KPMG Budget Brief

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KPMG Taseer Hadi & Co.

Chartered Accountants

Budget Brief 2011An Economic and Tax Commentary


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Budget Brief 2011 i

The Budget Brief 2011 contains a review of economic

scenario and highlights of Finance Bill 2011 as they

relate to direct and indirect taxes and certain other

laws.

The provisions of the Finance Bill 2011 are

generally applicable from 01 July 2011, unless

otherwise specified.

The Budget Brief contains the comments, whichrepresent our interpretation of the legislation, and

we recommend that while considering their

application to any particular case, reference be

made to the specific wordings of the relevant

statutes.

4 June 2011


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ii Budget Brief 2011

This page is intentionally left blank.


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Budget Brief 2011 iii

Contents Page

Budget at a Glance 1

Economic Analysis 3

Economic Scenario 9

Highlights (Income Tax, Sales Tax, Federal Excise, Customsand Capital Value Tax 15

Significant Amendments

Income Tax 19

Sales Tax 31

Federal Excise Duty 37

Customs 41

Federal Consolidated Fund 45

Withholding Tax Rates Table Existing and Proposed 47

This brief is being issued as part of our client service programme exclusively for the information of clients and

staff of KPMG Taseer Hadi & Co. and other KPMG member firms.


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iv Budget Brief 2011



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Budget Brief 2011 1

2011 KPMG Taseer Hadi & Co., a Partnership firm registered in Pakistan and a member firm of the KPMG network of independent

member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

Budget at a glance

Budget

Estimate

2010-11

% Revised

Estimate

2010-11

% Budget

Estimate

2011-12

%

Tax Revenue

Direct Taxes

Income tax 633.0 26.1 602.5 23.5 718.6 26.0

Others 24.7 1.0 24.4 1.0 25.0 0.9

657.7 27.1 626.9 24.5 743.6 26.9

Indirect Taxes

Customs 180.8 7.5 173.3 6.8 206.4 7.5

Sales tax 674.9 27.9 654.6 25.6 836.7 30.2

Federal excise 153.6 6.3 132.9 5.2 165.6 6.0

Carbon surcharge on POL and CNG 110.0 4.5 90.0 3.5 120.0 4.3

Others 1.7 0.1 1.7 0.1 1.9 0.1

1,121.0 46.3 1,052.5 41.2 1,330.6 48.1

Total Tax Revenue 1,778.7 73.4 1,679.4 65.7 2,074.2 75.0

Non Tax Revenue 632.3 26.1 556.5 21.7 658.0 23.8

2,411.0 99.5 2,235.9 87.4 2,732.2 98.8

Less: Provincial Share 1,033.6 42.7 997.7 39.0 1,203.3 43.5

1,377.4 56.8 1,238.2 48.4 1,528.9 55.3

Net Capital Receipts 325.4 13.4 459.4 17.9 395.7 14.3

External Receipts 386.6 16.0 289.8 11.3 413.9 14.9

Change in Provincial cash balance 166.9 6.9 119.8 4.7 124.9 4.5

Bank Borrowings 166.5 6.9 452.2 17.7 303.5 11.0

2,422.8 100.0 2,559.4 100.0 2,766.9 100.0

Expenditure

Current Expenditure

General Public Services

Debt servicing 873.0 36.0 855.5 33.4 1,034.2 37.4

Grants and transfers 227.2 9.4 300.0 11.7 295.0 10.7

Superannuation and pensions 90.7 3.7 92.9 3.6 96.1 3.4

Subsidies 126.6 5.2 395.8 15.5 166.4 6.0

Others 70.2 2.9 11.4 0.4 68.3 2.5

1,387.7 57.2 1,655.6 64.6 1,660.0 60.0

Defence Affairs & Services 442.2 18.3 444.6 17.4 495.2 17.9

Economic Affairs 66.9 2.8 80.0 3.1 50.3 1.8

Public Order and Safety Affairs 51.3 2.1 58.7 2.3 59.6 2.2

Education Affairs and Services 34.5 1.4 40.3 1.6 39.5 1.4

Others 15.3 0.6 16.8 0.7 10.3 0.4

1,997.9 82.4 2,296.0 89.7 2,314.9 83.7

Development Expenditure

PSDP 321.4 13.3 217.9 8.5 355.0 12.8

Others 103.5 4.3 45.5 1.8 97.0 3.5

424.9 17.6 263.4 10.3 452.0 16.3Total Expenditure 2,422.8 100.0 2,559.4 100.0 2,766.9 100.0

------------------(Rupees in billions ) ----------------


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2 Budget Brief 2011





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Budget Brief 2011 3



-4

-2

0

2

4

6

8

10

12

14

16

06-07 07-08 08-09 09-10 10-11

Overall GDP (fc) 6.8 3.7 1.7 3.8 2.4

Agriculture 0.9 0.2 0.9 0.1 0.3

Industry 2.3 0.4 -0.03 2.1 -0.02

Services 3.6 3.1 0.9 1.5 2.2

Sectoral Contribution to GDP Growth (% Points)

-4

1

6

11

16

06-07 07-08 08-09 09-10 10-11

Agriculture 4.1 1.0 4.0 0.6 1.2

Manufacturing 8.3 4.8 -3.6 5.5 3.0

Services 7.0 6.0 1.7 2.9 4.1

Sectoral GDP Growth (% Points)

Economic Analysis


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4 Budget Brief 2011



0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

06-07 07-08 08-09 09-10 10-11

Others 7.3 6.6 7.1 7.8 7.1

Services 51.8 52.9 52.9 52.4 53.3

Manufacturing 19.0 19.2 18.2 18.6 18.7

Agriculture 21.9 21.3 21.8 21.2 20.9

Sectoral Share in GDP (% Points)

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

-

1,000

2,000

3,000

4,000

5,000

6,000

06-07 07-08 08-09 09-10 10-11

Domestic 2,610 3,267 3,852 4,651 5,461

Foreign currency 2,140 2,780 3,736 4,284 4,559

In percent of GDP 54.8 59.0 59.6 60.2 55.5

Domestic % of GDP 30.1 31.9 30.3 31.3 30.2

Foreign % of GDP 24.7 27.1 29.4 28.9 25.5

Public Debt (in billions of Rupees)


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Budget Brief 2011 5



-

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

06-07 07-08 08-09 09-10 10-11

Foreign exchange 11,542 15,070 9,539 10,255 13,953

Gold 1,268 1,344 1,926 1,935 2,575

Rupees to USD 59.86 60.63 62.55 78.50 83.80

Exchange Reserves (in USD millions)

Total exchange reserves at end of April 2011 reached USD 17.1 billion with Rupee US Dollar parity reaching 85.50

-

200

400

600

800

1,000

1,200

1,400

06-07 07-08 08-09 09-10 10-11

020406080

100

120140160180200

06-07 07-08 08-09 09-10 10-11

Population (millions) 162.9 166.4 169.9 173.5 177.1

Unemployment rate (% per annum) 5.2 5.5 5.5 5.6 5.6

Per Capita Income (mp - USD) 904 1,015 990 1,073 1,254

Total Investment - % of GDP 22.5 22.1 18.2 15.4 13.4

National Savings - % of GDP 17.4 13.6 12.5 13.2 13.8

Social Indicators


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6 Budget Brief 2011



8,673

10,243

12,724

14,836

18,063

4.3%

7.6%

5.3%

6.3%

5.5%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

06-07 07-08 08-09 09-10 10-11

Rs.

