11A. Qadir & Company

Presentation at the

Organized by

Karachi Tax Bar Association

by

Former PresidentPakistan Tax Bar Association

On June 07, 2014

Budget direction Filer Versus Non-Filer Enhancement of Tax Rates Withdrawal of Concession/ Exemptions Widening of Scope of withholding tax for Broadening

of Tax Base Minimum Tax on certain persons Concept of Alternative Corporate Tax Rationalization of Taxation for Capital Market Incentives for setting up of Industrial Undertaking &

Others Appointment of Member of the Appellate Tribunal Opting out of Final Tax Regime Income Support Levy.

Create clear difference between taxpayer and non-taxpayer;

Broadening through introduction of new withholding tax regime;

Plug Loopholes;Share of Direct Taxation shall increase from 36.5% to

37.5%;Withdrawal of concessions of over Rs. 100 Billion;Exemptions to infrastructure related industrial

undertakings;Exemptions to industrial undertakings set up with FDI;Incentivize export and textile sectors; and Rationalization of taxation for capital market.

Concept of filer and non filer has been introduced by inserting new Clauses (23A) and (35C) in Section 2 of the Ordinance; whereby it has been defined as under:-

“Filer” means a taxpayer whose name appears in the active taxpayers’ list issued by the Board from time to time or is holder of a taxpayer’s card; and

“Non-filer” means a person who is not a filer.

Nature of Receipt Section Existing Rate

Proposed Rates

Filer Non-Filer

Dividend 150 10% 10% 15%

Profit on debt not exceeding Rs. 500,000

151 10% 10% 10%

Profit on debt exceeding Rs.500,000 151 10% 10% 15%

Cash withdrawal 231A 0.3% 0.3% 0.5%

Registration of new locally manufactured motor vehicle, transfer of registration or ownership of a private motor vehicle and sale of motor car and jeep with engine capacity below 850cc to 3000cc and above

231B Various rates

Rs. 10,000/-

to150,000

Various rates

Rs. 10,000/-

to250,000

Various rates

Rs. 10,000/-

to450,000

International first / business /club class travel

236L NIL 3% 6%

Nature of Receipt Section Existing Rate

Proposed Rates

Filer Non-Filer

Collection of advance tax from other private motor cars alongwith motor vehicle tax with engine capacity from 850cc to 2000cc and above .

234 Various rates

750/- to8,000/-

Various rates

Rs. 1,000/- to

12,000/-

Various rates

Rs. 1,000/- to

24,000/-

Collection of advance tax where motor vehicletax is collected in lump sum

234 7,500/- to

80,000/-

10,000/- to120,000/-

10,000/- to240,000/-

Sale of immovable property from seller

236C 0.5% 0.5% 1%

Purchase of immovable property by buyer ifpurchase value is more than Rs. 3 million

236K NIL 1% 2%

Particulars Companies Other TaxpayersExisting

RateProposed

RateExisting

RateProposed

RateSale of Goods 3.5% 4% 4% 4.5%Rendering of or providing of Services

6% 8% 7% 10%

Execution of Contract 6% 7% 6.5 % 7.5%Export Oriented Services 0.5% 1% 0.5% 1%Commission or discount on Petrol Pumps

10% 12% 10% 12%

Commission or Brokerage other than Advertising

10% 12% 10% 12%

Commission paid to Advertising Agents

5% 7.5% 5% 7.5%

Mandatory to obtain National Tax Number 181AA has been proposed to be inserted in view of current efforts of the Federal Government to enlarge the tax base of the country and bring up the tax to GDP ratio. It is proposed to be made mandatory for a person to obtain National Tax Number first before getting new commercial or industrial connection of electricity or natural gas. The new section intends to impose embargo on processing of application and providing of such connections. We are of the view that FBR should revisit the procedural requirements or SOP for issuance of NTN as the current procedure already requires number of electricity meter and last paid bill of electricity/utility along with application for NTN.

Rice Exporters Association Presently, the Rice Exporters Association of Pakistan (REAP) is entitled to reduce rates of tax deduction under Section 153(1)(a) of the Ordinance on sale of rice to Utility Stores Corporation (USC) in accordance with the specified agreements signed with the Ministry of Food, Agriculture and Livestock. The Finance Bill proposes to omit Clauses (13HH) and (13HHH) of Part II of the Second Schedule in order to withdraw the concession allowed to REAP. Now the supplies of rice to USC by REAP will be subject to withholding of tax at normal rates.

