COMMENTS ON AMENDMENTS MADE IN INCOME TAX ORDINANCE 2001

COMMENTS ON AMENDMENTS MADE IN INCOME TAX ORDINANCE, 2001 <!--[if gte mso 10]> COMMENTS ON AMENDMENTS MADE IN INCOME TAX ORDINANCE, 2001 BY FINANCE ACT, 2009 By Habib Fakhruddin, F.C.A., Karachi Section 2(19) - Effective from tax year 2010 * After tax profit of a branch of a foreign company operating in Pakistan to the extent remitted shall be treated as dividend instead of the entire after tax profit earlier treated as dividend. * However, remittance of after tax profit of a branch of a foreign Petroleum Exploration and Production company operating in Pakistan shall not be treated as dividend. Section 2(30AA) - Effective from 1st July, 2009 Definition of `KIBOR' has been added to mean Karachi Inter Bank Offered Rate prevalent on the first day of each quarter of the financial year. Section 2(70A) - Effective from tax year 2010 `Turnover' as defined in section 113 has been made applicable for the purposes of the entire Ordinance. 'Section 5 - Effective from tax year 2010 * In section 2(19) the definition of `dividend' is an inclusive definition (dictionary meaning of dividend and few other items treated as dividend for the purposes of the Ordinance). In order to remove any ambiguity, section 5 has been amended to create a charge on dividend as well as other items treated as dividend. * In fact when an inclusive definition of dividend is already given there was no need for this amendment. Section 12(2) and First Schedule - Part I - Division I - Paragraph (2) - Effective for tax year 2010 * Bonus paid or payable to `Corporate Employees' deriving income from salary of Rs. 1,000,000 or more (excluding the bonus) for the tax year 2010 is chargeable to tax (as Internally Displaced Person Tax (IDPT), as income tax), at the rate of 30% of the amount of such Bonus. * In the amendment the words used are `paid or payable' as against the appropriate words `received or receivable'. * Further income from salary is chargeable to tax- on the basis of actually received during a tax year. Through the amendment the Bonus `paid or payable' has been brought in the ambit of charge of tax which is in contradiction to the opening sentences of section 12(2) as well as the main section 12(1) which creates a charge on income from salary. * The term `Corporate Employees' is not defined in the Ordinance. Ordinary dictionary meaning will apply, which means employees of a legal entity which has its own existence distinct from the natural persons who make it up, .i.e.: -- a company incorporated under the Companies Ordinance, 1984; - a body corporate formed by or under any law in force in Pakistan; -- a modaraba; - a body incorporated by or under the law of a country outside Pakistan relating to incorporation of companies; and -- a trust or a co-operative society or a finance society or any other society established or constituted by or under any law for the time being in force. * In paragraph (2) of Division I of Part I of First Schedule it has been. stated that "the rate of tax payable on bonus as IDPT as income tax shall be 30%". Accordingly, such tax is for all purposes `income tax' and also qualifies for reduction in tax liability (teacher/researcher reduction in tax liability) as well as tax credits allowed under sections 61 to 65A (donations, investment in shares, contribution to approved pension fund, etc.). * Further, this tax on Bonus will be also subject to further IDPT of 5% in addition to the tax payable on the taxable income. * Section 12(2).deals with the definition of `salary', i.e. what is covered by the term `salary' for the purposes of income chargeable under the head of income `salary' and adding a proviso in the definition of `salary' that bonus of `Corporate Employees' will taxed as stated above is a bad legislation. * It would have been appropriate, if a new subsection had been added. * Accordingly, how this levy will be enforced is a question mark. Section 20(1A) - Effective from tax year 2010 * In case of tangible and intangible assets used for the purposes of business, depreciation and amortization is deductible for the diminution in the value of such assets is allowed. However, no provision existed in the Ordinance for the deduction of diminution in the value of animals used for the purposes of business. * Section 20(1A) has now been added to allow deduction for the diminution in the value of animals used for the purposes of business. * Unlike depreciation or amortization for other tangible and intangible assets, the entire cost of the animals used for the purposes of business has been made an admissible deduction in the year in which such animal dies or becomes permanently useless as reduced by any amount realized against such animals or their-carcasses. Section 22(13) - Effective from tax year 2010 * The concept of restricting the cost of a passenger transport vehicle not plying for hire for the purposes of depreciation claim has been re-introduced. * Now the cost of a passenger transport vehicle not plying for hire shall be lower of the actual cost or Rs. 1,500,000 for the purposes of depreciation claim. Section 23B and Third Schedule - Part II - Paragraph (2) - Effective from tax year 2010 * Last year the, concept of `First Year Allowance' at the rate of 90% of the cost of plant, machinery and equipment (not previously used in Pakistan) installed by an industrial undertakings set up in specified rural and under developed areas was introduced. * The same concept stands extended to industrial undertaking engaged in generation of alternate energy any where in Pakistan. Section 28(1)(g)-Effective retrospectively being a corrective amendment * Technical correction of replacing `Small Business Finance Corporation (hereinafter referred to as "the Corporation")" with `Small and Medium Enterprises Bank (hereinafter referred to as "the SME Bank")'. * However, corresponding amendment to replace the word `Corporation' with `SME Bank' has not been done in the later part of the said section. Section 29A - Effective from tax year 2010 * This section deals with the deduction for bad debts arising out of consumer loans given by banks etc. * Since the computation of income of Banking Company is dealt with separately under the 7th Schedule to the Ordinance, accordingly this section has been made ineffective for a banking company. * Also see corresponding amendments in the 7th Schedule to the Ordinance. Section 49 * Editorial amendment. Sections 57(4) and 57(5) - Effective from tax year 2010 * Corresponding amendments in respect of `first year allowance for the purposes of carry forward of business losses have been made. * As a result, for the purposes of carry forward of business losses `first year allowance' has been brought at par with the treatment given to `depreciation' and `initial allowance'. Section 61 - Effective from tax year 2010 * The monetary limits for the `charitable donations' qualifying for tax credit in case of company has been enhanced from 15% to 20% of the taxable income. * In case of an individual and an association of persons the monetary limit remains unchanged at 30% of the taxable income. Section 64 - Effective from tax year 2010 * The monetary limits for the `profit on debt' qualifying for tax credit have been enhanced from: -- 40% to 50% of the taxable income; or - Rs. 500,000 to Rs.750,000 Section 65A - Effective from tax year 2010 * A new provision has been added for allowing tax credit of 2.5% of the income tax payable (other than final tax or minimum tax) to a taxpayer who:--- -- Is a manufacturer; - Is registered under Sales Tax Act, 1990; - Makes at least 90% of sales to persons registered under the Sales Tax Act, 1990; and - Provides complete details of the persons to whom sales have been made. * Subsection (4) stating that any portion of the credit, which is not adjusted against the tax liability, cannot be carry forward is superfluous since this credit is to be calculated on the amount of income tax payable, if any. Section 76(5) - Effective from tax year 2010 * In case of an asset acquired, which is financed from a loan denominated in foreign currency, the difference arising in the amount of loan repaid or the amount of loan out-standing expressed in Pak Rupees due to exchange rate fluctuations was added or subtracted, as the case may be, from the cost of such asset till the loan was finally re-paid i.e., every year the cost of such asset was re-determined. * Through this amendment, it has now been provided that such differences will be taken into the cost till such, asset qualifies for the first time for the purposes' of depreciation. * As a result the subsequent exchange rate fluctuations will be taken to the income or expenditure, as the case may be. Section 113 - Effective from tax year 2010 * The concept of `minimum tax', of 0.50% of the `turnover', has been re-introduced. * This applies to a resident company, whose income tax payable is less than 0.50% of its `turnover' or which is not liable to pay income tax for any of the following reasons:--- --- loss for the year; --- the setting off of a loss of an earlier year; -- exemption from tax; -- the application of credits or rebates; or -- the claiming of allowances or deductions (including depreciation and amortization). * `Minimum tax' paid in a tax year in excess of the income tax payable can be carried forward for adjustment against the income tax payable for the following three years, if any. * The definition of `turnover' now added is quiet different from the one previously on the statute book. Now the turnover in respect of income falling under the final tax regime has been excluded. * As a result minimum tax payable will be calculated on turnover excluding the turnover in respect of income falling under the final tax regime and compared with the income tax payable only in-respect of taxable income. Previously, both income tax payable on taxable income and final tax payable were taken