The Federal Board of Revenue (FBR) has categorically refuted recent reports suggesting a possible extension of the deadline for filing income tax returns for the tax year 2021.
(more…)Author: Faisal Shahnawaz
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Failure to keep record to attract two years imprisonment
Section 193 of Income Tax Ordinance, 2001, updated up to June 30, 2021, now emphasizes that a taxpayer may face two years imprisonment on failure to keep record.
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KIBOR rates on September 21, 2021
KARACHI: State Bank of Pakistan (SBP) on Tuesday issued the following Karachi Interbank Offered Rates (KIBOR) on September 21, 2021.
Tenor BID OFFER 1 – Week 7.20 7.70 2 – Week 7.24 7.74 1 – Month 7.28 7.78 3 – Month 7.44 7.69 6 – Month 7.66 7.91 9 – Month 7.81 8.31 1 – Year 8.00 8.50 -
Technical issues in return filing, KTBA tells FBR
KARACHI: Karachi Tax Bar Association (KTBA) in a letter to the chairman of the Federal Board of Revenue (FBR) sent on Tuesday, highlighted technical issues in filing return of income for tax year 2021.
It is commendable that the FBR issued the return form for tax year 2021 on July 01, 2021. “It is however, return filers and tax consultants alike are not satisfied with the classification of income set in IRIS, and otherwise are experiencing various computational errors, glitches etc.,” Muhammad Zeeshan Merchant, President, KTBA said in the letter.
The KTBA highlighted following technical issues:
1) COMPUTATION OF CAPITAL GAINS TAX ON DISPOSAL OF IMMOVABLE PROPERTY U/S. 37
The provisions of Section 37(1A) of the Income Tax Ordinance, 2001 (Ordinance) prescribes mode of taxation of gain on disposal of an immovable property on the basis of holding period of the property and the amount of taxable gain; whereas the amount of taxable gain is effectively reduced by 25% with each additional year of holding and finally taxable value is reduced to ‘0’ if the holding period exceeds four years. Correspondingly a variable tax rates are prescribed in Division VIII of Part I of the First Schedule.
Although, law prescribes taxation of gain of immovable property on net amount (refer sub-section (3A) Section 3A) but conversely the return works out the tax liability on gross amount of gain.
2) LOSS ON DISPOSAL OF SECURITIES U/S. 37A
Similarly, in line with Section 37A, unadjusted loss on disposal of securities during the Tax Year 2019 and onwards shall be carried forward to subsequent three tax year or is adjustable only against the gain of the person’s gain on disposal of securities in succeeding three years. Conversely, the web portal does not have any enabling/dedicated field / tab to declare the amount of loss sustained on disposal of securities and carried forward to future tax periods. Moreover, if such a loss on capital gain of securities is reported under the existing tab the same is resulting in a negative amount of tax that ultimately results in incorrect tax computation.
3) INCORRECT WORKING OF TAX DEPRECATION U/S. 22
In order to restrict claim of depreciation upto 50% to first time return filers a proviso to Section 22(2) is inserted via Finance Act 2020 which to the exclusion of Special Tax Year 2021 is expressly applicable w.e.f. July 2020; however, IRIS portal is applying this restriction in cases of Special Tax Year.
4) INITIAL ALLOWANCE ON PLANT & MACHINERY U/S. 23
Subject to certain restrictions initial allowance @ 25% is allowed against plant and machinery on the strength of proviso to Section 23 (read with Part II of the Third Schedule). The IRIS web portal is presently not catering this scenario in line with law resulting in an incorrect computation of tax depreciation.
5) TAX ON FEE FOR TECHNICAL SERVICES / ROYALTY OF A NON-RESIDENT PERSON
Under the provisions of Section 152(1) read with Sections 6 and 8 of the Ordinance, the tax deducted on payment of Pakistan-sourced Royalty and Fee for Technical Services of a non-resident person is a Final Tax. The online return form is presently classifying it under ‘minimum tax tab’ resulting in a incorrect higher tax liability.