Foreign News Agencies Presently, the payments to foreign news agencies, syndicate services and non-resident contributors are exempt from withholding of tax under Section 152 of the Ordinance. Though the payment is exempt from withholding of tax at source, the Pakistan-source income of aforesaid organizations is not exempt. It was alleged by the tax authorities that due to exemption, their income escaped to have been properly taxed. The Finance Bill proposes to omit Clause (41B) of Part IV of the Second Schedule to bring the aforesaid organizations or their local agents under tax net in order to broaden the tax base. Companies Operating Trading HouseThe Finance Bill has proposed to insert explanation to clarify that exemption from the application of provision of section 153 is available as a recipient and not as withholding agent.

Nature of Receipt/Transaction Section Rate of TaxFiler Non-

FilerContract signed by a Sportsperson 153(1)(c) 10% 10%

Director Fee 149 (3)(4) 20% 20%

Registration of new locally manufactured motor vehicle, transfer of registration or ownership of a private motor vehicle and sale of motor vehicle and jeep with engine capacity below 850cc to 3000cc and above.

231B Various rates

Rs. 10,000/-

to250,000

Various rates

Rs. 10,000/-

to450,000

International first / business class travel 236L 3% 6%

Purchase of immovable property by buyer if purchase value is more than Rs. 3 million

236K 1% 2%

Domestic Electricity Bill, exceeding monthly bill of Rs.100,000/-

235A 7.5% 7.5%

Presently, under section 113 minimum tax at the rate of 1% of the declared turnover is applicable to every company and individual or association of persons having annual turnover of Rs.50 million or more, where there is no tax payable or tax so payable is less than the minimum tax computed at the rate of 1% of the declared turnover. The taxpayers are also allowed to carry forward minimum tax in next five years and set-off the same against the normal income tax in that year(s).

The provisions of Clauses (7), (8), (9), (10), (12), (13), (14) and (15) of Part III of the Second Schedule provides reduction of minimum tax rates applicable to specified class of taxpayers. The Finance Bill seeks to consolidate the minimum tax rate including reduced rates in Division IX of Part I of the First Schedule to the Ordinance for more clarity and easy referencing and omit the aforesaid clauses.

The above consolidation has resulted in the following changes:-

Presently, the distributors of consumer goods including fast moving consumer goods are entitled to a reduction of 80% of minimum tax as computed under Section 113 of the Ordinance. The said benefit appears to be withdrawn. Presently, distributors of cigarettes manufactured in Pakistan are entitled to reduction of 80% of minimum tax as computed under Section 113 of the Ordinance. The words “manufactured in Pakistan” have not been specified under the division, meaning thereby that benefit is also extended to distributors of cigarettes including imported cigarettes.

Moreover Certain exemptions from application of minimum tax provided under clauses (11A), (16), (19) and (57) of Part IV of the Second Schedule to the Ordinance and where a company declare gross loss before set-off of depreciation will remain available to such taxpayers.

The law of Alternative Minimum Tax is prevailing in USA and India. It is parallel computation of tax mechanism in the same universe. It was believed through AMT by the legislators that use of certain tax incentives by profitable companies to either eliminate or substantially reduce income taxes could be restricted. The Finance Bill seems to borrow the same concept; whereby a company in Pakistan, except insurance companies, companies engaged in exploration and production of petroleum and banking companies, would be subject to Alternative Corporate Tax (“ACT”) at the rate of 17% on their accounting income under section 113C subject to the conditions laid down under the new section.

The definitions of “Accounting Income”, “Alternate Corporate Tax” and “Corporate Tax” have been provided to avoid confusion. The following classes of income shall be excluded from the ambit of accounting income for the purpose of ACT:-•Exempt income;•Capital gains on specified securities;•Income subject to final taxation derived from imports, dividends, supplies, contract receipts, various specified services to exporters, exports, prize & winnings and brokerage & commission; and •Income subject to tax credit under section 65D and 65E.

•Tax credits in respect of extension, expansion, balancing, modernization and replacement of the plant and machinery shall be allowed against ACT.•Expenses shall be apportioned for determining the Accounting Income and amount treated as taxable income.•The higher of corporate tax or ACT will be payable by the company for a tax year; however, excess ACT for the year shall be carried forward and adjusted against tax payable for immediately succeeding ten years. •The Commissioner is authorized to make adjustments to compute Accounting Income as per historical accounting pattern excluding share from associates recognized under equity method of accounting after providing an opportunity of being heard.

