Comments on Finance Act 2014

COMMENTS ON FINANCE ACT, 2014 COMMENTS ON FINANCE ACT, 2014 By Amir Alam Khan & Co. Chartered Accountants, Rawalpindi All references to sections, subsections, clauses, schedules, etc. are to the Income Tax Ordinance, 2001, unless otherwise stated All amendments are applicable from tax year 2015 and from July 01, 2014 for the purpose of connection and deduction of tax at source, unless otherwise stated 1. Re-Numbering, having no impact Section 2(8) Definition of "bonus Shares" Section 2(9) Definition of "business" Section 2(10) Definition of "capital assets" Section 2(11) Definition of "Board" Section 2(11) Definition of "Board" 2. Editorial amendments, having no impact Section 8 General provisions relating to taxes imposed under sections 5, 6 and 7 Section 13(8) Value of perquisites Section 18(3) Income from business Section 21(e) Deductions not allowed Section 56A Set off of losses of companies operating hotels Section 59AA Group taxation Section 156(3) Deduction of tax from Petroleum Products Section 159(4) Exemption or lower rate certificate Section 21(e) Deductions not allowed Section 169(1)(b) Tax collected or deducted as final tax Section 239(13) Savings 2nd Schedule, Part I, Clause (4) Income of Pakistani seafarer 3. Redundant provision omitted, having no impact Section 4A Surcharge 1st Schedule: Part I, Division I, Para (2) IDP Tax Part IIA 2nd Schedule: Collection of tax from distributors, dealers and wholesalers Part I, Clause (81A) Foreign Exchange Bearer Certificates Part I, Clause (88A) Federal Government Securities and Redeemable Capital Part I, Clause (92A) Income of universities and educational institutions established in affected areas of KPK, FATA and PATA Part I, Clause (92A) Profits and gains from the running of any vocational institute or technical institute or poly-technical institute Part I, Clause (126) Profits and gains derived by a taxpayer from an industrial. undertaking set up between the July 01, 1995, and December 31, 2002 Part I, Clause (135) Special US Dollar Bond Part II, Clause (13HH) and (13HHH) Reduced rate of deduction of tax form sale value and of Rice to Utility Store Corporation [u/s 153] Part II, Clause (19) Reduced rate of tax for amalgamated company Part II, Clause (24B) Concessionary tax rates for steel melters and steel re-rolling mills Part II, Clause (29) Reduced rate of tax for cigarettes manufacturer U/S 153A Part II, Clause (30) Reduction in tax rate for new and non-complaint taxpayers Part III, Clause (5) Turnover for the purposes of Minimum Tax of corporative entities of Pakistan Water and Power Development Authority (DISCOs) and National Transmission and Dispatch Company (NTDC) Part IV, Clause (10) Special US Dollar Bonds Part IV, Clause (10A) Waivers for affected areas of KPK, FATA, PATA, etc. Part IV, Clause (80) Keeping in abeyance the provisions of section 153A Part IV, Clause (84) and (85) Immunity from Audit and exemption from approval for revising the return Part IV, Clauses (87) and (88) Incentives to non-compliant taxpayers Section 31(1) Transfer to participatory reserve Reference to the repealed "Banking Tribunals Ordinance, 1984" replaced with "Financial Institutions (Recovery of Finances) Ordinance, 2001 (XLVI of 2001)" Section 122B - Revision by Regional Commissioner 'Regional Commissioner' replaced with 'Chief Commissioner' Section 127 Appeal to Commissioner (Appeals) 'taxation officer' replaced with 'Officer of Inland Revenue' Section 148(7)(d) - Imports The words 'with Sales Tax Department' replaced with 'under the Sales Tax Act, 1990' Section 150 - Deduction of tax from dividend. Reference to 'Division III of Part I' replaced with 'Division I of Part III' Section 2368 - Advance tax on purchase of domestic air ticket "The word 'person preparing' replaced with 'airline issuing' 5. Consolidation of provisions, having no impact 2nd Schedule Part II Clauses (3) and (3A) Tax on income from services and construction contracts out-side Pakistan 2nd Schedule Part IV Clauses (38B) and (38C) Islamic Development Bank exemptions 6 "Filer" and "Non-Filer" - Sections 2(23A) and 2(35C) Insertion of new definitions: "filer" means a taxpayer whose name appears in the active taxpayers' list issued by the Board from time to time or is holder of a taxpayer's card; "non-filer" means a person who is not a filer; "Active Taxpayers' List" has been notified and is available on the website of FBR. The purpose of insertion of these new definitions is to distinguish between Compliant and Non-compliant taxpayers and placing additional tax burden, by way of increased rates of withholding tax. Withholding agents will now be required to check from the website of FBR, whether the person from whom tax is being collected or deducted is on the "Active Taxpayers' List" or not, in respect of the following transactions: Deduction of tax from dividend (see Para 18 below); Deduction of tax from profit on debt (see Para 21 below); Deduction of tax from cash withdrawal from bank account (see Para 28 below); Collection of tax at the time of registration and transfer of motor vehicles (see Para 29 below); Collection of tax at the time of collection motor vehicle tax (see Para 31 below); Collection of tax at the time of sale to distributors, dealers and wholesalers (see Para 32 below); Collection of tax at the time of registering or attesting transfer of any immoveable property (see Para 36 below). 7. Bonus shares or bonus - Sections 2(29), 39(1) and 236M The face value of bonus shares or bonus declared, issued or paid by a company to its shareholders with a view to increasing its paid up share capital was specifically excluded from the ambit of the definition of "income" and hence the same was not chargeable to tax in the hands of the shareholders. By virtue of amendment of definition of "income" and corresponding amendment in section 39(1), effective July 01, 2014, the value of such bonus shares or bonus shall be chargeable to tax in the hands of the shareholders as "Income from other sources" as well subject to final tax. Consequent upon charge created on the value of bonus shares or bonus, new sections 236M and 236N have been inserted to regulate the collection of tax thereon at source. Every company issuing bonus shares to a shareholder of the company is required to collect tax at the rate of 5% of the value of the bonus shares determined on the basis of "day-end price" on the first day of closure of books. The "day-end-price" of the shares of listed companies shall be as quoted on the stock exchange and in case of a non-listed companies, FBR has been authorized to prescribe the rules for determination of 'day -end-price'. The rules have not yet been notified. A detailed procedure and mechanism for collection of this tax has been provided separately for listed companies and non-listed companies, as under: Listed Companies: 5% of the bonus shares issued shall be withheld and retained by the company; 5% of the bonus shares withheld shall be issued by the company to the share holders on receipt of the amount of tax from the shareholder within 15 days from the first day of closure of books; If the amount of tax is not paid by the shareholder to the company, as