Karachi, December 11, 2023 – Federal Board of Revenue (FBR) has issued procedure for release of tax exemption certificates to non-residents during tax year 2024.
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Tax offices highlight anomaly in granting concession, exemption on imported goods
ISLAMABAD: Tax offices have highlighted anomaly in extending concessionary rate of tax or exemption under Section 148 of the Income Tax Ordinance, 2001 to imported goods at customs stage.
Large Tax Offices (LTOs) Islamabad and Karachi pointed out the anomaly and advised the Federal Board of Revenue (FBR) to rectify as taxpayers were suffering.
Large Taxpayers Office (LTO) Karachi in a communication sent to FBR HQ stated that only FBR had powers under Section 148 of the Income Tax Ordinance, 2001 to reclassify goods under Part III of Twelfth Schedule. “In this condition the power of commissioner Inland Revenue to issue reduced rate certificate under SRO 715(I)/2020 dated August 12, 2020 is legally valid?”
The LTO Karachi said that the FBR issued SRO 715(I)/2020 through which Rule 40E was inserted to Income Tax Rules, 2002 and the requirement had been set for the taxpayer desirous of seeking reduced rate certificate on goods classified in Part III of the Twelfth Schedule to the Ordinance.
The LTO Karachi said that even issuance of the rule the commissioner cannot issue reduced rate certificate because there is no statutory or enabling provision in the statute itself (substantive law) for issuance of reduced rate certificate to the goods classified in Part III of the Twelfth Schedule, even if import is being made by the industrial undertaking.
Explaining the background, the LTO Karachi said that before amendment brought in by the Finance Act, 2020, Section 148(7) of Income Tax Ordinance, 2001 provided the tax to be collected on import of raw material or plant and machinery for own manufacturing use by Industrial Undertaking shall not be Minimum Tax or Final Tax as the case may be.
To this effect, earlier reduced rate certificate on import of Plant and Machinery for Industrial Undertaking was governed under the SRO 947(1)/2008 which now stands rescinded and the facility of exemption on plant and Machinery vide SRO 1020(1)/2020 dated 8th October stands withdrawn. Similarly, exemption under section 148 on import of in-house use by industrial undertaking was governed by Clause 72B of Part-IV of the Second Schedule to the Income Tax Ordinance, 2001 which has been omitted by Finance Act, 2020.
The LTO Karachi said that section 148 has been amended by Finance Act, 2020, whereby tax to be collected u/s 148(1) on imports has been made Minimum Tax by amending Section 148(7) of the Ordinance except in the case of “Industrial Undertaking” importing goods subject to collection of Import Tax at 1 percent or 2 percent with respect to goods specified in Part-I or Part-II of the Twelfth Schedule to the Ordinance.
“ The Plant and Machinery being capital goods have already been classified and mentioned in Part-I of the Twelfth Schedule to the Ordinance which is subject to reduce rate of withholding. Similarly, Raw Materials specified in Part-II of the Twelfth Schedule are subject to 2 percent of advance tax collection at import stage under section 148. However, goods specified in Part-III of the Twelfth Schedule to the Ordinance are subject to advance tax collection on import at 5.5 percent.
“This tax to be collected under Part-III of the Twelfth Schedule at 5.5 percent is minimum tax even if import is made by Industrial Undertaking for its own use. As sub-section 7 of section 148 states that tax required to be collected under section 148 is to be minimum tax except in case of import of goods by Industrial Undertaking for its own use on which tax to be collected is at the rate if 1 percent or 2 percent as the case may be.”
The tax office further informed that Section 159 of the Ordinance only grants exemption in three conditions: (i) where amount subject to withholding is exempt from tax; (ii) where amount subject to withholding tax is reduced rate; (iii) or where taxpayer is entitled for 100 percent tax credit under section 100C of the Ordinance.
The LTO Karachi presented its view that commissioner is not competent or authorized under Section 148 to issue any reduced rate certificate with respect to goods specified in Part III of the 12th Schedule to the Ordinance unless the import is made by taxpayer whose income is exempt.
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FBR issues procedure for availing exemption certificate by erstwhile FATA/PATA residents
ISLAMABAD: Federal Board of Revenue (FBR) issued a procedure for issuing tax exemption certificate for residents of erstwhile FATA/PATA.
