Budget Briefing 2015

Ernst & Young Ford Rhodes Sidat Hyder


BUDGET BRIEFING 2015

This Memorandum is correct to the best of our knowledge and belief at the time of going to the press. It is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. The Firm and Ernst & Young do not accept any responsibility for any loss arising from any action taken or not taken by anyone using this publication.

This Memorandum may be accessed on our website http://www.ey.com


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Budget Briefing


This Memorandum has been prepared as a general guide for the benefit of our clients and is available to other interested persons upon request. This should not be published in any manner without the Firms consent. This is not an exhaustive treatise as it sets out interpretation of only the significant amendments proposed by the Finance Bill, 2015 (the Bill) in the Income Tax Ordinance, 2001 (the Ordinance), the Sales Tax Act, 1990 (the ST Act), the Customs Act, 1969 (the Customs Act) and the Federal Excise Act, 2005 (the FE Act) in a concise form sufficient enough to amplify the important aspects of the changes proposed to be made. The Repealed Ordinance means the Income Tax Ordinance, 1979 since repealed. The Board means the Federal Board of Revenue, Government of Pakistan.

Changes of consequential, administrative, procedural or editorial in nature have either been excluded from these comments or otherwise dealt with briefly.

The amendments proposed by the Bill after having been enacted as the Finance Act, 2015, shall, with or without modification, become effective from the tax year 2016, unless otherwise indicated.

It is suggested that the text of the Bill and the relevant laws and notifications, where applicable, be referred to in considering the interpretation of any provision. Since these are only general comments, no decision on any issue be taken without further consideration and specific professional advice should be sought before any action is taken.

Contents Page

Highlights i - ii

Income Tax 1 29

Sales Tax 31 43

Customs 45 48

Federal Excise 49 - 54

KARACHI: 06 June 2015


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Highlights


i

Income Tax

A public company deriving profit for the year and having reserves in excess of hundred percent of its paid up capital is now further taxable on such excess reserves at the rate of ten percent. However, a scheduled bank, a modaraba and a government owned public company are not chargeable to such tax.

A one-time super tax @ 4% of income of banking companies and 3% of income of Rs.500 million or more 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).

Capital gain on securities that are held for a period less than 4 years are proposed to be taxed based on the following holding period of securities and rates

Holding period

Tax year

2015 2016

Less than 12 months 12.5% 15%

12 months or more but less than 24 months

10% 12.5%


0% 7.5%

Profit on debt derived by all taxpayers is now

taxable as a separate block of income at progressive slab rates of ten, twelve and half and fifteen percent applicable on gross amount of profit on debt.

Tax credit available to a company on its enlistment on a registered stock exchange is proposed to be enhanced from 15% to 20% of the tax payable.

Like banking companies, other companies and AOPs are proposed to estimate the advance tax before the second instalment is due in cases where higher income and tax payable is anticipated. 50% of the estimated advance tax is required to be paid in the second quarter and balance in remaining quarters.

A tax credit of 1% of tax payable, for every 50 employees employed by a newly established industrial undertaking shall be allowed for 10 years. The maximum credit is allowed upto 10% of tax payable.

The eligible threshold of admissible investment in shares and premium on life insurance for claim of tax credit is proposed to be enhanced from Rs.1 million to Rs.1.5 million

Instead of tax credit on profit on debt paid on a housing loan, the Bill proposes to allow deductible allowance with reference to profit on debt paid on a housing loan for the purpose of construction of a new house or acquisition of a house.

Exporters are to be given an option to opt out of

the final tax regime and pay tax on normal basis but the tax deducted will be treated as minimum tax.

CNIC issued by NADRA to be treated as NTN effective from the tax year 2015.

Non-filers are proposed to subject to collection of tax @ 0.6% on all banking transactions where the value of transactions in a day exceeds Rs.50,000.

The Bill proposes to enact provisions enabling automatic exchange of information by the Government with other countries.

Rate of tax on dividend increased from 10% to 12.5%

The due date of payment of tax demand is proposed to be enhanced from 15 days to 30 days. Moreover, the Commissioner (Appeals) has been empowered to grant stay from recovery of tax demand for a period of 60 days instead of 30 days at present.

Remittance of education and related expenses abroad is proposed to be subject to collection of tax @ 5%

Concept of Special Audit Panels comprising officers of Inland Revenue and professionals introduced.

Automatic selection for audit of such retailers proposed who do not file their returns or pay tax as per the conditions prescribed.

Whistleblower who reports concealment to be rewarded. Amendments made on the following tax laws for this purpose:

Income Tax Ordinance, 2001

Sales Tax Act, 1990 Federal Excise Act, 2005

Single rate of tax for banking companies on dividend income and capital gain of 35% is proposed

Application of minimum tax on builders has been deferred until 30 June 2018.

