Finance Bill 2008

1. Finance Bill 2008 Proposed Amendments in Income Tax Ordinance, 2001 and Impact thereon. Presented by Syed Naved Andrabi. Andrabi & Gabriel. Advocates, Solicitors & Tax Attorneys'

2. Economic Growth 2007. • GDP Growth of 5.8% • Escalating Current Account/ Fiscal Deficit. • Rising Global Commodity Prices. • Significant Increase in Global Oil Prices. • Worsening Security Environment. • Acute Shortage of Power. • Unstable Exchange Rate. • Political Instability. Andrabi & Gabriel, Lahore.

3. Proposed Amendments, 2008.Income Tax Ordinance, 2001. • After Tax Profits of Branch of Foreign Company operating in Pakistan to be Dividends. Section 2 (19) (f ). • Tax @ 10% on Remittance. • Final Discharge. • Will be Double Taxation. • Harsh Amendment. Andrabi & Gabriel, Lahore.

4. Maintenance of Electronic Record. • Section 237A Introduced. • Allows FBR to Require any Person. • Electronic Record… 2 (19) (C). • Electronic Resources… 2 (19) (D). • Telecommunication System… 2 (19) (E). • Certain Definitions of Electronic Transactions Ordinance, 2002 Adopted… 2 (19) (B) Andrabi & Gabriel, Lahore.

5. Taxation of Local Authority. • By way of General Amendment the term Local Authority is to be read as Local Government. • Definition of Local Government added… 2 (31A). • Meaning as given in Respective Provincial Local Government Ordinances, 2001. • Local Authorities brought into the Tax Net. • Proviso Added to Section 54 by Finance Act, 2003 Omitted & Section 3 made effective. • All Local Authorities having exemption from tax within their statute also to be taxed. Andrabi & Gabriel, Lahore.

6. Progressive Taxation of Income From Property. • The Universal rate of Tax @ 5% Abolished. • Section 15; 155 (2) & Division VI of Part I of the First Schedule Amended. • Income up to PKR. 150,000. No Tax (Other than Company). • Exceeding PKR. 150,000 but 5% of the amount less than PKR 500,000. exceeding PKR 150,000. • Exceeding PKR 500,00 but PKR 17,500. Plus 10% of the Less than PKR 1,300,000. amount Exceeding PKR 500,000. • Amount Exceeding PKR 97,500. Plus 15% of the PKR 1,300,000/- amount exceeding PKR 1,300,000. Andrabi & Gabriel, Lahore.

7. Payment of Salary up to PKR 15,000. Allowed to be paid in Cash . • Amendment in Section 21 (1) (m) made. • Salary above PKR. 15,000 from July 01, 2008 to be paid through banking instrument, i.e., Cheque; Bank Transfer; Electronic Transfer etc., directly into the bank account of the employee. • It recognizes the inflationary trends and the fact that the general employee is not interested in opening an account only for such purposes. Andrabi & Gabriel, Lahore.

8. First Year Allowance at 90%. • Insertion of Section 23A and Part II of the Third Schedule amended. • Industries set-up in notified Rural & Under Developed Areas allowed. • Accelerated Depreciation of 90% allowed. • Withdrawal of Exemption compensated through Accelerated Depreciation. • Conditions for Initial Allowance shall apply. Andrabi & Gabriel, Lahore.

9. Set-Off of Accumulated Losses on Amalgamation. • By Finance Act, 2007 Current Year Loss was Restricted For Allowance & Carry Forward. • By Proposed Insertion of Sub-Section 2A in Section 57A Accumulated Loss, other than Speculation Loss now allowed. • In Case of Non-Banking Financial Institutions; Modarbas and Insurance Companies. • Banking Companies… Rule 8 of 7th Schedule. Andrabi & Gabriel, Lahore.

10. Charitable Donations. • Section 61 & Clause 61 of the Second Schedule to the Income Tax Ordinance, 2001 amended. • Eligible Donations for all Persons shall now be 10% of the Taxable Income. • Earlier for Individual & AOP 30% & Companies 15% of the Total Income. • All other conditions remain the same. Andrabi & Gabriel, Lahore.

11. Thin Capitalization. • Amendment in Section 106 made. • Thin Capitalization Rules apply only to Foreign Controlled Resident Companies, other than Financial Institutions & Banking Companies. • Proposed to Include a Branch of a Foreign Company Operating in Pakistan. • Application may be Difficult. Andrabi & Gabriel, Lahore.

