Comments Effects and Implications of The Amendments Made In The Income-Tax Ordinance 2001 By The Finance Act 2010

COMMENTS, EFFECTS AND IMPLICATIONS COMMENTS, EFFECTS AND IMPLICATIONS OF THE AMENDMENTS MADE IN THE INCOME-TAX ORDINANCE, 2001 BY THE FINANCE ACT 2010 By Habib Fakhruddin, FCA Amir Alam Khan & Co., Rawalpindi SUMMARY OF IMPLICATIONS ON AN INDIVIDUAL: Reference Implications Effective Para 2 Exemption of deemed income of an employee on account of waiver of interest on an account maintained with the employer Tax Year 2011 Para 9 Levy of Minimum Tax (turnover tax) on certain individuals Tax Year 2010 Para 10 Threshold for filing of wealth statement in case of income subject to final tax increased Tax Year 2010 Para 19 Capital gains brought in the ambit for payment of advance tax and threshold of latest assessed income for payment of advance tax increased from 200,000 to Rs.500,000 Tax Year 2011 Para 21 Obligation imposed of withholding tax at source from payments made against sale of goods, rendering of or providing of services and execution of contracts. July 01, 2010 Para 40/41 Increase in the threshold of taxable income subject to zero tax to Rs.300,000 both for salaried and non salaried taxpayers Withdrawal of preferential tax treatment for available to a women taxpayer Increase in tax rate by 1% of salaried persons having taxable income between Rs.4,550,001 and Rs.8,650,000 Tax Year 2011 Para 42 Increase in the rate of tax on Retailers with turnover upto Rs.5 million opting for tax on the basis of turnover from 0.50% to 1.00% Tax Year 2011 Para 46 Decrease in the rate of withholding tax and final tax in respect of winnings from cross-word puzzle from 20% to 10% July 01, 2010 Para 52 Increase in the threshold of taxable income for claiming senior citizen reduction in tax liability from Rs.750,000 to Rs. 1,000,000 Tax Year 2011 Para 53 Exemption of income of a foreign expert, appointed with the prior approval of the Ministry of Textile Industry July 01, 2010 SUMMARY OF IMPLICATIONS ON AN ASSOCIATION OF PERSONS Reference Implications Effective Para 1 Increase in the rate of income tax Tax year 2010 Para 9 Levy of Minimum Tax (turnover tax) on certain association of persons Tax year 2010 Para 19 Capital gains brought in the ambit for payment of advance tax and payment of advance tax on the basis of quarterly turnover Tax year 2011 Para 20 Obligation for payment of quarterly advance tax in respect of capital gains arising from securities. July 01, 2010 Para 42 Increase in the rate of tax on Retailers with turnover upto Rs.5 million opting for tax on the basis of turnover from 0.50% to 1.00% Tax year 2011 SUMMARY OF IMPLICATIONS ON A COMPANY Reference Implications Effective Para 4 Tax credit for balancing, modernization and replacement of plant and machinery Tax Year 2011 Para 5 Tax credit for enlistment on a Stock Exchange in Pakistan Tax Year 2011 Para 9 Increase in the rate of Minimum Tax (turnover tax) Tax Year 2011 Para 19 Capital gains brought in the ambit for payment of advance tax and changes in the due dates for payment of advance tax Tax Year 2011 Para 20 Obligation for payment of quarterly advance tax in respect of capital gains arising from securities. July 01, 2010 Para 43 Increase in the rate of tax on small company from 20% to 25% Tax Year 2011 Para 51 Decrease in the rate of withholding tax for payments received by certain large distribution houses against sale of goods from 3.50% to 1.00% July 01, 2010 Para 50 Withdrawal of exemption of capital gains on disposal of shares of public companies etc. derived by certain funds etc. * Withdrawal of exemption of dividend income received by the Investment Corporation of Pakistan. * Withdrawal of exemption of gain on transfer of a capital asset of the existing stock exchanges to new corporatized stock exchange. * Withdrawal of exemption of capital gains arising from sale of shares of a public company by a foreign institutional July 01, 2010 SUMMARY OF IMPLICATIONS ON ALL THREE CATEGORIES (AN INDIVIDUAL, AN ASSOCIATION OF PERSONS AND A COMPANY) Reference Implications Effective Para 3 Withdrawal of exemption of capital gains arising from disposal of shares of shares of public companies, etc. Tax Year 2011 Para 11 Changes in due dates for filing of return of income etc. July 01, 2010 Para 22 Changes in calculation of tax payable in respect of income from property Tax Year 2011 Para 23 Obligation for filing of quarterly statements of tax collected or deducted at source and withdrawal of obligation of filing monthly, biannual and annual statements July 01, 2010 Para 25 Taxpayers having income from property only required to file statement of final tax instead of return of income July 01, 2010 Para 28 Increase in the quantum of penalty of certain offences and defaults; and an offence or default to attract both penalty and prosecution proceedings July 01, 2010 Para 35 Certain banking transaction brought under the ambit of withholding tax July 01, 2010 Para 36 Tax collected on sale and purchase of shares by members of stock exchange excluded from the ambit of minimum tax Tax Year 2011 Para 37 Sale of telephone units through any electronic medium brought in the ambit of withholding tax July 01, 2010 Para 39 Purchase of domestic air travel ticket brought under the ambit of withholding tax July 01, 2010 Para 44 Increase In the rate of withholding tax on import of goods and final tax on commercial importers from 4% to 5% July 01, 2010 Para 45 Decrease in the general rate of withholding tax from payments to non- residents from 30% to 20% July 01, 2010 Para 47 Increase in .the rate of withholding tax and final tax in respect of goods transport vehicles to Re. 1 per kilogram of the laden weight from the slab rates July 01, 2010 Para 48 Decrease in the rate of withholding tax in respect of electricity bill exceeding Rs. 20,000 from 10% to 5% July 01, 2010 Para 49 Exemption of income of Punjab Pension Fund Exemption of interest income of certain foreigners Exemption of income of educational institutions established in specified affected areas of Khyber Pakhtoon Khaw, PATA and PATA Exemption of profits and gains on sale of immoveable property to a REIT Scheme extended upto June 20, 2015 Exemption of profits and gains (certain business income) of taxpayers located in specified affected areas of Khyber Pakhtoon Khaw, FATA and PATA Tax Year 2011 July 01, 2010 Tax Year 2010 and 2011 July 01, 2010 Tax Year 2010 to 2012 Para 53 Exemption from application of certain provisions of the Income Tax Ordinance, 2001 to taxpayers located in specified affected arrears of Khyber Pakhtoon Khaw, FATA and PATA See Para 53 Para 54 100% depreciation for a ramp built to provide access to persons with disabilities Tax Year 2011 SUMMARY OF TECHNICAL, PROCEDURAL