Tax Memorandum 2011

8/6/2019 Tax Memorandum 2011

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Finance Bill 2011

This Memorandum summarizes an overview of economy for the year 2010-2011 and the

important changes proposed through the Finance Bill 2011. It contains comments on the budgetand on the Finance Bill 2011, including highlights, of the changes brought through the Income

Tax Ordinance, 2001, the Sales Tax Act, 1990, the Federal Excise Act, 2005, the Custom Act,

1969, the Finance Act, 1989, the Securities and Exchange Commission of Pakistan Act, 1997,

Oil and Gas Regulatory Authority Ordinance, 2002 and the Provisional Collection of Taxes Act,

1931. The amendments proposed through the Income Tax Ordinance, 2001 and through other

laws are intended to be effective once the parliament has accorded it s assent and thereafter,

would be effective from July 01, 2011 i.e. tax year 2012 unless otherwise indicated. Whereas

certain provisions relating to custom duty, excise duty and sales tax have been made applicable

from June 04, 2011.

This Memorandum is intended to provide general guidance to the readers on the important

changes brought through the bill and should not be considered as a substitute for specific

advice relating to a particular enactment. For considering the precise effect of a proposed

change, reference should be made to the appropriate wordings in the relevant statute and the

notifications issued where relevant.

The Memorandum has been prepared exclusively for the use of our clients and staff, based on

information available with us till the time of giving it for printing. Printing of this Memorandum, in

any manner, is strictly prohibited without seeking a written permission from the firm.

Anjum Asim Shahid Rahman

Chartered Accountants

June 04, 2011


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Table of Contents

Budget at a glance 1

Overview of the Economy 2010-2011 2

The Finance Bill 2011 Highlights 10

Summary of changes in:

The Income Tax Ordinance, 2001 15

The Sales Tax Act, 1990 29

The Federal Excise Act, 2005 35

The Customs Act, 1969 39

Other Laws 43-45

The Provisional Collection of Taxes Act, 1931 46


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Budget at a Glance

Tax Memorandum 2011 1

2011-2012 2010-2011 2011-2012 2010-2011

Rupees in billion % %

RECEIPTS

Revenue

Tax 2,074 1,779 75% 64%

Non tax 658 632 24% 23%

Grossrevenue receipts 2,732 2,411 99% 87%

Less: Provincial share 1,203 1,034 43% 37%

Net revenue receipts 1,529 1,377 55% 50%

OthersourcesNet capital receipts 396 325 14% 12%

External receipts 414 387 15% 14%

Self financing of PSDP by provinces - 342 0% 12%

Estimated provincial surplus 125 167 5% 6%

Bank borrowings 304 167 11% 6%

1,239 1,388 45% 50%

TOTAL RECEIPTS 2,768 2,765 100% 100%

EXPENDITURE

Current

General public service 1,593 1,388 58% 50%

Defence 495 442 18% 16%

Others 228 168 8% 6%

Total current expenditure 2,316 1,998 84% 72%

Development

Federal government 300 290 11% 10%

Provincial government 55 373 2% 13%

Other development expenditure 97 104 4% 4%

Total development expenditure 452 767 16% 28%

TOTAL EXPENDITURE 2,768 2,765 100% 100%


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Overview of the Economy 2010-2011


Pakistan s economy reflected a slow growth over the last five years with the real GDP posting a

moderate CAGR of nearly 3.7%. During FY 2010-11 the economy has witnessed a growth of2.4% which is 37% lower than the growth recorded in FY 2009-10. This low GDP reflects the

overall pressure on the economy causing high unemployment rate, inflation, fiscal deficit and

debt burden. Among the three major sectors of the economy, services was the major contributor

in the overall growth of the country with 4.1% growth over the preceding fiscal year. As a

consequence, the agriculture sector grew at rate of 1.2% against the target of 3.8%. Major crops

witnessed negative growth while minor crops along with livestock and fishery recorded positive

growths. Manufacturing, the third major sector of the economy, grew by 1.2%, It was the Small

Scale Manufacturing (SSM) that played an important role in the positive contribution to GDP.

While the Large Scale Manufacturing (LSM) growth was hampered due to reduced output in

textile and petroleum products (submersions of refineries under flood water, energy crisis and

circular debt).

The deceleration in the economic growth can mainly be attributed to the devastating floods of

2010, deteriorating law and order situation, energy crises, price hike in petroleum products and

a fallout of the global financial crisis.

Figure 1: Real GDP Growth

In FY 2010-11, the Rupee against the US Dollar stabilized, while a higher growth in nominal

GNP had a direct impact on the per capita real income with a growth of 0.7% in FY 2010-11. In

dollar terms the per capita income rose from USD 1,073 in FY 2009-10 to USD 1,254 in FY

2010-11.

7.5%9.0%

5.8%6.8%

3.7%

1.70%

3.80%2.40%

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11


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Figure 2: Per Capita Income (in USD)

Inflation remains a major challenge for the political government and the economy at large

despite a stringent monetary policy. The rise in the food prices due to destruction of crops in

2010, floods and the rise in cost of production mainly due to oil price hike and energy crisis in

aggregate contributed to the persistently high level of inflation which was recorded at 14% in FY

2010-2011. Increased government borrowings to cover the fiscal deficit also fueled inflation

during the preceding fiscal year as did printing of currencyby the SBP.

Performance of Sub Sectors

Pakistan s economy also comprises three sectors namely (i) Agriculture, (ii) Manufacturing and

(iii) Services. These three sectors make up the GDP of the economy of Pakistan. In the FY

2010-11 the service sector outperformed the other two sectors in contribution to GDP. Theperformance of all the three sectors has been provided in the ensuing paragraphs.

Service sector comprises transport, storage, communication, wholesale and retail trade, finance

and insurance. This sector contributed approximately 53% to the total economy in FY 2010-11

and grew by 4.1% as against 2.9% of last fiscal year. Social services witnessed a rising trend

while other areas showed a stable growth.

The agriculture sector, which provides employment to approximately 47% of the total workforce,

includes crops, livestock, fishery and forestry. The crops are further classified into two

categories namely major crops and minor crops. In the FY 2010-2011 the major crops i.e rice

and cotton have experienced negative growth of 4%, whereas the minor crops have witnessed

positive growth of 4.8%. The significant contributor which led to an overall positive growth in the

agriculture is livestock, which experienced a growth of 3.7%.

663 724823 904

1015 990 10731254

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11


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The manufacturing sector is third largest sector of the economy, accounting for almost 18%

contribution to GDP. The manufacturing sector of Pakistan is divided into two branches namelyLarge Scale Manufacturing (LSM) and Small Scale Manufacturing. LSM remained victim of

powershortage and cost escalation due to price hike of raw materials and power tariffs. Another

main factor which led to adverse growth in the manufacturing sector is the recent floods which

disrupted the operations of various large scale manufacturing units.

The increased cost of borrowing, due to tight monetary policy resulted in negative growth in the

sector. This decrease in the trend of investments has resulted in loss of employment

opportunities which are generated as a consequence of new investments. Conversely, the small

scale manufacturing sector has done well and as a result contributed towards the GDP.

Additionally, the mining sector has also experienced a decline in the FY 2010-2011. The

significant reasons behind this decline are low investments in the sector, followed by law and

order situation in the regions where major mining operations take place.

Figure 3: Performance of Sub Sectors

Investments and Savings

Investment is a key determinant of growth; however in FY 2010-11 the total investment as a

percentage of GDP decreased from 15.4% in FY 2009-2010 to 13.4%. Private sector

4.1%1.0%

4.1%0.6% 1.2%

8.3%

4.8%

-3.6%

5.5% 3.0%

6.6%

1.3%1.8%

4.7%5.0%

7.0%

6.0%

1.7%

2.9% 4.1%

2006-07 2007-08 2008-09 2009-10 2010-11

Agriculture Manufacturing Commodity Producing Sector Services Sector

2006-07 2007-08 2008-09 2009-10 2010-11


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investment fell by 1.7%, while public sector investment also declined by 0.3% in the FY 2010-

2011. The decrease in the indicators has adversely affected the economy as low investmentfrom both the private and the public sectors has led to a fall in the aggregate demand in the

economy, thus resulting in a decrease in the GDP growth.