6) DISCREPANCIES IN DETAILS AVAILABLE ON FBR ONLINE PLATFORMS
For past few years, the FBR has started sharing information regarding WH/advance taxes through “FBR Maloomat” and recently via “MIS”. It is, however, as of today the information at times is patchy and is not complete and correct either. Given that, it is suggested that unless the scheme is fully operational, tax deduction certificates will continue to be acceptable and no adverse inference should be taken for discrepancies on this score.
7) SIMPLIFIED RETURN FOR SMEs
A simplified scheme for manufacturing SMEs (having turnover upto 250 m) is introduced by adding Section 110E read with Fourteenth Schedule through Finance Act, 2021. It is however, in patent disregard for Section 237, no draft return for this purpose was notified and a return is uploaded on the portal without any notification as well as without following the conditions of Rule 34A putting validity of the return in jeopardy. A few anomalies in this return (though still not notified) are also experienced by us and is shared below for your appreciation:
The return is accepting turnover in excess of Rs. 250(M) in revenue tab which ought to be restricted to Rs. 250(M).
It is not applying correct rate of tax in case a person who opts not to avail FTR and creating incorrect tax liability. Screen shots from return is shared below for your understanding.
It has also been observed that an assignment for re-filing of SME return afresh is available to a person who already had filed its return; without any recourse for a revised return.
Although law requires dedicated registration SME at IRIS portal however, the portal sans this feature as yet; needless to add that selection from “attribute tab” is not an apt option for this purpose.
8) DISCLOSURE OF TAX COLLECTED UNDER SECTION 236D
Through the Finance Act, 2020, the advance tax on function and gatherings has been withdrawn which is practically applicable from July 1, 2020, it is however persons following Special Tax Year are yet to claim this collection/deduction whereas this filed has been removed from the return. It is therefore, suggested that field should be reinstated to claim tax deduction who are entitled for that.
9) WEALTH STATEMENT FOR NON-RESIDENT INDIVIDUALS
It has been observed that statement of wealth for tax year 2021 is pre-populated with opening balance of last year’s closing balance without considering the tax residency of a person. Consequently, non-resident individuals who otherwise is not required to file a wealth statement cannot proceed to file a return of income in the presence of such unnecessary disclosure.
10) DISCREPANCIES IN TAX COMPUTATION OF A COMMERCIAL IMPORTER
Through Finance Act, 2019, the facility of FTR for commercial importers has been abolished. In order to cater the transition period, the FBR has made appropriate changes in the computation of tax liability of commercial importer like impact of closing and opening stocks. However, IRIS web portal is not catering the impact of closing / opening stock which is resulting in an incorrect tax computation.
11) INCOME ATTRIBUTION WITH RESPECT TO MINIMUM TAXATION U/S. 153 AND U/S. 234A
It has been observed that IRIS web portal is presently computing and attributing income of persons associated to Section 153 and Section 234A on certain predefined and programmed formula.
It is suggested that such persons should be allowed to compute and attribute their incomes based on facts instead of predefined or programmed formula and relevant field should be relaxed.
12) COMPUTATION OF FOREIGN INCOMES
Though tabs for various classification of incomes has now been catered in the return of income it has however, been observed that portal is computing tax for all streams of income on the basis of business income.
For the purpose of better appreciation of all issues in correct and true spirit and to create a harmonized approach, we suggest you that a joint meeting (physical or online) between the representatives of KTBA and FBR’s Policy, Legal, IT/PRAL Divisions should be fixed (preferably in current week) at mutual convenience. The KTBA will be glad to assist the FBR’s technical team and join hand for the earliest resolution of the issues.
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KSE-100 index plunges 519 points amid selling
KARACHI: The benchmark KSE-100 index of the Pakistan Stock Exchange (PSX) plunged by 519 points on Tuesday due to across-the-board selling on closing.