Minimum tax on land developers has been levied at the rate of two percent of the value of land notified by any authority for the purpose of stamp duty.

Payments to resident persons for use of machinery and equipment is proposed to be subject to withholding tax @ 10%

Board no longer empowered to exempt goods or person from collection of tax at import stage.

Manufacturers of cooking oil and vegetable ghee subject to final tax at the rate of two percent on purchase of locally produced edible oil.

Commissioner empowered to issue reduced/nil withholding tax certificate to a permanent establishment of a non-resident person.

Highlights


ii

Scope of collection of advance tax on private motor vehicles has been expanded. The term motor vehicle has also been defined.

Collection of advance tax also required in respect of internet bills and prepaid card for internet.

Wholesalers of specified goods now exposed to collection of advance tax by manufacturers, wholesaler, dealers and distributers.

Exemption from collection of tax under Chapter-XII (transitional advance tax provisions) as available to various persons have been consolidated under a single section for ease of reference.

The rate of default surcharge in respect of various non-compliances has been reduced from eighteen percent to twelve percent.

Penalties for non-filing of statement in respect of income governed by the final tax regime, withholding statements, furnishing of information by banks and wealth statements have been amended.

Rate of compensation for delayed refund reduced from fifteen percent per annum to KIBOR plus zero point five percent per annum.

Sales Tax

Certain amendments made in the definitions of

Active taxpayer, Cottage Industry, Retailer and

Supply.

Rate of further tax enhanced from 1% to 2%.

Custom Authorities empowered to recover short

payments or non-payments of sales tax at import

stage

Manner of claiming input tax adjustment on import

rationalized

Disallowance of input tax scope enhanced

Joint or several liability for unpaid sales tax

amount in the supply chain.

Withdrawal of boards power to grant exemption

except for emergency situation Now such

exemptions would stands rescinded at the close of

the financial year.

Extended requirement of registration under the

Act.

Special audit panel to conduct audit

Certain amendments made in offences and

penalties

Monitoring or tracking of production, sales,

clearance, stocks etc. through electronic or other

means.

Agreements for the exchange of information with

provincial or foreign governments.

Prize scheme to promote tax culture

Certain amendments in the following Schedules:

-Fifth Schedule -Sixth Schedule -Eighth Schedule -Ninth Schedule

Customs

Withdrawal of Boards power to grant exemption from customs except for emergency situations. Now such exemptions would stand rescinded at the close of the financial year.

Enhancement of lower limit of recovery of short paid custom duty amount enhanced to Rs.20,000.

Clarification on transshipment of goods to other destinations.

Penalty exceeding Rs.50,000/- specified for not sending invoice with the goods

Rates of custom duty enhanced from 1% to 2% and 25% to 20% to the First Schedule.

Fifth Schedule to the Customs Act relating to

imports of plant and machinery with certain substitution of entries and rates of duty related thereto.

Federal Excise

Powers of the Board granting exemption from the levy

of FED are proposed to be withdrawn Federal Government is now only empowered to

exempt good or services from the levy of FED subject to the approval of Economic Coordination Committee

Commissioner to pass orders under section 35 of the FE Act, upon receipt of an application from the aggrieved person in addition to taking suo moto action

Board to appoint special audit panels for conducting audit

Federal Government to enter into bilateral or multilateral agreements with provincial governments or with governments of foreign countries for exchange of information

Confidentiality to be maintained by Public Servants in respect of information received under any provision of the Act or in pursuance to a bilateral or multilateral agreements

Rate of duty on aerated waters enhanced Rate of duty on locally manufactured cigarettes

modified Duty on filter rod for cigarettes levied Withdrawal of duty on socio-economic routes Exemptions from levy of duty as available through

various notifications / SROs has been rationalized and is now proposed to be included in the Third Schedule

Table of Contents


1

INCOME-TAX

Section Page

1. Excess reserves of public company to suffer tax 5(A) 5

2. Super tax for rehabilitation of temporary displaced persons 4B 5

3. Capital gain on disposal of securities 37A, Fourth Schedule 6

4. Exemptions and tax concessions - Second Schedule 53 and 159 6

5. Profit on debt now taxable as a separate block for all taxpayers, including companies

7B and 151 6

6. Commissioner empowered to issue reduced/nil withholding tax certificate to a permanent establishment of a non-resident

