GOVERNMENT OF
PAKISTAN
CENTRAL
BOARD OF REVENUE
*****
|
No.F.1-167(1)ITP/2001-EC/SAL |
Islamabad,
the July 4, 2001 |
(Income
Tax)
Subject:
FINANCE ORDINANCE, 2001 –
EXPLANATION OF IMPORTANT PROVISIONS RELATING TO INCOME
TAX.
The following are the important amendments made in the Income Tax
Ordinance, 1979, through the Finance Ordinance, 2001:
1.
BONUS
SHARES.
[Sections 2 (20), (24), 12(9), 50(7) and clause (108)
of Part-I of Second Schedule]
Bonus shares issued by a company are deemed to be its income under
section 12(9) of the Income Tax Ordinance, but are exempt upto 30th
June 2001 under clause (108) of Part-I of the Second Schedule to the Ordinance.
These shares are also not taxable in the hands of shareholders because of
specific exclusion from the definition of income given in clause (20) of section
2.
As a result of omission of sub-section (9) of section 12, through the
Finance Ordinance 2001, bonus shares issued by a company, on or after first day
of July, 2001, would not be deemed to be its income. Consequently, sub-section
(7) of section 50 under which tax was payable at the time of issue of bonus
shares, has been omitted. Similarly, clause (108) of Part-I of Second Schedule,
which exempted the companies from the provisions of section 12(9), would also
stand omitted w.e.f. 1st July 2001.
Clauses (2) and (24) of section 20 have also been amended The effect of
amendments in these clauses is that from 1st July 2001, bonus shares
would be taxable in the hands of shareholders and tax would be collectable under
the amended section 50 (6A) @ 10% by the companies from shareholders other than
companies.
2.
FOREIGN
REMITTANCES.
[Section
13(2A)]
A new sub-section (2A) has been introduced in section 13 which envisages
that sources of foreign remittances from abroad through normal banking channel,
which are encashed from a schedule bank and a certificate of encashment is
produced to that effect, would neither be probed nor would addition be made
under section 13 on that account.
3.
FIRST YEAR ALLOWANCE IN
RESPECT OF LEASED PLANT, MACHINERY AND
EQUIPMENT.
[Section 23(1)(a), Rule 5AA of Third
Schedule]
A new rule 5AA has been introduced in the Third Schedule whereby leasing
companies, modarabas and investment banks have been allowed First Year Allowance
(FYA) @ 30% besides 10% normal depreciation on plant, machinery and equipment
leased out by them for the first time on or after 1st July 2001. FYA would not be admissible on motor
cars (not being motor vehicles plying for hire), ships and boats other than
fishing trawlers. Used plant,
machinery and equipment and that on which initial depreciation or depreciation
or FYA or Reinvestment allowance has been allowed in the past, would also not be
eligible for FYA, under the new rule 5AA.
4.
SPECIAL PURPOSE VEHICLES
(SPVs).
[Section 23(1)(via), (7D), Explanation to sub-section
(1) of section 23, Proviso to section 50(4)]
SPVs are companies formed under the Assets Backed Securitization Rules,
1999, framed under the Companies Ordinance, 1984, for the purposes of
securitization of receivable. The following concessions have been allowed to
SPVs:-
(i)
Where payment is made
to a SPV on behalf of the creditor (originator), it shall be treated as payment
to the creditor and would be allowable as a deduction if it was admissible as an
expenditure u/s 23.
(ii)
The financial
cost/discount of securitization of receivables would be deductible as an expense
by the person selling/getting discounted the receivables i.e. Originator. On the other hand, total amount of
receivables securitized would be recognized as an income of the year in which
the securitization takes place.
(iii)
Tax would not be
deductible under section 50(4) from payments made by SPVs to the
Originator.
(iv)
Credit for the tax
deducted by a debtor from payments made on behalf of the creditor to SPV would
be allowed to the creditor/ originator.
5.
INTEREST ACCRUED ON
NON-PERFORMING LOANS CREDITED TO SUSPENSE ACCOUNT BY DEVELOPMENT FINANCE
INSTITUTIONS (DFIs).
[Section 23(1)(xxii)].
A new clause (xxii) has been inserted in section 23(1) allowing as an
expense the interest on non-performing loan credited to suspense account by
development finance institutions in accordance with the Prudential Regulations
for banks and such institutions by the SBP. This is applicable for assessment year
commencing on or after the 1st day of July
2002.
6.
ALLOWANCE FOR INVESTMENT IN
NEW SHARES.
[Section 41A, Clause (d) of Paragraph A1 of the First
Schedule].
