Circular No. 13 of 2002

(Income Tax)

Subject: FINANCE ORDINANCE, 2002 – EXPLANATION OF IMPORTANT PROVISIONS RELATING TO AMENDMENT IN INCOME TAX ORDINANCE, 1979.

Income Tax 0rdinance, 2001 has come into force w.e.f. July 1, 2002 vide notification No. S.R.O. 381(I)/2002 dated June 15, 2002. However, sub-sections (1) and (2) of section 239 of the said Ordinance provide that the provisions of Income Tax 0rdinance, 1979, as amended vide Finance 0rdinance 2002, shall continue to apply in the matters of and relating to computation of total income and tax payable in respect of any income earned on or before June 30, 2002 as if the Income Tax 0rdinance, 2001 has not come into force.

2. The provisions of Income Tax Ordinance, 1979 shall also continue to apply in respect of imposition or charge of penalty or additional tax on or before June 30, 2002. However, such proceedings shall be initiated by the Commissioner or any authority designated by the Commissioner under Income Tax Ordinance, 2001. Tax rates applicable for the relevant years would also continue to apply.

3. Various amendments introduced in the Income Tax 0rdinance, 1979 through Finance 0rdinance 2002 are explained as under:-

a. EXCLUSION OF “BONUS SHARES” FROM “INCOME”.

The “ bonus shares “ have been excluded from the definition of “Income” as well as “dividend” by amending sub-sections (20) and (24) of section 2 of the said Ordinance. Consequential amendment in section 50(6A) regarding collection of tax on “bonus shares” has also been made. Further, clause (63) of Part-IV of Second Schedule has also been omitted. Accordingly, declaration, issue or payment of bonus shares issued after July 1, 2002 shall neither be income in the hands of recipient nor in the hands of the domestic company.

b. PAYMENT TO HBFC TOWARDS APPRECIATION IN VALUE OF HOUSE.

Payment to house Building Finance Corporation towards appreciation in the value of house/property has been allowed as an admissible expenditure by amending section 20(1)(ee).

c. CARRY FORWARD OF BUSINESS LOSSES IN CASE OF PRIVATIZATION OF FINANCIAL SECTOR UNITS.

The banking companies wholly owned by the Federal Government as on June 1, 2002 and approved by the State Bank of Pakistan were allowed to carry forward their losses relating to assessment year commencing on first day of July 1995 and ending on 30^th day of June 2001 for a period of six years. Through a proviso added to in section 35 the period of carry forward of losses has been extended upto ten years.

d. INCREASE IN MARK-UP LIMIT FOR HOUSING LOAN.

At present mark-up paid by a taxpayer on a loan, not exceeding Rs.600,000, to 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, upto Rs.50,000 or 25% of the income, whichever is the less, is entitled for tax rebate. The ceiling on loan obtained for the said purpose on or after July 1^st 2002 has been removed and admissible mark-up limit of Rs.50,000 for tax rebate has been raised to Rs.100,000.

e. ANNUITY PAYMENT TO BE MADE TAX DEDUCTIBLE.

The existing limit of contribution to an annuity scheme of an insurance company approved by Securities and Exchange Commission of Pakistan, at Rs.50,000 or 5% of the total income, whichever is the less, has been raised to Rs.100,000 or 5% of the income, whichever is the less.

f. POWERS OF TAX AUTHORITIES TO MODIFY ORDERS.

A new section 62BB has been added which provides that where a question of law, in the case of assessee, has been decided by the High Court or the Income Tax Appellate Tribunal, on or after July 1, 2002, the DCIT may follow the said decision on similar issue at the time of framing any pending assessment of such assessee notwithstanding the fact that a reference application against the order of ITAT or an appeal against the order of the High Court has been filed. In case, the decision followed by the DCIT is reversed or modified, the assessment framed on the basis of earlier decision of the High Court or Appellate Tribunal, can be modified accordingly within one year from the date of receipt of the final decision.

g. COMMISSION OR DISCOUNT TO PETROL PUMP OPERATORS.

The amount paid as commission or discount to the petrol pump operators on sale of petroleum products was subject to withholding tax and covered by presumptive tax regime. From first day of July 2002 such payments are no longer subject to withholding tax w.e.f. first day of July 2002.

h. CHANGE OF “COLLECTOR” BY “DISTRICT OFFICER (REVENUE)”.

Due to the change in designation and authority under District Devolution Plan, the word “Collector” appearing in sections 92, 93 and 94 has been substituted by the word “ District Officer (Revenue)”.

i. MANDATORY PAYMENT OF TAX FOR FILING OF FIRST APPEAL.

