BUDGET BRIEFING

BY

FAZAL MAHMOOD AND COMPANY CHARTERED ACCOUNTANTS

Note:

This budget briefing is correct to the best of our knowledge and belief at the time of going to the press. It is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. The Firm and JHI do not accept any responsibility for any loss arising from any action taken or not taken by anyone using this publication. Before relying on any information in this document please contact us

June 15, 2013

Dear Valued Client,

Please find attached herewith brief budgetary measured introduced by the Federal Government through Finance Bill 2013 for your kind information and guidance.

SALIENT FEATURES

INCOME TAX BUDGETARY MEASURES 2013-14

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SALES TAX BUDGETARY MEASURES 2013-14

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INCOME TAX BUDGETARY MEASURES 2013-14

1. 1.    DIVIDEND INCOME OF CORPORATE TAXPAYERS

Section 8

Presently dividend income of a corporate taxpayer is excluded from the ambit of Final Tax Regime (FTR) of section 8 read with section 169 and is subject to tax at the rate of 10 per cent as a separate block of income. It is proposed to bring the dividend income of corporate taxpayer under the FTR of section 8 read with section 169 as was the case prior to July 1, 2007. However, dividend income of a corporate taxpayer will continue to be taxed at the rate of 10 per cent.

1. 2.    LOSSES CANNOT BE SET-OFF AGAINST SALARY

Section 56

Under the scheme of Section 56, losses other than speculation business losses and capital losses are available to be set-off against any other head of income including salary for the year. The Bill seeks to amend sub-section (1) of Section 56 of the Ordinance whereby losses will no longer be available for setting off against salary.

1. 3.    DEFINITION OF “COMPANY” BROADENED

Section 80

The definition of “Company” has been enlarged to include:

• A “non-profit organization”; and

• An “entity” or a “body of persons” established or constituted by or under any law for the time being in force.

In addition to cooperative and finance societies, all other societies will now be treated as company.

1. 4.     MINIMUM TAX

Section 113

The minimum tax payable by a resident company, individual or Association of Persons (AOPs), has been increased from 0.5 per cent to 1 per cent of their turnover. It is proposed that in addition to corporate taxpayers, henceforth non-salaried individuals and AOPs will also be entitled to adjust minimum tax paid for the year against the tax liability (other than minimum tax) for the subsequent five tax years.

Builders and Land developers have been brought under the ambit of Minimum tax.

1. 5.    RETURN OF INCOME

Section 114

It is proposed to require the following to also file a return of income:

• persons having commercial or industrial connections of electricity where the amount of annual bill exceeds Rs 500,000; presently the threshold is annual bill exceeding Rs 1,000,000.

• persons registered with 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.

• individuals having income under the head ‘Income from Business’ in excess of Rs 300,000 but not exceeding Rs 400,000 in a tax year.

1. PERSONS NOT REQUIRED TO FURNISH A RETURN OF INCOME

Section 115

Presently, a taxpayer whose entire income in a tax year consists of income chargeable under the head ‘Salary’ is not required to file his return of income, if the employer has filed related annual statement of deduction of income tax from salary, provided his salary income for the tax year does not exceed Rs 500,000. The relief is proposed to be withdrawn and consequently such taxpayers are required to file return of income. The requirement of electronic filing of return by the salaried individual having salary income of Rs 500,000 or more remains applicable.

1. 7.    WEALTH STATEMENT

Section 116

It is proposed to require every resident taxpayer being an individual filing return of income or statement of Final Tax to file a wealth statement irrespective of any threshold of income or tax paid

1. 8.    SALARY

Section 149

The responsibility for withholding tax from salary has now been extended to any “person responsible for” paying salary. Previously, it was only the “employer” who was responsible for the withholding. It is now proposed not to consider the following, whilst determining tax to be withheld from salary payments:

a) Charitable donations;

b) Tax credit for investment in shares and insurance;

c) Contribution to an “Approved Pension Fund”; and

d) Profit paid on loan utilized for construction of a new house or acquisition of a house.

As a result, the salaried individuals will claim the above tax credits in their returns, which may result in refund.

1. 9.    PAYMENTS TO TRADERS AND DISTRIBUTORS

Section 153 A

This section required manufacturers to collect tax from traders and distributors. The operation of this section was suspended and it is now proposed to be omitted, however, similar provision with a limited scope, is being introduced in section 236G.

