The Pakistan Tax Bar Association (PTBA) has advised the Federal Board of Revenue (FBR) to significantly reduce penalties imposed on non-filers and late filers of income tax returns and wealth statements.
(more…)Category: Budget
This is parent category of budget presented by Pakistan government. Here you will find year-wise federal and provincial budgets.
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Installing scanners at Pak-China borders suggested to prevent misuse clearance under CPEC
KARACHI: Institute of Chartered Accountants of Pakistan (ICAP) has suggested to install scanners at Pak-China borders to stop misuse customs clearance of goods transported under China – Pakistan Economic Corridor(CPEC).
The ICAP in its tax proposals for budget 2019/2020 said that CPEC is a journey towards economic regionalization in the globalized world.
This will deepen and broaden economic links between Pakistan and China and will surly leave a positive impact on other countries of the region.
The success of CPEC is directly proportional to three factors viz. (a) security arrangements, (b) infrastructural development and (c) smooth e-based Customs operations.
Whereas, a number of initiatives are being taken, and proposed to be taken, on two fronts viz. security and infrastructure, but Customs operations, have hitherto been given little thought.
The ICAP presented following recommendations:
i. “SCANNERS” be introduced / installed at Pak China Borders and at Gwadar / Karachi Port in order to check / verify each and every container with its contents
to cross verify that the same have been exported / imported without its misuse.
ii. Scanning image of exports from China border should be compared with scanning image of goods delivered from Gwadar / Karachi port and vice versa for imports until then entry should remain open for scrutiny.
iii. Chinese exporters / importers should also file the entry in the WeBOC system of China, and Pakistan should have access to the China WeBOC system to mark green the container cleared in the WeBOC.
Entry to remain open until the same is verified by actual export / import routed through Gwadar / Karachi as such showing the containers not yet cleared or in transit or if not cleared after 7 days of being released from Pakistan port then marked red for being misused.
In such cases, show cause notices be sent to exporters / importers, as the case may be, for further inquiry.
iv. In case of exports, goods should only be allowed in containers loaded in China and evidence of shipping line booking and Bill of Lading be obtained as proper evidence.
v. There should also be a set up for custom offices after every 200 km intervals along the routes of CPEC to ensure effective monitoring of transit trade flows.
vi. In order to ensure swift and smooth monitoring, e-tagging be installed on vehicles carrying cargo.
When a vehicle crosses the designated customs office at the pre-marked route, the data of cargo movement would automatically enter the system showing location and brief description of goods, etc.
vii. The online movement of the cargo should be viewed by both customs offices at port of entry and exit. The containers carrying cargo be sealed and de-sealed by customs at entry and exit points respectively. This will ensure safety of the cargo and avoiding en-route pilferage.
viii. Both Governments must agree to strengthen customs controls at the border and to establish “Electronic Data Interchange” (EDI) linkage between Pakistan and China on “Real Time Basis” to ensure reconciliation of export/ import data of cargo routed through CPEC route.
ix. In case of imports, evidence of payment of goods by Chinese importer to their suppliers and submission of bank guarantee equivalent to government levies to be collected on China imports by Pakistan Customs before release.
Transit cargo will be transported from and to China, which needs Customs facilitation as well as monitoring both en-route and entry/exit stations to avoid menace like presently being faced due to Afghan Transit Trade.
CPEC also envisages establishment of export processing zones, special economic zones and free zones. This requires door-step Customs facilitation to ensure swift clearances of goods without any pilferages.
More importantly, the duty/tax free goods will be transported across Pakistan, which needs en-route monitoring so that the same are not pilfered en-route, jeopardizing the very essence of CPEC.
Moreover, any smuggling/pilferage of Chinese goods en-route will have direct and serious repercussions on Pakistani industry and duty paid goods.
“A case in hand is Afghan Transit trade cargo. It used to suffer from different infirmities, which kept on hindering its smooth operations. These issues ranged from mis-declarations, delays, isolated and partial e-monitoring, en- route pilferages, smuggling etc.”
A number of adhoc arrangements such as verifications of cross border certificates, random examinations at port of entry and enhancement of anti-smuggling operations etc. were made, but desired results could not be fetched.
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New tax legislation sought for Islamic banking
KARACHI: Federal Board of Revenue (FBR) has been suggested to draft new legislation for taxation of Islamic banking.