In order to obviate the hardships of the taxpayers the provision relating to mandatory payment of tax for filing of first appeal has been modified. The said payment, in respect of appeals filed on or after first day of July 2002 would be 15% of the additional tax demand raised or 20% of the tax assessed in immediately preceding tax year – whichever is the less. Where a person has not been assessed to tax for that tax year, then thirty percent of the amount of tax paid under section 54 of the Income Tax Ordinance, 1979 or section 137 of Income Tax Ordinance, 2001 (i.e. payment alongwith the return) is to be paid for the aforesaid purpose.

j. OMISSION OF TAX REBATE.

The following income tax rebates have been omitted through Finance Ordinance, 2002:-

i. Tax rebate @ 5% available to a person other than a company, enjoying income from business, in respect of issuance of cash memos for each transaction of sale or receipt [clause (2) of Para A of Part-IV of First Schedule of Income Tax Ordinance, 1979].

ii. Income tax rebate to an assessee deriving income from import of goods or whole sale business for furnishing complete details of sales indicating the amount of sales and the claims and full address of the purchaser [clause (2C) of Para A of Part-IV of First Schedule of Income Tax Ordinance, 1979].

iii. Rebate in respect of personal expenditure on legal services [clause (2D) of Para A of Part-IV of First Schedule of Income Tax Ordinance, 1979].

iv. Rebate in respect of expenditure incurred on education of dependent children [clause (2E) of Para A of Part-IV of First Schedule of Income Tax Ordinance, 1979].

The aforesaid rebate would, therefore, not be available in respect of tax year 2003.

k. WITHDRAWAL OF EXEMPTIONS:

(A) The following exemptions, pertaining to salaried taxpayers, have been withdrawn from tax year 2003 i.e. w.e.f. first day of July 2002:-

Clause Contents

i. (29) Any income of an officer representing the sum received by him as entertainment allowance admissible to him under the Ministry of Finance and Provincial coordination (Finance Division) OM No.F.2(2)IMP-I/77 dated April 29, 1977.

ii. (29A) Any income of an officer representing the sum received by him as entertainment allowance admissible to him under the Ministry of Finance (Finance Division) OM No.F.1(1)IMP/83 dated 18-8-1983.

iii. (30) Any income of an officer of the Pakistan Armed Forces representing the sum received as entertainment allowance admissible to him under the Ministry of Defence OM No.716/(B)/77 dated April 29, 1977.

iv. (31) Any income of an officer representing the sum received by him as entertainment allowance admissible to him under the Cabinet Secretariat (Establishment Division) OM No.18(2)/78-CV dated 13-7-1978.

v. (32) Any income of an officer representing the sum received by him as Senior Post Allowance admissible to him under the Ministry of Finance, Planning and Development (Finance Division) OM No.F.1(36)Gaz-Imp-I/73 dated 18-8-1973.

vi. (33) Any income of an officer representing the sum received by him as Senior Post Allowance admissible to him under the Ministry of Finance and Provincial Coordination (Finance Division) OM No.F.1(1)IMP-I/77 dated April 28, 1977.

vii. (33B) Any income of an employee of a recognize University of Pakistan representing the sums received by him as senior post allowance and entertainment allowance admissible to him under the terms and condition of his service.

viii. (54A)(a) Any sum paid for purpose of meeting the charges for gas, water and electricity to the Federal and Provincial Ministers.

ix. (54B)(b) The value of gas, water and electricity provided free of charge to the Federal and Provincial Ministers.

(B) The exemptions contained in clauses (7C), (16), (38A), (41), (47), (79A), (79B), (80A), (86A), (91A), (91B), (102C), (102F), (116B), (117A), (121A), (121B), (126), (126A), (126B), (126D), (128), (129B),(135), (141) and (167C) of Part-I of Second Schedule to the Income Tax Ordinance, 1979 have been withdrawn w.e.f. first day of July 2002. The deletion of aforesaid clauses is prospective in nature and henceforth would not be available for fiscal year 2002-03 relevant to tax year 2003.

(C) Clauses (77C), (77D) and (77E) have been omitted. However, profit arising on deposits in National Savings Schemes as on 30^th June 2001 would continue to be exempt from tax. The corresponding provisions have been provided in clause (7) of Part-II of Second Schedule to the Income Tax Ordinance, 2001.

(D) Clauses (110), (111), (111A) and (118) have been omitted.

(E) Clauses (125D) and (125E) of Part-I of Second Schedule to the Income Tax Ordinance, 1979 have also been omitted. However, the benefit contained in these clauses would remain available to the relevant taxpayers for the un-expired period.

(F) Clauses (121C), (134), (140A), (140B) and (183) of Part-I of Second Schedule to the Income Tax Ordinance, 1979 have been omitted from the Ordinance having already expired.

(G) Clause (63) of Part-IV of Second Schedule to the Income Tax Ordinance, 1979 has been omitted because “bonus shares” are no more includable in “income”.

(MUKHTAR AHMAD GONDAL)

CHIEF (DIRECT TAX POLICY)

Ph:9201742