10. INCOME FROM PROPERTY

Section 155

The “prescribed person” for the purposes of withholding tax from payment of rent will now also include the following:

• charitable institutions.
• private educational institutions, boutiques, beauty parlours, hospitals, clinics
• or maternity homes.
• individual or AOPs paying gross rent of Rs 1,500,000 and above in a year

11. CERTIFICATE OF COLLECTION OR DEDUCTION OF TAX

Section 164

Presently, a certificate issued by a withholding agent for tax collected or deducted is treated sufficient evidence of tax suffered for claiming credit thereof under section 168. This facilitation is proposed to be withdrawn.

The law envisages furnishing of copies of challans / receipts of payment with the return of income. It appears that such evidences will be verified by the department for allowing the credit for tax collected or deducted claimed in the return of income

12. FURNISHING OF INFORMATION BY BANKS

Section 165 A

It is proposed that every banking company shall make arrangements to provide following to the FBR:

• online access to its central database containing details of its account holders and all transactions made in their accounts;
• list containing particulars of deposits aggregating Rs 1,000,000 or more made during the preceding calendar month;
• list of payments made by any person against bills raised in respect of a credit card issued to that person, aggregating Rs 100,000 or more during the preceding calendar month;
• consolidated list of loans written off exceeding Rs 1,000,000 during a calendar year; and
• a copy of each Currency Transactions Report and Suspicious

Transactions Report generated and submitted by it to the Financial Monitoring Unit under the Anti-Money Laundering Act, 2010. Further, each banking company shall nominate a senior officer at the head office to coordinate with the FBR for provision of any additional information and documents as may be required by the FBR. The banking companies and their officers shall not be liable to any civil, criminal or disciplinary proceedings against them for furnishing the requisite information. The information collected shall only be used for tax purposes and kept confidential.

13. AUDIT

Section 177

It is proposed to clarify that the Commissioner’s power to select and conduct audit of a person is independent of powers conferred on the FBR under section 214C for selection of a person for tax audit. Apparently, the proposed amendment is aimed to nullify the effect of a recent decision of Lahore High Court holding that powers to select taxpayers’ cases for audit only vested with FBR. Similar amendments are also proposed in The Act and Federal Excise Act, 2005 (FED Act).

14. TAXPAYERS REGISTRATION

Section 181

It is proposed that the FBR may allow the use of Computerized National Identity Card as an alternative to National Tax Number (NTN).

15. DISPLAYING OF NTN

Section 181 C

Presently, NTN is required to be displayed at a conspicuous place at every place of business by a taxpayer under Rule 83(1) of the Income Tax Rules, 2002. It is now proposed to be included in the Ordinance.

It is also proposed to levy penalty of Rs 5,000 under section 182 for non compliance with this section.

16. OFFENCES AND PENALTIES

Section 182

The following changes in penalties are proposed:

17. COLLECTION OF ADVANCE TAX

Section 236D to 236 J

It is proposed to collect advance tax as follows:

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18. TAX RATES FOR SALARIED INDIVIDUALS

Clause (1A) of Division I of Part I of First Schedule

The rates of tax for salaried individuals are proposed to be revised. The existing six slabs of salaried individuals are proposed to be increased to twelve which shall bring progressivity in taxation. The significant changes, apart from variation in rates, are:

• There would be twelve slabs as against six slabs currently provided for.

• The highest rate of 30 per cent would apply on income exceeding Rs 7,000,000 per annum, whereas this income is currently taxable at the rate of 20 per cent.

Since progressive slab rates are proposed, the concept of ‘marginal relief’ introduced through Finance Act 2008 and amended through Finance Act 2009 is now proposed to be omitted.

19. TAX RATES FOR AOPs AND NON-SALARIED INDIVIDUALS

Clause (1) of Division I of Part I of First Schedule

Currently, income of AOPs and non-salaried individuals are taxable at rates ranging from 10 per cent to 25 per cent of taxable income. The rates of tax for business individuals are proposed to be revised to support the middle income earners. The existing five slabs for business individuals and AOPs are proposed to be increased to seven slabs which will bring progressivity in the rates of tax.

20. CORPORATE TAX RATE

Division II of Part I of the First Schedule

The Bill proposes to reduce the rate of tax on the taxable income of a company, other than a banking company, to 34 per cent from the existing rate of 35 per cent.