together for comparison with the minimum tax payable on the total turnover including the turnover in respect of income falling under the final tax regime. * `Minimum tax' is not payable where the resident company suffers a gross loss before depreciation and inadmissible expenses. However, if the gross loss is arrived by changing the historical accounting pattern, the exemption is not avail-able. * Also see Second Schedule - Part IV - Clause (11A) for list of entities exempt from levy of `minimum tax'. . Section 113A - Effective from tax year 2010 * Although there has been no amendment in this section, but since there has been a change in the definition of the `turnover', there is a corresponding effect. * For the purposes of tax on retailers with turnover upto Rs.5,000,000, opting for turnover tax, the `turnover' will be taken exclusive of turnover in respect of income falling under the final tax regime. Section 113B - Effective from tax year 2010 * For the purposes of tax on retailers with turnover exceeding Rs.5,000,000 and subject to special procedure for payment of sales tax under Chapter III of Special Procedure Rules, 2006, the `turnover' will be taken exclusive of turnover in respect of income falling under the final tax regime. A proviso has been added for this purpose. This effectively means a retailer making sale of goods attracting deduction of tax at source under section 153 also qualifies for opting for payment of turnover tax under this section. * This amendment is contrary to the provisions of the Sales Tax Act, 1990. * Any person making sale of goods attracting deduction of tax at source under section 153 of the Ordinance, is a wholesaler and not a retailer under the Sales Tax Act, 1990 and is out side the scope of special procedure for payment of sales tax, under Chapter III of Special Procedure Rules, 2006 and as such cannot qualify under this section. Thus the change made is practically in-effective. * Further, the addition of proviso is superfluous since the definition of turnover given in Section 113(3) has been made applicable to the entire Ordinance wherein such exclusion is already provided. Section 114 - Effective from tax year 2009 * Obligation to file return of income also placed on an individual and an association of person who: -- owns immoveable property with a land area of five hundred square yards or more located in a rating area; --- owns a flat having covered area of two thousand square feet or more located in a rating area; -- owns a motor vehicle having engine capacity above 1000CC; and -- has obtained National Tax Number. * Also see section 115(1). Section 114(6) - Effective from 1st July, 2009 * Filing of revised return of income is now subject to the following conditions: -- To be accompanied by revised accounts or revised audited accounts, as the case may be; --- To be accompanied with statement of reason of revision duly signed by the taxpayer; - Is filed before the issuance of the notice for amendment of assessment; and --- Is without prejudice to any other liability, incurred under the Ordinance. * A return of income can be revised within five years from the end of the financial year in which the original return was filed. Previously a return of income could be revised within five years from the date of filing of original return. * Return of income already filed on or after 1st July, 2004, for any year, can now be revised under the extended time limit. Section 115(1) - Effective from tax year 2009 * In case of an individual deriving income exclusively from salary, the employer's annual statement of tax deduction from salary, treated as return of income on behalf of such employee is now restricted to an employee whose income from salary is less than Rs.500,000. * In consequence, an individual deriving income from salary of Rs. 500,000 or more is now required to file a return of income. Section 115(4) - Effective from tax year 2010 * Consequential/technical amendments in the obligation to file statement of final tax: - To exclude rendering of or providing of services. This has been excluded from the final tax regime (See section 153). - To include CNG stations. This was earlier missing although such income falls under the final tax regime. Section 115(4A) - Effective from 1st July, 2009 * Provision for revision of statement of final tax has been made. This was earlier missing. * Like a return of income, a statement of final tax can also be revised within five years from the end of the financial year in which the original statement was filed. * Revision of statement of final tax is without prejudice to any other liability incurred under the Ordinance. * Statement of final tax already filed on or after 1st July, 2004, for any year, can be revised now. Section 115(4B) - Effective from tax year 2009 * Filing of wealth statement along with its reconciliation made obligatory on an individual who is required to file the statement of final tax, where the final tax amounts to Rs. 20,000 or more. * In the amendment this .obligation has been placed on every person, other than a company. The obligation to file a wealth statement is only in respect of an individual and therefore placing this obligation on an association of persons is not appropriate. * Further, this amendment is misplaced. It would have been appropriate if section 116(2) had been amended for this purpose. Section 116 (1) - Effective from tax year 2009 and any wealth statement filed on or after 1st July, 2009 * The particulars of a wealth statement have been enlarged to now also include a re-conciliation statement of wealth, in addition to the details of the assets, liabilities, assets transferred and expenditures incurred. Section 116(2) - Effective from tax year 2009 and any wealth statement filed on or after 1st July, 2009 * Consequential amendment in the obligation to file a wealth statement to include a re--conciliation statement of wealth. * Once in section 116(1) the particulars of a wealth statement have been enlarged to include a re-conciliation statement of wealth, this amendment is superfluous. Section 121(1) - Effective from 1st July, 2009 * Situations under which the Commissioner can resort to Best Judgment Assessment has been enlarged to include where a taxpayer fails to furnish a statement of final tax. Section 122(2) - Effective from 1st July, 2009 * Time limit for an amended assessment has been changed / extended. * Now an amended assessment can be made within five years from the end of the financial year in which the Commissioner has issued or treated to having issued the assessment order to the taxpayer. Previously an amended assessment could be made within five years from the date the Commissioner had issued or treated to having issued the assessment order. * Under the extended time limit an assessment made or order issued or treated as issued on or after 1st July, 2004, for any tax year, can be amended now. Section 122(4) - Effective from 1st July, 2009 * Time limit for further amended assessment has been changed / extended. * Now a further amended assessment can be made within later of: -- Five years from the end of the financial year in which the Commissioner has made or issued an order or treated to having issued an assessment order to the taxpayer. (Previously this was -five years from the date the Commissioner had made or issued an order or treated to having issued the original assessment order); or -- One year from the end of the financial year in which the Commissioner has issued or treated to having issued the amended assessment order to the taxpayer. (Previously this was one year from the date the Commissioner had issued or treated to having issued the amended assessment order). * Under the extended time limit an amended assessment issued or treated as having issued on or after 1st July, 2008 can be further amended by 30th June 2010. Section 127(1) - Effective from 1st July, 2009 * An order imposing additional tax under section 205 has been specifically included in the orders against which an appeal can be preferred before the Commissioner (Appeals). * There is a difference of opinion that an order imposing additional tax is not a separate order but an amended assessment in the light of subsection (5) of section 205 and therefore there was no need for this amendment. * Similarly, an order giving effect to any finding or directions in any order made by the Commissioner (Appeals), Appellate Tribunal, High Court or Supreme Court has also been specifically included in the orders against which an appeal can be preferred before the Commissioner (Appeals). Section 127(4) - Effective from tax year 2010 (as per decision of Appellate Tribunal) * Appeal fee for an appeal against an assessment order before Commissioner (Appeals) has been fixed at Rs. 1,000. Earlier this was lower of 10% of the tax assessed or Rs. 1,000. In small cases where the tax assessed is less than Rs. 10,000, there will be an additional burden. Section 129(4) - Effective on appeals filed after 1st July, 2009, for any tax year-- * There was no time limit within which the Commissioner (Appeals) was required to dispose of an appeal (except where a notice was given by a taxpayer). Now a time limit of 120 days from the date of filing of appeal has been specified for the Commissioner (Appeals) to dispose of the appeal. However, this period of 120 days can be extended by another 60 days, for reasons to be recorded in writing by the Commissioner (Appeals). * In reckoning the above time limit, any period during which the hearing of an appeal is adjourned at the request of the appellant or is postponed due to any appeal or proceedings or stay order, remand or alternative dispute resolution proceedings or for any other reason, shall be not taken into account. * The provisions regarding notice by a taxpayer to the Commissioner (Appeals) for disposal of an appeal remains un changed to 4 months from the date of filing of appeal, which does not