Karachi, October 8, 2023 – Pakistan has implemented a minimum tax requirement for companies that frequently declare losses in their financial statements, effective for Tax Year 2024.
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Minimum tax rates for tax year 2022
The minimum tax rates for the tax year 2022 are under the First Schedule of the Income Tax Ordinance, 2001.
The Federal Board of Revenue (FBR) issued the Income Tax Ordinance, 2001 updated up to June 30, 2021. The Ordinance incorporated amendments brought through Finance Act, 2021.
Following are the minimum tax rates under Section 113 of Income Tax Ordinance, 2001:
01. The tax rate shall be 0.75 per cent on the following:
(a) Oil marketing companies, Sui Southern Gas Company Limited and Sui Northern Gas Pipelines Limited (for the cases where annual turnover exceeds rupees one billion.)
(b) Pakistani International Airlines Corporation; and
(c) Poultry industry including poultry breeding, broiler production, egg production and poultry feed production;
02. The tax rate shall be 0.5 per cent on the following:
(a) Oil refineries
(b) Motorcycle dealers registered under the Sales Tax Act, 1990
03. The tax rate shall be 0.25 per cent on the following:
(a) Distributors of pharmaceutical products, fast moving consumer goods and cigarettes;
(b) Petroleum agents and distributors who are registered under the Sales Tax Act, 1990;
(c) Rice mills and dealers;
(d) Tier-1 retailers of fast moving consumer goods who are integrated with Board or its computerized system for real time reporting of sales and receipts;
(e) Person’s turnover from supplies through e-commerce including from running an online marketplace as defined in clause (38B) of section 2.
(f) Persons engaged in the sale and purchase of used vehicles; and
(g) Flour mills
04. The tax rate shall be 1.25 per cent in all other cases
(Disclaimer: The text of above section is only for information. Team PkRevenue.com makes all efforts to provide the correct version of the text. However, the team PkRevenue.com is not responsible for any error or omission.)
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Changes made to minimum tax regime through Finance Act 2021
ISLAMABAD: The Federal Board of Revenue (FBR) has issued explanation to changes made through Finance Bill, 2021 in Income Tax Ordinance, 2001 related to minimum tax regime.
The FBR said that previously, minimum tax on turnover at the rate of 1.5 per cent of turnover was payable by all companies and individuals/ Association of Persons (AOPs) having turnover exceeding Rs. 10 million. This is an alternative tax. It is payable when the normal tax liability in cases of exemption, loss, tax credits or for any other reason, is less than tax payable on turnover basis.
It can be carried forward for adjustment against next year’s tax liability however it cannot be carried forward if person has sustained loss for a year. 4 different types of changes have been made in this regime which are summarized below:
— Generalized reduction in minimum turnover tax paid from 1.5 per cent to 1.25 per cent
— Enhanced threshold for individuals and AOPs from Rs10 million to Rs100 million to pay minimum tax
— Allowing carrying forward of minimum tax for adjustment against normal tax liability even in cases of loss to provide relief to businesses sustaining loss and to maximize equity
Division IX of Part I of First schedule has been substituted as below:
1. 0.75 per cent minimum tax to be applicable on:
(a) Oil marketing companies, Sui Southern Gas Company Limited and Sui Northern Gas Pipelines Limited (for the cases where annual turnover exceeds rupees one billion.)
(b) Pakistan International Airlines Corporation; and
(c) poultry industry including poultry breeding, broiler production, egg production and poultry feed production
2. 0.5 per cent to be applicable as minimum tax on:
(a) oil refineries
(b) motorcycle dealers registered under the Sales Tax Act, 1990
3. 0.25 per cent to be applicable as minimum tax on:
(a) Distributors of pharmaceutical products, fast moving consumer goods and cigarettes;
(b) petroleum agents and distributors who are registered under the Sales Tax Act, 1990;
(c) rice mills and dealers
(d) Tier-1 retailers of fast moving consumer goods who are integrated with board or its computerized system for real time reporting of sales and receipts;
(e) Person’s turnover from supplies through e-commerce including from running on online marketplace as defined in clause (38B) of Section 2.
(f) Persons engaged in the sale of purchase of used vehicles
(g) flour mills
4. in all other cases the minimum tax rates shall be 1.25 per cent
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Turnover increased to Rs100 million for minimum tax levy
ISLAMABAD: The government has increased threshold of annual turnover to Rs100 million from Rs10 million for imposing minimum income tax from July 01, 2021 onwards.
According to Budget 2021/2022 documents, Finance Bill 2021 has proposed amendment to Section 113 of Income Tax Ordinance, 2001.
