FinanceNews

Five Muslim banking institutions status changed

ISLAMABAD (June 14 2003) : In an effort to facilitate foreign investors, the government has changed the status of five Muslim banking/financial institutions from private limited companies to public limited companies, reducing tax rate from 43 percent to 35 percent, Member Direct Taxes Vakil Ahmed Khan said here Friday.

Now, Pak Arab Fertiliser, Pak Saudi Fertiliser, Pak-Kuwait Investment Fund/Bank, Pak-Saudi Investment Fund/Bank and Pak-Oman Fund/Bank would be treated as Public Limited Companies.

He said that Pakistan has entered into joint ventures with these companies.

This move would not only promote relations with these brotherly Muslim countries, but also help in expanding financial market and promoting trade with more banks/DFIs to pour resources into Pakistan's business-friendly atmosphere.

Giving details of other taxation measures, he said, the government has given suo motu powers to the commissioners to amend the arbitrary orders of assessing officers to secure aggrieved persons who could not deposit 15 per cent appeal fee in the tribunals.

Taxpayers' record could be examined and orders be revised by the commissioners without filing an appeal in tribunal.

The CBR would generate Rs 70 million from the exemption withdrawn from Orderly Allowance, but it would not affect the existing take home salary of civil servants.

This move would also not affect army officers as they get Orderly Allowance in the form of Batman, while civilians get this allowance in cash.

Vakil stated that almost hundred per cent irritants have been removed from Budget 2003-2004 as the Central Board of Revenue (CBR) has incorporated viable suggestions from the Securities and Exchange Commission of Pakistan (SECP), stock exchanges, State Bank of Pakistan (SBP), Federation of Chamber of Commerce and Industry (FPCCI), Institute of Chartered Accountant, besides all major trade/business associations.

The government has given special concessions/incentives to the housing sector as 22 more industries like cement, steel, wire and cable are directly linked with this sector of the economy.

Furthermore, the housing industry is labour-intensive and maximum concessions to this industry would be instrumental in reducing unemployment.

This would not only support labour industry, but also help in strengthening Small and Medium Enterprises (SMEs) sector as the government has slashed import duty on over 259 items so that SMEs could become competitive.

In line with the above proposal, the Central Excise Duty (CED) on cement has been curtailed from Rs 1000 per metric ton to Rs 750 per metric ton i.e. 25 per cent reduction. CED on wire and cables has been totally taken away.

Vakeel maintained that the implementation of the Universal Self-Assessment Scheme (USAS) would considerably increase the number of returns as banking, leasing and Modarabas would also be covered under the USAS.

Similarly, the losses of exempted period will be adjustable against income period.

The Member Direct Taxes pointed out that liquidity of banks has been increasing and these institutions were switching over to consumer banking.

To encourage banks to come in consumer and retail banking and to provide provision for bad debts banking, the authorities have proposed to allow 3 per cent of total income from consumer loans as deduction against the income of the banks is rising from such loans.

This amount would be kept in a reserve created for the purpose of setting up of any future bad debt pertaining to consumer banking loan.

To give relief to the pensioners, the Security and Exchange Commission of Pakistan (SECP) would have the authority to approve 'Private Pension Fund', which would be best saving instrument for the old age pensioners.

Tax credit is being allowed for contribution up to Rs 0.2 million or 10 percent of income (whichever is less) as against Rs 0.1 million or 10 percent previously.

Now, people in the private sector could also take benefit of the pension fund, he added.

Vakil said that to encourage amalgamation of financial institutions to achieve efficiency gain tax incentive for merger of banking and non-banking financial institutions was allowed for a period of one year ending June 30, 2003.

Considering the fact that the process of amalgamation could not be materialised during the fiscal year 2002-03, the facility is proposed to be extended for another year ie up to June 30, 2004.

The Member Income Tax said that the government is gradually making all out efforts to reduce dependency on the withholding taxes.

While referring to countrywide strikes by the power loom sector, he said that withholding tax rate was Rs 1000 per month on Rs 6000 power consumption bill of four power looms, which is unjustified. On calculation, the annual withholding tax on electricity consumption by four power looms comes to Rs 12,000, which is unreasonable, he said.

For this purpose, withholding tax rate on commercial and industrial users of electricity is proposed to be rationalised, to reduce burden of lower income group particularly small power looms owners, he added.