The FBR issued circular No. 13 of 2021 stating that a standardized procedure for the issuance of Exemption Certificate on quarterly basis is being rolled out so as to ensure fair operationalization of the exemptions enshrined in the law. Accordingly, a FATA/PATA-domiciled person appearing on the “active taxpayers’ list” instituted by FBR in terms of section 181A of the I.T.0, 2001, and intending to import “plant, machinery, equipment” or “industrial inputs” for installation or consumption at his own manufacturing site would lodge a written application to the Commissioner Inland Revenue (CIR) concerned providing therein: –
(i) Production capacity of the manufacturing unit, and if the same has increased over time, the month from which the enhanced production capacity was installed along with particulars of the additional manufacturing capacity;
(ii) Month-wise quantity of (a) raw material imported, and (b) purchased locally since July, 2020 (or 1 st month of the tax year);
(iii) Quantity of stock available from earlier imports;
(iv) Month-wise details of Gas and Electricity consumed since July, 2020 (or lm month of the tax year);
(v) Month-wise particulars of goods produced;
(vi) Month-wise details of post-dated cheques (PDCs) deposited earlier with Customs authorities, if any;
(vii) List of buyers of the goods produced;
(viii) Bank statement for the past quarter;
(ix) Electricity/Gas bills for the past quarter; and
(x) Month-wise proof of Federal Excise paid — only in case of goods covered under the Federal Excise Act, 2005.
The commissioner Inland Revenue would ensure that particulars supplied by the taxpayer are verified before the issuance of Exemption Certificate. In case any data are not verified, the taxpayer would be given an opportunity to complete the application, provide the required information, and make up the deficiency. The Exemption Certificate issued will be directly mailed to the Collector Customs concerned with a copy thereof being duly marked to Member (IR Operations) and Member (Customs Operations), and under no circumstances will be handed over to the taxpayer. If the CIR decides to reject the application for a Exemption Certificate, the previous PDCs deposited would be encashed.
The FBR issued the procedure In pursuance to the amalgamation of FATA/PATA regions via 25th Amendment to the Constitution, in order to boost economic development therein, the Government of Pakistan, vide Clause (146) of Part I of 2nd Schedule to the Income Tax Ordinance, 2001 (hereinafter “the I.T.0, 2001”), exempted income “of any individual domiciled or company and association of persons resident in the Tribal Areas forming part of the Provinces of Khyber PalchtunIchwa and Balochistan…with effect from the Is’ day of June, 2018 to the 30th day of June, 2023.”
The “provisions of sections in Division III of Part V of Chapter X and Chapter XII” of the I.T.0, 2001, pertaining to withholding taxes have also been rendered inapplicable to FATA/PATA-domiciled tax persons vide Clause (110) of Part IV of 2nd Schedule to the 1.T.0, 2001.
Although, FBR’s stated position continues to be that section 148 by dint of its being in Division II (instead of Division III) of Part V of Chapter X of the I.T.0, 2001, it has consciously been excluded from the nexus of Clause (110) by the Legislature as also emphatically articulated by FBR vide letter No.DOC.No.1(1)-M(IR-Ops)/2020/165904-R dated 21-09-2020, yet in view of Hon’ble Peshawar High Court’s judgement in W.P.No.442-M of 2020 to the contrary, and till its reversal by the Supreme Court of Pakistan in a CPLA filed by FBR, FATA/PATA-domiciled tax persons could avail exemption u/s 148 of the I.T.0, 2001.
There, however, does exist significant confusion as to the mechanism of operationalization of the exemptions enshrined in the law. In particular, a controversy has recently raged vis-a-vis application of withholding tax at the import stage as to whether it would be available to a FATA/PATA-domiciled persons per se or it would trigger on issuance (and production) of exemption certificate as stipulated in section 148/159 of the I.T.0, 2001.
The Hon’ble Peshawar High Court in W.P.No.442-M of 2020 titled as Hadi Khan Silk Mills Vs. Federation of Pakistan has also categorically held that FATA/PATA-domiciled tax persons “shall be exempt from levy and imposition of advance tax payable under section 148.. .at import stage, till the period mentioned in Clause 146” of Part 1 of 2nd Schedule to the I.T.0, 2001.