stated above, the 5% of the bonus shares withheld shall be deposited with the Central Depository Company of Pakistan Limited or any other legal entity as may be prescribed; and The 5% of the bonus shares deposited with the Central Depository Company of Pakistan Limited or any other legal entity (as stated above) shall be disposed off in the mode and manner to be prescribed and the proceeds thereof shall be paid to the Commissioner in settlement of the tax due from the shareholder. Non-Listed Companies: The amount of tax to be collected shall be deposited by the company within 15 days of the first day of closure books, whether the company has recovered it from the shareholders or not; In return the company has been authorized to recover the tax from the shareholder before issuance of bonus shares; If the shareholders neither collects the bonus shares nor makes the payment of tax due within 3 months from the date of issuance of bonus shares, the company has been authorized to dispose off the bonus shares to the extent of amount of tax due from the shareholder in realization of the tax already paid by the company. Such tax collected shall be a final tax on the income of the shareholder of the company arising from issuance of bonus shares. 8. Capital gains (immoveable property) Section 37(1A) and Division VIII of Part I of 1st Schedule In order to remove the lacuna in the law about taxability of capital gains arising on disposal of "immoveable property" held for a period of more than 2 years, appropriate amendments have been made. Capital gains arising from disposal of immoveable property held for a period of more than 2 years shall now be subject to tax at the rate of 0%. 9. Capital gains (Securities) Sections 37A(1), 37A(3) and 100B(2)(d) and Division VII of Part I of 1st Schedule The definition of the term "securities" has been enlarged to also include "debt securities". Resultantly, the gain arising on disposal of "debt securities" will also be chargeable to tax as a separate block of income. The amended definition of the "securities" is as under: "Security" means share of a public company, ' voucher of Pakistan Telecommunication Corporation, Modaraba Certificate, an instrument of redeemable capital, debt securities and derivative products. The term "debt securities" has also been defined for this purpose to mean: (a) Corporate Debt Securities such as Term Finance Certificates (TFCs), Sukuk Certificates (Sharia Compliant Bonds), Registered Bonds, Commercial Papers, Participation Term Certificates (PTCs) and all kinds of debt instruments issued by any Pakistani or foreign company or corporation registered in Pakistan; and (b) Government Debt Securities such as Treasury Bills (T-bills), Federal Investment Bonds (FIBS), Pakistan Investment Bonds (PIBs), Foreign Currency Bonds, Government Papers, Municipal Bonds, Infrastructure Bonds and all kinds of debt instruments issued by Federal Government, Provincial Governments, Local Authorities and other statutory bodies." The non-chargeability of capital gains arising on disposal of "securities" held for a period of more than one year stands withdrawn and instead a 0% tax rate has been prescribed for capital gains arising on disposal of "securities" held for a period of more than 2 years. National Clearing Company of Pakistan Limited (NCCPL) is responsible for collection of withholding tax equal to the total tax liability in respect of capital gains arising from disposal of "securities". However, certain persons are excluded from the ambit of NCCPL responsibility for collection of such withholding tax and such persons were permitted to discharge their tax liability on their own. A company, in respect of debt securities (which is now covered under the term "securities") has been included in the list of persons excluded from the ambit of NCCPL responsibility for collection of withholding tax. On the other hand a "foreign institutional investor" falling in the list of persons excluded from the ambit of NCCPL responsibility for collection of withholding tax has been omitted and henceforth NCCPL will be responsible for collection of withholding tax equal to the total tax liability in respect of capital gains arising from disposal of "securities" by a "foreign institutional investor", unless granted exemption by the Commissioner. The rates of tax payable on capital gains arising from disposal of `securities' have been revised as under:-- Holding period of: Rates of final tax as a separate block of income Tax Year 2015 Tax Year 2014 Revised Existing Securities including debt securities where the taxpayer is not a company; and Securities excluding debt securities where the taxpayer is a company; and Less than 6 months 12.50% 17.50% 10.00% More than 6 months but less than 12 months 12.50% 9.50% 8.00% 12 months but less than 24 months 10.00% 0.00% 0.00% 24 months or more 0.00% 0.00% 0.00% Debt securities where the taxpayer is a company Irrespective of holding period 33.00% Not separately. provided Irrespective of holding period 10. Federal Government, Provincial Government, and Local Government income Section 49 The income from sale of spectrum licenses by Pakistan Telecommunication Authority (PTA) on behalf of the Federal Government shall be treated as income of the Federal Govern ment and not of the Pakistan Telecommunication Authority. Accordingly, PTA will not liable to pay any tax on such income. 11. Taxation of AOP in which a company is member and of share of profit of such company (Joint Ventures) Sections 88A and 92 An association of persons (AOP) is a separate tax entity and the entire income of the AOP is liable to tax independent of its members. The share of profits of the members, being individual or AOP, is however exempt and included in the taxable income for rate purposes only. In case of a company being member of AOP, its share of profits from the AOP was not exempt and chargeable to tax, subject to tax credit for the amount equal to its share in the tax paid by the AOP. By virtue of amendments made following rules will apply:-‑ (a) The share of the company in the profits of an AOP, in which a company is a member, shall be included in its taxable income and subjected to tax at the rates applicable to such company. (b) On the other hand while determining the taxable income of such AOP, the share of profits belonging to the member(s) being company shall be excluded from the total income of the AOP to arrive at the taxable income and the tax liability of the AOP will be on such taxable income. As a result of this change right of application of reduced rate of tax under the Ordinance or Avoidance of Double Tax Treaty has been granted to the companies in respect of their share of profits from an AOP (Joint Venture). 