SUBJECT: DEDUCTION OF TAX UNDER SECTION 50(5AA) OF THE INCOME TAX ORDINANCE, 1979, BY BANKS AFFECTING  PAYMENT AGAINST STANDARD PURCHASE ORDER.

According to the provisions of sub-section (5AA) inserted in section 50 of the Income Tax Ordinance, 1979, through Finance Act, 1999, every banking company has to deduct tax at the prescribed rates, at the time of realization of proceeds on account of supply of goods to an exporter under an inland back to back letter of credit. Vide Board's Circular No.24 of 1999, based upon State Bank of Pakistan's BPRD Circular No.24 dated 28.06.1999 and No.31 dated 13.08.1999, the aforesaid provisions were also extended to cases where payment is made by direct exporter through crossed cheques to indirect exporters against Standard Purchase Order in the format prescribed by State Bank of Pakistan. Income tax so deducted has been made full and final discharge of tax liability of the person supplying the goods to the exporter. Withholding tax deductible on supplies under section 50(4) also constitutes full and final discharge of tax liability.

2. It has been brought to the notice of the Board that in certain cases of suppliers of goods to exporter, tax is being withheld/deducted under sub-section 50(4) and 50(5AA). The exporter of the goods deducts tax under section 50(4) @ 3.5% out of the payment for supplies of such goods and the banking company deducts tax at the prescribed rates, at the time of realization of proceeds on account of supply of goods to an exporter under an inland back to back letter of credit/Standard Purchase Order.

3. The above situation is likely to create hardship for such suppliers of goods. To remove this hardship, the Commissioner of Income Tax may issue exemption certificates under clause (b) of

Sub-section (4) of section 50 if tax is being deducted at the prescribed rate under section 50(5AA) and is being deposited promptly. However, in case irregularities are found in collection/deposit of tax under section 50(5AA), the exemption certificate issued may be cancelled.

(Pervez Akhtar)

Secretary (Withholding Taxes)

Tel: 9201448