Transcript A. Qadir & Company - Karachi Tax Bar Association

A. Qadir & Company
1
1
Presentation at the
“POST BUDGET 2012-13 SEMINAR”
Organized by
Karachi Tax Bar Association
by
Abdul Qadir Memon
Former President
Pakistan Tax Bar Association
On June 4, 2012
2
TABLE OF CONTENTS
•Taxation of Income from Salary _Value of Perquisites;
•Capital Gains on disposal of Immoveable Property, Cost &
Consideration;
•Tax Credit on Investment in Plant and Machinery;
•Tax credit for newly established industrial undertakings;
•Tax credit for industrial undertakings established before
the first day of July, 2011;
•Special Provisions relating to Capital Gain Tax on disposal
of listed Securities;
•Minimum Tax;
•Revision of Return of Income;
•Assessment ;
•Amendment of Assessment ;
•Procedure in Appeal;
3
TABLE OF CONTENTS
•Decision in Appeal;
•Deducted v/s Deductable;
•Payment to Non-resident;
•Taxation of PE of a Non-Resident Person;
•Payment to Traders and Distributor;
•Condonation of time limit;
•Rate of tax for Individuals & AOPs;
•Reduction in tax rate;
•Exemptions from specific provisions;
•Opting out of Final Tax Regime;
•Initial Allowance and First Year Allowance;
•Capital Gain Tax on disposal of Securities by Insurance
Cos;
•Payment of tax by Exploration and Production Companies;
•Tax on Dividend Income of Banking Companies;
4
TAXATION OF INCOME FROM SALARY AND VALUE
OF PERQUISITES
Loan received by an employee from the employer -Section 13 (7)
Presently, where loan is received by an employee and
either no profit on loan is paid, or the rate of profit on loan
is less than the benchmark rate of 14% (Tax year 2012),
the difference between profit and bench mark rate, is
treated notional income for the purpose of taxation.
The Finance Bill now seeks to give relief to the
employees availing loans up to Rs.500,000/-, where no
such profit or difference of profit and bench mark rate
would be included in the taxable salary and also proposes
to fix the bench mark rate at 10% in order to provide relief
to the employees.
A. Qadir & Company
5
CAPITAL GAINS ON DISPOSAL OF IMMOVABLE PROPERTY
Section 37 (1A), 76 & 77
The Finance Bill seeks to impose tax on capital gains
on disposal of immovable property and accordingly
new sub-section (1A) has been introduced; whereby,
the capital gain derived from disposal of such property
shall be taxable where such property is held for less
than two years, at the following rates:-
6
Cost and Consideration- Section 76 & 77
The Finance Bill also seeks to authorize the Board to
make or prescribe rules for the determination of cost
of and consideration received for any asset.
Apparently, this is proposed to avoid conflicts in the
determination of cost & consideration and not to give
discretionary power to the assessing officer.
A. Qadir & Company
7
Tax Credit on Investment in Plant and Machinery- Section
65B
The Finance Bill proposed to amend sub-section (1),
substitute sub-section (4) and (5) and insert subsection (6); whereby:(i) It has been elaborated that for the purpose of
providing tax credit “tax payable” would include
minimum tax and final tax payable;
(ii) The tax credit equal to 20% of the amount
invested during 01-07-2011 and 30-06-2016,
shall be available to the company set-up in
Pakistan before 01-07-2011.
A. Qadir & Company
8
(iii) In case of taxpayer being a Company
set-up in Pakistan before the 01-07-2011, the
unutilized tax credit may be carried forward and
deducted from the tax payable up-to five tax
years.
This section also provides that any credit is allowed
and subsequently if it is discovered by the
Commissioner that any one or more of the conditions
specified was, or were, not fulfilled, the
Commissioner may re-compute the tax payable by
the taxpayer for the relevant year and the provisions
of this Ordinance shall, so far as may be, apply
accordingly.