12. Zero rating of income of certain non-profit organizations, trust, welfare institutions, etc. Sections 100C and 159 and Clauses (58), (58A), (59) and (60) of Part-I of 2nd Schedule Specified income of certain non-profit organizations, trust, welfare institutions, etc. was exempt from tax under clauses (58), (58A), (59) and (60) of Part-I of 2nd Schedule, subject to conditions and restrictions specified therein as per following details: Reference To whom available Nature of income exempt Clause (58) A trust administered under a scheme approved by the Federal Government in this behalf and established in Pakistan exclusively for the purposes of carrying out such activities as are for the benefit and welfare of (i) ex-servicemen and serving including civilian employees of the Armed Forces, and their dependents; or (ii) ex-employees and serving personnel of the Federal Government or a Provincial Government And their dependents, where the said trust is administered by a committee nominated by the Federal Government or, as the case may be, a Provincial Government. Donations, voluntary contributions, subscriptions, house property, investments in the securities of the Federal Government and so much of the income Chargeable under the head "Income from business" as is expended in Pakistan for the purposes of carrying out welfare activities. A trust or welfare institution or non-profit organization approved by Chief Commis sioner of Income Tax for the purposes of this sub-clause. Clause (58A) A university or other educational institution being run by a non-profit organization existing solely for educational purposes and not for purposes of profit. Any income Clause (59) Held under trust or other legal obligations wholly, or in part only, for religious or charitable purposes and is actually applied or finally set apart for application thereto Income from investments in securities of 'the Federal Government, profit on debt from scheduled banks, grant received from Federal Government or Provincial Government or District Governments, foreign grants and house property. Clause (60) Religious or charitable institution, excluding private religious trust which does not ensure for the benefit of the public Any income derived from voluntary contributions applicable solely to religious or charitable purposes of the institution: All the above exemptions have been withdrawn and replaced with tax credit (tax reduction) equal to the amount of tax payable, including minimum tax and final tax, on such income, as a result of withdrawal of exemption. However, the tax credit admissible shall be subject to full filling the following conditions: (a) Return has been filed; (b) Tax required to be deducted or collected has been deducted or collected and paid; and (c) Withholding tax statements for the, immediately preceding tax year have been filed. This concept of providing concessions is a preferable method, in force in many other countries, which will promote strong documentation and compliance. Income of the foregoing trust, welfare institutions, non-profit organizations, religious and charitable institutions, universities, etc. was exempt from tax and they were entitle to get exemption certificate from collection and deduction of tax (withholding tax) from them. Since the exemption has been withdrawn and replaced with 100% tax credit, a corresponding amendment has also been made in section 159 for grant of exemption certificate from collection and deduction of tax (withholding tax) from them. From the plain reading of the above conditions, in our opinion, if there is a single default, error or mistake, whether intentional or un intentional or for any other reason, in deducting, collecting or depositing the withholding tax, the facility of tax credit will not be available. Thus, such non-profit organizations, trust, welfare institutions, etc., have to be very vigilant in discharging their obligations as withholding agents. Earlier, under clause (58) of Part-I of 2nd Schedule, exemption was available to "a trust or welfare institution or non-profit organization improved by Chief commissioner of Income Tax for this purposes". As a result of amendments and omissions now 100% tax credit will be admissible to "a trust or welfare institution or non-profit organization without any requirement of approval by Chief Commissioner of Income Tax" in respect of their income from donations, voluntary contributions, subscriptions, house property, investments in the securities of the Federal Government and so much of the income chargeable under the head "Income from business" as is expended in Pakistan for, the purposes of carrying out welfare activities. In addition, a trust or welfare institution or non-profit organization approved by Chief Commissioner for this purposes in respect of their un specified income will also qualify for 100% tax credit. On the other hand religious or charitable institutions, mainly small association of persons which are neither a trust nor a non-profit organization, enjoying exemption under clause (60) in respect of voluntary contributions applicable solely to religious or charitable purposes of the institution will also have to undergo the obligations of filing return of income and deduction of tax from payment of rent of immovable property, if any 13. Minimum tax (based on turnover) Section 113, Division IX of Part I of 1st Schedule, Clauses (7), (8), (9), (10), (11), (12), (13), (14) and (15) of Part-III of 2nd Schedule and Clause (11A)(v) of Pat IV of 2nd Schedule Prior to the amendments in this section. the standard rate of "Minimum Tax" was 1% of the turnover, which was subject to reduction for certain specified persons or businesses through clauses (7), (8), (9), (10), (11), (12), (13), (14) and (15) of Part-III of 2nd Schedule. Through amendments / omissions / insertions / transposition, the standard rate has been replaced by applicable rates as under: Minimum Tax as percentage of the person's turnover for the year Oil marketing companies, Oil refineries, Sui Southern Gas Company Limited and Sui Northern Gas Pipelines Limited ( for the cases where annual turnover exceeds rupees one billion) 0.50% Pakistani Airlines. 0.50% Poultry industry including poultry breeding, broiler production, egg production and poultry feed production 0.50% Distributors of pharmaceutical products, fertilizers, consumer goods including fast moving consumers goods and cigarettes 0.20% Petroleum agents and distributors who are registered under the Sales Tax Act, 1990 0.20% Rice mills and dealers 0.20% Flour mills 0.20% Motorcycle dealers registered under the Sales Tax Act, 1990 0.25% In all other cases 1.00% Effectively there is no change, except that: Pakistani Airlines, excluding Pakistan International Airlines Corporation, have also been granted the facility of reduced rate of Minimum tax of 0.50%. Distributors of cigarettes not manufactured in Pakistan have also been granted the facility of reduced rate of minimum tax cf 0.20% instead of 1.00% applicable earlier. Exemption from the application of provisions of Minimum Tax has been granted to the turnover of a taxpayer from a coal mining project in Sindh, supplying coal exclusively to power generation projects. 