cater for the extended 60 days' time limit available with the Commissioner (Appeals). This is an ambiguity and needs appropriate redress by the legislators. Sections 130(8A) and 130(8AA) - Effective from 1st July, 2009 * The Chairman of the Appellate Tribunal has been empowered to constitute as many benches consisting of a single member of the Appellate Tribunal, as deem necessary and such benches can hear such cases or class of cases involving tax or penalty upto Rs. 5,000,000, as the Federal Government may specify. * In the absence of any concept of inter-tribunal appeal against the order of a bench comprising of a single member (as in case of High Court), the scope of cases (limit of cases involving tax or penalty upto Rs. 5,000,000) that can be assigned to a bench comprising of a single member is exceptionally high, particularly in view of the fact that the Appellate Tribunal is the last fact finding authority under the Ordinance. * In these new sections added the word `chairman' has been used instead of `chairperson' otherwise used in the corresponding sections. This also needs appropriate redress by the legislators. Section 131(3) - Effective from tax year 2010 (as per decision of the Appellate Tribunal) * A flat appeal fee of Rs. 2,000 has been fixed for an appeal to the Appellate Tribunal. Earlier this was lower of 10% of the tax assessed or Rs. 2,500 for an appeal against an assessment order and Rs. 2,000 (in case of a company) / Rs. 500 (in case other than a company) for an appeal against any other order. In small cases where the tax assessed is less than Rs. 20,000 there will be additional burden. Section 131(5) - Effective from 1st July, 2009 * The appellate tribunal has been restrained from granting a stay against the recovery of tax. Now the appellate tribunal can only grant a preliminary stay against the recovery of tax for 30 days and within the said period the Appellate Tribunal is required to give notice to the respondent (department) and after hearing both the parties can grant a stay against recovery of tax as it deems fit. * In the third proviso added the words `but stay order shall in no case remain operative for more than one hundred and eighty days' are superfluous and contradictory as in the first proviso already on' the statute book it has been provided that the stay order granted by the Appellate Tribunal will cease to have effect on the expiry of a period of 3 months. * Further, the proviso inserted as third proviso is not appropriate. It should have been the first proviso. Section 134A(1) - Effective from 1st July, 2009 * The scope of cases which could be referred for Alternative .Dispute Resolution (ADR) has been restricted. * Now the cases where:- --- prosecution proceedings have been initiated; or --- interpretation of question of law is involved having effect on other identical cases; --- cannot be referred for Alternative Dispute Resolution. * The Rules regarding Alternative Dispute Resolution already provide that "Any such resolution shall not be used as precedent, except as provided in the agreement". Accordingly the exclusion of cases where interpretation of question of law is involved having effect on other identical cases is not justified. Section 134A(2) Effective on applications received on or after 1st July, 2009 * There was no time limit for the Board within which it was required to constitute an Alternative Dispute Resolution Committee. Now a time limit of 60 days from the date of receipt of application has been prescribed for this purpose. Section 134A(3) - Effective on all cases referred on or after 1st July, 2009 * A period of 90 days has been prescribed for making recommendation by the Alternative Dispute Resolution Committee from the date of its constitution. The Rules regarding Alternative Dispute Resolution continue to provide that the Alternative Dispute Resolution Committee may dispose of the application within thirty days of its constitution with powers to the Board to further extend the time period. No notification has been issued by the Board, for corresponding amendment of the Rules. * It is also, now provided that:-- -- If the Committee fails to make recommendations within the said period of 90 days, the Board is empowered to dissolve the committee and constitute a New Committee which shall decide the matter within a further period of 90 days. -- If the New Committee also fails to give its recommendations within the period of 90 days the applicant shall take up the matter before appropriate forum for decision. * No time period for constitution of the New Committee by the Board has been prescribed. Section 134A(4) - Effective on recommendations received on or after 1st July, 2009 * A time period of 45 days has been prescribed for the Board to pass an order on the recommendation of the Alternative Dispute Resolution Committee. Previously no time limit was prescribed. This amendment will result into speedy disposal of cases. Section 137(1) - Effective from tax year 2010 * The due date for payment of `minimum tax' by a resident company is the due date for furnishing the return of income, i.e., 30th September for companies with income year ending between 1st July and 31st December and 31st December for companies with income year ending between 1st January and 30th June. Section 147(1) - Effective from tax year 2010 * A corrective amendment has been made in this section. Now a taxpayer is liable to pay advance income tax, if charged to tax for the latest year except the following: -- Salary income subject to deduction of tax at source; -- Property income not subject to deduction of tax at source; --- Capital gains; -- Dividend (of an individual or an association of persons); -- royalty, fee for technical services and shipping and air transport income received by non-residents, subject to a separate charge; and --- All income subject to collection or deduction of tax at source as a final tax. * Prior to the amendment inadvertently, commission of the members of the Stock Exchange not subject to final tax was included in the list of exclusions and income of the owners of goods transport vehicle and income of CNG stations though subject to final tax were not mentioned in the list of exclusions. Sections 147(4) and 147(4AA) - Effective from tax year 2010 * Basis of payment of advance income tax in case of a company has been changed. Now a company has to pay advance income tax for each quarter as under:--- -- Income tax assessed for the latest tax year including minimum tax; divided by --- Turnover assessed for the latest tax year; multiplied by -- Turnover for the quarter; minus --- Tax collected or deducted at source during the quarter, other than the final tax. Sections 147(5) and 147(5A) - Effective from tax year 2010 * Due date for payment of advance tax by an individual and an association of persons for each quarter remains unchanged, i.e., 15th September, 15th December, 15th March and 15th June. * Due date for payment of advance tax by a company for each quarter has been changed, i.e., 15th October, 15th January, 15th April and 15th June. Section 147(6A) - Effective from tax year 2010 * Consequential amendment has been made in this section for payment of advance income tax by a company on the basis of its turnover for each quarter and minimum tax payable in the absence of income tax and turnover assessed for the latest tax year. * Inadvertently, through the amendment this section has been made applicable to an association of persons, which otherwise is not applicable in view of provisions of section 147(4B) or alternative sections 147(4B) and 147(6A) are contradictory as far as an association of persons is concerned. * Further, under clause (b) the company is entitled to `make adjustment for the amount (if any) already paid'. The words `make adjustment for the amount (if any) already paid' are ambiguous and the right choice was to use the words `make adjustment of tax already paid for which a tax credit is allowed under section 168'. Section 148(7) - Effective from tax year 2010 * This section specifies the goods on which tax collected at import stage is not a final tax. One of the categories of such goods is the goods imported by Large Import Houses. The definition of Large Import Houses has been changed as under:-- -- Large import houses, who:-- have paid-up capital of exceeding 250 (previously Rs.100) million; have imports exceeding Rs.500 million during the tax year (no change); own total assets exceeding Rs. 350 (previously Rs.100) million at the close of the tax year; is single object company (no change); maintain computerized records of imports and sale of goods (no change); maintain a system for issuance of 100% cash receipts on sales (no change); present accounts for tax audit every year (no change); is registered with Sales Tax Department (no change); and make sales of industrial raw material of manufacturer registered for sales tax purposes (no change). Section 148(8) Effective from tax year 2010 * Tax collected at source from import of edible oil has been made minimum tax as against final tax previously. * The scheme of the Ordinance, prior to amendment of this section was that the income of the manufacturer's of cooking oil or vegetable ghee or both was:-- --- to the extent of import of edible oil was covered under the final tax regime; --- to the extent of purchase of locally produced edible oil was covered under fixed tax as a separate block of income (under clause (13G) of Part II of the 2nd Schedule); and --- to the extent of locally purchased imported edible oil chargeable to tax as taxable income. * There has been no corresponding change in clause (13G) of Part II of the 2nd Schedule and now the manufacturer's of cooking oil or vegetable ghee or both shall be subject to tax as under: -- to the extent of import of edible oil chargeable to tax as taxable income subject to minimum tax; -- to the extent of purchase of locally produced edible oil