Billion

Overall Deficit

GDP(mp) Overall Deficit

Trade Deficit / Current Account Deficit

06-07 07-08 08-09 09-10 10-11

(Jul-Mar)

Exports 17,278 20,427 19,121 19,673 17,945

Imports 26,989 35,397 31,747 31,209 25,956

Trade balance -9,711 -14,970 -12,626 -11,536 -8,011

Services net -4,170 -6,457 -3,381 -1,690 -1,232

Current Transfer (Net) 10,585 11,476 11,154 12,562 11,511

(Workers remittances) 5,494 6,449 7,811 8,906 8,016

Income Account Balance (Net) -3,582 -3,923 -4,407 -3,282 -2,169

Current Account -6,878 -13,874 -9,260 -3,946 99


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Budget Brief 2011 7



0

5

10

15

20

25

06-07 07-08 08-09 09-10 10-11 (Jul-Apr)

CPI 7.77 12 20.77 11.73 14.08

SPI 10.82 16.81 23.41 12.63 23.29

WPI 6.94 16.64 18.19 13.32 18.47

Inflation

10

15

20

25

30

06-07 07-08 08-09 09-10 (Jul-Apr) 10-11 (Jul-Apr)

Overall 7.77 12 20.77 11.49 14.08

Food 10.28 17.65 23.7 12.03 18.41

Non Food 6.02 7.9 18.45 11.04 10.43

Core 5.9 8.4 17.6 11.2 9.5

Core Inflation


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8 Budget Brief 2011



Average retail prices of essential items

Kerosene

(per ltr)

Gas

(100 cf)

Petrol

Super (per

ltr)

Electricity

charges

(upto 50

units)

Tele local

call charges

(per call)

Wheat

Flour (Avg

Quality per

Kg)

Basmati

Rice

(Broken per

Kg)

Beef (Cow /

Buffalo with

bone per Kg)

06-07 39.09 99.79* 56.00 2.49 2.31 13.64 23.11 117.87

07-08 43.44 97.17* 57.83 2.76 2.31 18.07 37.77 123.30

08-09 66.79 96.91* 67.68 3.18 2.38 25.64 47.12 143.8209-10 (Jul-Apr) 71.45 105.10* 66.49 3.58 2.42 29.05 43.75 170.93

10-11 (Jul-Apr) 82.12 115.40 73.16 4.29 3.59 29.73 49.44 212.90

% Inc 10-11 14.9 9.8 10.0 19.8 48.3 2.3 13.0 24.5

* The units were changed from 100 cm to 100 cf.

Chicken

(Farm per

Kg)

Mutton (Goat

Avg Quality

per Kg)

Eggs (Hen

Farm per

Dozen)

Sugar (open

market - per

Kg)

Milk (Fresh

per ltr)

Tea (in packet

Super Qlty

per 250 gm)

Cooking oil

(Dalda per

2.5 ltr)

06-07 74.16 224.07 38.31 31.85 26.72 68.39 224.48

07-08 83.39 236.49 49.45 27.92 30.45 68.28 316.32

08-09 103.12 262.03 58.80 38.72 36.62 97.94 371.38

09-10 (Jul-Apr) 126.22 307.19 67.19 56.25 41.70 118.87 356.43

10-11 (Jul-Apr) 130.89 405.36 74.67 73.82 49.02 136.74 424.05

% Inc 10-11 3.7 32.0 11.1 31.2 17.6 15.0 19.0


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Budget Brief 2011 9



The fiscal year 2010-11 started with an expectation to

build on the modest recovery shown in 2009-10 and by

projecting the growth in real GDP to 4.5 percent from 3.8

percent of last year. However, the target set out in the

Annual Plan turned out to be unrealistic shortly after the

approval of the Federal Budget for 2010-11, mainly due to

omission of consideration of cost increases on

government employees salaries, etc. The overall

objective of restoration of macro-economic stability was

put off-track by both exogenous shocks and

unprecedented disaster by floods. The impact was further

compounded by the continuing structural imbalance in our

economy.

The economy which over the years has shown resilience

against crisis after crisis came to a breaking point where

the continuing weaknesses and perennial challenges

were further exposed. The structural weaknesses, such

as low domestic resource mobilization, lower productivity,

lower growth, high inflation, unprecedented fall in total

investments, increasing reliance on external and

domestic borrowings to finance fiscal deficit and reduction

in FDI have been and continue to be the factors indicating

volatility and fragility of the Reform process in the medium

to long term.

Pakistan is unique in this context, even as compared to

other economies in Asia, where most of the countries

have shown growth of 8-9 percent with inflation of 4-5

percent, as against the growth of 2.4 percent and inflation

of 15.5 percent in Pakistan.

The salient features of the Economy are as follows:

The GDP growth, Investment to GDP rate and overallinflation for Pakistan have remained over the last few

years as follows:

(Percentages)

Year Growth Investment Inflation

2007-08 3.7 22.1 12.0

2008-09 1.7 18.2 20.8

2009-10 3.8 15.4 11.7

2010-11 (BE) 2.4 13.4 14.1 (Jul-Apr)

The fall in the GDP for 2010-11 was mainly caused byslower growth in Agriculture and Manufacturing sector.

Services sector contributed to 90 percent of GDPgrowth, whereas the commodity producing sector

(CPC) only contributed to 10 percent of such growth.

The energy shortfall, high interest rates and crowdingout of the private sector credit were the factors

responsible for major drag on growth in manufacturing

sector.

The Reform measures undertaken by Governmenthave failed to achieve the desired results and the

Government had to announce certain tax policy

measures to raise additional revenue of Rs. 53 billion in

the last quarter.

The following tax measures were taken through theamendments (Presidential order and withdrawal of

SRO based exemptions):

- Withdrawal of sales tax exemption on agriculture

inputs like tractors, pesticides, and fertilizer, both at

domestic and import stages.

- A one-time surcharge of 15 percent was imposed on

withholding and advance taxes payable during

financial year 2011 (15 March to 30 June 2011); and

- Special excise duty rate was increased from 1

percent to 2.5 percent on non-essential items for theremaining period of tax year 2010-11.

The overall deficit for 2010-11 is expected to be Rs.961 billion, around 5.3 percent of GDP against target of

Rs. 683 billion i.e. 4.0 percent of GDP. The GDP at

market price is expected to be Rs. 18,063 billion.

Overall total revenue is expected to be Rs. 2,236 billionagainst target of Rs. 2,411 billion.

The tax revenue of FBR is expected to be Rs. 1,679billion as against the target of Rs. 1,779 billion.

Economic Scenario


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10 Budget Brief 2011



The overall expenditure is projected to be Rs. 2,559billion as against target of Rs. 2,423 billion.

The slippage in expenditure was caused by FloodRelief activities, security related expenditure and delay

in implementation of tax reforms.

The overall brunt of increase in current expenditure andshortfall in revenue fell on Development expenditure,

which was either reallocated or substantially reduced.

External sector is projected to depict a surplus incurrent account of Rs. 748 billion, as against deficit of

Rs. 3.456 billion in the corresponding period last year

due to the following factors:

- Exports up to April 2011 have been US$20.2 billion

as against US$15.8 billion last year, showing a

growth of 27.8 percent.

- Imports up to April 2011 have been US$32.3 billion

as against US$28.1 billion last year, showing a

growth of 14.7 percent.

- The 14.7 percent growth in imports has been

neutralized by 27.8 percent growth in exports

resulting in decline of trade deficit in 10 months to

Rs. 12.1 billion from Rs. 12.3 billion

- Workers remittances in ten months amounted to

US$9.1 billion and are expected to be over US$11.0

billion by 30 June 2011.

- Improvement in current account has been in all sub

components as follows:

(US Dollars in Millions)

2009-10

Jul to Apr

2010-11

Jul to Apr

Trade Balance (9,292) (8,285)

Services Balance (1,937) (1,392)

Income Account Balance (2,594) (2,421)

Current Transfers

- Workers Remittances 7,307 9,046

- Others 3,060 3,800

10,367 12,846

2009-10

Jul to Apr

2010-11

Jul to Apr

Current Account Balance (3,456) 748

- External Account has been a surplus of US$1,210

million during July-April 2010-11 due to improvement

in current account balance and the surplus in Capital

and Finance Account.

Exchange rate has generally remained stable as Rupeedepreciated by 2.2 percent in ten months, but Real

Effective Exchange Rate (REER) appreciated by 0.8

percent during the period.

FDI up to April 2011 has been US$1.232 billion againstUS$1.725 in the corresponding period last year,

resulting in a decline of 29 percent.

Per capita income in dollar terms increased from

US$1,073 to US$1,254 in 2010-11, showing an

increase of 16.9 percent.

Foreign exchange reserves as at 30 April 2011 wereUS$17.1 billion, out of which US$13.7 billion were held

by SBP.