14. Alternative Corporate Tax - Section 113B A unique concept of Alternative Corporate Tax has been introduced retrospectively with effect from tax year 2014. This is applicable on a "Company" other than a company whose income is chargeable to tax in accordance with the provisions contained in the 4th [Insurance], 5th [Exploration and Production of Petroleum] and 7th [Banking] Schedules. In fact this is an additional minimum tax based on 'Accounting Income' over and above minimum tax based on turnover. Where the "Corporate Tax" (as explained below) is less than the "Alternative Corporate Tax" (as explained below) then the difference is payable as Alternative Corporate Tax. "Alternative Corporate Tax" paid for a tax year can be carried forward along with the "Minimum Tax" [On turnover under section 113] for adjustment against the tax payable on taxable income (normal income) for the following ten years. The law is silent as to priority of adjustment in the following years of the "Minimum Tax" or "Alternative Corporate Tax" It is also provided that if the "Corporate Tax" or "Alternative Corporate Tax" rates are enhanced or reduced, the "Alternative Corporate Tax" amount carried forward shall be reduced or enhanced accordingly. This needs clarification by FBR. For the purposes of this Alternative Corporate Tax a few new terms used are explained as under: (a) "Accounting Income" means the profit before taxation as per financial statements reduced by: (i) Share from the associated undertakings recognized under equity method of accounting; (ii) Exempt income (net of proportionate attributable expenses); (iii) Income (net of proportionate attributable expenses) subject to tax under section 37A (Capital gain on sale of "securities") ; (iv) Income (net of proportionate attributable expenses) subject to final tax chargeable under section 148(7) [Commercial imports], under section 150 [Dividend], under section 153(3) [Sale of goods, services and contracts], under section 154(4) [Exports/foreign indenting commission], under section 156 [Prizes and winnings] and under section 233(3) [Commission and brokerage]; (v) Income subject to tax credit under section 65D [On new equity investment in establishing and operating a new 'industrial undertaking' and dairy farming] and 65E [On new equity investment in purchase and installation of plant and machinery for an industrial undertaking, including corporate dairy farming for the purpose of expansion of the already installed plant and machinery or undertaking a new project]; (vi) Income subject to tax credit under section 100C [Income of trust, welfare institutions, non-profit organizations, universities, educational institutions, etc. qualifying for 100% tax credit (see Para 12 above)]; (vii) Income of a company qualifying for reduction in tax rate under clause (18A) of Part II of 2nd Schedule (see Para 38(a) below) Note: The Commissioner is empowered to make adjustments and proceed to compute accounting income as per historical accounting pattern after providing an opportunity of being heard. Following income of a company falling under fixed/final tax regime have not been taken care off for the purposes of arriving at "Accounting Income": (a) Capital gains (Immoveable property) (b) Where a non-resident company executes certain specified contracts subject to deduction of tax under section 152(1A) and does not opt out of final tax regime; (c) Income derived by a company from operating a CNG station. (d) Income derived by a company from operating a petrol pump. (a) "Alternative Corporate Tax" means the tax at a rate of 17% of `Accounting Income' (as explained above) as reduced by tax credit admissible under section 65B [On extension, expansion balancing, modernization and replacement of the already installed plant and machinery in an 'industrial undertaking']. (b) "Corporate Tax" means total tax payable by the company, including tax payable on account of minimum tax and final taxes payable, under any of the provisions of the Ordinance but not including those mentioned in sections 8 (final tax subject to separate charge), 161 (tax recovered on account of failure to collect or deduct or deposit tax required to be collected or deducted under various provisions of the Ordinance) and 162 (tax recovered which should have been collected or deducted under various provisions of the Ordinance) and any amount charged or paid on account of default surcharge or penalty.. On the one hand "Corporate Tax" includes 'Final Tax' whereas from 'Accounting Income' income subject to final tax has been excluded. This is drafting lacuna and may give rise to litigation. 15. Obligation to furnish return of income Section 114(1)(b)(ix) Through Finance Act, 2013 every member of any chamber of commerce and industry or any trade or business association or any market committee or any professional body including Pakistan Engineering Council, Pakistan Medical and Dental Council, Pakistan Bar Council or any Provincial Bar Council, Institute of Chartered Accountants of Pakistan or Institute of Cost and Management Accountants of Pakistan were required to furnish their return of income, irrespective of whether they have any taxable income or not. Non resident members of such trade and professional associations or bodies were hard hit by this amendment. The hardship has been removed and now only "resident" members of such trade and professional association or bodies are required to furnish their return of income, irrespective of whether they have any taxable income or not. 16. Wealth statement Section 116 and Clause (82) of Part IV of 2nd Schedule - Through Finance Act, 2013, every individual required to furnish a return of income or statement of final tax was also required to furnish the Wealth Statement and Reconciliation thereof, irrespective of the quantum of taxable income or amount of final tax. However, this amendment was nullify by inserting clause (82) in Part IV of 2nd Schedule and furnishing of Wealth Statement and Reconciliation thereof for the tax year 2013 was only required where the income declared or last assessed was Rs. 1,000,000 or above or the amount of final tax was Rs. 35,000 or more. This concession has been extended for the tax year 2014 as well. 17. Appointment of Appellate Tribunal Section 130 Cost and Management Accountant within the meaning of Cost and Management Accountants Act, 1966 having not less than 10 years of experience of practicing as Cost and Management Accountant can also be appointed as an Accountant Mernber of the Appellate Tribunal. 18. Imports Section 148(8A), Part II of 1st Schedule and Clauses (9B), (13E), (23), (9C) and (24) of Part-II of 2nd Schedule Income from import of ships by ship breakers has been brought in Final Tax Regime at the rate of 4.50% of the value of ships imported. Import of goods is subject to collection of tax at import stage. Reduced rates of collection of tax from Part II of 2nd Schedule have been omitted and corresponding rates have been prescribed in Part II of the 1st Schedule, without any change. The rates of collection of tax at the time of import of goods (as percentage of 'value' of goods imported) and final tax (where applicable) have been revised as under: S. No. Nature persons importing goods of goods Tax Year 2015 Tax Year 2014 1. Industrial undertaking importing remeltable steel (PCT Heading 72.04) and directly reduced iron for its own use 1.00% 1.00% Clause (9B) of Part _ II of 2nd Schedule 2. Persons importing potassic 1.00% fertilizers in pursuance of Economic Coordination Committee of the cabinet's decision No. ECC-155/12/2004 dated the 9th December, 2004 1.00% 1.00% Clause (13E) of Part _ II of 2nd Schedule 3. Persons importing urea 1.00% 1.00% Clause (23) of Part _ II of 2nd Schedule 4. Manufacturers covered under Notification No. S.R.O. 1125(1)/2011 dated the 31st December, 2011. 