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Presented By : RANA MUNIR HUSSAIN Advocate Supreme Court of Pakistan

PAKISTAN TAX BAR ASSOCIATION Synopsis of Finance Act, 2009 Presented at PTBA Summer Camp-2009 at Pearl Continental Hotel-Burbhan. Presented By : RANA MUNIR HUSSAIN Advocate Supreme Court of Pakistan Senior Vice President Pakistan Tax Bar Association. Table of Contents. Income Tax

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Presented By : RANA MUNIR HUSSAIN Advocate Supreme Court of Pakistan

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  1. PAKISTAN TAX BAR ASSOCIATION Synopsis of Finance Act, 2009Presented at PTBA Summer Camp-2009at Pearl Continental Hotel-Burbhan Presented By : RANA MUNIR HUSSAIN Advocate Supreme Courtof Pakistan Senior Vice President Pakistan Tax Bar Association

  2. Table of Contents • Income Tax • Sales Tax • Capital Value Tax

  3. Section 2(30AA) KIBOR has been defined u/s 2(30AA) as ( Karachi Inter Bank Rate ) for the purpose of Additional Payment for delayed refund and additional Tax

  4. Rate of tax on Small Companies • Section 2(59A), Division II Part I of the First Schedule • In case of a small company the rate of tax is 20%. A proviso inserted under finance Act. 2008, wherein it was inserted that in case of a small company where turnover exceed Rs.250 million, the progressive of rate of tax of 25% , 30% and 35% shall be applicable. But according to the definition of small company as defined under Section 2(59A), if the turnover exceeds Rs.250 million, the company becomes ineligible to be a small company and this was an anomaly and the same is removed by deleting this proviso through Finance Act 2009. Now Small Company will be charged to tax @ 20%.

  5. Minimum Tax on the income of certain personsTurnover • Section 113,Section 2(70A), Section 137(1),Section 147(4AA)  • Prior to the amendments through finance Act 2008, wherein, section 113 was omitted, the resident companies sustaining losses were required to pay a minimum tax @ 0.5% of the turnover from all sources for that year. Now it is amended to restore the Section 113 in the same spirit. Further this section has been more elaborated to remove the anomalies e.g. the treatment of turnover of the persons where some part of the income was subject to final tax.  Now under section 113(3), the turnover has been defined and it will include the gross receipts excluding the sales tax/federal excise and the receipts which are subject to final tax. Consequently, relevant provisions in section 137 (1), relating to payment of tax on due date, section 147(4AA) relating to payment of advance tax as amended last year are restored accordingly.

  6. 30% Tax on bonus received by corporate employees The rate of tax on bonus income will be charged @30% for tax year 2010. A proviso has been inserted in section 12 of the Ordinance wherein it is provided that to compute taxable salary of the corporate employees, the bonus will be excluded from taxable salary of the corporate employees for the tax year  2010 whose income is Rs.1,000,000 or more.

  7. IDP Tax @ 5 % of Tax Payable • Tax @ 5% will be charged to business individuals and AOPs having income Rs.1,000,000/- or more for the tax year 2009 to support Internally Displaced Persons (IDP’S).

  8. Basic limit of exemption for Salaried person • The basic limit of exemption from income tax in respect of salaried person is increased from Rs.180,000 to Rs.200,000. In the case of women  salaried  taxpayer  the   basic  exemption  limit  is increased from Rs.240,000 to Rs.260,000 effective from July 1,2009. (Tax Year 2010)

  9. Income from Property, Rate of tax under section 15Rate of Tax under Section 155 • Section 15, Division IV Part I of the First Schedule, Division V Part III of the First Schedule • Through Finance Act 2008, progressive rates of tax , 5% , 10% & 15%  for Property income were introduced and later on through SRO 766(I)/2008 , dated July 21,2008 the relief was given by reducing the tax rate to 5%, 7.5% and 10%   and this relief was given  in the second schedule  and now through Finance Act 2009 this clause has been inserted in first schedule and omitted from second schedule.

  10. Deductions in Computing  “Income from Business”Loss of Animals died or permanently disabled • Section 20, Subsection 1A • A new subsection 1A is inserted providing that If the animals are used for the purpose of business or profession other than as stock in trade died or become useless, the difference of cost of that animal and any amount realized will be deductible to compute income chargeable to tax. Previously such provisions are not available in the Ordinance.

  11. Depreciation, Limit of depreciable cost of passenger transport vehicles not plying for hire • Section 22, Subsection (13) • In case of passenger transport vehicles not plying for hire, there is no threshold limit of depreciable cost in case the vehicles are purchased on or after 1st day of July 2005, Now, through the amendment in this section, a limit of Rs.1.5 million has been prescribed, if actual cost is more, for the purpose of computing depreciation.