A. Qadir & Company
9
Tax credit for newly established
industrial undertakings
Section 65D
The Finance Bill, proposes to amend sub-section
(1); whereby:(i) The tax credit under this section would also be
available to the “Corporate Dairy Farming”;
(ii) It has been elaborated that for the purpose of
tax credit, “Tax Payable” would include
minimum tax and final tax.
A. Qadir & Company
10
(iii) It has been also clarified that the “Equity” is an
amount which is raised through issuance of new
shares for cash consideration and short term
loans and finances obtained from banking
companies or non-banking financial institutions
for the purposes of meeting working capital
requirements shall not disqualify the taxpayer
from claiming tax credit under this section
(iv) The Finance Bill also proposed that an industrial
undertaking shall be treated to have been setup
on the date on which it is ready to go into
production,
whether
trial
production
or
commercial production.
A. Qadir & Company
11
In my view sub-section (1) provides that the tax
credit is available for five years beginning from the
date of setting-up or commencement of production,
whichever is later. On the other hand sub-section (3)
states that tax credit shall be deducted from the tax
payable in respect of the tax year in which the plant
or machinery is purchased and installed, which
means a one time tax credit only would be allowed.
Generally tax is not payable in the first few years of
set-up of new industrial undertaking; therefore I am
of the view that there should be concept of carry
forward of unabsorbed tax credit as it is available in
section 65E (3) & (4) of the Ordinance.
A. Qadir & Company
12
Tax credit for industrial undertakings established
before the first day of July, 2011 – Section 65E
The Finance Bill proposes to substitute Sub-Sections
(1), (2), (3) and (4); whereby:(i)
The tax credit for a period of five years would
also be available to “Corporate Dairy
Farming” for the purposes of:(a) expansion of plant and machinery
already therein; or
(b) undertaking a new project.
(ii) The tax credit would be available for a period of
five years from the date of setting-up or
commencement
of
commercial
production
from the new plant or expansion project,
whichever is later.
A. Qadir & Company
13
(iii)
Where a taxpayer maintains separate
accounts of an expansion project or a new
project, as the case may be, the taxpayer
shall be allowed a tax credit equal to one
hundred percent of the tax payable, including
minimum tax and final tax payable under
any of the provisions of this Ordinance,
attributable to such expansion project or new
project.
(iv)
It has been elaborated that for the purpose of
tax credit “Tax Payable” would include
minimum tax and final tax.
A. Qadir & Company
14
(v)Presently tax credit is allowable in the proportions,
which exist between the total investment and such
equity investment made by the industrial
undertaking. Since the total investment and equity
investment are not defined; therefore following
appropriate substitution has been proposed through
the Finance Bill, 2011.
“In all other cases, the credit under this section
shall be
such proportion of the tax
payable, including minimum
tax and final taxes payable under any of the provisions of this
Ordinance as is the proportion between the new equity and
the total equity including new equity.”
vi) The Finance Bill also proposes to insert Sub- Section
(7); whereby the term “New Equity” has been
defined which I have explained in detail
while
dealing with Section 65D.
A. Qadir & Company
15
Special Provisions relating to Capital Gain Tax on Disposal
of listed Securities - Section 2(35AA), 37A, 100B, 8th Schedule
Section 37A was inserted by the Finance Act, 2010,
which provides taxation of Capital Gains arising on or
after July 1, 2010 on disposal of securities held for a
period of less than a year, which was exempt for almost
36 years under Clause (110) of the First Schedule to
the Ordinance. This provision is not applicable to the
Banks and Insurance Companies.
The SECP presented a concept paper early this year;
wherein it was highlighted that the Capital Market has
always shown willingness to pay taxes as CVT and
withholding tax imposed in the year 2004, which were
doubled in 2006 and were well absorbed by the market,
since there was:A. Qadir & Company
16
Ease of transaction;
Economic Viability; and
Minimum interaction with tax authorities.
It was therefore proposed by the SECP that:(i) Applicability of Section 111 of the Ordinance,
requiring unexplained income or assets may be
deferred for funds invested in CM;
(ii)To abolish the WHT under Section 233A(1)(c);
(iii) Freeze the existing CGT rate at the current rate
applicable for the tax year 2012; and
(iv) A centralized collection mechanism be allowed at
NCCPL, who shall act as a withholding agent for
CGT from investors’ transactions.
