Amendments in Finance Act 2018
Circular
no. 3 of 2018 issued on 12th September 2018: The government has issued Finance Act, 2018 through
circular No.3 of 2018 with certain amendments in the Income Tax Ordinance,
2001. Pakistan’s Finance Minister Mr. Asad Umar presented amendments in the
parliament for the federal budget 2018-19. As the Finance Minister presents amendments for federal
budget 2018-19. Some significant amendments in Finance Act 2018 are explained
here under:-
Sr. #
|
Taxable Income
|
Rate of Tax
|
1
|
Where the taxable income does not
exceed Rs.400,000/-
|
0%
|
2
|
Where the taxable income
exceedsRs.400,000/- but does not exceed Rs.800,000/-
|
Rs.1,000/-
|
3
|
Where the taxable income exceeds
Rs.800,000/- but does not exceed Rs.1,200,000/-
|
Rs.2,000/-
|
4
|
Where the taxable income
exceeds Rs.1,200,000/- but does not exceed Rs.2,400,000/-
|
5% of the amount exceeding
Rs.1,200,000/-
|
5
|
Where the taxable income
exceeds Rs.2,400,000/- but does not exceed Rs.4,800,000/-
|
Rs.60,000/-+ 10% of the amount
exceeding Rs.2,400,000/-
|
6
|
Where the taxable income exceeds
Rs.4,800,000/-
|
Rs.300,000/-+ 15% of the amount
exceeding Rs.4,800,000/-
|
After this table a proviso has been added which states that
where the taxable income exceeds Rs.800,000/- but the tax payable is less than
Rs.2000, a minimum tax of Rs.2000/- would be payable. Hence, Rs.2000/- would be
payable on income from Rs.800,000/- to Rs.1,240,000/-.
The proviso has been added, because the tax at
the rate of 5% on income exceeding Rs.1,200,000/- up to Rs.1,240,000/- would
have been less than Rs.2000/-.
Reduction in rates of tax for Association of
Persons [Paragraph (2), Division I, Part I of the First Schedule
Prior to the Finance Act, 2018 the tax rates
applicable to Association of Persons (AOP’s) and non-salaried individuals were
clubbed together and comprised seven progressive tax slabs as provided in
paragraph (1), Division I, Part I of the First Schedule. Through the Finance
Act, 2018, separate tax rates have been provided for AOP’s in paragraph (2),
Division I, Part I of the First Schedule
which are as under:-
Sr. #
|
Taxable Income
|
Rate of Tax
|
1
|
Where the taxable income does not
exceed Rs.400,000/-
|
0%
|
2
|
Where the taxable income exceeds
Rs.400,000/- but does not exceed Rs.1,200,000/-
|
5% of the amount exceeding
Rs.400,000/-
|
3
|
Where the taxable income exceeds
Rs.1,200,000/- but does not exceed Rs.2,400,000/-
|
Rs.40,000/- +10% of the amount
exceeding Rs.1,200,000/-
|
4
|
Where the taxable income exceeds
Rs.2,400,000/- but does not exceed Rs.3,600,000/-
|
Rs.160,000/-+15% of the amount
exceeding Rs.2,400,000/-
|
5
|
Where the taxable income exceeds
Rs.3,600,000/- but does not exceed Rs.4,800,000/-
|
Rs.340,000/- +20% of the amount
exceeding Rs.3,600,000/-
|
6
|
Where the taxable income exceeds
Rs.4,800,000/- but does not exceed Rs.6,000,000/-
|
Rs.580,000/-+25% of the amount
exceeding Rs.4,800,000/-
|
7
|
Where the taxable income exceeds
Rs.6,000,000/-
|
Rs.880,000/+30% of the
amount exceeding Rs.6,000,000/-
|
Further reduction in tax rate applicable to
companies (Paragraph) (i), Division II, Part I of the First Schedule
Rate of tax for companies other than banking companies are given
in Division II, Part I of the First Schedule.
Tax rate for such companies was 35% for the tax year 2013 and
the same was reduced by 1% each year reducing to 30% for the year 2018 and
onwards.
Through the Finance Act, 2018, the rate of tax
for companies other than banking companies has been further reduced by 1% each
year (for five years) in the following manner:-
Tax
Year
Rate of Tax
2019
29%
2020
28%
2021
27%
2022
26%
2023 and onwards 25%
Further reduction in tax rate applicable to “small companies”
[Paragraph (iii), Division II, Part I of the First Schedule]
A “small company” is defined in sub-section (59A) of section 2
of the Ordinance. A tax rate of 25% was applicable to a small company prior to
the Finance Act, 2018.
Through the Finance Act, 2018, the rate of tax for a small
company has also been reduced by 1% each year (for five years) in the following
manner:-
Tax
Year
Rate of Tax
2019
24%
2020
23%
2021
22%
2022
21%
2023 and onwards 20%
Successive reduction and elimination of Super Tax [Division IIA,
Part I of the First Schedule]
Super Tax was levied through the Finance Act,
2015 @ 4% on the income of
banking companies and @ 3% on the income of persons other than banking
companies.
Rate of 3% was only applicable if the income was above Rs. 500
million in a year. Through the Finance Act, 2018, Super Tax has been omitted in
a phased manner, as depicted here under:-
Tax year 2018
|
Tax year 2019
|
Tax year 2020
|
Tax year 2021
|
|
Banking company
|
0
|
4
|
3
|
2
|
Person other than a banking
company having income of Rs.500 million
|
3
|
2
|
1
|
0
|
Reduction in tax rate on undistributed profit [Section 5A)
Through Finance Act 2017, section 5A was amended and a tax @
7.5% was imposed on public companies if the said companies failed to distribute
40% of their after tax profits.
Through the Finance Act, 2018 the said rate of 7.5% has been
reduced to 5% and limit of 40% has been reduced to 20%.
However, such distribution has to be made only through cash as
the words “bonus shares” have also been omitted.
NON-RECOGNITION OF CAPITAL GAIN IN THE CASE OF A GIFT TO BE
RESTRICTED TO RELATIVES [SECTIONS 37(4A) & 79(1) (C)1
Prior to the Finance Act, 2018, as per clause (c) of sub-section
(1) of section 79, no gain or loss was taken to arise on disposal by reason of
gift of an asset.
Further, as per clause (a) of sub-section (4A) of section 37,
where the capital asset became a property of a person under a gift, the fair
market value of the asset, on the date of its transfer or acquisition by the
person was treated as the cost of the asset.
Hence, capital gain on safe of asset could be avoided by using
conduit of gift in otherwise market based sale/purchase transactions between
unrelated parties.
In order to plug this loophole having potential of being used as
conduit of tax evasion, amendment has been made in clause (c) of sub-section
(1) of section (79) as well as in clause (a) of subsection (4A) of section 37
whereby non-recognition of capital gain is restricted to gain arising on
disposal of an asset as a result of gift to a relative only as defined in
subsection (5) of section 85, which, in relation to an individual encompasses:
·
an ancestor, a
descendent of any of the grandparents or an adopted child of such individual or
his/her spouse.
·
the spouse of the
individual or the spouse of any person delineated in clause (i) above.
However, capital gain or loss shail be recognized and
subsequently arise in case of disposal of an asset by way of gift to a person
who is not a relative as defined in subsection (5) of section 85 of the
Ordinance.
Set off of loss attributable to deductions u/s 22, 23,23A, 23B
& 24 [Sections 57 & 59A
Prior to the Finance Act, 2018, sub-section (4) of section 57
and sub-section (5) of section 59A provided that where business loss included
deductions allowed under sections 22, 23, 23A, 23B and 24 that had not been set
off against income, the amount not set off shall be added to the deductions
allowed under those sections in the following tax year, and so on until
completely set off.
Through the Finance Act, 2018, sub-section (4) of section 57 and
sub-section (5) of section 59A have been substituted and now the loss
attributable to deductions allowed under sections 22, 23, 23A, 23B and 24 that
has not been set off against income shall be set off against 50 percent of the
person’s balance income from business after setting off the business loss under
sub-section (1) of section 57.
However, the condition of set off against 50% shall not apply if
the taxable income for the year is less than Rs.10 million. This is illustrated
through the following examples:-
Example 1 (in
Rs.)
