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Presented by: Abdul Qadir Memon 12 June 2006

Explore detailed pre and post-budget proposals aimed at broadening tax base, rationalizing taxes, reducing business costs, and curbing informal economy leakage. Highlights judicial reforms, corporate incentives, and revenue measures.

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Presented by: Abdul Qadir Memon 12 June 2006

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  1. Income Tax Bar Association Karachi POST BUDGET SEMINAR – 2006 Presented by: Abdul Qadir Memon 12 June 2006

  2. Pre Budget Proposals • Broadening of tax base; • Rationalization of taxes; • Reducing cost of doing business; • Plugging the avenues generating informal economy and leakages of tax revenues (under invoicing, no question to foreign remittances and issuance of exemption certificates to the alleged manufacturers);

  3. Pre Budget Proposals • Incentives to the Research & Development and export of services; • Simplification of salary taxation; • Removal of anomalies and irritants; • Taxpayers facilitation; • Judicial Reforms; • Encouragement and sustainability of holding companies; • Incentives for the corporatization and investment; • Strengthening the concept of ADR; and • Additional revenue measures.

  4. Broadening of Tax Base

  5. Broadening of tax base As we all know that the challenge the government and the entire nation is not how to increase current tax revenues; but how to widen the tax base to prevent tax revenue erosion as well as to bring those untaped avenues in order to create fairer society. The following budgetary proposals are in this regard..

  6. Capital Value Tax on Immoveable Property The Finance Bill proposes, where the value of immovable property is recorded the rate of tax would be @ 2% of the recorded value; however, where the value of immovable property is not recorded, the CVT would be recovered @ Rs.50/- per square yard of the land area. The said tax is leviable on immovable property other than commercial situated in Urban area measuring at least 1 kanal or 500 square yards, whichever is less; however in case of commercial immovable property it is leviable irrespective of its size.

  7. Capital Value Tax on Immoveable Property It is important to note that Finance Act 1999 deleted CVT on Immovable Properties that was leviable pursuant to Paragraph (A) and (B) of Sub section (2) of Section 7 of the Finance Act, 1989 and once again, this levy has been proposed. The Bill also proposes to bring those properties into the tax net which are acquired by way of Power of Attorney. The Bill further proposes to increase the rate of CVT on purchase of shares from 0.01% to 0.02% of the purchase value.

  8. Sections 15, 115, 155 and Division V of Part III of First Schedule Income from Property Section 155 requires every prescribed person to deduct advance tax @ 5% on the gross amount while making payment of rent if the annual rental value exceeds Rs.300,000/- and the tax so deducted is adjustable against the normal tax liability for that year.

  9. Sections 15, 115, 155 and Division V of Part III of First Schedule Income from Property • The Finance Bill proposes to • bring rental income into final tax regime at the rate of 5% of the gross amount of rent received; and • to abolish the monetary limit of Rs.300,000/-. • The Finance Bill has also proposed corresponding amendments in respect of filing of statement in Section 115 and deductions against Income from Property in section 17.

  10. Sections 15, 115, 155 and Division V of Part III of First Schedule Income from Property In my humble view the proposed amendment will benefit who are earning higher rental income and will increase the tax liability of lower class.

  11. Sections 15, 115, 155 and Division V of Part III of First Schedule Income from Property

  12. Filing of Statements Sections 165 It was proposed by the stakeholders that various registration authorities, banks, clubs should be asked to provide necessary information for the day to day registration/transfer of immovable properties and transactions conducted by bank, clubs in order to broaden the tax base. As such the Finance Bill now proposes to authorize CBR to prescribe a statement requiring any person to furnish information periodically in respect of any transaction in the prescribed form and verify in the prescribed manner.

  13. Sections 165 Filing of Statements The Finance Bill also proposes to authorize CBR to require any person to furnish statement on monthly basis in addition to annual, quarterly or six monthly statements as withholding agent. I feel this proposal has been made to ensure close monitoring of withholding taxes.

  14. Minimum Tax on Retailers Section 113 B The Finance Act, 2005 introduced minimum tax for individuals and Association of Persons (AOP); who are Retailers of textile fabrics and articles of apparel including ready made garments or fashion wear, articles of leather including foot-wear, carpets, surgical goods and sports goods and having annual turnover exceeding Rs 5 Million in a tax year.

  15. Minimum Tax on Retailers Section 113 B The tax so levied is 1% of turnover, being full & final discharge of income tax liability and was part of the single stage sales tax collected @ 3% of the declared turnover. The Bill now proposes to extend the application of Section 113B to all the retailers irrespective of the nature of business. However, this scheme will continue to apply to only Individual & AOP retailers, having annual turnover exceeding Rs.5 Million.

  16. Filing of Return of Income by Non-Profit Organizations and Welfare Institutions Section 114 Section 114 provides that every company and every person whose taxable income for the year exceeds the maximum amount that is not chargeable to tax or has been charged to tax in respect of any of two preceding tax years or claims a loss carried forward under the Ordinance or owns immovable property of specified size and any flat in the specified areas, are required to furnish Return of Income for a tax year.