The overall inflation based on CPI has been acumulative increase of 14.1 percent during July-April

2010-11, against 11.5 percent last year.

Food inflation was 18.4 percent and non food inflationwas 10 .4 percent.

The spike in inflation was caused by:

- Rising international oil prices

- Commodity price increases textile products

- Supply shock and supply disruption resulting in

increase in food prices

- Deficit financing

Monetary policy was frequently reviewed by State Bankof Pakistan during 2010-11. The continued heavy


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Budget Brief 2011 11



reliance by government on SBP borrowings to finance

the fiscal deficit has increased the demand pressure

and SBP has resorted to policy rate change to target

inflation. This policy rate was raised thrice in August,

September and November 2010 to increase the rate to

14 percent from 12.5 percent

The focus of monetary and fiscal policy was changed toaddress structural weakness, reduction of inflation,

revival of economic growth. However, the desired

objectives could not be achieved and even policy rate

increases did not have any significant impact on

inflation.

Budget 2011-2012

Challenges

The Finance Minister has recognized, in his speech, the

need to move towards a growth framework which could

lead to 7 percent plus growth for a continuous period of

ten years and more. The following challenges have been

identified to put the economy on a stable and desirable

long term growth trajectory.

Chronic fiscal difficulties for the last 25 years leading toIMF several times.

Low growth rates.

Lack of long-term focus and consistency in economicpolicies to give investors and entrepreneurs a stable

enabling environment.

Ailing public sector enterprises continue to drain thebudget and create black market opportunities.

Inadequate regulatory and governance structures thatdoes not encourage investment and the development

of competitive markets.

Budget Estimates for 2011-12

The total outlay of budget 2011-12 is Rs. 2,767 billion.This size is 14.2 percent higher than the size of budget

estimates of 2010-11.

The resource availability during 2011-12 has beenestimated at Rs. 2,463 billion, against Rs. 2,256 billion

in the budget estimates of 2010-11.

Net revenue receipts for 2011-12 have been estimatedat Rs. 1,529 billion, indicating an increase of 11 percent

over the budget estimates of 2010-11.

The provincial share in Federal revenue receipts isestimated at Rs. 1,203 billion during 2011-12 which is

16.4 percent higher than the budget estimates for

2010-11.

The capital receipts (net) for 2011-12 have been

estimated at Rs. 396 billion, against the budgetestimates of Rs. 325 billion in 2010-11 i.e. increase of

11 percent.

The external receipts in 2011-12 are estimated at Rs.414 billion. This shows an increase of 7.1 percent over

the budget estimates of 2010-11.

The overall expenditure during 2011-12 has beenestimated at Rs. 2,767 billion, of which the current

expenditure is Rs. 2,315 billion and development

expenditure is Rs. 452 billion (net).

Current expenditure shows increase of less than 1percent over the revised estimates of 2010-11, while

development expenditure will increase by 64.4 percent

in 2011-12, over the revised estimates for 2010-11.

The expenditure on General Public Services (inclusiveof debt servicing, transfer payments and

superannuation allowance) is estimated at Rs. 1,660

billion, which is 71.1 percent of the current expenditure.

The size of Public Sector Development Programme for2011-12 is Rs. 730 billion, while for Other Development


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Expenditure an amount of Rs. 97 billion has been

allocated. The PSDP shows an increase of 58 percent

over the revised estimates for 2010-11.

An amount of Rs. 430 billion has been allocated inbudget estimates 2011-12 to provinces for their

development expenditure, against Rs. 373 billion for

2010-11.

An amount of Rs. 10 billion has been allocated toEarthquake Rehabilitation Authority (ERRA) in 2011-

12.

The size of current expenditure in total budget outlaysfor 2011-12 is 83.7 percent, as compared to 89 percent

in revised estimates for 2010-11.

Budget Strategy for 2011-12

The budget strategy as outlined by the Finance Minister

in his budget speech is summarized as follows:

Further reduction of fiscal deficit.

Reduction of rate of inflation to single digit level.

Development of a broad, equitable and stable revenuemobilization system to cater to development needs.

Maintaining and further developing social safety netsfor the vulnerable.

Progressive elimination of untargeted subsidies.

Strengthen restructuring of loss making public sectorenterprises including opting for privatization or closure,

where required.

Investment as part of PSDP in vital infrastructure andhuman resource development.

Reduction of debts to sustainable level well below therequired 60 percent of Fiscal Responsibility and Debt

Limitation Act (FRDC).

Macro-Economic Targets for 2011-12

In order to achieve objectives set-out in the budget

strategy following macro-economic targets are being set

up for 2011-12.

Real GDP is expected to grow by 4.2 percent againstrevised estimates of 2.4 percent for 2010-11.

The average inflation target is 12 percent as against15.5 percent for 2010-11.

Selective intervention in commodity markets to ensurestable supplies at affordable prices.

Reduction of borrowing from SBP through strict controlon expenditure.

Improvement of regulatory oversight by empoweringNEPRA to regulate the power sector.

Creating additional capacity for power generation.

FBR revenue to grow by about Rs. 400 billion i.e. 9.3percent of GDP.

Revenue as a percentage of GDP is projected at 13.6percent in 2011-12.

Fiscal deficit to be brought to 4 percent of GDP.

GDP at market prices is projected at Rs. 21,041 billionin 2011-12.

Conclusions

The performance of economy in 2010-11 has exposedits vulnerability and structural weaknesses when

confronted with challenges during the year.

The interim budgetary measures announced during theyear have facilitated the GDP growth of 2.4 percent.

The growth or decline in Agriculture sector which is ourniche continues to be dependent on weather conditions


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or natural disasters. The productivity gains in terms of

efficiency, improved yields and value addition are still

lacking.

In order to achieve the specified objectives outlined inthe budget strategy and to align the economic

development with the common mans perception of

such development, a much more focused economic

management is required.

The growth framework and the basic parameters ofeconomic agenda, need to be agreed across the

political parties as the main imperatives, irrespective of

political bias and priorities.

The most important component of such strategy has tobe revival of investment and savings to a level aligned

with other developing economies in Asia.

The long term structural issues like documentation of

economy and equity in tax incidence are a must toaddress distributional crisis.

The expenditure on education and health and safetynets has to be increased from the current level of 3

percent of GDP to around 8-9 percent in 3 years.

The basic concept of tax all income beyond athreshold has to be implemented with a clear plan to

plug all leakages, including elimination of all untargeted

subsidies.

The budget estimate for 2011-12 in this contextappears to be ambitious and would require concerted

efforts to target non tax-payers, disciplined monitoring

of expenditure and ensuring provincial surplus. Any

deviation could easily impact overall fiscal deficit and

development budget.

The provinces would have to focus on revenuegeneration as their overall contribution is minimal. The

tax on agriculture income, Sales Tax on services and

reform of property taxation could increase revenues

substantially.

The way forward is to ensure economic consolidationalong with macro-economic strategy which would

require a prudent fiscal policy with improvement in

governance and vigilant implementation and

accountability.

Inflation has to be addressed by both supply anddemand measures, rather than by demand

suppression.

Pakistan is a factor driven economy and does requirea different economic strategy.

8 percent of total labour force is unemployed and thecountry is suffering from a severe distributional crisis.

The overall unemployment rate is 5.6 percent.

Pakistan need an inclusive growth strategy with asustained balanced approach between supply led and

demand led economic strategy.

Fiscal deficit has to be addressed due to resourceconstraint but not at the cost of growth and higher

expenditure on social sectors.

The medium to long term framework of sustainablehigh growth over a decade with restructured fiscal

deficit are the pre-requisites to catch up to the

economies around Pakistan.

Desired frame work could reduce inflation, bring debt

burden within sustainable limits, provide opportunity toexplore our potential of demographic advantage and

above all target poverty on war footings.

The economic well being coupled with goodgovernance, transparency and unbiased accountability

would have its own impact on the security situation.

We are a great nation, endowed with all sorts of

resources including natural resources and a great capital

of young human resources. What we need is dedicated

leadership to direct us to the heights which people of this

country deserve and would require a strong political will

and cohesion to achieve the target.


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Income Tax

Minimum threshold for levy of tax on salaried andnon-salaried individuals enhanced from Rs. 300,000

to Rs. 350,000.