The benchmark index ended at 46,009 points as against the previous day’s close of 46,528 points.
Analysts at Arif Habib Limited said that the market posted an increase of 305 points during the session early on, however lost that gain and by the end of session lost a total of 1055 points (including the erosion of 305 points earned earlier).
At closing, the market saw a steep decline. Selling was witnessed across the board, with heavy implications on Technology and Cement sectors.
Despite low leverage level in the market in DFC, MTS and MFS segments, index melted due to calls of redemption at Mutual Funds.
Regardless of the steep decline in Index, overall trading volumes remained low compared to the hay days seen in outgoing fiscal. Among scrips, TELE realized trading volumes of 28.1 million shares, followed by WTL (26.4 million) and TPL (21.4 million).
Sectors contributing to the performance include Cement (-101 points), Technology (-81 points), Banks (-45 points), Fertilizer (-39 points) and E&P (-34 points).
Volumes increased from 194.7 million shares to 325.9 million shares (+67 per cent DoD). Average traded value also increased by 53 per cent to reach US$ 73.1 million as against US$ 47.9 million.
Stocks that contributed significantly to the volumes include TELE, WTL, TPL, BYCO and TRG, which formed 33 per cent of total volumes.
Stocks that contributed positively to the index include HMB (+18 points), MCB (+18 points), BAFL (+14 points), ANL (+14 points) and COLG (+7 points). Stocks that contributed negatively include SYS (-53 points), MEBL (-37 points), HBL (-34 points), LUCK (-32 points) and TRG (-23 points).
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SBP issues customers exchange rates for September 21
Karachi, September 21, 2021 – The State Bank of Pakistan (SBP) has issued the exchange rates for customers on Tuesday, September 21, 2021.
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Revised taxation for banks applicable January 01, 2021
ISLAMABAD: The Federal Board of Revenue (FBR) has revised taxation for banks from tax year 2022 (starting from January 01, 2021, to December 31, 2021) onwards.
An important amendment has been introduced through Tax Laws (Third Amendment) Ordinance, 2021, which was promulgated through a presidential ordinance.
Through Finance Act, 2021, a sub-rule (6A) in rule 6C of Income Tax Ordinance, 2001 was introduced, which was applicable for banks from the tax year 2022 (January 01, 2021 to December 31, 2021).
The text of sub-rule 6A was:
(6A) For tax year 2022 onwards, the taxable income attributable to investment in the Federal Government securities shall be taxed at the rate of—
(i) 40 per cent instead of rate provided in Division II of Part I of the First schedule if the assets to deposit ratio as on last day of the tax year is upto 40 per cent;
(ii) 37.5 per cent instead of rate provided in Division II of Part I of the First schedule if the assets to deposit ratio as on last day of the tax year exceeds 40 per cent but does not exceed 50 per cent; and
(iii) at the rates provided in Division II of Part I of the First schedule if assets to deposit ratio as on last day of the tax year exceeds 50 per cent.
However, through Tax Laws (Third Amendment) Ordinance, 2021 this was amended and for the words ‘assets’, wherever occurring, the words ‘gross advances’ shall be substituted.
Tax experts believe that the amendment would have a negative impact on banks with ADR of less than 50 per cent as they have to pay additional tax on their entire income arising from investment in government securities rather than additional income as was the case previously.
They said that the banks with low ADR took the impact of the same in June 2021 financial results and as a result effective tax rate of banking sector increased from 38 per cent in 2Q2020 to 40 per cent in 2Q2021. This is likely to have an earnings impact of around 5-10 per cent for the sector.
The idea of this increased taxation was to encourage banks to increase their lending activity but this remains a big question mark of how effective this policy measure will be.
The latest banking sector data (week ending September 3, 2021) show that ADR of the sector is at 47 per cent, below the threshold of 50 per cent for additional taxation. This compares to ADR of 48 per cent in Sep-2020 and 45 per cent in Jun-2021.