  17. Filing of Return of Income by Non-Profit Organizations and Welfare Institutions Section 114 It was observed that number of NGOs do not file return of income and even do not obtain National Tax Number considering themselves as exempt entities. It was felt that there is no explicit provision in the Ordinance to make them file their return of income tax annually.

  18. Filing of Return of Income by Non-Profit Organizations and Welfare Institutions Section 114 Therefore, the Finance Bill proposes to extend the provision of Section 114; whereby Non-Profit Organization defined in Section 2(36) and Welfare Institution approved under Clause 58 of Part I of the Second Schedule are now required to file mandatory return of their income on due date stated in the Ordinance.

  19. Payments for goods and services Sections 153(8A) • Disclosure of NTN or CNIC • The Finance Bill proposes to levy and collect extra tax @ 2% over and above the applicable withholding tax rates specified in Division III of Part III of the First Schedule to the Ordinance from the persons who fail to disclose their National Tax Number (NTN) or Computerized National Identity Card (CNIC) to the Withholding Tax Agent (WTA) making payments for goods or services rendered.

  20. Rationalization of Tax

  21. Clause (1) of Division I Tax Rates for Non-Salaried Person The Finance Bill proposes to revise income tax rates for individual or AOP excluding person having salary income exceeding 50% of his taxable income. The rates ranging b/w 0.5% to 25%. This reduction has been resulted in benefit to the above taxpayers to the extent of 3.5% to 33%. The Bill also proposes that where income of a woman is covered by this clause no tax shall be charged if the taxable income does not exceed Rs.125,000/-

  22. Income of mutual fund or an investment company or a Unit Trust Scheme Clause (99) Presently any income derived by a mutual fund or an investment company registered under the Non-banking Finance Companies (establishment and Regulation) Rules, 2003, or ….

  23. Income of mutual fund or an investment company or a Unit Trust Scheme Clause (99) ... a unit trust scheme constituted by an assets management company registered under the Assets Management Companies Rules 1995, if not less than ninety percent of its accounting income of that year as reduced by capital gains whether realized or …

  24. Income of mutual fund or an investment company or a Unit Trust Scheme Clause (99) … unrealized is distributed amongst the unit or certificate holders or the shareholders as the case may be. The Finance Bill proposes to withdraw the exemption on mark-up earned on investment in Carry Over Trade (COT) by such mutual fund, investment company or a unit trust scheme.

  25. Income of an Electric Power Generation Project Clause (132) The above clause provides exemption to an electric power generation projects setup in Pakistan on or after the 1st day of July, 1988. By virtue of SRO 940(1)/2002 dated December 19, 2002, the exemption to oil fired power plants setup on or after 22nd October, 2002 was withdrawn.

  26. Income of an Electric Power Generation Project Clause (132) However, by virtue of SRO 1009(1)/2005 dated September 26, 2005 the exemption was granted to Dual Fuel (Oil / Gas) power projects setup on or after 1st September, 2005.

  27. Income of an Electric Power Generation Project Clause (132) Now the Finance Bill proposes to restrict the withdrawal of exemption only up to June, 2006 to the oil fired power plants which apparently means that the exemption will be available to such oil fired power plants which are setup on or after 1st July 2006. I am of the view that those projects which were setup b/w the period from 22nd October 2002 and 30th June 2006 would be deprived of benefit of exemption even for the future period as well.

  28. Section 151(3) & Division Part III of First Schedule Profit on Debt Section 151 provides that the payer of the profit at the time of payment of profit to the recipient shall deduct tax at the prescribed rates.

  29. Section 151(3) & Division Part III of First Schedule Profit on Debt The Finance Bill now proposes to insert sub-section (3) in this section to bring the Income on National Saving Schemes & Post Office Saving Account, Profit received on a deposit or on an account under the Presumptive Tax Regime and Profit on bond, certificate, debenture, security or instrument of any kind. The tax deducted thereon at the rate of 10% of the yield or profit paid shall constitute full and final discharge of tax liability.

  30. Section 151(3) & Division Part III of First Schedule Profit on Debt • The Finance Bill also proposes to reduce the rate of tax on the profit on any securities other than that referred to in clause (a) issued by the Federal Government, a Provincial Government or a local authority from 20% to 10%.

  31. Section 151(3) & Division Part III of First Schedule Profit on Debt • The proposed amendment will benefit the • tax payers earning substantial amount from • above sources while effecting small • investor. The net impact could be seen in the following chart:

  32. Section 151(3) & Division Part III of First Schedule Profit on Debt

  33. Taxability of Morabaha Transactions Clause 11(xvii) Pakistan is one of the pioneer countries in the Islamic world to successfully introduce Islamic Banking phenomenon. Based on a concept which was in existence during the medieval period and providing to that a technical and legal framework in the twentieth century is truly a momentous task which required vast amount of mental and physical input from many luminaries both in and outside Pakistan.

