Senate finance panel calls for export-focused tax reforms to strengthen competitiveness and boost foreign exchange inflows
(more…)Tag: final tax regime
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KCCI seeks restoration of final tax regime for exporters in FY2026-27 budget
Karachi Chamber says shift to Normal Tax Regime has increased tax burden, compliance costs and operational challenges for exporters.
The Karachi Chamber of Commerce and Industry (KCCI) has urged the government to restore the Final Tax Regime (FTR) for exporters in the Federal Budget 2026-27, arguing that the existing taxation framework is undermining the competitiveness of Pakistan’s export sector.
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Proposal of final tax regime for commercial importers rejected
KARACHI: The National Assembly of Pakistan has rejected a proposal to grant final tax regime for commercial importers.
The proposal was made part of Finance Bill, 2022 under which the government proposed to bring commercial importers under the ambit of final tax regime.
READ MORE: Mechanism revamped for tax dispute resolution
Previously, PTI government after consultation with manufacturers and other stakeholders brought the importers into minimum tax regime through Finance Act, 2019.
The importers were brought into the minimum tax regime after arguments that the importers were misusing the tax incentives as the final tax regime was not subject to audit and returns. The importers are required to file a statement only under the FTR.
The Finance Bill, 2022 proposed to make amendment in sub-section 7 of Section 148 of the Income Tax Ordinance, 2001 to substitute the word ‘minimum’ with the word ‘final’.
However, the national assembly rejected the proposal of final tax regime for commercial importers is withdrawn. Consequently, commercial importers will remain under minimum tax regime.
READ MORE: Simplified tax regime for shopkeepers implemented
Tax experts at PwC A. F. Ferguson & Co. said that previously, in case of goods imported by an industrial undertaking for own use, the advance tax on imports did not constitute minimum tax if the same were subjected to advance tax collection at 1 per cent or 2 per cent.
There were various items which were in the nature of raw material but were subjected to standard rate of 5.5 per cent.
READ MORE: Pakistan withdraws tax amnesties for industrial promotion
The tax authorities were misinterpreting these provisions to deny the adjustability of tax collected at 5.5 per cent.
This regime has been amended and now the advance tax on raw materials imported by an industrial undertaking for own use will not be minimum tax irrespective of the applicable rate.
However, advance tax on import of following items will be treated as minimum tax in respect of income arising from such imports:- a) Edible oil; b) Packaging material; c) Paper and paper board; or d) Plastics.
READ MORE: Pakistan expands tax exemptions under foreign treaties
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General provisions for final tax regime
General provisions for final tax regime have been issued by the Federal Board of Revenue (FBR) through an updated version of the Income Tax Ordinance, 2001.
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Filing income tax return mandatory for FTR taxpayers: FBR
ISLAMABAD: Federal Board of Revenue (FBR) has said that filing annual income tax return is mandatory for taxpayers falling under final tax regime (FTR).
The FBR on Thursday issued Income Tax Circular No. 03 of 2020 to explain major changes to Income Tax Ordinance, 2001 through Finance Act, 2020.
The FBR said that prior to the Finance Act, 2020 persons subject to the final tax regime were obliged to file statement of final taxation under section 115(4) of the Ordinance.
This section has now been omitted since final tax regime has been phased out for most of the transactions.
“However, any person whose income is still subject to final tax regime, is now obligated to file normal income tax return and allied documents under the newly inserted clause (ae) in sub-section (1) of section 114 of the Ordinance,” the FBR said.
The FBR further added that an enabling provision has also been inserted in clause (a) of sub-section (2) of section 114 of the Ordinance whereby the Board had been empowered to prescribe different returns for different classes of income or persons including persons subject to final taxation.
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Commercial importers, traders require filing annual returns, maintain complete record
KARACHI: Commercial importers and individual traders are required to file income tax return and maintain complete records of transactions, a tax analyst said.