The national and domestic savings witnessed a marginal growth of 5.3% and 2.1% respectively

in comparison to the previous year s figures of 13.8% and 9.5% of GDP in FY2010-11 as

against 13.1% and 9.3% of GDP in FY2009-10.

Figure 4: Structure of Investment and Savings as Percentage of GDP

2009-10 2010-11

Public Debt

Public debt is the outcome of the developments taking place on the fiscal and current account

deficits; thus larger gap in these two deficits cause the public debt to grow at an accelerated

rate. Low fiscal and current account deficits, along with the stability in the exchange rate, are

critical in maintaining public debt at a sustainable level. In FY 2010-11, a considerable rise in

the public debt has been observed where the external debt and liabilities from public sources

equal 91.6% of the total external debt and liabilities. Public and publicly guaranteed debt

accounts for the largest share of the total external debt liability and stands at 78.2% in the

quarter ending March 2011 which is a 5.8% growth over the preceding fiscal year.

15.4%

2.0%

10.2%

13.1%

9.3%

13.4%

-0.4%

8.5%13.8%

9.5%

Total Investment

Foreign Savings

Private Investment

National SavingsDomestic Savings


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Current Account

The current account balance has long suffered a current account deficit; however in the current

FY the deficit turned to surplus of US$ 99 million. The higher export bill, strong and sustained

inflows of workers remittances, logistic support related receipts and grants received all

contributed to this improvement.

Figure 5: Current Account Balance as Percentage of GDP

Trade

The preceding FY has experienced a decrease in the balance of trade by almost US$ 3 billion.

This fall is attributable to an increase in the growth of merchandise export of about 27% in the

fiscal year. Similarly, imports have also experienced a relative slowdown in growth due to an

overall fall in demand in the economy. The significant contributor in export as always has been

the textile sector. However, the wheat crop also contributed more than US$ 400 m to the export

bill. The increase in exports remained concentrated in few items namely, cotton, rice and

leather. This reinforces the need for diversification if the economy is to avoid setbacks from

natural disasters such as the recent floods, which disrupted manufacturing operations along

with the severe damage to the raw material.

On the contrary, the import bill also witnessed an increase of about US$ 4 billion in the FY

2010-11 which primarily was driven by the Price Effect rather than the Quantity Effect . In thepreceding fiscal year the trade deficit improved by US$ 240 m.

-5.10%

-8.70%

-5.70%

-2.20%0.35%

2006-07 2007-08 2008-09 2009-10 2010-11


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Figure 6: Trade (Import and Export Trend) - All Values in USD Billion

Foreign Direct Investment (FDI)

Foreign direct investment (private) stood at $ 1,232 million during July-April 2010-11 as against

$ 1,725 million in last year, thereby showing a decline of 29%. This is mainly due to volatile

security condition in the country, high interest rates, electricity outages and cuts in the Public

Sector Development Program. The main attraction for foreign investors remained the power, oil

and gas and financial businesses sectors of the economy.

No measures have been announced in the budget which shall act towards building confidenceof the potential foreign investors. It is therefore anticipated that this trend of fall in the FDI

figures will continue in the succeeding years.

In terms of the economy s total size, investment dipped to 13.4% against last year s 15.4%

which largely is a reflection of deterioration of law and order situation, which reduced the foreign

direct investment and increased the cost of investment. However, in absolute terms, total

investment grew and stood at PKR 2.5 trillion, which is PKR 300 billion more thanlast year.

17 20 19 20 18

(27)(35) (32) (31)

(26)

(9.6)(15.0) (12.6) (11.5)

(8.0)

2006-07 2007-08 2008-09 2009-10 2010-11

Exports Imports Balance of Trade


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Figure 7: Foreign Direct Investment Value in USD Billion

Workers Remittances

During July April, 2011, overseas workers remitted an amount equivalent to $ 9.1 billion as

compared to $ 7.3 billion last year thereby an increase of 23.8% has been witnessed. Keeping

this trend in view, remittances for the full-year are estimated to reach up to $ 12 billion.

Meanwhile, with estimated trade deficit at $ 11.3 billion and workers remittances of about $ 12

billion, the current account deficit is estimated to decrease to around $ 1 billion in 2010-11 from

the previous year s deficit of $ 3.9 billion.

Figure 8: Workers Remittances Values in USD Billion

Foreign Exchange Reserves

The current foreign exchange reserves of the country stand at USD 17.2 billion which is

approximately USD 500 million higher in comparison to FY 2009-2010. The contributors to this

position of the foreign exchange reserves apart from the current account balance surplus are

the funds from international donor / lending organizations.

5.1

5.3

3.7

1.5

1.1

2006-07

2007-08

2008-09

2009-10

2010-11

5,4946,453

7,8118,906

8,016

2006-07 2007-08 2008-09 2009-10 2010-11


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Figure 9: Foreign Exchange Reserves - Values in USD Billion

Inflation (CPI)

Inflationary pressures were quite severe in the beginning of fiscal year 2010-11 and became

worse by the devastating floods. The inflation figures touched their record high of 14.1 percent

in FY 2010-11. The main driver of the CPI index has been the increase in the food prices.

During FY 2010-11, food has remained the major driver of the inflation on the back of supply

disruptions due to floods as well as hike in prices of imported edibles. Food inflation recorded at

18.4 percent which has been mainly due to increase in prices of sugar, milk, poultry, meat, fresh

vegetables and fruits owing to shortfall in production of these items and significant increase in

world food prices. The inflation based on non-food component witnessed an increase of 10.4%

in this period.

Monetary Policy

The FY 2010-2011 witnessed an increase in interest rates by 150 basis points. Since Nov 2010

there has been no change in the interest rates by the government. The government s effort to

control inflation is falling victim to its own policy of extensive borrowing from the SBP to cover

the fiscal deficit.

.

16.6

11.3 12.4

16.5 17.1

2006-07 2007-08 2008-09 2009-10 2010-11

5.9%8.4%

17.6%

11.0% 9.5%7.8%12.0%

20.8%

11.7%14.1%

2006-07 2007-08 2008-09 2009-10 2010-11

Core Inflation Inflation

Figure 10: Inflation


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Finance Bill 2011 - Highlights


INCOME TAXORDINANCE, 2001

The threshold of taxable income for individual taxpayers is proposed to be enhanced fromRs.300,000 to Rs. 350,000.

Minimum tax paid in terms of section 113 is proposed to be available for adjustment in fivesubsequent years instead of currently allowable period of three years.

Waiver of profit on debt and principal outstanding, duly approved under the schemesissued by the SBP, is proposed to be treatedas business income.

Permanent Establishment of non-residentperson is proposed to be brought under theFinalTax Regime on accountof the supply of goods andexecution of contract.

Tax deduction under section 153 of the companies on provision of services is proposed tobe a minimum tax.

The credit allowable to a company for enlistment in Stock Exchange is proposed to beincreased to 15% of tax liability as opposedtothe existing slabof 5%.

Upper limit for investment in new shares for claiming tax credit proposed to be increasedfrom Rs. 300,000 to Rs. 500,000. Such credit is also proposed to include premium paid forlife insurance policies in respect of individuals earning salaries and business income.

A tax credit equal to 100% of the tax payable is proposed to be allowed for a period of fiveyears to a company which establishes a new industrial undertaking owning 100% equity andengaged in manufacturing in Pakistan or makes investment under BMR relating to purchaseand installation of plant and machineryin an existing undertaking.