1.00% 1.00% Clause (9C) of Part _ II of 2nd Schedule 5. Persons importing pulses 2.00% 2.00% Clause (24) of Part _ II of 2nd Schedule 6. Commercial importers covered under Notification No. S.R.O. 1125(1)/2011 dated the 31st December, 2011 3.00% 3.00% Clause (9C) of Part _ II of 2nd Schedule 7. Ship breakers on import of ships 4.50% Covered under Ss. No. 8, 9, 10 8. Industrial undertakings not covered under S. Nos. 1 to 7 5.50% 5.00% 9. Companies not covered under S. Nos. 1 to 8 5.50% 5.00% 10 Persons not covered under S. Nos. 1 to 9 6.00% 5.50% 11. Import of foreign produced film imported for the purposes of screening and viewing Not separately provided 12.00% There is no change in the final tax regime for importers of goods, except the ships imported by ship breakers, which has been specifically added to the final tax regime. 19. Deduction of tax from salary - Section 149(3) Directorship fee or fee for attending board meeting or such fee by whatever name for the purposes of deduction of tax at source shall hence forth be subjected to deduction of adjustable advance tax at the rate of 20% instead of Annual Average Rate applicable on Salary. The issue of taxability of directorship fee under the head 'Salary' or 'Other Sources', also stands resolved through this amendment. The intention of the legislator is now clear that directorship fee falls under the head 'Salary'. 20. Deduction of tax from dividend Sections 2(61A) and 150, Division I and III of Part III of 1st Schedule and Clauses (17) and (20) of Part II of 2nd Schedule The reduced rate of deduction of tax from dividend declared or distributed by purchaser of a power project privatized by WAPDA and by a company set up for power generation provided through clauses (17) and (20) of Part II of 2nd Schedule have been omitted and instead the same reduced rate of 7.50% has been incorporated in Division III of Part I of 1st Schedule. In addition enhanced rate of deduction of tax has been provided for `non-filer' and dividend from 'stock fund', which is defined as under:-- "stock fund" means a collective investment scheme or a mutual fund where the investible funds are invested by way of equity shares in companies, to the extent of more than seventy per cent of the investment;" The rates of the tax to be deducted from dividend and the rates of final tax thereon have been revised as under: Dividend received from: Tax Year 2015 Tax Year 2014 Rates of tax deduction Rates of final tax Rates of tax deduction and final tax Filer Non-filer No distinction Power project privatized by WAPDA 7.50% 7.50% 7.50% 7.50% Company set up for power generation 7.50% 7.50% 7.50% 7.50% Company supplying coal exclusively to power generation projects 7.50% 7.50% 7.50% 10.00% Other companies * 10.00% 15.00% 10.00% 10.00% Collective investment scheme or a mutual fund: Stock Fund (if dividend receipts of the fund are less than capital gains) 12.50% 12.50% 12.50% Not separately provided Stock Fund (if dividend receipts of the fund are more than capital gains) 10.00% 10.00% 10.00% Money market Fund, Income Fund or any other fund: By an individual or an AOP 10.00% 10.00% 10.00% By a company 25.00% 25.00% 25.00% * In case of dividend from other companies the rate of tax deduction for non-filer is 15% whereas the rate of final tax for the non-filer is also 10%. There is no mention of treatment of excess deduction from a non-filer. In similar circumstances in case of tax deduction from profit on debt a specific provision has been made that the excess deduction will be an adjustable tax. 21. Deduction of tax from profit on debt Section 151 and Division IA of Part III of 1st Schedule The rates of the tax to be deducted from profit on debt have been revised as under: Filer 10.00% No change Non-filer: Where the profit on debt does not exceed 10.00% No change Rs.500,000 Where the profit on debt exceeds Rs. 500,000 15.00% Increase In case of a non-filer, other than a company, where tax has been deducted at the rate of 15%, the final tax liability will continue to be at the rate of 10% and the additional 5% tax deducted will be an adjustable advance tax. 22. Deduction of tax from sale of goods, rendering or providing services and execution of contracts Section 153, Division III of Part III of 1st Schedule and Clause (9AA) of Part IV of 2nd Schedule Payments received by a sportsperson against a contract entered/signed has been included in the "execution of a contract" in section 153(1)(c) and made subject to deduction of tax at source as well as subject to final tax at the rate of 10%. The rate of tax deduction and final tax (where applicable) and minimum tax (where applicable), as percentage of gross amount for sale of goods, rendering or providing services and execution of contracts are revised as under: On account of: Tax Year 2015 Tax Year 2014 Remarks Sale of rice, cotton seed or edible oils 1.50% 1.50% No change Sale of other goods by: A company 4.00% 3.50% Increased Other than a company 4.50% 4.00% Increased Transport services 2.00% 2.00% No change Other services provided or rendered by: A company 8.00% 6.00% Increased Other than a company 10.00% 7.00% Increased Execution of Contract by: A company 7.00% 6.00% Increased Other than a company 7.50% 6.50% Increased A sportsperson 10.00% Not separately provided There is no change in the final tax regime for sale of goods, rendering or providing services and execution of contracts, except the addition of contract entered/signed by sportsperson in the final tax regime. As explained under Imports section 148, the income of the ship breakers from the import of ships for breaking purpose has been brought into final tax regime by way of collection of tax at import stage. Accordingly, ship breakers, as recipient of payment, have been granted exemption from deduction of tax under section 153(1)(a), in respect of ships imported after the July 01, 2014 through clause (9AA) of Part IV of 2nd Schedule. 23. Rate of tax deduction on specified export oriented services Division IV of Part III of 1st Schedule The rate of tax deduction and corresponding final tax rate in respect of rendering of export oriented services of stitching, dying, printing, embroidery, washing, sizing and weaving to an exporter or an export house has been raised to 1% from 0.50%. 24. Deduction of tax from Petroleum Products Section 156(3) and Division VIA of Part III of 1st Schedule The rate of tax deduction and corresponding final tax rate in respect of commission or discount allowed to petrol pump operators by the person selling goods to them has been raised to 12% from 10%. 25. Compulsory registration in certain cases Section 181AA Applications for new commercial or industrial connection for electricity or natural gas will be processed subject to the condition that the applicant is registered under section 181 i.e., the applicant has obtained a National Tax Number. Registration/NTN issuance rules and procedure needs to be amended to exclude the requirement of utility bills. 