Capital Gains on disposal of Securities including Debt Securities Holding period Tax

year 2014

Tax year 2015

already prescribed

Tax year 2015

proposed by Finance

Bill

Less than six months 10% 17.5% 12.5%More than six months but less than twelve months.

8% 9.5% 12.5%

Twelve months or more but less than twentyfour months

0% 0% 10%

Twenty four months or more

0% 0% 0%

Exemptions of Income of Collective Investment Scheme or a REIT SchemePresently any income derived by a Collective Investments Scheme or REIT scheme is exempt from tax, if ninety percent of its accounting profits for the year, as reduced by capital gains, whether realized or unrealized, is distributed amongst the unit or certificate holders or shareholders as the case may be.

Few of the Collective Investments Scheme distributed profits through bonus shares which was disputed by the tax department and exemption was denied.

The Bill proposes to insert proviso in Clause (99) of Part I of the Second Schedule whereby for the purpose of determining distribution of at least 90% of accounting income, the income distributed through bonus shares, units or certificates as the case may be, shall not be taken into account.

Taxability of Bonus ShareThe scope of ‘income’ as defined in Section 2(29) has now been extended to include ‘Bonus Shares’ issued by the companies. The mechanism of tax collection has been proposed by inserting new section 236M to the Ordinance as under: Every person issuing bonus shares to a shareholder of the company, shall collect tax at the rate of five per cent on the value of the bonus shares determined on the basis of day-end price on the first day of closure of books; and

The company issuing bonus shares shall make adequate arrangements for collection of such tax and tax so collected under this section shall be a final tax on the income of the shareholder of the company arising from issuance of bonus shares .

Withholding of tax on Capital Gain arises on disposal of Securities from “Foreign Institutional Investors”.Presently under section 100B Capital gains on disposal of securities and tax thereon, is computed, determined, collected and deposited by the NCCPL in accordance with the rules laid down in the Eighth Schedule; other than the (a) a mutual fund; (b) a banking company, a non-banking finance company and an insurance company subject to tax under the Fourth Schedule; (c) a modaraba; (d) a “foreign institutional investor” being a person registered with NCCPL as a foreign institutional investor; and (e) any other person or class of persons notified by the Board.The Bill now proposes to withdraw the exclusion of “foreign institutional investor” from withholding of tax on Capital Gain by the NCCPL.

Exemption to China Overseas Ports Holding Company LimitedPresently, exemption for income is provided to the entities namely, Gwadar Free Zone Company Limited, PSA Gwadar International Terminal Limited, Gwadar Marine Services Limited and PSA Gwadar PTE Limited. We understand that the Gwadar port operations have been acquired by China Overseas Ports Holding Company Limited. Now, the Finance Bill proposes to extend the same exemption to China Overseas Ports Holding Company Limited for the remaining period by inserting Clause (126A) in Part I of the Second Schedule. Fruit Processing or Preservation Unit The Finance Bill propose to insert Clause (126H) to provide exemption for profits and gains derived from a fruit processing or preservation unit for a period of five years provided that such unit is set up in Balochistan Province, Malakand Division, Gilgit-Baltistan and FATA between 01.07.2014 to 30.06.2017.

Industries Set-up with FDI The Finance Bill propose to insert Clause (18A) to provide reduced rate of tax at 20% for a company setting up an industrial undertaking for a period of five years provided that it is set up between the first day of July, 2014 to the thirtieth day of June, 2017 and Fifty percent of the cost of project including working capital is through owner foreign direct investment.Coal Mining Projects in Sindh The Finance Bill proposes to insert Clause (132B) in Part I of Second Schedule to provide exemption for profits and gains derived from coal mining projects in Sindh, supplying coal exclusively to power generation projects. The above projects are also proposed to be exempt from levy of minimum tax under Section 113 of the Ordinance as per proposed insertion in Clause (11A)(v) of Part IV of the Second Schedule

Prior to the Finance Act, 2013 persons who have exercised the powers of a District Judge or have been an advocate of a High Court or were qualified to be a Judge of a High Court and eligible to be appointed as judicial member of the ATIR. However the Finance Act, 2013 amended section 130 of the Ordinance; whereby an officer of Inland Revenue Services in BS-20 and is a law graduate can be appointed as Judicial Member of the ATIR. The ATIR is the last forum on finding of the facts of matter of the appellant.