[Section 44AA, Clause (d) of Paragraph A1 of the First
Schedule].
A new section 44AA has been introduced in the Income Tax Ordinance. The assessees contributing under a
contract of annuity scheme introduced by an insurance company registered under
the Insurance Ordinance, 2000 and is approved by the Security and Exchange
Commission of Pakistan (SECP), and the main object of the scheme is to make
provision of an annuity in old age would be allowed a rebate in tax. The contribution, in a year, should not
exceed 5% of the income or Rs.50,000 – whichever may be less. The above allowance shall not be allowed
in respect of an annuity contract, which provides:
(a) for
the payment during the life of the assessee of any sums besides the sums payable
as annuity;
(b) for
the annuity payable to the assessee to commence before he attains the age of
sixty years;
(c) that
the annuity shall be capable in whole or in part, of surrender, commutation or
assignment; or
(d) for
payment of the annuity outside Pakistan.
8.
ALLOWANCE FOR MARK UP PAID ON
HOUSING LOANS.
[Section 44AAA, Clause (d) of Paragraph A1 of the First
Schedule].
A new section has been inserted in the Ordinance to allow a rebate at
average rate of tax on any mark up paid by an assessee on a loan sanctioned and
advance on or after 1st July 2001 and which does not exceed
Rs.600,000 and is advanced for the purpose of construction of a new house or
acquisition of a house. The
allowance would be available where such loan is advanced by a scheduled bank
under a house finance scheme approved by the State Bank of Pakistan or advanced
by Government or a local authority or House Building Finance Corporation. The maximum amount eligible for an
allowance under this section is 25% of income or Rs.50,000 – whichever is the
less. Besides, the loan must be
utilized for construction of a new house or acquisition of a house. An allowance under this section would
not be available where an assessee claims a deduction for mark up under clause
(e) or (ee) of sub-section (1) of section 20.
9.
TAX
WITHHOLDING.
[Sub-section (5AAA), (5B), (6A), (7), (7A) & (7G) of section
50]
The following tax withholding provisions have been omitted w.e.f.
1st July 2001.
(i)
Tax withholding on
foreign exchange differential on import of wheat [Section
50(5AAA)];
(ii)
Tax withholding on
encashment of Bearer Certificates and Foreign Exchange Bearer Certificates
[Section 50(5B)];
(iii)
Tax withholding on
bonus or bonus shares [Section 50(7)];
(iv)
Tax withholding on
auction of immovable properties, octroi and toll tax [Section
50(7A)];
(v)
Tax withholding on gas
bills of industrial and commercial consumers [Section
50(7G)];
(vi)
Sub-section (6A) of
section 50 has also been amended to provide for tax withholding @ 10% or face
value of bonus shares by companies issuing bonus or bonus
shares.
10. NOTICE FOR FILING OF
RETURN.
[Section 56]
The explanation to section 56, which was inserted last year, has been
substituted by a proviso.
Consequently, where a return is not filed a notice under section 56 may
be issued only for last five assessment years from the end of the year for which
return of income was due.
11. REVISION OF WEALTH
STATEMENT.
[Section 58].
The facility of revision of wealth statement before assessment by
taxpayers who have filed wealth statement under sub-section (1) of section 58
has been provided.
12. EXTENSION OF SELF-ASSESSMENT SCHEME TO
PUBLIC COMPANIES AND TIME LIMITATION OF ASSESSMENT OF SAS
CASES.
[Section 59(4)].
Section 59 has been amended to extend the facility of self-assessment to
public companies. Further,
assessment in cases qualifying for self-assessment shall be made before the
close of the financial year next following the income year in respect of which a
return of total income has been furnished under section
55.
13. ASSESSMENTS ON THE BASIS OF IDENTICAL
QUESTION OF LAW.
[Section 62C].
This section which was introduced through Finance Ordinance, 2000, has
been omitted.
14. CONVERSION OF PRESUMPTIVE WITHHOLDING
TAXES INTO ADJUSTABLE.
[Section 50(4A), 50(7D), Section 80C(2)(ia) and 80B(2((bb) & (c),
Clause (80A) of Part-I and Clause (10A) of Part-IV of Second
Schedule].
(i)
The tax deducted from
commission and brokerage under section 50(4A) was the final discharge of
recipient’s tax liability. Clause
(ia) of sub-section (2) of section 80C has been amended and from assessment year
2002-2003 the tax deducted under sub-section (4A) of section 50 shall be
adjustable against final tax liability.
The tax withholding rate would, however, remain
10%.
