ISLAMABAD: Federal Board of Revenue (FBR) has reduced sales tax on imported mobile phones by 85 percent in order to promote digital economy in the country.
(more…)Tag: Tax Laws (Second Amendment) Ordinance 2019
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Up to 75% capital gain tax exempt on immovable property sale
KARACHI: The government has exempted capital gain tax up to 75 percent in case an immovable property sold by government employees of army personnel after completion of three years.
According to BDO Audit Consultancy Firm, Clause (9A) of Part III of Second Schedule provides a 50 percent exemption on capital gain derived on first sale of immovable property acquired or allotted to ex-servicemen and serving personnel of Armed forces or ex-employees or serving personnel of Federal and Provincial Governments, being original allottees of immovable property.
The Tax Laws (Second Amendment) Ordinance, 2019 has further exempted capital gains up to 75 percent in case the property is sold after completion of three years from date of acquisition.
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100% tax exemption allowed on inter-corporate dividend
KARACHI: The government has allowed 100 percent exemption on inter-corporate dividend to companies entitled to group relief.
Analysts at Topline Securities on Tuesday said that as per the Tax Laws (Second Amendment) Ordinance 2019 issued on Dec 28th, the government has allowed 100% tax exemption on inter-corporate dividends, to companies entitled to group relief.
To avail group relief, one of the company in the group has to be a public company listed on a registered stock exchange in Pakistan, and the holding company has to directly hold 51 percent or more of the share capital of the subsidiary company.
Where none of the companies in the group is a listed company, the holding company shall hold directly 75 percent or more of the share capital of the subsidiary company.
To recall, the Finance Act 2016 excluded entities entitled to group relief from the exemption on inter-corporate dividend entirely.
The Finance Supplementary (Second Amendment) Act, 2019 addressed the issue, however allowed relief on tax liability up to the percentage of shareholding in the subsidiary, given that the company has registered itself for group relief.
Tax Laws (Second Amendment) Ordinance 2019, has now allowed 100 percent relief on tax liability on dividends received from a subsidiary given that the company has registered itself for group relief.
Our checks on few holding companies suggest following potential impacts on unconsolidated accounts based on last full year financials, the analysts said.
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KTBA seeks FBR clarification on tax ordinance
KARACHI: Karachi Tax Bar Association (KTBA) on Monday urged Federal Board of Revenue (FBR) to issue necessary clarification related to issues in recently promulgated tax ordinance.
The KTBA sent a letter to Syed Shabbar Zaidi, Chairman, FBR and pointed out anomalies in the Tax Laws (Second Amendment) Ordinance, 2019 for clarification.
The KTBA highlighted that Sub-section 4 has been added to section 73 of Sales Tax Act, 1990, under which sales to an unregistered person by a registered manufacture cannot be made for more than Rs10 million in a month and Rs100 million in a year, failing which input tax will be disallowed proportionately.
Considering the implication of the phrase of unregistered person [i.e. singular term] used in drafting of the law, instead of the phrase unregistered persons [plural term], it implies that the restriction is applicable on sales to a single unregistered person instead of cumulative sales to all unregistered person(s).
In order to ensure that intent of law is not suffered by any legal infirmity due to any unintended or inadvertent drafting, the clarification must be issued in this respect on urgent note, it added.
It further pointed out that in addition to the above, it should also be clarified as to whether the all unregistered person will be effected or only those unregistered person who actually were required to be registered in Sale Tax but didn’t ?
In the event, the law is intended to cover all unregistered persons, without any discrimination, certain serious ramification would follow because of the fact that Manufacturers won’t be able to make sale to various Government/other authorities, armed forces hospitals, Universities, Charities & EPZ entities, which by law, are not required to be registered at all, in the first place.
The KTBA said that it is important to define the category of unregistered person who should not suffer due to any adverse implication of the law. Hence, a clarification is necessitated in this context.
The tax bar further highlighted the amendments introduced related to business license.
Through the Tax Laws (Second Amendment) Ordinance, 2019, various penalties have been prescribed for person who has not obtained business license, while the procedure to obtain business license has not been prescribed as yet.It is not possible to get a Business License either for any person or for any tax commissioner to issue one.