The tax bars, professional bodies like ICAP and ICMA, chambers, experts and taxpayers agitated against this amendment and pointed out that the said amendment is in violation of following Para 5 of the National Judicial Policy, 2009.

“All Special Courts/Tribunals under the administrative control of Executive must be placed under the control and supervision of the judiciary” The Honorable Supreme Court in Government of Baluchistan Vs Azizullah Memon, PLD 1993 SC 31 has categorically held that "Separation of judiciary from executive is the cornerstone of independence of judiciary". This applies equally to ATIR. To dispense fair justice and equity the FBR should consider not to recommend both the Accountant and Judicial Members to review its own revenue order.

The aforesaid issue of uncalled for amendments made through the Finance Act, 2012 and 2013 was raised by the representative of PTBA alongwith other Professional associations during the last Tax Advisory Council meeting; wherein the Honourable Finance Minister given his consent to incorporate the agreed proposal made by the PTBA and other Professional associations. But once again appropriate amendment could not be proposed in the above section in the present Budget. The Senate of Pakistan in the current session passed the following proposal through Services Tribunals (Amendment) Act, 2014:-“The Services Tribunal Bill seeks to bring appointments of tribunal members in line with procedures followed for appointments to the judiciary, making the tribunals financially autonomous and empowering them to implement their decisions.”We strongly feel that the same principle should be applied for the ATIR and Customs Tribunal as well.

Class of Taxpayer / Description of Transaction

Minimum tax liability should not be less thanTax Year 2014 Tax Year 2015

Companies Other than Companies

Commercial Importer 60% of tax collected at import stage

5.5% of the value of Imports

6% of the value of Imports

Sale of Goods 70% of tax deducted at source on such

sales

3.5% of the gross amount of such sales

4% of the gross amount of such sales

Exports and Indenting commission

50% of tax collected at the time of

realization of Export and indenting commission

proceeds

Not eligible to opt out for normal tax

regime

Not eligible to opt out for normal tax

regime

Class of Taxpayer / Description of Transaction

Minimum tax liability should not be less thanTax Year 2014 Tax Year 2015

Companies Other than Companies

ContractsNot eligible to opt out for normal tax regime

6% of Contract Receipts

6.5% of Contract Receipts

Services provided to Exporter and Export House

Not eligible to opt out for normal tax regime

0.5% of the gross amount of Services

Received

0.5% of the gross amount of

Services Received

Petrol Pump Operators

Not eligible to opt out for normal tax regime

10% of the Commission or

Discount Received

10% of the Commission or

Discount Received

Commission AgentsNot eligible to opt out for normal tax regime

10% of Brokerage or Commission

10% of Brokerage or Commission

The Finance Act 2013 introduced Income Support Levy Act, 2013 (ISL) effective from tax year 2013. It was chargeable to the individuals @ 0.5% on net value of moveable wealth exceeding Rs.1,000,000/- on the last date of the tax year and was payable along with wealth statement. The aforesaid levy was challenged on various grounds including the very purpose of the levy and discriminatory in nature. The Hon’ble Sindh High Court while admitted the CP D-3757/2013 for regular hearing, it has ordered that the respondents be allowed to file their tax returns manually, without filing the ISL proforma and payment thereof vide order dated 10 October 2013 .

Subsequent to the above order, the Hon’ble Sindh High Court on similar CPs filed by other taxpayers vide its order dated 22 October 2013 admitted all the aforesaid CPs and held that the interim order passed in C.P.D. No.3757 of 2013 on 10.10.2013 in the following terms shall also operate in the instant petitions and shall also apply in the case of other taxpayers as well to maintain uniformity and to avoid any confusion and inconvenience to the taxpayers at large.

The impugned order was challenged by the FBR on the ground that through an interim order the provisions of law (statute) to which presumption of constitutionality is attached cannot be rendered ineffective and nugatory, directly or indirectly placing reliance on the judgment reported as PLD 1989 SC 61. The Hon’ble Supreme Court of Pakistan suspended the operation of the CP D-3757/2013. Since the Hon’ble Supreme Court of Pakistan has not suspended the operation of the order dated 22 October 2013 being an “order in rem” which operates for all taxpayers whether they have filed the CPs or not challenging the levy of ISL; therefore it was viewed that an “order in rem” still holds the field irrespective of the interim order of the Hon’ble Supreme Court dated 20 November 2013. It was also argued from number of professionals, financial and mercantile associations to withdraw the aforesaid levy. Therefore, the Bill now proposes to repealed the Income Support Levy Act, 2013.