(ii)
The tax withheld from
profit or interest on bonds, certificates, debentures, securities etc. under
sub-section (7D) of section 50 was final discharge of tax liability. It is being converted into adjustable
tax w.e.f. assessment year 2002-2003.
An amendment has accordingly been made in clause (c) of sub-section (2)
of section 80B. The tax on income
from instruments specified in sub-section (7D) is deductible @ 10%.
(iii)
Tax was not deductible
from interest on Term Finance Certificates held by companies and others. As the exemption under clause (80A) of
Part-I of Second Schedule on TFC’s held by individuals, AOP, URF, HUF has been
withdrawn, therefore, tax will be deductible @ 10%. The Companies’ income from TFC’s was
taxable and continues as such but as in the past no tax is deductible from
income of TFC’s held by Companies.
15. MINIMUM TAX ON TURNOVER UNDER SECTION
80D ON INDIVIDUALS, AOPs, URFs and HUF etc.
[Section 80D].
Individuals, AOP’s, URF and HUF have been excluded from the purview of
minimum tax leviable under section 80D.
16. QUALIFICATIONS OF AN ACCOUNTANT MEMBER
OF ITAT.
[Section 133].
Section 133 has been amended to restore the original qualifications
prescribed for appointment as Member of the Income Tax Appellate Tribunal.
17. REVISION AGAINST ORDERS OF COMMISSIONER
APPEALS.
[Section 138(1) & (5)].
Section 138 has been amended and no revision applications can now be
filed against the orders of Appellate Additional Commissioner or Commissioner
Income Tax (Appeals) after 30th June 2001. The pending applications would be
disposed of by Regional Commissioners.
The sub-section (5) of section 138 has also been amended and the words
“Regional Commissioner” occurring for the first time have been replaced by the
words “Central Board of Revenue” to remove the error.
18. FILING OF STATEMENT UNDER SECTION 143B
BY GOODS TRANSPORT MOTOR VEHICLE OWNERS AND INDUSTRIAL UNDERTAKINGS LOCATED IN
EXPORT PROCESSING ZONES (EPZs).
[Section 143B].
Tax withheld from goods transport motor vehicles owners (section 80BB)
and industrial undertakings located in EPZs (Section 80CD) was made final
discharge of tax liability through Finance Ordinance, 2000. Like other taxpayers
covered by presumptive tax, these taxpayers would also file statement under
section 143B. An appropriate
amendment has been made in the said section.
19. NEW RATES OF INCOME TAX FOR INDIVIDUALS,
AOPs, URFs AND HUF.
[Paragraph A1 of Part-I of First Schedule].
New income tax rates for individuals, AOPs, URFs and UHF have been
provided which are applicable from assessment year commencing on or after
1st day of July 2002.
Salient features are as under:-
(a)
A uniform basic
threshold of Rs.60,000 has been provided both for salaried and non-salaried
taxpayers;
(b)
Basic exemption of
Rs.60,000 would not be available to taxpayers who have income from agriculture
and are entitled to Rs.80,000 basic exemption under Provincial Agricultural
Income Tax. A separate rate
structure has been provided for such persons in clause (a) of the proviso to
newly introduced paragraph A1 in Part-I of the First
Schedule;
(c)
The reduction in tax
liability to salaried taxpayers as contained in paragraphs (1) and (2) of clause
(1B) of Part-III of the Second Schedule continues to be available to
them;
(d)
The 50% reduction in
tax liability for assessees who are 65 years of age or above and their income
does not exceed Rs.200,000, also continues to be available to
them;
(e)
Relief in tax under
sections 41A, 44AA and 44AAA introduced through Finance Ordinance 2001, would be
available at the average rate of tax;
(f)
The new rates for
purposes of assessment would be applicable from assessment year commencing
2002-03. However, for purposes of
tax withholding under sub-section (1) of section 50 in respect of salaried
taxpayers, these rates would be applicable from 1st July 2001.
20. HIGHER TAX WITHHOLDING RATES FOR
CONTRACTORS AND SUPPLIERS NOT HOLDING NATIONAL TAX NUMBER
(NTN).
[Section 50(4), paragraphs CCC and E, of Part-I of the First
Schedule].
Contractors and suppliers who do not hold NTN would be liable to higher
tax withholding rates. The
following are the rates for such non-NTN holders:-
(i) where
the value of
seven per cent
contract does not
of such income.
exceed thirty million
rupees.
(ii)
where the value of
eight per cent
contract exceeds thirty
of such income.
million rupees.
(iii)
payments on
five per cent of
account of supplies.
such income.
The tax deducted at the above rates would constitute
the final discharge of tax liability from assessment year 2002-03 onwards.