Tax
Year 1
Sales
50,000,000
Business deductions excluding depreciation/amortization
30,000,000
Deductions u/s 22, 23, 23A, 23B &
24
40,000,000
Loss for the
year
(20,000,000)
Tax
Year 2
Sales
70,000,000
Total admissible deductions for the tax year
2
40,000,000
Business income for the
year
30,000,000
Brought forward
loss
(20,000,000)
Loss set off against 50% of business
income
15,000,000
Taxable income after setting off
losses
15,000,000
Balance
loss to be carried forward to Tax Year
3 (5,000,000)
Example 2
Tax
Year 1
Sales
50,000,000
Business deductions excluding
depreciation/amortization 30,000,000
Deductions u/s 22, 23, 23A, 23B &
24
40,000,000
Loss for the
year
(20,000,000)
Tax
Year 2
Sales
45,000,000
Total admissible deductions for the tax year
2
40,000,000
Business income for the
year
5,000,000
Loss for Tax Year 1 shall be set off against 100% of business
income as taxable income for the year is less than Rs.10 million.
Taxable income after setting off
losses
(15,000,000)
Balance
loss to be carried forward to Tax Year
3 (15,000,000)
Example 3
Tax
Year 1
Sales
50,000,000
Business deductions excluding depreciation/amortization
80,000,000
Deductions u/s 22, 23, 23A, 23B &
24
0
Business loss for tax year 1 (30,000,000)
Tax
Year 2
Sales
70,000,000
Business deductions excluding
depreciation/amortization 20,000,000
Deductions u/s 22, 23, 23A, 23B &
24
80,000,000
Loss for the
year
(30,000,000)
Tax
Year 3
Sales
90,000,000
Total admissible
deductions
40,000,000
Business income for the
year
50,000,000
Setting off business loss for tax year
1
(30,000,000)
Income from business
20,000,000
50% of income from
business
10,000,000
Loss for year 2 set
off
10,000,000
Taxable income after setting off
loss
10,000,000
Balance loss attributable to deductions u/s 22, 23, 23A, 23B 8z
24 to be carried forward to tax year 4 is (Rs. 20,000,000/-
Normal income tax shall be paid on 50% of income from business
after setting off business loss i.e. normal income tax shall be paid on Rs.
10,000,000/-.
AMENDMENTS RELATED TO ADVANCE TAX U/S 147 [SECTIONS 137 & 1471
Advance tax is due on the dates specified in sub-sections (5),
(5A) and (5B) of section 147. In case of non-payment, sub-section (7) states
that the provisions of the Ordinance shall apply to any advance tax due under
section 147 as if the amount due were tax due under an assessment order.
In this regard, advance tax was due on the dates specified for
in sub-sections (5), (5A) or (5B).
However, sub-section (2) of section 137 provided that where any
tax was payable under an assessment order, a notice in the prescribed form
shall be served upon the taxpayer specifying the amount payable and thereupon
the sum so specified was to be paid within thirty days from the date of service
of the notice
In order to ensure that advance tax is tax due on the dates
mentioned in section 147, a proviso has been added in sub-section (2) of
section 137 providing that the due date for payment of tax payable under
sub-section (7) of section 147 shall be the date specified in sub-sections (5)
or (5A) or the first proviso to sub-section (5B) of section 147.
Secondly, in the case of companies and association of persons,
advance tax due for a quarter is computed as per formula given in sub-section
(4) of section 147.
In cases where taxpayers fail to provide turnover for the
quarter or turnover for the quarter is not known on the due date for payment of
advance tax, it was not possible to compute advance tax liability under
sub-section (4) on the due date for payment of advance tax.
Through the Finance Act, 2018, a proviso has been added in
component ‘A’ of sub-section (4) of section 147 providing that where a taxpayer
fails to provide turnover for the quarter or the turnover for the quarter is
not known, the turnover for the quarter shall be taken to be one-fourth of 110
percent of the turnover for the latest tax year for which a return has been
filed.
Thirdly, as per sub-section (6) of section 147, taxpayers can
file lower estimate of advance tax at any time before the last installment is
due. However, prior to the Finance Act, 2018, there was neither requirement of
giving reason for lower estimate nor any details or documentary evidence was
required.
Through the Finance Act, 2018, two provisos have been added in
sub-section (6) providing that an estimate of the amount of tax payable shall
contain turnover for the completed quarters for the relevant tax year,
estimated turnover of the remaining quarters along with reasons for any decline
in estimated turnover, documentary evidence of estimated expenses or deductions
which may result in lower payment of advance tax and the computation of the
estimated taxable income of the relevant tax year.
The Commissioner has been empowered to reject the estimate after
providing an opportunity of being heard to the taxpayer if the Commissioner is
not satisfied with documentary evidence provided or where an estimate of tax
payable is not accompanied by details mentioned above.
Abolition of Presumptive Tax Regime (PTR) for commercial importers Section 148(7)1
Prior to the Finance Act, 2018 under sub-section (7) of section
148, advance tax on imports was final tax for such importers where the imported
goods were sold in the same condition in which these were imported.
Through the Finance Act, 2018, tax required to be collected from
commercial importers where goods are sold in the same condition as these were
when imported, has been made minimum tax.
However, the minimum tax shall be 5% of the import value as
increased by customs duty, sales tax and federal excise duty. This is
illustrated through the following examples:-
Example 1
ABC Limited
Tax Year 2019
Taxable
Income
Rs.10,000,000
Normal tax @
29%
Rs.2,900,000
Import value including customs duty, sales tax and federal
excise
duty
Rs.100,000,000
Tax deducted u/s 148 @
5.5%
Rs.5,500,000
Minimum tax @
5%
Rs.5,000,000
As minimum tax @ 5% is higher than normal tax @ 29%, minimum tax
@ 5% shall be payable.
Example 2
Mr. XYZ
Tax Year 2019
Taxable
Income
Rs.5,000,000
Normal tax @ Rs.300,000 + 15% of amount exceeding Rs.4.8
million
Rs.330,000
Import value including customs duty, sales tax and federal
excise
duty
Rs.10,000,000
Tax deducted u/s 148 @
6%
Rs.600,000
Minimum tax @
5%
Rs.500,000
As minimum tax @ 5% is higher than normal tax, minimum tax @ 5%
shall be payable.
Example 3
Mr. ABC
Tax Year 2019
Taxable
Income
Rs.4,800,000
Normal tax @ Rs.60,000+ 10% of amount exceeding Rs.2.4
Million
Rs.300,000
Import value including customs duty, sales tax and federal
excise
duty
Rs.4,000,000
Tax deducted u/s 148 @ 6%
Rs.240,000
Minimum tax @
5%
Rs.200,000
As minimum tax @ 5% is lower than normal tax, normal tax of
Rs.300,000 shall be payable.
Tax on sale of certain petroleum products [Section 236HAl
As per section 156A, every person selling petroleum products to
a petrol pump operator is required to deduct tax from the commission or
discount allowed to the operator at the rate of 12% of the amount of payment
for filers and 17.5% for non-filers.
Through the Finance Act, 2018, a new section 236HA has been
inserted which states that every person selling petroleum products to a petrol
pump operator or distributor, where such operator or distributor is not allowed
a commission or discount, shall collect tax on ex-depot sale price of such
products @ 0.5% for filers and 1% for non-filers.
Hence, where the petrol pump operator is allowed a commission or
discount, only tax under section 156A shall be collected and tax under section
236HA shall not be collected.
In case the petrol pump operator or distributor is not allowed
commission or discount, tax under section 156A shall not be collected but tax
under section 236HA shall be collected. Tax deducted under the newly inserted
section is a final tax.
Advance tax on persons remitting amounts abroad through Credit
Cards, Debit Cards or Prepaid Cards [Section 236Y1
Credit, debit and prepaid cards are being used as a mode to pay
for foreign travel, lodging, shopping etc and for online shopping from
merchants outside Pakistan.
Through the Finance Act, 2018, a new section 236Y has been
inserted in the Income Tax Ordinance, 2001 which requires every banking company
to collect advance tax at the time of transfer of any sum remitted outside
Pakistan on behalf of a person who has completed a debit card or credit card or
prepaid card transaction with a person outside Pakistan.
