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A. F. FERGUSON & CO.
FEDERAL BUDGET 2015
This memorandum gives a brief overview of Pakistan economy and significant amendments proposed by the Finance Bill 2015. All changes proposed through the Finance Bill 2015 are effective July 1, 2015.
This memorandum can also be accessed on our website www.pwc.com/pk Table of Contents
Federal Excise Duty
Islamabad Capital Territory
(Tax on Services) Ordinance, 2001

KEY ECONOMIC INDICATORS
Economic Survey 2014-15
FY 14 – 15 FY 13 – 14 Economy has done better than last Inflation has remained all time low in any year in this decade. Foreign substantially on account of increased home remittances, issue of Sukuk, decrease in import bill for oil, GDP growth rate
privatization proceeds and receipt of the tranche from the donors. These Per capita income - US$
factors, inter alia, encouraged State Bank of Pakistan to bring discount rate FDI (July – April)
at all time low of 7%, in the last 42 US$ million
On the other hand, manufacturing and agriculture sectors being principal employment generating sectors have not shown desired improvements. Public debt
Exports have fallen even in value terms. Current year's expected goals in the private sector remained sluggish. Resource mobilization efforts do not seem to be in place in the manner that may lead to a respectable tax-to-GDP ratio of over 15%. Budget deficit -
%age of GDP
These trends would place pressure on employment creation and availability of funds with the Government for social services of education, health, law & order and infrastructure. Foreign direct investment is expected in following years in infrastructure sector by way of China-Pakistan economic Corridor (CPEC). Source: Economic Survey of Pakistan 2014-2015 indicators are heading in positive direction, however, private sector's initiatives by way of contribution in the form of taxes and investments in manufacturing and agriculture sectors have to be accelerated, if national economic objectives of distributional equity, increase in level of employment and economic security cover is to be made available to the people.

BUDGET AT GLANCE
The following table sets out the Key Budget Financials: Rs in
Rs in
Gross revenue receipts Public account receipt – net Provincial share in Federal taxes Net revenue receipts - Current expenditure - Development expenditure - Domestic debts non-bank - Domestic debts banks - Privatization proceeds - Surplus from provinces

WHERE FROM THE RUPEE COMES IN
AND WHERE IT GOES OUT
Domestic debts non-bank Domestic debts banks Customs Duty (5%) and FED (3%) Petroleum levy, Gas Infrastructure Cess & Others Surplus from provinces Borrowings Non-tax revenue Provincial share in Federal taxes Debt servicing Defence Affairs and Services Grants and transfers Subsidies Federal Government expenses including pensions Development expenditure BREAK-UP OF TAX REVENUE
FY 15 – 16
FY 14 – 15
Rs in
Rs in
There is no in the ratio of direct and indirect taxes.  Workers' Welfare Fund A substantial and incremental shift is required to decrease disparity in income and reduce the burden of indirect taxes on common  Federal Excise Duty  Petroleum Levy  Gas Infrastructure Cess  Natural Gas Surcharge EXECUTIVE SUMMARY ON TAX PROPOSALS
Royalties for the use or right of use of A one-time super tax for tax year 2015 has equipment etc. provided by residents will now be been proposed on (i) banking companies; and (ii) subject to final tax regime.
all other taxpayers having income of Rs 500 million or above at the rate of 3 and 4% respectively. This SALES TAX
‘tax' is for the rehabilitation of temporary displaced persons. Incidence will also arise for cases where 1.
The concept of active taxpayers has also financial statements have already been finalized, been introduced for the purposes of sales tax.
such as banking companies.
Amendments not in line with the VAT principles have been introduced in relation to the Undistributed reserves of a public company admissibility of input tax in certain cases.
(other than modaraba and a scheduled bank) have again been proposed to be taxed at the rate of 10% 3.