For banking companies, provisioning in excess of 5

percent of advances for consumers and SMEsallowed to be carried over to succeeding years.

Dividend received by a banking company from itsasset management company shall be taxed at the

rate of 20 percent.

The members of AOP also required to furnish wealthstatement, wealth reconciliation statement and

explanation of source of acquisition of assets

alongwith return filed in response to provisional

assessment order under section 122C.

Appeal to the Commissioner (Appeals) notpermissible against provisional assessment order

under section 122C.

Tax payable as a result of provisional assessmentorder under section 122C shall be payable

immediately after a period of sixty days from the date

of service of notice.

Waiver of profit on debt or debt itself under specified

SBP Circular or in any other scheme issued by SBPto be treated as benefit / income chargeable to tax

under the head Income from Business.

Tax credit for investment in shares to be allowed toresident persons only.

Threshold for allowability of tax credit on investmentin shares enhanced. However, the shares must be

held for at least thirty six months instead of twelve

months.

Tax credit also allowed for life insurance premiumpaid by resident persons on the same basis as tax

credit for investment in shares.

Threshold of Rs. 500,000 for contribution to approvedpension fund for the purpose of tax credit removed.

Rate of tax credit to companies for enlistment onstock exchange enhanced from 5 percent to 15

percent.

Tax credit equal to tax payable allowed to companiesestablishing new industrial undertaking or investment

in plant and machinery for BMR.

Unexplained income or assets to include concealedincome or furnishing inaccurate particulars of income,

suppression of any production, sales, amount

chargeable to tax and item of receipt.

Period for carry forward and adjustment of minimumtax enhanced to five years from three years.

Turnover for the purposes of minimum tax will begross sales or gross receipts.

Pension fund established under the VoluntaryPension System Rules 2005 exempted from

minimum tax under section 113.

Holders of commercial or industrial connection ofelectricity where the amount of annual bill exceeds

rupees one million compulsorily required to file return

of income.

Individuals having income from business betweenRs. 300,000 and Rs. 350,000 to file return of income

despite having zero percent tax.

Threshold for compulsory filing of wealth statementand its reconciliation increased from Rs. 500,000 to

Rs. 1,000,000.

Highlights


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Every member of an AOP required to furnish wealthstatement and reconciliation of wealth if share of

income from such AOP, before tax, for the year is Rs.

1,000,000 or more.

Single member bench of the Tribunal to dispose ofcases involving tax or penalty not exceeding Rs.

1,000,000 instead of Rs. 5,000,000.

Appellate Tribunal to decide the appeal on the basisof available record and cannot dismiss the appeal in

case of default by any party on the date of hearing.

Advance tax on capital gains on sale of securitiesshall be payable within a period of twenty one days

after the close of each quarter.

Withholding tax under section 148 in the case of oldand used automotive vehicles shall not exceed the

amount specified in Notification No. SRO

577(1)/2005 dated 6 June 2005.

Profit on debt on securities issued by FederalGovernment, Provincial Government or Local

Government to be taxed under final tax regime for

resident individuals and AoPs.

Tax deducted on profit on debt from debtinstruments, government securities including treasury

bills and PIBs shall be final tax in the case of non-

resident persons having no PE in Pakistan.

Gross amount for sale of goods, services andcontracts shall include sales tax for the purposes of

withholding tax under section 153.

Tax deducted from payments for services to betreated as minimum tax in the case of all resident

persons and PE of non-residents.

Threshold for withdrawal from pension fundenhanced from 25 percent to 50 percent of

accumulated balance in order to attract withholding

tax under section 156B.

Withholding tax rate on cash withdrawals reducedfrom 0.3 percent to 0.2 percent.

Collection of tax under section 236A also required tobe made in the case of auction / sale by tender.

Withholding tax on purchase of domestic air ticketsshall not be collected in the case of Federal and

Provincial Government and from a person who

produces a certificate from the Commissioner that

income of such person is exempt from tax.

Monthly instead of quarterly statements ofwithholding tax to be filed under section 165. The

statements to include CNIC and NTN of the persons

form whom tax was deducted.

Annual withholding tax statement to be filed by theemployers for tax withheld under section 149 and for

taxable salaries between Rs 300,000 and Rs.

350,000 despite having zero percent tax.

Tax payable defined as tax chargeable on the taxableincome for the purposes of levy of penalty.

Non-resident person having a permanentestablishment in Pakistan not entitled to seek

Advance Ruling.

Board and Chief Commissioner empowered totransfer jurisdiction in respect of cases or persons

from one Commissioner to another.

Tax and withholding tax exemptions provided toIslamic Development Bank.

Sales Tax

Rate of sales tax reduced to 16 percent from 17percent

Several exemptions under Sixth Schedule of SalesTax Act and through certain specific notifications

stand withdrawn, which inter-alia include:


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- Bricks, building blocks, and ready mix concrete;

- Adult diapers;

- Computer software;

- Aircrafts & ships, machinery for pilotage &

towage, air navigation equipments;

- Bull-dozers, harvesters, CNG Euro-2 buses,

trucks for high-ways;

- Agricultural machinery;

- CNG kits & cylinders;

- Rock phosphate & phosphoric acid;

- Mineral oils;

- White Crystalline Sugar, etc.

Zero rating facility withdrawn on CNG buses in CBUor CKD condition, trucks & dumpers, trailers & semi-

trailers, road tractors, etc.

Restriction of 90 percent claim of input taxadjustment on fixed assets and capital goods is

withdrawn.

Specific and express legal provision introducedregarding inadmissible claim of input tax credit

against invoices issued by suspended / blacklisted

registered.

Special returns can also be revised after approval

from the Commissioner.

A Member nominated by the Chairman FBR may alsopass an order considered appropriate by him with

respect to any decision or recommendation under the

mechanism of alternate dispute resolution.

No refund of sales tax is admissible under section 66of the Act, if the incidence of the sales tax has

already been directly or indirectly passed on to the

consumer.

Federal Excise

Special excise duty leviable at the rate of 2.5 percenton imported and manufactured goods abolished

across the board.

Rate of FED introduced on aerated waters and fruitjuices, etc. reduced to 6 percent of retail price.

Rate of duty on various types of cement slashed fromRs. 700 PMT to Rs. 500 PMT.

FED abolished from 15 different type of goodsincluding solvent oils, other fuel oils, greases, MBTE,

viscose staple fibre, motor cars, air-conditioners,

deep freezers, etc.

Rate of duty enhanced on locally producedcigarettes, unmanufactured tobacco and filter rods of

cigarettes.

FED in sales tax mode imposed at the rate of 8percent ad val. on white crystalline sugar to substitute

sales tax.

FED on services rendered or provided by propertydevelopers and promoters stands withdrawn.

Recovery proceedings can be initiated during theperiod of 5 years instead of 3 years.

Powers to seize and confiscate goods extended for

beverages in addition to cigarettes.

Customs

Power to prohibit import or export of goods onbelieving that the importer has submitted false

statements withdrawn.

Duty drawback facility allowed for supplies againstinternational tenders.


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Enhancement of time limit from three years to fiveyears for issuance of show cause notice on account

of audit.

One year time period for refund to be reckoned fromthe date of the decision of the appropriate authorities.

FBR empowered to collect transit fee.

Tariff rationalization through introduction of sub-PCTcodes alongwith their description and the rate of

customs duty.

Regulatory duty abolished on number of items.

Incentives to local industry through reduction of dutyin the concessionary notification.

Withdrawal of sales tax exemption on plant,machinery, equipment, etc. relating to the specified

sectors / industries / capital goods.

Capital Value Tax

CVT on purchase of modaraba certificates,instruments of redeemable capital and shares of

listed public companies withdrawn.


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Exemption threshold enhancedto Rs. 350,000 for individualsand Association of Persons

Clauses (I) & (IA), Div I, Part I, First Schedule

The Finance Bill proposes to enhance the threshold of

exempt income from Rs. 300,000 to Rs. 350,000 in case

of individuals and association of persons. No change in

tax rates has been proposed.

The comparison of existing and proposed tax rates tables

applicable to individuals, other than salaried individuals,

and association of persons is summarised below:

S.No

Taxable income(Rs.)