The advance tax collected under this section shall be
adjustable. The rate of tax to be deducted shall be 1% of the gross amount
remitted abroad from filers and 3% from non-filers.
The following transactions are included in this section:-
·
Use of credit card,
debit card or prepaid card in Pakistan where the transaction is with a person
outside Pakistan and results in transfer of sum remitted outside Pakistan;
·
Use of credit card,
debit card or prepaid card outside Pakistan where the transaction is with a
person outside Pakistan and results in transfer of sum remitted outside
Pakistan;
·
Use of ATM card
outside Pakistan which results in transfer of any sum remitted outside Pakistan
All plastic cards which are categorized as debit, credit or
prepaid cards are covered in this section. As ATM cards are mostly debit cards
or in some cases can also be credit or prepaid cards, transactions of cash
withdrawal using ATM cards outside Pakistan are also covered in this section if
such transactions result in transfer of any sum remitted outside Pakistan.
Ban on transfer of immovable property or a new motor vehicle to a
non-filer [Section 227C1
In order to reinforce efforts being made for broadening of the
Tax Base and to bring about an increase in the number of return filers a new
section 227C has been inserted through the Finance Act, 2018.
According to this section applications for booking, registration
or purchase of a new locally manufactured motor vehicle or for the first
registration of an imported vehicle shall not be accepted or processed by any
vehicle registering authority or a manufacturer of a motor vehicle unless the
person is a filer as defined in section 2(23A) of the Ordinance.
It would also be pertinent to mention that all motor vehicles
regardless of their engine capacity would fall within the purview of this newly
inserted section 2270 of the Ordinance.
Moreover, it would also be pertinent to mention that the term
motor vehicle would include within its ambit all types of automobiles including
cars, jeeps, vans, trucks etc irrespective of whether it is for private or
commercial use.
However, section 227C does not extend to motorcycles, rickshaws
and motorcycle rickshaws i.e. condition of being a filer shall not extend to
persons purchasing locally manufactured motorcycles, rickshaws and
motorcycle-rickshaws
Furthermore, consequent to the introduction of Section 227C of
the Ordinance, through the Finance Act, 2018 any authority responsible for
registering, recording or attesting transfer of any immovable property
exceeding five million rupees shall not accept or process any application or
request by a person for registering, recording or attesting transfer of any
immovable property exceeding Rs. 5 Million unless such person is a filer as
defined in section 2(23A) of the Ordinance.
It would be pertinent to mention that such immovable property
includes within its ambit agricultural, commercial, residential plots/land,
houses, buildings, apartments, malls, flats etc.
Moreover the authorities responsible for registering, recording
or attesting transfer of immovable property include housing authorities,
housing societies, co-operative societies, registrar of properties etc.
Directorate General of Immovable Property Section 230F
A major initiative to correct the valuation of real estate for
the purpose of taxation has been taken through the Finance Act 2018, whereby
Government has introduced a new section 230F to the Income Tax Ordinance 2001.
Sub-section (1) of Section 230F of the Ordinance provides for
the establishment of a new Directorate General of Immovable property (DG-IP).
This new office will be endowed with the necessary capacity and
legal jurisdiction to establish and implement a framework for taxation of
immovable property.
Sub-section (3) empowers the Directorate General to undertake
proceedings for acquisition of property for reasons and purposes enumerated in
sub-section (4).
As per this sub-section, the proceedings under sub-section (3)
shall be initiated, where the Director General, on the basis of valuation made
by it, has reason to believe that any immovable property of a fair market value
has been transferred by a person (transferor), to another person (transferee),
for a consideration which is less than the fair market value of the immovable
property and that the consideration for such transfer as agreed to between the
transferor and transferee has been understated in the instrument of transfer
for the purposes of:
(a) the avoidance or reduction of withholding tax obligations
under this Ordinance;
(b) concealment of unexplained amount referred to in sub-section
(1) of section 111 representing investment in immovable property; or
(c) avoidance or reduction of capital gains tax under section
37.
The valuation mechanism (appointment of valuator and its
working), is to be prescribed. Sub-section (8) restricts the period for
initiation of proceedings within six months of the transfer of immovable
property.
The manner of proceedings, opportunity of being heard for
transferor and transferee and making of the final order for acquisition of
property are the subjects covered under sub-sections (9) to (11).
The appellate procedures against the orders of the DG-IP are
specified in sub-sections (12) to (18).
If the order of DG-IP, made under sub-section (11), survives the
test of appellate forums, the immovable property and all rights including
ownership rights therein shall be vested in the Federal Government with same
rights and enjoyments as would have persisted under the previous ownership in
terms of sub-section (19) of the newly inserted section 230F of the Ordinance.
Sub-section (20) provides for payment to the owner of ‘consideration for
acquisition’, which is defined in sub-section (21) as twice the price at which
the transferor and transferee have executed the transfer of property which is
the subject of proceedings.
The aim of the Federal Government is to make correct assessment
of fair value of the property for the purpose of raising tax demands. However,
as per sub-section
(22), the new provisions including the appointment of
Directorate General will come into force on the date as notified by the Federal
Government. Considerable preparatory work has to be done before this
notification can be issued.
This includes necessary notifications regarding funds, valuation
mechanism, appointment of appellate authorities and consultations with the
provinces for requesting them to withdraw their valuation tables and reducing
their tax rates on property transaction. Accordingly, sub-section
(22) provides that the provisions of section 230F shall remain
inapplicable unless a notification by the Federal Government is issued.
After the issuance of the notification, provisions of the
existing sections 111, 236C and 236W shall not apply whereas rates under
section 236K shall be reduced to 1%.
However, till the date of issuance of the said notification, tax
required to be collected under section 236C, 2361< and 236W shall continue
to be collected, Moreover, provisions of Section 111 shall also continue to be
applicable.
Time limitation for Best Judgement assessments under section 121
of the Ordinance to be extended ‘Section 121(3)
In terms of proviso to sub-section (5) of section 114 of the
Ordinance, notice for furnishing of a return of income under section 114(4) of
the Income Tax Ordinance, 2001 can be issued for one or more of the last ten
completed tax years to a person who has not filed return of income for any of
the last five tax years.
However, prior to the Finance Act, 2018, in case of failure to
file return in response to notice issued in such a case, best judgment
assessment could only be issued within five years of the end of tax year to
which it related.
In this way, though notice for filing of return could be issued
for the last ten completed years, in case of non-filing of returns, best
judgment assessment could only be made for the last five completed tax years
due to the time limitation stipulated in sub-section (3) of section 121 of the
Ordinance.
In order to remove this anomaly, a proviso has been added in
sub-section (3) of section 121 whereby a best judgement assessment can be made
within two years from the end of the tax year in instances where notice calling
for furnishing of return of income is issued in respect of one or more of the
last ten completed tax years in terms of proviso to sub-section (5) of section
114 of the Ordinance.
Revamping of Alternative Dispute Resolution mechanism [Section
134A1
The concept of Alternative Dispute Resolution was introduced
through the Finance Act, 2004 by inserting a new section 134A in the Income Tax
Ordinance, 2001.
The objective was to provide an alternate channel for
expeditious settlement of disputes between FBR and taxpayers and to reduce the
pendency of cases at various appellate forums.
However, the existing mechanism for resolution of disputes
through Alternative Dispute Resolution Committee (ADRC) had not been entirely
successful in mitigating the hardship of taxpayers and therefore section 134A
has been substituted with major changes which are mentioned hereunder:-
Prior to the Finance Act, 2018 any aggrieved person could apply
to the Board for the appointment of a committee for the resolution of any
hardship or dispute in connection with any matter pending before an Appellate
Authority.
However, cases where prosecution proceedings had been initiated
or where interpretation of question of law having effect on identical cases was
involved were ousted from the purview of Alternative Dispute Resolution
(ADR).However, by virtue of amendment made through the Finance
Act, 2018 any dispute pertaining to:
(i) liability of tax against the aggrieved person or
admissibility of refunds; or
(ii) extent of waiver of default surcharge and penalty; or
(iii) any other specific relief required to resolve the dispute
shall fall within the purview of section 134A of the Ordinance relating to
Alternative Dispute Resolution.