21. NEW TAX WITHHOLDING RATES ON ELECTRICITY
BILLS.
[Section 50(7E), Paragraph K, sub-para (a) of Part-I of First
Schedule].
The tax withholding rate on electricity bills in the case of commercial
consumers have been revised effective 1st day of July 2001. Following are the new rates:-
(i)
does not exceed Rs.400
Rs.
60
(ii)
exceeds Rs.400 but does not exceed Rs.600
Rs.
80
(iii)
exceeds Rs.600 but does not exceed Rs.800
Rs. 100
(iv)
exceeds Rs.800 but does not exceed Rs.1000
Rs. 160
(v)
exceeds Rs.1000 but does not exceed Rs.1500
Rs. 300
(vi)
exceeds Rs.1500 but does not exceed Rs.3000
Rs. 450
(vii)
exceeds Rs.3000 but does not exceed Rs.4500
Rs. 600
(viii)
exceeds Rs.4500 but does not exceed Rs.6000
Rs. 750
(ix)
exceeds Rs.6000.
Rs.1000;
22. ABOLITION OF
SURCHARGES.
[Paragraphs B and C of Part-III of First Schedule].
The surcharge of Rs.300 payable by assessees qualifying under the
self-assessment scheme and 10% surcharge payable by non-salaried individuals and
AOPs, URF, HUF where income exceeds Rs.100,000, would not be applicable from
assessment year 2002-03. Similarly,
companies would also not be liable to 5% surcharge from assessment year
2002-03.
23. NEW INCOME TAX RATES FOR
COMPANIES.
[Paragraph A, sub-paragraph (4) of Part-V of First
Schedule].
A sub-paragraph (4) has been added to paragraph A of Part-V of First
Schedule, to provide new rates for companies, which would be applicable from
assessment year 2002-03. The
following are tax rates for assessment year 2002-03 and
onwards:
(a) in
case of a
banking company
50%
(b) in
case of a
public company other
than a banking company
35%
(c) in
case of any
other company
45%.
24. TAXATION OF DIVIDEND INCOME OF PUBLIC
COMPANIES CARRYING ON INSURANCE BUSINESS.
[Paragraph D of Part-V of First Schedule].
At present, dividend income of public companies carrying on insurance
business, is taxable @ 33%.
Paragraph D of Part-V of First Schedule has been amended to provide for
taxation of dividend income of such insurance companies @ 5%, as applicable to
other public companies from the assessment year 2002-2003.
25. AMENDMENTS IN SECOND SCHEDULE OF THE
INCOME TAX ORDINANCE, 1979.
[Part-I, Part-III and Part-IV of the Second
Schedule].
(A) The
following amendments have been made in Part-I of Second Schedule to the
Ordinance.
(i)
A new clause (7F) has been introduced in Part-I of the Second Schedule,
by virtue of which the salary of Pakistani seafarers working on foreign ships,
which is chargeable to tax, would be exempt from tax in Pakistan, if it is
remitted through normal banking channel within two months of the end of the
relevant income year;
(ii)
Flying allowance
received by pilots, navigators and engineers employed by Civil Aviation
Authority has been exempted from tax through an amendment in clause
(39B);
(iii)
National Savings Schemes: Clauses
(77A), (77D) & (77E) have been amended. As a result, income from investments
made on or after 1st July 2001 in Defence Saving Certificates,
Special Saving Certificates and Accounts, National/Post Office Savings Banks
Account and mahana amadani accounts would be taxable. The income from such investments would
be subject to tax withholding u/s 50(2) at the reduced rate of 10% if the
investment exceeds Rs.300,000. The
tax so withheld would be adjustable against final tax liability of a
taxpayer. Such taxpayers whose
income exceeds Rs.60,000 from all sources would be liable to file returns of
income and entitled to claim adjustment for tax withheld against their final tax
liability.
At present, tax is deductable @ 10% from Regular
Income Certificates and Accounts and mahana amadani accounts where monthly
contribution exceeds Rs.1000 per month.
This rate of deduction would continue irrespective of the quantum of
investment. The tax deducted upto
30th June 2001 would be the final discharge of tax liability whereas
tax deducted from 1st July 2001 onwards would be adjustable against
final tax liability.
The income from investments made upto 30th
June 2001 in Defence Savings Certificates, Special Savings Certificates/
Accounts, mahana amadani account – where monthly contribution does not exceed
Rs.1000, and in Post Office Saving Bank or National Saving Centres under
National Saving Schemes, would remain exempt and shall not be subject to tax
withholding.