The reduced rate is only applicable for the tax year 2014.

21. INCOME FROM PROPERTY

Division VI of Part I and Division V of Part III of the First Schedule

The annual rental income exceeding Rs 1 million derived by individuals, AOPs and companies have now been proposed to be taxed at the following progressive rates:

The above rates would also be applicable for withholding tax.

22. ADVANCE TAX ON IMPORTS

Part II of the First Schedule

The rates of advance tax to be collected by the Collector of Customs under section 148 are proposed to be enhanced from 5 to 5.5 per cent in case of all taxpayers excluding companies and industrial undertakings, for which the previous rate remains applicable.

23. WITHHOLDING TAX ON GOODS AND SERVICES

Division III of Part III of the First Schedule

The rates of tax to be deducted from payments for sale of goods, services and execution of contract made to all the taxpayers, except companies, are proposed to be enhanced as follows:

• Sale of goods: from 3.5 to 4 per cent

• Rendering or providing of services: from 6 to 7 per cent

• Execution of contract: from 6 to 6.5 per cent

24. PRIZES AND WINNINGS

Division VI of Part III of the First Schedule

The rate of withholding tax to be deducted on a prize on prize bond or crossword puzzle, is proposed to be enhanced from 10 to 15 per cent.

25. ADVANCE TAX ON MOTOR VEHICLES

Division III of Part IV of the First Schedule

The amount of advance tax to be collected under section 234 where the motor vehicle tax is paid on a lump sum basis, has now been prescribed as follows:

26. WITHHOLDING TAX ON CASH WITHDRAWALS FROM A BANK

Division VI of Part IV of the First Schedule

The withholding tax rate on cash withdrawals from a bank is proposed to be enhanced from 0.2 to 0.3 per cent of the gross amount of withdrawal. The currently applicable limit of per day cash withdrawal upto Rs 50,000 not subject to such withholding, remains intact.

27. ADVANCE TAX ON PURCHASE OF MOTORCARS AND JEEPS

Section 231B and Division VII of Part IV of the First Schedule

The amounts of advance tax to be collected by the Motor Vehicle registration authority on the registration of new motorcars / jeeps are proposed to be revised as under:

28. ADVANCE TAX AT THE TIME OF SALE BY AUCTION

Section 236A and Division VIII of Part IV of the First Schedule

The rate of advance tax to be collected by a person making sale of any property or goods by public auction has been enhanced to 10 per cent from the existing rate of 5 per cent of the gross sale price of such property or goods.

29. INCOME OF UNIVERSITY OR OTHER EDUCATIONAL INSTITUTIONS

Clause (92) of Part I of the Second Schedule

Any income of any university or other educational institution established solely for educational purposes and not for purposes of profit, was exempt from tax under clause (86) of Part I of the Second Schedule to the repealed Income Tax Ordinance, 1979. The said exemption was continued under clause (92) of Part I of the Second Schedule to the Income Tax Ordinance, 2001 (Ordinance).

The Bill proposes to withdraw the above exemption and consequently, such universities and educational institutions will now be required to compute their taxable income and pay tax at the applicable rates

30. DIVIDEND IN SPECIE

Clause (103B) of Part I of the Second Schedule

Tax on any dividend in specie derived in the form of shares in a Company, as defined in the Companies Ordinance, 1984 was effectively deferred in a certain manner with effect from July 1, 2010. Where such shares are disposed by the recipient, the amount representing the dividend in specie is taxed at the rate of 10 per cent in accordance with section 5, and the amount representing the difference between the consideration received and the amount taxed as dividend, is taxed under the head Capital Gains under section 37 or 37A, as the case may be. The Bill proposes to withdraw the above concession and consequently, dividend in specie will be taxed under section 5 at the rate of 10 per cent in the tax year in which the same is received by the shareholder

31. SPECIAL ECONOMIC ZONES (SEZ)

Clause (126E) of Part I of the Second Schedule

Since July 2009, following corporate income tax holiday had been available with regard to SEZ as announced by the Federal Government:

• for a period of five years for projects from the date of start of commercial operations; and

• for a period of ten years for developers of the Zone from the date of start of developmental activity in the SEZ.