Sales tax regime in respect of certain items with effect from tax year 2015. All undistributed has been revamped. This process inter alia includes reserves so defined in the law shall be subject to substitution of zero rating with exemption regime this tax if the same are in excess of 100% of paid up and / or introduction of a reduced rate. In particular in the case of both processed and The rate of tax on companies other than unprocessed milk existing status for the levy of banking companies has been reduce to 32% for tax sales tax has been retained, however, the sales tax year 2016 in line with the announcement made by regime for other dairy products like flavoured milk, the Finance Minister in 2013 whereby the rate of yogurt etc. has been substituted with either tax for companies is to be brought to 30% in a exemption or reduced tax rate of 10%.
phased manner over five years (from tax years 2014 FEDERAL EXCISE DUTY
The rate of tax on dividends (other than Federal Excise Duty on aerated beverages and from stock funds) has been increased from 10% to locally produced cigarettes have been enhanced.
12.5% for filers and from 15% to 17.5% for non- filers. Dividend from stock funds shall be taxable at GENERAL
the rate of 15% instead of 12.5%.
A new concept of ‘whistleblower' has been The rates for tax on capital gains have been introduced to reward the persons identifying revised upward. The holding period for taxable concealment or evasion of taxes.
gains has been extended to 48 months.
GAS INFRASTRUCTURE DEVELOPMENT
All income of banking company shall now CESS (GIDC)
be taxable at the rate of 35%. Reduced rate for An Act has been passed by the Parliament which dividend income and capital gains have been has also received Presidential assent for the charge and recovery of GIDC by the Federal Government.
A 0.6% collection of tax has been In the aforesaid Act, special enabling provisions introduced on almost all banking transactions have been placed to recover GIDC levied in the undertaken by a non-filer.
earlier years through various statutes and rules which superior courts had held as ultra vires. The A tax credit has been introduced for newly validity of the present legislation particularly in the established manufacturing companies in relation to context of retrospective application may be tested under the Constitutional provisions. Recoveries in 9. A new concept of audit by a panel consisting respect of past years can only be made from certain inter alia by a firm of Chartered Accountant has specified consumers.
been introduced.
INCOME TAX
INTRODUCTION OF ONE-TIME SUPER
This effectively represents retrospective charge in the cases where financial statements have already been finalised. The right course to settle A one-time super tax for tax year 2015 has been this aspect would be the recovery of super tax in proposed on (i) banking companies; and such cases in the following tax year 2016.
(ii) all other taxpayers having income of Rs 500 million or above. The general rate of TAX ON UNDISTRIBUTED RESERVES
super tax is 3% while the rate of tax for banking companies shall be 4%.
Undistributed reserves of a public company (other than modaraba, scheduled bank and Government-owned companies) have again been As specifically stated in the relevant provision, proposed to be taxed with effect from tax year this ‘tax' is for the rehabilitation of temporary 2015. This effectively represents re-introduction displaced persons.
of similar levy imposed under section 12(9A) of repealed Income Tax Ordinance, 1979 vide The term ‘income' for the purpose of this section Finance Act 1999.
shall be the taxable income under section 9 of the Income Tax Ordinance, 2001 (excluding Such tax is proposed to be payable at the rate of exempt income) and also includes profit on debt, 10% on the whole amount of undistributed dividend, capital gains, brokerage and reserves as are in excess of 100% of paid up commission, even if taxable under the special capital of the company after the distribution of provisions of the Ordinance. In the cases subject cash dividend within six months of the end of to final regime, such income will represent ‘imputable income' as newly defined under section 2(28A) of the Ordinance to mean the A special provision has been introduced that any income which would have resulted in the same cash distribution before the date of filing the tax had the amount not been subjected to final return shall be considered as distribution for tax The term ‘reserves' has been defined in a One time super tax shall also be applicable on sub-section to this provision, however, in case companies engaged in the extraction and this provision is to be retained, the term production of petroleum and mineral deposits if ‘reserves' shall be required to be defined as the such companies are taxable at the rate amount reflected in the financial statements prescribed under the Ordinance not being those prepared under the accounting framework.
subject to tax under the respective overriding Agreements with Government of Pakistan.
This provision in essence levies a tax on entire undistributed accumulated reserves in excess of The ‘income' from profit on debt, dividends and paid up capital. This tax is effectively chargeable brokerage and commission are susceptible to be on reserves that have arisen out of already taxed included separately as well as under the income. When the identical levy was introduced imputable income basis. This matter needs to be under the repealed 1979 Ordinance, similar issues were raised and consequently this tax was effectively related to income for the year and was Super tax is payable for tax year 2015 which not applicable where distribution for the year includes cases having special tax years other was lower of 40% of the profit for the year or than June 30, 2015 such as banking companies, 50% of the paid up capital. This is either an insurance companies, sugar companies, etc.
omission or a serious defect as under the earlier which follows special tax years already ended.
law the minimum threshold of distribution was introduced after realising the aforesaid issues.
