The Federal Board of Revenue (FBR) has introduced a new mechanism to collect advance tax where a person does not file his estimate or declaration and in such cases advance tax will be estimated by the taxation officer of the FBR.
Explaining the legal changes in Finance Bill 2018, Syed Naved Andrabi Advocate Supreme Court informed that a mechanism to collect advance tax is being introduced where a person does not file his estimate or declaration. In such situation the advance tax will be estimated by the Officer and collected u/s 137 of the Ordinance. This is being done to overrule the judgment of the Lahore High Court where it was held that advance tax cannot be recovered arbitrarily and on estimation by the Officer.
At present, a taxpayer can file a lower estimate of advance tax without furnishing any basis of such lower estimate. Provisions of law have been streamlined so that a lower estimate is accompanied by an estimate of the turnover of the remaining quarters, reasons for any projected decline in turnover, documentary evidence of any claim of expenses resulting in lowering of estimate and computation of estimated taxable income. In case the estimate is not supported with adequate basis, the Commissioner shall have the mandate to reject the lower estimate and the taxpayer shall be required to pay advance tax on the basis of his turnover for the quarter.
In order to streamline computation of advance tax where the taxpayer has not paid advance tax and his turnover for the quarter is not known, turnover for the quarter shall be taken to be 10% higher than one-fourth of the turnover for the year.
He said that banks while filing statement u/s 165A of the Ordinance will have to give names and complete particulars of person withdrawing more than Rs 50,000/- in cash in a day. This will be again a cumbersome exercise for the banks who are already under lot of stress on account of withholding of taxes. The recovery of which is also being made from them in case there is an omission or default.
Under section 101A (gain on disposal of assets outside Pakistan), any gain from the disposal or alienation outside Pakistan of an asset located in Pakistan of a non-resident company shall be Pakistan-source. The gain under sub-section (1) shall be chargeable to tax at the rate and in the manner as specified. Where the asset is any share or interest in a non- resident company, the asset shall be treated to be located in Pakistan, if the share or interest derives, directly or indirectly, its value wholly or principally from the assets located in Pakistan and shares or interest representing ten per cent or more of the share capital of the non-resident company are disposed or alienated.
The share or interest, shall be treated to derive its value principally from the assets located in Pakistan, if on the last day of the tax year preceding the date of transfer of a share or an interest, the value of such assets exceeds one hundred million Rupees and represents at least fifty per cent of the value of all the assets owned by the non-resident company.
Notwithstanding the provisions of section 68, the value as mentioned in sub-section (4) shall be the fair market value, as may be prescribed, for the purpose of this section without reduction of liabilities.
Where the entire assets by the non-resident company are not located in Pakistan, the income of the non-resident company, from disposal or alienation outside Pakistan of a share of, or interest in, such non-resident company shall be treated to be located in Pakistan, to the extent it is reasonably attributable to assets located in Pakistan and determined as may be prescribed.
Where the asset of a non-resident company derives, directly or indirectly, its value wholly or principally from the assets located in Pakistan and the non-resident company holds, directly or indirectly, such assets through a resident company, such resident company shall, for the purposes of determination of gain and tax thereon under sub-section (8) or, as the case may be, sub-section (9), shall furnish to the Commissioner within sixty days of the transaction of disposal or alienation of the asset by the non-resident company, the prescribed information or documents, in a statement as may be prescribed:
Provided that the Commissioner may, by notice in writing, require the resident company, to furnish information, documents and statement within a period of less than sixty days as specified in the notice.
The person acquiring the asset from the non-resident person shall deduct tax from the gross amount paid as consideration for the asset at the rate of fifteen percent and shall be paid to the Commissioner by way of credit to the Federal Government through remittance to the Government Treasury or deposit in an authorized branch of the State Bank of Pakistan or the National Bank of Pakistan, within fifteen days of the payment to the non-resident.
The resident company as referred to in sub-section (7) shall collect advance tax as computed in sub-section (10) from the non-resident company within thirty days of the transaction of disposal or alienation of the asset by such non-resident company:
Provided that where the tax has been deducted and paid by the person acquiring the asset from the non-resident person under sub-section (8), the said tax shall be treated as tax collected and paid under this sub-section and shall be allowed a tax credit for that tax in computing the tax under sub-section (10).
The tax to be deducted under sub-section (8) or to be collected under sub-section (9) shall be the higher of 20% of A, where A = fair market value less cost of acquisition of the asset or 10% of the fair market value of the asset.
Where tax has been paid under sub-section (8) or (9), no tax shall be payable by the non-resident company in respect of gain under sub-section (8) of section 22 or capital gains under section 37 or 37A.", it added.