  12. Deductible allowance to off- set bad debts on Consumer Loans by Banking Companies  • Section 29A, • Now banking companies, not allowed a deduction previously allowed up to three percent of the income arising out of consumer loans for creation of a reserve to offset bad debts arising out of such loans.

  13. Charitable Donations-Tax Credits • Section 61 (2)  • Previously, the limit of charitable donations, eligible for tax credit, in the case of individual/association of persons and companies is admissible @ 30% and 15% respectively of the taxable income.  It is the limit is enhanced to 20% from existing 15% for companies.

  14. Profit on Debt-Tax Credits on housing loan • Section 64 (2)  • Tax credit is also allowed in respect of payments by a person on a loan against any profit or share in rent and share in appreciation of for the value of house to a scheduled bank or non banking finance institution subject to certain limitations. • Percentage has been increased to 50 %from 40 % of the income or Rs. 750,000/- as against Rs, 500,000/-

  15. Tax Credit to a Person Registered under the Sales Tax Act, 1990 • Section 65 A(New Insertion)  • A new section is inserted in the Ordinance allowing tax credit @2.5% of the tax payable for the persons registered under the Sales Tax Act, 1990 subject to the condition that 90% of its sales will to the registered persons. Such tax credit will not be available to the persons whose income is covered under final tax or minimum tax. Further, this credit not will be available where the loss is carried forward.

  16. Taxation of Retailers having turnover exceeding Rs.5,000,000 by excluding supplies subject to final tax • Section 113(B)  • The tax on retailers other than companies is paid on turnover at slab rates @ 0.5% & 0.75%. Previously, all the receipts of retailers are taken into account for the purpose of turnover tax. It is amended that the turnover of retailers will not include the sale of goods on which tax is deducted or deductible under clause (a) subsection 1 of Section 153 of the Ordinance. This amendment is made to remove the anomaly because such sales/supplies are already subject to final tax.

  17. Persons Required to furnish the Return of Total IncomeDisallowing Revised Return if proceedings initiated by the department • Section 114(1)  ,Section 114(2) • Subsection 1 of section 114 prescribes the persons who have to file the return of total income. The scope of filing of tax returns is enhanced and now the following persons will also be required to file income tax return for a tax year Who owns immoveable property with a land area of five hundred square yards or more located in a rating area; • Who owns a flat having covered area of two thousand square feet or more located in a rating area; • Who owns a motor vehicle having engine capacity above 1000CC; and • Who has obtained National Tax Number”. • Under subsection 2, it is amended to disallow the revised return if it is filed after initiating the proceeding for amendment of assessment by the department. Previously, a return can be revised anytime within a period of five years of filing the original return without any condition.

  18. Filing of Return made mandatory by Salaried Person if income is Rs.500,000 or more. • Section115(1) , Section 114(2) • Previously, the salaried persons are not required to furnish a return under section 114 if the employer furnishes annual statement of deduction of tax as required under the law. However, where the annual income is Rs.500,000 or more, the salaried person is required to file Wealth Statement. • Now, the salaried persons having annual income of Rs.500,000 or more will require to file the return of income electronically along with wealth statement.

  19. Revision of Statement u/s 115(4) and filing of wealth statement u/s 115(4B) • Revision of statement: • Now the tax payer like return of income can also file revise statement u/s 115 • Filling of Wealth Statement u/s 115(4B): • Where the amount declared as final tax is Rs. 20,000/- or more filing of wealth statement with statement of 115(4) has been made mandatory, there was no such condition previously

  20. Filing of Reconciliation Statement of Wealth along with Wealth Statement • Section 116 • It is amended that filing of Reconciliation Statement of Wealth will be mandatory along with Wealth Statement required to be filed under this section. Previously, tax payers normally file wealth reconciliation statements along with the wealth statement and returns but it was not mandatory.

  21. Prescribed Fee for Appeal to the Commissioner (Appeals) and Appeal to the Appellate Tribunal fixed • Section 127(4), Section 131(3) • Previously, the prescribed fee for appeal to the Commissioner (Appeals) was 10% of the tax payable or Rs.1000 whichever was less. It is amended to fix the appeal fee as Rs.1000/-. Previously the prescribed fee for appeal to Appellate Tribunal was lesser of 10% of the tax payable or Rs.2500. Now the fee for appeal to Appellate Tribunal is also fixed to Rs.2000/-.