Sub-section (4A) of 152 7

7. Tax credit on industrial investments 65 7

8. Tax credit for enlistment 65C 7

9. Tax credit for industrial undertakings 65E 7

10. Advance payment of tax 147 8

11. Tax credit for employment generation by manufacturers 64B 8

12. Tax credit for investment in shares and life insurance premium paid 62 8

13. Deductible allowance for profit on debt 64A 8

14. Exports 154 9

15. Taxpayers registration 181 9

16. Advance tax on banking transaction otherwise than through cash 236P 9

17. Collection and exchange of information 107 sub-section (1), (1A)

and (1B) 165B 10

18. Dividend paid by non-resident companies 94 and the First Schedule 10

19. Revision of return 114 10

20. Grant of stay by Commissioner (Appeals) 128 10

21. Due date for payment of tax demand 137 11

22. Withholding tax on services rendered by companies 153, Clause (79), Part IV,

Second Schedule 11

23. Payment to residents for use of machinery and equipment 236Q 11

24. Collection of tax on remittance of education expenses abroad 236R 11

25. Concept of whistleblower 227B 11

26. Collection of tax by Pakistan Mercantile Exchange Limited 236T 12

27. Audit 121, 176, 177, 210 and

211 12

28. Automatic selection for audit or retailers 214D 13

29. Single rate of tax for all incomes of banking companies Seventh Schedule 13

30. Deductions against income from property 15A 13

31. Tax on shipping business carried on by resident person 7A and Clause (21) of Part II of the Second

Schedule 14

32. Tax credit for non-profit organizations 100C 14

33. Minimum tax on builders 113A 14

34. Minimum tax on land developers 113B 14

35. Power of the Board to exempt goods from collection of income tax at import stage withdrawn

148 14

36. Tax on local purchase of cooking oil or vegetable ghee 148A, 169 14

37. Reduction in the rate of default surcharge in case of failure to pay tax collected or deducted

Sub-section (1B) of 161 14

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2

38. Advance tax on private motor vehicles 231B 14

39. Tax on motor vehicles 234 15

40. Advance tax on telephone and internet user 236 15

41. Advance tax on purchase of domestic air tickets 236B 15

42. Advance tax on sale or transfer of immovable property 236C 15

43. Advance tax on sale to retailers and wholesalers 236H 15

44. Collection of advance tax by educational intuitions 236I & Clause 89 to Part-

IV of Second Schedule 15

45. Advance tax on purchase or transfer of immovable property 236K 16

46. Advance tax under Chapter XII 236O 16

47. Default surcharge 205 16

48. Additional payment for delayed refunds 171 16

49. Offences and penalties 182 16

50. Prosecution for making false or misleading statements 195 16

51. Income Tax Authorities 207 16

52. Dividend in specie 236S 17

FIRST SCHEDULE

Page

53. Rates of tax for individuals and Association of Persons 18

54. Association of Persons 18

55. Tax Year 18

56. Salaried taxpayer 18

57. Reduction in tax liability 18

58. Rates of tax for companies 19

59. Rate of Super tax for rehabilitation of temporarily displaced persons 19

60. Rate of tax on dividend income 19

61. Rate of tax on profit on debt 19

62. Rate of tax on capital gains on securities 19

63. Rate of tax on capital gain on immovable property 20

64. Minimum Tax 20

65. Advance tax on imports 20

66. Advance tax on dividends 21

67. Advance tax on profit on debt 21

68. Advance Income tax on payment to non-residents 21

69. Advance income tax on payment to resident on payment for goods and services

21

70. Collection of advance income tax on petroleum products 21

Table of Contents


3

Page

71. Collection of advance income tax on Brokerage and Commission 21

72. Collection of advance income tax on goods transport vehicles 22

73. Collection of advance income tax on passenger transport vehicles 22

74. Collection of advance income tax on private motor vehicles 22

75. Motor Vehicle tax when collected in lump sum 22

76. Advance tax on electricity consumption 22

77. Advance tax on telephone users 22

78. Advance tax on cash withdrawal 22

79. Advance tax on transaction in bank 22

80. Advance tax on purchase, registration and transfer for motor vehicles

22

81. Advance tax on sale to distributors, dealers or wholesalers 23

82. Advance tax on domestic electricity consumption 23

83. Advance tax on international air ticket 23

84. Advance tax on Banking transactions otherwise than through cash 23

85. Rate of collection of tax by Pakistan Mercantile Exchange Limited 23

86. Advance tax on the payment to residents for use of machinery and equipment

23

87. Collection of Advance tax on remittance of educational expenses 23

THE SECOND SCHEDULE

PART-I Clause Page

88. Exemption to Inter-corporate Dividend (103A) 24

89. Deletions 20, 113 and 126F 24

90. Tax credit in respect of donations to The Indus Hospital, Karachi (61) 24

91. Exemption to The Indus Hospital, Karachi (66) 25

92. Sale of immoveable property to a REIT Scheme (99A) 25

93. Exemption to the income derived by China Overseas Port Holding Company Limited

(126A) 25

94. Income of Manufacturer of certain Plant, Machinery & Equipment (126I) 25

95. Income of Warehousing or Cold Chain facilities (126J) 25

96. Income from operating Halal Meat production (126K) 25

97. Income from industrial undertaking set-up in KPK (126L) 25

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4

Clause Page

98. Income from Transmission Line Project (126M) 25

99. Exemption to LNG Terminal Operators and Terminal Owners (141) 26

100. Exemption to income from social security contribution (142) 26

PART-II

Clause Page

101. Deletions 13C, 14, 14A, 14B and 21

26

PART-IV

Clause Page

102. Exemption from minimum tax to KAPCO (11A) (iv)

26

103. Coal Mining Project in Sindh Exemption from minimum tax (11A), (xviii)

26

104. Exemption from minimum tax and alternate corporate tax to LNG Terminal Operators and Terminal Owners

(11A), (xix) & (11D)

27

105. Exemption from minimum tax for businesses in KPT, FATA & PATA (11A), (xx)

27

106. Rice Mills Exemption from minimum tax for the tax year 2015 (11A), (xxi)

27

107. Exemption from minimum tax (11A), (xxii), (xxiii), (xxiv) & (xxv)

27

108. Exemption from withholding of tax for advertisement services (16A)

27