  34. Taxability of Morabaha Transactions Clause 11(xvii) Since early 1980’s and more specifically in the past couple of years the Government of Pakistan and State Bank of Pakistan have strived vigorously to establish Islamic Banks/Financial Institutions.

  35. Taxability of Morabaha Transactions Clause 11(xvii) In past a number of provisions in the Income and Sales Tax Laws have been introduced in respect of Modarba and Leasing transactions to provide level playing field to the Islamic Bank/Financial Institutions with Conventional Banks/ Financial Institutions.

  36. Taxability of Morabaha Transactions Clause 11(xvii) Recently another mode of Islamic Banking Instruments Morabaha has been introduced. It was therefore proposed that appropriate amendments in section 113,148, 153, 169 and Part-IV of the Second Schedule to the Income Tax Ordinance be made to provide level playing field to the Morabaha transactions as well.

  37. Taxability of Morabaha Transactions Clause 11(xvii) The Government in order to ensure that Islamic Banking is not at a disadvantage viz-a-viz normal banking the Finance Bill proposes to exempt minimum tax u/s.113 on Morabaha Transactions. In my view, this half hearted relief would not resolve the problem of Islamic Banks in respect of Morabaha Transactions and I feel that Government would require to provide more appropriate incentives.

  38. Plugging of Tax Revenue Leakages

  39. Collection of Tax at Import Stage Section 148 Section 148(3) empowers the Commissioner to issue Reduce Rate Certificate from collection of tax at import stage up to 100% of the amount of tax to the manufacturers importing raw materials (other than edible oils) exclusively for their own use provided the manufacturer has paid tax equals to the amount of tax paid in the immediately preceding year.

  40. Collection of Tax at Import Stage Section 148 It was argued by number of trade associations that due to misuse of exemption certificate issued to the alleged manufacturers for import of goods, has put the commercial importers and others at a disadvantage and they were unable to compete. It was also propagated that the high rate of 6% on Import of Goods is having adverse effects on the economic condition of citizens of Pakistan.

  41. Collection of Tax at Import Stage Section 148 Therefore, it was suggested that rate of withholding tax for import of raw material under this section be rationalized and the exemption certificate to the manufacturers may be issued after collection of some nominal amount in order to provide level playing field to the other importers.

  42. Collection of Tax at Import Stage Section 148 The Finance Bill now proposes to restrict the powers of the Commissioner of Income Tax to issue the reduce rate certificate up to 75% of the amount of tax with no change in the existing conditions for the issuance of the certificate stated above. In my view in the presence of Sub- Section (4) of Section 148, this amendment will have no effect and Government must consider to make appropriate amendment.

  43. Withholding Tax on Cash Withdrawals Sections 231 (1) • The Finance Act, 2005 introduced deduction of advance tax @ 0.1% on cash withdrawal from a bank account on the amount exceeding Rs 25,000/-. • The Bill now proposes to increase the advance tax rate from 0.1% to 0.2%.

  44. Withholding Tax on Cash Withdrawals Sections 231 (1) • Furthermore, it has also been proposed that advance tax should be deducted if the payment for cash withdrawal or the sum total of the payment for cash withdrawal in a day, exceeds Rs 25,000/-. In other words the limit of Rs.25,000/- per transaction has been proposed to change to a per day basis. • In my view the change of basis has also necessitated that the limit of Rs 25,000/- be increased to a reasonable level.

  45. Admissibility of Expenses Section 21(l) Section 21(l) allows any expenditure under a single head of account exceeding Rs.50,000/- if incurred through a crossed bank cheque & crossed bank draft.

  46. Admissibility of Expenses Section 21(l) The Finance Bill proposes to also allow those payments which are made through crossed pay order or any other crossed banking instrument, on-line transfer of payments and credit card payments provided that the amounts are paid/ transferred through business bank account of the taxpayer and verifiable from the bank statements of the payer and the payee as the case may be.

  47. Admissibility of Expenses Section 21(l) As you all know that the provision of Section 21(l) is similar to the provision of Section 24(ff) of the Repealed Income Tax Ordinance, 1979. The CBR, vide Circulars 6 dated July 15, 1990 and 11 of 1998 dated 20.07.1998 while explaining the application of Section 24(ff) of the Repealed Ordinance, stated that it is applicable to P & L Expenses like rent, salary, repairs, traveling, advertising and entertainment and would not affect purchases and other manufacturing or trading account expenses. Hence, the provision of Section 21(l) may only be attracted in the case of P&L Expenses.

  48. Admissibility of Expenses Section 21(l) Now the Finance Bill proposes to substitute above sub-section, whereby the words “any expenditure” have been substituted with the words “any expenditure for a transaction”. In my humble view such substitution has been made to bring all the transactions/ payments including related to trading and manufacturing account under the preview of this sub-section.

  49. Removal of Anomalies and Irritants

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