A. Qadir & Company
17
The Ordinance No.III of 2012 was promulgated on 24-04-2012
and the contents of the above Ordinance which have been
made part of the proposals made through the Finance Bill,
2012 to have the legislative approval. Following are the
highlights:(i) NCCPL has been made responsible to compute,
determine Capital Gains, collect tax thereon and deposit
on behalf of the investors excluding the following:(a)
(b)
(c)
(d)
(e)
a mutual fund;
a banking company, a non-banking
finance
company, and an insurance company subject to tax
under the Fourth Schedule;
a modaraba;
a “foreign institutional investor” being a person
registered with NCCPL as a
foreign
institutional
investors; and
any other person or class of persons notified by the
Boards
A. Qadir & Company
18
ii) Clause (c) of Sub-Section (1) of Section 233A is proposed
to be omitted; which relates to adjustable tax collected
by the Stock Exchange from its members, in respect of
trading of shares by the members;
iii) The respective provisions for collection and recovery of
tax, advance tax and deduction of tax at source laid
down in the Parts IV and V of Chapter (X) shall not apply
on the income from capital gains subject to tax under
this Schedule and these provisions shall apply in the
manner as laid down in the rules made under this
Ordinance, except where the recovery of tax is referred
by NCCPL to the FBR in terms of Rule 6(3) of Eight
Schedule to the Ordinance.
A. Qadir & Company
19
(iv) The CGT Rates proposed to have been freeze at
the existing level. Following is the comparison:S.
No.
Period
Tax
Year
1
Where holding period
of a security is less
than six months
2011
2012
2013
2014
2015
2011
2012
2013
1014
2015
2
Where holding period
of a security is more
than six months but
less than twelve
months
3 Where holding period
of a security is twelve
months or more
A. Qadir & Company
___
Existing
Proposed
Rate of Tax Rate of Tax
10.0%
10.0%
12.5%
15.0%
17.5%
7.5%
8.0%
8.5%
9.0%
9.5%
10.0%
0%
10.0%
10.0%
10.0%
10.0%
17.5%
7.5%
8.0%
8.0%
8.0%
9.5%
10.0%
0%
20
(v)Regarding source of investment it is provided that _
(a) where a person has made any investment in the
listed securities, enquiries as to the nature and source
of the amount invested shall not be made for any
investment made prior to the introduction of this
Schedule, provided that the amount remains invested
for a period of forty- five days up-to 30th of June 2012;
and
(b) Where a person has made any investment from
the date of coming into force of this Schedule till June
30, 2014, enquiries as to the nature and sources of
amount invested shall not be made provided that the
amount remains invested for a period of one hundred
and twenty days in the manner as may be prescribed ;
A. Qadir & Company
21
(vi) An investor may opt out from the provision of law
in respect of determination and collection of CGT by
NCCPL by filing an irrevocable option with NCCPL
and after having prior permission from the
Commissioner. In this case the exemption from
inquiry regarding the source of investment in the
shares of listed securities would not be available.
The Finance Bill also proposes to amend provisions
of 37A to exclude exempt capital gains and also to
provide formula for computation of capital gain on
sale of listed securities.
A. Qadir & Company
22
Minimum Tax
Section 113
Minimum tax is applicable on resident company,
association of persons having annual turnover of Rs 50
million or above in the tax year 2007 or in any subsequent
year or an Individual having annual turnover of Rs 50
million or above in the tax year 2009 or in any subsequent
year. It is payable @ 1% of turnover where there is no tax
payable or paid by above persons or tax payable or tax
paid is less than the tax calculated @ 1% of turnover due
to:• Loss for the year;
•The setting off of a loss of an earlier year;
•Exemption from tax;
•The application of credits or rebate; or
•The claiming of allowance or deduction (including
depreciation) and amortization deduction.
A. Qadir & Company
23
However, the reduction in minimum tax payable is
available to the various companies and class of business.
Minimum tax is also not payable by certain Companies
and Sectors.
