by way of sale of any instrument including demand draft, pay order, etc and/or transfer of any sum through cheque and other similar manners or clearing interbank transfer through cheques etc.
This effectively means that all 'debits' in an account shall be subject to advance tax collection.
This provision shall only be applicable on accounts maintained by non-filers. The names of non-filers appear of Active Taxpayers List as maintained on electronic system by the Board.
This provision will only be applicable where the sum total of payments for all transactions in an account exceed Rs 50,000 in a day.
It is important that the Finance Minister whilst concluding the budget session has stated that the basis of aforesaid threshold will be changed to Rs 50,000 per transaction instead of Rs 50,000 in a day. Nevertheless this amendment as referred to by the Finance Minister does not form part of the Act as has been presented before the parliament. This apparent omission is expected to be corrected.
The amounts so collected are adjustable against the tax liability if the person files the return of income.
Provisions of this section shall not be applicable on transaction through Pakistan Real time Interbank Settlement Mechanism (PRISM) or payments to Federal, Provincial or Local Governments.
This provision is applicable on all accounts maintained in a banking company. Banks will be required to collect such tax on all accounts unless that particular account is maintained by a person who is a filer. Accordingly unless intimated by the account holders about the status collection will become applicable on all accounts with the enactment of law.
In another context, bank accounts are also maintained by persons who are otherwise require to be on active taxpayers lists such as persons maintaining accounts out of funds earned from agricultural income, income exempt from tax, or persons otherwise not required to file return of income. This matter will require legal and constitutional considerations. Unless specifically excluded, banks will be required to collect advance on all such accounts.
This provision is in addition of an existing provisions of Section 231AA where in all cases (being a filer or non-filer) a collection of tax is made on cash transactions. Furthermore a proviso in Section 231AA whereby advance tax collection on cash movement through transfer has been excluded from the levy of collection of tax under Section 231AA for thereason that such transaction is now covered under new provision of Section 236N.
Advance tax on private motor vehicle
Section 231B
Motor vehicle for the purposes of this section has been defined to include cars, jeep, van, sports utility vehicle, pick-up trucks for private use, caravan automobiles, limousine, wagon and any other automobile used for private purposes.
Date of first registration has been defined for the purposes of collection of advance tax on private motor vehicle.
Telephone users
Section (236)
Advance tax collectible on telephone bills will now also be collected on internet charges. Such collection shall be collected on internet bill of a subscriber and prepaid card for internet.
Advance tax on purchase of air ticket
Section (236B)
Provisions relating to collection of advance tax shall not apply to routes of Balochistan coastal belt, Azad Jammu and Kashmir, FATA , Gilgit-Baltistan and Chitral.
Advance Tax on sales to Retailers
Section (236H)
Advance tax collection on sales to retailers under this section has been made inapplicable for sale of fertilisers.
Furthermore previously such collection was applicable only on sales to retailers. Now such collection shall also be made on sales to every distributors or dealers to another wholesaler.
Collection of Advance Tax by Educational Institutions
Section (236I)
Collection of advance tax on payment of educational institution by non-resident person if:
-- The person furnishes a copy of passport as an evidence to the educational institution that during previous tax year the stay in Pakistan was less than 180 days;
-- Furnishes a certificate that there is no Pakistan source income; and
-- That the fee remitted directly from abroad through normal banking channel to the bank account of the educational institution.
Advance Collection of Tax on purchase or transfer of immovable property
Section (235K)
Provisions relating to advance collection of tax on purchase or transfer of immovable properties is not applicable inter alia on schemes introduced by Federal or Provincial Governments for expatriate Pakistanis. It has now been provided that such concession shall be applicable only if the payment is received from a normal banking channel.
Exemption from Advance Collection of Tax
Section (236O)
A special section has been introduced to prescribe that provisions relating to advance collection of tax under Chapter XII of the Ordinance are not be applicable in the following cases:
(i) Federal, Provincial or Local Governments;
(ii) Diplomats or a diplomatic mission; and
(iii) A person who produces a certificate from the Commissioner that the income during the year is exempt from tax;
This exemption was previously laid down in the respective sections. It appears that the word 'withdrawal' in this section would not limit the application of this section to Section 231A or 231AA where incidence is related to withdrawal from banks. It would appear to be applicable to all cases.
There appears to be no reason to exclude 'Local Government' under this provision as such entity is also exempt from tax under Section 49 of the Ordinance and was eligible from application of advance tax provisions in the respective sections which have been amended on account of introduction of this consolidated section.
Payments to residents for the use of machinery and equipment
A new presumptive tax at the rate of 10% has been introduced on payments to a resident person for the use or right to use any industrial, commercial or scientific equipment.
This provision will however not apply on payment for such consideration for the use of agricultural machinery or where the recipient is a leasing company, a scheduled bank, an investment bank, a modaraba or a development finance institution.
Presently, such payments to non-residents are subject to final tax regime. Even in such cases of non-residents, presumptive tax is not applicable if the person has a Permanent Establishment in Pakistan.
Collection of advance tax on education related expenses remitted abroad Section (236R)
In line with the tax collection regime for payments of education fees to local institutions in certain cases, a parallel regime has been introduced for advance tax collection at 5% on adjustable basis for remittance of education expenses abroad.
Under this provision, every bank, financial institution, an exchange company or any other person responsible for remitting foreign currency abroad shall collect advance tax from the payer if the remittance is on account of f education related expenses abroad.