Monetary threshold of taxable income for filing of wealth statements by individuals ormembers of AOPis proposed to beenhanced from Rs. 500,000 to Rs. 1,000,000.

An industrial or commercial electricity connection holder is also proposed to file income taxreturn if his annual electricity bill exceeds Rs. 1million.

A single member court of Appellate Tribunal Inland Revenue is proposed to dispose offcases involving tax or penalty threshold not exceeding Rs. 1 million instead of present limitof Rs. 5 million.

Monthly filing of statements by withholding tax agents is proposed as against on quarterlybasis.

Rate of tax on dividend income received by a commercial bank from an asset managementcompany is proposed to be enhanced from 10% to 20%.


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Rate of withholding tax on cash withdrawals is proposed to be reduced from 0.3% to 0.2%.

Final Tax Regime @ 10% prescribed for profit on debt in the hands of individuals and non-corporate sector in respect of income from schemes of the Federal or the ProvincialGovernment.

Excess provision over the prescribed limit of 5% for bad and doubtful debts in respect ofconsumer and small and medium enterprises is allowed to be carried forward to futureyears.

SALES TAX ACT, 1990

To facilitate cash flow of industrial sector full adjustment of sales tax paid on import or localpurchase of capital goods has been allowed.

Exemption of sales tax withdrawn on defence stores at import and local supply to bring it inline with international best practices.

Sales tax exemption regime rationalized to reduce its scope to selected sectors.

Value addition tax levied on commercial importers enhanced from 2% to 3%.

Sales tax exemption withdrawn on cement/concrete blocks and bricks.

Sales tax leviable on sugar at import and local supply stage has been withdrawn and federalexcise duty @ 8% is leviedinstead.

Zero-rating regime rationalized to limit its application to selected sectors.

Specific provisions for enforcement of blacklisting regime.

A new designation introduced namely Inspector Inland Revenue as an authority under theSales Tax Act, 1990.

Rejection of refund claim where directly or indirectly incidence is passed on to theconsumers.

FBR empowered to condone time limit in time bound cases dealt by authorities specified insection 30 of the Sales Tax Act, 1990.


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FEDERAL EXCISE ACT, 2005

Quantum of excise duty reduced on cement.

Reduction in the rate of the federal excise duty leviable on aerated beverages from 12% to6%.

Federal excise duty on services provided by property developers or promoters abolished.

Exemption on local supply of reclaimed lead to recognized manufacturers of lead batteries.

Excise duty slab revised upward to enhance the burden of the federal excise duty on locally

produced cigarettes.

Federal excise duty rationalized on filter rods for cigarettes from Rs.1 per filter rod to 20% advalorum.

Federal excise duty on un-manufactured tobacco is being enhanced from Rs. 5 per kg toRs.10 per kg.

Uniformity proposed in the period of recovery of federal excise duty and sales tax.

Confiscation provisions extended to beverages along with cigarettes.

Time limit prescribed to decide the case after issuance of show cause notice.

Various provisions of the Federal Excise Act, 2005 harmonized with the Sales Tax Act,1990.

CUSTOMS ACT, 1969

Regulatory Duty removed on edible items, furniture, toiletries and make-up items.

Custom duty reduced to 5% on pharmaceutical raw materials.

Concession prescribed for butyl acetate industry through concession on import of its rawmaterials (Sabutol).

Incentives provided for glass industry raw materials namely mirror backing paint andwaste / scrap of glass .

Incentive for CNG compressors manufacturing industry prescribed through concession on15 components.


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Concession extended to machinery and equipment for oil exploration companies.

Concession extended to raw material of audio cassettes.

Incentive extended for hi-tech car audio manufacturing industry through concession onimport of mechanism for car audio system.

Corrections prescribed in industrial SRO 565(I)/2006 to ensure expeditious clearance.

Tariff rationalized on bars, rods and profiles of refined copper and copper alloy.

Separate PCT codes prescribed for brass scrap and armored cash carrying vehicle.

Tariff correction to remove ambiguity in re-import scheme.

Duty draw back introduced in respect of supply of goods against international tenders.

Extension of limitation period from three to five years for cases unearthed during audit.

Limitation period for claim of refund to be counted from the date of finalization of the case(order / decision / judgment).

Enabling provision introduced for collection of transit fee in the Customs Act, 1969.

OTHER LAWS

Finance Act, 1989 (V of 1989) Capital Value Tax

Withdrawal of Capital Value Tax (CVT) is proposed on purchase of modaraba certificate or a

registered instrument of redeemable capital or shares of a public company, listed on a

registered stock exchange in Pakistan by a resident person.

Securities and Exchange Commission of Pakistan Act, 1997 (XLII of 1997)

It is proposed that the Securities and Exchange Commission of Pakistan (SECP) shall remit

any surplus of receipts over the actual expenditure in a financial year to the Federal

Consolidated Fund and any deficit from the actual expenditure shall be made up by the

Federal Government.


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All fines and penalties imposed and collected by the SECP are also proposed to be credited

to the Federal Consolidated Fund.

Oil and Gas Regulatory Authority Ordinance, 2002 (XVII of 2002)

It is proposed that the Oil and Gas Regulatory Authority (the Authority) shall remit any

surplus of receipts over the actual expenditure in a financial year to the Federal

Consolidated Fund and any deficit from the actual expenditure shall be made up by the

Federal Government.

All fines and penalties imposed and collected by the Authority are also proposed to be

credited to the Federal Consolidated Fund.


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Summary of changes in theIncome Tax Ordinance, 2001


SectionDefinition of assessment 2(5)

The bill seeks to include the words provisional assessment in the definitionof assessment. The proposed change is more of rectificatory in nature aspower to make provisional assessment already exists under the provisionsof section 122C and123.

Definition of Collective Investment Scheme 2(11C)

The bill seeks to insert definition of above and has adopted the same fromNon-Banking Finance Companies (Establishment and Regulation) Rules,

2003 which states:Collective investment scheme means a close-end fund and

an open-end scheme:

The proposed definition is for the purpose of Clause (99) of the Part I of theSecond Schedule to the Income Tax Ordinance, 2001.

Waiver of profit on debt and debt (18)(1)(d)

In order to revive sick units, as part of policy the State Bank of PakistanBanking Policy Department issued Circular No. 29 of 2002 and otherschemes from time to time to provide relief to sick industries which defaulted

in repayment of profit on debt or principal amount of debt.

The tax department had been attempting to tax such relief of waiver ofprincipal amount of debt but judicial pronouncements held that waiver ofprincipal amount of debt does not constitute income in the hands of thetaxpayers.

The bill seeks to clarify by way of insertion of an explanation in section18(1)(d) that such a waiver of profit on debt as well as debt constitutesincome chargeable to tax under the head income from business.

This amendment is negation of the policy of the Government to revive sick

units. It is to be appreciated that when a sick unit did not have the ability todischarge principal amount of debt, how it can pay tax upon waiver of debt?The implementation of this provision will result in a hardship situation. Theproposed amendment, if implemented, will provoke tax litigations as taxofficers would like to amend assessments under the provision of section122(5A) till the period such assessments can be amended under the law.


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SectionInvestment in shares and insurance policies 62

The proposed substitution seeks to enlarge the scope to include within itsambit investment in life insurance policies and provide tax incentive by wayof tax credit in respect of premium paid on a life insurance policy to a lifeinsurance company registered with the Securities and ExchangeCommission of Pakistan under the Insurance Ordinance, 2000, (XXXIX of2000).

The bill does not change the other basis of allowing tax credit under thissection except that the tax credit shall be calculated at the lower of 15% of

the taxable income of the person or Rs. 500,000 or the total cost ofacquiring the shares/the total contribution/ premium paid on life insurancepolicies. Presently this threshold is equal to 10% of the person s taxableincome of the year or Rs. 300,000.