AND EDITORIAL AMENDMENTS (No direct tax implications) Reference Implications Effective Para 6 Tax liability of a deceased will have a first charge on the estate of a deceased July 01, 2010 Para 7 Year of chargeability of unexplained investments, acquisitions, expenditure, etc July 01, 2010 Para 8 Limitation for chargeability of un- explained investments, acquisitions, expenditure, etc. July 01, 2010 Para 12 Audit of returns assessed u/s 120 (self assessed) July 01, 2010 Para 13 Enlargement of the scope of making a best judgment assessment July 01, 2010 Para 14 Empowerment of making further amendment of an assessment amended being erroneous and prejudicial to the interest of revenue - July 01, 2002 Para 15 Empowerment to further amend an order merged in appellate order July 01, 2010 Para 16 Enlargement of the scope of making a provisional assessment July 01, 2010 Para 17 Appeal fee for an appeal before the Commissioner (Appeals) July 01, 2010 Para 18 New provisions for recovery of tax liability of a bankrupt taxpayer July 01, 2010 Para 24 Statement of final tax will be deemed to be an order u/s 120. July 01, 2010 Para 26 The unfettered powers of the Commissioner to call for the records etc. for the conduct of audit has been slashed down and restriction imposed of "reasonable grounds" for audit in the next or following years July 01, 2010 Para 26 A firm of Chartered Accountants or Cost and Management Accountants can be appointed by the Commissioner to conduct the audit of the income tax affairs July 01, 2010 Para 27 The Board has been empowered to institute active taxpayers list July 01, 2010 Para 29 Addition and deletion of certain income tax authorities July 01, 2010 Para 30 Certain income tax authorities made subordinate to Additional Commissioner of Inland Revenue July 01, 2010 Para 31 Board vested with the powers of selection of persons or classes of persons for audit of Income Tax affairs July 01, 2002 Para 32 Exclusion of time period for which proceedings remained pending from various limitations prescribed under the law July 01, 2010 Para 33 Prior approval of Board required for initiating legal proceedings in any civil court against any officer or official. July 01, 2010 Para 34 Directorate General of Training and Research July 01, 2010 Para 38 Scope of collection of tax at the time of sale by auction modified July 01, 2010 COMMENTS, EFFECTS AND IMPLICATIONS OF THE AMENDMENTS MADE IN THE INCOME TAX ORDINANCE, 2001 BY THE FINANCE ACT 2010 1. Increase in income tax rate of an association of persons An association of persons has to pay income tax at a flat rate of tax of 25% Instead of incremental rate of income tax ranging from 0% to 25%. A comparison of the effect of change is as under: Taxable Income Income Tax payable Earlier Now Increase Increase% Rs. 100,000 Nil Rs. 25,000 Rs. 25,000 Rs. 110,000 Rs. 550 Rs. 27,500 Rs. 26,950 4,900% Rs. 125,000 Rs. 1,250 Rs. 31,250 Rs. 30,000 2,400% Rs. 150,000 Rs. 3,000 Rs. 37,500 Rs. 34,500 1,150% Rs. 175,000 Rs. 5,250 Rs. 43,750 Rs. 38,500 733% Rs. 200,000 Rs. 8,000 Rs. 50,000 Rs. 42,000 525% Rs. 300,000 Rs. 15,000 Rs. 75,000 Rs. 60,000 400% Rs. 400,000 Rs. 30,000 Rs. 100,000 Rs. 70,000 233% Rs. 500,000 Rs. 50,000 Rs. 125,000 Rs. 75,000 150% Rs. 600,000 Rs. 75,000 Rs. 150,000 Rs. 75,000 100% Rs. 800,000 Rs. 120,000 Rs. 200,000 Rs. 80,000 67% Rs. 1,000,000 Rs. 175,000 Rs. 250,000 Rs. 75,000 43% Rs. 1,300,000 Rs. 275,000 Rs. 325,000 Rs. 52,000 19% Rs. 1,300,001 And above No change The new flat income tax rate of 25% Is retrospectively applicable from the tax year 2010 i,e, on the returns of Income to be filed in September, 2010, Associations of persons with turnover of Rs. 50 million and above, are advised to convert themselves into a Private Limited Company for potential tax savings. 2. Exemption of deemed income of an Employee Interest waived off by an employee on his account with the employer shall be not chargeable to tax. 3. Withdrawal of exemption of 'capital gains' arising from disposal of shares of public companies etc. Exemption of 'Capital gains' arising on disposal of shares of public companies including the vouchers of Pakistan Telecommunication Corporation, modaraba certificates or any instrument of redeemable capital as defined in the Companies Ordinance, 1984 (XLVII of 1984) held for a period of less than a year stands withdrawn. From July 01, 2010 onwards, capital gains as reduced by capital losses, if any, arising from the disposal of the securities held for a period of less than a year [calculated from the date of acquisition (whether on or before 30th June, 2010) to the date of disposal (on or after July 01, 2010)] shall be chargeable to tax as a separate block of income as under: Tax Year Holding Period Less than six months More than six months but less than one year 2011 10.00% 07.50% 2012 10.00% 08.00% 2013 12.50% 08.50% 2014 15.00% 09.00% 2015 17.50% 09.50% 2016 Not provided 10.00% In case of a banking company and an insurance company the gain arising on disposal of securities shall be chargeable to tax as separately provided. "Securities" means shares of public companies including the vouchers of Pakistan Telecommunication Corporation, Modaraba Certificates or any instrument of redeemable capital and derivative products. The law is silent as to how capital gain on the disposal of securities will be calculated, i.e. what are the admissible deductions from the sale proceeds to arrive at the amount of gain, particularly where various costs are involved like, markup/interest on borrowed capital, bank and brokers charges, etc. 4. Tax credit for balancing, modernization and replacement of plant and machinery Tax credit equal to 10% of the amount invested in the acquisition of plant and machinery for purposes of balancing, modernization and replacement will be admissible against the tax payable subject to the following conditions: *** The balancing, modernization and replacement is carried on: * In an industrial undertaking set up in Pakistan and owned by a company; * In an already installed plant and machinery; * Between July 01, 2010 to June 30, 2015; * The tax credit is admissible in the tax year in which such plant and machinery is installed; and * The unadjusted amount of such tax credit can be carried forward and adjusted against the tax payable in the following two tax years. "Industrial undertaking" means (a) an undertaking which is set up in Pakistan and which employs,- (i) ten or more persons in Pakistan and involves the use of electrical energy or any other form of energy which is mechanically transmitted and is not generated by human or animal energy; or (ii) twenty or more persons in Pakistan and does not involve the use of electrical energy or any other form of energy which is mechanically transmitted and is not generated by human or animal energy; and which is engaged in,- (i) the manufacture of goods or materials or the subjection of goods or materials to any process which substantially changes their original condition; or (ii) ship-building; or (iii) generation, conversion, transmission or distribution of electrical energy, or the supply of hydraulic power; or (iv) the working of any mine, oil-well or any other source of mineral deposits; and (b) any other industrial undertaking which the Board may by notification in the Official Gazette, specify."; 5. Tax credit for enlistment on a Stock Exchange in Pakistan One time tax credit equal to 5% of the tax payable is admissible to a company in the tax year in which it is listed on any registered Stock Exchange in Pakistan. 