Relief package for anti-terror war affected areas: FBR supersedes all income tax clarifications

The Federal Board of Revenue (FBR) has superseded all income tax clarifications issued on the fiscal relief package granted to investors and businessmen of Khyber Pukhtoonkhwa (KP), Federally Administered Tribal Areas (FATA) and the Provincially Administered Tribal Areas (PATA) to check misuse of the income tax exemption on profits derived from entities in anti-terror war-affected areas.
The FBR has superseded all earlier clarifications on clause 126F of the Income Tax Ordinance 2001 through circular number 14 of 2011 on Friday to prevent misuse of the facility due to wrong interpretation of letters/clarifications issued by the Board. Through the new income tax circular, the FBR has stated that the person would be taxable if the taxpayer is located inside the specified areas, but his business is outside the specified areas.
When contacted, a tax expert said that the quantum of misuse of the exemption due to wrong interpretation of FBR clarifications on profits and gains derived by a taxpayer located in the most affected and moderately affected areas of Khyber Pakhtunkhwa, FATA and PATA is yet not known. However, the FBR has now superseded all income tax clarifications, letters and notifications issued on clause 126F of the Income Tax Ordinance 2001 due to possible misuse of the facility, tax expert added.
In the income tax circular 14 of 2011, the FBR has admitted that the clarifications, instructions, letters and notifications issued on clause 126F of the Income Tax Ordinance 2001 had created confusion due to different interpretations on the exemptions granted under the fiscal relief package. Under clause (126F) of Part-I of Second Schedule of the Income Tax Ordinance, 200l, income tax exemption was available on profits and gains derived by a taxpayer located in the most affected and moderately affected areas of Khyber Pakhtunkhwa, FATA and PATA for a period of three years starting from the tax year 2010.
The FBR has clarified that the taxpayer would be treated as exempted in case he is located inside the affected and moderately affected areas and his business is also carried on inside the specified areas. In case the taxpayer is located outside the specified areas but his business is carried on within the specified areas, he would also be treated as exempt under clause 126F of the Income Tax Ordinance 2001.
On the other hand, if the taxpayer is located inside the specified areas, but his business is carried on outside the specified areas, he would be treated as taxable. If the taxpayer is located outside the specified areas, but his business is partly carried on inside the specified areas, he would be treated as exempt to the extent of the income attributable to the business operations carried on inside the specified areas.
According to the FBR circular issued here on Friday, the clause (126F) was inserted in Part I of Second Schedule to the Income Tax Ordinance, 200l, through Finance Act, 2010, to grant fiscal relief to the taxpayers whose businesses were adversely affected during the on-going strife in the Khyber Pukhtoonkhwa (KP), Federally Administered Tribal Areas (FATA) and the Provincially Administered Tribal Areas (PATA), for a period of three years from tax year 2010. In follow-up thereto, a number of communications were issued by the Board to define and clarify the parameters of Clause (126F) including SROs, Circulars, and Letters, which being prone to varying interpretations, may have caused certain degree of confusion in some respects.
The FBR said that queries had been received in the Board as regards the availability of exemption under Clause (126F) with reference to the location of the taxpayer, the location of the business, and other allied matters. In supersession of all earlier clarifications issued by the Board, in order to streamline the operation of Clause (126F), and ensure its standardised implementation across the board, the instructions as contained in the succeeding paragraphs will henceforth apply. The word "located" as used in Clause (126F) can possibly have more than one dimension.
The relevant scenarios along with the corresponding exemption/ taxable status are outlined below:
---- The taxpayer is located inside the affected and moderately affected areas (hereinafter 'the specified areas'), and his business is also carried on inside the specified areas. (Exempt).
---- The taxpayer is located outside the specified areas but his business is carried on within the specified areas (Exempt).
---- The taxpayer is located inside the specified areas, but his business is carried on outside the specified areas (Taxable).
---- The taxpayer is located outside the specified areas, but his business is partly carried on inside the specified areas. Exempt to the extent of the income attributable to the business operations carried on inside the specified areas.
Thus, it is apparent that the provisions of Clause (126F) have to be applied keeping in view the facts of each case. Accordingly, the field formations may decide each case on merit in the light of the above instructions upon filing of a claim in this regard by the taxpayer, the FBR circular added.