An aggrieved person may apply to the Federal Board of Revenue
for the appointment of a Committee to resolve any hardship or dispute which is
under litigation in any court of Law or an Appellate Authority.
However, instances where criminal proceedings have been
initiated or where interpretation of question of law having effect on other
cases is involved have been ousted from the purview of the section 134A
substituted through the Finance Act, 2018.
Prior to the Finance Act, 2018, the ADR Committee was to be
appointed by the Board within 60 days of the receipt of application by an
aggrieved person.
Such committee comprised of an officer of Inland Revenue not
below the rank of Commissioner and two persons from a panel comprising
Chartered or Cost Accountants, Advocates, Income Tax Practitioners or reputable
taxpayers for the resolution of the hardship or dispute.
By virtue of amendment made through the Finance Act 2018, the
composition of the ADRC has been changed.
The first member shall be an officer of Inland Revenue, not
below the rank of Commissioner.
The second member shall be a person to be nominated by the
taxpayer from a panel notified by the Board comprising senior chartered
accountants and senior advocates having experience in the field of taxation and
reputable businessmen as nominated by Chambers of Commerce and Industry.
However, the taxpayer is not allowed to nominate a Chartered
Accountant or an Advocate who is or has been an auditor or authorized
representative of the taxpayer.
The third member shall be a retired judge not below the rank of
District and Sessions Judge and shall be nominated through consensus by the
first two members.
Prior to the Finance Act, 2018, the proceedings of ADRC were
conducted while the appeal of the taxpayer remained pending before the
appellate authority.
After the passage of order by the Board in the light of recommendations
of ADRC, the said recommendations were to be submitted before the authority,
tribunal or court where the matter was subjudice for consideration and orders
as deemed appropriate.
Through the Finance Act, 2018, the aggrieved person or the Commissioner
or both as the case may be are required to withdraw the appeal pending before
any appellate authority or Court of Law after constitution of ADRC by the
Board.
The ADRC shall not commence proceedings unless the order of
withdrawal has been communicated to the Board, and in case the decision is not
communicated within 75 days of appointment of ADRC, the said committee shall
stand dissolved and the provisions of section 134A shall not apply.
The Alternative Dispute Resolution Committee is mandated with
examining the issue at hand and may conduct inquiry, seek expert opinion and
direct any officer of the Inland Revenue or any other person to conduct an
audit if deemed necessary.
Such committee shall be required to decide the dispute by
majority within 120 days of commencement of proceedings, however, in computing
the aforesaid period of 120 days the period for communicating the order of
withdrawal by the court of law or the Appellate Authority shall be excluded.
In case of failure to decide within 120 days, the Board shall
dissolve the committee by an order in writing and the matter shall be decided
by the Court of Law or the appellate authority which had issued the order of
withdrawal.
In such a case, the appeal shall be treated as pending before
the Court of Law or the appellate authority as if it had never been withdrawn.
In such a situation, the Board shall communicate the order of
dissolution to the court of law or the appellate authority and the
Commissioner.
Moreover, upon receipt of the order of dissolution the aggrieved
person shall communicate the same to the court of law or the Appellate
Authority, which shall decide the case within six months of communication of
said order.
Prior to the Finance Act, 2018, the recovery of tax was not
automatically stayed during the pendency of dispute before the ADRC.
In order to facilitate taxpayers and alleviate hardship, the
recovery of tax in connection with any dispute for which committee has been
constituted shall be deemed to have been stayed from the date of order of
withdrawal of appeal by the court of law or the appellate authority up to the
date of decision by the committee.
Prior to the Finance Act, 2018, recommendations of the Alternate
Dispute Resolution committee constituted by the Federal Board of Revenue in
pursuance of application filed by an aggrieved person in connection with any
matter pending before an Appellate Authority was not binding upon the Board and
the Board had the mandate of passing an order as it deemed appropriate within
ninety days of the receipt of the recommendations of the Alternative Dispute
Resolution Committee.
Moreover, an applicant being dissatisfied with the order passed
by FBR also had the option of continuing to pursue the matter at hand before
the relevant appellate authority.
Through the Finance Act, 2018, the decision of the Alternative
Dispute Resolution Committee has been made binding upon both the Commissioner
and the aggrieved person/taxpayer.
Upon decision of the dispute by the Alternative Dispute
Resolution Committee the aggrieved person/applicant shall be obliged to make
payment of income tax and other taxes as decided by the committee and all
decisions, orders and judgements shall stand modified to that extent.
The Board has also been accorded the mandate to prescribe the
amount to be paid as remuneration to the members of the Alternative Dispute
Resolution Committee for their services except an officer of Inland Revenue
(not below the rank of a Commissioner) who is appointed as a member of the
committee.
Disclosure of information to National Database Registration
Authority (NADRA) [Section 216(3)1
As per sub-section (1) of section 216 of the Income Tax
Ordinance, 2001 public servants are barred from disclosing information
contained in tax returns/statements/ accounts as well as documents furnished,
evidences given and affidavits or depositions made during the course of
proceedings under the Ordinance (except proceedings relating to offences and
prosecutions). In addition, any record related to assessment or recovery
proceedings under the Ordinance is also to be kept confidential.
However, certain exceptions have been provided in sub-section
(3) of section 216 of the Income Tax Ordinance, 2001 where information can be
disclosed to specified persons and organizations.
Through the Finance Act, 2018, the National Database and
Registration Authority (NADRA) has been included in the list of organizations
that do not fall within the ambit of the confidentiality clause in terms of
sub-section (1) of section 216 of the Income Tax Ordinance, 2001.
This amendment would assist the Federal Board of Revenue for
purposes of broadening of the tax base.
Enhancement in limit of tax credit under section 62 of the
Ordinance for investment in shares, sukuks and insurance.
A resident individual or an AOP being original allottee of
shares or sukuks is entitled to tax credit under section 62 of the Income Tax
Ordinance, 2001 upon acquiring new shares offered by a public company listed on
a stock exchange in Pakistan or acquiring sukuks offered by a public company
listed and traded on a stock exchange in Pakistan.
Moreover, a resident individual or an AOP
deriving income from salary or business can also avail such tax credit upon
payment of life insurance premium to a life insurance company registered
by SECP under
the Insurance Ordinance, 2000.
The amount of tax credit allowable under section 62 of the
Income Tax Ordinance, 2001 is computed according to the formula depicted here
under:-
(NB) x C
Where:-
A: amount of tax assessed to the resident individual or AOP for
the relevant tax year prior to the allowance of any tax credit under Part X of
Chapter III;
B: taxable income of the resident individual or AOP for the
relevant tax year; C: the lesser of —
(a) the total cost of acquiring the
shares/sukuks or aggregate amount of
life insurance premium paid by a resident individual/AOP in the
relevant tax year;
(b) 20% of the taxable income of the
resident individual /AOP for the relevant tax year; or
(c) Rs. 1.5 Million
In order to incentivize investment in shares/sukuks and payment
of life insurance premium the limit of Rs.1.5 Million in component “C” of the
formula for computation of tax credit under section 62 of the Ordinance has
been enhanced to Rs. 2 Million through the Finance Act, 2018.
Extension of various tax credits upto 30th June,
2021 [Sections 65B, 65D & 65E1
Prior to the Finance Act, 2018, tax credits under sections 65B,
650 and 65E were available up to 30-06-2019. Through the Finance Act, 2018, the
cut-off date has been extended from 30.06.2019 to 30.06.2021.
Audit under section 177 and 214C of the Ordinance to be conducted
once in three years [Clause (105), Part IV of the Second Schedule
The Federal Board of Revenue is empowered to select persons for
audit of their Income Tax affairs through random or parametric computer ballot
under section 214C of the Income Tax Ordinance, 2001.
Commissioners also have the mandate to select taxpayers for
audit of their Income Tax Affairs under section 177 of the Income Tax
Ordinance, 2001 after recording reasons in writing for the same.