A new clause (5AA) has been inserted in Part-II of
the Second Schedule to provide for aforementioned tax withholding under section
50(2) at a reduced rate of 10%.
(iv)
Income or profit from
deposits made from 1st July 2001 onward in Post Office Saving
Accounts or National Savings Account under National Saving Schemes has also been
made taxable at normal tax rates.
Tax withholding @ 10% would be effective if such deposits exceeds
Rs.300,000 [Clause (77D) refers].
(v)
Under clause (80A)
income derived by individuals from Term Finance Certificates is exempt. Such exemption would not be available
from assessment year 2002-03. Tax
would, therefore, be deductible from 1st July 2001 onwards under
section 50(7D) @ 10% from interest on TFCs, which is paid to individuals. The tax so deducted would be adjustable
against the final tax liability from assessment year
2002-03.
It may be mentioned that income of companies from
TFC’s continues to be taxable but not liable to tax withholding (in respect of
TFCs issued on or after 1st July 1999).
(vi)
Exemption available to
donations made to the Prime Minister’s Fund for National Debt Retirement and
National Self Reliance Fund has been withdrawn.
(vii)
As explained in
paragraph I, tax exemption under clause (108) in respect of bonus shares issued
by a company has been withdrawn as sub-section (9) of section 12 has been
omitted.
(viii)
Exemption on capital
gains under clause (116), which was to lapse after assessment year 2001-02, has
been extended for another three years i.e. upto assessment year
2004-05.
(ix)
Clause (171) has been
withdrawn.
(B)
In Part-III of the
Second Schedule, clause (1B) has been amended. Consequently, reduction in tax liability
equal to 80% if income does not exceed Rs.60,000, would not apply in respect of
tax withholding under section 50(1) from 1st July 2001 and for
assessment for assessment year 2002-03 in other cases, because of increase in
taxable income threshold.
(C)
In Part-IV of the
Second Schedule, the following amendments have been made:-
(i)
Clause (10B) has been
substituted to provide exemption from tax withholding under section 50(7D) in
respect of profit or interest on TFCs held by a company (issued on or after
1st day of July 1999).
(ii)
Clause (32D), regarding
exemption from minimum tax under section 80D to individuals, AOPs, URFs and HUF
qualifying under SAS has been omitted w.e.f. 1st July 2001 as a
corresponding amendment to this effect has been made in section
80D.
(iii)
A new clause (32G), has
been introduced which exempts Corporate and Industrial Restructuring Corporation
(CIRC) from the levy of minimum tax under section 80D.
(iv)
Pak Arab Refinery
limited, like other refineries, has been exempted from application of the
provision of section 50(4) in respect of supply of its products [clause
(33A)].
(v)
Sub-clause (i) of
clause (59) has been amended to provide that the provisions of section 12(9A)
shall not be applicable in respect of a company listed on stock exchange which
distributes cash dividend equal to 40% of its after-tax-profit or 50% of the
paid up capital – whichever is less.
26. AMENDMENTS IN THIRD SCHEDULE OF THE
INCOME TAX ORDINANCE, 1979.
[Third Schedule].
The following amendments have been made in the Third
Schedule:-
(a)
normal depreciation
rate on personal computer hardware has been enhanced from 10% to
30%;
(b)
tourism, hotel and
tourism related projects, housing and construction and agriculture projects have
been placed under entry C of the table in rule 5A. Consequently, the rate of First Year
Allowance in respect of such projects would be 65% plus 10% normal
depreciation.
(c)
A new rule 5AA has been
inserted to allow First Year Allowance (FYA) @ 30% in respect of any plant,
machinery and equipment (other than motor vehicles not plying for hire and ships
not being fishing trawlers) given on lease on or after 1st day of
July 2000, by an Investment Bank or a Modaraba or a Leasing Company. The new
rule also defines an investment bank.
(d)
The cost of a motor
vehicle for the purposes of depreciation, as contained in rule 8, has been
enhanced from Rs.600,000 to Rs.750,000.
27. AMENDMENTS IN PART-I OF FIFTH SCHEDULE
OF THE INCOME TAX ORDINANCE, 1979.
[Part-I of the Fifth Schedule].
Rules 2 and 4 of Part-I of the Fifth Schedule have been amended. As a result, “royalty” would be allowed
as an admissible expense to on-shore petroleum exploration and production
undertakings in respect of income year commencing on or after 1st
July 2001. In addition, the rate of
tax in respect of on-shore companies would be reduced from 50% to 40% in respect
of assessment year 2002-03 onwards.
(ABDUL
HAMID)
SECRETARY
(IT POLICY)
Ph:9203993