ISLAMABAD (July 13 2003) : The Central Board of Revenue (CBR) has made it mandatory for all concerned to declare their income even if it is exempted from tax and no tax is payable on the same, says an income tax circular here on Saturday.
The income tax authorities have explained 52 major budgetary amendments made in the Income Tax Ordinance 2001 and incorporated the same in Finance Act, 2003 through Circular 7 of 2003 to make things easy for the taxpayer while interpreting the relevant amendment.
To avoid complications in making big transactions, sub-section 2 of section 71 has been amended to covert currencies into Pak rupees at the State Bank of Pakistan (SBP) rate on the day of conversion instead of mid-exchange rate.
As per circular, the CBR has exempted from tax the salary income earned by overseas Pakistanis during the tax year they went abroad.
The CBR has amended First Schedule of the 2001 Ordinance whereby co-operative societies would be liable to pay tax at the rate applicable to a public company or an individual, whichever is beneficial to the taxpayer.
For the valuation of certain capital assets for capital gain purposes, amendment has been made to determine the cost of capital assets acquired under a gift, bequest or will; by succession, inheritance or devolution; on distribution of assets on dissolution of association of person; or distribution of assets on liquidation of a company to be taken as fair market value of the assets on the date of its transfer or acquisition by the person.
Furthermore, tax credit pertaining to investment made in the purchase of new shares of a public limited company listed on a stock exchange or shares acquired from the Privatisation Commission (PC) would be admissible to individuals only.
Such investment made by companies would not be entitled to tax credit.
Following is the text of the Circular issued here on Saturday:
The important amendments made in the Income Tax Ordinance 2001 and Schedules thereto, through the Finance Act, 2003 are explained as under:
1 FISCAL INCENTIVES FOR MERGER OF BANKING AND NON-BANKING FINANCIAL INSTITUTIONS.
The Finance Ordinance 2002 provided the following incentives on merger of Banking Companies and Non-Banking Companies:
(a) admissibility of expenses on merger/amalgamation;
(b) continued availability of unabsorbed depreciation;
(c) transfer/carry forward of losses of merged entities; and
(d) admissibility of different tax rates for banking and non-banking operations.
Limitation up to 30th June, 2004 has now been provided by amending section 2(1A) of the Income Tax Ordinance 2001 to avail the aforesaid incentives.
2 DEFINITION OF INCOME.
In order to remove anomalies in the earlier definition of “income”, sub-clause (29) of section 2 has been amended to include any amount treated as income under any provisions of Income Tax Ordinance 2001, in the definition of “income”.
3 CHARGE OF ADVANCE TAX ON INCOME SUBJECTED TO TAX WITHHOLDING UNDER THE ORDINANCE.
Sub-section (6) has been inserted in section 4 to authorise deduction at source or collection or payment in advance under the provision of the Ordinance.
The provision is identical to sub-section (2) of section 9 of the repealed Ordinance.
4 DEFINITION OF PERMANENT ESTABLISHMENT:
The restricted definition of Permanent Establishment has been expanded to include premises for soliciting orders, warehouse, permanent sales exhibition or sales outlet; an agricultural pastoral or forestry property. Similarly, the limitation of 90 days period within any twelve months period to constitute P.E. for furnishing of services, including consultancy services, by any person through employees or other persons engaged for such services, has been withdrawn.
5 EXPANDING THE DEFINITION OF “PUBLIC MONEY”:
Certain companies having investment of foreign government or a foreign company controlled and regulated by a foreign government attract the status of private limited company.
The definition of “public company” as given in clause (47) of section 2 has been expanded to include such companies as well.
A company in which shares are held by a foreign Government, or a foreign company owned by a foreign Government shall now be subjected to tax at the rate applicable to a public company instead of a private company.
6 PROPERTY INCOME:
The text of subsection (1) of section 15 of Income Tax Ordinance, 2001 would imply that advance received by a taxpayer would be chargeable to tax in the year of receipt.
Subsection (1) has been amended to remove the anomaly whereby income from property including advance receipt would be charged to tax in the tax year to which the income pertain.
Sub-section (3A) has also been added in section 15 by virtue of which rent received in respect of provision of amenities, utilities or any other service connected with the renting of the building shall be chargeable to tax under the head “Income from Other Sources” instead of “Income from Property”.