Moreover, the powers of a Commissioner to select taxpayers for
audit of their Income Tax Affairs under section 177 of the Ordinance are
independent of the powers exercised by the Federal Board of Revenue with
respect to selection of taxpayers for audit of their Income Tax affairs through
random or parametric computer ballot under section 214C of the Income Tax
Ordinance, 2001.
Prior to the Finance Act, 2018 a person could be selected for
audit of its Income Tax affairs repetitively under section 177 and 214C of the
Income Tax Ordinance, 2001 i.e. the audit of the Income Tax Affairs of a person
under section 177 or section 214C of the Ordinance could be conducted in
successive Tax Years.
However, in order to facilitate taxpayers who may be subjected
to audit repetitively and to mitigate the ensuing hardship of such taxpayers,
amendment has been through the Finance Act, 2018 whereby the powers of the
Board and the Commissioner to select a person for audit of its income tax
affairs repetitively i.e. for successive Tax Years has been curtailed.
Therefore, consequent to the passage of the Finance Act, 2018
selection of a person for audit of its Income Tax Affairs cannot be made if a
person has been selected for audit in any of the preceding three Tax Years.
However, the Commissioner can still select a person for audit
under section 177 even if the person was selected for audit in any of the
preceding three tax years but in such a situation the selection by the
Commissioner is subject to prior approval of the Board.
Therefore, a person may be subjected to audit of its Income Tax
Affairs more than once in three Tax Years under section 177 of the Income Tax
Ordinance, 2001 if the Commissioner has the approval of the Federal Board of
Revenue in this respect
Taxpayers filing returns in Azad Jammu and Kashmir (AJK) and
Gilgit- Baltistan (GB) to be treated as filers under the Income Tax
Ordinance, 2001. [Section 2(23A)
The Federal Board of Revenue has espoused the policy of
increasing the cost of doing business for non-filers by prescribing higher
rates of withholding tax for non-filers viz-a-viz filers under various
withholding tax provisions.
Persons filing their Income Tax returns in Azad Jammu and
Kashmir and Gilgit—Baltistan were being subjected to higher rates of withholding
tax applicable to non-filers on various transactions such as cash withdrawal
from banks, banking transactions, registration of motor vehicles, collection of
motor vehicle tax etc in the territory of Pakistan because they did not fall
within the ambit of definition of the term “filer” in terms of sub-section
(23A) of section 2 of the Income Tax Ordinance, 2001 as their name(s) did not
appear in the active taxpayers list issued by the Federal Board of Revenue
periodically.
In order to facilitate persons filing their tax returns in
AJ&K and Gilgit-Baltistan amendment in the definition of a “filer” under
section 2(23A) of the Income Tax Ordinance, 2001 has been made through the
Finance Act, 2018 whereby persons appearing on the Active Taxpayers List being maintained
by Azad Jammu and Kashmir Council Board of Revenue and the Gilgit—Baltistan
Council Board of Revenue, shall also be treated as filers under the Income Tax
Ordinance,2001 therefore, such persons shall not be subjected to higher
withholding taxes applicable to non-filers.
However, it would be pertinent to mention that persons
conducting business/earning Pakistan-source income in the territory of Pakistan
are obliged to file their income tax returns in Pakistan.
Amount paid as scholarship not to be subject to collection of
advance tax by educational institutions [Section 236I]
In terms of section 2361 of the Ordinance, a person preparing a
fee voucher or challan was obliged to collect/charge advance tax @ 5% from a
person on the amount of fee paid to an educational institution such as schools,
colleges, universities, tuition centers etc.
However, such advance tax under section 2361 of the Ordinance
was not to be collected in instances where annual fee was upto Rs.200,000/- and
in the case of a person who is a non-resident, subject to the furnishing of
various documentation as enunciated in sub-section (6) of section 2361 of the
Ordinance.
In order to alleviate the hardship of persons whose educational
fees are being paid through a scholarship, appropriate amendment has been made
in sub-section (3) of section 2361 of the Ordinance through the Finance Act,
2018 wherein it has been stipulated that advance tax under section 2361 of the
Ordinance shall not be collected on an amount which is paid by way of scholarship.
Rationalizing rate(s) of tax on the import of
coal – Part II of the First Schedule
Prior to the Finance Act, 2018 tax on import of coal under
section 148 of the Income Tax Ordinance,2001 was collected @ 5.5% from
companies and industrial undertakings and @ 6% from other persons (in the case
of filers) and tax was collected @ 8% from companies and industrial
undertakings and 9% from other persons (in the case of non-filers). Through the
Finance Act, 2018, the rate of tax under section 148 on import of coal has been
reduced to 4% for filers and 6% for non-filers.
Ambit of concessional rate of tax on import of LNG to be extended
[Part II of the First Schedulel
Prior to the Finance Act, 2018 only buyers of Liquefied Natural
Gas (LNG) designated on behalf of the government of Pakistan were entitled to
reduced rate of collection of tax at the import stage under section 148 of the
Ordinance @ 1% for filers and 1.5% for non-filers.
However, in order to provide a level playing field for all
importers of LNG and to ensure non-discriminatory treatment necessary amendment
has been made through the Finance Act, 2018 whereby from 1st July, 2018 onwards
tax at the import stage under section 148 of the Ordinance shall be collected @
1% from filers and @ 1.5% from non-filers from all importers of LNG whether nor
not designated by the government.
Reduced rate of advance tax on Banking Transactions by non-filers
[Division XXI of Part IV of the First Schedule]
Prior to the Finance Act, 2018 every banking company, in terms
of section 236P of the Income Tax Ordinance, 2001 was obliged to collect
advance adjustable tax @0.6% from non-filers upon sale of instruments such as
demand draft, pay order, special deposit receipt, cash deposit receipt, short
term deposit receipt, call deposit receipt, rupee traveller’s cheques etc in
excess of Rs.50,000/- per day.
Similarly, collection of such adjustable advance tax @ 0.6% from
non-filers by banks was also mandated upon transfer of funds through
cheque/clearing, inter/intra-bank transfers through cheques,
online/telegraphic/mail transfers, direct debits, payments through internet,
mobile phones and transfer of funds through various modes as delineated under
section 236P of the Ordinance in case such transfers exceeded Rs.50,000/- per day
(in aggregate) from all bank accounts.
The rate of tax under section 236P of the Ordinance was
temporarily reduced to 0.4% and was extended periodically pursuant to the
recommendation of the Economic Coordination Committee of the Cabinet.
Through the Finance Act, 2018 the rate of tax applicable under
section 236P of the Ordinance has been reduced from 0.6% to 0.4%, therefore,
extension of reduced rate of 0.4% under section 236P is no longer required.
Tax collected from members of Stock Exchange to constitute
adjustable tax [Section 233A]
As per section 233A of the Income Tax Ordinance, 2001 a stock
exchange registered in Pakistan is obliged to collect tax @ 0.02% from its
members upon the purchase and sale of shares in lieu of tax on commission
earned by such members.
Prior to the Finance Act, 2018 the tax collected under section
233A of the Ordinance constituted final tax. Pursuant to the Finance Act, 2018
the tax collected by a registered stock exchange in Pakistan under section 233A
of the Ordinance from its members on the purchase and sale of shares in lieu of
tax on commission earned by such members shall be adjustable in nature.
Reduction of minimum threshold of payment of tax to prevent
recovery through attachment under section 140 of the Income Tax Ordinance,
2001.
Section 140 of the Ordinance enables a Commissioner to recover
outstanding tax due by a taxpayer from persons holding money on behalf of the
taxpayer.
A proviso to sub-section (1) of section 140 of the Income Tax
Ordinance, 2001 was introduced through the Finance Act, 2016 whereby
Commissioner was restrained to issue notice for recovery of tax due during the
pendency of First appeal under section 127 of the Ordinance provided that
payment of 25% of the disputed tax demand has been made by the taxpayer.
In order to alleviate the difficulties faced by taxpayers in
payment of outstanding demand during pendency of First appeal the minimum
threshold of payment of tax has been reduced from payment of 25% of the
outstanding demand to payment of 10% of the outstanding demand.
Therefore, if a taxpayer makes payment of 10% of the outstanding
demand pending adjudication before the Commissioner (Appeals), recovery under
section 140 of the Income Tax Ordinance, 2001 shall not be made.
