The Federal Board of Revenue has allowed deduction of Zakat paid under the Zakat and Ushr Ordinance 1980 by the recipients of 'profit on debt'. In this regard, the FBR has amended Income Tax Circular 9 of 2011 through an Income Tax Circular 13 of 2011.
Tax experts explained to this scribe that the most significant change made through the said circular is that earlier no deduction of Zakat was allowed which was against the provisions of section 60 of the Income Tax Ordinance 2001. Other than companies, the income from profit on debt was subject to final discharge of tax liability at 10 percent of the profit received.
It is now clarified that the recipients whose income falls under the fixed tax regime shall also be allowed deduction of Zakat from the said profit. This means that the banks would withhold tax on the profit on debt paid to the recipients after deduction of Zakat from the said profit. This would create problems for the withholding agents as the deduction of Zakat is made once a year whereas withholding tax on profit on debt can be charged more than once in a year.
It was further explained by the experts that the new circular may create problems for the withholding agents due to timing difference between the Zakat deduction and withholding tax on profit on debt. Another income tax lawyer was of the view that the purpose of this circular is to give logical relief to the person who pays Zakat under the Zakat and Ushr Ordinance, 1980.
Now tax shall be deducted after giving credit of payment of Zakat. In simple words we may say following shall be interpretation of the new income tax circular:- [10% of the gross amount of profit on debt as reduced by the amount of Zakat, if any, paid by the recipient under the Zakat and Ushr Ordinance 1980 (XVII of 1980'.
Following is the text of the income tax circular 13 of 2011 issued here on Tuesday: "In partial modification of the Board's Circular No 09 of 2011, it is clarified that the words "before deduction of Zakat" whenever appearing in the said Circular stand substituted by the words "as reduced by the amount of Zakat, if any, paid by the recipient under the Zakat and Ushr Ordinance, 1980 (XVII of 1980)."