Murtaza Qurban, Executive Manager, EY Ford Rhodes highlighted the application of minimum tax on commercial importers and individual traders in an event recently organized by Karachi Tax Bar Association (KTBA).
He said that commercial importers / traders are now required to prepare financial statements / accounts. Further filing of return of income is also mandatory instead of statement under section 115 of Income Tax Ordinance, 2001.
Maintenance of proper and complete records (earlier no expense was being claimed therefore there was no risk of disallowance of expenses), he said.
The tax authorities may raise questions regarding transfer pricing (earlier tax paid on assessed value of goods was final tax – largely applicable on multinationals). While, payment of advance tax under section 147 in respect will also applicable, he added.
H e said that the Finance Act, 2019, however, again introduced amendments through which tax collection at import stage is made minimum tax instead of final tax. As a result of this change, Commercial Importers are now required to compute their financial results for comparison of tax on profits with minimum tax.
He said that sale by commercial Importer would still not be subject to withholding tax in terms of section 153(5) where tax at import stage has already been collected.
Two regimes of minimum tax would be applicable:Under section 113
Under section 148
If minimum tax liability under 148 > minimum tax liability under 113 > tax liability under Normal Tax Regime. Carry forward of minimum tax under 113 would be available, he questioned.
Alternative Corporate Tax would also be applicable. Thereafter, carryforward under ACT will be available, if ACT under section 113C is > minimum tax under section 148, he further questioned?
Similar to the implications as discussed above, contractors and service providers would also be required to prepare financial statements / accounts and file return of income.
However, one major problem that is being faced is that since tax deductible under section 153(1)(b) and (c) is minimum tax, whether it would be computed on actual receipts or its accrual would also entail such income to be offered under MTR. Specially in case of companies, where accrual method of accounting is mandatorily followed, he said.
If tax under MTR is worked out on accrual basis, actual receipts would also be subjected to withholding of tax, which would not be refundable being minimum tax. In other words, such tax may be lapsed if income in subsequent year is less than the prior year, he added.
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FBR asks customs to provide clearance details of commercial importers
KARACHI: Federal Board of Revenue (FBR) has directed customs authorities to provide details of commercial importers who made clearance during first half of current fiscal year.
The FBR sources on Thursday said that the collector of customs is required to collect income advance tax at the rate specified as withholding agent from commercial importers.
Under the law withholding agents are required to provide details of persons whose tax was deducted.
The sources said that the customs authorities as per the law to provide details of all those persons whose tax had been deducted at clearance stage on January 31, 2020.
The sources said that transactions made by commercial importers were very important for broadening of tax base.
Previously, the tax deducted at import stage was final tax and commercial importers were escaped from many questioning.
Through Finance Act, 2018, a minimum tax regime was introduced for commercial importers but due to strong lobby the amendment was withdrawn through Supplementary (Second Amendment) Act, 2019.
Through Finance Act, 2019 the minimum tax was reintroduced for commercial importers and ship breakers for tax collected at import stage.
The intention of legislature to promote documentation of economy by abolishing final tax regime is a positive step.
However, the policy should be implemented consistently to avoid unnecessary confusion, which affects the decision making of the business community.
FBR sources said that it was estimated huge amount of undocumented money was involved in payment of imports. The sources said that the commercial importers would file complete income tax returns and declaration of assets for tax year 2020.
They further said that the FBR and its field offices now can select cases of commercial importers for conducting audit and ask source of money for making payments against imports.
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FBR starts phasing out final tax regime
ISLAMABAD: Federal Board of Revenue (FBR) has started phasing out final tax regime for an equitable taxation system.
Sources in the FBR said on Saturday that in the budget 2019/2020 final tax regime had been withdrawn for various sectors, which were enjoying this regime for the past many years.
The FBR in a report said that income tax by its inherent nature is tax charged and levied on income.
However some persons involved in certain transactions are not required to pay tax on their actual profit.