On examination of Budget Speech, Salient Features –
Budget 2012-13 and subsequent press conference; it is
observed that it was stated by the honorable Finance
Minister that “minimum tax was levied @ 1% on gross
turnover through Finance Act, 2010. Various sectors of
economy agitated the enhanced rate of minimum tax.
Therefore, in the case of business community the rate of
minimum tax is proposed to be reduced to 0.5% from 1%
on gross turnover.” However no amendment has been
proposed through Finance Bill in Section 113 to give
effect to the intention of the legislative body.
A. Qadir & Company
24
Revision of Return of Income
Section 114(6)
Presently, any person who discovers any omission or
wrong statement after filing of return may file revised
return along with revised accounts or revised audited
account and reasons for revision in writing duly signed
by the taxpayer. The Finance Bill now seeks to
impose a condition that the taxable income in revised
return should not be less than or loss declared in
revised return should not be more than the amount, as
the case may be, determined by an order under
sections121, 122 ,122A ,122C , 129 , 132 , 133 or 221
The Bill further proposes that the revised return filed
by any person in contrary to the above conditions
shall render such revised return invalid as if it had not
been furnished..
A. Qadir & Company
25
Assessment
Section 120(6)
A complete return filed by the taxpayer is deemed to be an
assessment order issued by the Commissioner u/s 120(1)
of the Ordinance. The Commissioner is authorized under
section 120(3) to issue notice within the close of financial
year in which return was furnished by the taxpayer, stating
the deficiencies in the return filed by the taxpayer and
allowing him to remove the deficiencies. Non compliance
of said notice from taxpayer renders the return invalid u/s
120(4) as if it had not been furnished.
The Finance Bill now seeks to extend limitation period for
issuance of such notice; whereby the Commissioner can
issue notice within 180 days from the end of financial year
in which return was furnished.
A. Qadir & Company
26
Amendment of Assessment
Section 122
Presently, sub-section (1) provides that the
Commissioner may amend an Assessment Order
treated as issued under Sections 120 or 121 of the
Ordinance or 59, 59A, 62, 63 or 65 of the repealed
Ordinance by making such alterations or additions as
the Commissioner considers necessary.
The Finance Bill now seeks to provide power to the
Commissioner to amend the assessment order that has
been issued u/s 122C of the Ordinance.
The Finance Bill also seeks to delete the references of
sections 59, 59A, 62, 63 or 65 of the repealed Income
Tax Ordinance, 1979 being redundant and superfluous
A. Qadir & Company
27
Sub-Section (5A) of Section 122 of the Ordinance
provides that the Commissioner may amend, or further
amend an Assessment Order, if he considers that the
assessment order is erroneous in so far it is prejudicial to
the interest of revenue.
Corresponding Section 66A of the repealed Ordinance,
however provided powers to the Inspecting Additional
Commissioner to make or cause to be made, such
enquiry as deem necessary.
The Finance Bill seeks to extend similar powers to the
Commissioner to amend the order u/s 122(5A) after
making or causing to be made, such enquiries as he
deems necessary
A. Qadir & Company
28
Procedure in Appeal
Section 128
Presently, the Commissioner Inland Revenue (Appeals),
keeping in view the vested right and judicial
pronouncements is granting stay of demand without any
time restriction, in cases where the tax levied is causing
undue hardship to the appellant. Now the Finance Bill
seeks to give powers to the Commissioner (Appeals) to
stay the recovery of tax levied in the assessment order in
appeal for a period not exceeding 30 days in aggregate
providing an opportunity of being heard to the
Commissioner against whose order appeal has been
made. We feel that under the circumstance explained
above, stay must be granted till the disposal of appeal or
provision related to time limit to finalize the appeal within
30 days must be incorporated
A. Qadir & Company
29
Decision in Appeal
Section 129
Presently sub-section (5) of Section 129 provides that
where the Commissioner (Appeals) has not made an
order on an appeal before the expiration of four months
from the end of the month in which the appeal was filed,
the relief sought by the appellant in the appeal shall be
treated as having been given and all the provisions of this
Ordinance shall have effect accordingly.