chargeable to fixed tax as a separate block of income; and --- to the extent of locally purchased imported edible oil chargeable to tax as taxable income. * In addition, tax collected at source on import of `packing material' has also been made minimum tax. As a consequence, packing material imported by all industrial undertakings for their own use will also be subject to minimum tax. This will create an anomaly in case of manufacturers etc., whose raw material is outside the final tax regime by virtue of subsection (7). * This appears to be not the intention of the legislature and needs redress thereof. Section 150 - Effective from 1st July, 2009 * Previously a resident company was obliged to deduct tax a, source from the payment of dividend. Now a person is obliged to deduct tax at source from the payment of dividend. * Dividend is the distribution of profit by a company to its shareholders in the proportion of shares held and under the Ordinance this also includes few other distributions which also apply to a company and shareholders. The intention behind this change is not clear. Section 153(6) - Effective from tax year 2010 * Rendering of or providing of services subject to deduction of tax at source has been excluded from the ambit of final tax. Now such income will be chargeable under the head income from business as a taxable income. However, the tax deducted at source shall be the minimum tax. * Under the first proviso to this section the rendering of or providing of services subject to deduction of tax at source is not a final tax in case of company. The newly inserted proviso without excluding the company again provides that the rendering of or providing of services subject to deduction of tax at source is not a final tax and the proviso to clause (iii) of the newly inserted second proviso provides without excluding the company that the tax deducted form rendering of or providing of services shall be a minimum tax. * In view of these overlapping provisions, a confusion has arisen that whether the tax deducted from rendering of or providing of services from a company will be a minimum tax or not. Section 153(9) - Effective from 1st July, 2009 / tax year 2010 * A non-profit organization has also been made a withholding agent in respect of payments made to a resident person or to a permanent establishment in Pakistan of a non-resident person for sale of goods, rendering of or providing of services and execution of contracts. * Sale of goods by a manufacturer thereof being a company from which tax is deducted at source is already outside the ambit of final tax. The definition of manufacturer for this purpose has been narrowed by excluding the process of packing and re-packing of goods. Section 154(3C) and First Schedule - Part III Division IV - Effective from 1st July, 2009 * A new subsection has been added empowering the Collector of Customs to collect tax at source from the gross value of goods at the time of clearing of goods exported in addition to an authorized dealer in foreign exchange at the time of realization of foreign exchange proceeds on account of export of goods by an exporter. * A plain reading of the newly added subsection reveals that the tax on export of goods will be collected twice, once at the time of clearing of goods and again at the time of realization of export proceeds of such goods. * In the notes to the Finance Bill 2009, it has been stated that this proposed amendment seeks to extend the scope of withholding tax on goods exported through land and in the salient features of the Finance Bill 2009 it has been explained that at present no tax is collected on export of goods made without form "E" and therefore Collector of Customs shall collect tax @ 1% at the time of clearing goods for export made without form "E". However, the subsection inserted is silent as to what has been stated in the notes and salient features of the Finance Bill 2009. It is not out of place to mention over here, that the law will prevail over the notes and salient features of the Finance Bill 2009. * Rate of tax to be collected by the Collector of Customs on export of goods has been specified as 1% of the value of the goods exported. Section 164(1) - Effective from 1st July, 2009 I tax year 2009 * A withholding agent collecting or deducting tax at source hitherto was required to provide a certificate of collection or deduction of tax at source in the prescribed form to the person from whom the tax has been collected or deducted. Now the withholding agents are also required to provide the copies of tax deposit form (challan) of the tax dully deposited on behalf of the person from whom it is collected or deducted or any other equivalent document. * The Ordinance and the Rules are silent as to what is meant by `any other equivalent document'. This will be open to different interpretations and continuity of the problem of giving credit of tax or refund of tax collected or deducted at source, particularly in case of utility bills, book transfers by government departments, by banks etc. in respect of profit on debt and cash withdrawal, etc. Section 164(2) - Effective from 1st July, 2009 for return of income furnished for any tax year * Now a taxpayer is required to attach the copies of the tax deposit form (challan) in respect of tax collected or deducted at source along with the return of income instead of the certificate of tax collected or deducted in the prescribed form. * The amendment does not cater for `any other equivalent document' provided by the withholding agent as an acceptable evidence of the tax paid by way of collection or deduction at source. * Further, the amended subsection on the one hand requires submission of the tax deposit form (challan) in respect of .tax collected or deducted at source along with the return and on the other hand states that the certificate of tax collected or deducted in the prescribed form shall be treated as sufficient evidence thereof, which is a contradiction. Section 168(3) - Effective from tax year 2010 * This section deals with the tax collected or deducted for which credit is not allowed since the tax collected or deducted is a final tax. As per Finance Bill, the tax collected on import of goods was excluded from the ambit of final tax and made a minimum tax and accordingly, the corresponding amendment in this sub-section was also proposed. However, as per Finance Act, 2009, the tax collected on import of goods continues to remain a final tax and as such the amendment in this section which effectively means that credit of tax collected on import of goods will be allowed is a mistake/error and requires suitable redress by the legislature. Sections 168(6) and 168(7) - Effective from 1st July, 2009 * The newly inserted subsections provide that notwithstanding any thing contained in other law for the time being in force, no withholding agent will be entitled to deduct or charge service charges for the services of collection and deduction of tax at source. * In case a withholding agent deducts any such service charges, that will be payable to the Federal Government and all the provisions of the Ordinance in relation of recovery of tax shall apply accordingly. Section 170(4) - Effective on applications received on or after 1st July, 2009 * The time limit for disposing of an application for refund of tax by the Commissioner has been extended from 45 days to 60 days. Section 171(1) - Effective from 1st July, 2009 * The rate of compensation for delayed payment of refund has been changed and linked with the quarterly `KIBOR' (Karachi Inter Bank Offered Rate) prevailing on the first day of each quarter. Earlier the rate of compensation was 6% per annum. * However, where there is reason to believe that a person has claimed the refund which is not admissible to him, no compensation shall be payable for the period till the investigation of the claim is completed and the claim is either accepted or rejected. * Compensation for delayed refund is payable from 3 months after the date on which a `refund is due' to the date on which it is actually refunded. Subsection (2) provides that a `refund is due' on the day a refund order is made by the Commissioner under section 170 and the Commissioner while making a refund order is fully competent to decide whether a claim is admissible or not as well as investigate the claim and accept or reject a claim within the time period of 60 days available with him. Thus the insertion of the above proviso is not warranted. * In our tax system the issues of allowing compensation linger on for years and to maintain a track record of quarterly KIBOR rates both for the taxpayer and tax officials will not be an easy job and will involve complex calculations as well as incorrect application of the rate resulting into increased volume of rectification request. Section 176(1) - Effective from 1st July, 2009 * A firm of chartered accountants appointed by the Board for conducting an audit of a taxpayer, with the prior approval of the Commissioner, has been empowered to: -- Enter the business premises; --- Obtain any information; -- Require production of any record, on which the required information is stored; and -- Examine such record within the business premises. * In addition, if specifically delegated by the Commissioner, such firm of chartered accountants can exercise the same powers as are vested in a Court under the Code of Civil Procedure., 1908, in respect of the following matters, namely:-- -- Enforcing the attendance of any person and examining the person on oath or affirmation; --- Compelling the production of any accounts, records, computer stored information, or computer; -- Receiving evidence on affidavit; or --- Issuing commissions for the examination of witnesses. * This subsection basically empowers the Commissioner to call for information, evidence from any person, personal attendance of any person for the purposes of examining on oath, etc. and