Education related expenses have been defined in this section to include tuition fee, boarding and lodging expenses, and any payment for distant learning to any institution or university abroad or any other expenditure related or attributable to foreign education.
On the practical side every institution referred above, whilst remitting foreign currency abroad shall collect advance tax on account of the payer if such remittance is being made for education related expenses as defined above. Nevertheless foreign exchange regulations will have to be appropriately adjusted in case if the purpose of remittance is not required to be disclosed voluntarily.
The payer shall be entitled to claim the amount so collected against the tax liability.
Regime, payment on that account are generally routed through private foreign currency accounts where in practice, there is no enquiry for income tax purposes in respect of the purpose of remittance made abroad.
DIVIDEND IN SPECIE
Section (236S)
Distribution by way of dividend in specie has now been subjected to collection of tax. Such collection shall be made on the gross amount of dividend in specie which in accounting sense represents the value of asset released from the reserves as per the financial statements.
Specific provision would have to be introduced to implement such collection process as in this case an amount would be required to be paid by the recipient of dividend to the company to comply with these provisions.
Collection of tax by Pakistan Mercantile Exchange Limited (PMEX)
Section (235T)
PMEX shall be required to collect tax on receipts by PMEX from members (other than deposits) on purchase or sale of future commodity contracts. Rule shall be required to be framed for the implementation of this section.
Revision in tax rates for individuals and Association of Persons not being salaries and for salary income.
Division 1 of Part 1 of First Schedule
Minor adjustment has been in schedule for the charge of tax on income of individuals and AOP. Income exceeding Rupees 400,000 to 750,000 with a rate of 10 percent has been revised to Rs 400, 000 to 500, 000 with a rate of 7 percent and a new slab has been introduced for salary between 500, 000 to 750,000. All corresponding adjustments have been made in the schedule.
Similar adjustments have been made in slabs relating to salary income. A new slab of income between
Rs 400,000 to Rs 500, 000 has been introduced with a rate of 2%. Previously income under this slab was taxable at the rate of 5 %
Tax rates for Professional Firms
Proviso to Division 1 of Part I of the First Schedule
A proviso has been added to the rate prescribed under this part of the First Schedule in respect of rate applicable for Association of Persons. By way of this proviso in case of AOPs, being professional firms, where there is a prohibition under any law or the rules of body governing that profession to incorporate as a limited liability company the maximum rate of tax shall be 32 percent instead of 35 percent as prescribed in the Table. Such reduced rate shall be applicable for the year 2016 onwards.
There is an error in the said proviso as reference to serial number (7) has to be serial number (8).
Furthermore, the said proviso has to refer to a member of an AOP in addition to an AOP as under correct application of Section 92 taxable person is a member of an AOP not being an AOP.
These errors are expected to be corrected in the following year.
Tax Rates on Companies
Division II of Part 1 of the First Schedule
Rates of tax for companies for the following tax years 2016, 2017 and 2018 shall be 32, 31 and 30 percent of income respectively.
This is the prescription of policy already announced in 2013 whereby it had been announced that tax rates for companies shall be brought to 30 percent over a five years.
This prescription was essential for the reason that future incidence of tax specially in relation to accounting for deferred taxation was not possible at the reduced rate unless the same is legislatively prescribed.
Rate of Dividend tax
Division III of Part 1 of the First Schedule
General rate of tax on dividend, being dividend from a company other than inter alia being a power generation company, of 10 percent has been enhanced to 12.5%
However dividend from a mutual fund shall remain taxable at the rate of 10 percent.
Dividend received by a company from a collective investment scheme or a mutual fund other than stock funds are taxable at a higher rate of 25 percent. Dividend received from a REIT Scheme shall also be subject to the higher rate of 25 percent.
Nevertheless, a special concession has been provided by way of reduction of dividend rate by 50 percent for a REIT Scheme that:
-Dividend is from a Development REIT Scheme set up with the object of development and construction of residential buildings; and
-Scheme is set up by June 30, 2018.
Reduced rate shall be applicable for dividends paid after June 30, 2018.
Minimum Tax under Section 113
Division IX of Part 1 of First Schedule
Dealers or distributors of fertilisers shall now be subject to minimum tax at the rate of 0.5 percent instead of 0.2 percent of turnover of the year.
Furthermore reduced rate of 0.2 percent rate of minimum tax which was previously applicable for distributors of all consumer goods shall now be limited to only to distributors of fast moving consumer goods. Such goods have now been defined in Section 2 of the Ordinance.
The rate of tax on dividends (other than from stock funds) has been increased from 10% to 12.5% for filers and from 15% to 17.5% for non-filers.
Dividend from stock funds shall be taxable at the rate of 15% instead of 12.5%.
As identified earlier, a consistent policy regime is essential for bridging the trust gap between the taxpayers and policymakers.
Rate of tax on capital gains of insurance companies for tax year 2016 has been prescribed in line with similar income in the hands of other taxpayers as laid down for income covered under section 37A.
Adjustable withholding tax of 14% has also been introduced on internet services.
The tax slabs for salary income have been revised. The maximum rate of 30% has been retained, however, the slabs within that structure have been amended which has resulted in a very minor relief for lower brackets. Similar amendments have been made for non-salaried income.
Minimum tax on income of distributors or dealers in fertilisers business is proposed to be increased from 0.2% to 0.5%.
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