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Presentation at the

POST BUDGET SEMINAR-2015Organized by

Karachi Tax Bar AssociationBy

Abdul Qadir Memon

Former President

Pakistan Tax Bar Association

On June 09, 2015

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“Where there is an

Income Tax, the just

man will pay more and

the unjust less on the

same amount of

income”- Plato

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Table of Contents Budget direction Taxation Measures for Capital and Commodity Markets Introduction of one time Super tax Exemption and Incentives for Manufacturing sector Incentives for the construction industries Taxability of Companies providing services Provisions relating to Tax Credits Advance tax on banking transactions otherwise than through cash for non-filers Taxation Regime of Banking Companies Tax on Profit on Debt Definitions of “Consumer Goods” and “Fast Moving Consumer Goods” Withdrawals of Powers to grant Exemptions, tax concessions or amending withholding

provisions Reward to whistleblowers Automatic selection of Retailer for audit Payment to Residents for use of Machinery & Equipment Agreements for the avoidance of double taxation and prevention of fiscal evasion Enhancement of withholding tax rates Filer versus Non-Filer Offences and Penalties

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Create clear difference between filer and non-filer; Measures for broadening of the tax base and

documentation of economy; Increasing the share of the direct taxes; Incentives for Agriculture Sector; Incentives for Construction /Housing Sectors; Incentives for Manufacturing sector; Relief measures for Khyber Paktunkhawa; Withdrawal of Powers to issue concessionary SROs.

Budget Direction

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Taxation Measures for Capital and Commodity Markets

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Tax on undistributed Reserves Tax on undistributed reserves shall be imposed

at the rate of ten percent, on every public company other than a scheduled bank or a modaraba, that derives profits for a tax year but does not distribute cash dividends within six months of the end of the said tax year or distributes dividends to such an extent that its reserves, after such distribution, are in excess of hundred percent of its paid up capital, so much of its reserves as exceed hundred per cent of its paid up capital shall be treated as income of the said company.

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Tax on undistributed Reserves

The ‘reserves’ includes amount set-aside out of revenue or other surpluses excluding capital reserves, share premium reserves and reserves required to be created under any law, rule or regulation.

The tax on undistributed reserves is also payable for the tax year 2015 and the taxpayers who have special tax year and have already closed their financial statements would also be required to pay the aforesaid tax.

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Where Holding period of a security is

Tax year 2014

Tax year 2015

Tax year 2016 proposed by Finance Bill

Less than twelve months 8% 12.5% 15%Twelve months or more but less than twenty-four months

0% 10.0% 12.5%

Twenty –four months or more but lessthan four years

0% 0% 7.5%

Provided that the rate for companies in respect of debt securities shall be taxed at the normal corporate rate, as specified in Division II of Part I of First Schedule to the Ordinance. Similar amendments have also been proposed in Rule (6B) of the Fourth Schedule

Capital Gains on disposal of Securities including Debt

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Capital Gains on disposal of securities including Debt That a mutual fund or a collective investment

scheme or a REIT scheme shall deduct Capital Gains Tax at the rates as specified below, on redemption of securities as prescribed, namely

Category Filer Non-Filer

Individual and association of persons

10% for stock fund 17.5%10% for other

Individual and association of persons

10% for stock fund 25%25% for others

Provided further that in case of a stock fund if dividend receipts of the fund are less than capital gains, the rate of tax deduction shall be 12.5%

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Tax credit for investment in shares and insurance At present, Section 62 of the Ordinance provides tax credit for

investment in shares and insurance up to a maximum threshold is Rs. 1 million. The Finance Bill now seeks to enhance the maximum threshold up to Rs.1.5 million in order to further encourage the investment in shares and insurance.

Tax credit for enlistment At present, Section 65C provides tax credit at the rate of

15% of the tax payable for the year of a company which opts for enlistment in any registered stock exchange in Pakistan in the tax year in which the company is enlisted. The Finance Bill now proposes to enhance the tax credit from 15% to 20% of the tax payable for the year.