clauses (a) and (b) thereof specify the nature, extent, etc., of such powers vested in the Commissioner. Clause (c) inserted by Finance Act 2009 specifying the aforesaid powers of a firm of chartered accountant is misplaced when read with the opening sentence of this subsection. In fact a separate subsection was required instead of a clause to the existing subsection (1). Section 177 - Effective from 1st July, 2009 * The Board has been empowered to lay down criteria for selection of any `class of persons' for audit in addition to the criteria for selection of any person. * The Commissioner has been empowered to select for audit and conduct audit of any `class of persons' in addition to any person. * The Board has been empowered to appoint a firm of chartered accountants for audit of any `class of persons' in addition to a person. * As a result of these amendments, now audit of a `class of persons' can also be conducted collectively. Section 191 - Effective from 1st July, 2009 * Under subsection (1) non-compliance of statutory obligations results into prosecution proceedings which may result into a fine or imprisonment for one year or both and under subsection (2) a further fine or imprisonment for two years or both if the compliance is not made within the time allowed by the court. * Interestingly, subsection (2) dealing with a further fine or imprisonment or both has been amended to provide for a maximum limit of fine of Rs. 50,000 while subsection (1) continues to remain open ended as to the quantum of fine. Section 192 - Effective from 1st July, 2009 * False statement in a verification results into prosecution proceedings which may result into a fine or imprisonment for three years or both. A maximum limit of fine of Rs. 100,000 has been provided. Section 192A - Effective from tax year 2010 * A new section has been added to provide for prosecution proceedings for concealment of income or furnishing of inaccurate particulars of such income, where the tax revenue impact of such concealment of income or furnishing of inaccurate particulars of income is Rs. 500,000 or more, in addition to the penalty already on the statute. * Concealment of income or furnishing of inaccurate particulars of such income is an offence punishable on conviction with imprisonment upto two years or with fine or both. * Concealment of income or the furnishing of inaccurate particulars of income include: -- The suppression of any income or amount chargeable to tax; -- The claiming of any deduction for any expenditure not actually incurred; -- The un-explained sources of any:--- Amount credited in a person's books of account; Investment made or ownership of any money or valuable article;, or Expenditure incurred. * However, where any income or amount declared is claimed to be exempt from tax or any expenditure is claimed to be deductible, the mere disallowance of such claim does not constitute concealment of income or the furnishing of inaccurate particulars of income, unless it is proved that the claim was made knowingly to be wrong. Section 193 - Effective from 1st July, 2009 * Failure to maintain records results into prosecution proceedings which may result into a fine or imprisonment for two years or both. A maximum limit of fine of Rs. 50,000 has been provided. Section 194 - Effective from 1st July, 2009 * Improper use of National Tax Number Certificate results into prosecution proceedings which may result into a fine or imprisonment for two years or both. A maximum limit of fine of Rs. 50,000 has been provided. Section 197 - Effective from 1st July, 2009 * Disposal of property to prevent attachment results into prosecution proceedings which may result into a fine or imprisonment for three years or both. A maximum limit of fine of Rs. 100,000 has been provided. Section 202 - Effective from 1st July, 2009 * Previously, the power to compound an offence attracting prosecution proceedings was vested in the Commissioner. Now this has been vested in the Director General. * There is no authority known as `Director General' under the Ordinance. In fact, in the Finance Bill 2009 it was proposed to replace the `Regional Commissioner' with `Director General'. However, in the Finance Act 2009 this was omitted but the corresponding change in this section has not been done. * Further, previously, the power to compound such offence was subject to payment of a compounding amount. Now it has been dispensed with and instead the only requirement is payment of tax due along with additional tax and penalty. Section 205 - Effective from 1st July, 2009 * The rate of additional tax for delayed payment of taxes due including advance income tax and tax collected or deducted at source has been changed from 12% per annum and linked with `KIBOR' (Karachi Inter Bank Offered Rate) on the first day of each quarter plus 3% per quarter. * In our tax system the issues of levy of additional tax linger on for years and to maintain a track record of quarterly KIBOR rates both for the taxpayer and tax officials will not be an easy job and will involve complex calculations as well as incorrect application of the rate resulting into increased volume of appeals and rectification request. . Section 210(1B) - Effective from 1st July, 2009 * Commissioner has been empowered to delegate his powers, to conduct the audit of persons selected for audit, to a firm of chartered accountants appointed by the Board. * Unlike the amendments is section 177 where provision has been made for selection and conduct of audit of a `class of persons' collectively, the delegation of powers under this section is restricted to audit of a person only. Section 214A - Effective from 1st July, 2009 * The Board has been empowered to extend the due date of compliance of any statutory obligations or submission of any application or any act or thing to be done under the Ordinance or Rules. * This power can be exercised by the Board for any specific case or entire class of cases. * Further, the Board is also empowered to delegate this power to any Commissioner or Director General by notification in the official Gazette, and subject to such limitations or conditions as may be specified therein. * There is no authority known as `Director General' under the Ordinance. In fact, in the Finance Bill 2009 it was proposed to replace the `Regional Commissioner' with `Director General'. However, in the Finance Act 2009 this was omitted but the corresponding change in this 'section has been not done. Section 214B - Effective from 1st July, 2009 * The Board has been empowered to call for and examine the record of any departmental proceedings under the Ordinance or the rules made there-under for the purpose of satisfying itself as to the legality or propriety of any decision or order passed therein and may pass such order as it may think fit subject to the following conditions:-- --- In case the order by the Board results into imposing or enhancing any tax or penalty than the originally levied then the Board is required `to provide an opportunity of showing cause and of being heard to the person affected by such order; --- No proceeding can be initiated by the Board where an appeal is pending; and --- No order can be made by the Board after the expiry of three years from the date of original decision or order. Section 231B - Effective from 1st July, 2009 / tax year 2010 * Previously every person was liable to pay advance tax at the time of registration of new motor car or jeep at the following rates: Engine Capacity Amount of Tax upto 850cc Rs. 7,500 851cc to 1000cc Rs.10,500 1001cc to 1300cc Rs.16,875 1301cc to 1600cc Rs.16,875 1601cc to 1800cc Rs.22,500 1801cc to 2000cc Rs.16,875 Above 2000cc Rs.50,000 * Now every motor vehicle registration authority of Excise and Taxation Department has been made a withholding agent to collect advance tax at the time of registration of a new locally manufactured vehicle. * Basically, the change is that now advance tax is payable on a new locally manufactured vehicles instead of new motor car or jeep (both locally manufactured and imported). * Exemption from payment of this advance tax has also been granted to a Local Government in addition to the Federal Government, the Provincial Government, a foreign diplomat and a diplomatic mission in Pakistan. Section 235(4) - Effective for tax year 2010 * The limit of minimum tax has been raised from monthly electricity bill of Rs. 20,000 to Rs. 30,000. Now tax collected along with monthly electricity bill of upto Rs. 30,000 shall be the minimum tax on the income of an individual and an association of person and where the monthly bill amount exceeds Rs. 30,000 the tax collected at source shall be an adjustable advance tax. * In case of a company, tax collected along with electricity bills without any monetary limit shall be adjustable advance tax. * According to this section, each and every bill for a month has to be seen to establish which is the `minimum tax" and which is the `adjustable tax'. It is not a simple job, both for the taxpayer and the department, and it becomes more difficult where more than one electricity connection is involved. Section 236A and First Schedule - Part IV - Division VIII - Effective from 1st July, 2009 / tax year 2010 * A new section has been added to provide for collection of tax at source at the time of sale by public auction. The details thereof are as under:-- Person(s) liable to collect tax Any person making sale by public auction, of any: Property; Awarding of any lease; Awarding of a lease of the right to collect tolls, fees or other levies; Goods confiscated or attached either belonging to or not belonging to: The Government; A Local Government; Any authority; A company; A foreign association declared to be a company under sub-clause (vi) of clause (b) of subsection (2) of section 80; A foreign contractor; A foreign consultant; A foreign consortium; The Collector of Customs; The Commissioner of Income Tax; or Any