Reduction in penalty for late filers of withholding tax statements
[Section 182 read with section 115, 165, 165A &165B]
Prior to the Finance Act, 2018 a withholding agent failing to
furnish a statement as required under section 115,165,165A or 165B of the
Income Tax Ordinance, 2001 within the due date was liable to pay penalty of Rs.
2,500/- for each day of default subject to a minimum penalty of Rs.10,000/-
under section 182 of the Income Tax Ordinance, 2001.
In order to alleviate the hardship of withholding agents who
make payment of the tax collected/withheld into the treasury within the due
date but are unable to file the statements as required under sections
115,165,165A or 165B of the Ordinance within the due date(s) on account of any
reason, such persons, consequent to the passage of the Finance Act, 2018 shall
be obliged to pay a total penalty of Rs.5000/- under section 182 of the Income
Tax Ordinance, 2001 as against minimum penalty of Rs.10,000/- or penalty of
Rs.2,500/- daily as was the case prior to the passage of the Finance Act, 2018.
However, such reduced penalty shall only be applicable in cases which fulfill
the twin conditions of the tax collected /withheld having been deposited into
the exchequer within the due date as mentioned earlier and where the
statement(s) under sections 115,165,165A or 165B are filed by the withholding
agent within 90 days from the due date for filing such statements. In case
these two conditions are not fulfilled, the taxpayer shall be liable to pay a
minimum penalty of Rs.10,000/- or penalty of Rs. 2,500/- daily as was the case
prior to the Finance Act, 2018.
Extension in the period of reduced rate of minimum tax for Large
Trading Houses [clause (57), Part-IV of the Second Schedule
Companies operating trading houses which simultaneously fulfill
the conditions of having paid up capital exceeding Rs. 250 Million, owning
fixed assets exceeding Rs. 300 million at the close of the Tax Year,
maintaining computerized records of imports and sale of goods, having a system
of issuance of 100% cash receipts on sales, presenting their accounts for audit
every year and being registered under the Sales Tax Act 1990 are entitled to
avail a reduced rate of minimum tax @ 0.5% of turnover under section 113 of the
Income Tax Ordinance, 2001 up to Tax Year 2019 and 1% thereafter as against the
prevalent rate of minimum tax @ 1.25% introduced through Finance Act, 2017.
This facility of reduced rate of minimum tax @ 0.5% for large
trading houses under clause (57) of Part-IV of the Second Schedule was
available up to the Tax Year 2019 prior to the Finance Act, 2018.
In order to promote and encourage the growth of such enterprises
the facility of reduced rate of minimum tax @ 0.5% in the case of large trading
houses has been extended up to 30th June, 2021 through the Finance Act, 2018.
Obligation to act as withholding agent under section 153 of the
Ordinance to be deferred to the succeeding year [Section 153(7)(i)(i)]
Prior to the Finance Act, 2018 individuals and association of
persons having turnover of Rs. 50 Million or above in any given Tax Year were
liable to act as withholding agents and deduct tax at the rates specified in
Division III of Part III of the First Schedule from the gross amount of
payments being made for the sale of goods, for the rendering or providing of
services or upon the execution of a contract under section 153 of the Income
Tax Ordinance, 2001.
Such individuals and AOPs faced difficulty and hardship in
discharging their legal obligations as withholding tax agents under section 153
of the Income Tax Ordinance, 2001 immediately upon crossing the threshold of
turnover of Rs. 50 Million during the currency of a particular Tax Year.
In order to provide such individuals and
Association of Persons (AOP’s) with a window to organize and prepare thereby
enabling them to effectively discharge their responsibility as a withholding
agent amendment has been made in section 153 of the Income Tax Ordinance, 2001
whereby individuals and AOP’s crossing the threshold of Rs. 50 Million during
the currency of a tax year, shall, pursuant to the passage of the Finance Act,
2018 be required to act as a withholding tax agent permanently from the tax
year following the tax year in which the aggregate turnover is Rs.50 million or
above.
Increase in minimum threshold of tax deduction on payments made
under section 153 of the Income Tax Ordinance, 2001 [Section 153(1)]
Prior to the passage of the Finance Act, 2018 the withholding
tax agents i.e. prescribed persons specified in clause (i) of sub-section (7)
of section 153 of the Income Tax Ordinance, 2001 were obliged to deduct tax at
the rates specified in Division III of Part III of the First Schedule to the
Ordinance from payments made in respect of provision/ rendering of services
aggregating Rs.10,000/- in a given tax year and from payments made on account
of supply of goods aggregating Rs.25,000/- in a given tax year in terms of
Circular No. 26 of 1991 (Income Tax) dated 24th August, 1991.
In order to facilitate withholding tax agents the minimum
thresholds for deduction of tax under section 153 of the Income Tax Ordinance,
2001 previously given in Circular No. 26 of 1991 (Income Tax) dated 24th
August, 1991 have now been enhanced to an aggregate amount of Rs.75,000/-
during a financial year in the case of payments being made for supplies of
goods by the withholding agent and to an aggregate amount of Rs. 30,000/-
during a financial year in the case of payments being made by the withholding agent
for the provision/rendering of services.
Scope of persons obliged to act as withholding tax agents under
section 153 of the Income Tax Ordinance, 2001 extended to builders
and developers [Section 153f7)(i)]
Prior to the passage of the Finance Act, 2018 builders i.e.
persons deriving income from the business of construction and sale of
residential, commercial or other buildings and developers i.e. persons deriving
income from the business of development and sale of residential, commercial or
other plots were not obliged to act as withholding tax agents under section 153
of the Income Tax Ordinance, 2001 if their turnover during any given tax year
was less than Rs. 50 million.
The scope of persons obliged to act as withholding tax agents
under section 153 of the Income Tax Ordinance, 2001 has now been enlarged
through the Finance Act, 2018 and all builders and developers regardless of
whether or not their turnover during a tax year exceeds Rs. 50 Million shall
now be obliged to act as withholding tax agents under section 153 of the Income
Tax Ordinance, 2001.
Late filers of tax returns not to be subjected to automatic
selection for audit under section 214D of the Ordinance [Section 2140,
Section 182A of the Ordinance]
Prior to the passage of the Finance Act, 2018 a person was
automatically selected for audit under section 214D if the person failed to
file return of income within the time period delineated under section 118 of
the Income Tax Ordinan ce, 2001 or within the time period extended by the Board
or the concerned Commissioner under sections 214A and 119 of the Income Tax
Ordinance, 2001 respectively.
Taxpayers were also subjected to automatic selection for audit
if tax required to be paid along with return of income under section 137 of the
Ordinance was not paid. Moreover, audit of the Income Tax Affairs of the person
under section 214D of the Ordinance was required to be conducted as per
procedure laid down under section 177 of the Income Tax Ordinance, 2001.
However, taxpayers were not subjected to automatic selection and
were ousted from the ambit of section 214D of the Ordinance if they:-
(i) filed their income tax returns suo-moto within:-
·
ninety days of the
time period delineated under section 118 of the Income TaxOrdinance, 2001;
·
or within the time
period extended by the Board or the concerned Commissioner under sections 214A
and 119 of the Income Tax Ordinance, 2001 respectively
(ii) and paid :-
·
25% higher tax as
compared to the previous tax year on the basis of their taxable income; or
·
the higher of 2% of
turnover or normal tax liability alongwith return in cases where return for the
preceding year was not filed or income below taxable limit was declared.
The concept of automatic selection for audit under section 214D
of the Ordinance posed hardship for new taxpayers, desirous of coming within
the fold of the tax net who file their income tax returns after the due date
and mostly upon issuance of notice under section 114.
In order to provide relief to new taxpayers coming within the
fold of the tax net and supplement efforts geared towards broadening of the tax
base, section 214D of the Ordinance has been omitted.
Now the late-filers shall not be subjected to automatic
selection for audit under section 214D of the Ordinance.
However, in order to create a deterrence against late filing of
returns a new section 182A has been inserted through the Finance Act, 2018
whereby a person who fails to file return of income under section 114 of the
Ordinance within the due date as delineated under section 118 of the Income Tax
Ordinance, 2001 or within the date extended by the Board or the concerned
Commissioner under sections 214A and 119 of the Ordinance respectively shall
not be included in the active taxpayers list for the year for which return was
not filed within the due date.