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Collection of tax by Pakistan Mercantile Exchange Ltd In order to bring the transaction of sale and purchase of

commodities through Pakistan Mercantile Exchange Limited (PMEX)at par with equity transactions at the stock exchanges of Pakistan amendments have been proposed the Finance bill to add clause (42A) in Section 2 defining “PMEX” and Section 236T for collection of following tax by the PMEX :- 

S.N0

Nature of Transaction Rate of withholding

1 in case of sale or purchase of future commodity contract as per clause (a) and (b) of sub-section (1) of section 236T

0.1% of value of sale or purchase contract

2 in case of sale or purchase of future commodity contract as per clause (c) and (d) of sub-section (1) of section 236T in lieu of tax on the commission earned by such members

0.1% of value of sale or purchase contract

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Dividend Income

Tax rate on dividend for non-filer has increased from 15% to 17.5% of which 7.5% shall continue to be adjustable. Dividend from stock funds shall be taxable at the rate of 15% instead of 12.5%. The reduced rate of tax of 7.5% applicable to dividends paid by certain specified companies remains unchanged.

For Mutual Funds, existing rate of 10% shall continue

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Super tax for rehabilitation of temporarily displaced persons

“Imputable Income” in relation to an amount subject to final tax means the income which would have resulted in the same tax, had this amount not been subject to final tax;”

The Super Tax would be payable along with Return for the tax year 2015 on the date the return is to be filed by a person.

Furthermore, it is also provided that the proceedings for recovery, penalty and default surcharge in respect of Super Tax would be taken by the Commissioner in similar manner as provided for the recovery, penalty and default surcharge of tax in the Ordinance.

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Super tax for rehabilitation of temporarily displaced persons

The one time for the tax year 2015 Super Tax is proposed to be levied as follows:-

Banking Company at the rate of 4% of the income; or Persons, other than a banking company, having income

equal to or exceeding Rs.500 million at the rate of 3% of the income.

The income for this purpose shall be the sum of:-I. Profit on debt, dividend, capital gains, brokerage and

commission;II. Taxable income under section (9);III. Imputable income as defined in Clause (28A) of Section 2;

and iv) Income computed under Fourth, Fifth, Seventh and Eighth Schedule.

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Exemption and Incentives for Manufacturing sector

Industrial undertaking engaged in the manufacturing of plant, machinery, equipments and items dedicatedly used for generation of renewable energy from solar, wind and like sources [Clause (126I)].

Industrial undertaking engaged in operating warehousing or cold change facilities for storage of agriculture produce [Clause (126J)].

Industrial undertaking engaged in operating halal meat production, which has obtained halal certification [Clause (126K)].

Manufacturing unit set up in Khyber Pukhtukhwa Province irrespective of specific product [Clause (126L)].

Taxpayers from a transmission line project [Clause (126M)].

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Exemption and Incentives for Manufacturing sector

In order to generate employment and job opportunities in the country the Bill proposes to allow tax credit to the new manufacturing units setup between 01/07/2015 to 30/06/2018 @ 1% for every 50 employees registered with EOBI and Social Securities institutions in their respective provinces subject to following conditions:-

1. The company must be incorporated and the unit is setup between 01/07/2015 to 30/06/2018.

2. Number of employees should be more than 50 and they are registered with EOBI and SSI.

3. The unit is managed by the company formed under the Companies Ordinance and its registered office is situated in Pakistan.

4. The unit is not establish by splitting up or reconstruction or reconstitution or transfer of machinery of plant from undertaking already established in Pakistan before 01/07/2015.

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Incentives for Construction and Housing Sectors

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Minimum Tax on Builders and Developers Through the Finance Act, 2013, Sections 113A and

113B were inserted. According to these sections the Federal Government had to notify in official Gazette the rates of tax, mode, and time of payment of amount of tax. After lapse of about two years such notification has not been issued by the Government therefore these sections are not effective so far.

The bill now proposes that section 113A in respect of Minimum Tax on Builders shall not have effect till 30th

June-2018; however tax @ 2% of the value of land notify by any authority for the purpose of stamp duty shall be charged for the purpose of section 113B being minimum tax on land developers

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Taxability of RIET Schemes At present, Clause (99A) provides that the profit and gains

accruing to a person on sale of immovable property to a REIT Scheme are exempt from tax up to 30th June, 2015. The Finance Bill proposes to insert a proviso in aforesaid Clause to exempt profit and gains on sale of property to a Developmental REIT Scheme with the object of development and construction of residential building up to 30th June, 2020.