More importantly, the Hon’ble High Court, in the same judgement, has gone on to address the critical question as to how this particular exemption would operationalize by mandating “that for seeking exemption from payment of advance income tax under section 148 of the Ordinance at import stage, the petitioners shall have to seek exemption from the levy thereof, under section 159 of the Ordinance.” The Hon’ble High Court has re-affirmed this mechanism in W.P.No.1219-M of 2020 titled Sohrab Sons & Co. Vs. Government of Pakistan & Others and W.P.No.2009- P of 2020 titled Ws Dawood Steel Vs. Federation of Pakistan & Others.
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Procedure to get exemption certificate for imported goods
ISLAMABAD – The Federal Board of Revenue (FBR) has established a clear procedure for taxpayers to obtain exemption certificates for the exemption from advance income tax on imported goods.
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Finance Act 2020: Commissioner empowered to cancel exemption certificate
ISLAMABAD: A commissioner of Inland Revenue has been authorized to cancel or modify exemption certificate issued automatically by online system IRIS.
Through Finance Act, 2020 amendment has been made to Section 153 of Income Tax Ordinance, 2001.
As per the amendment the commissioner of Inland Revenue of Federal Board of Revenue (FBR) is required to issue certificate to taxpayer within prescribed time frame. However, if application is filed by taxpayer and commissioner fails to take action than the IRIS will automatically issue certificate to the taxpayer.
However, the commissioner is empowered to modify or cancel the certificate on reasonable ground.
The amendment in this regard is as:
“Provided that the Commissioner shall issue certificate for payment under clause (a) of sub-section (1) without deduction of tax within fifteen days of filing of application to a public company listed on a registered stock exchange in Pakistan if advance tax liability has been discharged.
“Provided further that the Commissioner shall be deemed to have issued the exemption certificate upon the expiry of fifteen days to the aforesaid public listed company and the certificate shall be automatically processed and issued by Iris:
“Provided also that the Commissioner may modify or cancel the certificate issued automatically by IRIS on the basis of reasons to be recorded in writing after providing an opportunity of being heard.”
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Automatic issuance of exemption certificate granted
KARACHI: The Federal Board of Revenue (FBR) allowed automated issuance of exemption certificate in case commissioner delays in approval.
Tax experts at PwC A F Ferguson Chartered Accountants said Clause (72B) contained in Part IV of the Second Schedule to the ITO 2001 allows a taxpayer to obtain a withholding exemption certificate from the concerned Commissioner Inland Revenue so as to avoid tax collection at import stage.
Due to procedural issues, hardships were being faced by taxpayer in getting such withholding exemption certificates renewed, which are generally issued for 6-months validity although tax liability for the entire year as prescribed is discharged.
To facilitate the taxpayers, the relevant clause has now been amended to provide for automatic approval of application filed on FBR’s IRIS portal for renewal of the certificate in case no action is taken by the Commissioner by the expiry of prescribed time period.
The concerned Commissioner has, however, been empowered to cancel or modify any such certificate automatically issued on IRIS but any such cancellation or modification may be made after granting the taxpayer an opportunity of being heard and for reasons to be recorded by the Commissioner in writing.
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Exemption in import certificates facilitates manufacturers
ISLAMABAD: The government has facilitated manufacturers in obtaining exemption certificates for import of raw material.
The Federal Board of Revenue (FBR) issued salient features to explain amendments to Income Tax Ordinance, 2001 brought through Tax Laws (Second Amendment) Ordinance, 2019.
A major change was introduced under which a manufacturer applies for exemption certificates to the Commissioner Inland Revenue. In case the commissioner unable to approve the request within give timeframe then the exemption certificate would automatically granted.
The FBR explained that in order to facilitate manufacturers, a Commissioner, under the auspices of clause (72B) of Part-IV of the Second Schedule to the Ordinance has the mandate to issue exemption certificate in respect of collection of tax under section 148 of the Ordinance at the import stage in respect of raw materials being imported by industrial undertakings subject to various conditions.
However, no time limit has been prescribed under the law or rules for disposal of such exemption certificate by the Commissioner.
In order to complement efforts being made towards ease of doing business if a Commissioner fails to issue such certificate within the time period prescribed under the Income Tax Rules, 2002 the certificate shall be automatically processed and issued by IRIS and shall be deemed to have been issued by the Commissioner.
However, the Commissioner shall have the mandate to modify or cancel the certificate issued automatically by IRIS on the basis of reasons to be recorded in writing after providing an opportunity of being heard to the taxpayer.
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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.