6. Charge on the estate of a deceased A first charge has been created on the assets of a deceased in respect of any liability of the deceased under the Income Tax Ordinance, 2001. Accordingly, the assets of a deceased after deducting the tax liability, if any, will be available for distribution among the heirs of a deceased. 7. Year of chargeability of unexplained investments, acquisi tions, expenditure, etc. Unexplained investments, acquisitions, expenditure, etc. will be chargeable to tax in the tax year to which it relates instead of the tax year immediately preceding the financial year in which it was discovered. Similarly, the difference in the value of any investment, acquisition, expenditure, etc. declared and the reasonable cost of investment, acquisition, etc or the amount of expenditure will also be chargeable to tax in the tax year to which it relates. 8. Limitation for chargeability of un-explained investments, acquisitions, expenditure, etc. Unexplained investments, acquisitions, expenditure, etc., can be taxed irrespective of any time limitation instead of earlier limitation of five years. Although the limitation for chargeability of un-explained investments, acquisitions, expenditure, etc. has been done away with, yet the limitation of making an amended assessment (five years from the end of financial year in which an assessment has been treated to be issued under section 120) and calling for a return (five completed tax years) still holds good. 9. Minimum Tax (turnover tax) Rate of Minimum Tax (turnover tax) on resident companies will be one percent (1%) instead of one-half percent (0.50%) with effect from tax year 2011. In addition, certain individuals and association of persons carrying on business will be also liable to pay Minimum Tax (turnover tax) at the rate of one percent (1%) of their turnover from the tax year 2011 onwards. This effectively means that income tax payable on the taxable income shall be higher of: * Income tax calculated as per applicable tax rates on the taxable income; or * One percent (1%) of the turnover. Minimum tax paid in excess of income tax payable calculated as per applicable tax rates on taxable income can be carried forward in the following three years for adjustment against the income tax payable calculated as per applicable tax rates on taxable income, to the extent it exceeds the minimum tax of that year. Example: Turnover Rs. 60,000,000 Taxable income Rs. 1,500,000 Income tax calculated as per applicable tax rates Rs. 375,000 One percent (1%) of the turnover Rs. 600,000 Income tax payable on taxable income of Rs.1,500,000 will be Rs.600,000 instead of Rs.375,000 and minimum tax (Rs.600,0000) in excess of income tax calculated as per applicable tax rates (Rs.375,000) amounting to Rs.225,000 will be carried forward in the following three years for adjustment against the income tax payable calculated as per applicable tax rates on taxable income, to the extent it exceeds the minimum tax of that year. Certain individuals and association of persons to whom this levy of minimum tax applies are: * An individual whose turnover for the tax year 2009 or any subsequent year is Rs.50 million or more; and * An association of persons whose turnover for the tax year 2007 or any subsequent year is Rs.50 million or more. Once minimum tax attracted will continue to apply in the following years even if the turnover falls below the threshold in the subsequent years. Turnover for this purpose means: * the gross receipts, exclusive of Sales Tax and Federal Excise duty or any trade discounts shown on invoices, or bills, derived from the sale of goods, and also excluding any amount taken as deemed income and is assessed as final discharge of the tax liability for which tax is already paid or payable; * the gross fees for the rendering of services for giving benefits including commissions; except covered by final discharge of tax liability for which tax is separately paid or payable; * the gross receipts from the execution of contracts; except covered by final discharge of tax liability for which tax is separately paid or payable; and * the company's share of the amounts stated above of any association of persons of which the company is a member. Applicable tax rates on taxable income are: * 35% in case of a company; * 25% in case of an association of persons; and * 0% to 25% (depending upon the quantum of taxable income) in case of an individual (please see Para 40) The rate of minimum tax of 1.00% is too high for many businesses having high volumes of turnover but a low net profit margin e.g., wholesalers and distributors. This will require further provisions for exemption on account of Minimum Tax on case to case basis by additions to the already provided exemptions under Clauses (IIA), (16), (19) and (57) of Part IV of 2nd Schedule and similarly reduction in the Minimum Tax rate where the margin of net income to the turnover does not justify the standard rate of 1.00%. 10. Filing of wealth statement and reconciliation thereof An individual will be required-to file his wealth statement and re-conciliation thereof along with the return of income for the tax year 2010 and onwards, if: * The taxable income is Rs. 500,000 or more; or * The tax payable on the sources of income subject to final tax (presumptive tax regime) is Rs. 35,000 or more. 11. Due dates for filing of return etc. Due dates of filing of return of income etc. for the tax year 2010 (due in September 2010) and onwards shall be as under: * By a company: * Return of income and statement of final tax: * Where the tax year ends between July to December 30th September * Where the tax year ends between January to June 31st December * By an individual deriving income exclusively from salary of Rs.500,000 or more * Return of income 31st August * By an individual (other than a salaried person) and an association of persons: * Return of income 30th September Statement of final tax * Where the taxpayer derives income exclusively from * sources subject to final tax and property income* 31st August * In other cases 30th September * By an employer * Annual statement of deduction of income tax from salary 31st August * A taxpayer deriving income exclusively from property (rental income) is now required to file only statement of final tax instead of a return of income. 