It is to be noted that Developmental REIT Scheme as defined under clause (17D) of section (2) of the Ordinance read with Real Estate Investment Trust Regulations, 2015 means a REIT Scheme established for investment in Real Estate with the object of development, construction and refurbishment of such real estate for industrial, commercial, residential or a combination thereof. However, the benefit is only provided to a REIT Scheme for development and construction of residential buildings.

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Taxability of Companies providing services

In the wake of controversial clarification, subsequent insertion of Clause (79) in Part IV of the Second Schedule, decisions of the Honorable Appellate Tribunal Inland Revenue and Honorable the Federal Tax Ombudsman in respect of taxability of companies providing services under section 153(1)(b) ; the Finance Bill proposes to substitute the proviso to sub-section (3) of section 153 to clarify that tax deductible on transactions referred to in clause (b) of sub-section (1) of section 153 shall be (i) adjustable, with effect from tax year 2009, if payments are received by a company and (ii) a minimum tax, if payments are received by a person other than a company.”

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Provisions relating to Tax Credits

Presently, Section 65B, 65D and 65E provides tax credits for investments in industrial undertakings against tax payable including minimum tax u/s. 113 and final tax payable u/s. 169. But, the tax department disagrees to allow this credit due to the reason that corresponding amendment were not proposed in Section 113 and 169. Although, FBR has already issued clarification in this regard, but to remove any ambiguity, the Bill proposes to insert sub-section (6). After proposed amendment, the provisions of Section 113(1)(d) and 169(2)(d) shall not apply while calculating the tax credit in eligible cases.

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Advance tax on banking transactions otherwise than through cash for non-filers

Every banking company shall collect advance adjustable tax at the time of sale of any instrument, including demand draft, pay order, special deposit receipt, cash deposit receipt, short term deposit receipt, call deposit receipt, rupee traveller’s cheque or any other instrument of such nature and at the time of transfer of any sum through cheque or clearing, interbank or intra bank transfers through cheques, online transfer, telegraphic transfer, mail transfer, direct debit, payments through internet, payments through mobile phones, account to account funds transfer, third party account to account funds transfers, real time account to account funds transfer, real time third party account to account fund transfer, automated teller machine (ATM) transfers, or any other mode of electronic or paper based funds transfer. As per Sub-Section 4 the advance tax shall not be collected in the case of Pakistan Real-time interbank settlement mechanism (PRISM) transactions or payments made for Federal, Provincial or Local Government Taxes.

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Taxation Regime of Banking Companies Currently under Rule (6) read with Rule [(6A) related to

apportionment of expenses] of the Seventh Schedule different type of Banking incomes are being taxed at the following rates :-

Nature of Income Present Rates

Business Income 35%Dividend (After admissibility of expenditure under Rule (6A)

10%

Capital Gains(After admissibility of expenditure under Rule (6A)

As per schedule

Dividend from its Assets Management Company 20%Dividend received from Money Market & Income Funds

25%

The Finance Bill proposes to omit the aforesaid Rules and propose to insert Rule (7B) Rule (7C) whereby the Capital Gains and Dividends would be taxed at the rate of 35%.

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Tax on Profit on Debt The Finance Bill seeks to insert Section 7B;

whereby, the receipt from profit on debt is proposed to be taxed as a separate block of income received from the following withholding agents under Section 151 of the Ordinance:- National Savings and Post Office; Banking company or Financial institution; Federal Government, Provincial Government or Local

Government; or A banking company, a financial institution, a Company

referred to in section 80(2)(b)(i)/(ii) or a Finance Society.

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Tax on Profit on Debt Sub-Section (1) of Section 7B proposes that the tax at

different rate is to be imposed ranging from 10% to 15% in the following manner and tax so deducted under section 151 of the Ordinance shall be adjusted accordingly:-

S.NO Profit on Debt Rate of tax

1 Where profit on debt does notExceed Rs 25,000,000

10%

2 Where profit on debt exceedsRs 25,000,000 but does not Exceed Rs 50,000,000

2,500,000 + 12.5% of the amount exceedingRs 25,000,000

3 Where profit on debt exceedsRs 50,000,000

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

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Definitions of “Consumer Goods” and “Fast Moving Consumer Goods”