26. Trial by Special Judge Sections 2(59B) and 203(1) A new definition has been inserted to link the term "Special Judge" used any where in the Ordinance with section 203 of the Ordinance, as under:-‑ "Special Judge" means the Special Judge appointed under section 203;" In addition, the Federal Government has been empowered to declare, through a notification in the official Gazette, that a Special Judge appointed under section 185 of the Customs Act, 1969 shall have jurisdiction to try offences under the Income Tax Ordinance, 2001. 27. Rate of tax for companies Division II of Part I of 1st Schedule In line with Governments commitment made in the last year budget, the rate of tax on companies has been reduced to 33% from 34%. 28. Rate of tax on cash withdrawal from a bank account Division VI of Part IV of 1st Schedule The rate of tax deduction on cash withdrawal from a bank account for a 'filer' remains un-changed at 0.30% of cash withdrawn, while separate rate of tax deduction on withdrawal by a 'non-filer' has been prescribed at 0.50% of the cash withdrawn. 29. Advance tax on private motor vehicles Section 231B and Division VII of Part IV of 1st Schedule The effects of the substituted provisions are as under:-‑ (a) Purchase of motor car or jeep from a manufacturer will now attract payment of adjustable advance tax and the obligation of collecting the advance tax has been placed on every manufacturer. (b) Where advance tax has not been collected by the manufacturer (as stated above) or at the time of import of a motor vehicle, the motor vehicle registering authority of Excise and Taxation Department at the time of registration of motor vehicle shall collect adjustable advance tax. (c) In addition, payment of adjustable advance tax will also be attracted at the time of transfer of registration or ownership of a private motor vehicle, within five years from the date of first registration, and the obligation of collecting the advance tax have been placed on the motor vehicle registering authority of Excise and Taxation Department. The rates of collection of adjustable advance tax have been revised for purchase, registration or transfer and higher rates have been prescribed for 'non-filers' as under Engine capacity: Tax Year 2015 Tax Year 2014 Remarks Filer Non-filer No distinction Upto 850cc Rs.10,000 Rs.10,000 Rs.10,000 No change for filer 851cc to 1000cc Rs.20,000 Rs.25,000 Rs.20,000 No change for filer 1001cc to 1300cc Rs.30,000 Rs.40,000 Rs.30,000 No change for filer 1301cc to 1600cc Rs.50,000 Rs.100,000 Rs.50,000 No change for filer 1601cc to 1800cc Rs.75,000 Rs.150,000 Rs.75,000 No change for filer 1801cc to- 2000cc Rs . 100 ,000 Rs.200,000 Rs.100,000 No change for filer 2001cc to 2500cc Rs.150,000 Rs.300,000 Rs.150,000 No change for filer 2501cc to 3000cc Rs.200,000 Rs.400,000 Rs.150,000 Increased for filer Above 3000cc Rs.250,000 Rs.450,000 Rs.150,000 Increased for filer In case of transfer of registration or ownership of a private motor vehicle the rate of collection of advance tax shall be reduced by 10% for each year from the date of first registration. There is no change in the persons exempt from collection of advance tax under this section. 30. Rate of collection of tax from brokerage and commission Division II of Part IV of 1st Schedule The reduced rate of deduction of tax from the commission of advertising agents under clause (26) of Part II of 2nd Schedule has been omitted and corresponding rate has been prescribed in Division II of Part IV of the 1st Schedule. The rates of deduction of tax and final tax (as percentage of gross amount) from brokerage and commission have been revised as under: Brokerage or commission of: Tax Year 2015 Tax Year 2014 Advertising agents 7.50% 5.00% Clause (26) of Part II of 2nd Schedule All others 12.00% 10.00% 31. Rate of collection of tax at the time of collection motor vehicle tax Division III of Part IV of 1st Schedule The rates of collection of adjustable advance at the time of collection of motor vehicle tax (Token Tax) in respect of Private Motor Cars have been revised and higher rates have been prescribed for 'non filers', as under: Where Motor Vehicle Tax is collected on annual basis Engine Capacity: Tax Year 2015 Tax Year 2014 Filer Non-filer No distinction upto 1000cc Rs. 1,000 Rs. 1,000 Rs. 750 1001cc to 1199cc Rs. 1,800 Rs. 3,600 Rs. 1,250 1200cc to 1299cc Rs. 2,000 Rs. 4,000 Rs. 1,750 1300cc to 1499cc Rs. 3,000 Rs. 6,000 Rs. 3,000 1500cc to 1599cc Rs. 4,500 Rs. 9,000 Rs. 3,000 1600cc to 1999cc Rs. 6,000 Rs. 12,000 Rs. 4,000 2000cc and above Rs. 12,000 Rs. 24,000 Rs. 8,000 Where Motor Vehicle Tax is collected In lump sum Engine Capacity: Tax Year 2015 Tax Year 2014 Filer Non-filer No distinction upto 1000cc Rs. 10,000 Rs. 10,000 Rs. 7,500 1200cc to 1299cc Rs. 20,000 Rs. 40,000 Rs. 17,500 1300cc to 1499cc Rs. 30,000 Rs. 60,000 Rs. 30,000 1500cc to 1599cc Rs. 45,000 Rs. 90,000 Rs. 30,000 1600cc to 1999cc Rs. 60,000 Rs. 120,000 Rs. 40,000 2000cc and above Rs. 120,000 Rs. 240,000 Rs. 80,000 upto 1000cc Rs. 10,000 Rs. 10,000 Rs. 7,500 1200cc to 1299cc Rs. 20,000 Rs. 40,000 Rs. 17,500 32. Rate of collection of tax at the time of sale to distributors, dealers and wholesalers Division XIV of Part IV of 1st Schedule Every manufacturer or commercial importer of electronics, sugar, cement, iron and steel products, fertilizer, motorcycles, pesticides, cigarettes, glass, textile, beverages, paint or foam sector is required to collect advance, at the time of sale to distributors, dealers and wholesalers. The rate of tax to be collected was 0.10% of the gross value of sale. The rates of tax collection have been revised and higher rates have also been provided for "non-filers", as under: Nature of goods: Tax Year 2015 Tax Year 2014 Filer Non-filer No distinction Fertilizer 0.20% 0.40% 0.10% Other than fertilizer 0.10% 0.20% 0.10% 33. Domestic electricity consumption Section 235A and Division XIX of Part IV of 1st Schedule Obligation for payment of adjustable advance tax on domestic electricity consumption has been placed on every person whose monthly electricity consumption bill is Rs. 100,000 or more. The rate of advance tax, is 7.5% of such electricity bill and the obligation of collecting this advance tax has been placed on person preparing electricity consumption bill. 34. Tax on steel melters, re-rollers etc. Section 235B and Clause (9A) of Part IV of 2nd Schedule Steel melters, steel re-rollers and composite steel units were facing problem in deducting tax from the local suppliers of Scrap as required under section 153. To resolve this issue an alternate method of payment of such tax has been introduced. All steel melters, steel re-rollers and composite steel units registered for the purpose of Chapter XI of Sales Tax Special Procedure Rules, 2007 will now be required to pay un-adjustable tax at the rate of Rupee 1 per unit of electricity consumed for production of steel billets, ingots and mild steel (MS products) excluding stainless steel. The obligation for collecting this tax has been placed on person preparing electricity consumption bill. This tax shall be deemed to be the tax required to be deducted under subsection (1) of section 153 from the payment for local purchase of scrap and credit of this shall not be admissible to any person. This facility of discharging the obligation to deduct tax from the suppliers of scrap has been granted retrospectively from the tax year 2012, provided the tax due at the rate of Rupee 1 per unit of electricity consumption is paid before June 30, 2014. However, if any tax in this respect has already been deducted or paid as a result of order under 161 shall be not refundable. Corresponding exemption to the steel melters, steel re-rollers, composite steel units, as a payer, in respect of purchase of scrap from application of section 153(1)(a) has been granted through clause (9A) of Part IV of 2nd Schedule. 