12. Audit of returns assessed under section 120 (Self-Assessment) The concept of 'selection for audit' by the Commissioner has been replaced with 'conduct of audit' under section 177. Accordingly, a corresponding change has been made in this sub section whereby the Commissioner is empowered to conduct audit of the income tax affairs of a person instead of selecting a person for an audit of his income tax affairs, where an assessment has been made under section 120. 13. Best judgment assessment Defaults attracting best judgment assessment (ex parte order, will now also include failure to produce accounts, documents and records required to be maintained before a person employed by a firm of cost and management accountants in addition to person employed by a firm of chartered accountants. Further, the Commissioner can now make best judgment assessment of "income" in addition to the "taxable income", resultantly best judgment assessment can be made by the Commissioner in respect of: * Any amount chargeable to tax under the Ordinance; * Any amount subject to collection or deduction of tax at source; * Any amount treated as income under any provisions of the Ordinance; and * Any loss of income. 14. Further amendment of an assessment already amended The Commissioner can now further amend, as many times as may be necessary, an assessment which has already amended of further amended under section 122(5A) i.e. an erroneous order in so far it is prejudicial to the interest of revenue. This power has been given retrospectively with effect from 4th July, 2003. 15. Amendment or further amendment of an order merged in appellate order The Commissioner can now further amend, as many times as may be necessary, an assessment against which an appeal has been preferred or decided. However, this power of further amendment can not be exercised in respect of any matter which was in dispute in an appeal. This power has been vested retrospectively since the inception of the Ordinance to overcome the litigation in the courts. 16. Provisional assessment The Commissioner can now make a provisional assessment of "income" in addition to the "taxable income", resultantly best provisional assessment can be made by the Commissioner in respect of: * Any amount chargeable to tax under the Ordinance; * Any amount subject to collection br deduction of tax at source; * Any amount treated as income under any provisions of the Ordinance; and * Any loss of income. 17. Appeal fee Effective July 01, 2010 the appeal fee for an appeal before the Commissioner (Appeals) will be Rs.1,000 against an assessment order irrespective of the quantum of tax assessed. Earlier this was 10% of tax assessed for small cases. 18. Estate in bankruptcy New provisions introduced for recovery of tax liability of a taxpayer declared bankrupt. 19. Advance tax Payment of Advance Tax, with effect from tax year 2011, will be also attracted where a taxpayer derives income chargeable under the head "Capital Gains" excluding capital gains arising from disposal of shares of public companies, etc. for which separate provisions have been made. With effect from the tax year 2011, an individual will be liable to pay advance tax if the latest assessed income [excluding dividend income (Section 5), Pakistan source royalty or fee for technical services of non-residents (Section 6), shipping and air transport income of non-residents (Section 7), income from property (Section 15)., income from salary subject to deduction of tax at source and income subject to collection or deduction of tax at source as final tax], exceeds. Rs. 500,000. Earlier this was Rs.200,000. With effect from tax year 2011, an association of persons will be liable to pay advance tax irrespective of the quantum of latest assessed taxable income based on turnover of each quarter in the ratio of tax assessed to the turnover of the latest assessed year. Due dates for payment of advance tax are now as under: In case of A company or an association of persons An individual 1st Quarter (July to September) September 25 September 15 2nd Quarter (October to December) December 25 December 15 3rd Quarter (January to March) March 25 March 15 4th Quarter (April to June) June 15 June 15 20. Advance tax on capital gains arising from disposal of securities A company and an association of persons will be required to make payment of advance tax in respect of capital gains arising from the disposal of securities which are chargeable to tax as a separate block of income as under: Holding period Rate of Advance Tax Due date for payment of advance tax Where holding period of a securities is less than six months 2.00% of the capital gains derived during the quarter Within a period of seven days after the close of each quarter Where holding period of a securities is more than six months but less than twelve months 1.50% of the capital gains derived during the quarter Within a period of seven days after the close of each quarter "Securities" means shares of a public company, vouchers of Pakistan Telecommunication Corporation, Modaraba Certificates or instruments of redeemable capital and derivative products. 21. Prescribed persons for withholding tax at source An individual with a turnover of Rs. 50 million or more for the tax year 2009 or in any subsequent tax year will be required to deduct tax at source under section 153 from payments made against sale of goods, rendering of or providing of services and execution of contracts and file quarterly statements of such withholding tax with effect from July 01, 2010. Once an individual's turnover is Rs. 50 million or more, he will continue to be a withholding agent and deduct tax in the following years even if the turnover falls below the threshold in the subsequent years. Turnover for this purpose means: the gross receipts, exclusive of Sales Tax and Federal Excise duty or any trade discounts shown on invoices, or bills, derived from the sale of goods, and also excluding any amount taken as deemed income and is assessed as final discharge of the tax liability for which tax is already paid or payable; the gross fees for the rendering of services for giving benefits including commissions; except covered by final discharge of tax liability for which tax is separately paid or payable; the gross receipts from the execution of contracts; except covered by final discharge of tax liability for which tax is separately paid or payable; and the company's share of the amounts stated above of any association of persons of which the company is a member. 