It is proposed that the audited financial statements of Islamic banks as well as those of Islamic Banking branches/windows operations of conventional banks provided separately in the audited financial statements of conventional banks submitted to the State Bank of Pakistan should be taken as basis of calculation for income tax.
Overseas Investors Chamber of Commerce and Industry (OICCI) in tax proposals of budget 2019/2020 highlighted:
Rule 3: Treatment for Shariah compliant banking—
— Any special treatment for “Shariah Compliant Banking” approved by the State Bank of Pakistan shall not be provided for any reduction or addition to income and tax liability for the said “Shariah Compliant Banking” as computed in the manner laid down in this schedule.
— A statement, certified by the auditors of the bank, shall be attached to the return of income to disclose the comparative position of transaction as per Islamic mode of financing and as per normal accounting principles. Adjustment to the income of the company on this account shall be made according to the accounting income for purpose of this schedule.
It is recommended that new legislation to be drafted to provide neutrality in the light of below:
— The audited financial statements of Islamic Banks as well as those of Islamic banking operations of conventional banks provided separately in the audited financial statements of conventional banks and submitted to the State Bank of Pakistan shall form the basis for the calculation of income tax liability as provided in this Schedule.
The OICCI said that the objective of Rule 3 of 7th Schedule was to provide tax neutral treatment to IBIs, however, it is difficult to meet the condition of Sub-Rule (2) of Rule 3, keeping in view the diversified nature of Islamic banking transactions and equating each transaction to a conventional equivalence and then getting it certified by the auditor which is time consuming and costly for Islamic Banking Institutions. Moreover, it does not give space for differentiated transactions as each transaction from Income Tax purpose has to be equated with a conventional transaction.
It is thus proposed that the audited financial statements of Islamic Banks as well as those of Islamic Banking branches/windows operations of conventional banks provided separately in the audited financial statements of conventional banks submitted to the State Bank of Pakistan should be taken as basis of calculation for income tax with additions and deductions as provided in the Seventh Schedule to the Income Tax Ordinance, 2001 which is applicable to the entire banking industry in Pakistan.
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FBR suggested removing impediments in availing exemption certificates for industrial growth
KARACHI: Federal Board of Revenue (FBR) has been suggested to remove restriction of exemption certificates for import of plant and machinery for new projects in order to promote industrial growth in the country.
Pakistan Tax Bar Association (PTBA) in its tax proposals for budget 2019/2020 said that existing procedures and rules for obtaining exemption certificates for import of plant & machinery and raw material by taxpayers has serious restrictions which causes hardship and increases cost of doing business.
The PTBA highlighted following issues related to exemption certificates:
Current income tax rules do not support issuance of exemption certificate for import of raw material by manufacturers starting new business or in the process of expanding the current product or launched a new product etc. These restrictions are hindering industrial growth in the country;
For qualifying for exemption, maximum import of raw material is restricted to the extent of 125 percent of the material previously imported and consumed;
In order to qualify for exemption, the law requires minimum tax (equal to higher of last two years tax liability) to be paid before qualifying for exemption. This means that in the case of lower taxable profits due to expansion or operational reasons, the taxpayer will inevitably have a tax refundable in the current year;
In case of newly established undertakings, tax credit under section 65D of Income Tax Ordinance, 2001 is not being allowed by the department while working out tax liability of the last two years;
Coupled with a high rate of withholding at 5.5% these restrictions badly affect working capital of the manufacturers; and
Currently, certificate of exemption from withholding tax on imports under Section 148 of Income Tax Ordinance, 2001 is not allowed to persons who are importing raw material, plant, machinery, equipment and parts for its own use unless they qualify as industrial undertaking.
The tax paid at import stage on such imports by persons other than the industrial undertaking is treated as a final tax.
The tax bar recommended that in order to address the issues faced in respect of claim of exemption under section 148 of the ITO, following amendments are proposed:-
Restrictions in respect of issuance of exemption certificate for new projects / capacity expansions / formula and process changes may be removed which will allow industrial growth in the country;
Maximum volume restriction be at least enhanced to 150 percent of last year’s raw material imported;
Requirement to meet the tax payment equal to previous two tax years be abolished and may be linked with payment of advance tax liability for the respective period (as in the case of exemption under section 153);
Amendments may be made to allow tax credit under section 65D while working out previous year’s tax liability for newly established undertakings already under immense cash-flow burden. This would help eliminate piling up of unnecessary refunds for newly established undertakings; and
The rate of tax on import of raw material and plant & machinery may be gradually reduced to 1 percent.