Therefore, a person who is unable to file return within the date
stipulated under section 118 of the Ordinance or within the date extended by
the Board or the concerned Commissioner under sections 214A and 119 of the
Ordinance shall no longer be entitled to appear on the active taxpayers list
for the year for which return of income is not filed within the due date i.e. a
late filer shall no longer be treated as a “file( in terms of section 2(23A) of
the Ordinance as the name of such taxpayer shall no longer appear on the active
taxpayers list issued by the Board.
However, an explanation has also been inserted in section 182A
of the Ordinance whereby it has been clarified that Section 182A of the
Ordinance shall have prospective effect and shall only be applicable for the
returns due for the Tax Year 2018 and onwards for which the first Active
Taxpayers List is to be issued on 1st March, 2019 under the Income Tax Rules,
2002.
Therefore, taxpayers should ensure that their income tax returns
for the Tax Years 2018 and onwards are filed within the due date under section
118 of the Ordinance or the date extended under sections 214A and 119 of the
Ordinance in order to avoid higher rates of withholding taxes across a multitude
of transactions applicable to non-filers viz-a-viz filers.
Prior to the Finance Act, 2018, banking companies were required
to provide to the Board a list containing particulars of deposits aggregating
Rs. 1 million or more during the preceding calendar month. By virtue of
amendments made in section 165A of the Income Tax Ordinance, 2001 through the
Finance Act, 2018 banks are now required to furnish particulars of deposits
aggregating Rs. 10 million or more during the preceding calendar month.
Before the Finance Act, 2018 banks were required to provide a
list of payments made by any person against bills raised in respect of credit
card issued to such person, aggregating to Rs. 100,000/- or more during the
preceding calendar month. Consequent to the Finance Act, 2018 banks are
required to provide list of persons where payments against bills raised in
respect of credit card(s) issued to such person(s) in the preceding calendar
month aggregate to Rs. 200,000/- or more.
Withdrawal of exemption to income of a modaraba engaged in
the manufacturing business [Section 100C (2)(e)]
Certain non-profit organizations, trusts and welfare
institutions as specified in sub-section (2) of section 100C of the Income Tax
Ordinance,2001 are entitled to a tax credit equivalent to 100% of the tax
payable (including minimum and final taxes) upon fulfillment of certain
conditions delineated in sub-section (1) of section 100C of the Ordinance
including filing of income tax return, filing of withholding tax statements,
fulfillments of obligations as a withholding agent, ensuring that
administrative and management expenses does not exceed 15% of the total
receipts etc.
Prior to the passage of the Finance Act, 2018 profit on debt
from scheduled banks constituted one of the incomes entitled to 100% tax credit
under section 100C of the Income Tax Ordinance, 2001.
In order to promote and encourage microfinance banks,
appropriate amendment has been made in clause (e) of sub-section (2) of section
100C of the Ordinance whereby income representing profit on debt from
microfinance banks shall also be entitled to 100% tax credit under section 100C
of the Ordinance upon fulfillment of the conditionalities deleniated in
sub-section (1) of section 100C of the Ordinance.
Collection of advance tax on purchase of property to be made along
with each installment in instances where payments for purchase of property
is made piecemeal [Section 236K]
Prior to the Finance Act, 2018 advance tax on purchase of
immovable property under section 236K of the Income Tax Ordinance, 2001 was
collected at the time of registering, recording or attesting transfer of any
immovable property.
In instances where payments for purchase of property are being
made in installments the purchaser has to bear the entire burden of collection
of such advance tax at the time of transfer of the immovable property.
In order to provide relief to purchasers of
immovable property making payments in installments, advance tax under section
236K of the Ordinance on the purchase of immovable property shall, pursuant to
the Finance Act, 2018 be collected at the time of collecting installments @ 2%
for filers and 4% for non-filers (where the value of immovable property exceeds
Rs.4 Million) along with each installment where the transfer is to be effected
after making payment of all installments of immovable property.
Extension of minimum tax regime to services rendered by
permanent establishments of non-resident persons [Section
152(2B)]
Prior to the Finance Act, 2018 the tax deducted under clause (b)
of subsection (2A) of section 152 of the Ordinance from payments made to
permanent establishments of non-resident persons for provision/rendering of
services was adjustable against their tax liability whereas the tax
deducted/deductible under clause (b) of sub-section (1) of section 153 of the
Ordinance from payments made on account of provision or rendering of services
to resident persons constituted minimum tax in terms of clause (b) of
sub-section (3) of section 153 of the Income Tax Ordinance, 2001.
However, reduced rate of minimum tax @ 2% of the gross amount of
turnover from all sources is available to various specified sectors rendering
services as delineated in clause (94) of Part-IV of the Second Schedule to the
Ordinance.
Therefore prior to the Finance Act, 2018 resident persons
providing or rendering services were in a disadvantageous position viz-a-viz
permanent establishments of non-resident persons involved in the rendering/
provision of services.
In order to create a level playing field for resident persons
rendering services viz-a-viz non-resident persons rendering services a new
sub-section (2B) has been inserted in section 152 of the Income Tax Ordinance,
2001 through the Finance Act, 2018 whereby the tax deducted under clause (b) of
sub-section (2A) of section 152 of the Ordinance in respect of payments made to
permanent establishments of non-residents for provision of services has been
made minimum tax.
Moreover, as stipulated in sub-clauses (i), (ii) and (iii) of
clause (b) of sub-section (3) of section 153 of the Ordinance, a company (being
a permanent establishment of a non-resident person and a filer) rendering
services in the sectors specified in clause (94) of Part-IV of the Second
Schedule to the Ordinance shall be entitled to carry forward excess amount of
minimum tax paid @ 2% of the gross amount of turnover from all sources
viz-a-viz the normal tax liability of such company for a maximum of five tax
years immediately succeeding the year in which the excess was first paid.
Additionally, in a manner akin to a resident company which is
entitled to issuance of an exemption certificate by the Commissioner under
sub-section (4A) of section 153 of the Ordinance upon fulfillment of certain
conditions, a company being a permanent establishment of a non-resident person
and falling within the ambit of clause (94) of Part-I of the Second Schedule to
the Ordinance may also, pursuant to the Finance Act, 2018 be issued an
exemption certificate by the concerned Commissioner for a period of at least
three months subject to making advance payment of tax @ 2% of the total
turnover of the corresponding period of the immediately preceding year.
Stay of recovery by Appellate Tribunal Inland Revenue [Section
131(5)]
The Appellate Tribunal, in terms of sub-section (5) of section
131 of the Income Tax Ordinance, 2001 may, in cases of undue hardship and
pursuant to provision of opportunity of being heard to the Commissioner grant
stay against recovery of tax which has been upheld at the level of the
Commissioner (Appeals) for a period not exceeding 180 days in aggregate.
Through the Finance Act, 2018 a new proviso has been inserted in
sub-section (5) of section 131 of the Income Tax Ordinance, 2001 wherein the
Commissioner has been empowered and accorded the mandate to recover the tax
demand stayed by the Tribunal pursuant to the lapse of stay accorded by the
Appellate Tribunal Inland Revenue for a period aggregating 180 days. In other
words the stay accorded by the Tribunal shall automatically cease to have
effect upon the expiration of 180 days following the date on which the stay
order was made and the Commissioner shall have to right to effect recovery of
tax [upheld at the level of the Commissioner (Appeals)] in respect of a
taxpayer whose appeal is still pending adjudication before the appellate
Tribunal.
Measure s for incentivizind investment in REIT and Collective
Investment Schemes [Division III of Part I and Division I of Part Ill of the
First Schedule’)
(I) Prior to the Finance Act, 2018 the dividend
received by a company from a collective investment scheme, a REIT scheme or a
mutual fund (except a stock fund) was subjected to tax @ 25% for the tax year
2015 onwards under section 5 of the Income Tax Ordinance, 2001. In order to
incentivize investment by companies in collective investment schemes, REIT
schemes and mutual funds, an amendment has been made in the second proviso to
Division III of Part I of the First Schedule to the Income Tax Ordinance, 2001
whereby the rate of tax has been reduced from 25% to 15% in respect of dividend
received by a company from a collective investment scheme, REIT scheme or a
mutual fund (other than a stock fund) .