other authority From whom collectable Purchaser/lessee of any of the aforesaid property, goods or lease Rate of tax to be collected 5% of the amount of sale price When At the time of realization of sale proceeds * Tax collected under this section is adjustable against the tax liability, if any, and also refundable if in excess of the tax payable. First Schedule - Part I - Division I - Paragraphs (1) and (IA) - Effective from tax year 2009 * Internally Displaced Person Tax (IDPT), treated as income tax, has been imposed on all individuals and association of persons, retrospectively for the tax year 2009 where the taxable income is Rs. 1,000,000 or more at the rate of 5% of the tax payable on taxable income. * The charging section 4 of the Ordinance is silent as to such levy and only a rate has been prescribed in the First Schedule to the Ordinance. Technically speaking there cannot be any levy unless the charging section so specifies. This levy is similar to `Surcharge' levied under the repealed Income Tax Ordinance, 1979 for which a specific charge was first created under section 10 and the rate of surcharge was provided in Part III of First Schedule of the repealed Ordinance. * Accordingly, how this levy will be enforced is a question mark. * Tax payable on taxable income is of two types:-- -- One subject to income tax under Division I of Part I of 1st Schedule; and --- The other subject to fixed income tax, e.g., Retirement and termination benefits [section 12(6)]; Arrears of salary [section 12(7)]; Flying allowance and submarine allowance [Clause (1) of Part III of 2nd Schedule]; Property income not subject to deduction of tax at source [Section 15]; Business income of retailers [Sections 113A and 113B]; Business income from services rendered outside Pakistan [Clause (3) of Part II of 2nd Schedule]; Business income from construction contracts executed out-side Pakistan [Clause (3A) of Part II of 2nd Schedule]; Business income of manufacturers of cooking, oil or vegetable ghee or both [Clause (13C) of Part II of 2nd Schedule] Business income of resident from shipping business [Clause (21) of Part II of 2nd Schedule], * It is not clear whether the IDP Tax of 5% will apply on tax payable on both types of above taxable income or only on taxable income covered Division I of Part I of 1st Schedule. * Further, it is also not clear as to what is meant by `tax payable'. The tax payable on taxable income is either arrived at as under: -- Gross income tax; minus --- Reduction in tax liability (Part III of 2nd Schedule); minus -- Foreign tax credit; minus --- Tax credit for donations etc; OR --- After further deduction of the following credits: --- Tax credit for advance income tax paid; minus -- Tax credit for adjustable tax collected or deducted at source. First Schedule - Part I - Division I - Paragraph (IA)- Effective from tax year 2010 * The rate of income tax on taxable income of salaried taxpayers (where income from salary is more than 50% of the taxable income) has been changed to provide for enhancement of basic threshold from Rs. 180,000 to Rs. 200,000 in case of male taxpayer and from Rs. 240,000 to Rs. 260,000 for a female taxpayer. * The revised income tax rates are as under: Taxable income Rate of tax Where the taxable income does not exceed Rs.200,000 0% Where the taxable income exceeds Rs.200,000 but does not exceed Rs.250,000 0.50% and 0% for a women taxpayer Where the taxable income exceeds Rs.250,000 but does not exceed Rs.260,000 0.75% and 0% for a women taxpayer Where the taxable income exceeds Rs.260,000 but does not exceed Rs.350,000 0.75%. Where the taxable income exceeds Rs.350,000 but does not exceed Rs. 400,000 1.50% Where the taxable income exceeds Rs.400,000 but does not exceed Rs.450,000 2.50% Where the taxable income exceeds Rs.450,000 but does not exceed Rs.550,000 3.50% Where the taxable income exceeds Rs.550,000 but does not exceed Rs.650,000 4.50% Where the taxable income exceeds Rs.650,000 but does not exceed Rs.750,000 6.00% Where the taxable income exceeds Rs.750,000 but does not exceed Rs.900,000 7.509& Where the taxable income exceeds Rs.900,000 but does not exceed Rs.1,050,000 9.00% Where the taxable income exceeds Rs.1,050,000 but does not exceed Rs.1,200,000 10.00% Where the taxable income exceeds Rs.1,200,000 but does not exceed Rs.1,450,000 11.00% Where the taxable income exceeds Rs.1,450,000 but does not exceed Rs.1,700,000 12.50% Where the taxable income exceeds Rs.1,700,000 but does not exceed Rs.1,950,000 14.00% Where the taxable income exceeds Rs.1,950,000 but does not exceed Rs.2,250,000 15.00% Where the taxable income exceeds Rs.2,250,000 but does not exceed Rs.2,850,000 16.00% Where the taxable income exceeds Rs.2,850,000 but does not exceed Rs.3,550,000 17.50% Where the taxable income exceeds Rs.3,550,000 but does not exceed Rs.4,550,000 18.50% Where the taxable income exceeds Rs.4,550,000 but does not exceed Rs.8,650,000 19.00% Where the taxable income exceeds Rs.8,650,000 20.00% * In consequence, the marginal tax relief limits have also been changed as under: --- 20% of the amount by which the total income exceeds the said limit where the total income does not exceed Rs. 550,000. --- 30% of the amount by which the total income exceeds in each slab where the total income does not exceed Rs. 1,050,000. --- 40% of the amount by which the total income exceeds in each slab where the total income does not exceed Rs. 2,250,000. --- 50% of the amount by which the total income exceeds in each slab where the total income does not exceed Rs. 4,550,000. --- 60% of the amount by which the total income exceeds in each slab where the total income exceeds Rs. 4,550,000. First Schedule - Part I - Division II - Paragraph (iii) - Effective from tax year 2010 * The rate of income tax on a `small company' was originally 20% of the taxable income. Last year, in contradiction to the definition of a small company incremental rate of income tax were provided for a small company where its turnover exceeded Rs. 250 million. * The amendment made last year has been withdrawn, and the original position has been restored. First Schedule - Part II and Second Schedule - Part II - Clause (9A) - Effective from 1st July, 2009' / tax year 2010 * Rate of tax to be collected at source on import of goods has been raised from 2% to 4% of the value of goods imported. * However, in case of import of raw material by an industrial undertaking for its own use, a lower rate of collection of tax source of 3% of the value of goods imported has been specified. First Schedule - Part IV Division V - Effective from 1st July, 2009 I tax year 2010 * Rate of tax to be collected at source from sale of pre-paid telephone units through CD or any other form has been specified as 10% of the sale price. * Use of abbreviation `CD' is not appropriate in any statute unless it is defined. * Further, the charge is created by section 236 read with section 4, which does not provide for any charge on sale of pre-paid telephone units through CD or any other form. Accordingly, how this levy will be enforced is a question mark. Second Schedule - Part I - Clause (23A) - Effective from tax year 2010 * The exemption limit of withdrawal of the accumulated balance from the voluntary pension system offered by a pension fund manager under the Voluntary Pension System Rules, 2005 has been raised from 25% to 50%. Second Schedule - Part I - Clause (61) - Effective from tax year 2010 * The monetary limits for the `charitable donations' qualifying for straight deduction from total income in case of company has been enhanced from 15% to 20% of the taxable income. * In, case of an individual and an association of persons the monetary limit remains unchanged at 30% of the taxable income. Second Schedule - Part II - Clause (5) - Effective from tax year 2010 * By omission of this clause, the reduced rate of tax on the commission of an export indenting agent of 1% of such commission stands enhanced to 5% of such commission. Second Schedule Part II - Clause (5A) * Correction of editorial mistake having no effect. Second Schedule - Part II - Clause (24A) - Effective from 1st July, 2009/tax year 2010 * The rate of tax to be deducted at source from payments against sale of goods, under clause (a) of subsection (1) of section 153, from distributors of cigarette and pharmaceutical products has been reduced to 1% of the gross amount of payments as against the standard rate of 3.5%. Second Schedule - Part III - Clause (1A) - Effective from tax year 2010 * The limit of taxable income has been raised from Rs. 500,000 to Rs. 750,000 for reduction in tax liability of a taxpayer aged 60 years or more on the first day of that tax year by 50% of the income tax due on taxable income. Second Schedule - Part IV - Clause (11A) and Clause (16) - Effective from tax year 2010 * The following entities have been exempted from levy of `minimum tax' under section 113 of the Ordinance: -- National Investment (Unit) Trust; -- A collective investment scheme authorized or registered under the Non-banking Finance Companies (Establishment and Regulation) Rules, 2003; --- A real estate investment trust approved and authorized under the Real Estate Investment Trust Rules, 2006; -- Any company in respect of turnover representing transactions in shares, or securities listed on a registered stock exchange; -- Hub Power Company Limited so far as they relate to its receipts on account of sale of electricity; --- Kot Addu Power Company Limited (KAPCO) for the period it continues to be entitled to exemption under clause (138) of Part-I of the 2nd Schedule; -- Companies, qualifying for exemption under clause (132) of Part-I of 2nd Schedule, in respect of receipts from sale of electricity; --- Petroleum dealers, in so far as they relate to turnover on account of sale of petroleum and petroleum products, notwithstanding their status as a company, a registered firm or an individual, engaged in retail sale of petroleum and petroleum products through petrol pumps for the purposes of assessment of their income and determination of tax thereon (excluding the sale of petroleum and petroleum products through petrol pumps which are directly operated or managed by companies engaged in distribution of petroleum and petroleum products). --- Explanation.