The bill also seeks to enhance minimum holding period of investment inshares to 36 months from existing prescribed holding period of 12 monthsfrom the date of acquisition of shares to avail this tax incentive.

In case of disposal of shares within the period of three years, the tax creditalready availed by the taxpayer shall be disallowed by the Commissioner inthe year of disposal of shares. However, it is not clear as to how the tax

credit already allowed will be withdrawn whether through the amendment ofassessment or otherwise.

The purpose and intent behind the proposed changes appear to encouragetaxpayers to take a long term position in fresh issuance of shares onRegistered Stock Exchanges or disinvestment through PrivatizationCommission. The above is a positive change from the point of view ofpromotion of investment in life insurance policies. However long term viewon investments may not be seen that encouraging.

Contribution to an Approved Pension Fund 63(2)(iii)

The bill seeks to omit clause (iii) from the statute book to remove theexisting limit of Rs. 500,000 to allow of tax credit available in respect ofpremium or total contribution made in the year by a person towards theapproved pension fund under Voluntary Pension System Rules, 2005. Afterthe proposed change the existing limit of tax credit is allowable on the basisof lowerof:


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a) total contribution or premium paid by the person in the year;

b) twenty percent of the eligible person s taxable income for the relevanttax year; or

c) fifty percent of the total taxable income of the preceding year.

Section

Tax credit for listing on Registered Stock Exchange 65C(1)

The proposed amendment seeks to enhance the tax credit to 15% from

existing limit of 5% for a corporate taxpayer which opts to list itself on anyRegistered Stock Exchange in Pakistan. Tax credit is available in the shapeof reduction in tax payable for the tax year in which the company would beenlisted.

This is a one time incentive but positive in nature and will promote listing orconversion of private and public un-listed companies into listed companies.

Tax credit for equity investment 65D

A new section is proposed to be inserted in the Ordinance which providesfor tax incentive equal to 100% credit of tax payable in the year any taxpayer

being a company, which establishes a new industrial undertaking formanufacturing activity in Pakistan or invests any amount for purchase andinstallation of machinery for the purpose of Balancing, Modernization andReplacement (BMR) of plant and machinery in an existing industrialundertaking established and owned by it.

This incentive is available to holding company which owns 100% equity ofthe subsidiary company. The incentive is available for investment on or afterJuly 01, 2011 for a period of five years or commencement of commercialproduction whichever is later.

However, in the event the Commissioner Inland Revenue discovers on the

basis of documents or otherwise that any of the condition stipulated foravailing this incentive was not fulfilled, he may re-compute the tax payableby the taxpayer for the relevant tax year by withdrawing the tax creditoriginally allowed, as if it was wrongly allowed.

The purpose behind the proposed insertion is to promote industrializationandenhance manufacturing activities in the country either in new ventures


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or BMR in line with the Government s Policy to promote industrial activity.This is a positive change which will generate employment and will provideeconomic opportunities to various segments of the society.

Section

Unexplained income or assets 111(1)(d)

The proposed amendment seeks to enlarge the ambit of unexplainedincome or assets by including in it the concealment or furnishing ofinaccurate particulars of income comprising suppression of production, salesor any amount chargeable to tax or suppression of any item of receipts liableto tax in whole or in part.

The intention of the legislature is to take punitive actions once concealmentof income is detected. The focus of the Government is to document theeconomy and enlarge the tax collection by minimizing tax evasion.

Minimum tax on the income of certain persons 113(2)

Presently minimumtax paid by a resident company or an individual having aturnover of Rs. 50 million or above in the tax year 2009 or in any subsequenttax year or an AOP having a turnover of Rs. 50 million or above in the taxyear 2007 or in any subsequent tax year, is adjustable against normal taxliability in succeeding three years.

The bill seeks to extend the existing period of three years to five years toclaim adjustment of minimum tax paid in any tax year. This is a beneficialchange as it will provide relief to those entities which have taxable incomeinsucceeding years.

Definition of turnover 113(3)(a)

The bill seeks to include the word gross sales as part of definition ofturnover in addition to the word gross receipts . It appears that the purposebehind the proposed insertion of gross sales in the ambit of turnover is toreflect the receipts from manufacturing activities.

Taxation of income of certain retailers 113B(b)

This is a consequential change and rectificatory in nature to replace ChapterII of the Sales Tax Special Procedures Rules, 2006 with Chapter III of theSales Tax Special Procedures Rules, 2007.


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SectionReturn of income 114(1)(b)(viii)

The bill seeks to insert sub-clause (viii) requiring the holders of commercialor industrial connections of electricity to mandatorily file return of incomewhere the amount of bill exceeds Rs. 1 million in any year.

This is an important change as it will highlight number of consumers ofelectricity who may be non-filers for one reason or the other. Although theGovernment had the powers and was always in a position to obtaininformation about such electricity consumers from electric distributioncompanies and take necessary actions.

A new section is proposed to be inserted whereby persons enjoying incomefrom business , between Rs. 300,000 to Rs. 350,000 in a tax year whoalthough are not liable to pay income tax on such income but aremandatorily required to file their return of income.

The purpose behind the proposed change is to promote documentation byrequiring persons earning income below the taxable threshold to file returnof income.

114(1A)

The new sub-clauses are proposed to be inserted requiring any person filingthe return of income to pay any tax due with the return and also file wealth

statement, if required under the provisions of section 116.

114(2)(d) & (e)

Wealth statement 116(2)

The bill seeks to:

a) enhance the monetary threshold for filing of wealth statement for aresident taxpayer, being an individual, from Rs 500,000 toRs. 1,000,000; and

b) require all individuals being members of an AOP whose share fromincome of such AOP, before tax, for the year is Rs 1,000,000 or

more to file their wealth statements and wealth reconciliationstatements alongwith the return of income of the AOP.

A new sub-section is proposed to be inserted in the statute book whereby incase of a provisional assessment under section 122C a person being anindividual or member of AOP, files a return such return shall beaccompanied by a wealth statement and reconciliation statement explaining

116(2A)


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the source of acquisition of assets and in case of a member of an AOP withwealth statement and reconciliation statement explaining sources ofacquisition of assets specified, of all the members.

Section

Appeal to the Commissioner (Appeals) 127(1)

The proposed amendment seeks to restrict a person against whom aprovisional assessment order under section 122C has been framed fromfiling an appeal to the Commissioner Appeals against such an order. It isinteresting to note that under the law a provisional assessment order attainsstatus of final assessment order upon expiry of sixty days at which stage

first appeal becomes barred by time.

The above is against the principle of natural justice and judicial judgments,which stipulate that all orders raising tax liability against the taxpayers aresubject to appeals. This amendment may not be able to withstand the test ofconstitutional petitions, if filed against the proposed amendment.

Appointment of the Appellate Tribunal 130(8A)&(8AA)

The proposed amendment seek to curtail the monitory threshold fromexisting limit of Rs. 5 million to Rs. 1 million as regards the amount of tax orpenalty involved to be heard by a single bench. Additionally, the word

Chairman is proposed to be replaced by the word Chairperson to include thepossible appointment of both the genders to this position.

The curtailment of limit is a positive change as cases involving revenue uptoRs. 5 million to be heard by single bench appeared unreasonable.

Disposal of appeals by the Appellate Tribunal 132(2)

The proposed amendment seeks to remove the word may if it deems fit,dismiss the appeals in default from the statute book whereby curtailing thepower of the Tribunal to dismiss the appeals for non-appearance of the anyparty to the appeal. With the proposed change the tribunal may in ex-parte

proceedings decide the case on the basis of available record.

Due date for payment of tax 137(2) proviso

The proposed amendment seeks to insert the word immediately clarifyingthat in case of passing of provisional assessment order under section 122C,the tax shall be payable immediately after the expiry of 60 days from thedate of service of the notice.