Clause (a) of sub-section (7) of Section 148 should be amended as under:-
“Raw material, plant, machinery, equipment, parts or any other goods by any person for its own use”.
In present situation, high rate of withholding at 5.5% coupled with these restrictions badly affect the working capital of the manufacturers. Removal of these hardships would provide incentive to industries and reduction of piling of huge refunds, it said.
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Demonetizing high denomination currency notes recommended to eliminate avenues for untaxed funds
KARACHI: The foreign investors and multinational companies have suggested the government to demonetize high denomination currency notes to eliminate parking lots for untaxed funds.
The Overseas Investors Chamber of Commerce and Industry (OICCI) in its tax proposals for budget 2019/2020 suggested measures to eliminate legally permissible ‘parking lots’ for untaxed funds.
The OICCI – representative body of foreign investors in Pakistan and multinational companies – suggested that defective mode and manner of valuation of immovable properties should be addressed. “Registration of sale and purchase of real estate should only be on fair market value at the time of the transaction,” it suggested and said necessary information on market value of real estate can be easily obtained.
It further suggested that sale of all kinds of bearer securities, prize bonds, and other such items should be stopped.
Appropriate restrictions should be imposed on the hoarding of foreign currencies.
“High denomination currency notes should be demonetized.”
The OICCI also suggested introduction of books of account and cash registers.
The Federal Board of Revenue (FBR) does not have any proper shop-wise record of approximately 35 million SMEs, which are mostly sole proprietorship or partnerships, despite the fact that jurisdictions within the tax offices are location centric, especially for small and medium sized businesses.
It should be made mandatory for all businesses to maintain books of account and taxes should be levied on ‘net income’ basis only.
Registration of all retail outlets and electronic cash registers should be made mandatory without any turnover thresholds, which gives rise to tax evasion.
The installation of these registers should be inspected regularly by tax inspectors.
The FBR should engage with representatives of small manufacturers, wholesalers and retailers and ensure their buy-in for introduction of these documentation measures so that the previous back-tracking on these actions is not repeated.
The book keeping requirements /outline be regularly upgraded considering the best practices learnt from other neighboring countries in the region with similar business infra-structure.
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Amnesty schemes culture should be eliminated: OICCI
KARACHI: Overseas Investors Chamber of Commerce and Industry (OICCI) has recommended the government to eliminate culture of amnesty schemes as such measures encourage tax evaders.
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FBR recommended tax exemption to inter-corporate dividend
KARACHI: Federal Board of Revenue (FBR) has been suggested to allow tax exemption to inter-corporate dividend for promoting group formation and consolidation and strengthen the overall corporate structure in Pakistan.
Pakistan Tax Bar Association (PTBA) – the umbrella of tax bars in the country – in its tax proposals for budget 2019/2020, said that through Finance Supplementary (Second Amendment) Act, 2019 a new clause in Part I of the Second Schedule of Income Tax Ordinance, 2001 was inserted, which with effect from 01 July 2019 exempts dividend income derived by a company, if the recipient has availed group relief under section 59B, computed according to the following formula:-
A x B/C; Where,
A is the amount of dividend;
B is the shareholding of the company receiving the dividend in the company distributing the dividends; and
C is the total ordinary share capital of the company distributing the dividend.
The PTBA said that pursuant to the provisions of clause (103A) of Part I of the Second Schedule, any income derived from inter-corporate dividend was exempt for group companies entitled to group taxation under section 59AA or group relief under section 59B.
The Finance Act, 2015 then added a condition, that such exemption would only be available if the consolidated return of the group had been filed. Subsequently, the Finance Act, 2016, excluded entities entitled to group relief under section 59B from the exemption entirely.
The above amendments created significant difficulties for corporate and industrial groups by adding multiple layers of taxation on dividends issued by group entities.
This resulted in corporate structures becoming inefficient due to multiple taxation of the same income, on mere distribution within the group, even though no value addition was taking place. This also led to substantial litigation from various groups.