109. Exemption from withholding of tax while making payment to PE of a non-resident E&P companies

(46)

27

110. Exemption from payment of tax at import stage under Section 148 (56)

28

111. Deletion 56B, 56H, 59 sub-clause (iii), 72A and 83

28

112. Large Trading Houses (57)

28

113. Deduction of tax from cash withdrawal by exchange companies (61A) and (28B) of Part-II

29

114. Exemption from invocation of Section 111 (86)

29

115. Collection of advance tax on functions and gathering (90)

29

116. Exemption from payment of tax at import stage under Section 148 (91) & (92)

29

117. Exemption from collection of tax on exports (93) 29

Income Tax


5

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 companys paid-up capital. The Bill proposes a proviso to sub section (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. Sub section (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 companys profit for the year. Hence the proposed section, in effect, creates a double tax on the companys income; first on the companys 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

Banking company 4% of income Person other than a banking

company having income equal to or exceeding Rs.500 million

3% of income

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.

Income Tax


6

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

Holding period

Tax year

2015 2016

Less than 12 months 12.5% 15%


10% 12.5%

24 months or more but less than 4 years

0% 7.5%

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

Category Filer Non-filer

Individuals and AOP 10% 17.5%

Company 10% for stock funds 25% for others

25%

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 i.e. 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:

S.No Profit on Debt Rate of Tax

(1) (2) (3)

1 Where profit on debt does not exceed Rs.25,000,000

10%

2 Where profit on debt exceeds Rs.25,000,000 but does not exceed Rs.50,000,000

2,500,000 + 12.5% of the amount exceeding Rs.25,000,000

3 Where profit on debt exceeds Rs.50,000,000

Rs.5,625,000 + 15% of the amount exceeding Rs.50,000,000

Income Tax


7

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 i.e. 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

Income Tax


8

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 i.e. 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 persons taxable income in a tax year is presently allowed upto lessor of the cost of acquiring the shares/ premium paid or 20% of the persons 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 persons 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.

Income Tax


9

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 countrys 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.

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17. Collection and exchange of information Section 107 sub section (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--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

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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) i.e. 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) i.e. 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 i.e. 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

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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 Exchange

Limited Section 236T

The proposed Section 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 incorporated under the Companies Ordinance, 1984 and is licensed 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.

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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 i.e. 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 i.e. 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.

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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

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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 tickets is 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 this section 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.

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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 his income 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 the Table 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.

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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.

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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.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.2,500,001 3,000,000


Rs.3,000,001 3,500,000


Rs.3,500,001 4,000,000


Rs.4,000,001 7,000,000


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


Non-Salaried taxpayers

Rate

Rs.750,001 1,500,000


Rs.1,500,001 2,500,000


Rs.2,500,001 4,000,000


Rs.4,000,001 6,000,000


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.

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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 displaced persons

The rate of super tax for rehabilitation of temporarily displaced persons 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 REIT Scheme with the object of development and construction of residential buildings is set up by 30th June, 2018, dividend

received by a person from such Developmental REIT Scheme shall be reduced by fifty percent for three years from 30th June, 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:

Taxpayer 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 a REIT scheme shall deduct, on redemption 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

Income Tax


20

In case of a stock fund if dividend receipts of the fund are 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 turnover have 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

Income Tax


21

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 Filer Non-

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 Filer Non

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%

Income Tax


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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

Up to 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

T

Budget Briefing 2015

Documents

Transcript of Budget Briefing 2015