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SectionAdvance tax paid by the taxpayer 147(5B) first

proviso

The proposed amendment seeks to enhance the period for payment ofadvance tax from 7 days to 21 days in case of advance tax on capital gainson sale of securities. This will provide some relief to the taxpayers.

Persons not required to furnish a return of income 151(3) &115 (4)

The proposed changes seeks to bring profit on debt arising to a taxpayerother than a company in Final Tax Regime (FTR) arising on the securities

issued by the Federal Government or Provincial Government or the LocalGovernment. Presently income from such securities are taxed on netincome basis.

It is interesting to note that securities of the Federal and the ProvincialGovernments were not issued to individual or non-corporate taxpayers and itappears that it is the intention of the Government to issue such securities infuture to individuals or non-corporate taxpayers as well. The Governmentintends to raise funds from non-corporate sector as well and reduce burdenof government borrowings on banking system or corporate sector as part ofits policy to finance its budgetary deficits.

Consequential changes are also proposed in section 115(4) whereby non-corporate taxpayers are not required to file their returns of income in respectof above source of income rather now would file prescribed statementsunder section 165.

Payment of goods and services 153,168 & 169

Under the existing provisions, permanent establishment of the non-residentwere not covered under the final tax regime and were required to beassessed under the normal tax regime in line with provisions of section 105.

Tax withheld on payments received by companies providing services by

virtue of the proviso was not treated as minimum tax which had also beenclarified by the Board vide Circular No.6 of 2009 dated August 18, 2009.Subsequently vide internal letter issued on April 26, 2011 the Board insupersession of Circular No. 6 of 2009 clarified that tax deducted onpayments for rendering of services is to be treated as minimum tax in allcases. Exemption certificates under section 153(1)(b) were denied by the


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tax authorities to companies providing services on the basis of theclarification issued by the Board. Petitions have been filed challenging thelater clarification issued by the Board in the High Court.

The substituted section proposes to bring within the ambit of final tax regimepayments received by permanent establishment of the non-resident. It alsoproposes to enlarge the scope of minimum tax regime to companiesproviding or rendering services. It further proposes to define turnover toinclude Sales Tax and Federal Excise Duty or any trade discounts shown onthe invoice. In our view this is a typographical error and the intent was todefine gross payment since the term turnover has not been used in the

section. Yarn traders receiving payments from taxpayers covered under thezero rated regime of sales tax have been exempt from the application of thissection. The Commissioner has further been empowered to allow deductionof tax at reduced rate.

Certain referential changes due to the substitution of the section have beenproposed in section 168 and 169.

Section

Withdrawal of balance under Pension Fund 156B

The bill seeks to increase the exemption of withdrawal from twenty fivepercent to fifty percent of the accumulated balance at or after the retirement

age from application of the withholding provision.

Withholding tax statements 165

Withholding agents were required to file quarterly statement instead ofmonthly statement vide amendment made through the Finance Act, 2010.The proposed amendment seeks to revert back to the position of requiringwithholding agents to file monthly statements instead of quarterlystatements. It additionally places the responsibility of providing informationin the statement with regards to Computerized National Identity CardNumber or National Tax Number of the person whose tax has beenwithheld.

Sub-section (2) which requires quarterly statement to be filed on or before20th day of the succeeding month is being substituted to curtail the period offiling the statement by 15th day of the succeeding month.

A new sub-section (6) is proposed to be inserted whereby every employerwould additionally be required to file annual statement even in respect ofemployees whose annual salary exceeds three hundred thousand rupees.


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SectionOffences and penalties 182(1) Table

S.No.1Under the existing provision for non-filing of return of income or a statementunder section 115 or a wealth statement or wealth reconciliation statementor a statement under section 165 by the due date, penalty equal to 0.1% ofthe tax payable for each day of default subject to a minimum of fivethousand rupees and a maximum of 25% of the tax payable is attracted.The tax authorities have been attempting to interpret the words tax payableto mean tax calculated by applying the applicable rates to the taxableincome of the tax payable, ignoring the provisions of section 4 and thedecision of the appellate authorities. The Appellate Tribunal has held that

tax payable means the amount payable with the return and not the amountcalculated by applying the rate of tax to the taxable income of the tax payer.The department filed a reference application in the Honorable Sindh HighCourt against the decision of the Appellate Tribunal on the issue. TheHonourable Sindh High Court while upholding the interpretation of theAppellate Tribunal dismissed the departmental reference in limine.

The bill proposes to insert an explanation to clarify that the term taxpayable for the above mentioned default to mean tax chargeable on thetaxable income on any assessment made or treated to have been madeunder section 120, 121, 122 or 122C. In our view, the proposed insertionapart from being an attempt to nullify the decision of the superior court, is

also against the principle of natural justice since its implementation wouldnot allow the benefit of any tax payments, tax credits and refunds due to thetaxpayer under the Ordinance.

Advance ruling 206A

The proposed insertion restricts the scope by providing that non-residenthaving permanent establishment in Pakistan can not apply for advanceruling to the Board. As a result this provision shall only be available for non-residents who do not have a PE in Pakistan. This amendment will provideset-back to the concept of advance ruling.

Advance tax at the time of sale by auction 236A(1)

The proposed insertion seeks to enlarge the scope of withholding taxprovision to cover any auction by a tender. In a recent judgment of theappellate forum it was held that auction by tender is not covered within theprovision of existing law.


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SectionAdvance tax on purchases of air ticket 236B (3) & (4)

The proposed insertion seeks to clarify that the tax collected is adjustableagainst the final tax liability of the person. Further the tax is not collectableon tickets purchased by the Federal Government or Provincial Governmentor a person who produces a certificate from the Commissioner InlandRevenue that income of such person during the tax year is exempt.

First Schedule Part I,Division-IClause (1)The proposed amendment seeks to remove the word association of persons

(AOP) from the First Schedule having become redundant effective tax year2011. The flat rate of tax applicable to AOP was 25% as provided in DivisionIB.

Minimum taxable threshold and tax benefit Part I,Division-I

Clause (I) &(1A)

The bill proposes to increase the minimum threshold for the purposes of levyof tax on the taxable income to Rs.350,000 for all individuals.

Non salaried persons

The substituted tax tariff will provide relief to the extent indicated below.

Taxable income up to Proposedslab

Previousslabs

Tax saving

Rupees Rate Rate Rupees% %

301,000 0 7.5 22,575310,000 0 7.5 23,250325,000 0 7.5 24,375350,000 0 7.5 26,250


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Salaried persons Part I,Division-IClause (1)

The tax tariff has been substituted to allow benefit of the change in minimumthreshold salaried persons will benefit from this change to the extent exhibitedhereunder:

Gross income up to Proposedslab

Previousslabs

Tax relief

Rupees Rate Rate Rupees% %

310,000 0 0.75 2,325325,000 0 0.75 2,438350,000 0 0.75 2,625350,001 1.50 1.50 -

Capital gains on disposal of securities Part I,Division-VII

Although there are no changes in effective tax rates the proposed amendmentseeks to correct the description of the holding period of securities.

Exports Part III,

Division-IVClause (3)The bill proposes to provide correct reference to section 153 by replacing sub-

section (1A) with sub-section (2).

Cash withdrawal from a bank Part IV,Division-VI

The bill proposes to reduce the rate of advance tax on cash withdrawal frombanks to 0.2% as against the existing rate of 0.3%.

Second Schedule Part IExemption from total income

Clause

The bill proposes to omit the following clauses from the Schedule:

Bank of Commerce and Credit International Foundation forAdvancement of Science and Technology (Sub-clause xi).

BCCI Foundation.(sub-clause-xxv).

(61)


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Clause

Profit and debt payable to National Bank of Pakistan on foreigncurrency loan ofUS $ 100 million given to PSO.