An unnumbered and undated draft SRO was issued by the FBR in July 2019, whereby Draft rules 83A to 83E were proposed in the Income Tax Rules, 2002 for the purpose, which were not finalized yet.
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Procedure for conducting audit of transfer pricing cases unveiled
KARACHI: The Director General of International Tax Operations has been empowered to select and conduct transfer pricing audit of cases under section 230E of Income Tax Ordinance 2001.
Federal Board of Revenue (FBR) in explanation to Tax Laws (Second Amendment) Ordinance, 2019 said that previously, there was no provision which specified the procedure to be adopted for conducting transfer pricing audit of taxpayers.
It has now been specified that transfer pricing audit of cases selected by the Director General of International Tax Operations shall be conducted as per procedure laid down in 177 of the Ordinance.
Moreover, the right to conduct transfer pricing audit under section 230E of the Ordinance shall not prejudice the right of the Commissioner to determine transfer price at arms length in transactions between associates while conducting audit under section 177 or 214C of the Ordinance or whilst making amendment under section 122 of the Ordinance.
Tax experts at PwC A F Ferguson Chartered Accountants said that Section 230E was introduced in the Income Tax Ordinance, 2001 through the Finance Act, 2017 for establishing a separate Directorate for conducting transfer pricing audit of taxpayers.
Through the Finance Supplementary (Second Amendment) Act, 2019, Section 230E was substituted so as to establish Directorate General of International Tax.
However, no specific procedure or mechanism for transfer pricing audit was prescribed in the said section which was causing ambiguity amongst the field officers and taxpayers.
Through the Second Amendment Ordinance, necessary amendment has been made in Section 230E to prescribe that transfer pricing audit is to be conducted as per the procedure laid down in section 177 and other provisions of the Ordinance.
This way, the ambiguity relating to the transfer pricing audit procedure has now been removed, the experts said.
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Baggage false declaration to be treated as smuggled goods
KARACHI: Any misdeclaration or false declaration of baggage carrying by passengers or crew members shall be treated as smuggled goods and penalties will be applicable related to smuggled goods.
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Traders given tax incentives
KARACHI: Federal Board of Revenue (FBR) has allowed tax concession to traders to bring them into tax net.
The tax concessions have been granted through Tax Laws (Second Amendment) Ordinance, 2019.
Tax experts at PwC A F Ferguson Chartered Accountants said that pursuant to the agreement between representatives of federal government and trade bodies on October 30, 2019; certain concessions have been allowed to traders through the Second Amendment Ordinance.
The term ‘trader’ has been defined to mean an individual engaged in business of buying and selling of goods in the same state, including a retailer and a wholesaler but excluding a distributor.
The concessions provided to traders are as under:
(i)The general rate of minimum tax payable (under section 113 of the Income Tax Ordinance 2001) has been reduced from 1.5 percent to 0.5 percent for tax year 2020 for traders having turnover up to Rs100 million.
However, for traders who have filed income tax returns for tax year 2018, the tax liability for tax years 2019 and 2020 should not be less than the tax liability for tax year 2018, to become eligible for reduced rate of minimum tax of 0.5 percent.
(ii)Individual having turnover of Rs. 50 million or more in any of the preceding tax years is liable to deduct tax under section 153 while making payments against supply of goods, services and contracts.
Through the Second Amendment Ordinance, traders being individuals having turnover up to Rs100 million have been exempted from deducting tax under section 153 while making payment against supply of goods, services and contracts.
The board is expected to clarify the year with respect to which turnover of Rs100 million will be calculated by the trader.
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Taxpayers’ declarations to be checked for money laundering
ISLAMABAD: Financial Monitoring Unit (FMU) has been allowed to obtain information of taxpayers from tax authorities to check income tax returns and other declarations for money laundering and terror financing.
The FMU has been granted access to taxpayers’ data through amendment introduced to Section 216 of the Income Tax Ordinance, 2001. The amendment has been brought through Tax Laws (Second Amendment) Ordinance, 2001.
Under Section 216 of the Income Tax Ordinance, 2001, public servants are barred from disclosing any information relating to income tax filings, evidences or proceedings of any taxpayer.
Certain exceptions to this general prohibition are also contained in the said section whereby information may be disclosed to specified persons, organizations or authorities.