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Three-year jail for false statement under income tax law
Section 192 of the Income Tax Ordinance, 2001, as updated up to June 30, 2021, through the Finance Act, 2021, recommends a three-year jail term for individuals found guilty of making false statements before the Commissioner Inland Revenue (IR).
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KIBOR rates on September 20, 2021
KARACHI: State Bank of Pakistan (SBP) on Monday issued the following Karachi Interbank Offered Rates (KIBOR) on September 20, 2021.
Tenor BID OFFER 1 – Week 6.96 7.46 2 – Week 7.02 7.52 1 – Month 7.09 7.59 3 – Month 7.32 7.57 6 – Month 7.50 7.75 9 – Month 7.66 8.16 1 – Year 7.82 8.32 -
SBP announces first policy rate increase in 26 months
KARACHI: The State Bank of Pakistan (SBP) on Monday announced first increase in key policy rate by 25 basis points in past 25 months.
Previously, the SBP announced the increase in policy rate of 100 basis points to 13.25 per cent.
The SBP kept the policy rate unchanged at 13.25 per cent till March 17, 2020 when it decided to reduce the policy rate by 75 per cent to 12.50 per cent.
Due to coronavirus pandemic, the central bank brought down the policy rate to 7 per cent in short span of time and maintained at this level for the past many months. The SBP reduced the policy rate to 7 per cent in its announcement on June 25, 2020.
At its meeting on September 20, 2021, the Monetary Policy Committee (MPC) decided to raise the policy rate by 25 basis points to 7.25 percent.
Since its last meeting in July, the MPC noted that the pace of the economic recovery has exceeded expectations.
This robust recovery in domestic demand, coupled with higher international commodity prices, is leading to a strong pick-up in imports and a rise in the current account deficit.
While year-on-year inflation has declined since June, rising demand pressures together with higher imported inflation could begin to manifest in inflation readings later in the fiscal year.
With growing signs that the latest COVID wave in Pakistan remains contained, continued progress in vaccination, and overall deft management of the pandemic by the government, the economic recovery now appears less vulnerable to pandemic-related uncertainty.
As a result, at this more mature stage of the recovery, a greater emphasis is needed on ensuring the appropriate policy mix to protect the longevity of growth, keep inflation expectations anchored, and slow the growth in the current account deficit.
In line with this shift in the economic outlook, the MPC was of the view that the priority of monetary policy also needed to gradually pivot from catalyzing the recovery after the Covid shock toward sustaining it.
As foreshadowed in previous monetary policy statements, the MPC noted that this rebalancing would be best achieved by gradually tapering the significant monetary stimulus provided over the last 18 months.
The MPC noted that over the last few months the burden of adjusting to the rising current account deficit had fallen primarily on the exchange rate and it was appropriate for other adjustment tools, including interest rates, to also play their due role.
The MPC noted that the stance of monetary policy is still appropriately supportive of growth, with real interest rates remaining negative on a forward-looking basis. Looking ahead, in the absence of unforeseen circumstances, the MPC expects monetary policy to remain accommodative in the near term, with possible further gradual tapering of stimulus to achieve mildly positive real interest rates over time.
The pace of this possible further gradual tapering would be informed by updated information on the continued strength of demand growth and the stance of fiscal policy, amongst other factors.
In reaching its decision, the MPC considered key trends and prospects in the real, external and fiscal sectors, and the resulting outlook for monetary conditions and inflation.
With a supportiveFY22 budget and accommodative monetary policy, most high-frequency domestic demand indicators such as automobiles, POL (petroleum, oil and lubricants) sales, cement sales and electricity generation continue to depict robust growth. This growth is mirrored in the strength of imports and tax collections.