The Bill proposes to substitute the existing clause 126E by exempting the following:

• the income derived by a zone enterprise as defined in the SEZ Act, 2012 for a period of ten years starting from the date the developer certifies that the zone enterprise has commenced commercial production; and

• for a period of ten years to a developer of a zone starting from the date of signing of the development agreement in the SEZ as announced by the Federal Government.

PART II – REDUCTION IN TAX RATES

IMPORT OF HYBRID CARS

Clause (28) of Part II of the Second Schedule

The Bill proposes to insert a new clause (28) in Part II of the Second Schedule providing for the reduction of tax under section 148 on import of hybrid cars as follows:

PART III – REDUCTION IN TAX LIABILITY

TAX PAYABLE BY A FULL TIME TEACHER OR A RESEARCHER

Clause (2) of Part III of the Second Schedule

The tax payable by a full time teacher or a researcher, employed in a non profit education or research Institution duly recognised by Higher Education Commission, a Board of Education or a University recognised by the Higher Education Commission, including government training and research institution is presently reduced by an amount equal to 75 per cent of tax payable on his income from salary.

The above reduction in tax liability is now proposed to be withdrawn

PART IV – EXEMPTION FROM SPECIFIC PROVISIONS

PROFIT ON DEBT

Clause (59)(iv)(a) of Part IV of the Second Schedule

In the case of any resident individual, no tax is required to be deducted under section 151 from income or profits paid on Defence Saving Certificates, Special Savings Certificates, Savings Accounts or Post Office Savings Accounts, or Term Finance Certificates (TFCs), where such deposit does not exceed Rs 150,000.

The Bill proposes to withdraw the above exemptions effective July 1, 2013

IMPORTS BY AN INDUSTRIAL UNDERTAKING

Clause (72B) of Part IV of the Second Schedule

Under section 148, the Collector of Customs is required to collect advance tax from every importer of goods on the value of goods at the applicable rate, which is ordinarily treated as a final tax on the income of the importer arising from the imports except inter alia in the case of import of raw material, plant, machinery, equipment and parts by an industrial undertaking for its own use. The Bill proposes to insert a new clause in Part IV of the Second Schedule whereby the provisions of section 148 will not apply to an industrial undertaking, if the tax liability for the current tax year, on the basis of determined tax liability for any of the preceding two tax years, whichever is higher, has been paid and a certificate to this effect is issued by the concerned Commissioner.

THIRD SCHEDULE

Part II – Initial Allowance

Currently ‘eligible depreciable assets’ are entitled to initial allowance at the rate of 50 per cent for plant and machinery and 25 per cent for buildings.

The Bill now proposes to reduce the rate of initial allowance to 25 per cent in the case of plant and machinery

 SALES TAX BUDGETARY MEASURES 2013-14

1. 1.    INADMISSIBILITY OF INPUT SALES TAX NOT VERIFIABLE FROM ‘CREST’ OR IN THE ‘SUPPLY CHAIN’

[Sections 2(5AC), 2(33A) and 8(1)(caa)]

Based on the discrepancies pointed out by the automated information system, ‘Computerized Risk-based Evaluation of Sales Tax’ (‘CREST’), proceedings were initiated against taxpayers either disallowing the relevant claim of input tax or for recovery of output tax.

Discrepancies under this system include:

(i)  mismatch on cross matching of the sales tax returns of taxpayers in a supply chain i.e. both the purchaser [input] and registered supplier [output].

(ii)  on account of timing differences (in declaration of ‘output tax’ and claim of corresponding ‘input tax’).

The action was, however, not fully endorsed by Courts.

Through insertion of sub-sections (5AC) and (33A) in section 2, the terms ‘CREST’ and ‘supply chain’ are now proposed to be defined. Further, effective June 13, 2013, a new clause (caa) is proposed to be inserted in section 8(1) for disallowance of input as indicated by CREST or not verifiable from the supply chain.

The proposed amendments are seemingly aimed to validate legal status of the defaults adjudged on the basis of CREST or discrepancies otherwise unearthed by departmental officials in the supply chain.

The proposed amendments are seemingly aimed to validate legal status of the defaults adjudged on the basis of CREST or discrepancies otherwise unearthed by departmental officials in the supply chain.

1. 2.    TIME OF SUPPLY – PAYMENT OF SALES TAX ON EARLIER OF RECEIPT OF

PAYMENT OR DELIVERY OF GOODS

[Section 2(44)]

Under the currently applicable provisions, sales tax is leviable at the time of actual delivery of goods regardless of the time of payment i.e. sales tax is not chargeable on ‘advance payments’ against purchase of goods.