The Section 113 after the proposed amendment is:
Minimum tax on the income of certain persons.- (1) This section shall apply to a resident company, permanent establishment of a non-resident company, an individual (having turnover of one hundred million rupees or above in the tax year 2017 or in any subsequent tax year) and an association of persons (having turnover of one hundred million rupees or above in the tax year 2017 or in any subsequent tax year) where, for any reason whatsoever allowed under this Ordinance, including any other law for the time being in force—
(a) loss for the year;
(b) the setting off of a loss of an earlier year;
(c) exemption from tax;
(d) the application of credits or rebates; or
(e) the claiming of allowances or deductions (including depreciation and amortization deductions) no tax is payable or paid by the person for a tax year or the tax payable or paid by the person for a tax year is less than the percentage as specified in column (3) of the Table in Division IX of Part-I of the First Schedule of the amount representing the person’s turnover from all sources for that year:
The Finance Bill 2021 also added an explanation:.- For the removal of doubt, it is clarified that the definition of turnover covers receipts from all business activities in line with expression “ turnover from all sources” used in sub-section (1) including but not limited to receipts from sale of immoveable property where such receipt is taxable under the head Income from Business.”
More provisos has been proposed through Finance Bill 2021:
“Provided that if tax is paid under sub-section (1) due to the fact that no tax is payable or paid for the year, the entire amount of tax paid under sub-section (1) shall be carried forward for adjustment in the manner stated aforesaid:
Provided further that the amount under this clause shall be carried forward and adjusted against tax liability for five tax years immediately succeeding the tax year for which the amount was paid.”;
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TAX YEAR 2021: minimum tax rates
ISLAMABAD: Federal Board of Revenue (FBR) has updated rates of minimum tax to be applicable during tax year 2021 (July 01, 2020 – June 30, 2021).
The FBR issued Income Tax Ordinance, 2001 (updated up to June 30, 2020) after incorporating amendment brought through Finance Act, 2020. The FBR updated following rates of minimum tax under Section 113 of the Ordinance:
S.No Person(s) Minimum Tax as percentage of the person’s turnover for the year (1) (2) (3) 1. (a) Oil marketing companies, Oil refineries, Sui Southern Gas Company Limited and Sui Northern Gas Pipelines Limited (for the cases where annual turnover exceeds rupees one billion.) (b) Pakistani Airlines; and (c) Poultry industry including poultry breeding, broiler production, egg production and poultry feed production. (d) Dealers or distributors of fertilizer ; and (e) person running an online marketplace as defined in clause (38B) of section 2. 0.75% 2. (a) Distributors of pharmaceutical products, fast moving consumer goods and cigarettes; (b) Petroleum agents and distributors who are registered under the Sales Tax Act, 1990; (c) Rice mills and dealers; and (d) Flour mills. 0.25% 3. Motorcycle dealers registered under the Sales Tax Act, 1990. 0.3% 4. In all other cases. 1.5% Section 113: Minimum tax on the income of certain persons.
(1) This section shall apply to a resident company, permanent establishment of a non-resident company, an individual (having turnover of ten million rupees or above in the tax year 2017 or in any subsequent tax year) and an association of persons (having turnover of ten million rupees or above in the tax year 2017 or in any subsequent tax year) where, for any reason whatsoever allowed under this Ordinance, including any other law for the time being in force—
(a) loss for the year;
(b) the setting off of a loss of an earlier year;
(c) exemption from tax;
(d) the application of credits or rebates; or
(e) the claiming of allowances or deductions (including depreciation and amortization deductions) no tax is payable or paid by the person for a tax year or the tax payable or paid by the person for a tax year is less than the percentage as specified in column (3) of the Table in Division IX of Part-I of the First Schedule of the amount representing the person’s turnover from all sources for that year:
Explanation.-For the purpose of this sub-section, the expression “tax payable or paid” does not include-
(a) tax already paid or payable in respect of deemed income which is assessed as final discharge of the tax liability under section 169 or under any other provision of this Ordinance; and
(b) tax payable or paid under section 4B.”
(3) Where this section applies:
(a) the aggregate of the person’s turnover as defined in sub-section (3) for the tax year shall be treated as the income of the person for the year chargeable to tax;
(b) the person shall pay as income tax for the tax year (instead of the actual tax payable under this Ordinance), minimum tax computed on the basis of rates as specified in Division IX of Part I of First Schedule;
(c) where tax paid under sub-section (1) exceeds the actual tax payable under Part I, clause (1) of Division I, or Division II of the First Schedule, the excess amount of tax paid shall be carried forward for adjustment against tax liability under the aforesaid Part of the subsequent tax year:
Provided that the amount under this clause shall be carried forward and adjusted against tax liability for five tax years immediately succeeding the tax year for which the amount was paid.
(4) “turnover” means,-
(a) the gross sales or gross receipts, exclusive of Sales Tax and Federal Excise duty or any trade discounts shown on invoices,
or bills, derived from the sale of goods, and also excluding any amount taken as deemed income and is assessed as final discharge of the tax liability for which tax is already paid or payable;
(b) the gross fees for the rendering of services for giving benefits including commissions; except covered by final discharge of tax liability for which tax is separately paid or payable;
(c) the gross receipts from the execution of contracts; except covered by final discharge of tax liability for which tax is separately paid or payable; and
(d) the company’s share of the amounts stated above of any association of persons of which the company is a member.