--For the removal, of doubt it is declared that the companies engaged in distribution of petroleum and petroleum products other than through petrol pumps shall not be entitled to the benefits of this exemption; -- Provincial Governments and Local Government, qualifying for exemption under section 49 and other Government bodies which are otherwise exempt from income tax. -- Provided nothing shall be construed to authorize any refund of tax already paid or the collection of any outstanding demand created under the said section; -- Pakistan Red Crescent Society; -- Special, purpose, non-profit companies engaged in scrutinizing the receivables of Provincial Governments; -- Non-profit organizations approved under clause (36) of section 2 or clause (58) or included in clause (61) of Part-I of 2nd Schedule; --- A taxpayer who qualifies for exemption under clause (133) of Part-I of 2nd Schedule, in respect of income from export of computer software or IT services or IT enabled services; --- A resident person engaged in the business of shipping who qualifies for application of reduced rate of tax on tonnage basis as final tax under clause (21) of Part II of the 2nd Schedule; --- A venture capital company, venture capital fund and Private Equity- and Venture Capital Fund which is exempt under clause (101) of Part-I of 2nd Schedule; --- A Modaraba registered under the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980; --- Corporate and Industrial Restructuring Corporation (CIRC); --- The corporatized entities of Pakistan Water and Power Development Authority, so far as they relate to their receipts on account of sales of electricity, from the date of their creation upto the date of completion of the process of corporatization i.e. till the tariff is notified; --- A morabaha bank or a financial institution approved by the State' Bank of Pakistan or the Securities and Exchange Commission of Pakistan (SECP), as the case may be, for the purpose of Islamic Banking and Finance in respect of turnover under a morabaha arrangement; and --- WAPDA First Sukuk Company Limited; --- The institutions of the Agha Khan Development Network (Pakistan) listed in Schedule 1 of the Accord and Protocol dated November 13, 1994, executed between the Government of the Islamic Republic of Pakistan and Agha Khan Development Network; and --- Companies operating Trading Houses (for definition or trading houses see clause (57) of Part IV of 2nd Schedule) for the first ten years, starting from the tax year in which the business operations are commenced. Second Schedule - Part IV - Clause (16A) - Effective from 1st July, 2009/tax year 2010 * Payments received by news print media services for providing - advertising services has been exempted from deduction of tax at source under section 153(1)(b) of the Ordinance. Second Schedule - Part IV -Clause (19) -Effective from tax year 2010 * Non residents, (excluding local branches or subsidiaries or offices of foreign banks, companies, associations of persons or any other person operating in Pakistan), in respect of their receipts from Pak rupees denominated Government and corporate securities and redeemable capital, as defined in the Companies Ordinance, 1984 (XLVII of 1984), listed on a - registered stock exchange, where the investments are made exclusively from foreign exchange remitted into Pakistan through a Special Convertible Rupee Account maintained with a bank in Pakistan, have been exempted from the levy of `minimum tax' under section 113 of the Ordinance. * `Minimum tax' under section 113 of the Ordinance, is attracted only on resident companies, where as exemption has been provided to non-residents, which is not understandable. Second Schedule - Part IV - Clause (47) - Effective from 1st July, 2009 * By omission of this clause the power of the Commissioner to grant exemption certificate from deduction of tax at source - under section 151 (Profit on debt) and 155 (Income from Property) has been withdrawn. * In fact, this was duplication, as the Commissioner already has such power under section 159 of the Ordinance. Second Schedule - Part IV - Clause (57) - Effective from 1st July, 2009/tax year 2010 * The exemption from collection of tax at source on import of goods available to Trading Houses (as defined under this clause) has been withdrawn. Now such trading houses will be liable to collection of tax at source at the rate of 4% of the value of goods imported and such tax collected shall be a final tax. Seventh Schedule - Paragraph (1) - Clause (c) - Effective from tax year 2010 * In case of a banking company, provision for bad debts in respect of classified advances and off balance sheet items was an admissible deduction in accordance with the provisions of sections 29 (bad debts) and 29A (bad debts of consumer loans). This has been withdrawn and instead, now the provisions for bad debts in respect of advances and off balance sheet items is an admissible deduction for the actual amount of the provision or 1% of total advances, which ever is lower, on the basis of a certificate from the external auditor that such provisions is based upon and is in line with the Prudential Regulations. * Provision for bad debts in excess of 1%, if any, would not be allowed to be carried over to succeeding years. Seventh Schedule - Paragraph (1) - Clauses (d), (e) and (f) - Effective from tax year 2010 * In case of a banking company:-- -- The amount of "bad debt" classified as "sub-standard" under the Prudential Regulations issued by the State Bank of Pakistan is not an allowable deduction in computing the income chargeable to tax; -- Any "bad debt" classified as "sub-standard" and disallowed in computing the income chargeable to tax (as stated above), is subsequently reclassified under Prudential Regulations issued by the State Bank of Pakistan, as 'doubtful' or 'loss', the same shall be an allowable deduction in computing the income chargeable to tax subject to the conditions specified in clause (c) of paragraph (1) of the Seventh Schedule (as stated hereinabove); and --- Any "bad debt" classified as "sub-standard" and disallowed in computing the income chargeable to tax (as stated above), is subsequently reclassified as 'recoverable', the same shall be an allowable deduction in computing the income chargeable to tax. This effectively, means that the reversal of the provision for bad debt on re-classification from "sub-standard" to , "recoverable" shall not be included in the income chargeable to tax. Seventh Schedule - Paragraph (7A) - Effective from tax year 2010 * A banking company will also be liable to pay `minimum tax' as provided in section 113 of the Ordinance. Minimum tax - Sections 148(8), 153(6), 233A(2) and 235(4) * The above sections read as under:-- -- Section 148(8) "The tax collected from a person under this section on the import of edible oil and packing material for a tax year shall be minimum tax". -- Section 153(6) "Provided that tax deducted under sub-clause (b) of subsection (1) of section 153 shall be minimum tax". --Section 233A(2) "The tax collected under clauses (a) to (c) of subsection (1) shall be minimum tax" ---Section 235(4) "In the case of a taxpayer other than a company, tax collected upto bill amount of thirty thousand rupees per month shall be treated as minimum tax on the income of such persons and no refund shall be allowed". * The first three sections are not appropriately drafted to indicate whether this minimum tax is on the overall income [i.e. taxable income (normal income), income subject to final taxation and income subject to fixed tax as a separate block of income]. or the proportionate tax attributable on such incomes. * Contrary to this in section 235(4) the words used are `minimum tax on the income of such persons', which read with the definition of income in section 2(63), clearly means that this is the minimum tax on the overall income [i.e. taxable income (normal income), income subject to final taxation and income subject to fixed tax as a separate block of income]. * Following are the examples of more than one interpretation of the above provisions of `minimum tax': Business income from rendering of services 100,000 100,000 (actual receipts Rs. 1,000,000 and tax collected at source Rs. 60,000) Other business income 200,000 200,000 Total/Taxable income 300,000 300,000 Income Tax on above say 10% 30,000 30,000 Tax on income subject to final taxation 10,000 10,000 Tax on income subject to fixed tax as a separate block 20,000 20,000 Total tax liability before credit of taxes paid 60,000 60,000 Minimum Tax 60,000 60,000 Add: Proportionate tax on income other than services 0 20,000 Add: Tax on income: Subject to final taxation 0 10,000 Subject to fixed tax as a separate block 0 20,000 Total tax liability before credit of taxes paid 60,000 100,000 No. Finance Bill 2009/1 June 20, 2009 The Member (Direct Tax), Federal Board of Revenue, FBR House, Constitution Avenue, Islamabad Sub: FINANCE BILL 2009 - SUGGESTIONS AND CLARIFICA TIONS REGARDING Dear Sir, We shall be highly obliged for issuing necessary clarifications on the following amendments proposed in the Income Tax Ordinance, 2001 through the Finance Bill 2009: Amendment in Section 5(1): The definition of the `Dividend" in section 2(19) is an inclusive definition which means that in addition to whatever is covered by the word `dividend' the items enumerated in the said clause are treated as also dividend. Accordingly, the logic of amending section 5 may please be clarified. Amendment in Section 12(2): This section is defining the term "salary" and is not a charging section. The