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Finance Act, 2018 in Income Tax Ordinance, 2001 amendments

Tax rates of both salaried as well as non-salaried individuals clubbed, revised

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M J Hayat

LAHORE: The Ministry of Finace Thursday amended Finance Act, 2018 in
the Income Tax Ordinance, 2001 where some significant amendments have
been under taken.

Prior to the Finance Act, 2018 the minimum threshold for taxable
income was Rs.400,000/- for individuals and tax rates for non-salaried
and salaried individuals were separately provided .

Through the Finance Act, 2018, tax rates of both salaried as well as
non-salaried individuals have been clubbed and revised by providing
rates for individuals (salaried as well as non-salaried).

After this table a proviso has been added which states that where the
taxable income exceeds Rs.800,0001- but the tax payable is less than
Rs. 20001-, a minimum tax of Rs.20001- would be payable. Hence,
Rs.20001- would be payable on income from Rs.800,0001- to
Rs.1,240,000/-. The proviso has been added, because the tax at the
rate of 5% on income exceeding Rs.1,200,000/- up to Rs.1,240,0001-
would have been less than Rs.20001-.

Prior to the Finance Act, 2018 the tax rates applicable to Association
of Persons (AOP’s) and non-salaried individuals were clubbed together
and comprised seven progressive tax slabs.

A “small company” is defined in sub-section (59A) of section 2 of the
Ordinance. A tax rate of 25% was applicable to a small company prior
to the Finance Act, 2018. Through the Finance Act, 2018, the rate of
tax for a small company has also been reduced by 1 % each year (for
five years).

Super Tax was levied through the Finance Act, 2015 @ 4% on the income
of banking companies and @ 3% on the income of persons other than
banking companies. Rate of 3% was only applicable if the income was
above Rs. 500 million in a year. Through the Finance Act, 2018, Super
Tax has been omitted.

Through Finance Act 2017, section 5A was amended and a tax @ 7.5% was
imposed on public companies if the said companies failed to distribute
40% of their after tax profits. Through the Finance Act, 2018 the said
rate of 7.5% has been reduced to 5% and limit of 40% has been reduced
to 20%. However, such distribution has to be made only through cash as
the words “bonus shares” have also been omitted.

Prior to the Finance Act, 2018, as per clause (c) of sub-section (1)
of section 79, no gain or loss was taken to arise on disposal by
reason of gift of an asset. Further, as per clause (a) of sub-section
(4A) of section 37, where the capital asset became a property of a
person under a gift, the fair market value of the asset, on the date
of its transfer or acquisition by the person was treated as the cost
of the asset. Hence, capital gain on sale of asset could be avoided by
using conduit of gift in otherwise market based salelpurchase
transactions between unrelated parties. In order to plug this loophole
having potential of being used as conduit of tax evasion, amendment
has been made in clause (c) of sub-section (1) of section (79) as well
as in clause (a) of subsection (4A) of section 37 whereby
non-recognition of capital gain is restricted to gain arising on
disposal of an asset as a result of gift to a relative only as defined
in subsection (5) of section 85, which, in relation to an individual
encompasses: (i) an ancestor, a descendent of any of the grandparents
or an adopted child of such individual or hislher spouse. (ii) the
spouse of the individual or the spouse of any person delineated in
clause (i) above. However, capital gain or loss shall be recognized
and subsequently arise in case of disposal of an asset by way of gift
to a person who is not a relative as defined in subsection (5) of
section 85 of the Ordinance.
Prior to the Finance Act, 2018, sub-section (4) of section 57 and
sub-section (5) of section 59A provided that where business loss
included deductions allowed under sections 22, 23, 23A, 23B and 24
that had not been set off against income, the amount not set off shall
be added to the deductions allowed under those sections in the
following tax year, and so on until completely set off. Through the
Finance Act, 2018, sub-section (4) of section 57 and sub-section (5)
of section 59A have been substituted and now the loss attributable to
deductions allowed under sections 22, 23, 23A, 23B and 24 that has not
been set off against income shall be set off against 50 percent of 4
the person’s balance income from business after setting off the
business loss under sub-section (1) of section 57. However, the
condition of set off against 50% shall not apply if the taxable income
for the year is less than Rs.10 million.

Advance tax is due on the dates specified in sub-sections (5), (5A)
and (5B) ot section 147. In case of non-payment, sub-section (7)
states that the provisions of the Ordinance shall apply to any advance
tax due under section 147 as if the amount due were tax due under an
assessment order. In this regard, advance tax was due on the dates
specified for in sub-sections (5), (5A) or (58). However, sub-section
(2) of section 137 provided that where any tax was payable under an
assessment order, a notice in the prescribed form shall be sewed upon
the taxpayer specifying the amount payable and thereupon the sum so
specified was to be paid within thirty days from the date of sewice of
the notice. In order to ensure that advance tax is tax due on the
dates mentioned in section 147, a proviso has been added in
sub-section (2) of section 137 providing that the due date for payment
of tax payable under sub-section (7) of section 147 shall be the date
specified in sub-sections (5) or (5A) or the first proviso to
sub-section (5B) of section 147. Secondly, in the case of companies
and association of persons, advance tax due for a quarter is computed
as per formula given in sub-section (4) of section 147. In cases where
taxpayers fail to provide turnover for the quarter or turnover for the
quarter is not known on the due date for payment of advance tax, it
was not possible to compute advance tax liability under sub-section
(4) on the due date for payment of advance tax.

