Tag: Federal Board of Revenue

The Federal Board of Revenue is Pakistan’s apex tax agency, overseeing tax collection and policies. Pakistan Revenue is committed to providing timely updates on the Federal Board of Revenue to its readers.

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.

May 24, 2019
FTO directs audit of all manufacturers for misusing SRO 1125

ISLAMABAD: Federal Tax Ombudsman (FTO) has directed Federal Board of Revenue (FBR) to conduct audit of all manufacturers who availed the benefit of SRO 1125(I)/2011.

In its suo moto action related to misuse of zero-rated sales tax facility under SRO 1125(I)/2011 the FTO detected systematic flaws and directed, through an order dated May 15, 2019, the FBR to take following measures:

— develop a comprehensive risk management framework in the working of IRIS based sales tax registration rules and revisit the approved risk engine and scores to mitigate the possibility of any misuse of ‘manufacturer status’ by the registered persons;

— “arrange audit of all manufacturers who availed the benefit of SRO 1125(I)/2011 to find out whether ‘manufacturer status’ was granted after fulfillment of requisite conditions and in cases of irregular approvals of manufacturers status fix responsibility on the dealing staff for proceedings under E&D Rules and take necessary measures under law/rules for recovery of losses caused to government revenues;

— direct PRAL and Directorate of Reforms and Automation (Customs) to develop and implement system/software for live data synchronization with WeBOC regarding sales tax registration to ensure blacklisted and suspended taxpayers are not able to import and get undue benefit of SRO 1125(I)/2011; and

— to direct all commissioners to conduct half yearly physical verification of all units registered in their jurisdiction as ‘manufacture’ to verify existence of manufacturing facility of all such units.

The FTO also directed the FBR to submit quarterly implementation report.

In the misuse of the SRO, the findings of the FTO observed that the review of sales tax registration rules and risk score weightage assigned to the risk parameters employed in the registration process which lead to misuse of ‘manufacturer’ status by registered persons for the purpose of tax evasion.

The FTO further observed that the FBR vide SRO 494 (I)/2015 dated June 30, 2015 showed that the IRIS based Sales Tax Registration module failed to timely incorporate the provisions of revised registration rules.

“The requisite changes in IRIS were incorporated after nine months vide SRO 227(I)/2016 dated March 21, 2016.”

The FTO observed that the FBR had failed to take timely action in integrating the registration modules in IRIS system thereby providing opportunity to the unscrupulous elements to take advantage of the weaknesses in the registration procedure of the sales tax department.

“Moreover, modification in the registration module was carried out after nine months of the revision of sales tax registration rules, but evidently no exercise was carried out by the field formation to verify that the existing manufacturers were registered in conformity with the provisions of revised rules.”

The FTO mentioned two cases i.e. M/s. Aran Mart International and M/s. Venus & Co. where FBR had failed to monitor their transactions and took belated action to recover short levied government dues.

In its case specific recommendations, the FTO asked the FBR to direct the Directorate General Intelligence and Investigation to:

a. conduct detailed investigation to find out real owners of M/s. Aran Mark International by interalia utilizing information available in customs clearance documents and instruments used for payment of import duties and taxes; and

b. recover the amount of illegal concessions availed by M/s. Aran Mart International uder the law/rules; and

c. ascertain IR staff responsible for approving ‘manufacturer status’ of M/s. Aran Mart International either through collusion or failure to take precautionary measures for protection of government revenue for taking disciplinary action under E&D Rules and for recovery under the law/rules; and

d. initiate criminal proceedings against the owners of M/s. Aran Mart International along with those delinquent tax functionaries who deliberately and with ulterior motive connived to approve the ‘manufacturer’ status of M/s. Aran Mart International.

The FBR has also been asked to direct the Chief Commissioner IR, Corporate RTO Karachi to recover from M/s. Venus & Co. sales tax amounting to Rs32.799 million and further tax of Rs8.7 million assessed by the department.

The FBR has been further asked to direct the Directorate of Intelligence and Investigation (Customs) to investigate and fix responsibility of clearance of import after suspension of STR of the M/s. Aran Mart International.

May 24, 2019
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.

May 24, 2019
NBP provides online exchange rate facility to Pakistan Customs

KARACHI: The Federal Board of Revenue (FBR) is receiving real time exchange rate from National Bank of Pakistan (NBP) for determination of customs valuation.

FBR has decided to electronically link customs automated system WeBOC with the Treasury and Capital Markets Group of the National Bank of Pakistan so that the daily exchange rate of major currencies are uploaded into WeBOC directly as soon as the same are notified.