ExistingRate %

ProposedRate %

1 Upto 300,000 0 0

2 300,001 to 350,000 7.50 0

3 350,001 to 500,000 7.50 7.50

4 500,001 to 750,000 10 10

5 750,001 to 1,000,000 15 15

6 1,000,001 to 1,500,000 20 20

7 1,500,001 and above 25 25

The comparison of existing and proposed tax rates tables

applicable to salaried individuals is summarised below:

S.No

Taxable income (Rs.) ExistingRate %

ProposedRate %

1 Upto 300,000 0 0

2 300,001 to 350,000 0.75 0

3 350,001 to 400,000 1.50 1.50

4 400,001 to 450,000 2.50 2.50

5 450,001 to 550,000 3.50 3.50

6 550,001 to Rs.650,000 4.50 4.50

7 650,001 to 750,000 6.00 6.00

S.No

Taxable income (Rs.) ExistingRate %

ProposedRate %

8 750,001 to 900,000 7.50 7.50

9 900,001 to 1,050,000 9.00 9.00

10 1,050,001 to 1,200,000 10.00 10.00

11 1,200,001 to 1,450,000 11.00 11.00

12 1,450,001 to 1,700,000 12.50 12.50

13 1,700,001 to 1,950,000 14.00 14.00

14 1,950,001 to 2,250,000 15.00 15.00

15 2,250,001 to 2,850,000 16.00 16.00

16 2,850,001 to 3,550,000 17.50 17.50

17 3,550,001 to 4,550,000 18.50 18.50

18 4,550,001 and above. 20.00 20.00

The marginal relief introduced would continue to be

applicable in the case of salaried individuals, as follows:

S.No.

Total Income Threshold Percentage of incrementalincome taxable at nextapplicable tax rate %

1 Upto 550,000 20

2 550,001 to 1,050,000 30

3 1,050,001 to 2,250,000 40

4 2,250,001 to 4,550,000 50

5 4,550,001 and above 60

Income Tax

Significant amendments


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Taxation of Banking Companies

Carry forward of excess provision of advances

for consumers and SMEs clarified; lower of

actual provisions or at prescribed limit to be

deductible

Rule 1(c), Seventh Schedule

Existing Rule 1(c) of Seventh Schedule, substituted vide

the Finance Act, 2010 created anomalies regarding

deductibility and carry forward of provisions of advances

for consumers and Small and Medium Enterprises.

The Finance Bill now seeks to amend Rule 1(c) to clarify

the position in the following manner:

Provisioning upto 1 percent of total advances oractual provisioning whichever is lower, shall be

deductible. The provisioning in excess of 1 percent

shall be carried forward to succeeding years.

Provisioning at 5 percent of total advances forconsumers and SMEs or actual, whichever is lower,

shall be deductible, whereas, provisioning in excess

of 5 percent shall be carried forward to succeeding

years.

Tax rate on dividends received by banking

company from its Asset Management Company

enhanced

Rule 6, Seventh Schedule

Presently, dividend income received by a banking

company is subject to tax at 10 percent. The Finance Bill

proposes to provide separate rate of 20 percent on

dividend received by a banking company from its Asset

Management Company.

Provisions relating toProvisional assessmentrationalised

The Finance Act, 2010 inserted section 122C to provide

mechanism for provisional assessment in case a person

fails to furnish return of income. However, certain relevant

amendments were not made in other provisions of the

Ordinance to align them with objective of section 122C.

The Finance Bill now seeks to make such amendments

as explained below.

Assessment

Section 2(5)

The Finance Bill seeks to include provisional

assessment with the expression assessment.

Wealth statement and reconciliation

Section 116

Sub-section (2A) of section 116 provides that where a

person files a return of income in response to a

provisional assessment under section 122C, such return

shall be accompanied by wealth statement along with

wealth reconciliation and an explanation of sources of

acquisition of assets specified therein.

The Finance Bill now seeks to provide that in case of

association of persons, such return shall be accompanied

by wealth statement of all members along with theirwealth reconciliations and explanation of source of

acquisition of assets specified therein.

No appeal shall lie against provisional

assessment

Section 127

Section 122C provides that a provisional assessment

shall be treated as final after expiry of 60 days from the

date of service of order. However, if a person files return

of income within sixty days with wealth statement, wealth

reconciliation and other documents required under


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member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All r ights reserved.

section 116(2A), then the provisional assessment is not

considered as final, and proceedings may continue on the

basis of return of income and other documents filed.

The Finance Bill seeks to provide that an appeal shall not

lie against a provisional assessment order. The

underlying objective of proposed amendment appears to

rationalise the scheme of provisional assessment so as to

require the person to file a return of income and other

required documents in response to provisional

assessment order. In case of failure to file return, no

appeal should lie against a provisional assessment order

which has attained the finality on expiry of 60 days.

Due date for payment of tax

Section 137(2)

Proviso to section 137(2) provides that the tax payable as

a result of provisional assessment shall be payable after

a period of 60 days from the date of service of the notice.

However, there is no time limit prescribed for payment of

tax after expiry of 60 days, which created anomalies with

regard to recovery and levy of penalties etc.

The Finance Bill seeks to clarify that tax would become

payable immediately after expiry of 60 days from the date

of service of notice i.e. the first day after completion of 60

days. Consequently, all recovery measures including

levy of default surcharge / penalties would also be based

upon such due date.

Collective Investment Schemedefined

Section 2(11C)

The Finance Bill seeks to insert sub-section (11C) in

section 2 to provide definition of Collective Investment

Scheme to have the same meaning as are assigned

under the Non-Banking Finance Companies

(Establishment and Regulation) Rules, 2003. The Rules

define the term as a closed-end fund and an open-end

scheme.

The term Collective Investment Scheme [CIS] has been

used in various provisions of the Ordinance. Absence of

definition has been causing disputes regarding

applicability of such provisions. Such provisions interalia

include:

Division VII of Part I of the First Schedule obligatingCIS to withhold capital gains tax on redemption

Clauses 57(2), 99 and 103 of Part I of SecondSchedule providing exemptions from income to CIS

Clauses 11A and 47B of Part IV of Second Scheduleto the Ordinance providing exemptions to CIS from

minimum tax and certain withholding tax provisions

After proposed insertion of the definition, such anomalies

are expected to be clarified.

Waiver of profit on debt ordebt by a bank to be treated asbusiness income of theborrower

Section 18(1)(d)

Section 18(1)(d) provides that fair market value of any

benefit or perquisite, whether convertible into money or

not, derived by a person in the course of, or by virtue of, a

past, present, or prospective business relationship is to

be treated as Income from Business.

There have been disputes on taxability of amounts written

back by a taxpayer on account of profit on debt or debt

which were waived by the lender causing litigation.

The Finance Bill now seeks to insert an explanation in

section 18(1)(d) to provide that the word benefit shall

include any benefit derived by way of waiver of profit on

debt or debt itself under Circular No. 29 of 2002 issued by

the Banking Policy Department, State Bank of Pakistan or

any other scheme issued by the SBP.


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Tax credits

Tax credit for investment in shares and

insurance scope and limit enhanced

Section 62

Section 62 contains provisions relating to tax credit to

individuals and association of persons on investment in

shares of a public company listed on stock exchange inPakistan. The Finance Bill seeks to amend the provisions

of section 62 to make following changes:

Tax credit shall now be available to residentindividuals and association of persons only as

against current applicability to resident and non-

resident individuals.

The Bill proposes to allow tax credit on payment ofpremium for life insurance, besides investment in

public companys shares.

Threshold of investment has been proposed to beenhanced from 10 percent to 15 percent of taxable

income.

The threshold of Rs. 300,000 has been proposed tobe enhanced to Rs. 500,000.

Time limit for holding of shares is proposed toenhance to 36 months from existing 12 months.

Consequent to the proposed amendments, the amounteligible for credit shall be lower of the following:

Actual cost of acquiring shares or the totalcontribution or premium paid;

15 percent of taxable income; or

Rs. 500,000

The proposed holding period of 36 months shall apply to

such investments which will be made on or after 01 July

2011. Any investment made on or before 30 June 2011

shall continue to be subject to holding period of 12

months.