LSM registered strong growth in June (18.5 percent (y/y)) before moderating in August to 2.2 percent (y/y), in line with typical seasonal patterns. The services sector is also rebounding strongly; latest Google Community Mobility Reports show that activity across grocery stores, restaurants, and shopping centers during July and August rose above pre-Covid levels. In agriculture, the decline in the area under cultivation of cotton is expected to be compensated by an increase in area for rice, maize, and sugarcane. Based on these trends, growth in FY22 is now expected toward the upper end of the forecast range of 4-5 percent, notwithstanding some greater uncertainty with respect to spillovers from the evolving situation in Afghanistan.
The current account deficit rose to $0.8 billion in July and $1.5 billion in August, reflecting both vigorous domestic demand and high global commodity prices. While remittances remained strong, growing by 10.4 percent (y/y) during July-August and exports also performed reasonably well (averaging $2.3 billion per month), they were outstripped by imports. In response, the rupee depreciated by 4.1 percent since the last MPC meeting. The MPC noted that many other currencies have also depreciated recently as expectations of tapering by the Federal Reserve have been brought forward.
The MPC noted that the flexible market-based exchange rate regime has performed well since its introduction in June 2019, including through the Covid shock. It has overseen a healthy modulation of the current account and supported a critical build-up in the country’s gross and net FX reserves despite external pressures. Under this regime, the SBP does not suppress an underlying trend in the exchange rate and any interventions are limited to address disorderly market conditions. Since its floatation, the rupee has moved in an orderly manner in both directions and has depreciated by only 4.8 percent to date, much less than many other emerging market currencies over the same period. Since the rupee was floated, SBP’s gross foreign exchange reserves have nearly tripled to a record $20 billion, while net international reserves have risen by nearly $16 billion between end-June 2019 and end-August 2021.
The MPC observed that while the flexible exchange rate has appropriately played its role as a shock absorber, it is important that its role be complemented by strong exports, targeted measures to curb non-essential imports, and appropriate macroeconomic policy settings to contain import growth.
In FY21, prudent management of the public finances facilitated fiscal consolidation for the second year in a row despite Covid, with the primary deficit declining by around ½ percentage points to 1.4 percent of GDP. This improvement largely stemmed from strong growth in tax and petroleum development levy (PDL) revenues, together with significant deceleration in non-interest expenditures. Following the seasonal end-year release of expenditure allocations, the fiscal impulse was strongly expansionary in the final quarter of FY21. In the first two months of FY22, FBR revenue grew by over 40 percent (y/y)while Federal PSDP releases rose to an all-time high for this period, equivalent to nearly 44 percent of their budgeted amount for the full year. It will be important to support tax revenue growth and carefully monitor outturns through the year to ensure the budget remains on track. Any unforeseen slippages in the fiscal stance would further bolster domestic demand, imports and inflation.
The MPC noted that accommodative financial conditions have provided significant support to the growth recovery since the start of FY21. Following historic cuts in the policy rate and the introduction of SBP Covid-related support packages, private sector credit grew by more than 11 percent during FY21, on the back of consumer loans (mainly auto finance and personal loans) followed by a broad-based expansion in credit for fixed investment and finally working capital loans. The MPC felt that some macro prudential tightening of consumer finance may also be appropriate to moderate demand growth as part of the move toward gradually normalizing monetary conditions.
Inflation fell from 9.7 percent (y/y) in June to 8.4 percent in both July and August. In addition to favorable base effects, this decline reflects continued deceleration in administered prices of energy due to the reduction in PDL and sales tax on petroleum products. Core inflation also fell in both urban and rural areas in August. Nevertheless, the momentum of prices remains relatively elevated, with month-on-month increases of 1.3 percent in July and 0.6 percent in August. In addition, inflation expectations of both households and businesses have drifted up and wage growth has picked up as the recovery has strengthened.
Looking ahead, the inflation outlook largely depends on the path of domestic demand and administered prices, notably fuel and electricity, as well as global commodity prices. The MPC will continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability and growth and stands ready to respond appropriately.