The Finance Bill seeks to done away with the limitation
period of 4 months for disposal of appeal by the
Commissioner (Appeals) prescribed in Section 129(5) of
the Ordinance. Corresponding sections 129(6) & 129(7)
have also been proposed to be omitted being become
redundant and superfluous on omission of Section 129(5).
A. Qadir & Company
30
Appointment of the
Appellate Tribunal
Section 130(4)
Upto the year 2007, only an officer of the Income Tax
Group equivalent in rank to that of a Regional
Commissioner was eligible for Accountant Member
of ATIR.
The Finance Act, 2007 however made changes in
the law adding the Commissioner Inland Revenue or
Commissioner (Appeals) to hold the position of
Accountant Member of ATIR who have served as
Commissioner or Collector for 5 years.
A. Qadir & Company
31
Appointment of the
Appellate Tribunal
Section 130(4)
The Finance Bill now seeks to relax the minimum
qualifying period of services of any Commissioner
Inland Revenue Services or Commissioner Inland
Revenue Services (Appeals) as Commissioner or
Collector from 5 years to 3 years for holding the
post of Accountant Member of Income Tax Appellate
Tribunal Inland Revenue (ATIR).
Presently, the judicial member can be appointed as
Chairperson of the ATIR by the Federal Government
unless special circumstances exist for appointment
of Accountant Member as Chairperson.
A. Qadir & Company
32
Appointment of the
Appellate Tribunal
Section 130(4)
The Finance Bill seeks to done away with the
requirement of existence of special circumstances
for appointment of Accountant Member as
Chairperson of ATIR. Thus, either Accountant
Member or Judicial Member can be appointed as
Chairperson of ATIR.
In our view, the Legislator should reconsider the
eligibility of appointment of Accountant Member as
‘Chairman’ of ATIR, being a Judicial Forum, should
have its Chairman from Judicial exposure and
experience.
A. Qadir & Company
33
Deducted V/S Deductable and insertion of “Required to be”
In section 148(7) & (8) and section 233 the words
“required to be” are being added to hold that not
only the tax collected, but the tax required to be
collected will be a final tax. Thus, even if the tax has
not been collected for any reason the person will
have to pay the same as it was required to be
collected.
Similarly, in section 151, 152, 153, 154 ,156, 156A
and 233 the tax “deducted” is being replace by tax
“deductable”. This means that the default; if any
would be determined if the tax was deductable and
not if it was not deducted.
A. Qadir & Company
34
Payment to Non-Residents- Sections 152, 153 & 153A
Section 152 deals with the taxability of non resident
persons. Certain provisions relating to non-resident
persons were appearing in other sections of the
Ordinance. The Finance Bill now proposes to consolidate
such provisions as under:a)
Non-resident Media Persons
The tax deducted from non-resident media person
relaying from outside Pakistan has now been placed
under Section 152 by inserting a new sub-section (1AAA).
Presently, such payments are covered u/s 153A of the
Ordinance. The rate of tax of 10% shall remain the same
and the tax so deducted is final discharge of tax liability of
non-resident media persons as Pakistan source Income.
A. Qadir & Company
35
b) Taxation of PE of a Non-resident Person
The Finance Bill proposes amendments in Sections 152,
153 and 153A of the Ordinance; whereby the word
“Permanent Establishment in Pakistan of a non-resident
person” appearing in Section 153(1) and 153(3) of the
Ordinance and the word ‘153’ as appearing in Section
152(3)(a) of the Ordinance have been omitted.
Moreover there appears some error in the Finance Bill,
as with the proposed consolidation of above referred
sections, taxation of PE needs to be defined in Section
152 of the Ordinance. Although deduction rates for
payment to PE have been proposed in Clauses (4), (5)
and (6) of Part-III of Division-II of First Schedule to the
Ordinance, but apparently proposed insertion of subsection required in the referring section is missing.