Corresponding amendment to this effect has also been made in section 39. The amendment is applicable prospectively.
7 PROFIT OR INTEREST PAID ON MORTGAGE OF PROPERTY MADE AS AN ADMISSIBLE EXPENSE AGAINST PROPERTY INCOME:
Profit or interest paid on mortgage of property or other capital charge would be an allowable deduction against income from the said property as was under the repealed ordinance. Section 17 has, therefore, accordingly been amended.
8 TREATMENT OF LEASE RENTALS AS “INCOME FROM BUSINESS” FOR ADMISSIBILITY OF DEPRECIATION ON LEASED ASSETS:
A new sub-section (3) has been added in section 18 to treat any amount paid or payable by a person in connection with the lease of an asset by a Scheduled Bank or an Investment bank or DFI or a Modaraba or a Leasing Company as income of the lessor under the head “income from Business”.
9 DIVIDEND INCOME ON DISTRIBUTION BY MUTUAL FUNDS RECEIVED BY A BANKING COMPANY OR A NON-BANKING FINANCE COMPANY TO BE TREATED AS INCOME FROM BANKING BUSINESS.
The income earned by a financial institution from any source is liable to tax at normal tax rates. Dividend on distribution of profits is charged at concessional rates.
To obviate any misuse of the provision by the financial sector, a new sub-section (4) has been added in section 18 whereby dividend income of the banking company or non-banking finance company would be chargeable to tax at normal rates under the head “Income from Business”.
It would be applicable for tax year 2003 and onwards.
10 ALLOWING INITIAL ALLOWANCE ON ACCOUNT OF DEPRECIATION TO SECOND HAND PLANT AND MACHINERY USED FOR THE FIRST TIME IN PAKISTAN:
To encourage investment in industry, the facility of initial allowance on account of depreciation to plant and machinery imported second hand and not earlier used in Pakistan, has been provided by amending sub-section (5) of section 23 of the Income Tax Ordinance 2001.
Amended provisions would be applicable in respect of tax year 2003 onwards.
11 EXTENDING THE SCOPE OF SECTION 24:
Second paragraph of sub-section (11) of section 24 has been amended to include “trade mark, scientific or technical knowledge, computer software, motion picture film, export quotas, franchise, license, intellectual property” in the definition of “intangible”.
Expense relating to these items shall be amortised in accordance with provision of section 24.
12 SCIENTIFIC RESEARCH EXPENDITURE:
Sub-section (1) of section 26 has been amended to restrict the admissibility of scientific research expenditure in respect of research, which has been undertaken in Pakistan.
13 PROVIDING 3 % DEDUCTION ON PROFIT FROM CONSUMER LENDING BY BANKING COMPANIES AS RESERVE FOR ADJUSTMENT AGAINST BAD DEBTS:
A new section 29 has been inserted in the Ordinance to allow 3 percent of total income from consumer loans as deduction against the said income to banking companies for creation of a reserve for the purpose of setting off any future bad debt pertaining to consumer banking loans.
However, if the bad debt, arising on consumer loans, actually written off exceeds the said reserve, it will not be adjustable against any other income of the bank but shall be carried forward for adjustment against such reserve for the next year.
14 EXTENDING ALLOWABILITY OF PROFIT ON NON-PERFORMING DEBTS ON ACCRUAL BASIS AS A DEDUCTION TO NON-BANKING FINANCE COMPANIES:
Section 30 has been amended to allow deduction of profit on non-performing debts on accrual basis to non-banking finance companies like that of banking companies.
Amended provisions are applicable to the tax year 2004 onwards.
15 TREATING A BENEFIT RECEIVED IN LIEU OF A TRADING LIABILITY AS INCOME:
A new sub-section (5A) has been inserted in section 34 to treat any benefit derived by a taxpayer in respect of a trading liability allowed as a deduction as income chargeable to tax under the head “Income from Business” for the tax year in which such benefit is received.