12. Minimum/Turn Over Tax Abolished. • Section 113 to be Omitted. Amendments in Section 137; 147 & 148 Proposed. • Tax @ 0.5% of the Gross Turn Over to be paid by Resident Companies in case no Tax was paid or tax paid was less than ½% of the Turn Over from the Tax Year 2009. • Unabsorbed Minimum Tax Credits can be availed. Andrabi & Gabriel, Lahore.

13. Minimum Tax on Builders & Developers. • Section 113C & Division 1AA of Part I to the First Schedule to be Inserted. • Minimum Tax on Builders and Developers of Commercial, Industrial and Residential Properties to Pay:- • Builders…PKR 50/Sq. Ft. of Constructed Area. • Developers…PKR 100/Sq. Yd. of Developed Area. Andrabi & Gabriel, Lahore.

14. Salaried Person Having No Other Income To File Wealth Statement. • Sub-Section (1) of Section 115 Substituted. • Annual Statement filed by the Employer to be treated as a Return Furnished U/S 114. • Employee to file Wealth Statement required U/S 116 if Income for the Tax Year or Last Tax Year is more than PKR 500,000. Andrabi & Gabriel, Lahore.

15. Investment Tax. • Section 120A to be Inserted for Payment of Tax on Undisclosed Assets. • FBR Entrusted to make a Scheme. • No Scheme issued so far. • Budget Speech suggests Investment Tax @ 2%. • No Additional Tax, Penalty & Prosecution. • Undisclosed Income for any Year or Years. • Deemed Income U/S 111 Covered. Andrabi & Gabriel, Lahore.

16. Assessments to Give Appeal Effects. • Appeal Effect to be given by Commissioner within One Year from the end of Financial Year in which the Order is Served on Commissioner. • The Same Limitation is now being entrusted on the Commissioner Appeals. • Appropriate amendment in Section 124 is proposed. Andrabi & Gabriel, Lahore.

17. Adjudication By Appellate Commissioner. • Sub-Sections (5); (6) & (7) of Section 129 being amended to extend the Time Limit of Three Months to Four Months. • Relief Sought Deemed to be allowed if no Order passed within Four Months of Filing of appeal. • Appellate Commissioners’ Burden Relieved. • All other Conditions remain the same. Andrabi & Gabriel, Lahore.

18. FBR Order in ADRC. • FBR may Pass Order on Recommendations. • Order or Decision now Rectifiable. [134 (4A)] • Powers Entrusted to Chairman. • Appropriate Order to be in Writing. • Order to be Just & Equitable. • Application by Aggrieved Person. • Hearing to be allowed… Audi Alteram Partem. Andrabi & Gabriel, Lahore.

19. Curtailment of Period For Collection & Recovery of Tax Demand. • Section 137 (2) being amended. • Time allowed reduced to 15 days from 30 days. • Seemingly a bit Harsh. • Current Practice to Recover After 1st Appeal. • In some cases even After 2nd Appeal. • Tax Collector being facilitated as the targets for the Next Year may be difficult. Andrabi & Gabriel, Lahore.

20. Settlement of Arrears of Tax. • Section 146B being introduced. • FBR Empowered to issue a Scheme For Recovery of Tax Arrears; Withholding Taxes; Waiver of Additional Tax & Penalty. • May be General or on Case to Case basis. • Special Rules may also be Proposed By FBR for Effective Implementation. Andrabi & Gabriel, Lahore.

21. Uniformity Of Withholding Tax At Import Stage. • Rate of Withholding Tax @ 2%. • Lower Rates Provided by Clause 13; 13A; 13B; sub-clause i to iii & vii to xxiv of Clause13G & 13H of Part II of 2nd Schedule Omitted. • Goods Covered By Zero Rating Schemes and Fibres Yarns & Fabric not disturbed @ 1%. • SRO 566 & 567(I)/2008 issued to make it effective immediately. Andrabi & Gabriel, Lahore.

22. Insurance Or Re-Insurance Premium Paid To Non-Resident Persons. • Sections 101(13A); 152(1AA); (1BB) & Clause 1A Of Division-II of Part-III of the First Schedule to the Ordinance. • Premium Considered Pakistan Source Income. • Every Person to Withhold Tax @ 5%. • Tax So Deducted Deemed to be Final Tax. • May Result into increase in Insurance Rates. Andrabi & Gabriel, Lahore.

23. Certain Payments To Non-Residents. • Provisions of Section 152 (5) not applicable on Payments Liable to Reduced Rate under Agreement for Avoidance of Double Taxation. • Commissioner’s Certificate not required. • Transfer of Title to be supported by Import Documents. • Remittances made through F.E. Companies & F.E. Accounts are Payments U/S 152. Andrabi & Gabriel, Lahore.