  22. Appellate Tribunal –Empowering Chairman to Constitute Single Member Benches to decide where amount involved is less than Rs.5million • Section 130(8A), (8AA) • Previously, a Bench cannot be less than two members to decide the cases of appeals in the Appellate Tribunal.  It is amended to empower the Chairman-Appellate Tribunal to constitute as many single member benches as he may deem necessary. Further, the single member, on behalf of chairman, may dispose off any case where the amount of tax or penalty involved is less than Rs.5 million.  This amendment is made to reduce the pendency of cases in the Appellate Tribunal.

  23. Alternative Dispute Resolution Committee (ADRC)- Limiting the Scope and Specifying Time Limits • Section 134 • Previously, any aggrieved person in connection with any matter pending with any appellate authority may apply to ADRC for the resolution of any hardship or dispute. An amendment in subsection (1) is made limiting the scope of ADRC. Now the cases where prosecution proceedings have already been started or where interpretation of question of law having effect on identical other cases will not be referred to ADRC. Previously no time limits for the whole process of ADRC are defined resulting delays in settlement of ADRC cases. Now it is amended to specify the time limits as follows. • Appointment of Committee by FBR :within 60 days of the receipt of application  Recommendations by ADRC :Within  90 days of constitution Passing of Order by the Board on Recommendations of ADRC :Within 45 days of receipt of recommendations of ADRC Further it is amended by substituting  subsection (3) that  the committee may if it deem fit necessary to to conduct inquiry seek expert opinion, direct any officer of the income tax or any other person to conduct an audit  and if the committee fails to submit recommendations within  90 days of its constitution, the board may dissolve the committee and constitute a new committee which shall decide the matter with in a further period 90 days. If after the expiry of that period the dispute is not resolved the matter shall be taken up by the appropriate forum.

  24. Modes of Recovery of tax from tax payer or other person on behalf of taxpayer • Section 138 • Subsection (2) of section 138 empowers the commissioner to recover the amount of any tax due from the tax payer.

  25. Advance Tax- AOPs require to pay advance taxTurnover will be taken into account to compute advance • Section 147, Section 147(2) , Section 147(4) • Under this section advance tax is payable by the persons in four quarterly installments computed according to the formula given. Previously individuals and AOPs whose latest assessed taxable income is less than Rs.200,000 are not liable to pay advance tax. The formula is also amended as follows. (A x B/C)-DWhere A   is the taxpayer’s turnover for the quarterB   is the tax assessed to the taxpayer for the latest tax year C   is the taxpayer’s turnover for the latest tax year; andD   is the tax paid in the quarter for which a tax credit is allowed under section 168 for tax deducted or collected, other than tax deducted under section 155. • Previously, the advance tax was computed on the basis of latest tax assessed only. [The Formula was  (A/4)-B  where A is latest tax assessed, B is tax deducted or collected in the quarter] • In the amended formula the turnover will also be taken into account for the purpose of computing the advance tax installment. The time for payment of advance tax for companies is 15 days after the quarter end except the last quarter of the tax year and for individuals/AOPs is 15 days before the quarter end.

  26. Tax on Imports-Rate of Tax on Imports • Section 148 , Part II of the First Schedule • The rate of tax on imports is increased from 2% to 4% whereas the rate of tax under this section for import of raw material imported by an industrial undertaking for its own use will be 3% and this will be final tax The provisions of  final tax  will not be applicable on certain imports in case of imports by industrial undertakings, manufacturers of fertilizers and manufacturers of motor vehicles. These provisions will also be not applicable to the Large Import Houses having paid up capital of Rs.250 million, total assets Rs.350 million and imports exceeding 500 million in a year.  Section 169 regarding collection or deduction of tax as final tax is amended accordingly. Previously the tax collected on imports of edible oil was final now it will be minimum tax.

  27. Payments for goods and servicesNPOs to Act as Withholding Agent • Section 153 (6), (9), Section 153 (6B) • Section 153 contains provisions relating to deduction of tax at source from payments made on account of sale of goods, rendering of services and execution of contracts etc.  • Subsection (6) contains provisions that tax deducted under this section shall be final tax except deduction against rendering of services by companies. The Finance Act amended that deduction against services other than companies will also not be the final tax but it will be minimum tax. Now the service providers will file the normal return of income. • In Subsection (9), provisions defining the prescribed persons to act as withholding agents are amended by including Non Profit Organizations (NPOs). • The definition of “manufacturer” under subsection (9) is also amended by excluding packing and repacking process but under the Sales Tax Act, packing and repacking process still comes under manufacturing.