16 VALUATION OF CERTAIN CAPITAL ASSETS FOR CAPITAL GAIN PURPOSES:
Sub-Section (4A) to Section 37 has been inserted to determine the cost of capital assets acquired under a gift, bequest or will; by succession, inheritance or devolution; on distribution of assets on dissolution of association of persons; or distribution of assets on liquidation of a company to be taken as fair market value of the asset on the date of its transfer or acquisition by the person.
17 ALLOWING TAXATION OF ACCUMULATED PROFITS ON MATURITY OF NATIONAL SAVING CERTIFICATES AT REDUCED RATE:
At present profits are taxed in the year of receipt which caused hardship especially in the case of National Saving Certificates etc where accumulated profits on maturity were to be taxed attracting invariably higher rate of tax.
A new sub-section (4A) to section 39 has been added in the income Tax Ordinance 2001 whereby the taxpayer may opt to get the Profit on debt in respect of investment made in National Savings Deposit Certificates including Defence Savings Certificate on or after July 1, 2001 to be taxed at the rate of tax applicable to the tax year to which the profit relates or when such profit accrued.
18 WITHHOLDING TAX ON PRIZE WINNING IN QUIZ AND PRIZES RELATING TO PROMOTION OF SALES:
Section 39(1)(h) has been amended to include prize on winning a quiz or prize offered for promotion of sales to be chargeable to tax under the head “Income from Other Sources”.
Where the prize is not paid in cash amendment has been made in section 68, by adding sub-section (3) providing for the determination of fair market value of the prize by the Commissioner.
As per amended section 156 the tax withheld at the rate of 10 percent on the amount of prize on winning a quiz or prize offered for promotion of sales or fair market value thereof as the case may, would constitute the final discharge of tax liability.
19 ALLOWING TAX-FREE SALARY TO A CITIZEN OF PAKISTAN GOING ABROAD:
Sub-section (2) to section 51 has been added to exempt from tax the salary income earned by Pakistanis outside Pakistan during the tax year they went abroad for the said tax year.
20 INCOME EXEMPT UNDER SECOND SCHEDULE TO BE DECLARED IN THE RETURN OF INCOME:
Sub-Section (1A) to section 53 has been inserted whereby it has been made mandatory to declare income even if it is exempt from tax and no tax is payable on the same.
21 PROTECTION OF EXEMPTIONS GIVEN IN OTHER LAWS:
Section 54 of the Income Tax Ordinance 2001 has been amendment to protect the exemption from income tax available in other-than-income-tax statutes of the Government prior to promulgation of Income Tax Ordinance, 2001.
Henceforth exemption from tax, taxation on reduced rate, reduction in tax liability or exemption from operation of a particular provision of the Ordinance shall be available only if it is provided in the Income Tax Ordinance 2001 which has an overriding affect.
22 LOSS OF EXEMPT INDUSTRIAL UNDERTAKINGS TO BE CARRIED FORWARD TO POST EXEMPTION PERIOD:
Sub-Section (2) of Section 55 of the Income Tax Ordinance 2001 has been omitted.
The business loss sustained during the exempt period has, therefore, been made adjustable against income of the post-exemption period of industrial undertakings.
The limitation period for carry forward of loss as contained in section 57 would continue to be applicable.
23 LIMITATION PERIOD FOR SET OFF AND CARRY FORWARD OF LOSSES RELATING TO AOPs:
Section 59A has been added to determine the limitation period for set off and carry forward of losses in respect of AOP and its members.
24 ALLOWING TAX REBATE ON DONATIONS TO A UNIVERSITY OR HOSPITAL OR RELIEF FUND ESTABLISHED BY GOVERNMENT:
Tax credit was available on donation paid to a non-profit organisation.
Provision has been made for tax credit on donations made on or after 1.07.2003 to any Board of Education, any University in Pakistan established under Federal or a Provincial Act or any educational institution, hospital or relief fund established or run in Pakistan by Federal Government or a Provincial Government or a local authority.
For this purpose sub-section (1) of section 61 has accordingly been amended.
25 WITHDRAWAL OF TAX CREDIT ON PURCHASE OF NEW SHARES OF PUBLIC COMPANIES AND PRIVATISATION COMMISSION BY COMPANIES:
Section 62 of Income Tax Ordinance, 2001 has been amended.