24. Payments For Goods & Services. • Small Company to Withhold Tax. [153 (5)(e)] • Word Person Replaced by Company. [153 (6A)] • Sub-Section (6B) Omitted. • AOP with Turnover of 50 (M) & Individual with Turnover of 25 (M) to Withhold Tax. [153 (9) (g) & (h)] • Definition of Manufacturer explained. Andrabi & Gabriel, Lahore.

25. Non-Resident Media Persons. Section 153A; 169 (1) (b) of the Ordinance. • Payment for Advertisement Services to Non-Resident Media Persons Taxable. • Any Person making payment shall Withhold Tax @ 10% of the Gross Amount. • The Tax Withheld shall be Final Tax. • No Consequential Amendment in Section 101. • Section 152 (1A) (c) gives a rate of 6%. (Advertisement by T.V Satellite Channels). Andrabi & Gabriel, Lahore.

26. Small Companies. • Small Companies as Defined in Section 2 (59A). • To act as a Withholding Agent. • Progressive Tax Rates Introduced. • Turnover Less Than 250(M) 20% • More Than 250(M) & Less Than 350(M) 25% • More Than 350(M) & Less Than 500(M) 30% • More Than 500(M) 35% Andrabi & Gabriel, Lahore.

27. Powers of the FBR Enhanced To Allow Exemption From Withholding. • Section 159 (3) to be Replaced. • FBR may Exempt Persons; Class of Persons; Goods or Class of Goods from Withholding. • The Power of the Parliament given to FBR. • Can Be Construed Both Ways… Facilitation or Misuse. Andrabi & Gabriel, Lahore.

28. Electronic Tax Register (ETR). • Section 174 (5) Proposed to be Added. • Commissioner Empowered to Direct any Person to install ETR . • Prescribed ETR to be Installed. • Information having bearing on Tax Liability to be Stored. • Prescribed Rules Awaited. Andrabi & Gabriel, Lahore.

29. Other Amendments. • Tax Payers’ Registration Scheme & Rules to be Prescribed/Notified. Section 181 • Consequential Relief in Penalty if Tax Reduced Section 184 (5). • Fine for Non-Maintenance of Record Limited to PKR 50,000. Section 193 (b). • Directorate General of Withholding Introduced. Andrabi & Gabriel, Lahore.

30. Other Changes. • Withholding on Cash Withdrawals Increased. • Concept of Withholding Tax on Purchase of Vehicles Changed to Payment of Tax at the time of Registration of the Vehicle. • Tax Collected from the Members of Stock Exchange now Minimum Tax & not Final Tax. • Electricity Bills more than PKR 20,000 shall be subject to 10% Withholding and Adjustable. Andrabi & Gabriel, Lahore.

31. Other Changes… Continued. • Clause 66 of Part IV to 2nd Schedule Exempts certain Exporters-Cum-Manufacturers. • Land Line Telephones bills more than PKR. 1000/- subject to 10% Withholding. • Maximum Tax Payable on Profit Paid on Bahbood Savings Scheme & Pensioner’s Benefit Account Restricted up to 10% of such Profit. • SBP Exempted…. PCB Taxed. Andrabi & Gabriel, Lahore.

32. Other Changes… Continued. • Reduced Rate of Tax for Cooperative & Finance Societies Withdrawn. • Rice Supplied by REAP To USC subject to Reduced Rate of Withholding Tax @ 1%. • Provisions For Classified Advances in case of Banks allowed as Per Section 29 & 29A. • Accumulated Losses of Banking Companies Allowed to be Adjusted for Six Years. Andrabi & Gabriel, Lahore.

33. Salaried Persons. • Basic Exemption increased to… Employee PKR 180,000. Women Employee PKR 240,000. • Marginal Tax Relief. • Marginal Increase not Defined. • Relief Ranges between 20% to 50%. Andrabi & Gabriel, Lahore.

34. Salaried Persons… Continued. • Employers’ Contribution to PF Restricted To 1/10th of Salary or PKR 100,000 which ever is Low. • Contribution made by Employer & Paid to the Employee to be Taxed at the Current Year Rates and not at the Average of the Three Years. Andrabi & Gabriel, Lahore.

35. Finance Bill 2008 Thank You. Presented by Syed Naved Andrabi. Andrabi & Gabriel. Advocates, Solicitors & Tax Attorneys'