A. Qadir & Company
36
Payment to Traders and Distributors- Section 153A
The Finance Bill now proposes to substitute Section
153A ; whereby every manufacturer at the time of
sale to distributors, dealers and wholesales shall be
required to collect tax @ 1% as prescribed in Part IIA
of the First Schedule. The tax so collected will be
adjustable against the tax liability of distributor,
dealers and wholesaler.
The proposed amendment appears to aim at the
documentation of the economy and broadening of
the tax net.
A. Qadir & Company
37
In our view, this will be an additional burden on
distributors, dealers and wholesalers due to the following
reasons:• Large distributors, dealers and wholesalers are mostly
registered under the Sales Tax Act, 1990. Moreover, the
existing sales tax law requires every registered person to
provide CNICs of buyer and, accordingly, such persons
are already in the tax net of FBR.
• Distributors, dealers and wholesalers in majority of
cases, operate under fixed commission basis and the tax
is deductible on their Income under Section 233 of the
Ordinance which constitutes full and final tax liability of
income against such business. This will not only create
extra financial burden but will also increase corruption.
A. Qadir & Company
38
Condonation of time limit
Section 214A
This section was inserted through the Finance Act,
2009. However, it was not very clear that the
condonation of time limit was for both the taxpayer as
well as the subordinate authorities of the Board for
any time or period specified under the provisions of
the Ordinance or Rules there-under.
Therefore, the Finance Bill now seeks to clarify that
“any act or thing is to be done” includes any act or
thing to be done by the taxpayer or by the authorities
specified in Section 207.
A. Qadir & Company
39
Rate of tax for Individuals& AOP-The First Schedule
The Finance Bill proposes as under:I.
To increase basic threshold for charge of Income
tax for both salaried and non- salaried persons
has been raised from Rs. 350,000/- to Rs.
400,000/-.
II. Number of slabs in the case of a salaried person
have been reduced from the existing 17 to 5 and
in the case of an individual from 6 to 5.
III. Tax on AOP would be charged at the progressive
rates prescribed for individuals instead of existing
flat rate of 25%.
A. Qadir & Company
40
Reduction in tax rate - Clause(9) of Part III of the
Second Schedule
As per this clause tax is collected at a reduced rate
of 3% on import of raw material by an industrial
undertaking for its own use. At present, the industrial
undertakings are not required to obtain exemption
certificate u/s 159 (1A) for such reduced rate on
import.
The Finance Bill now proposes that such exemption
will be available only after issuance of exemption
certificate by the Commissioner to such taxpayers.
This could create hardship to genuine importers and
may increase corruption.
A. Qadir & Company
41
Exemptions from
specific provisions
Clauses 11B,11C 16A & 47B
of Part IV of the 2nd Schedule
•At present, the inter-corporate dividends within the group
companies entitled to group taxation or group relief under
Section 59AA or Section 59B are exempt under Clause
103A of Part I of Second Schedule. The Finance Bill
proposes to provide exemption from withholding of tax on
such dividends paid within the group companies entitled
to group taxation or group relief under Section 59AA or
59B.
•Similarly, the profit on debt is subject to withholding of
tax at the rate of 10%. The Finance Bill proposes to
provide exemption from withholding of tax on such profit
on debt paid within the group companies entitled to group
taxation or group relief under Section 59AA or 59B.
A. Qadir & Company
42
•At present, in view of Clause (16A) of Part I, the
provisions of section 153(1)(b) are not applicable to the
news print media services in respect of the advertising
services. As per proposed substitution by the Finance
Bill the persons making payments to electronic and
printing media shall enjoy such exemption.
•At present, the provisions of sections 150, 151 and 233
are not applicable to any person making payments to
approved retirement scheme or collective investment
scheme, as provided under clause 47B of Part IV. Now,
the Finance Bill proposes to allow such exemption to the
payments made against Capital Gain on disposal of
securities chargeable under Section 37A read with
Division VII of Part-I of First Schedule.