Tax credit in respect of investment made in the purchase of new shares of a public company listed on a stock exchange in Pakistan or the shares from acquired the Privatisation Commission of Pakistan would be admissible to individuals only.
Such investment made by companies would not be entitled to tax credit.
26 INCREASING LIMIT FOR CONTRIBUTION TOWARDS ANNUITY SCHEME OF INSURANCE COMPANIES:
Section 63 of the Income Tax Ordinance 2001 has been amended to enhance the limit for contribution or premium paid under a contract of annuity scheme approved by Securities and Exchange Commission of Pakistan of an insurance company duly registered under the Insurance Ordinance, 2000 (XXXIX of 2000) from Rs 100,000 to Rs 200,000 or 10 per cent of the income – whichever is less.
Enhanced limit would be applicable in respect of tax year 2003 and onwards.
27 ENHANCING THE LIMIT OF INTEREST PAID ON HOUSING LOANS FOR TAX CREDIT:
The scope of the provision of section 64 has been widened to include all loans by scheduled banks or non-banking financial institutions (NBFIs) regulated by Securities and Exchange Commission of Pakistan.
Advance by Government or a local authority or HBFC are already included for the purpose of tax credit in respect of any profit or share in rent, where the loan is utilised for construction or acquisition of a house.
To encourage and facilitate housing the limit for tax credit has also been enhanced to Rs 500,000 or 40 per cent of the income – whichever is less.
Enhanced limit would be applicable in respect of tax year commencing on or after July 1, 2003.
28 CONVERSION OF OTHER CURRENCIES INTO PAK RUPEES:
Sub-Section (2) of Section 71 has been amended to convert other currencies into Pak Rupees at the SBP rate on the day of conversion instead of mid-exchange rate which was a complicated and impracticable method of conversion especially for taxpayers whose transactions run into thousands.
29 DEFINITION OF RESIDENT INDIVIDUAL:
An individual was resident for a tax year if he was present in Pakistan for one hundred and eighty two days or more, in aggregate, in a tax year, or ninety days in a year and three hundred and sixty five days in aggregate in the four years preceding the tax year.
For the purposes of determining the residential status of an individual, law has been simplified whereby the stay in Pakistan for one hundred and eighty days in aggregate only in the relevant tax year would be considered.
Clause (b) of section 82 has therefore been omitted.
30 TREATMENT OF SHARE INCOME FROM AOP OF A COMPANY AS A MEMBER OF AOPs:
Where tax is paid by the AOPs wherein the company is a member; the share income is to be added to other income of the company.
Since the AOP has already paid tax on its income, a credit for the tax indirectly paid by the company on its share in AOP should be admissible.
Accordingly section 88A has been added in the Income Tax Ordinance 2001 laying down the formula for allowing tax credit to the company.
31 DETERMINATION OF TAX LIABILITY IN CASES OF CHANGE IN THE CONSTITUTION OF AOPs AND SUCCESSION TO BUSINESS:
Section 98A,98B and 98C have been inserted in Part VA of Chapter V to provide for procedure to determine tax liability on change in constitution of an association of persons, discontinuation of business or dissolution of an association persons and succession to business otherwise than on death.
32 RETURN OF INCOME:
An amendment in sub-section (2) of section 114 has been made to state that return is to be filed on prescribed form along with applicable prescribed statements/annexes and filling in all the relevant columns with declaration of maintenance of books of accounts.
In case of complete returns only an assessment under section 120 of the Income Tax Ordinance 2001 shall be taken to have been made.
Where returns are not complete as provided in section 114(2), the taxpayers would be provided an opportunity through a notice by the Commissioner to remove the deficiencies specified in the notice.
Non-compliance of the notice would render the return invalid, meaning thereby that a complete return shall be required to be filed.
In case the requirements of the notice are met, the assessment in such return shall be taken to have been made on the date it was originally filed.
33 REVISION OF WEALTH STATEMENT IN INCOME TAX ORDINANCE BEFORE ASSESSMENT:
A new sub-section (3) has been added to section 116 to provide for furnishing of a revised wealth statement by a taxpayer to rectify any omission or wrong statement contained in the original wealth statement but before an assessment under sub-section (1) or sub-section (4) of section 122 is made, and without prejudice to any liability incurred by him under any other provision of the Ordinance 2001.