Prior to the Finance Act, 2018 under sub-section (7) of section 148,
advance tax on imports was final tax for such importers where the
imported goods were sold in the same condition in which these were
imported. Through the Finance Act, 2018, tax required to be collected
from commercial importers where goods are sold in the same condition
as these were when imported, has been made minimum tax. However, the
minimum tax shall be 5% of the import value as increased by customs
duty, sales tax and federal excise duty.

As per section 156A, every person selling petroleum products to a
petrol pump operator is required to deduct tax from the commission or
discount allowed to the operator at the rate of 12% of the amount of
payment for filers and 17.5% for non-filers. Through the Finance Act,
2018, a new section 236HA has been inserted which states that every
person selling petroleum products to a petrol pump operator or
distributor, where such operator or distributor is not allowed a
commission or discount, shall collect tax on ex-depot sale price of
such products @ 0.5% for filers and 1% for non-filers. Hence, where
the petrol pump operator is allowed a commission or discount, only tax
under section 156A shall be collected and tax under section 236HA
shall not be collected. In case the petrol pump operator or
distributor is not allowed commission or discount, tax under section
156A shall not be collected but tax under section 236HA shall be
collected. Tax deducted under the newly inserted section is a final
tax.

Credit, debit and prepaid cards are being used as a mode to pay for
foreign travel, lodging, shopping etc and for online shopping from
merchants outside Pakistan. Through the Finance Act, 2018, a new
section 236Y has been inserted in the Income Tax Ordinance, 2001 which
requires every banking company to collect advance tax at the time of
transfer of any sum remitted outside Pakistan on behalf of a person
who has completed a debit card or credit card or prepaid card
transaction with a person outside Pakistan.

about an increase in the number of return filers a new section 227C
has been inserted through the Finance Act, 2018 whereby applications
for booking, registration or purchase of a new locally manufactured
motor vehicle or for the first registration of an imported vehicle
shall not be accepted or processed by any vehicle registering
authority or a manufacturer of a motor vehicle unless the person is a
filer as defined in section 2(23A) of the Ordinance.

A major initiative to correct the valuation of real estate for the
purpose of taxation has been taken through the Finance Act 2018,
whereby Government has introduced a new section 230F to the Income Tax
Ordinance 2001. Sub-section (1) of Section 230F of the Ordinance
provides for the establishment of a new Directorate General of
Immovable property (DG-IP).

In terms of proviso to sub-section (5) of section 114 of the
Ordinance, notice for furnishing of a return of income under section
114(4) of the Income Tax Ordinance, 2001 can be issued for one or more
of the last ten completed tax years to a person who has not filed
return of income for any of the last five tax years. However, prior to
the Finance Act, 2018, in case of failure to file return in response
to notice issued in such a case, best judgment assessment could only
be issued within five years of the end of tax year to which it
related. In this way, though notice for filing of return could be
issued for the last ten completed years, in case of non-filing of
returns, best judgment assessment could only be made for the last five
completed tax years due to the time limitation stipulated in
sub-section (3) of section 121 of the Ordinance. In order to remove
this anomaly, a proviso has been added in sub-section (3) of section
121 whereby a best judgement assessment can be made within two years
from the end of the tax year in instances where notice calling for
furnishing of return of income is issued in respect of one or more of
the last ten completed tax years in terms of proviso to sub-section
(5) of section 114 of the Ordinance.

The concept of Alternative Dispute Resolution was introduced through
the Finance Act, 2004 by inserting a new section 134A in the Income
Tax Ordinance, 2001. The objective was to provide an alternate channel
for expeditious settlement of disputes between FBR and taxpayers and
to reduce the pendency of cases at various appellate forums.

As per sub-section (1) of section 216 of the Income Tax Ordinance,
2001 public servants are barred from disclosing information contained
in tax returnslstatementsl accounts as well as documents furnished,
evidences given and affidavits or depositions made during the course
of proceedings under the Ordinance (except proceedings relating to
offences and prosecutions). In addition, any record related to
assessment or recovery proceedings under the Ordinance is also to be
kept c 13 certain exceptions have been provided in sub-section (3) of
section 216 of the lncome Tax Ordinance, 2001 where information can be
disclosed to specified persons and organizations.

A resident individual or an AOP being original allottee of shares or
sukuks is entitled to tax credit under section 62 of the lncome Tax
Ordinance, 2001 upon acquiring new shares offered by a public company
listed on a stock exchange in Pakistan or acquiring sukuks offered by
a public company listed and traded on a stock exchange in Pakistan.
Moreover, a resident individual or an AOP deriving income from salary
or business can also avail such tax credit upon payment of life
insurance premium to a life insurance company registered by SECP under
the Insurance Ordinance, 2000.