(74A)

Profit and gain from any computer training institutions or schemesrecognized by the Board or Education or University.

(93)

Any income chargeable under the head capital gain derived by aperson from sale of ships and all floating crafts including tugs,dredgers, survey vehicles and other specialized craft.

(114A)

The bill propose to insert the following clause in the Schedule:

Islamic Development Bank (107A)

Any income derived by the Islamic Development Bank from itsoperations in Pakistan in connection with its social and economicdevelopmentactivities.

Second Schedule Part IIReduction in tax rates

Profit on debt payable to non-resident having no Permanent

Establishment in Pakistan

A proviso is proposed to be inserted whereby the tax deducted on profit ondebt from debt instruments, government securities including treasury billsand Pakistan Investment Bonds shall be final tax on profit on debts payableto a non-resident person having no permanent establishment in Pakistan.

(5A)

Second Schedule Part IIIReduction in tax liability

Clause

Tax on import of old and used automotive vehicles (4)

The bill seek to replace SRO 932(I)/2004 dated November 20, 2004 by SRO577(I)/2005 dated June 06, 2005. The tax under section 148 of the IncomeTax Ordinance, 2001 shall not exceed the amount specified in column (3) ofthe table bellow:


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S.No.

Automotive vehicles of Asianmakes meant for transport ofperson.

Duty and taxes in US$ orequivalent amount in Pakrupees.

(1) (2) (3)

1. Up to 800CC US$ 4,4002. Up to 801cc to 1000cc US$ 5,5003. From 1001cc to 1300cc US$ 11,0004. From 1301cc to 1500cc US$ 15,4005. From 1501cc to 1600cc US$ 18,7006. From 1601cc to 180cc

(excluding Jeeps)

US$ 23,100

The provisions of section 71(2) of the Income Tax Ordinance, 2001 statethat where an amount is in a currency other than rupees, the amount shallbe converted to the rupees at the SBP rate applying between the foreigncurrency and the rupee on the date the amount is takeninto account.

Second Schedule Part IVExemptions from specific provisions

Clause

Minimum tax (11A)

The bill proposes to insert in sub-clause (i) to provide exemption fromminimum tax to a pension fund registered under the Voluntary PensionScheme Rules, 2005.

Islamic Development Bank (38C)

The bill proposes that the deduction of tax under section 151, 152, 153 and233 shall not apply to the Islamic Development Bank.

Seventh Schedule Taxation of Banking Companies

Presently, Rule 1(c) provides that provision for doubtful advances and off

balance sheet items are admissible to the extent of 1% of total advancesor actual whichever is lower and 5% of consumers and small and mediumenterprises (SMEs) .

Further, presently the excess of 1% of total advances threshold is allowed tobe carried over to succeeding years. However, nothing is stipulated in theRule in respect of carried over of excess provision over 5% of consumersand SMEs threshold.

Rule 1(c)


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The proposed amendments seek to clarify the admissibility of doubtfuladvances for consumers and SMEs on the basis of 5% of advances oractual whichever is lower. This benefit is available in respect of advances forconsumers and SMEs with effect from July 01, 2010.

The proposed amendments also stipulates that excess of 5% threshold ofconsumers and SMEs would also allowed to be carried over to succeedingyears by virtue of this amendment.

Rule 1(c)

The bill seeks to insert a new proviso in Rule 6 whereby dividend receivedby a banking company from its asset management company shall be taxedat the rate of 20%.

The intention behind the proposed amendment is to tax the dividend incomeof the bank from its assets management operations at a higher rate of 20%instead of normal rate of 10% which appears to be a revenue enhancementmeasure from the existing taxpayers.

Rule 6proviso


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Summary of changes in theSales Tax Act, 1990


Section

Scope of tax 3

The proposed amendment seeks to reduce the rate of sales tax from 17% to

16% on all taxable supplies including goods covered under the Third Schedule

to the Sales Tax Act, 1990.

The rate of sales tax was enhanced by 1% i.e. from 16% to 17% last year

through the Finance Act, 2010 despite suggestions for reduction in rates from

various forums.

Adjustable input tax 8B

Under the existing provision a registered person is restricted from claiming input

tax adjustment in excess of 90% of the output tax. The adjustment of input tax

paid on fixed assets was allowed in twelve monthly installments.

By virtue of the proposed substitution of the proviso the restriction of claiming

input tax in excess of 90% has been made ineffective and registered person

have also been facilitated to claim total input tax adjustment in the month it is

paid on fixed assets or capital goods.

De-registration, blacklisting and suspension of registration 21(3)

The bill proposes insertion of new sub-section to prescribe consequential

effects of blacklisting and suspension of registration of registered person in

following manner:

during suspension period, invoices issued will not be considered for the

purposes of sales tax refund or input tax credit; and

on black listing of registered person, the refund or input tax credit of

invoices issued by such person whether issued prior to or after

blacklisting will be rejected through an order after opportunity of hearing

to such person.


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The proposed amendment though aimed at curbing issuance of fake invoices

causinghuge loss to exchequer will create hardship for business community as

the rejection of input tax credit or refund to genuine acquirer of goods

especially in case of those invoices that were issued prior to blacklisting of

supplier will unduly increase the cost of business as well as potential litigation.

Section

Revision of return 26(3)

The proposed amendment seeks to permit revision of special returns filedunder section 27 of the Act with the permission of the Commissioner Inland

Revenue. Under the existing law only revision of monthly returns is provided.

Appointment of authorities 30

The bill proposes to establishment of new tax authority namely Inspector Inland

Revenue who shall be subordinate to Inland Revenue Officer.

Alternative Dispute Resolution 47A

It is proposed that the Chairman FBR and a Member nominated by him will be

empowered to pass an order on being satisfied that an errorexists in the order

or decision of the Board passed on the recommendations of Alternative Dispute

Resolution Committee.

Refunds 66

The bill also proposes that where the incidence of tax is directly or indirectly

passed on to the consumer; the registered person will not be entitled to claimrefund of such amount. Similar provisions already exists in the section 3B of

the Act, which provides that where any tax is inadvertently or under

misapprehension collected from the consumer, the registered person is required

to deposit the same in the government exchequer.


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Section

Condonation of time limit 74

The bill proposes to add an explanation to clarify the expression that the Board

has the powers to condone any lapse of the department whereby limitation of

any action is expiring. The Board is also empowered to delegate this power of

condonation to the Commissioner.

Since the amendment is proposed to be inserted through an explanation , it will

be applicable retrospectively. However, in case of past and closed transactionssuch condonation would be unjustified and adversely affects the vested rights of

the registered person and would trigger un-called for litigation.

Sixth Schedule

The bill proposes to withdraw exemption granted to following items, with effect

from June 4, 2011.

Table I- Imports or Supplies

S.No. Description

29A Surgical tapes

29B Ultrasound gel

30 Diapers for adults (patients)

34 Bricks

35 Building blocks of cement including ready mix concrete blocks

41 Computer software

42 Ambulances, firefighting vehicles, waste disposal trucks, brake

down lorries, and vehicles for the maintenance of streetlights and

overhead cables.

43 Aircrafts

44 Ships, of gross tonnage exceeding 15 LDTs, excluding those for

recreational or pleasure purpose


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62 Defence stores, whether manufactured locally or imported by the

Federal Government

64 Spare parts and equipment for aircraft and ships covered by serial

number 43 and 44 above

65 Equipment and Machinery for pilotage, salvage or towage for use

in ports or airports

66 Equipment and Machinery for air navigation

67 Equipment and Machinery used for services provided for handling

of ships or aircrafts in a customs-port or customs-airport

68 Such plant and machinery as is notified by the FederalGovernment in the official Gazette but if imported, these shall be

entitled to exemption from sales tax on importation if these are not

manufactured in Pakistan.