Tax credit for contribution to an Approved

Pension Fund cap of Rs. 500,000 removed

Section 63

The Finance Bill seeks to remove the cap of Rs. 500,000

for tax credit on contribution to an approved pension fund.The amount eligible for credit shall now be lower of the

following:

Actual amount of contribution or premium paid in anapproved pension fund under the Voluntary Pension

System Rules, 2005; or

20 percent of the taxable income (subject to specifiedconditions).

Tax credit for enlistment on stock exchange in

Pakistan enhanced to 15 percent

Section 65C

The Finance Act 2010 introduced tax credit at 5 percent

of tax payable for the tax year in which a company is

listed on a stock exchange in Pakistan. The Finance Bill

proposes to enhance the rate to 15 percent.

The incentive of tax credit for one year is not attractive

enough to encourage companies to get listed on stock

exchanges.

Tax credit at 100 percent of tax payable for

equity investment in new industrial set-up and

for BMR in existing industrial set-up introduced

Section 65D

With the aim of promoting industrialization, the Finance

Bill seeks to introduce a tax credit for equity investment at

100 percent of tax payable by a company. The salient

features of this scheme are as follows:


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Tax credit shall be available to a taxpayer beingcompany, with 100 percent equity owned by it, on or

after 01 July 2011, which shall either:

- establish a new industrial undertaking for

manufacturing in Pakistan; or

- invest any amount in the purchase and

installation of plant and machinery, for the

purpose of balancing, modernization and

replacement of the plant and machinery, already

installed therein in an industrial undertaking set

up in Pakistan and owned by it.

Tax credit shall be allowed equal to 100 percent oftax payable by such company.

Tax credit shall be allowed for a period of five yearsor commencement of commercial production,

whichever is later.

Where a tax credit is allowed and subsequently it isdiscovered that any of the condition specified was not

fulfilled, the credit shall be deemed to have been

wrongly allowed, and the tax payable shall be re-

computed for the relevant tax year.

It appears that the incentive has been proposed without

linking it to the quantum of investment.

Further, the proposed language of section 65D may lead

to different interpretations defeating the envisagedobjective. For example, dispute may arise on availability

of tax credit to an existing company, which is not 100

percent owned through equity, investing in BMR on or

after 01 July 2011.

It is therefore suggested that the provisions of section

65D be rationalised.

Scope of unexplained income orassets extended

Section 111

Section 111 empowers the Commissioner to include the

following amounts under the head Income from Other

Sources if the taxpayer offers no explanation or

explanation is found un-satisfactory:

Where any amount credited in books of account

Where a person has made investment or is owner ofany money or valuable article; or

Where a person has incurred any expenditure.

The Finance Bill now seeks to extend the scope of

section 111. As proposed, if any person has concealed

income or furnishes inaccurate particulars of income

including the suppression of any production, sales or anyamount chargeable to tax; or the suppression of any item

of receipt liable to tax in whole or in part, and no

explanation is offered or explanation offered is not found

satisfactory, the Commissioner shall include such amount

under the head Income from Other Sources.

Minimum tax

Period for carry forward extended upto 5 years

Section 113

Existing provision allows carry forward of minimum tax

paid by a resident taxpayer for adjustment against tax

payable on profits of three immediately succeeding tax

years. The Finance Bill now seeks to extend the period

for carry forward of minimum tax from three years to five

years.

The Finance Bill also proposes to include gross sales,

besides gross receipts within the scope of turnover.

The proposed amendment is aimed to clarify that turnover

in respect of sales of goods to be taken on accrual basis.


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Exemption from minimum tax to approved

pension fund

Clause 11A(i), Part IV, Second Schedule

The Finance Bill proposes to extend exemption from

minimum tax to a pension fund registered under

Voluntary Pension System Rules, 2006.

Scope for filing of return ofincome extended

Section 114

The Finance Bill seeks to further extend the requirements

for filing of return, as follows:

Any person holding commercial or industrialconnection of electricity where the amount of annual

bill exceeds Rupees one million shall now be

required to file return of income.

The Finance Bill proposes to enhance exemptionthreshold to Rs. 350,000. However, the Finance Bill

also proposes that every individual having income

from business between Rs. 300,001 to Rs. 350,000 ,

though may not be liable to tax, shall be required to

file return of income for the tax year.

The Bill also proposes that a return of income shall be

accompanied with due payment of tax as per return of

income as well as a wealth statement as required under

section 116.

Wealth Statement - Thresholdenhanced to Rs. 1 million

Section 116

Presently, every resident taxpayer having taxable income

of Rs. 500,000 or more for the relevant tax year or

immediately preceding tax year is required to file a wealth

statement and wealth reconciliation. Though, by

implications, the requirement for filing of wealth statement

relates to individuals and association of persons, but due

to use of term resident taxpayer an interpretation can be

made that a resident company is also required to file

wealth statement.

The Finance Bill proposes to clarify the scope by

restricting its applicability to a resident individual taxpayer

including a resident individual being member of

association of persons. Further, the Bill seeks to

enhance the threshold for filing of wealth statement from

Rs. 500,000 to Rs. 1,000,000.

The Bill also proposes filing of wealth statement and

reconciliation by all members of association of persons in

case of filing of return in response to provisional

assessment of the association of persons.

Appellate Tribunal - Thresholdfor single member benchreduced; powers to dismiss

appeal in default withdrawnSections 130(8AA), 132

Presently, a single member bench is empowered to

dispose any case where the amount of tax or penalty

involved does not exceed Rs. 5 million. The Finance bill

proposes to reduce the threshold upto Rs. 1 million.

Section 132 empowers the Appellate Tribunal to dismiss

the appeal, if it deems fit, in case of default by any party

on the date of hearing. This position was against the

established principle that in case of an ex-partedecision,

appeal ought to be decided on merits of the case based

on available records instead of dismissal of appeal. The

Finance Bill now seeks to withdraw the powers for

dismissal of appeal in case of default.


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Period for payment of advancetax on capital gains enhanced to21 days

Period for payment extended

Section 147(5B)

Section 147(5B) provides that advance tax payable on

capital gains subject to tax under section 37A shall be

payable within a period of seven days after the close of

each quarter. The Finance Bill seeks to extend this period

upto 21 days after the close of each quarter.

Withholding tax

Collection of tax on import of old and used

motor vehicles not to exceed the amount of

duties and taxes prescribed in SRO 577of 2005

Section 148 and clause 4, Part III, SecondSchedule

Clause 4 of Part III of Second Schedule provides

collection of tax at import stage on old and used motor

vehicles under SRO 932(I)/2004 at prescribed rates. The

said SRO was subsequently superseded through SRO

577(I)/2005, but consequential amendment in clause 4

was not made. The Finance Bill now seeks to substitute

this clause to provide that tax under section 148 shall not

exceed the amount specified in SRO 577(I)/2005.

Profit on debt - tax deducted from profit on debton government securities to be final

Section 151

Under existing provisions, tax deducted on profit on debt

from a resident individual and association of persons is

final tax except tax deducted by the Federal Government,

a Provincial Government or a Local Government paying

profit on debt on any security issued by such authorities.

The Finance Bill now proposes to extend the final tax

regime to profit on debt on government securities by

amending provisions of section 151(3). After this

amendment, in the case of a resident individual and

association of persons, tax deducted on any kind of profit

on debt shall be final tax.

Tax deducted from profit on debt to be final in

the case of non-resident taxpayer having no

permanent establishment in Pakistan

Section 152(2) and clause 5A, Part II, Second

Schedule

Clause 5A provides that payment of profit on debt to a

non-resident person not having permanent establishment

in Pakistan shall be subject to withholding tax under

section 152(2) at 10 percent of gross amount of profit.

Such tax deducted is adjustable against final tax liability

determined either at tax rates provided in a double tax

treaty, if applicable, or at tax rate applicable under the

Ordinance, as the case may be.

The Finance Bill proposes to insert a proviso in clause 5A

providing that the tax deducted on profit on debt from

debt instrument, Government securities including treasury

bills and Pakistan Investment Bonds shall be final tax on

profit on debt payable to a non-resident person having no

permanent establishment in Pakistan and the investments

are exclusively made through a Special Rupee

Convertible Account maintained with a Bank in Pakistan.

