Karachi, August 2, 2024 – The Federal Board of Revenue (FBR) has announced new restrictions on Inland Revenue (IR) Commissioners, limiting their authority to issue 100% exemption certificates on payments made to non-residents. This significant change comes in the wake of the amendments introduced through the Finance Act, 2024.
Previously, under sub-section (4) of Section 152 of the Income Tax Ordinance, 2001, IR Commissioners were empowered to allow certain recipients to make payments without deduction of tax or with a reduced rate of tax. This applied to recipients with a Permanent Establishment in Pakistan or those receiving payments where the tax deductible was not the minimum. However, the recent amendments have curtailed this authority.
The FBR clarified that the Commissioners can no longer issue certificates that completely exempt the tax deduction. They are now restricted to issuing reduced rate certificates, but the reduction cannot exceed 80% of the rate specified in Division II of Part III of the First Schedule of the Income Tax Ordinance, 2001. This move is aimed at ensuring a more consistent and fair application of tax laws across the board.
In a similar vein, changes have been made to sub-section (4) of Section 153. Previously, IR Commissioners could issue certificates for recipients to receive payments without any tax deduction or with a reduced rate, where the tax deductible was not the minimum. The amendment has now substituted this provision, restricting the Commissioners from issuing certificates without tax deduction. Instead, they can only issue reduced rate certificates, with the reduction capped at 80% of the rate specified in Division III of Part III of the First Schedule.
The FBR emphasized that these changes are designed to enhance tax compliance and ensure a more equitable tax system. By limiting the scope of tax exemptions, the FBR aims to increase the tax base and improve revenue collection.
Tax experts believe that this change will have a significant impact on non-residents and entities with Permanent Establishments in Pakistan, who previously benefited from the 100% exemption certificates. The new restrictions will require these entities to reassess their tax planning strategies and potentially face higher tax liabilities.