  28. Rate of Tax on Payments to  News Print Media Services • Section 153 (1) bDivision III Part III of the First Schedule • The News Print Media have been exempted from deduction of tax under section 153(1)(b).

  29. Collection of Tax on Exports at the time of Clearing • Section 154 (3C),  Section 169, Division IV Part III of the First Schedule • An amendment has been made in section 154 whereby the Collectorate of Customs shall also collect tax @ 1% at the time of clearing goods for export. The tax shall be final. • The rate for indenting commission as per provisions of subsection 2 of section 154 has been increased from 1% to 5%.

  30. Copy of Challan will be required along with  Certificates of Collection or deduction of Tax • Section 164 • Previously, withholding agent is required to provide certificate of tax collected or deducted. The certificate does not guarantee the payment of the tax collected/deducted in the Government Treasury.  The Finance Act  made it mandatory to provide copy of the challan of payment or other equivalent document along with the certificate to authenticate and verify the deposit of the tax collected/deducted by the withholding agent.

  31. Credit for Tax Collected or Deducted • Section 168 • Further, subsections (6) and (7) are inserted clarifying that no service charges are allowed to any person under to ordinance against collection/deduction of tax. If any person will do so, such amount will be payable to the Federal Government as recovery of tax. • Although, no provision is available under the Ordinance that any person can deduct service charges from the tax withheld or collected. This amendment is made to further clarify the matter. 

  32. Refunds – time period to process refund  enhanced from 45 to 60 days • Section 170 • The time period to process refund application by the commissioner is enhanced from 45 days to   60 days providing relief to the department.

  33. Notice to Obtain Information or EvidenceAudit , Delegation of Powers • Section 176,Section 177,Section 210 (IB) • Amendments in section 177 are made empowering Commissioner to appoint a firm of chartered accountant for the audit of selected persons or classes of persons. • Section 176  empower a firm of chartered accountants, appointed under section 177, to serve notices to obtain information or evidence for the purpose of audit of tax payers. • A new subsection (1B) under section 210 is inserted where the Commissioner may delegate his powers to a firm of chartered accountants appointed to conduct audit under section 177.

  34. Fine on Prosecutions Prosecution for Concealment of Income • Section 191,192,193,194,,197,198 , Section 192A (New Insertion) • Previously, no limit of fines is prescribed on prosecutions under section 191, 192, 193, 194,  197 and 198 regarding the prosecutions for non-compliance with statutory obligations, false statements in verification, failure to maintain records, improper use of NTN, , disposal of property to prevent attachment or unauthorized disclosure of information by a public servant respectively. Now it is amended to prescribe amounts of fine under these sections. This amendment is made to discourage discretions of the officers of the Board. • A new section 192A is inserted regarding prosecution for concealment of income.

  35. Empowering Commissioner and Director General to Condone Time Limit • Section 214A • Previously, the powers to condone time limits specified under the provisions of the Ordinance or Rules lie with the Board. A new section is inserted where the Board may empower the Commissioner or Director General to exercise his powers in any case or class of cases.  

  36. Advance Tax on private motor vehicles • Section 231B, Division VII of Part IV of the First Schedule • Last year this section was substituted which stated the manufactures of vehicle are required to collect advance tax at the time of sale of vehicles. According to the current provisions of this section every person is liable to pay  at  the  time  of  registration  of  a  new  motor  car  or  a  jeep, advance tax at different rates according to engine capacity. Now, this section is substituted again making withholding agent to the vehicle registering authority of Excise and Taxation Department to collect advance tax at the time of registration of a newly manufactured motor vehicle Division VII of Part IV of the First Schedule. Clause (64) of Part IV of Second Schedule, The exemptions allowed for a specific period from application of the provisions of section 231B has been withdrawn. This amendment will bind the registering authority to act as withholding agent as the current provisions do not bind the registration authorities to collect advance tax.

  37. Electricity Consumption • Section 235 (4) • Subsection (4) of this section provides that advance tax collected on electricity consumption up to the bill amount of Rs.20,000 shall be minimum tax on the income of a person (other than a company). The Finance Act  increase the limit to Rs.30,000/- per month.

  38. Rate of tax on Telephone under section 236 • Division V Part IV of the First Schedule • Through Finance Act 2009 the scope of tax deductions on subscribers of Mobile phone & prepaid telephone cards has been broaden by including “sales of unit through CD or whatever form”.