22. Income from property Property income was being taxed in two categories i.e. subject to deduction of tax source and not subject to deduction of tax at source. With effect from tax year 2011, property income will be chargeable to tax under section 15 irrespective of the fact whether tax has been deducted at source or not and the tax deducted at source under section 155 will be an adjustable tax. The effect of this chance is as under: For the tax year 2009 and 2010 For the tax year 2011 and onwards Subject to deduction of tax at source Not subject to deduction of tax at source Total In case of an individual: Gross rent 150,000 150,000 300,000 300,000 Tax payable Nil Nil Nil 7,500 Gross rent 200,000 200,000 400,000 400,000 Tax payable 2,500 2,500 5,000 10,000 Gross rent 500,000 500,000 1,000,000 1,000,000 Tax payable 20,000 20,000 40,000 57,500 Gross rent 750,000 750,000 1,500,000 1,500,000 Tax payable 38,750 38,750 77,500 107,500 In case of a company: Gross rent 200,000 200,000 400,000 400,000 Tax payable 10,000 10,000 20,000 20,000 Gross rent 500,000 500,000 1,000,000 1,000,000 Tax payable 27,500 27,500 55,000 65,000 Gross rent 750,000 750,000 1,500,000 1,500,000 Tax payable 46,250 46,250 92,500 115,000 23. Filing of statements of tax collected or deducted at source The filing of annual, bi-annual and monthly statements of tax collected or deducted at source has been done away with. Effective July 1, 2010 only quarterly statements of tax collected or deducted at source is required to be filed within 20 days from the end of each quarter, by a person who is required to collect or deduct tax at source, irrespective of the fact whether tax has been collected or deducted at source in that quarter. 24. Deemed assessment under section 120 Statement required to be furnished under section 115(4) [statement of income subject to final tax] will now deemed to be an order under section 120. Resultantly, action under section 122 [amendment or further amendment of an assessment order] can be initiated in respect of income and tax declared in the said statement. 25. Obligation to furnish a return of income A taxpayer deriving income exclusively from property chargeable to tax under section 15 has been dispensed with the obligation of filing of return of income as required under section 114 and instead will be required to file a statement of final tax as required under section 115(4). This will be effective from tax year 2010. 26. Audit The unfettered powers of the Commissioner to call for the records etc. for the conduct of audit has been slashed down by providing that the Commissioner has to record reasons for calling for the records etc. and communicate the same to the taxpayer. Further, a restriction has been imposed of "reasonable grounds" for audit in the next or following years. The Commissioner has also been empowered to appoint a firm of Chartered Accountants or Cost and Management Accountants to conduct the audit of the income tax affairs of any person or classes of persons in addition to such power already vested in the Board. 27. Active taxpayers list - Section 181A The Board has been empowered to institute active taxpayers list. Sales Tax Registration Number is likely to be the NTN. Since all NTN holders would not be sales tax registered persons, this provision has been made empowering the Board to list active taxpayers for the purposes of Sales Tax. Similarly, in future CNIC is likely to be the NTN for all individuals. Since all CNIC holders would not be taxpayers, this provision has been made empowering the Board to list active taxpayers. The criteria from declaring a taxpayer as an active or non-active taxpayer and the effects thereof are yet to be laid down by the Board under the Rules making power. However, the Website of the FBR says as under: How to be Active Taxpayer ... No big deal! Becoming Active Taxpayer is very easy. You have to be consistently compliant in .... * Regularly filing IT Returns, ST&FE Returns, Withholding Tax Statements; * Timely Paying Taxes and Responding to the Legal Notices. Always purchase from Active Taxpayers, because in near future ... * Only Active Taxpayers will be allowed to Import and Export * Sales Tax Input Credit/Adjustment allowed, only if purchases are made from Active Taxpayers * Expenses for Income Tax will only be admissible if purchases are made from Active Taxpayers * Only Active Taxpayers will be able to participate in the Procurement Tenders * Only Active Taxpayers will be able to operate as Clearing Agent, Shipping Agent, etc. * Only Active Taxpayers will be able to serve as Consultant, Advisor, etc. 28. Offences and penalties The existing offences and penalty provisions have been consolidated and changes have been made in the quantum of existing penalties (see annexure). This will be effective from the tax year 2011. Penalties for certain offences/failures/defaults have been added, which earlier attracted only prosecution proceedings. Penalties have been made applicable in addition to prosecution proceedings. Earlier penalties were an alternative to prosecution proceeding, if any. 29. Income tax authorities Special Officer Inland Revenue has been removed from the list of Income Tax Authorities and following new Income Tax Authorities have been added: * Inland Revenue Audit Officer; * Superintendent Inland Revenue; * Inspector Inland Revenue; and * Auditor Inland Revenue. 30. Subordinates to an Additional Commissioner Inland Revenue Deputy Commissioners Inland Revenue, Assistant Commissioners Inland Revenue, Inland Revenue Officers, Inland Revenue Audit Officers, Superintendents Inland Revenue, Auditors Inland Revenue and Inspectors Inland Revenue have been made subordinate to Additional Commissioners Inland Revenue. Earlier, there were no sub-ordinates to an Additional Commissioner Inland Revenue. 31. Selection for audit Retrospectively, Board has been vested with the powers of selection of persons or classes of persons for audit of Income Tax affairs through computer ballot which may be random or parametric as the Board may deem fit. The retrospective power vested in the Board is to cover up the in-valid selection of cases done by the Board during October, 2009 to June, 2010. 32. Computation of limitation period The time period for which any proceeding for the tax year remains pending before any Court, Appellate Tribunal or any other authority will be excluded for computing the period of limitation. This will have far reaching impact. Particularly, the cases decided against the revenue on legal issues which have been taken care off through various amendments this year including those made through Finance (Amendment) Ordinance, 2009. 