Deduction of tax from payments for goods,

services and contracts

Section 153Section 153 contains provisions relating to deduction of

tax from resident persons or permanent establishment of

non-resident persons in respect of sale of goods,

rendering of services and execution of contracts.

The tax deducted on sale of goods and execution of

contracts is a final tax in the hands of resident tax payer.

However, this tax shall not be final in case of a company

being a manufacturer of goods and the listed company.

The tax deduction on services is adjustable in case of acompany. The position was also clarified by the Board


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vide Circular No.6 dated 18 August 2009. Subsequently,

the Board vide letter dated 26 April 2011 withdrew its

earlier clarification and stated that tax deducted on

payments made for rendering of services is to be treated

as minimum tax. The withdrawal of clarification by the

Board was viewed against the provisions of law.

The Finance Bill proposes to substitute section 153 in the

following manner:

There is no change in the withholding tax rates onsales of goods, services rendered and execution of

contract.

Under existing provisions, gross amount of sales ofgoods includes sales tax under specific provision of

law, whereas, no specific provision requires inclusion

of sales tax in gross amount for the purpose of

withholding tax on payments for services or execution

of contracts.

The proposed section provides that the gross amount

for sale of goods, services and execution of contracts

shall include sales tax, if any.

Tax deducted from payment for sale of goods istreated as final tax in case of a resident person (other

than manufacturer of goods and listed companies).

Similarly, tax deducted on execution of contracts is

treated as final tax in case of a resident person, other

than a listed company.

The Bill proposes that tax deducted shall be final tax

for resident person as well as permanent

establishment of non-resident person in respect of

sale of goods except (in the case of a company being

a manufacturer of goods or a listed company) and in

respect of execution of contract (except in the case of

a listed company and contracts specified in section

152(1A), subject to filing of options by non-resident

persons).

Tax deducted on payment for services rendered or

provided is treated as minimum tax in the case of

resident individuals and association of persons,

whereas, adjustable in the case of a company.

The Bill now proposes that tax deducted from

payment for services rendered or provided shall be

treated as minimum tax in the case of all resident

persons and permanent establishment of non-

resident person.

Threshold for withholding tax on withdrawal

from pension fund enhanced to 50 percent

Section 156B

The Finance Bill proposes to enhance the limit of

withdrawal from any approved pension fund from 25

percent to 50 percent at or after the retirement age for the

purpose of withholding tax.

Rate of tax collection on cash withdrawal

reduced to 0.2 percent

Section 231A and Div VI, Part IV, First Schedule

The Finance Bill proposes to reduce the rate of collection

of tax on withdrawal of cash from 0.3 percent to 0.2

percent.

The Bill however does not proposes any reduction in rate

of tax collection on transactions in banks covered in

section 231AA (e.g. sale against cash any instrument

including Demand Draft, Pay Order, CDR, STDR, SDR,

RTC or any other instrument of bearer nature etc.) which

shall continue to be at 0.3 percent.

Tax to be collected on sale under auction by

tender

Section 236A

The Finance Bill seeks to subject sale under auction by

tender to collection of tax under section 236A, besides

sale by public auction.


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Tax collected on sale of air tickets made

adjustable

Section 236B

The Finance Act, 2010 introduced collection of tax on

sale of air tickets, without specifying that tax collected to

be final or adjustable. The Board vide Circular 10 of 2010

clarified that tax collected shall be adjustable. Now, the

Finance Bill seeks to insert sub-section (3) to clarify thatthe tax collected under this section shall be adjustable.

The Bill further provides that tax shall not be collected in

the case of the Federal Government or a Provincial

Government or a person who produces a certificate from

the Commissioner that income of such person is exempt.

Editorial amendments

Sections, 115, 168 & 169, clause 3 Division IV Part III

First Schedule, clauses 42, 46A & 47D Part IV Second

Schedule

Consequent to the proposed amendments in withholding

tax provisions, editorial changes have also been

proposed in provisions dealing with filing of statement of

final taxation, inadmissibility of tax deducted / collected

which is final, and relevant withholding tax provisions

contained in the First and Second Schedules.

Withholding tax statements to be filed on

monthly basis by 15th

Section 165

day of the following

month

The Finance Bill seeks to amend section 165 in a manner

to replace requirement of quarterly statements of

withholding tax with monthly statements of withholding.

For the purpose, the Bill also proposes that monthly

statement shall be required to be filed by 15th

The Bill also proposes that, in addition to name and

address, CNIC Number and NTN would also be required

to be incorporated in the statements.

day of the

month, following the month to which the statement

pertains.

The Bill also proposes to insert a new sub-section (6) in

section 165 to provide that every employer shall furnish

annual statement of withholding tax from salary, including

information for such employees, whose salary though

exempt but fall in the range of Rs. 300,001 to Rs.

350,000.

Penalty for failure to furnishreturn or statements - Term taxpayable explained

Section 182

Existing provisions provide that where any person fails to

furnish a return of income or a statement required under

section 115 or wealth statement or wealth reconciliation

or withholding tax statement under section 165, such

person shall pay penalty equal to 0.1 percent of tax

payable for each day of default subject to a minimum

penalty of Rs. 500 and a maximum penalty of 25 percent

of the tax payable in respect of relevant tax year.

The Finance Bill proposes to insert an explanation to the

expression tax payable to mean tax chargeable on the

taxable income on the basis of assessment made or

treated to have been made under sections 120, 121, 122

or 122C.

Benefit of Advance rulingrestricted to non-residents nothaving permanentestablishment in Pakistan

Section 206A

Section 206A provides that a non-resident taxpayer may

seek advance ruling from the Board regarding application

of the Ordinance to a transaction proposed or entered

into.


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The Finance Bill seeks to restrict the availability of

advance ruling only to such non-resident taxpayers who

do not have permanent establishment in Pakistan by

proposing new sub-section (4).

Jurisdiction of tax authorities -Board or Chief Commissioner

empowered to transfer casesSection 209

Section 209 empowers the Board to assign persons or

classes of persons or areas to a Commissioner and the

Commissioner (Appeals), whereas, the Board, and the

Chief Commissioner with prior approval of the Board, may

confer upon or assign to any Officer of Inland Revenue all

of any of the powers and functions conferred upon or

assigned to the Commissioner in respect of any person or

persons or classes of persons or areas, as may be

specified in the order.

The Finance Bill now seeks to insert a proviso in sub-

section (1) of section 209 to empower the Board or the

Chief Commissioner to transfer jurisdiction in respect of

cases or persons from one Commissioner to another. The

proposed amendment appears to provide help in tax

administration in view of ongoing restructuring of field

formations.

Taxation of Capital Gains on

securities - Holding periodclarified

Div VII, Part I, First Schedule

The existing tax rate card for capital gains taxation under

section 37A has created an anomaly regarding taxation of

capital gains where holding period is exactly 6 months or

12 months, as tax rates have been provided only where

holding period is either lesser than or more than such

periods. The Finance Bill seeks to clarify this position by

substituting the rates table which is summarised as

under:

Tax Year Where holding

period is less

than 06

months

Where holding

period is 06

months or

more but less

than 12 months

Where holding

period is one

year or more

2011 10% 7.5% 0%

2012 10% 8.0% 0%

2013 12.5% 8.5% 0%

2014 15% 9.0% 0%

2015 17.5% 9.5% 0%

2016 * 10% 0%

*Tax rate not provided currently nor proposed in the Finance Bill

Exemptions and Concessions

Exemptions deleted

Clauses 61(xi) & (xxv), 74A, 93 and 114A, Part I, Second

Schedule

These clauses provide exemptions to BCCI Foundation

for Advancement of Science & Technology, BCCI

Foundation, foreign currency loan granted by National

Bank of Pakistan to Pakistan State Oil, profit and gains of

computer training institutions set-up between 01 July

1997 to 30 June 2005 for five years, and capital gains

from sale of ships and floating crafts upto tax year ending30 June 2011. The Finance Bill seeks to omit all these

exemptions.

Exemption to Islamic Development Bank

Clause 107A, Part , and clause 38C, Part VI,

Second Schedule

The Finance Bill proposes to provide exemption to any

income derived by the Islamic Development Bank from its

operations in Pakistan in connection with its social and

economic development activities.