This means that the similar mistake has been This amendment has effectively brought into tax repeated which requires immediate redressal.
net long term capital gains which arise on disposal of securities. This policy change The economic rationale of this tax regime is to represents departure of an understanding at the be examined in the context that all accumulated time of introduction of tax on capital gains that reserves in excess of 100% paid up capital will only short term trading gains were intended to effectively be used in the payment of tax if there be taxed under the Income Tax provisions.
is no distribution which may arise for various As identified earlier, a consistent policy regime reasons including non-availability of reserves in is essential for bridging the trust gap between liquid form.
the taxpayers and policymakers.
The other recourse of capitalisation of reserves Rate of tax on capital gains of insurance by way of issue of bonus shares is also not companies for tax year 2016 has been prescribed available as the same are also taxable.
in line with similar income in the hands of other Further, this tax is also payable for tax year 2015 taxpayers as laid down for income covered under which includes cases having special tax year section 37A.
already ended. This effectively represents retrospective charge in the cases where financial Adjustable withholding tax of 14% has also been statements have already been finalised. The introduced on internet services.
preferred option would have been the commencement of this levy from tax year 2016.
The tax slabs for salary income have been revised. The maximum rate of 30% has been REVISION IN TAX RATES
retained, however, the slabs within that structure have been amended which has resulted The rate of tax on companies other than banking in a very minor relief for lower brackets. Similar companies shall be 32% for tax year 2016. This amendments have been made for non-salaried positive policy of reduction of the corporate tax rate is in line with the announcement made by the Finance Minister in 2013 whereby the rate of Minimum tax on income of distributors or tax for companies is to be brought to 30% in a dealers in fertilizers business is proposed to be phased manner over five years (from tax years increased from 0.2% to 0.5%.
2014 to 2018). This step will enhance the confidence amongst the taxpayers for consistent TAX REGIME OF BANKING COMPANIES
application of policy statements.
Dividend income and capital gains for banking The rate of tax on dividends (other than from companies are subject to tax under Seventh stock funds) has been increased from 10% to Schedule at the rate of 10% and 12.5% 12.5% for filers and from 15% to 17.5% for respectively. All other income of banking non-filers. Dividend from stock funds shall be companies are taxable at the rate of 35%.
taxable at the rate of 15% instead of 12.5%.
It is important to note that special regime of The revised status of tax on Capital Gains on rates of tax are applicable in such cases and disposal of ‘securities' under section 37A is banking companies were not extended the proposed to be as under: benefit of the reduction of tax rate from 35% to 30% over the period of 5 years (2014 to 2018) which is otherwise available to all other companies. It is now proposed that the tax Less than 12 months regime for the banking companies will be revised 12 months to less and all incomes including dividend and capital gains shall also be taxable at the rate of 35%.
24 months to less In addition to this, as described earlier, one-time super tax at the rate of 4% shall also be payable More than 48 months by banking companies for tax year 2015.
The provisions relating to attribution of In line with mutual funds and Collective expenses have been omitted as now the whole Investment Schemes, REIT Schemes have also income is taxable at a gross rate of 35%.
been obliged to collect Capital Gains Tax on redemption of securities at the applicable rates.
COLLECTION OF TAX ON BANKING
TRANSACTIONS FROM NON FILERS
FOR
A unique regime for collection of tax on banking transactions has been introduced for persons who are non-filers for tax purposes. Under this A tax credit has been introduced for companies regime almost all banking transactions inter alia to encourage employment generation. Under including sale of instrument like demand draft, this provision, any company engaged in pay order, etc. and transfer of any sum through manufacturing formed between July 1, 2015 to cheque and other similar manners or clearing June 30, 2018 shall be allowed a tax credit of interbank transfer through cheques shall be 1% of tax payable for every 50 employees subject to collection of tax at the rate of 0.6% of registered with EOBI and social security the transaction amount. This provision will only schemes. The maximum tax credit shall, be applicable where the sum total of payments however, not exceed 10% of the tax payable.
for all transactions exceed Rs 50,000 in a day.