33. Bar of suits in Civil Courts Prior approval of Board is required for initiating legal proceedings against any officer or official for any thing done in his official capacity under the Ordinance or Rules, instructions and directions issued under the Ordinance, in any civil court notwithstanding anything contained in any other law. 34. Directorate General of Training and Research The Directorate General of Training and Research, the appointments of functionaries thereof and their functions, jurisdiction and powers regularized. 35. Advance tax on transactions in bank Purchase against cash payment of any instrument; or cancellation of any instrument in lieu of cash; or transfer of funds against cash from/trough Banking Company, Non-Banking Financial Institution, Exchange Company or Authorized Dealer of Foreign Exchange, will attract collection of adjustable advance tax at source at the rate of 0.30% of the value of such instrument or transfer. However, the following transactions will not attract such collection of advance tax at source: * Inter-bank or intra bank transfers; * Purchase of an instrument against a crossed cheque; and * Where the total sum of purchase of an instrument against cash, cancellation of an instrument in lieu of cash and transfer of funds against cash in a day does not exceed Rs.25,000. Further, the following are exempt from collection of such advance tax at source: * The Federal Government or a Provincial Government; * A foreign diplomat or a diplomatic mission in Pakistan; or * A person who produces a certificate from the Commissioner that its income during the tax year is exempt. Instrument includes demand draft; pay order; CDR; STDR; SDR; RTC; or any other instrument of bearer nature. Transfer includes online transfer, telegraphic transfer, mail transfer or any other mode of electronic transfer. 36. Collection of tax on transaction made at a stock exchange Tax collected on sale and purchase of shares by members of stock exchange and trading of shares has been excluded from the ambit of minimum tax and made an adjustable tax with effect from tax year, 2011. 37. Collection of advance tax from telephone users Sale of telephone units through any electronic medium or whatever form will also attract withholding tax at the rate of 10% of the sale price and for this purpose the person issuing or selling such units have been made liable to collect the tax from the purchaser at the time of sale of such units with effect from July 01, 2010. 38. Advance tax at the time of sale by auction The scope of collection of advance tax at the time of sale by auction has been modified. Earlier this section applied to any property; and goods confiscated or attached. Now the provisions of this section will apply to any property including confiscated or attached property; and any goods including confiscated or attached goods. 39. Advance tax on purchase of domestic air travel ticket Purchase of domestic air travel ticket will attract collection of advance tax at source at the rate of 5% of the gross amount of the air ticket and the person preparing such air ticket will be responsible to collect this tax with effect from July 01, 2010. The law is silent as to who will be claiming the credit for advance tax paid on air travel tickets of dependents and employees. 40. Rate of tax on taxable income of an non-salaried individual With effect from tax year 2011, new rate card for non-salaried tax payer with increase in 'zero' tax threshold to Rs. 300,000 from Rs.100,000 will be applicable. The new rate- card in contrast to the old is as under: Taxable income Rate of tax for the tax year Effect 2010 2011 Does not exceed Rs. 100,000 00.00% 00.00% No change Exceeds Rs.100,000 but does not exceed Es.110,000 00.50% 00.00% Relief of 00.50% Exceeds Rs. 110,000 but does not exceed Rs. 125,000 01.00% 00.00% Relief of 01.00% Exceeds Rs. 125,000 but does not exceed Rs. 150,000 02.00% 00.00% Relief of 02.00% Exceeds Rs. 150,000 but does not exceed Rs. 175,000 03.00% 00.00% Relief of 03.00% Exceeds Its 175,000 but does not exceed Rs. 200,000 04.00% 00.00% Relief of 04.00% Exceeds Rs. 200,000 but does not exceed Rs. 300,000 05.00% 00.00% Relief of 05.00% Exceeds Ks. 300,000 but does not exceed Rs 400,000 07.50% 07.50% No change Exceeds Rs. 400,000 but does not exceed Rs. 500,000 10.00% 07.50% Relief of 02.50% Exceeds Rs. 500,000 but does not exceed Rs. 600,000 12.50% 10.00% Relief of 02.50% Exceeds Rs. 600,000 but does not exceed Rs. 750,000 15.00% 10.00% Relief of 05.00% Exceeds Rs. 750,000 but does not exceed Rs. 800,000 15.00% 15.00% No change Exceeds R 800,000 but does not exceed Rs. 1,000,000 17.50% 15.00% Relief of 02.50% Exceeds Rs.1,000,000 but does not exceed Rs.1,300,000 21.00% 20.00% Relief of 01.00% Exceeds Rs.1,300,000 but does not exceed Rs.1,500,000 25,00% 20.00% Relief of 05.00% Exceeds Rs.1,500,000 25.00% 25.00% No change In view of the new rate card, the relief in tax given to women taxpayer stands withdrawn. 41. Rate of tax on taxable income of salaried individual With effect from tax year 2011, new rate card for salaried tax payer with increase in 'zero' tax threshold to Rs. 300,000 from Rs.200,000 will be applicable. The new rate card is as under: Taxable Income. Rate of tax Does not exceed Rs. 300,000 00.00% Exceeds Rs. 300,000 but does not exceed Rs. 350,000 00.75% Exceeds Rs. 350,000 but does not exceed Rs. 400,000 01.50% Exceeds Rs. 400,000 but does not exceed Rs. 450,000 02.50% Exceeds Rs. 450,000 but does not exceed Rs. 550,000 03.50% Exceeds Rs. 550,000 but does not exceed Rs. 650,000 04.50% Exceeds Rs. 650,000 but does not exceed Rs. 750,000 06.00% Exceeds Rs. 750,000 but does not exceed Rs. 900,000 07.50% Exceeds Rs. 900,000 but does not exceed Rs.1,050,000 09.00% Exceeds Rs.1,050,000 but does not exceed Rs.1,200,000 10.00% Exceeds Rs.1,200,000 but does not exceed Rs.1,450,000 11.00% Exceeds Rs.1,450,000 but does not exceed Rs.1,700,000 12.50% Exceeds Rs.1,700,000 but does not exceed Rs.1,950,000 14.00% Exceeds Rs.1,950,000 but does not exceed Rs.2,250,000 15.00% Exceeds Rs.2,250,000 but does not exceed Rs.2,850,000 16.00% Exceeds Rs.2,850,000 but does not exceed Rs.3,550,000 17.50% Exceeds Rs.3,550,000 but does not exceed Rs.4,550,000 18.50% Exceeds Rs.4,550,000 20.00% The effect of the new rate card for salaried tax payer is as under: * Relief for small taxpayers deriving income upto Rs.300,000; * No change in tax rates for taxpayers with taxable income between Rs. 300,001 and Rs. 4,550,000; * Increase in tax rate by 1% for taxpayers with taxable income between Rs. 4,550,001 and Rs. 8,8650,000; and * No change in tax rate for taxpayers with taxable income above Rs. 8,650,000. Relief in tax given to women taxpayer stands withdrawn from the tax year 2011. 