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The Bank is exempt from withholding tax under section

150 payment of dividend. The Finance Bill proposes to

insert clause 38C to provide exemption from withholding

tax to the Bank under sections 151, 152, 153 and 233 as

well.


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Scope of Tax Rate reduced to16 percent

Section 3

The Finance Bill seeks to reduce the standard rate of

sales tax from 17 percent (17 percent) to 16 percent (16

percent) w.e.f. 01 July 2011.

This is a major relief measure proposed under the Sales

Tax Act. It is however to be noted that the standard sales

tax rate was increased to 17 percent only last year

through the Finance Act 2010 to cater to the revenue

shortfalls due to non-implementation of RGST. As a

number of exemptions & zero-ratings under the Act and

notifications have either been withdrawn or are proposed

to be withdrawn, it seems a just and equitable decision to

reduce the standard rate of sales tax again at 16 percent.

Input tax adjustment on fixedassets and capital goods

Section 8B(1)

Presently, adjustment of input sales tax paid on purchase

of fixed assets / capital goods is allowed in 12 equal

instalments. Furthermore, there is a restriction on

claiming more than ninety percent (90 percent) of input

tax during the tax period and same restriction also applies

to adjustment of input sales tax incurred on purchase of

fixed assets/capital goods.

The Finance Bill seeks to substitute first proviso to sub

section (1) of section 8B to allow full input tax adjustment

against sales tax paid on fixed assets / capital goods

during the tax period in which these are purchased. This

would not only simplify the law, but also improve cash

flows of the taxpayer.

Restriction on claim of refund orinput tax adjustment on invoicesissued by blacklisted persons

Section 21(3)

The Bill seeks to insert sub section (3) to section 21 to

provide for an explicit provision in the Act for restricting

claim of input tax credit or refund on purchases from

registered persons that have been blacklisted by FBR;

including purchases made prior to the date of blacklisting.

Similar provision is already available under sub rule (5) of

rule 12 of the Sales Tax Rules, 2006. This proposed

amendment seeks to make it a part of the Act itself. The

intent appears to enhance the enforcement of the

provision; however not allowing input tax credit on

purchases made from a person prior to his blacklisting

appears to be a harsh measure for the purchaser who

would be penalised for no mistake on his part.

Return

Section 26(3)

The Bill proposes to empower the Commissioner to allow

revision of special sales tax return(s) filed in pursuance to

a direction from the Commissioner or FBR. Presently,

only a monthly sales tax return can be revised within 120

days of its filing.

Obligation to producedocuments and provideinformation

Section 38B (1)

Presently, as per section 38B (1), officers equivalent and

above the rank of the Deputy Commissioner of Inland

Revenue are empowered to call for any information or

documents from any registered person.

Sales Tax Act, 1990

Significant amendments


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The bill now seeks to empower the Assistant

Commissioner (in addition to officers equivalent and

above the rank of the Deputy Commissioner of Inland

Revenue), to call for any information or documents from

any registered person.

Alternate dispute resolution

Section 47A (4)

The Finance Bill seeks to make consequential

amendments in sub section (4) to bring it at par with

section 38 of the Federal Excise Act, 2005 through which

a Member nominated by the Chairman FBR may also

pass an order considered appropriate by him with respect

to any decision or recommendation under the mechanism

of alternate dispute resolution.

Refund to be claimed within oneyear

Section 66

The Bill seeks insertion of a new proviso to section 66

whereby no refund of sales tax would be admissible if the

incidence of the sales tax has already been directly or

indirectly passed on to the consumer. This proposed

amendment is to take care of the loss of revenue to

Government in a scenario where same amount is not only

claimed by refund claimant as refund, but also it (or part

of it) is recovered by him from the consumer.

Sixth ScheduleTable-1 & 2 - Withdrawal of sales tax

exemptions

The Bill proposes to withdraw sales tax exemptions

available on import and supply of the following goods

effective from 04 June 2011:

Sr.No.Product

PCT

Heading

29A of Surgical Tapes 30.05

Sr.No.Product

PCT

Heading

Table-1

29B Ultra Sound Gel 3006.7000

30 Diapers for Adults (patients) 4818.4010

34 Bricks 6901.0000

35 Building blocks of cement

including ready mix concrete

blocks

6810.1100

41 Computer software 8523.2990,

8523.4010,

8523.4090,

8523.5990

and

8523.8090

42 Ambulances, fire fighting

vehicles, waste disposal trucks,brake down lorries, special

purpose vehicles for the

maintenance of streetlights and

overhead cables.

87.02,

87.03,8704.2200,

8704.2300,

8705.3000

and

8705.9000

43 Aircrafts 8802.2000,

8802.3000

and

8802.4000

44 Ships, of gross tonnage

exceeding 15 LDTs, excluding

those for recreational or

pleasure purpose.

8901.2000,

8901.3000

and

8901.9000

62 Defence stores, including

trucks, trailers and vehicles,

their parts and accessories for

supply to Armed Forces

Respective

headings

64 Spare parts and equipments for

aircrafts and ships mentioned

above

Respective

headings


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Sr.No.Product

PCT

Heading

65 Equipments and machinery for

pilotage, salvage or towage for

use in ports or airport.

Respective

headings

66 Equipment and Machinery for

air navigation.

Respective

headings

67 Equipment and machinery used

for services provided for

handling of ships or aircrafts in

customs-port or customs-

airport.

Respective

headings

68 Plant and machinery as is

notified by Federal

Government, exempt from

sales tax on import if not

manufactured in Pakistan

Respective

headings

69 Bulldozers and combinedharvesters and components

(which include sub-

components, components, sub-

assemblies and assemblies

excluding consumables).

Respectiveheadings

70 CNG Euro-2 buses whether in

CBU or CKD condition

8702.9010

and

8702.9090

05 of

Table-2

Supply of other such

agricultural implements as

specified by government in

official Gazette.

Respective

headings

Significant amendments in theSales Tax Rules, 2006

SRO 487(I)/2011 dated 03 June 2011

This SRO amends rule 14A of the Sales Tax Rules, 2006

whereby automatic electronic approval for revision of

sales tax returns will not be available anymore.

An amendment has been made in rule 65 whereby time

limit for submission of report by Alternate Dispute

Resolution Committee has been enhanced to 90 days

from 60 days of its appointment.

These amendments are effective from 04 June 2011.

Significant amendments in the

Special Procedures Rules, 2007SRO 482(I)/2011 dated 03 June 2011

This SRO amends rule 58B of the Sales Tax Special

Procedures Rules, 2007 whereby minimum value addition

for payment of sales tax by commercial importers has

been enhanced to 3 percent (3 percent) from 2 percent (2

percent).

This amendment is effective from 04 June 2011.

Significant sales tax notificationsSRO 480(I)/2011 dated 03 June 2011

This SRO rescinds following notifications:

SRO 1240 (I)/2005 dated 16 December 2005

SRO 542(I)/2006 dated 05 June 2006

SRO 275(I)/2008 dated 12 March 2008

1(3) STM / 2004 (Pt-II) dated 23 August 2009

By rescinding these notifications, following exemptions

stands withdrawn:

Import of dump trucks for off-high way use, on-highway dump trucks of 320 HP and above (PCT

Code 8704.2290 and 8704.2390) and transit concrete

mixer.

Import and supply of agricultural machinery,equipment and implements, whether locally

manufactured or imported.


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Import and supply of CKD kits of single cylinderagriculture diesel engines of 3 to 36 HP.

Furthermore, sales tax exemption is provided on sugar by

rescinding SRO dated 23 August 2009, wherein reduced

rate of eight percent (8 percent) of sales tax was

applicable on local supplies of sugar. This notification is

effective from 04 June 2011.

SRO 481 (I) /2011 dated 03 June 2011

Through this SRO, amendments have been made in SRO

551 (I)/2008 dated 11 June 2008 whereby exemption on

following goods has been withdrawn:

Supply of CNG kits, cylinders and valves for CNGkits, if supplied for automotive vehicles

Import and supplies of Commercial catalogues falling

KPMG Budget Brief

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