By way of an amendment made through the Second Amendment Ordinance, Financial Monitoring Unit (FMU) established under the Anti-Money Laundering Act, 2010 has been included in the list of such exceptions which do not fall within the ambit of confidentiality clause contained in Section 216, tax experts at PwC A F Ferguson Chartered Accountants said.
This amendment is intended to enable FMU to better implement anti-money laundering procedures by directly obtaining necessary information from public servants.
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FBR empowered for closure of automatic audit selection
ISLAMABAD: Federal Board of Revenue (FBR) has been empowered to conclude cases which were automatic selected for audit.
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Massive tax relief announced for foreign investment in debt securities
KARACHI: The government has announced massive tax relief to foreign investment in debt securities considering the attractive environment due to higher interest rate in the country.
The foreign investment in domestic debt market including government securities including Market Treasury Bills and Pakistan Investment Bonds, is around $1.5 billion during first six month (July – December) of 2019/2020 and in total it is around $2 billion when investment included in the equity market.
Through Tax Laws (Second Amendment) Ordinance, 2019, the government facilitated the foreign investment by making significant changes to Income Tax Ordinance, 2001.
A commentary released by Pwc A F Ferguson Chartered Accountants on the tax ordinance 2019 explained the tax relief on the foreign investment through changes brought into the main statute.
The chartered accountancy firm said that foreign investors particularly foreign institutional investors invest in Pakistan’s capital market through Foreign Portfolio Investment (FPI) scheme, which allows such investors to invest in equity and debt securities (including Government Bonds, Term Finance Certificates, Pakistan Investment Bonds) without any physical presence.
The FPI scheme makes it mandatory for foreign investors to open Special Convertible Rupee Account (SCRA).
The requirement for non-residents to open SCRA is provided in Chapter 20 of the Foreign Exchange Manual issued by the State Bank of Pakistan (SBP).
The funds available in SCRA can be transferred outside Pakistan or credited to a foreign currency account of non-resident investor maintained in Pakistan at any time without prior approval of SBP.
Such non-resident corporate investors not having a Permanent Establishment in Pakistan are hereinafter referred to as NRI.
The tax incidence applicable on NRI on return from their investment in equity instruments, either as dividend or capital gains, is largely aligned and same (being 15 percent).
However, tax incidence applicable on return from investment in debt securities by NRI is not aligned. Interest income from debt investment is subject to final tax upon tax withholding at 10 percent whereas capital gains from disposal of debt instruments are taxable at corporate rate of tax which is presently 29 percent.
The Second Amendment Ordinance has aligned and rationalized the tax incidence through following amendments, apart from relieving NRI from certain compliances:
(i) Banking company / financial institution maintaining SCRA of NRI is now required to deduct tax from capital gains arising on disposal of debt instruments and Government securities (including Treasury Bills and Pakistan Investment Bonds) @ 10 percent.
Such tax deduction constitutes final tax on such capital gains. It appears that tax withholding is required to be made at the time when proceeds from disposal are accounted for in the SCRA and also that no adjustment for any capital loss may be made by the Banking company / financial institution while deducting tax @ 10 percent from capital gains earned by NRI on disposal of debt securities.
(ii) The requirements to obtain tax registration [under Section 181 of the Income Tax Ordinance, 2001 (‘ITO 2001’)] and also to file statement of final taxation [under Section 115(4)] will no longer apply, in case capital gains or profit on debt is earned from investments made through SCRA (maintained with a banking company or financial institution) in debt instruments & Government securities (including treasury bills and Pakistan investment bonds).
Despite not appearing on Active Taxpayers List (ATL), they will not be subjected to higher tax withholding under the Tenth Schedule on interest income and capital gains relating to such securities.
(iii) Advance tax under section 147(5B) will also be not payable in respect of capital gains arising on investment made through SCRA (maintained with a banking company or financial institution) in debt instruments and Government securities (including treasury bills and Pakistan Investment Bonds).
(iv) Tax withholding applicable on banking transactions by those not appearing on ATL (under section 236P) will not apply to SCRA. This is a blanket exemption for companies maintaining SCRA regardless of whether investment is made in equity or debt securities.