69 Tractors, Bulldozers and combined harvesters; and components

70 Import and supply of fully dedicated CNG Euro-2 buses

Table II- Local Supplies only

5 Supply of such agricultural implements as specified in a

notification issued by the Federal Government in the official

Gazette.


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Notifications

Following changes are brought in sales tax law through notifications to be

effective immediately:

SRO 480(I)/2011 dated June 3, 2011- exemption to machinery and

equipment

Following notifications are rescinded through this notification

Reference Subject

o SRO 1240 (I)/2005 dated 16th

Dec, 2005Exemption dump trucks for off-highway use

o SRO 542(I)/2006 dated 05th

June, 2006

Exemption to supply and import

of agricultural machinery and

equipments

o SRO 275(I)/2008 dated 12th

March, 2008

- do -

o Notification No.

1(3)STM/2004(PT-II) dated 23rd

August, 2009

Sales tax rate on local supply of

sugar

SRO 481(I)/2011 dated June 3, 2011- conditional exemption

Through this notification, another notification namely SRO 551(I)/2008

dated June 11, 2008 which prescribed conditional exemption is

amended in the following manner:

- withdrawal of exemption on CNG Kits, cylinders and valves for CNG

Kits, Commercial catalogues, Rock Phosphate, Phosphoric Acid and

Mineral Oil 97% (W/V).- exemption to white crystalline sugar

- exemption to reclaimed lead if supplied to recognized manufactures

of lead batteries.


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SRO 482(I)/2011 dated June 3, 2011- value addition tax on

commercial importer

Through this notification, Sales Tax Special Procedure Rules, 2007 are

now amended to enhance value addition tax on commercial importers

from two per cent to three per cent of value of goods.

SRO 485(I)/2011 dated June 3, 2011

Through this notification, SRO 1161(I)/ 2007 dated 30 November, 2007

is rescinded which provided zero rating on import of raw material for

manufacturing of diapers.

SRO 486(I)/2011 dated June 3, 2011- zero rating

Through this notification, zero rating on various goods specified in SRO

549(I)/2008 dated June 11, 2008 is withdrawn on followings:

- dedicated buses meant for transportation of 40 or more passengers

- Trucks and dumpers

- Trailers and semi-trailers

- Road tractors for semi-trailers, prime movers and road tractors

- whole annexure to notification as annexed to entry No. 3 to the

notification.

SRO 487(I)/2011 dated June 3, 2011- revision of return

Through this notification, the Sales Tax Rules, 2006 are now amended

to withdraw facility of upward revision of return without permission. This

relaxation from seeking permission was earlier provided through SRO

278(I)/ 2010 dated April 28, 2010.


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Summary of changes in theFederal Excise Act, 2005


Section

Definition 2(16)

The proposed amendment seeks to enlarge definition of word manufacture in

relation to tobacco by inclusion of activities or preparation of un-manufactured

tobacco by drying cutting and thrashing of raw tobacco.

Special Excise Duty (SED) 3A

The bill proposes complete withdrawal of special excise duty by omission ofsection 3A from the Federal Excise Act, 2005 which empowered the Federal

Government to levy SED. Further, SRO 655(I)/ 2007 dated June 29, 2007

through which SED was levied by the Federal Government is also rescinded

witheffect from July 1, 2011.

Recovery of unpaid duty 14

The bill also proposes to enhance the time period from three yeas to five years

for serving of notice for recovery of unpaid or erroneously refunded duty.

Further, in line with the provisions are contained in the Sales Tax Act, 1990, it

is proposed to prescribe time limitation of 120 days for passing an order after

issuance of a show cause notice subject to extension of period granted by the

Commissioner upto a maximum of 60 days with reasons to be recorded in

writing. It is also proposed that while computing the time limitation, the period

during which the proceedingsare adjourned due to a stay order or Alternative

Dispute Resolution Committee (ADRC) proceedings or adjournment granted to

the registered person notexceeding 30 days, shall be excluded.

Similar provisions existed in section 31(3) of the Federal Excise Act, 2005 which

were deleted by the Finance Amendment Ordinance, 2009 then on its expiry by

the Finance Amendment Ordinance, 2010and finally by the Finance Act, 2010.


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Section

Confiscation of Cigarettes and Beverages 26 & 27

The bill proposes to enlarge the scope of confiscation and destruction

provisions of the Act to beverages. Presently, only cigarettes are subject to the

provisions of confiscation and destruction in above cited sections.

Alternative Dispute Resolution 38

Similar to the provisions in the Sales Tax Act, 1990; the bill proposes toprescribe time limitation of 45 days for the Board to pass an order based on the

recommendations of the Alternative Dispute Resolution Committee.

FIRST SCHEDULE Table I

The bill also proposes to bring the following amendments in the First Schedule

to the Federal Excises Act, 2005:

Change in rates

S.No. Particulars Existing ratesin %

Proposed ratesin %

4 Aerated waters 12% 6%5 Aerated waters containing sugar.. 12% 6%6 Aerated waters if manufactured

locally10% 6%

7 Unmanufactured Tobacco Rs. 5 per K.g Rs. 10 per K.g.13 Cement (various specified types) Rs 700 per m.t Rs 500 per m.t

Exemption from levy of duty:

S.No. Description of goods17 Solvent oil (non-composite)18 Other21 Other fuel oils26 Mineral greases28 Transformer oil


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S.No. Description of goods29 Other mineral oils excluding sewing machine oil30 Waste oil39 Carbon black oil (carbon black feedstock) including residue carbon oil40 Methyl tertiary butyle ether (MBTE)46 Greases47 Organic composite solvents and thinners, not elsewhere specified or

included; preparedpaint or varnish removers,(i) Solvent oil (composite)(ii) Other (excluding thinners)

48 Viscose staple fiber49 Motor cars and other motor vehicles principally designed for the transport of

persons (other than those of heading 87,02), including station wagons andracing cars of cylinder capacity exceeding 850cc.

51 Air Conditioners52 Deep Freezers

Change in basis of levy

S.No. Particulars Existing Proposed50 Filter rods for cigarettes Re. 1 per rod 20% ad vol.

Inclusion of new item -amendment to be effective immediately

S.No. Particulars Proposed duty53 White Crystalline Sugar 8% ad val

Rationalization of duty on cigarettes

S.N Existing provisions ProposedDescription Rate Description Rate

9 If retail price exceedsRs. 19.5 per 10cigarettes

65% of retailprice

If retail priceexceeds Rs. 21per 10 cigarettes

65% of retailprice

10 If retail price exceedsRs. 10 per 10cigarettes but notexceeding Rs. 19.5

Rs. 5.25 per 10cigarettes plus70% ofincrementalamount

If retail priceexceeds Rs.11.50 per 10cigarettes but notexceeding Rs. 21

Rs. 6.04 per10 cigarettesplus 70% ofincrementalamount

11 If retail price does notexceed Rs. 10 per 10cigarettes

Rs. 5.25 per 10cigarettes

If retail price doesnot exceed Rs.11.5 per 10cigarettes

Rs. 6.04 per10 cigarettes


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FIRST SCHEDULE Table II

The bill proposes to abolish FED on services provided by property developers

and promoters.

SECOND SCHEDULE

The bill also proposes for inclusion of White Crystalline Sugar in Second

Schedule to the Federal Excise Act, 2005 to make its collection under the sales

tax mode. Further, it is also proposed that the amendment should be madeeffective immediately.

FED on franchise fee, technical fee or royalty Rule

43A of

Special

Procedures

for Excisable

Services

Through notification SRO 488(I)/2011 dated June 3, 2011 rate of FED on

franchise fee, technical fee and royalty is also enhanced from 5 per cent to 10

per cent of value of taxable services.The notification shall be effected from

June 4, 2011.