Recently, the Income Tax Appellate Tribunal, Lahore in Appeal numbers 1203, 1204 & 1205/LB/2014 (Tax Years 2011 to 2014) defined ‘FMCG’ and held that steel re-rolling products qualify as ‘FMCG’. The Finance Bill seeks to resolve the settle the unnecessary interpretation of the definition of ‘FMCGs’ and defined terms “Consumer Goods” as goods that are consumed by the end consumer rather than used in the production of another good and “Fast Moving Consumer Goods” (FMCG) as consumer goods which are supplied in retail marketing as per daily demand of a consumer. Division IX of Part I of the First Schedule provides that minimum tax shall be computed at the rate of 0.2% of the turnover for the year in the case of distributors of consumer goods including fast moving consumer goods.

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Withhdrawals of Powers to grant Exemptions,tax concessions or amending withholding provisions

The Bill proposes to take away the powers of the Federal Government or the Federal Board of Revenue to grant exemptions & tax concessions in the Second Schedule, amend the rates of withholding tax, exempt persons, classes of persons, goods or classes of goods from withholding tax except where an approval has been received from the Economic Coordination Committee of the Cabinet, whenever circumstances exist to take immediate action for the purpose of national security, natural disaster, national food security in emergency situations, protection of national economic interest in situations arising out of abnormal fluctuation in international commodity prices, removal of anomalies in taxes, development of backward areas and implementation of bilateral and multilateral agreements.

It is also proposed that after the promulgation of Finance Act, 2015,

any notification issued under sub-section (2) shall, if not earlier rescinded, stand rescinded on the expiry of the financial year in which it was issued.

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Reward to whistleblowers The Finance Bill proposed to insert section 227B;

whereby the Board may sanction reward to whistleblowers in cases of concealment or evasion of income tax, fraud, corruption or misconduct providing credible information leading to such detection of tax. However the claim of reward of the whistleblowers shall be rejected due to following reasons: The information provided is of no value; The Board already had the information; The information was available in public records; or No collection of taxes is made from the information provided

from which the Board can pay the reward. The Board will prescribe the procedure in this behalf

and also specify the apportionment of reward sanctioned for whistleblowers under this section.

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Automatic selection for auditIt is proposed that retailers who are registered under Rules (4) and (6) of the Sales Tax Special Procedure Rules, 2007 would be automatically selected for audit if they do not fulfill the following conditions- His name appears in the sales tax active taxpayers’ list ; Complete return of income within the meaning of section

114(2) read with section 118 has been filed within due date including extended date;

Tax along with return under section 137(1) has been paid; In case of filing below taxable return or in the preceding tax

year return was either not filed or declared income below taxable limit; and

In case of declaring taxable income in preceding year he should pay 25% higher tax than that of paid in preceding year.

However, this section shall be effective from the date announced by the Board through notification.

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Payment to Residents for use of Machinery & Equipment

At present, income from the lease of any building together with plant and machinery is charged to tax under the head income from other sources and no tax is deductible on lease of machinery only. The Bill proposes to insert Section 236Q to impose withholding tax @ 10% on payments for use or right to use industrial, commercial and scientific equipment and rent of machinery. The tax so deducted shall be final tax in the hand of recipient.

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Agreements for the avoidance of double taxation and prevention of fiscal evasion

The Finance Bill proposes to empower the Federal Government to enter into an agreement, bilateral or multilateral with the government or governments of foreign countries or tax jurisdictions for the avoidance of double taxation and the prevention of fiscal evasion and exchange of information including automatic exchange of information with respect to taxes on income. The amendments appears to have been proposed in the wake of recent legislations like FATCA.

The Bill also seeks to give powers to the Board to obtain and collect information when solicited by another country under such agreements.

The Bill also proposes to insert Section 165B to obtain information from financial institution in respect of non-residents. Similarly, corresponding amendments have also been proposed in Section 176(1)(a) to give powers to the Commissioner Inland Revenue to obtain such information.