Amendments are proposed in Clause (44) of section 2, defining the term ‘time of supply’, to the effect that sales tax becomes chargeable on earlier of receipt of payment or delivery of goods. The timing for accounting of part payment for purchase of goods, including under hire purchase and services has also been proposed.

Accordingly, any payment received in advance will undergo the incidence of sales tax and levy thereon would not be delayed until the supply of goods actually takes place.

The proposed amendment restores the legal position applicable upto June 30, 2007 when sales tax was chargeable on earlier of delivery of goods or payment of consideration. Amendments were introduced on account of litigation on the subject where different nature of advances for purchases was identified.

1. 3.    INCREASE IN TAX RATE FROM 16 PERCENT TO 17 PERCENT

[Section 3]

[Effective June 13, 2013]

The standard rate of sales tax for the purposes of section 3 is enhanced to 17 per cent.

1. 4.    IMPOSITION OF “FURTHER TAX”

[Section 3(1A)]

[Effective June 13, 2013]

Sales to ‘persons who have not obtained registration’ are now subject to further charge of sales tax i.e. ‘further tax’, at the rate of 2 per cent in addition to tax chargeable at standard rate.

Such charge is also proposed in addition to that on the basis of:

• Retail price
• Rate prescribed at a lower or higher rate as notified for certain goods
• Extra tax
• Fixed rates of taxes
• Capacity

The Federal Government, however, has been proposed to be vested with a power to notify ‘taxable supplies’ in respect whereof, further tax would not be applicable.

1. 5.    CLAIM OF INPUT SALES TAX ON PURCHASES FROM BLACKLISTED SUPPLIERS /

SUPPLIERS WITH SUSPENDED SALES TAX REGISTRATION

[Section 21]

Section 21(3) provides for disallowance of input sales tax in respect of purchases from a person who has either been blacklisted or whose registration has been suspended. There was, however, an exception to this in cases where the claimant of input sales tax demonstrated compliance with provisions of section 73 of the Act.

It is now proposed that such relaxation be done away with. It implies that even if the buyer of goods demonstrates compliance with section 73, claim of input tax would not be allowed. Further by way of insertion of sub-section 4, the FBR, Commissioner or any other authorized Officer is proposed to be empowered to block the refunds and input tax adjustments of a taxpayer in respect of whom there are reasons to believe that it is engaged in fraudulent activity or issuance of fake invoices. While the powers to suspend the registration or blacklist a taxpayer engaged in issuance of fake invoices/ fraudulent activities already vest under provisions of section 21(1), the intentions of proposed blockade of refund etc., is not clear. It appears that disallowance of ‘input tax adjustment’ was intended for the customers of the person engaged in fraudulent activity / issuance of fake invoices, however, in the proposed new clause, such aspect remains ambiguous.

1. 6.    MAINTENANCE OF RECORDS OF GOODS MOVEMENT

[Section 22]

A new sub-clause (ea) is proposed to be inserted in section 22(1) making it mandatory for taxpayers to maintain records of goods movement to and from business premises/ undertakings / warehouses i.e. inward and outward gate passes and transport receipts.

Similar amendment has also been proposed in FED Act.

The inclusion of goods movement documentation in the list of statutory records appears to counter the practices of issuance of fake invoices and dummy transactions.

Practical application of this provision needs to be examined as in the present business and commercial environment, the recommended procedures may raise problems for taxpayers.

1. 7.    FINISHED CONSUMER GOODS OF FIVE EXPORT-ORIENTED SECTORS

SRO 504(I)/2013

Amendment in SRO 1125(I)/2011 dated December 31, 2011

[Effective June 12, 2013]

In terms of SRO 1125(I)/2011 dated December 31, 2011 [as amended from time to time] a reduced rate of 2 per cent / 5 per cent is applicable inter alia on local sales of articles covered by five export-oriented sectors i.e. textile, carpets, leather, sports and surgical goods. Through the subject notification, with effect from June 12, 2013, the concession has been restricted to goods other than ‘finished’ articles. Consequently, the local sale of these ‘finished articles’ such as ‘‘garments’ now attracts sales tax at the rate of 17 %

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