proviso proposed to be inserted is providing for the rate of tax applicable to the `Bonus' of the `Corporate Employees' and not the exclusion of the `Bonus of Corporate Employees' from the definition of the "salary", which we understand is wrongly placed. Further in the absence of any corresponding amendment Para (1) and Para (IA) of Division I of Part I of 1st Schedule i.e. exclusion `Bonus of Corporate Employees' from the taxable income for the purposes of calculating the income tax payable as per applicable rate cards, the same continues to be forming part of taxable income and subject to income tax under the said Paras (1) and (1A). In fact, amendment is only required in the Para (1) and Para (1A) of Division I of Part I of 1st Schedule to exclude the `Bonus of Corporate Employees' from the taxable income for the purposes of calculating gross income tax as per applicable rate cards. Further, the proposed amendment is silent as to the definition of a new term used "Corporate Employees". We understand that instead of using an un-defined term it could have been linked with all employees other the employees of the Federal Government, Provincial Government and Local Government or any other exclusions using the already defined term. Clarification is also required, whether this IDP Tax treated as income tax will be added to the income tax calculated as per applicable rate card on the taxable income and qualify for reduction in tax liability under the 2nd Schedule and tax credits under sections 61 to 65A or is a separate block of income subject to a fixed income tax of 30%. Clarification is also required, whether this IDP Tax treated as income tax will be subject to further IDP Tax of 5% of income tax payable or not. Amendment in Section 76: Although the proposed amendment has been explained through the "salient features", but it will be appropriate if the amendment is suitably drafted to give the true intention. This could be as under: "Difference, if any, on account of foreign currency fluctuation, shall be taken into account till such asset for the first time qualifies for the depreciation." Amendment in Section 113B: Under the Sales Tax Act, 1990 a person making a sale which is subject to deduction of tax at source under section 153(1)(a) of the Income Tax Ordinance, 2001 is treated as a "wholesaler" and as per recent departmental views such retailers are held to be not covered under Section 113B being a "wholesaler". Through, the proposed amendment, a contradiction between the provisions of the two laws is being created. Amendment in Section 129(4): The proposed amendment is silent as to the consequences of CIT(A) not passing an order within the stipulated time. Substitution of Section 147(4): The substituted section applies to a company as well as an association of persons. However, no corresponding amendment has been made in sub-section (4A), which also continues to be applicable to an association of persons as well. Resultantly, there are two basis of payment of advance income tax for an association of persons. Further, in component "D" of the formula the words "other than tax. deducted under section 155" appear to be :superfluous as section 168 already excludes the tax deducted under section 155. Insertion of Section 147(6A): This proposed insertion applies a company as well as an association of persons. In case of an company in the absence of last assessed tax and turnover, advance tax can be paid on the basis of turnover and minimum tax payable on the turnover. However, in case of an association of persons it is not understood how and on what basis advance income tax will be calculated on the turnover of each quarter. It appears that due to an oversight, inadvertently subsections (4) and (6A) have been made applicable to an association of persons. Further, in clause (b) there is no mention of credit of tax paid in the quarter for which a tax credit is allowed under section 168. Amendment in Sections 148, 154 and 153 (Minimum tax): Once an income is out side the final tax regime (section 169), it becomes one the component of income under the respective head of income and forms part of the total income and taxable income. By the proposed amendments tax deducted under sections 148, 154 and 153 (services) has been made "minimum tax". It is not clear, whether the "minimum tax" is in respect of the proportionate income tax attributable to the income covered under the said sections or the overall taxable income, which may also include income from sources than those covered under the said section. Following example will clarify: Business income from imports 100,000 100,000 (actual imports Rs. 1,000,000 and tax collected at source Rs. 40,000) Business income from sale of goods 200,000 200,000 Total/Taxable income 300,000 300,000 Income Tax on above say @ 10% 30,000 30,000 Minimum Tax 40,000 40,000 Add: proportionate tax on income other than imports 0 20,000 Total tax liability 40,000 60,000 Amendment in Section 148(8): As a result of proposed amendment in this subsection "packing material" import of packing material has been brought in the ambit of minimum tax which will create an anomaly in case of manufacturers etc., whose raw material is out-side the minimum tax regime by virtue of subsection (7). Under that the intention is to bring the packing material imported by manufacturers of vegetable oil or ghee or both in the ambit of final taxation, but the proposed amendment does not say so. Insertion of Section 154(3C): The proposed insertion will result into double taxation once the tax will be collected under this subsection and then again on realization of export proceeds under subsection (1), which is not the intention as per salient features released by the Board. This subsection needs to suitably be re-drafted to reflect the true intention. Amendment of Section 164: Through this amendment the withholding agent are being compelled to issue the copies of challan of tax deposited in the name of the person from it was collected or deducted or alternatively "any other equivalent document". What does the legislature mean by "any other equivalent document" is a suspense and open to different interpretations and continuity of the problem of not giving credit or issuing refund of tax collected or deducted at source. In our opinion, the alternate for tax deposited challan should "any other document as prescribed" and the Board should forthwith prescribe the documents by invoking its rule making power in respect of tax deposited through book adjustments by government department, by banks etc. in respect of profit on debt and cash withdrawal, by utility providers (Electricity, gas, telephone), etc. Amendment in Sections 171 and 205 (KIBOR): In our tax system the issues of compensation and levy of additional tax linger on for years and to maintain a record of KIBOR quarterly both for the taxpayer and tax officials will not be easy and will involve complex calculations as well as incorrect application of the rate resulting into increased volume of appeals and rectification request. In our opinion, this should be fixed annual rate as per earlier practice. Amendment in Section 171(1): A refund is due when an order to this effect is passed under section 170 and at that stage the Commissioner is at liberty to decide which claim he accepts or rejects. In fact, the proviso proposed to be added is duplication of the powers already with the Commissioner. Amendment in Section 235: According to this section as amended last year, each and every bill for a month has to be seen to establish which is the `minimum tax" and which is the `adjustable tax'. It is not a simple job, both for the taxpayer and the department, and it becomes more difficult where more than one connection is involved. In our opinion, an annual aggregate threshold should be fixed for all connections instead of monthly threshold in respect of each connection. Insertion of proviso to Paragraph (1) and substitution of Paragraph (1A) of Division I of Part I of 1st Schedule: IDP Tax of 5% of tax payable on taxable income is proposed to be charged. Taxable income is of two types:-- -- One subject to income tax under Division I of Part I of 1st Schedule; and -- The other subject to fixed income tax (these are not covered under section 169) e.g., Retirement and termination benefits [section 12(6)]; Arrears of salary [section 12(7)]; Flying allowance and submarine allowance [Clause (1) of Part III of 2nd Schedule]; Property income not subject to deduction of tax at source [Section 15]; Business income of retailers [Sections 1134 and 113B]; Business income from services rendered outside Pakistan [Clause (3) of Part II of 2nd Schedule]; Business income from construction contracts executed out-side Pakistan [Clause (3A) of Part II of 2nd Schedule]; Business income of manufacturers of cooking oil or vegetable ghee or both [Clause (13C) of Part II of 2nd Schedule] Business income of resident from shipping business [Clause (21) of Part II of 2nd Schedule]; It is not clear whether the IDP Tax of 5% will apply income tax payable on both types of above taxable income or only taxable income covered Division I of Part I of 1st Schedule. Further under" section 4 the concept .of payable is after tax credits including tax credits for advance tax and adjustable withholding taxes. Accordingly suitable amendment is required to clarify tax payable. Clarification is also required as to whether this IDP Tax will be subject to reductions in tax liability as per Part III of the 2nd Schedule or not. Amendment in clause (19) of Part IV of 2nd Schedule: Minimum tax on turnover re-introduced under section 113 applies to resident companies only. Clause (19) of Part-IV of 2nd Schedule is in respect of non-residents and accordingly insertion of section 113 in this clause is superfluous. We sincerely hope that while finalizing the Finance Act, 2009 due consideration will be given to our foregoing observations.