35. Rates of tax collection from telephone users Division V of Part IV of 1st Schedule The rate of collection of adjustable advance from the subscriber of mobile telephone and pre-paid telephone card has been revised downwards to 14% from 15% of the amount of bill or sales price of pre-paid telephone card or sale of units through any electronic medium. The rate of collection of adjustable advance tax from the subscriber of telephone remains unchanged at 10% of the amount of bill exceeding Rs. 1,000. 36. Advance tax on sale or transfer of immovable property Section 236K Division X and XVIII of Part IV of the 1st Schedule Through Finance Act, 2012, collection of adjustable advance tax at the time of registering or attesting the transfer of an immovable property was imposed on the seller or transferor of the immovable property. Now, similar, adjustable advance tax has also been imposed on the purchaser or transferee of an immovable property. The obligation of collecting this adjustable advance tax has been placed on any person responsible for registering or attesting transfer of any immovable property. The Federal Government, a Provincial Government, a Local Government, a foreign diplomatic mission in Pakistan has been granted exemption from payment of this tax. In addition exemption has also been granted to expatriate Pakistanis purchasing immovable property in a scheme introduced by the Federal Government, or Provincial Government or an Authority established under a Federal or Provincial law for expatriate Pakistanis. Separate rates of collection of advance tax (as percentage of sale consideration) at the time of registering or attesting transfer of any immoveable property have been provided for 'filer' and 'non-filer' seller/transferor as well as for purchaser/transferee, as under: Collection of tax from: Value of immovable property Tax Year 2015 Tax Year 2014 Filer Non- filer No distinction Seller or transferor Any amount 0.50% 1.00% 0.50% Purchaser or transferee Upto Rs. 3,000,000 0.00% 0.00% Not applicable Purchaser or transferee Exceeds Rs.3,000,000 1.00% *1.00%/ 2.00% Not applicable * Currently 1% and 2% from the date to be notified by the Board 37. Rate of advance tax on holding of 'functions' Division XI of Part IV of the 1st Schedule The rate of tax collection from the person arranging or holding a `function' in a marriage hall, marquee, hotel, restaurant, commercial lawn, club, a community place or any other place used for such purpose has been revised downwards to 5% from 10%. 38. Advance tax on purchase of international air ticket Section 236L and Division XX of Part IV of the 1st Schedule Purchase of domestic air travel ticket is already subject to adjustable advance tax collection. Now, similar provisions have been made for collection of adjustable advance tax on issuance of international air travel ticket from Pakistan, whether one-way or return ticket. The responsibility of collection of this advance tax has been placed on every airline issuing ticket for journey originating from Pakistan and such tax shall be collected in the manner air ticket charges are collected or charged. The rates of tax to be collected are as under: Type of ticket Rate of tax Economy class 0% First/Business/Club class 4% 39. Reduction in tax liability for senior citizen and disabled persons Sub-clause (1A) of clause (1) of Part-III of 2nd Schedule and Para (1B) of Division I of Part I of 1st Schedule The 50% reduction in tax liability (tax on taxable income excluding final tax) available to a senior citizen aged above 60 years and whose taxable income (excluding income subject to final tax) does not exceed Rs. 1,000,000, has been omitted from 2nd Schedule and instead has been now provided in Para (1B) of Division I of Part I of 1st Schedule. Thus there in no change. In addition, similar reduction in tax liability has been provided to an individual holding National Database Registration Authority's Computerized National Identity Card for disabled persons, without any limit on age. 40. Exemptions from total income Part I of 2nd Schedule (a) Compensatory allowance payable to a citizen of Pakistan locally recruited in Pakistan Mission abroad Clause (35) Exemption withdrawn (b) Income of provident funds, etc. Clause (57) Exemption granted to any income from voluntary contributions, house property and investments in securities of the Federal Government derived by Sindh Province Pension Fund established under the Sindh Province Pension Fund Ordinance, 2002. (c) Donations qualifying for straight deduction Clause (66) National Trust Fund for the Disabled has been omitted from the list of institutions to which donations given qualify for straight deduction. Greenstar Social Marketing Pakistan (Guarantee) Limited has been added to the list of institutions to which donations given qualify for straight deduction. (d) Income derived by a Collective Investment Scheme or a REIT Scheme - Clause (99) Any income derived by a Collective Investment Scheme or a REIT Scheme is exempt, if not less than ninety percent of its accounting income of that year, as reduced by capital gains, whether realized or unrealized, is distributed amongst the unit or certificate holders or shareholders as the case may be. Through an amendment it is now provided that for the purpose of determining distribution of at least 90% of accounting income, the income distributed through bonus shares, units or certificates as the case may be, shall not be taken into account. (e) Any income derived by a public sector university established solely for educational purposes and not for the purposes of profit Clause (126) Exemption granted retrospectively with effect from July 01, 2013. (f) Income derived by Gawadar Free Zone Company Limited, PSA Gawadar International Terminal Limited, Gawadar Marine Services Limited and P.S.A. Gawadar (PTE) Ltd. from Gwadar Port operations Clause (126A) Exemption withdrawn (g) Income derived by China Overseas Ports Holding Company Limited from Gwadar Port operations Clause (126A) Exemption granted retrospectively from February 06, 2007 for a period of twenty years. (h) Profits and gains derived from a fruit processing or preservation unit Clause (126H) Exemption granted to the profits and gains derived by a taxpayer, from a fruit processing or preservation unit set up in Balochistan Province, Malakand Division, Gilgit-Baltistan and FATA between the first day of July, 2014 to the thirtieth day of June, 2017, both days inclusive, engaged in processing of locally grown fruits, for a period of five years beginning with the month in which the industrial undertaking is set up or commercial production is commenced, whichever is later. (i) Profits and gains from a coal mining project in Sindh Clause (132B) Exemption granted to the profits and gains derived by a taxpayer from a coal mining project in Sindh and supplying coal exclusively to power generation projects. 