Although, to cater the above problem an exemption has been introduced via the Second Supplementary Act, 2019, it is imperative to note that the newly inserted clause provides a relief only in the circumstances where the recipient of the dividend has availed group relief, i.e. loss has actually been surrendered between the two entities and even then, only to the extent of the shareholding that the parent entity has in its subsidiary. In effect, this means that:-
— since the provisions of section 59B require listing within a specified period, the relief would not be available to private groups unless they are willing to list;
— the relief would be available only to the entities actually surrendering or receiving the losses, and not all companies within the entire corporate structure;
— based on a literal interpretation, the holding company (i.e. the entity receiving the dividend) may not be able to claim the exemption if the losses under group relief are transferred from one subsidiary to another (i.e. between sister concerns);
— since a company cannot surrender its losses for more than three years, this is not an indefinite relief; and
— the benefit may practically be availed only in specific cases since a company, both receiving dividends and availing group relief in the same year, is normally only possible in structures where a holding company has several subsidiaries.
Overall, this has significantly watered-down relief compared to the demands of the corporate sector, the benefit of which may likely be availed in very few cases that may comply with all the conditions.
It is therefore recommended to exempt inter corporate dividends as it was used to be prior to the amendments brought about by the Finance Act, 2016.
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FBR advised to restore tax credit to sales tax registered persons
KARACHI: Federal Board of Revenue (FBR) has been proposed to restore tax credit to sales tax registered persons for documentation of the economy.
In its tax proposals for budget 2019/2020, the Pakistan Tax Bar Association (PTBA) said that the provisions of this section were applicable in case of sales made to the sales tax registered tax registered person.
The tax credit of 3 percent of tax payable was available to the seller for sales being made to the registered persons, however to promote documentation and registration with tax authorities it was suggested that this incentives should also be made available on purchases from registered persons as well.
“The government abolished this incentive available to the sellers instead of extending this credit to the purchasers as well,” the PTBA said.
It recommended that the application of above tax credit of making 90 percent sales to sales tax registered persons be restored and also be extended to persons making 90 percent of purchases from persons registered under the Sales Tax Act, 1990.
This change would enhance the number of sales tax registered person and documentation of the economy, the PTBA added.
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FBR restructuring proposed to make autonomous body
KARACHI: The government has been proposed to make Federal Board of Revenue (FBR) as an autonomous body on similar line as State Bank of Pakistan.
The Overseas Chamber of Commerce and Industry (OICCI) in its budget proposals for 2019/2020 suggested restructuring of FBR as an independent governing body.
It suggested that FBR should be made an autonomous body on similar lines as State Bank of Pakistan, SECP, and Internal Revenue Services (IRS) of United States.
FBR should operate and work in a corporate governance structure with a Board of Directors, vested with powers like that of the Boards of Public listed companies.
The Chairman of FBR and fifty percent of the Board members may be nominated by the government (Ministries of Finance, Law, and Commerce) and, the remaining fifty percent Board members should be nominated by bodies like OICCI, PBC and ICAP.
A transparent accountability system in tax administration should be introduced, and reasonable independence and empowerment given to various operational positions.
The external audit of FBR should be done annually, by an independent international audit firm whose report should be presented and fully discussed in the Tax Policy Board meeting.
There should also an Internal Audit function within the FBR for an effective ongoing internal audit reporting directly to the independent members of the Board nominated by the Trade bodies.
Apart from revenue collection a key function of the FBR should be to address coordination issues between federal and provincial revenue authorities, with monthly meetings to ensure ease of doing business for taxpayers.
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FBR suggested reducing income tax rate for banks
KARACHI: Federal Board of Revenue (FBR) has been advised to reduce income tax rates for banking companies in line with general corporate tax rates.
The Overseas Investors Chamber of Commerce and Industry (OICCI) in its tax proposals for budget 2019/2020, said that the banking sector tax rates have not been reduced in line with the general corporate tax rates.
Furthermore, Finance Supplementary (Second Amendment) Bill 2019, proposed to again amend the First Schedule to the Income Tax Ordinance 2001, whereby, Super Tax of 4 percent is applicable on banks from tax year 2018 to tax year 2021.
The banks, in compliance with the prevailing taxation regime have already closed the tax year 2018 (accounting year 2017) and income tax returns have already been duly filed/assessed.
As a result of the proposed abovementioned retrospective application from tax year 2018 (accounting year 2017), banks would now have to effectively pay super tax for two years or 8 percent instead of 4 percent in tax year 2019 i.e. 4 percent already paid in advance for tax year 2019 along with retrospective charge of 4 percent now being proposed for tax year 2018.
The OICCI suggested that the tax rates of the banking sector should be aligned with other sectors.
It is recommended, application of super tax on tax year 2018 should be removed to avoid the double charge of super tax in tax year 2019.
Furthermore, it is requested that the same overall relief on super tax, granted to other industries, is also provided to the banking sector as well.