This is a positive step in relation to economic The amounts so collected are adjustable against need for employment generation, therefore it is the tax liability if the person files the return of imperative that this regime should also income. On a practical side, the position appears all persons including to be that almost all banking transactions non-corporate taxpayers and persons engaged in undertaken by all persons will be subject to this activities other than manufacturing.
regime of collection of tax except those cases where the person's name is on the list of active Equity demands that this provision should also taxpayers. Validity of this provision will be be applicable to existing taxpayers generating questioned by persons who are otherwise not new employments.
taxable or are exempt under the Federal tax TAX ON PROFIT ON DEBT
REAL ESTATE INVESTMENT TRUSTS
The tax regime for profit on debt derived by resident taxpayers has been revamped.
Henceforth, all profits on debt received from The gain on disposal of immovable property persons who are withholding tax agent for to a REIT scheme is exempt from tax upto section 151 shall be taxed at the slab rates June 30, 2015. This period of exemption is ranging from 10% to 15%. This effectively means proposed to be extended to June 30, 2020 for that except for banking companies which are sale of immovable property to a Developmental taxed under special provisions of Seventh REIT Scheme with the objective of development Schedule, the gross amount of profit on debt and construction of residential buildings.
shall be taxed at the newly prescribed rates.
The taxability of profit on debt in the case of companies (other than banking companies) Developmental REIT Scheme set up by June 30, under this regime needs to be reviewed.
2018 shall be allowed a rebate of 50% for 3 years from June 30, 2018. The aforesaid concession is also required to be extended to the dividend income on REITs which are established or set up before the said date.
FORMATION OF PANEL FOR SPECIAL
Tax (including minimum tax) exemptions have been introduced for the following sectors and A new concept of formation of panel for conducting special audit has been introduced.
Under these provisions, a panel comprising of Manufacture of plant and machinery for two or more persons will be empowered to renewable energy resources; conduct an audit including a forensic audit of income tax affairs of a taxpayer. The Panel shall Operation of warehousing and cold chain consist of an Officer of Inland Revenue or a facilities for agricultural produce; Firm of Chartered Accountant or Cost and Operating Halal meat production; Management Accountant or any other person as directed by the FBR.
Any manufacturing unit set up in the Province of Khyber Pakhtunkhwa; The procedure prescribed envisage that member of the Panel other than Officer of the Inland Transmission line project; and Revenue shall effectively provide the support LNG Terminal owner and operators.
function only. The legal and procedural aspects for conducting such audit shall be undertaken by AGREEMENTS FOR AVOIDANCE OF
the member of the panel being the Officer of DOUBLE TAXATION AND PREVENTION
Inland Revenue.
OF FISCAL EVASION
This process is supposed to overcome practical Enabling provisions have been introduced to and legal difficulties that arose when the process allow Government of Pakistan to enter into of audit by the firms of Accountants was Agreements for Exchange of Information and such allied matters in addition to the existing powers to enter into Agreements for Avoidance STAY
BY
THE
of Double Taxation and Prevention of Fiscal Evasion with other countries.
Currently, the Commissioner (Appeals) is This amendment will empower the government empowered to grant a stay of tax demand in to obtain or render information in respect of an appeal before him for a period of 30 days transactions or activities undertaken in other only. Practical and legal difficulties are being countries or Pakistan respectively.
faced under the present regime as in many cases, appeals are not decided within the said 30 days.
Furthermore, a new section 165B has been In order to address this difficulty, a positive introduced to enable the banks and financial institutions to provide information in relation to Commissioner (Appeals) has been empowered to non-resident persons to FBR that may be grant a stay for a further period of 30 days and is required to be furnished to any other country required to decide the appeal within such under the agreement referred above. It appears extended period.
that the right of seeking information under this section is limited to that required by the other Based on interpretation of Article 199 of the Constitution of Islamic Republic of Pakistan, this implies that the stay shall continue to be These amendments have apparently been operative until the appeal is disposed of.
made to cater for reporting and other requirements introduced in various countries This positive amendment should also be such as US FATCA regulations.
introduced in the parallel provisions laid down in Sales Tax and Federal Excise laws.