  39. Advance Tax at the time of Sale by Auction • Section 236A,  Division VIII of Part IV of the First Schedule • A new section 236 A is inserted for collection of advance tax at the time of Sale by auction of any property or goods confiscated or attached. Any person making auction will collect @ 5% of the gross sale price of any property or goods sold by auction. The credit of tax collected shall be given to the person subject to the provisions of section 147, section 98B or section 145 of the Income Tax Ordinance.

  40. SALES TAX

  41.  Adjustable Input Tax • Section 8B (2) • Previously, section 8B (2) allows the adjustment of input tax in excess of 90% of the output tax, subject to conditions given under this section. However, section 8B (3) also allows the registered person for refund of sales tax. The Finance Act now removed this inconsistency by inserting the words “or refund” after the words adjustment in Section 8B (2).

  42. Assessment of Tax • Section 11(4) • The Finance Act, reduces the time period for the issuance of order to “within 180 days of show cause notice” (i.e. 120 days initial, further extendable for additional 60 days) previously it was 240 days (i.e. 120 days initial, further extendable for additional 120 days) .However, the period during which any case will remain adjourned on the request of the registered person or due to any other appellate proceedings, will be excluded while calculating the given time limit.This change will expedite the settlement of assessment proceedings.

  43. Offences & Penalties • Section 33 • Under section 40B, board is empowered to post an officer of sales tax to the premises of any registered person or class of persons to monitor production, sale of taxable goods and stock position; however provisions for penal action do not exist in case of any hindrance caused in respect of such posting. The Finance Act now  impose a penalty of Rs. 25,000 or 100 percent of the tax involved whichever is higher on the person who denies or obstructs the positing of any sales tax officer mentioned in serial 12 of table in section 33.

  44. Default Surcharge • Section 34(1) • The Finance Act now proposes that the default surcharge payable at the rate KIBOR plus 3 percent per annum in case of any erroneous default or on account of a tax fraud. Previously  default surcharge was payable at the rate 1.5 percent per month for the period of default and on account of a tax fraud, the rate of default surcharge is 2 percent per month of the amount of tax evaded.

  45. Recovery of tax not levied or short levied or erroneously refunded • Section 36(3) • The Finance Act  reduce the time period for the issuance of order for recovery of tax not levied or short levied or erroneously refunded to “within 180 days of show cause notice” (i.e. 120 days initial, further extendable for additional 60 days) previously it was 240 days (i.e. 120 days initial, further extendable for additional 120 days) .However, the period during which any case will remain adjourned on the request of the registered person or due to any other appellate proceedings, will be excluded while calculating the given time limit. This change will expedite the settlement of tax proceedings

  46. Appeals • Section 45B • The Finance Act  reduce the time period for the issuance of an appellate order by the Collector (Appeals)  to “180 days from date of filing of appeal” (i.e. 120 days initial, further extendable for additional 60 days) previously it was 240 days (i.e. 120 days initial, further extendable for additional 120 days) . However, the period during which any case will remain adjourned on the request of the registered person or due to any other appellate proceedings, will be excluded while calculating the given time limit. This change will expedite the settlement of appeal proceedings

  47. Appeals to Appellate Tribunal • Section 46 • The Finance Acts  amend the procedures for admitting, hearing and disposing of appeal by the Appellate Tribunal to bring it in line with the procedure laid down under the Customs Act, 1969.

  48. Alternative Dispute Resolution • Section 47A (3) • The Finance Act, increased the time period for issuance of recommendations by the Alternate Dispute Resolution Committee from 60 days to 90 days. The committee may, if it deem fit necessary to conduct inquiry seek expert opinion, direct any officer of the income tax or any other person to conduct an audit and shall make recommendations. The board may dissolve the committee and constitute a new committee which shall decide the matter with in a further period 90 days. If after the expiry of that period the dispute is not resolved the matter shall be taken up by the appropriate forum. • A new sub-section 3A also inserted to give powers to Board to dissolve the Committee and form a new Committee if the previous one fails to give its recommendations to Board within the stipulated 90 days. Further, the Act also specifies the time limit of 45 days for Board for issuing an order after receipt of Committee recommendations.

  49. Delayed Refund • Section 67 • Previously, the compensation for delayed refund was payable at the rate of 6 percent per annum of the amount of refund due, for the period of delay. The Finance Act now changed the rate of compensation equal to KIBOR.

  50. SIGNIFICANT SROs • SRO 471(I)/2009 dated 13 June 2009. • This notification has been issued to exclude monofilament, sun shedding, nylon fishing net, other fishing net, rope of poly ethylene and rope of nylon; and tyre cord fabric from the purview of zero rating given under SRO 509(I)/2007 dated 9 June 2007 with effect from 14 June 2009.

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