The Federal Board of Revenue is empowered to select persons for audit
of their lncome Tax affairs through random or parametric computer
ballot under section 214C of the lncome Tax Ordinance, 2001.
Commissioners also have the mandate to select taxpayers for audit of
their lncome Tax Affairs under section 177 of the lncome Tax
Ordinance, 2001 after recording reasons in writing for the same.
Moreover, the powers of a Commissioner to select taxpayers for audit
of their lncome Tax Affairs under section 177 of the Ordinance are
independent of the powers exercised by the Federal Board of Revenue
with respect to selection of taxpayers for audit of their lncome Tax
affairs through random or parametric computer ballot under section
214C of the lncome Tax Ordinance, 2001.

The Federal Board of Revenue has espoused the policy of increasing the
cost of doing business for non-filers by prescribing higher rates of
withholding tax for non-filers 15 viz-a-viz filers under various
withholding tax provisions.

In terms of section 2361 of the Ordinance, a person preparing a fee
voucher or challan was obliged to collecffcharge advance tax @ 5% from
a person on the amount of fee paid to an educational institution such
as schools, colleges, universities, tuition centers etc. However, such
advance tax under section 2361 of the Ordinance was not to be
collected in instances where annual fee was upto Rs.200,0001- and in
the case of a person who is a non-resident, subject to the furnishing
of various documentation as enunciated in sub-section (6) of section
2361 of the Ordinance.

Prior to the Finance Act, 2018 tax on import of coal under section 148
of the lncome Tax Ordinance,2001 was collected @ 5.5% from companies
and industrial undertakings and @ 6% from other persons (in the case
of filers) and tax was collected @ 8% from companies and industrial
undertakings and 9% from othe~ersons (in the case of non-filers).
Through the Finance Act, 2018, the rate of tax under section 148 on
import of coal has been reduced to 4% for filers and 6% for
non-filers.

Prior to the Finance Act, 2018 only buyers of Liquefied Natural Gas
(LNG) designated on behalf of the government of Pakistan were entitled
to reduced rate of collection of tax at the import stage under section
148 of the Ordinance @ 1% for filers and 1.5% for non-filers. However,
in order to provide a level playing field for all importers of LNG and
to ensure non-discriminatory treatment necessary amendment has been
made through the Finance Act, 2018 whereby from 1st July, 2018 onwards
tax at the import stage under section 148 of the Ordinance shall be
collected @ 1% from filers and @ 1.5% from non-filers from all
importers of LNG whether nor not designated by the government.

Prior to the Finance Act, 2018 every banking company, in terms of
section 236P of the Income Tax Ordinance, 2001 was obliged to collect
advance adjustable tax @ 0.6% from non-filers upon sale of instruments
such as demand draft, pay order, special deposit receipt, cash deposit
receipt, short term deposit receipt, call deposit receipt, rupee
traveller’s cheques etc in excess of Rs.50,000/- per day.

As per section 233A of the Income Tax Ordinance, 2001 a stock exchange
registered in Pakistan is obliged to collect tax @ 0.02% from its
members upon the purchase and sale of shares in lieu of tax on
commission earned by such members.

Section 140 of the Ordinance enables a Commissioner to recover
outstanding tax due by a taxpayer from persons holding money on behalf
of the taxpayer.

Prior to the Finance Act, 2018 a withholding agent failing to furnish
a statement as required under section 115,165,165A or 165B of the
lncome Tax Ordinance, 2001 within the due date was liable to pay
penalty of Rs. 2,5001- for each day of default subject to a minimum
penalty of Rs.10,0001- under section 182 of the lncome Tax Ordinance,
2001.

Companies operating trading houses which simultaneously fulfill the
conditions of having paid up capital exceeding Rs. 250 Million, owning
fixed assets exceeding Rs. 300 million at the close of the Tax Year,
maintaining computerized records of imports and sale of goods, having
a system of issuance of 100% cash receipts on sales, presenting their
accounts for audit every year and being registered under the Sales Tax
Act,1990 are entitled to avail a reduced rate of minimum tax @ 0.5% of
turnover under section 113 of the lncome Tax Ordinance, 2001 up to Tax
Year 2019 and 1% thereafter as against the prevalent rate of minimum
tax @ 1.25% introduced through Finance Act, 2017. This facility of
reduced rate of minimum tax @ 0.5% for large trading houses under
clause (57) of Part-IV of the Second Schedule was available up to the
Tax Year 2019 prior to the Finance Act, 2018. In order to promote and
encourage the growth of such enterprises the facility of reduced rate
of minimum tax @ 0.5% in the case of large trading houses has been
extended up to 30th June, 2021 through the Finance Act, 2018.

Various amendments have been introduced through the Finance Act, 2018
regarding international taxation  include: (i) Taxation of digital
economy (ii) Taxation of offshore indirect transfers (iii) Controlled
Foreign Company (CFC) Rules (iv) Strengthening anti-abuse rules (v)
Taking cognizance of unexplained foreign source incomelassets in the
tax year prior to the year of discovery. (vi) Reporting requirements
for offshore income and assets (vii) Rules to restrict artificial
avoidance of status of Permanent Establishment.

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