42. Rate of tax on certain retailers Retailers being an individual or an association of persons with turnover not exceeding Rs. 5 million opting for tax on the basis of turnover will be liable to tax at the rate of 1.00% of the their turnover with effect from tax year 2011 instead of 0.50%. The rate of tax on retailers with turnover exceeding Rs. 5 million and registered under the special procedure for payment of sales tax continues to be 0.5% on turnover upto Rs. 10 million and 0.75% for the turnover in excess of Rs. 10 million. 43. Rate of tax on small company Rate of tax on small company will be 25% with effect from tax year 2011 instead of 20%. 44. Rate of withholding tax on imports Standard rate of withholding tax on import of goods will be 5% with effect from July 01, 2010 instead of 4%. In other words commercial imports will be subject to 5% final tax on the value of goods imported with effect from tax year 2011. 45. Rate of withholding tax from payments to non-residents Rate of tax to be deducted at source from payments to non residents, other than certain specified contracts, royalty, fee for technical services, insurance and re-insurance premium and media services will be 20% with effect from July 01, 2010 instead of 30%. 46. Rate of withholding tax from winnings of cross word puzzle Rate of tax to be deducted from cross-word puzzle will be 10% with effect from July 01, 2010 instead of 20% and accordingly the rate of final tax also stands reduced with effect from tax year 2011. 47. Rate of withholding tax from goods transport vehicles Rate of tax to be collected along with motor vehicle tax from goods transport vehicles will be Re. 1 per kilogram of the laden weight with effect from July 01, 2010 instead of existing slab rates. However, the reduced rate for more than 10 years old goods transport vehicles with laden weight of 8,120 kilograms and above continues to be Rs. 1,200 per annum. 48. Rate of withholding tax from industrial electricity consumers Rate of tax to be collected along with electricity bill exceeding Rs.20,000 from industrial consumers will be 5% of the bill amount with effect from July 01, 2010 instead of 10%. The rates of tax to be collected for commercial electricity consumers and industrial consumers with bill amount of upto Rs.20,000 remains unchanged. 49. Exemptions of income Clause (57) Any income of Punjab Pension Fund established under the Punjab Pension Fund Act, 2007 (I of 2007) and the trust established thereunder. Clause (72) Profit on debt derived by a foreign individual, company, firm or association of persons in respect of a foreign loan utilized for industrial investment in Pakistan where the agreement for such loan is concluded between February 01, 1991 and June 30, 2010, and is duly registered with t4e State Bank of Pakistan. This exemption is applicable restrospectively. Clause (92A) Income of educational institutions established in certain affected areas of Khyber Pakhtoon Khaw, FATA and PATA for the tax years 2010 and 2011. Clause (99A) Profits and gains accruing to a person on sale of immoveable property to a REIT Scheme extended upto June 30, 2015. Clause (126F) Profits and gains (business income) of taxpayers located in certain affected areas of Khyber Pakhtoon Khaw, FATA and PATA, except manufacturers and suppliers of cement, sugar, beverages and cigarettes, for the tax years 2010 to 2012. 50. Withdrawal of exemptions of income - Second Schedule -Part I Clause (57) and clause (99) Capital gains arising on disposal of stock and shares of public company,. PTC vouchers, modaraba certificates, or any instrument redeemable capital and derivative products held for less than 12 months derived by any Mutual Fund, investment company, or a collective investment scheme or a REIT Scheme or Private Equity and Venture Capital Fund or the National Investment (Unit) Trust of Pakistan. Clause (102) Dividend income received by the Investment Corporation of Pakistan from any other company which has paid or will pay tax in respect of the profits out of which such dividends are paid. Clause (110A) Gain on transfer of a capital asset of the existing stock exchanges to new corporatized stock exchange, in the course of corporatization of an existing stock exchange. Clause (111) Capital gains arising from the sale of shares of a public company, derived by a foreign institutional investor. 51. Reduction in rate of withholding tax from large distribution houses Rate of withholding tax under section 153(1)(a) [sale of goods] from large distribution houses will be 1.00% with effect from July 01, 2010 instead of 3.50% subject to fulfilling the following conditions: (i) have paid-up capital of exceeding Rs.250 million; (ii) have imports exceeding Rs.500 million during the tax year; (iii) own total assets exceeding Rs.350 million at the close of the tax year; (iv) is single object company; (v) maintain computerized records of imports and sale of goods; (vi) maintain a system for issuance of 100% cash receipts on sales; (vii) present accounts for tax audit every year; (viii) is registered with Sales Tax Department; and (ix) make sales of industrial raw material of manufacturer registered for sales tax purposes. 52. Reduction in tax liability for senior citizens Threshold of taxable income for claiming reduction in tax liability, on account of being a senior citizen, will be Rs.1,000,000 with effect from tax year 2011 instead of Rs.750,000. 53. Exemption from specific provisions Clause (10A) Taxpayers located in most affected and moderately affected arrears of Khyber Pakhtoon Khaw, FATA and PATA have been granted exemption from the application of following provisions of law: * Penalty under section 182(1)(a)(5) [Failure to deposit the amount of tax due or any part thereof in the time or manner laid down under the Ordinance or Rules] provided the principal amount is paid by June 30, 2010; * Default surcharge under section 205(1)(a) [Failure to pay any tax (excluding advance tax)] provided the principal amount is paid by June 30, 2010; * Collection of tax under section 235 [alongwith electricity bill] from commercial and industrial consumers of electricity till June 30, 2011; * Deduction of tax under section 154 [export of goods only] originating from most or moderately affected areas June 30, 2011; * Collection of tax under section 148 [import of plant and machinery only (excluding manufacturers and suppliers of cement, sugar, beverages and cigarettes] for establishment of business in most or moderately affected areas till June 30, 2011. For the purposes of Second Schedule most affected and moderately affected areas has been defined as under: * "most affected areas" means district Peshawar, Malakand Agency, and districts of Swat, Buner, Shangla, Upper