34 BEST JUDGEMENT ASSESSMENT:
Section 121 has been substituted stipulating the reasons, procedure and limitation for making best judgement assessments.
35 ISSUES RAISED IN AUDIT TO BE CONFRONTED BEFORE MAKING AMENDED ASSESSMENT:
It has been made obligatory on the Commissioner to obtain taxpayer's explanation on all the issues raised in any audit before passing an order amending the assessment under section 122 of the Income Tax Ordinance, 2001.
36 AMENDMENT OF ASSESSMENT:
Sub-section (5A) has been inserted to section 122. It empowers the Commissioner to amend an assessment order if the said order is erroneous in so far as it is prejudicial to the interest of the revenue.
Such action, however, is to be completed within the time limit specified in sub-section (2) or sub-section (4) of section 122.
However, where an assessment order was earlier passed under section 65 of the repealed Ordinance, the limitation contained in the section shall neither be curtailed nor extended by the provisions of sub-section (2) or sub-section (4) of section 122.
37 SUO-MOTU REVISION OF ASSESSMENT ORDER BY THE COMMISSIONER:
Section 122A has been inserted to empower the Commissioner to suo-motu call for assessment record of any proceedings under the Ordinance or the repealed Ordinance and revise an order passed by any taxation officers other than Commissioner (Appeal).
The revision, however, shall not be prejudicial to the taxpayer.
38 STAY OF TAX DEMAND BY THE APPELLATE TRIBUNAL:
The Appellate Tribunal has been empowered to grant stay of recovery of tax demand for a period of three months.
However, stay of demand shall not exceed a period of six months in aggregate.
Accordingly, sub-section (5) in section 131 has been added for this purpose.
39 ALLOWING INDIVIDUALS TO PAY ADVANCE TAX ON LAST ASSESSED INCOME:
A new sub-section (4A) has been inserted in section 147 of the income Tax Ordinance 2001, by virtue of which, individuals are required to pay advance tax where latest assessed income is rupees Rs 200,000 or more excluding income chargeable under the head capital gain, salary income, property income, dividend income and income under presumptive tax regime.
For determination of quarterly liability of advance tax, an easy formula has also been provided.
40 CERTIFICATE OF EXEMPTION FROM WITHHOLDING TAX ON PROFIT ON GOVERNMENT SECURITIES:
Under the repealed Ordinance 1979, recipients of profit on investment in securities issued by the Federal Government, Provincial Government or a local authority was subjected to withholding tax at the rate of 20 per cent of the amount of profit on debt.
Income Tax Ordinance 2001 excluded “financial institutions” for the withholding provision.
It being anomalous, amendment has been made in section 151(1)(c) to omit the words “other than financial institutions”.
Now all recipients of aforesaid profit are liable to withholding tax.
However, a taxpayer whose income is not likely to be chargeable to tax under the Ordinance may obtain a certificate of exemption from the Commissioner who has been so empowered by inserting sub-section (1A) to section 159 of Income Tax Ordinance, 2001.
41 PAYMENT TO A CONTRACTOR FOR CONSTRUCTION MATERIAL SUPPLIED BY GOVERNMENT OR LOCAL AUTHORITY:
The payment made by the Federal Government, a Provincial Government or a local authority to a contractor for construction material supplied to the contractor by the government or the local authority, as the case may be, was not subjected to withholding tax through circular instructions issued by CBR.
A specific provision under clause (ba) to sub-section (5) of section 153 has been provided to exclude such payments, from deduction of tax.
42 TAX PAID ON LOAN TREATED AS DIVIDEND BY A SHAREHOLDER TO BE REFUNDED ON REPAYMENT OF LOAN:
A loan made by a private company to a shareholder is treated as dividend in the hands of the shareholder and taxed accordingly.
Under the repealed Ordinance, on repayment of loan tax paid on this account was refunded to the said shareholders.<br>
Similar provisions have been made in the Income Tax Ordinance by inserting sub-section (1A) to section 170 on repayment of loan treated as dividend under section 2(19).
43 INTRODUCING THE CONCEPT OF ADVANCE RULING:
On persistent demand of non-residents and in line with international practice the concept of advance ruling has been introduced through insertion of new section 206A in the Income Tax Ordinance, 2001.