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Enhancement of withholding tax rates

Nature of Receipt Section Existing Rates

Proposed Rates

Subscriber of internet prepaid internet card or units through any electronic medium 236 - 14%

Purchase of international air ticket (per person first class / per person other than first class excluding economy)

236L 4% Rs.16,000/ Rs.12,000

Payment to resident for right to use industrial, commercial and scientific equipment & rent of machinery 236Q - 10%

On remittance of education related expenses abroad 236R - 5%

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Filer Versus Non-FilerNature of Receipt

Section Existing Rates

Proposed Rates

Filer

Non-Filer

Filer

Non-Filer

Imports of Gold and Cotton 148

5.5%&

6.0%8% & 9% 1% 1.5%

Dividend by companies other than power projects

150 10% 15% 10% 17.5%

Profit on debt exceeding Rs.500,000 151 10% 15% 10% 17.5%

Sale of goods by company being PE of NR

152(2A) 3.5% 3.5% 4% 6%

Sale of goods by other than company being PE of NR

152(2A) 3.5% 3.5% 4.5% 6.5%

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Filer Versus Non-FilerNature of Receipt Sectio

nExisting Rates

Proposed Rates

Filer Non-Filer Filer Non-Filer

Services rendered by company being PE of NR 152(2A) 6% 6% 8% 12%

Services rendered (excluding transporters) by other than company being PE of NR

152(2A) 6% 6% 10% 15%

Execution of contract by company being PE of NR 152(2A) 6% 6% 7% 10%

Execution of contract by other than company being PE of NR 152(2A) 6% 6% 7.5% 10%

Sale of goods by a company 153 4% 4% 4% 6%Sale of goods by other than a company 153 4.5% 4.5% 4.5% 6.5%

Execution of contracts by company 153 7% 7% 7% 10%

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Filer Versus Non-Filer

Nature of Receipt Section Existing Rates Proposed Rates

Filer Non-Filer

Filer Non-Filer

Commission / discount to petrol pump operator 156A 12% 12% 12% 15%

Cash withdrawals in excess of Rs.50,000 231A 0.3% 0.5% 0.3% 0.6%

Transactions in banks 231AA 0.3% 0.3% 0.3% 0.6%Transfer of registration or ownership of motor vehicle 231B

10,000 To

250,000

10,000To

450,000

NIL To

62,500

5,000To

300,000Brokerage & commission other than advertising 233 12% 12% 12% 15%

Commission / discount to petrol pump operator 156A 12% 12% 12% 15%

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Filer Versus Non-FilerNature of Receipt Sectio

n Existing Rates Proposed Rates

Filer Non-Filer Filer Non-Filer

Brokerage & commission on advertising 233 7.5% 7.5% 10% 15%Collection of advance tax along with motor vehicle tax with engine capacity from up to 1000cc to 2000cc and above

2341,000

To12,000

1,000 To

24,000

800 To

10,000

1,200 To

30,000Sale of immoveable property from seller 236C 0.5% 1% 0.5% 1%

Sales of Electronic, Sugar, Cement, Iron & Steel products, Fertilizer, Motorcycles, Pesticides, Cigarette’s, Glass, Textile, Beverages, Paint or Foam Sector to distributors, dealers and wholesalers

236G

Fertilizer0.2%

Fertilizer0.4%

Fertilizer

0.7%Fertilizer

1.4%

Other than

Fertilizer0.1%

Other than

Fertilizer0.2%

Other than

Fertilizer

0.1%

Other than Fertilizer

0.2%

Specified transaction in bank by non-filers exceeding Rs.50,000/- in a day 236P - - - 0.6%

Dividend in specie 236S - - 10% 17.5%

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Offences and PenaltiesS.

No.Offences Section of the

Ordinance which offence has reference

Existing Proposed

1A Where any person fails to furnish a

statement as required

under Section 115, 165 or 165A within the due date

115, 165 and 165A

Such person shall pay a penalty of

Rs.2,500/- for each day of

default subject for a minimum penalty of fifty

thousand rupees

Shall pay a penalty of

Rs.2,500/- for each day of

default subject to a minimum penalty of Ten

Thousand rupees.

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Offences and Penalties

S. No.

Offences Section of the Ordinance

which offence has reference

Existing Proposed

1AA Where any person fails to furnish Wealth Statement or

Wealth Reconciliation

Statement

114, 115 and 116

Such person shall pay a

Rs.100/- for each day of

default

Such person shall pay a 0.1% of the

taxable income per

week or Rs.20,000/-, whichever is

higher

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Thank you and God bless you all