To cover the shortfall of revenue resulting from the above-mentioned relief measures, three slabs ranging between Rs 10,000 to Rs 20,000 have been introduced for the consumers of commercial electricity. If electricity consumed is worth Rs 10,000-Rs 15,000, tax would be Rs 1000; Rs 15,000-Rs 20,000, tax would be Rs 1500 and exceeding Rs 20,000 the tax would be Rs 2000.

This tax would be adjustable and would be considered as advance income tax, he added.

Vakil Ahmed Khan further said that a number of industries have been closed down in Europe and USA as a result of WTO regime.

Therefore, textile machinery particularly in USA is being offered for sale.

Countries like Pakistan should take advantage of this global development.

In the backdrop of this situation, initial depreciation on imported second-hand machinery is proposed to be allowed.

Previously, this depreciation allowance was not available. However, this decision would save precious foreign exchange, but also reduce the financial cost of the importer.

He maintained that the profit on debt in respect of investment made in National Saving Certificates, including Defence Saving Certificates, on or after July 1, 2001 is chargeable at normal tax rates on global income basis.

Profit in respect of such certificates is payable on maturity or at the time of encashment of such certificate.

The existing provisions of law would make the entire amount of profit on debt taxable in the year of receipt when certificates are encashed, thus creating the distortion and unduly raising the tax liability of the recipient.

In order to reduce the hardship and rationalise taxation of such accumulated profits, it is proposed to allow the recipient an option to be taxed at the rate of tax applicable to the tax year the profit relates/accrued, which means taxation in the year of receipt but on average effective rate of the year in which the profit accrued.

Member Direct Taxes stated that indirect exporters making supplies to direct exporters on the basis of back to back L/C or firm order are subject to withholding tax at the rate applicable to the export of goods.

To boost exports, the suppliers registered under Duty and Tax Remission for Export (DTRE) Rules and receiving payments from the direct exporters or export houses against a firm contract for supply of goods manufactured by them, are proposed to be subjected to the same rate of withholding tax as is applicable to the direct exporters.

In this way, the suppliers registered in the DTRE would be given status of exporters and would be treated within the presumptive tax regime.

In this regard, Vakil specified that tax rate to be applicable for such suppliers would be 0.75 per cent; 1 per cent and 1.5 per cent and there would be no assessment of these suppliers, but direct applications of above mentioned slabs.

The profit on prize bonds are subject to 7.5 per cent withholding tax, which would be extended in respect of prize on winning a quiz or prize offered by companies for promotion of sales for providing uniform treatment.

Presently, quiz programs and sale promotion schemes are not included within the purview of withholding tax liable to winning schemes, he added.

If a person wins gold or luxurious car, the CBR will determine the market value on the item and deduct 10 per cent withholding tax, Vakil added.

As far as the issuance of exemption certificates to the industrial units/manufacturers is concerned, the relevant provision of law has been amended to allow exemption certificate for a period of one year to the manufacturers, for the import of raw material, plant and machinery for their own use.

However, the facility would be available to only those units who are regularly paying advance tax.

Certain companies could not discharge their corporate asset tax liability within the time schedule prescribed in Corporate Assets Tax Act, 1991 on the basis of assets shown in balance sheet as on June 30, 1992.

The law provide for speedy dispute resolution; it is proposed to allow such taxpayers to discharge their corporate asset tax liability by making payment of principal amount only without payment of penalty and additional tax.

Vakil said that in order to close chapter of Corporate Assets Tax and put an end to past litigation, if any company pays principal amount, there would be no need to pay additional tax and penalty. Usually, the principal amount of Rs 500,000 to Rs one million crosses the figure of Rs 5 million after slapping additional tax and penalties, which ultimately result in litigation.

The Member Direct Taxes added that the payment on account of construction contracts received by a resident person are subject to withholding tax rate at 5 per cent to 6 per cent.

To facilitate Pakistani construction contractors to actively participate in the re-construction activity of Iraq and Afghanistan side by side with international and multinational construction companies, it is proposed to tax them at a reduced rate of 1 per cent, which is applicable to engineering contracting services performed outside Pakistan.

Vakeel added that the CBR would also empower the Appellate Tribunal to stay demand for three months in suitable cases where an appeal is pending, whereas such a stay order would not exceed six months.

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