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Summary of changes in theCustoms Act, 1969


Section

Repayment of duty incurred for supplies against international tenders 21(c)

The bill proposes to authorize repayment of duty either wholly or partly paid for

supplies against international tenders. Under the existing law, repayment of

duty was only available in respect of goods used in the production or repair of

other goods meant for exportation, or for supply to such persons who are

entitled to import same at concessionary rates.

This is a positive amendment meant to provide incentives to localmanufacturers and suppliers of domestic goods against international tenders

entitling to claim duty draw back.

Time limitation for recovery of duty 32(3A)

The bill proposes to extend the time period for serving of show cause notice

from three years to five years for recovery of duty discovered by an audit or

examination of an importer s accounts or by any means other than documents

provided at the time of import of goods.

Time limitation for claim of refund 33

The bill proposes to clarify that the time limitation for claim of refund of one year

will be counted from the date of decision or judgment of officer of the Customs

or the Board or the Appellate Tribunal or the Court.

Levy of transit fee 129 A

The bill proposes to authorize the Board to levy transit fee on any goods orclass of goods in transit across Pakistan to a foreign territory at such rate to be

prescribed by the Board through notification in the Official Gazette.


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First Schedule to the Customs Act, 1969

Following changes are proposed to be made in the First Schedule to the

Customs Act, 1969 to be effective immediately from June 4, 2011.

Tariff rationalization on following items by reducing rate of duty from 10% to

5%:

7407.1010 - - - Bars

7407.2100 - - Of copper-zinc base alloys (brass)

Corrections in descriptions of PCT codes:

2923.9010 - - - Betaine

2930.9060 - - - O.O. diethyl O-(3, 5, 6-trichloro 2-

pyridy)

Phosphorothioate

Creation of separate PCT codesfor following:

7404.0010 - - - Brass scrap

7404.0090 - - - Other

8710.0010 - - -Armoured cash carrying vehicles

8710.0090 - - -Other

Notifications

Following changes have been brought through notifications issued alongwith

the Finance Bill 2011, amending or deleting various other notifications effectivefrom June 4, 2011.


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S.R.O. 475(I)/2011- dated June 3, 2011

This notification amends SRO 565(I)2006 dated June 5, 2006 which is

prescribing exemption / concession on duty on raw materials used for

manufacturing of specified goods. Some of the significant amendments are as

follows:

concession provided for butyl acetate industry through concession on import

of its raw materials (Sabutol).

incentives given on glass industry raw materials namely mirror backing

paint and waste / scrap of glass .

incentive for CNG compressors manufacturing industry through concession

on its 15 components.

S.R.O. 476(I)/2011- dated June 3, 2011

This notification amends SRO 567(I)2006 dated June 5, 2006 to specify

additional items of Pharmaceutical industry for duty concession as stated in

Table III, Heading A captioned as Active Pharmaceutical Ingredients .

S.R.O. 477(I)/2011- dated June 3, 2011

This notification amends SRO 575(I)2006 dated June 5, 2006 which prescribes

concession for machinery used by various industries. The amendment brought

through the notification dealt with the concession for hotel industry for promotion

of tourism industry and sports and recreation services. Previously, concessions

were only available subject to approval of the Ministry of Tourism whereas nowconcessions can be availed on approval from Tourism Departments of the

Provincial Governments, Gilgit-Baltistan, FATA and Department of Tourist

Services of theCapital Administration and Development Division.


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S.R.O. 478(I)/2011- dated June 3, 2011

This notification amends SRO 678(I)/2004 dated August 7, 2004 to prescribe

10% per cent ad valorem duty for X-mass trees, well-head and integral

components andparts thereof used by E&P companies and their contractors for

oil exploration. Previously, these items were subject to duty at the rate of 15%.

S.R.O. 479(I)/2011 dated June 3, 2011

This notification amends SRO 482(I)/2009 dated June 13, 2009 wherebyregulatory duty was imposed on import of 397 items falling under various

categories such as food, fruits and vegetables, furniture, motor vehicles,

weapons, tiles and ceramics, tobacco, makeup items, toiletries etc. The

proposed amendment seeks to curtail this list to tobacco, tiles and ceramics,

motor vehicles, weapons, Betel Nuts and Maize imported from India.

Accordingly, all remaining items are now exempt from regulatory duty.


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Summary of changes in theFinance Act, 1989 (V of 1989)


SectionLevy of tax on Capital Value of certain assets 7(1)

The proposed amendment seeks to withdraw Capital Value Tax (CVT) onpurchase of modaraba certificate or a registered instrument of redeemablecapital as defined in the Companies Ordinance, 1984 (XLVII of 1984), orshares of a public company, listed on a Registered Stock Exchange inPakistan by a resident person comprising resident individual, residentcompany or resident association of person as defined in section 81 of theIncome Tax Ordinance, 2001 (XLIX of 2001).

A consequential amendment has been proposed pursuant to proposed

amendment in sub-section (1) of section 7 as aforesaid and seeks to omitthe third proviso for collection of CVT by a Registered Stock Exchange inPakistan on purchase value of modaraba certificates or any instrument ofredeemable capital or shares of a public company from the resident person.

7(4)

3rdProviso


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Summary of changes in theSecurities and Exchange Commissionof Pakistan Act, 1997 (XLII of 1997)


SectionExpenditure to be charged on the Fund 24(3A)

The proposed insertion of a new sub-section (3A) requires that theSecurities and Exchange Commission of Pakistan (SECP) shall remit anysurplus of receipts over the actual expenditure in a financial year to theFederal Consolidated Fund and any deficit from the actual expenditure shallbe made up by the Federal Government.

Fines and penalties to be credited

A new section 40AA is proposed to be inserted which requires that all finesand penalties imposed and collected by the SECP shall be credited to theFederal Consolidated Fund.

40AA


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Summary of changes in theOil and Gas Regulatory AuthorityOrdinance, 2002 (XVII of 2002)


Expenditure to be charged on the FundSection

17(4)

The proposed insertion of a new sub-section (4) requires that the Oil andGas Regulatory Authority (the Authority) shall remit any surplus of receiptsover the actual expenditure in a financial year to the Federal ConsolidatedFund and any deficit from the actual expenditure shall be made up by theFederal Government.

Fines and penalties to be credited

A new sub-section (2) is proposed to be inserted which requires that all finesand penalties imposed and collected by the Authority shall be credited to theFederal Consolidated Fund.

18(2)


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Summary of changes in theProvisional Collection of TaxesAct, 1931 (XVI of 1931)

Following is the summary of the amendments / insertions of the provisions of respective lawswhich have become effective from 4th June, 2011 under the Provisional Collection of TaxesAct, 1931 (XVI of 1931) whereas rest of the amendments are proposed to be effective from 1st

July, 2011 subject to the approval by the Parliament.

The Customs Act, 1969 First Schedule(Effective 4thJune, 2011)

Sales Tax Act, 1990 Sixth Schedule, Table-I, Column (1)

Serial No. 29A, 29B, 30, 34, 35, 41, 42, 43, 44, 62, 64, 65,66, 67, 68, 69 & 70 and corresponding entriesin Columns (2) and (3)(Effective 4thJune, 2011)

Sixth Schedule, Table-II, Column (1)Serial No. 5 and corresponding entriesin Columns (2) and (3)(Effective 4thJune, 2011)

Federal Excise Act, 2005 First Schedule, Table-I, Column (1)

Serial No. 7 Column (4)Serial No. 9, 10 & 11 and corresponding entriesin Columns (2),(3) & (4)Serial No. 53 and corresponding entriesin Columns (2),(3) & (4)In the Restriction for 2010-2011(Effective 4thJune, 2011)

Second Schedule, Table, Column (1)Serial No. 3 and corresponding entries relating theretoin Columns (2) & (3)(Effective 4thJune, 2011)

Tax Memorandum 2011

Documents

Transcript of Tax Memorandum 2011