Instead, the tax collected or deducted on these transactions is treated as final tax liability.
Previously, this regime is available persons to such as commercial importers, commercial suppliers of goods, contractors, persons deriving brokerage or commission income and persons earning income from CNG stations.
The tax collected or deducted from the aforesaid persons are now treated as minimum tax liability except for exporters, persons winning prizes and sellers of petroleum products.
This measure is designed as a first step for gradual phasing out of the final tax regime and transition to income based taxation for all persons.
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Final tax regime for certain amount under Income Tax Ordinance
KARACHI: Federal Board of Revenue (FBR) has defined final tax regime for certain income with certain conditions explained under Income Tax Ordinance, 2001.
Following are the income falling under Final Tax Regime under the Ordinance:
Section 5: Tax on dividends
Section 6: Tax on certain payments to non-residents.—
Section 7: Tax on shipping and air transport income of a non-resident person.
Section 5AA: Tax on return on investments in sukuks.
Section 7A: Tax on shipping of a resident person.
Section 7B: Tax on profit on debt.
The Section 8 of the Ordinance explained the scheme and terms and conditions
General provisions relating to taxes imposed under sections 5, 6 and 7
(1)-Subject to this Ordinance, the tax imposed under Sections 5, 5AA, 6, 7, 7A and 7B shall be a final tax on the amount in respect of which the tax is imposed and—(a) such amount shall not be chargeable to tax under any head of income in computing the taxable income of the person who derives it for any tax year;
(b) no deduction shall be allowable under this Ordinance for any expenditure incurred in deriving the amount;
(c) the amount shall not be reduced by —
(i) any deductible allowance; or
(ii) the set off of any loss;
(d) the tax payable by a person under section 5, 5A, 5AA, 6, 7, 7A and 7B shall not be reduced by any tax credits allowed under this Ordinance; and
(e) the liability of a person under section 5, 6 or 7 shall be discharged to the extent that —
(i) in the case of shipping and air transport income, the tax has been paid in accordance with section 143 or 144, as the case may be; or
(ii) in any other case, the tax payable has been deducted at source under Division III of Part V of Chapter X.
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Commercial importers to file income returns after removal of FTR
ISLAMABAD: Commercial importers will require to file return of income and statement of assets to the tax authorities after the removal of final tax regime.
Tax authorities said that the commercial importers would require to submit details of imports and source of payment for opening the letter of credit (LCs) through their returns.
According to budget commentary by EY Ford Rhodes on Finance Bill, 2019, before the Finance Act, 2018, tax required to be collected under Section 148 on import of plastic raw material imported by an industrial undertaking, falling under PCT headings 39.01 to 39.12, edible oils and packing material is treated as minimum tax.
Furthermore, tax required to be collected on import of goods that are sold in the same condition as they were when imported was treated as final tax.
The Finance Act, 2018 brought a substantive conceptual shift with respect to taxation of commercial importers whereby such tax collection was deemed to be “minimum tax” in respect of such importers.
Due to the aforesaid change in taxability of commercial importers, there were grave concerns shown by the above sector, as this change would have required the commercial importers to declare the financial results for comparison of tax on profits to the minimum tax on imports.
As a result of strong lobbying by commercial importers, amendments were made in Section 148 through the Finance Supplementary (Second Amendment) Act, 2019 whereby tax collected at import stage from commercial importers was again treated as final discharge of tax liability of such importers.
“The Finance Bill 2019 now proposes to restore the position as stood after the amendments made through the Finance Act, 2018 to change the character of such tax collection from “final tax” to “minimum tax”.
“Such commercial importers, pursuant to the proposed amendments will now be required to file a return of income instead of filing a statement in terms of Section 115 of the Ordinance.”
The Bill also proposes amendments in Sub-section (8A) of Section 148 whereby tax collected at the time of import of ships by ship-breakers is also to be treated as ‘minimum tax’.