Similarly, in consonance with the reduction in
the rate of tax on dividend received by a company from a collective investment
scheme, a REIT scheme or a mutual fund under section 5 of the Income Tax
Ordinance, 2001 the tax required to be deducted under section 150 of the Income
Tax Ordinance, 2001 by a collective investment scheme, REIT scheme or mutual
fund upon payment of dividend to a company has also been reduced from 25% to
15% (in case such company is a filer) by making amendment in Division I of Part III to the First Schedule to the
Income Tax, 2001.
However the rate of tax under section 150 of the Ordinance
required to be deducted upon payment of dividend by a collective investment
scheme, REIT scheme or mutual fund to a company, being a nonfiler, has not
witnessed any change and has remained static at 25%.
Prior to the Finance Act, 2018 any person receiving dividend
from a Developmental REIT Scheme set up by 30th June, 2018 (for the purpose of
development and construction of residential buildings) could avail a 50%
reduction in tax for a period of three years with effect from 30th June, 2018
in terms of the third proviso to Division III of Part I of First Schedule to
the Income Tax Ordinance, 2001.
In order to promote and encourage investment in Developmental
REIT Schemes appropriate amendments have been introduced in the third proviso
to Division Ill of Part-I of the First Schedule to the Ordinance through the
Finance Act, 2018 whereby persons receiving dividend from a Developmental REIT
Scheme shall be entitled to a 50% tax reduction if such Developmental REIT
scheme (with the object of development and construction of residential
buildings) is set up by 30th June, 2020.
In addition, 50% tax reduction on dividend received from such
Developmental REIT Schemes would be available for three years from the date of
setting up of such Developmental REIT Scheme.
Corresponding amendments have also been made in the third
proviso to Division I of Park-III of the First Schedule to the Ordinance in
respect of the tax required to be deducted under section 150 of the Income Tax
Ordinance, 2001 on the dividend by a Developmental REIT Scheme (with the
object of development and construction of residential buildings).
Prior to the Finance Act, 2018 the rate of advance tax to be
deducted under section 150 of the Ordinance on payment of dividend by a rental
REIT scheme to an individual as well as an AOP was 12.5% in the case of a filer
and 15% in the case of a non-filer.
In order to incentivize investment by individuals in rental REIT
schemes, a fifth proviso has been added in Division I of Part III of the First
Schedule to the Income Tax Ordinance, 2001 through the Finance Act, 2018
whereby advance tax to be deducted under section 150 of the Ordinance upon
payment of dividend to an individual by a rental REIT Scheme has been reduced
to 7.5% irrespective whether the individual is a filer or a non-filer.
Rates of Tax on Capital Gains emanating from the disposal of
securities for the Tax Year 2019 [Division VII of Part-I of the First
Schedule]
The rates of tax on Capital Gains emanating from the disposal of
securities under section 37A are provided in Division VII of Part I of the
First Schedule.
Through the Finance Act, 2018, the rates of tax applicable for
the tax year 2018 have been extended for the tax year 2019.
Increase in withholding tax rates for non-filers
FBR has consistently espoused the policy of creating a
distinction between compliant and non-compliant taxpayers.
An endeavor has been made o increase the cost of doing business
for non-filers by prescribing higher rates of withholding tax for non-compliant
taxpayers who choose to remain out of the tax net.
Continuing with the same policy the Finance Act, 2018 envisages
a further increase in the withholding tax rates for non-filers in the following
instances:-
(i) Withholding tax on sale of
goods under section 153(1)(a) of the Income Tax Ordinance,
2001 [Sub-paragraph (b), paragraph (1), Division III of Part III
of the First Schedule]
The withholding tax rates on sale of goods to a non-filer under
section 153(1)(a) of the Ordinance have been increased from the existing 7% to
8% in the case of a company, and from the existing 7.75% to 9% in non-corporate
cases through the Finance Act, 2018 as under:-
Person
|
Rats of tax for filers prior to the Finance Act, 2018
|
Rats of tax for non-filers prior to the Finance Act, 2018
|
Rats of tax as per the Finance Act, 2018 for non-filers
|
Company
|
4%
|
7%
|
8%
|
Non-company
|
4.5%
|
7.75%
|
9%
|
(ii) Withholding tax in respect of payments made for execution of
contracts under section 153(1)_(c) of the Income Tax Ordinance, 2001.
[Sub-paragraphs (ii) and (iii), paragraph (3),
Division III of Part III of the First Schedule].
The withholding tax rates applicable to a non-filer under
section 153(1)(c) of the Ordinance upon the execution of a contract have been
increased from the existing 12% to 14% in the case of a company, and from the
existing 12.5% to 15% in non-corporate cases through the Finance Act, 2018 as
under:-
Person
|
Rats of tax for filers prior to the Finance Act, 2018
|
Rats of tax for non-filers prior to the Finance Act, 2018
|
Rats of tax as per the Finance Act, 2018 for non-filers
|
Company
|
7%
|
12%
|
14%
|
Non-company
|
7.5%
|
12.5%
|
15%
|
Advance Tax on functions and gatherings under section 236D of the Income Tax Ordinance, 2001.
[Division XI of Part IV of First Schedule]
As per section 236D of the Income Tax Ordinance, 2001 owners,
lease holders, managers or operators of marriage halls, marquees, hotels,
restaurants, commercial lawns, clubs, community places or any other place used
for such businesses are mandated to collect 5% tax on the total amount of the
bill from a person arranging or holding a function in a marriage hall, marquee,
hotel, restaurant, commercial lawn, club, a community place etc.
Such function(s) may include a wedding related event, seminar,
workshop, session, exhibition, concert, show, party or any other such
gathering.
The persons specified in the foregoing paragraph are also
obliged to collect 5% advance tax from a person arranging or holding functions
as delineated in the aforementioned paragraph in instances where food, service
or any other facility is provided by any other person. The tax collected under
section 236D of the Ordinance is adjustable in nature.
Prior to Finance Act, 2018 the advance tax to be collected on
marriage functions under section 236D of the Ordinance was 5%. An amendment has
been introduced in Division XI of Part IV of the First Schedule through the
Finance Act, 2018 whereby the advance tax collected on marriage functions under
section 236D of the Ordinance shall be the higher of 5% of the total amount of
the bill or Rs.20,000/- per marriage function in cities which are provincial or
divisional headquarters comprising Islamabad, Lahore, Multan, Faisalabad,
Rawalpindi, Gujranwala, Bahawalpur, Sargodha, Sahiwal, Sheikhupura, Dera Ghazi
Khan, Karachi, Hyderabad, Sukkur, Thatta, Larkana, Mirpur Khas, Nawabshah,
Peshawar, Mardan, Abbottabad, Kohat, Dera Ismail Khan, Quetta, Sibi, LoraLai,
Khuzdar, Dera Murad Jamali and Turbat. For the remaining cities in Pakistan the
rate of tax to be collected on marriage functions under section 236D of the
Income Tax Ordinance, 2001 shall be the higher of 5% of the total amount of
bill of the marriage function or Rs.10,000/-per marriage function.
The aforementioned amendment in Division XI of Part IV of the
First Schedule through Finance Act, 2018 has rationalized withholding tax rates
on the basis of cities and in no way increases the liability or the obligation
of the persons arranging or holding marriage functions as the tax collected is
an advance tax and is adjustable against a person’s normal tax liability at the
end of the tax year.
Provisions relating to International Taxation
Various amendments have been introduced through the Finance Act,
2018 regarding international taxation. These include:
(i) Taxation of digital economy
(ii) Taxation of offshore indirect transfers
(iii) Controlled Foreign Company (CFC) Rules
(iv) Strengthening anti-abuse rules
(v) Taking cognizance of unexplained foreign source
income/assets in the tax year prior to the year of discovery.
(vi) Reporting requirements for offshore income and assets
(vii) Rules to restrict artificial avoidance of status of
Permanent Establishment
A separate circular explaining the above provisions is being
issue.
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