Dir, Lower Dir, Hangu, Bannu, Tank, Kohat and Chitral; and * "moderately affected areas" means districts of Charsadda, Nowshera, DI Khan, Batagram, Lakki Marwat, Swabi and Mardan. Clause (73) Income tax payable by a foreign expert, appointed with the prior approval of the Ministry of Textile Industry. Clauses (74) and (75) Gain or loss on disposal of depreciable asset will not be taken into account in the case of Civil Aviation Authority in respect of asset transferred for the purpose of the ijara agreement between Pakistan Domestic Sukuk Company Limited and the Federal Government. Similarly, the provisions of subsection (15) of section 22 will not apply to Civil Aviation Authority on the assets acquired from the Federal Government which were previously transferred for the purpose of the ijara agreement between Pakistan Domestic Sukuk Company Limited and the Federal Government. However, depreciation will be allowed at the written down value of the assets immediately before their transfer for the purpose of above mentioned ijara agreement. 54. Rates of depreciation for a ramp built for disable persons Normal depreciation at the rate of 100% for a ramp built to provide access to persons with disabilities with a cost not exceeding Rs.250,000 will be admissible with effect from the tax year 2011. Annexure Changes in the quantum of penalties etc. S No. Offence Penalties for failures or defaults committed on or after July 01, 2010 Section to which offence relates Penalties for failures or defaults committed on or before June 30, 2010 Penalty Minimum Maximum Penalty Minimum Maximum 1 (a) Failure to furnish; A return of income 0.1% of the tax payable for each day of default Rs. 5,000 25% of tax payable for that year 114 0.1% of the tax payable for each day of default Rs. 500 25% of tax payable for that year (b) A statement as require under section 115 115 (c) A wealth statement 116 1st failure Rs.2,000 25% of the penalty, if assessed tax liability is less than Rs. 25,000 2nd failure Rs 5,000 3rd & subsequent failure Rs. 10,000 (d) A wealth reconciliation 116 1st failure Rs. 2,000 25% of the penalty, if assessed tax liability is less than Rs. 25,000 2nd failure Rs 5,000 3rd and subsequent failure Rs. 10,000 (e) A statement under section 165 165 Rs. 2,000 and Rs. 200 for each day of default after the imposition of the penalty of Rs,2,000 2. Failure to issue cash memo or invoice or receipt Rs. 5,000 or 3% of the amount of tax involved, which ever is higher 174 and Rules No penalty was prescribed 3. Failure to make an application for registration, if require Rs. 5,000 181 No penalty was prescribed 4. Failure to notify changes in the particular of registration Rs. 5,000 181 No penalty was prescribed 5. Failure to deposit the amount of tax due 1st default 5% of the amount of tax in default 137 1st default -5% of the amount of tax in default 2nd default 25% of the amount of tax in default in addition to penalty of 1st default 2nd default -20% of the amount of tax in default in addition to penalty of 1st default 3rd and subsequent default 50% of the amount of tax in default in addition to penalty of 1st and 2nd default 3rd default -25% of the amount of tax in default in addition to penalty of 1st and 2nd default. 4th and subsequent default- As determined by the Commissioner subject to a maximum of 50% of the amount of tax in default in addition to penalty of 1st , 2nd and 3rd default 6. Repetition of erroneous calculation in return for more than one year resulting into short payment of tax Rs. 5,000 or 3% of the amount of tax involved, which ever is higher 137 No penalty was prescribed 7. Failure to maintain records as require Rs. 10,000 or 5% of tax on income whichever 174 1st failure Rs. 2,000 2nd failure Rs. 5,000 3rd and subsequent failure Rs. 10,000 8. Failure produce records and documents as require under section 177 On receipt of 1st notice Rs. 5,000 177 No penalty was prescribed On receipt of 2nd notice Rs. 10,000 On receipt of 3rd notice Rs. 50,000 9. Failure to furnish the information require or any other term of notice under section 176 1st failure Rs. 5,000 176 1st failure Rs.2,000 25% of the penalty if assessed tax liability is less then Rs. 25,000 Each subsequent failure Rs. 10,000 2nd failure Rs. 5,000 3rd and subsequent failure Rs. 10,000 10(a) Makes a false or miss leading statement to * Rs. 25,000 or 100% of the amount of tax shortfall whichever is higher 114,115,116,174,176,177 and General Knowingly or recklessly 200% of the tax shortfall 10(b) Furnishes or files a false or misleading information or document or statement to ** In other case 25% of the tax shortfall 10(c) Omits from a statement made or information furnishes to *** 11. Denying or obstruction access of the Commissioner or any authorized officer to the premises, place accounts, documents, computer or stocks Rs. 25,000 or 100% of the amount of tax involved, which ever is higher 175 or 177 No penalty was prescribed 12. Concealment of income or furnishing of inaccurate particular of such income ***** Rs. 25,000 or 100% of the amount of tax sought to be evaded whichever is higher 100% of the amount of tax sought to be evaded 13. Obstructing any income tax Authority in the performance of official duties Rs. 25,000 209, 210 And General Re. 1 Rs.10,000 14. Contravention of any of the provision of the Ordinance for which no penalty has, specifically, been provided Rs. 5,000 or 3% of the amount of tax involved, which ever is higher General Failure to give notice of discontinuation of business- Upto the amount of tax payable for that year Failure to give notice of appointment as liquidator- Upto Rs.10,000 15. Failure to collect or deduct tax as required or failure to pay the tax collected or deducted as required Rs.25,000 or 10% of the amount of tax whichever to higher 148,149,150,151,152,153,153A,154,155,156,156A,156B,158,160,231A,231B,233,233A, 234, 234A,235,236,236A No penalty was prescribed * an Inland Revenue Authority either in writing or orally or electronically including a statement in an application, certificate, declaration, notification, return, objection or other document including books of account made, prepared, given, filed or furnished under this Ordinance. ** an Income tax Authority either in writing or orally or electronically *** an Income tax Authority any matter or thing without which the statement or the information is false or misleading in a material particular **** Including but not limited to the suppression of any income or amount chargeable to tax, the claiming of any deduction for any expenditure not actually incurred or any act referred to in sub-section (1) of section 111, in the course of any proceeding under this Ordinance before any Income tax authority or the appellate tribunal.