A. Qadir & Company
43
Opting out of
Final Tax Regime
Clauses 41A,41AA & 41AAA
of Part IV of the 2nd Schedule
1. The Finance Bill proposes incentives for opting to
Normal Tax Regime (NTR) from Final Tax Regime
(FTR) for Importers, Exporters and Suppliers. For
exercising the proposed option the minimum tax
liability under NTR of the importers shall not be less
than 60% of tax already collected u/s 148;
2. Whereas, the exporters shall exercise such option,
their minimum tax liability under NTR must not be
less than 50% of tax already deducted u/s 154; and
3. The minimum tax liability under normal law payable
by suppliers on sale of goods shall not be less 70%
of tax already deducted u/s 153 (1) (a).
A. Qadir & Company
44
Initial Allowance and
First Year Allowance
Third Schedule
The Finance Bill proposes to reduce initial
depreciation from 50% to 25% in case of building.
However on Plant and Machinery it would remain
50%
A. Qadir & Company
45
Capital Gain Tax on disposal of
Fourth Schedule
Securities by Insurance Companies
The Finance Bill proposes to substitute Rule 6B of the
Fourth Schedule; whereby the following rates of tax on
Capital Gains on disposal of listed securities earned by
the Insurance Companies have been rationalized.
S. No.
Tax Year
Where holding period of
securities is less than six months
Where holding period of
securities is more than six
months but less than twelve
months
(1)
1
2
3
4
5
(2)
2011
2012
2013
2014
2015
(3)
10.0%
10.0%
12.5%
15.0%
17.5%
(4)
8.0%
8.0%
8.5%
9.0%
9.0%
A. Qadir & Company
46
Payment of tax by Exploration
and Production Companies
Fifth Schedule
Part-I of this Schedule prescribe rates for the computation
of Profits and Gains of Petroleum Exploration and
Production (E&P). The tax is payable by E&P companies as
per Petroleum Concession Agreements signed by them with
the Federal Government at minimum rate of 50% and
maximum rate of 52.50 % to 55%; whereas, the tax
authorities normally applies the maximum rate of 52.50%
and 55% depending on the respective Concession
Agreements. Furthermore, the royalty paid by the E&P
companies is not being allowed as deductable expenses. In
the meantime the larger bench of the Appellate Tribunal
Inland Revenue of Pakistan vide its order dated 13 June,
2011 decided the impugned issues and confirm the
interpretation of tax authorities.
A. Qadir & Company
47
The tax department after that decision initiated recovery
proceedings and substantial amount of tax recovered
from such companies.
The Finance Bill now seeks to offer an option to E&P
companies to pay 40% tax of their Profits and Gains
instead of 52.50% or 55% of tax levied by the tax
authorities. The Finance Bill also proposes to allow the
amount of royalty as deductable expense. However, only
those E&P will exercise this option who
1. withdraws their pending appeals, references and
petitions before the appellate forum; and
2. make payment of whole of the outstanding tax liability
created under this Ordinance up-to tax year 2011 by 30th
June, 2012.
The above option is available only for one time and
irrevocable.
A. Qadir & Company
48
Tax on Dividend Income of
Seventh Schedule
Banking Companies
The Finance Act, 2011 inserted Second Proviso to
Rule (6) of the Seventh Schedule to the Ordinance;
whereby the rate of tax on “Dividend” received by
the banking companies was enhanced from 10% to
20% in case it is received from its asset management
company. In fact investments in Government
Securities, Bonds, Treasury Bills is being made by
the Fixed Income and Cash funds and bank mostly
receive dividends from such Funds in cash or in the
shape of stock dividends managed by various assets
management companies including its own asset
management company.
A. Qadir & Company
49
Therefore it was proposed that the aforesaid proviso
may be substituted whereby the “Cash or Stock
Dividend” received by a banking company from fixed
income funds or cash funds or its asset management
company shall be taxed at the rate of 20%.
The Finance Bill now proposes to insert third proviso
in Rule (6); whereby the dividend received from
Money Market Funds and Income Funds shall be
taxed at the rate of 25% for tax year 2013 and at the
rate of 35% for tax years 2014 and onwards.
We feel the words “Stock Dividend” should also be
inserted in order to tax every form of dividend.
A. Qadir & Company
50
51