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Minimum tax to apply on non-resident PE companies
KARACHI: The minimum tax on turnover has been proposed to impose on non-resident companies having permanent establishment (PE) in Pakistan.
The amendment in Section 113 of the Income Tax Ordinance, 2001 has been proposed through Finance Bill, 2020.
According to EY Ford Rhodes Chartered Accountants the Section 113 of the Ordinance levies minimum tax on a person based on his turnover where such person is not liable to pay tax due to various reasons listed therein.
However, the levy of minimum tax in case of corporate taxpayers, is only applicable on resident companies.
This means that foreign companies having a permanent establishment in Pakistan (including a branch) are not subject to minimum tax.
The Finance Bill 2020 has now proposed to include non-resident companies having a permanent establishment in Pakistan under the domain of minimum tax on turnover.
Consequently, such companies would be required to compute minimum tax under Section 113 of the Ordinance for determination of their ultimate tax liability.
It may be noted that in the matter of levy of tax on non-resident persons, as per Section 107 of the Ordinance, the provisions of the Avoidance of Double Tax Agreement between Pakistan and the respective country would prevail over the provisions of the Ordinance.
It needs to be appreciated that in most of the agreements Pakistan has signed with other countries, a permanent establishment of a non-resident in Pakistan would be taxable only on net income basis.
“Therefore, the applicability of minimum tax in case of a non-resident person having a permanent establishment in Pakistan may be put to a question where a avoidance of double taxation treaty prevails,” they said.
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General rate of minimum tax proposed at 0.5 percent
KARACHI: Federal Board of Revenue (FBR) has been proposed to reduce the general rate of minimum tax to 0.5 percent in the upcoming budget 2020/2021.
In its proposals for budget 2020/2021, the Overseas Investors Chamber of Commerce and Industry (OICCI) has recommended to review minimum tax regime.
It said that standard rate of minimum tax under section 113 of Income Tax Ordinance, 2001 (ITO 2001) was enhanced from 1.25 percent to 1.50 percent through Finance Act 2019, whereas, reduced rate of minimum tax also prevails for specified sectors.
The application of MTR is resulting in an effective tax rate which is even higher than the standard rate for nearly all companies of specialized sectors with high turnover and low margins or regulated prices.
Further, Alternate Corporate Tax is a discriminatory regime, which hurts industries with major capital investment.
The OICCI recommended the following:
i. The general rate of Minimum Tax under section 113 of ITO 2001 should be reduced to 0.5 percent.
ii. Minimum Tax rate should be reduced to 0.2 percent for Oil Marketing/ Refineries/ LNG Terminal Operators, large chemical companies, authorized dealers of local vehicle manufacturers and traders, including large trading houses, dealing in sectors with high turnover and low margins.
Minimum tax should be adjustable against future tax liabilities for next 6 years.
iii. Minimum tax liability should be computed in comparison with normal tax liability without taking into account any initial depreciation allowance.
iv. Alternate Corporate Tax under section 113C should be abolished in presence of Minimum Tax under section 113.
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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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Minimum rate reduced to 0.5%
ISLAMABAD: The government has reduced the minimum tax rate to 0.5 percent from 1.5 percent for traders having turnover up to Rs100 million.
Federal Board of Revenue (FBR) issued salient features to explain changes made to Income Tax Ordinance, 2001 through Tax Laws (Second Amendment) Ordinance, 2001.
The FBR said that the standard rate of minimum tax under section 113 of the Income Tax Ordinance, 2001 is being reduced from 1.5 percent to 0.5 percent in the case of traders having turnover up to Rs.100 million for the Tax Year 2020.
However, traders having turnover up to Rs.100 million who have filed their returns for the Tax Year 2018 will be obliged to pay tax equal to or more than the tax paid for the Tax Year 2018 for the Tax Years 2019 and 2020.
Moreover, a trader has been defined as an individual engaged in the buying and selling of goods in the same state including a retailer and a wholesaler, however, distributors have been ousted from the scope of this definition.
Under section 153 of the Ordinance, individuals having turnover of Rs.50 million or above in any of the preceding Tax Years are obliged to act as withholding tax agents whilst making payments for supply of goods, rendering of services or for execution of contracts.
Henceforth traders, being individuals and having turnover up to Rs.100 million shall not be required to act as a withholding agent under section 153 of the Ordinance.
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PTBA recommends retaining alternative corporate tax or minimum tax
KARACHI: Pakistan Tax Bar Association (PTBA) has recommended the tax authorities to retain either Alternative Corporate Tax (ACT) or minimum tax, as existence of both regimes is inappropriate.
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