The object is to provide to non-resident companies an advance ruling on disclosures of full facts in the matters on which advance ruling is requested.
Such advance rulings would be binding on the Commissioner.
44 ALLOWING THE COMMISSIONER TO RECTIFY ORDERS PASSED UNDER THE REPEALED ORDINANCE:
The Commissioner has been empowered to rectify mistake apparent from record where an order under the repealed ordinance was passed by the Deputy Commissioner of Income Tax or the Income Tax Panels.
For this purpose sub-section (1A) has been inserted in section 221 restricting powers to rectify the order on account of a mistake apparent from the record within the period specified in the said section and requirement of issuing a notice where rectification is to result in increase of assessment, reduction in refund or otherwise applies adversely to the taxpayer.
45 PROVIDING INCOME TAX RATE FOR CO-OPERATIVE SOCIETY OR FINANCE SOCIETY:
A new paragraph has been added in Division II of Part-I of First Schedule whereby Co-operative Societies shall be liable to pay tax at the rate applicable to a public company or an individual, whichever is beneficial to the taxpayer.
46 ALLOWING EQUAL CONCESSION TO THE SHAREHOLDERS RECEIVING DIVIDENDS FROM NON-RESIDENT COMPANIES:
At present, reduced tax rate on receipt of dividend from resident company is 5per cent in the case of a public or insurance company and 10per cent in any other case.
The dividend received from a non-resident company is chargeable to tax at normal tax rates.
In order to provide equal tax treatment, Division III of Part – I of First Schedule to income Tax Ordinance, 2001 has been amended. From tax year commencing on or after July 1, 2003 the same rate of tax to dividends received from a resident and a non-resident company would be applicable.
It would continue to be the final discharge of liability.
47 WITHDRAWAL OF EXEMPTIONS:
The government is following a conscious policy of reducing the number of exemptions, rebates and concessions available and the Second Schedule.
The following exemptions, rebates and concessions have been omitted with effect from tax year 2004.
PART – I
Clauses (1), (33), (34), (36), (41), (50), (87), (108), (109), (115), (121), (129), (134) and (137);
PART – II
Clause (4), and
PART – IV
Clauses (1), (4), (6), (9), (43B), (43C), (43D),(43E), (48), (49), (50) and (51).
48 RELAXATION OF CONDITION IN ALLOWING EXEMPTION TO SPORTS ACTIVITIES MANAGED BY SPORTS BOARDS:
Amendment in clause (98) of Part-I of the Second Schedule to the Income Tax Ordinance, 2001 has been made to extend its application to any Board or other organisation established in Pakistan for the purposes of controlling, regulating or encouraging major games and sports recognised by the Government.
49 EXEMPTION OF CAPITAL GAINS ON SHARES OF LISTED COMPANIES:
Due to change of the concept of “assessment year” by “tax year” in Income Tax Ordinance, 2001, clause (110) of Part – I of Second Schedule has accordingly been amended. Now exemption to capital gains would be available up to tax year 2005.
50 EXPLAINING THE SCOPE OF COMPUTER SOFTWARE RELATED SERVICES FOR EXPORT:
Income from export of computer software and related services developed in Pakistan is exempt from tax up to June 30, 2016.
An explanation to clause (133) of Part I of the Second Schedule has been added to explain “IT related services” and “IT enabled services”.
51 TAX INCENTIVE FOR CONSTRUCTION CONTRACTS EXECUTED OUTSIDE PAKISTAN BY A RESIDENT PERSON:
Income from engineering contracting services rendered outside Pakistan is charged to tax at a reduced rate of 1 per cent of the gross receipts provided such receipts are brought into Pakistan through normal banking channel.
The same facility has been extended to construction contracts executed outside Pakistan whereby gross receipts brought into Pakistan through normal banking channel would be taxed at reduced rate of 1 per cent of the gross receipt as final discharge of liability.
52 Amendments relating to withholding provisions of the Income Tax Ordinance 2001 brought through Finance Act 2003 have been separately explained through circular No. 06 of 2003 issued vide C. No. 1(5)WHT/97 dated July 09, 2003.