The definition provisions are amended to introduce sub-section (22B) in section 2 of the Ordinance which introduces the concept of "fee for offshore digital services" which means any consideration for providing or rendering services by a non-resident person for online advertising including digital advertising space, designing, creating, hosting or maintenance of websites, digital or cyber space for websites, advertising, e-mails, online computing, blogs, online content and online data, providing any facility or service for uploading, storing or distribution of digital content including digital text, digital audio or digital video, online collection or processing of data related to users in Pakistan, any facility for online sale of goods or services or any other online facility. This comprehensive definition will bring the services provided by the non-resident persons on the web sites outside Pakistan into tax net in Pakistan and definitely the burden or cost will be on the persons seeking such services. It may not be out of place to mention that this service will also be taxable by the Provincial Revenue Authorities. A corresponding amendment in Section 6 and Section 101 relating to 'geographical source' is also proposed to tax the income of such non-residents.
The expression filer as given in Section 2 (23A) of the Ordinance is being broadened to include the filers in AJ&K or Gilgit Baltistan Area. This means that withholding agent will now have to follow the updating of filer list not only from FBR but also from the concerned Authorities in AJK and GB areas.
The definition of 'Permanent Establishment' as given in Section 2 (41) of the Ordinance is being amended to include a person who has and habitually exercises an authority to conclude contracts on behalf of the other person or has and habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the person and these contracts are (a) in the name of the person; or
(b) for the transfer of the ownership of or for the granting of the right to use property owned by that enterprise or that the enterprise has the right to use; or
(c) for the provision of services by that person.
An explanation has also been added in paragraph (ii) to state that...
"Explanation.- For removal of doubt, it is clarified that an agent of independent status acting in the ordinary course of business does not include a person acting exclusively or almost exclusively on behalf of the person to which it is an associate; or";
Another new sub-clause (g) is being added:-
"(g) a fixed place of business that is used or maintained by a person if the person or an associate of a person carries on business at that place or at another place in Pakistan and?
(i) that place or other place constitutes a permanent establishment of the person or an associate of the person under this sub-clause; or
(ii) business carried on by the person or an associate of the person at the same place or at more than one place constitute complementary functions that are part of a cohesive business operation.
Explanation.- For the removal of doubt, it is clarified that ?
1. (A) the term "cohesive business operation" includes an overall arrangement for the supply of goods,
installation, construction, assembly, commission, guarantees or supervisory activities and all or principal activities are undertaken or performed either by the person or the associates of the person; and
2. (B) supply of goods include the goods imported in the name of the associate or any other person, whether or not the title to the goods passes outside Pakistan.";
The definition is an attempt to bring in the taxation of non-residents within the scope of Pakistan income; however, it is to be seen as to whether this definition will be able to over ride the definition that is given in the Treaty for Avoidance of Double Taxation signed with other countries by Pakistan. It must be kept in mind that Section 107 of the Ordinance clearly states that the Treaty shall have an overriding effect.
It was being considered and assumed by the business community that Super Tax levied for one year, ie Tax Year 2015 will be abolished; however, it has now been extend to Tax Year 2020 but with reduction of rate by 1% every year.
The rate of tax on undistributed profits u/s 5A of the Ordinance is also being proposed to be reduced to 5% from 7.5%; similarly the allowance of issuing bonus shares is being withdrawn and only cash dividends will qualify. Further, this will no more be falling under Final Tax Regime.
In Section 100A of the Ordinance a new sub section is being added which would now apply Chapter VII & VIII to the income of the banks; ie, application parameters relating to geographical source; foreign source; taxation of non-residents; agreement for avoidance of double taxation; anti avoidance shall apply specifically; whereas, the income as declared to the State Bank was applicable with certain disallowance specifically defined in 7th schedule to the Ordinance. This may lead to exploitation of banking income by the Commissioner for the purposes of increasing revenues.
Section 109A is being introduced to bring the foreign controlled company of Pakistanis into tax net in Pakistan.
The person who has assets outside Pakistan is also being made liable to file tax return and wealth statement on said basis. This means that exchange of information with other countries will be effectively made to make this amendment effective.
A mechanism to collect advance tax is being introduced where a person does not file his estimate or declaration. In such situation the advance tax will be estimated by the Officer and collected u/s 137 of the Ordinance. This is being done to overrule the judgment of the Lahore High Court where it was held that advance tax cannot be recovered arbitrarily and on estimation by the Officer.
Section 152 is also being amended to make withholding of tax on payments made to non resident persons for off shore digital services. The definition of which has also been added in Section 2 of the Ordinance.
Minimum limits for withholding of tax u/s 153 on supplies and services have been enhanced to 75,000/- for supply and 30,000/- for services.
Section 214D which selects the case for audit in case the return is not filed within the prescribed time is being proposed to be deleted. In other words auto selection of audit is removed and description will again be applicable, Naved Andrabi added.