41. Reduction in tax rates - Part H of 2nd Schedule (a) Reduced rate of tax for a company setting up industrial undertaking -Clause (18A) In order to incentives industrial growth and foreign direct investment (FDI), the rate of tax on taxable income of an company will be 20% [instead of 33% applicable for tax year 2015] for a period of 5 years beginning from the month in which the industrial undertaking is set up or commercial production is commenced, which ever is latter. The conditions for availing this concessionary rate of tax on taxable income are: The industrial undertaking is set up in Pakistan; The industrial undertaking is set up between the July 01, 2014 and June 30, 2017; and At least 50% of the project cost and working capital is through owners equity by way of foreign direct investment. (b) Reduced rate of tax for passenger transport vehicles - Clause (14A) The rate of tax collection along with motor vehicle tax from passenger transport vehicles with seating capacity of 20 or more persons was raised to Rs. 500 per seat by Finance Act, 2012 (i.e. effective from July 01, 2012). However by insertion of clause (14A) this was reduced to Rs. 250 per seat through a notification dated November 18, 2013. The above reduced rate has been made effective from July 1, 2012 subject to payment of the tax on or before June 30, 2014. It has also been provided that this facility is only for those who have not yet paid the tax and where the tax is already paid at the standard rate, no refund shall be allowed. 42. Reduction in tax liability - Part III of 2nd Schedule (a) Flying allowance of pilots taxed as separate block -Clause (1)(1)(a) Separated from flying allowance of flight engineers, navigators, etc. [See clause (1)(1AA) below]. (b) Allowance of pilots of Pakistani airlines - Clause (1)(1AA) The aggregate of all allowances received by the pilots of any Pakistani airline, in excess of their basic salary, shall be chargeable to tax as a separate block of income and taxed at the rate of 7.5%. Prior to the amendment of the above two clauses, the flying allowance of the pilots of Pakistan Armed Forces, Pakistani Airlines or Civil Aviation Authority, to the extent of an amount equal to basic salary was treated as separate block of income and subject to tax at the rate of 2.5%. The new provisions inserted through clause (1)(1AA) are now applicable to the pilots of any Pakistani airline. Thus the concept of treating the flying allowance as a separate block of income in case of pilots of Pakistan Armed Forces and Civil Aviation Authority stands withdrawn. 43. Exemption from specific provisions - Part IV of 2nd Schedule (a) Option for opting out of final tax regime - Clauses (41A), (41AA) and (41AAA) The option given to importers of goods, exporters of goods, recipients of foreign commission and suppliers of goods, whose income fall under final tax regime, to opt out of final tax regime subject to payment of minimum equal to 60%, 50%, 50% and 70% respectively of the tax that would have been payable as final tax, through Finance Act, 2012, now stands withdrawn. However, an alternate scheme of opting out of final tax regime has been introduced and is explained separately below. (b) Exemption from collection of tax from an industrial undertaking at import stage - Clause (72B) Industrial undertakings are given a facility for exemption from collection of tax on import of goods on payment of tax for the current tax year on the basis of determined tax liability for any of the preceding two tax years, whichever is the higher. Now, the issuance of exemption certificate will be subject to additional requirement of an application in the manner and after fulfilling the conditions as specified by the Board through a notification for this purpose. However, the notification has not yet been issued. (c) Exemption from operation of section 152(2) Clause (41B) The exemption from deduction of tax from payments to the non resident foreign news agencies, syndicate services and non resident contributors, who have no permanent establishment in Pakistan, stands withdrawn. (d) Option for opting out of final tax regime - Clauses (56B) to (56G) In replacement of clauses (41A), (41AA) and (41AAA), taxpayers have been given option to opt out of final tax regime in respect of their certain incomes subject to following restrictions and conditions: Filing of return of total income along with accounts and documents as prescribed; and Normal tax liability (tax on taxable income after all tax credits etc, excluding tax credits for taxes already paid) is not less than the prescribed percentage of the 'Value of import', gross amount of receipts, commission or brokerage (see table below). Nature of transactions: Taxpayers Status Minimum prescribed% Rate of Final Tax Saving by opting ont 2015 2014 Commercial imports Company 5.50% 5.50% 0.00% 40.00% Non-Company 6.00% 6.00% 0.00% 40.00% Sale of goods Company 3.50% 4.00% 12.50% 30.00% Non-Company 4.00% 4.50% 11.12% 30.00% Execution of contracts Company 6.00% 7.00% 14.28% Not available Non-Company 6.50% 7.50% 13.33% Services of stitching etc. Both 0.50% 1.00% 50.00% Petrol operator pump Both 10.00% 12.00% Brokerage and commission Both 10.00% 12.00% 16.66% Exports/ Both Withdrawn 50.00% In tax year 2013, to the best of our understanding, very few taxpayers opted out of final tax regime and it is expected that very few will opt out for the tax year 2014. On the other hand the element of tax saving available for the tax year 2015 is much on the lower side as compared to tax year 2013 and 2014, effectively, this means that no one will opt out of final tax regime. In case of commercial imports, the rates of final tax and minimum tax to opt out of final tax are same. Thus, practically, commercial importers are out of the scheme to opt out of final tax regime. (e) Non-applicability of section 153 on Companies operating Trading Houses Clause (57) A plain reading of the existing clause (57) provides for exemption from non-applicability of section 153 on companies operating Trading Houses, both as a recipient as well as a payer. In order to restrict the non-applicability of section 153 on companies operating Trading Houses only as recipient an explanation has been inserted with the intention that it will have a retrospective effect. However, since this will create an additional liability, the appellate forums would not approve its retrospective application. 44. Rates of depreciation and initial allowance Clause (1) of Part II of 3rd Schedule The rate of initial allowance for buildings has been revised downward to 15% from 25%. Originally the rate of initial allowance on buildings as well as plant and machinery was 50%, which was reduced to 25% for building through Finance Act, 2012 and to 25% for plant and machinery through Finance Act, 2013. ***