Settlement of payments for Pakistan’s International Trade, like other countries, is done in international currencies. Value of imported goods is converted to Pak Rupees, using latest exchange rate of major currencies notified by the Treasury of the National Bank of Pakistan.

As per current procedure, Exchange rate for various currencies is procured from Treasury and Capital Markets Group office of National Bank of Pakistan by Pakistan Customs on daily basis either manually or by downloading the same from National Bank of Pakistan website.

It is then fed manually into the Customs automated system WeBOC for utilization in assessment of value of imports for calculating duties and taxes.

In order to further enhance the efficiency of this operation, FBR has decided to electronically link customs automated system WeBOC with the Treasury and Capital Markets Group of the National Bank of Pakistan so that the daily exchange rate of major currencies are uploaded into WeBOC directly as soon as the same are notified.

Necessary instructions have been issued to Director (Reforms & Automation), Karachi for development and deployment of required module in close consultation with National Bank of Pakistan on top priority basis. It is expected that this reform initiative will improve the efficiency and transparency of the process, and will also preclude any possibility of errors/omission.

May 23, 2019
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.

May 23, 2019
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.

May 23, 2019
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.

May 23, 2019
FBR issues Urdu version of Tax Amnesty Scheme – 2019

ISLAMABAD: Federal Board of Revenue (FBR) on Wednesday issued Urdu version of presidential ordinance for Tax Amnesty Scheme – 2019.

The FBR said that the Urdu translated version had been issued for the facilitation of people to understand the scheme and participate/avail proactively.

However, the FBR said that the translated version can not be referred anywhere and English version will be treated as authentic document.

May 22, 2019
FBR chairman warns unregistered industrial, commercial consumers of penal action

ISLAMABAD: Syed Muhammad Shabbar Zaidi, Chairman, Federal Board of Revenue (FBR) Wednesday warned industrial and commercial consumers of gas and electricity to get registered with sales tax authorities, otherwise penal action will be initiated from July 01, 2019.

Addressing a press conference, he said that currently there were around 341,174 industrial electricity connection and 7000 industrial gas connections, however compared to this the sales tax registration of industry was just 38,937, which he said was a huge gap.

“It is my request to all industrial consumers to take advantage of the scheme before June 30 and may be it (the scheme) do not remain in the same shape after July 1st,” so the people using industrial utility connections should take advantage, the Chairman added.

He said that there were possibilities that these industrial consumer connections might include some connections that come under cotton industry under law, however, added that there was dire need to check this huge difference.

“It would be our desire that under the special clause placed in Asset Declaration Scheme, the industries falling in the category pay two percent to clear past liabilities,” the chairman added.

He said that after July 1st, the FBR would make necessary legislation to get these industries and manufacturers registered and would also take actions.

He urged the industrialists and manufacturers to take advantage of the Asset Declaration Scheme and clear their past sales tax liabilities by paying just two percent tax till June 30, 2019 or the law would take its due course after the expiry of the data.

“A special clause has been included in the Asset Declaration Scheme, which was not included in it earlier, which is that if anybody is having sales tax liability he or she may clear these by paying just two percent tax,” the Chairman FBR, Muhammad Shabbar Zaidi said while addressing a press conference at FBR house here.

He urged the media to sensitize people on the issue so that those avoiding to clear their past sales tax liabilities might realize this gap and get registered with FBR by taking advantage of the Asset Declaration Scheme.

He said that the FBR would try its best to make it voluntary and do not indulge in harassment, as it wanted to create environment for the businesses.

To a question, the FBR Chairman said that there were around 3.1 million commercial consumers, however added that the strategy on how to get the unregistered consumers to get registered with FBR would be shared with media.

To another questions, the Chairman FBR said that there were over one lack companies registered with the Securities and Exchange Commission of Pakistan (SECP), however just 50,000 were filing their returns.

He said that it was high time for those having industrial connections to get registered with FBR and take benefit of the Tax Declaration Scheme.

It is pertinent to mention here that the government last week had announced Asset Declaration Scheme, providing one more opportunity to all Pakistani citizens to declare and legalize undisclosed assets inside and outside the country by paying just four percent taxes on all assets other than real estate.

The scheme would be applicable till June 30, and all Pakistan citizens, other than those holding public offices or their dependents, would be able to take benefit from it.

The basic purpose of the scheme was to document economy and make the dead assets functional to promote economy by encouraging businessmen to participate in the legal economy.

May 22, 2019
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.

May 21, 2019