Section 46 of the Income Tax Ordinance, 2001, has been brought to the forefront as it grants tax exemption to non-resident persons on profit earned from securities issued by resident entities.
This move is part of the broader efforts to create a more investor-friendly environment and encourage foreign investments in Pakistan.
The Federal Board of Revenue (FBR) recently issued an updated version of the Income Tax Ordinance, 2001, incorporating amendments made through the Finance Act, 2021, effective until June 30, 2021. Section 46 of the Ordinance, which pertains to the taxation of profits on debt, contains provisions that offer tax relief to non-resident individuals in specific scenarios.
The text of Section 46 reads as follows:
“46. Profit on debt.— Any profit received by a non-resident person on a security issued by a resident person shall be exempt from tax under this Ordinance where— (a) the persons are not associates; (b) the security was widely issued by the resident person outside Pakistan for the purposes of raising a loan outside Pakistan for use in a business carried on by the person in Pakistan; (c) the profit was paid outside Pakistan; and (d) the security is approved by the 1[Board] for the purposes of this section.”
This section outlines specific conditions under which a non-resident person can benefit from tax exemption on profits earned from securities issued by a resident person. Notably, the relationship between the involved parties should not constitute an association. Furthermore, the security in question must be widely issued outside Pakistan, with the primary intention of raising a loan for business activities within Pakistan. The profit derived from this security should be paid outside Pakistan to qualify for the tax exemption.
In a bid to ensure the credibility and eligibility of securities for tax exemption, the FBR mandates approval by the Board for the application of Section 46. This regulatory oversight is crucial in maintaining the integrity of the tax exemption mechanism and aligning it with the broader goals of economic development and fiscal responsibility.
This move by the FBR is expected to boost confidence among non-resident investors, making Pakistani securities more attractive by offering a tax-efficient investment environment. By providing exemptions in certain cases, the government aims to encourage foreign investments, support economic growth, and enhance Pakistan’s standing as an investment-friendly destination.
It is worth noting that these provisions are part of the ongoing efforts to modernize and refine Pakistan’s tax regime, ensuring that it remains responsive to the evolving needs of the global economic landscape. The clarity and specificity of Section 46 serve as a testament to the government’s commitment to creating a transparent and predictable tax environment, fostering economic stability and growth.
As the FBR continues to introduce measures aimed at simplifying tax processes and attracting foreign investment, the impact of Section 46 is anticipated to be positive for both non-resident investors and the overall economic landscape of Pakistan.