UPWARD ESTIMATE FOR ADVANCE
EXEMPTION CERTIFICATES TO NON-
Presently taxpayers, other than banks are not Upto June 30, 2012, the Commissioner Inland mandatorily required to discharge advance tax Revenue was allowed to issue exemption liability to the extent of 90% of the tax payable certificates in cases of residents and permanent based on an estimate before the last instalment establishments (PE) of non-resident companies.
is due. This envisages a possibility of not Through Finance Act, 2012, some withholding discharging the advance tax liability in line with provisions applicable to PEs of non-residents the income earned during that period.
were transposed in section 152 where the entire It is now proposed that advance tax to the extent withholding tax provisions relating to non- of 50% of the estimate if higher than the latest residents were consolidated.
assessed basis is paid by the due date of second instalment for that particular year. The regime In this process, the enabling provisions for the now introduced is in line with that applicable for issue of exemption certificates were missed out.
banking companies in Seventh Schedule.
As a corrective measure, a new sub-section is proposed in section 152 to allow the ON
Commissioner to issue exemption certificates in FEDERAL GOVERNMENT TO ISSUE
eligible cases of non-residents.
SROs FOR TAX EXEMPTIONS AND
MINIMUM TAX ON SERVICES OF
As a policy measure, it is proposed that the A clarificatory as well as explanatory provision discretionary powers of the Federal Government has been introduced in respect of minimum tax and FBR for granting concessions and on services rendered or provided by a company.
exemptions will be eliminated. Now, such Accordingly, in essence there is no change in the actions, if required, can only be undertaken in law. The provisions contained in clause 79 of special cases by way of a decision of the Part IV of the Second Schedule to the Ordinance Economic Coordination Committee of the are proposed to form part of the substantive Federal Cabinet.
provision of the law.
Under sections 148(2) and 159(3), (4) and (5) of This alignment has been undertaken to address the Income Tax Ordinance, 2001 various SROs the matter raised by the Federal Tax have been issued which provide concessions or Ombudsman. That authority had questioned the exemptions on collection of advance tax on right of the Federal Government to allow imports and other withholding tax provisions.
concessions through a notification instead of an enactment by the Parliament. Accordingly, this The Finance Bill proposes to omit sections provision has been proposed to take effect from 148(2) and 159(3), (4) and (5) of the Ordinance.
tax year 2009 being the year in which the The relevance of the SROs already in force prior minimum tax provisions were originally to omission of this section will be ascertained on the basis of principle of prospective application of legal provision.
OPTION FOR NORMAL TAX REGIME
It is considered that retrospective application is The exporters are subject to tax at the rate of 1% not envisaged, however, in order to avoid of export proceeds. This collection of tax is also unnecessary litigation and disputes at field the discharge of final tax liability in respect of levels, it is essential that the protection / savings income from such exports. Under clause 41AA for the substantive provision are introduced.
(inserted by Finance Act, 2012 and omitted by Finance Act, 2014) the exporters were entitled to opt out on a year to year basis from the presumptive tax regime subject to minimum payment of tax.
By way of expressed provision, a right of SELECTION OF RETAILERS FOR AUDIT
irrevocable option to be taxed under normal regime has been re-introduced. The new Retailers registered under the sales tax law shall provision prescribes that the amount deducted be immune from selection of audit if certain at source shall be the minimum tax liability on conditions are fulfilled. Retailers, who are income from such exports. This appears to a one registered under Sales Tax Special Procedure time option as against the year to year basis Rules, 2007 shall not be subject to compulsory prescribed under the earlier law. FBR is and automatic selection for audit of their income suggested to clarify the matter.
tax affairs under section 177 of the Ordinance if:(a) Name of the person appears in the sales tax Since the tax deducted is being treated active taxpayers list; as minimum tax under this provision which (b) Complete return of income has been filed is otherwise equal to minimum tax under within the due date; section 113, therefore, for practical purposes, (c) Tax payable as per return has been paid; benefit shall inter alia accrue only in relation to (d) 2% tax on turnover under section 113 losses (if any) arising from export business, (Minimum Tax) has been paid by a person which could be set off and carried forward registered as retailer who files a return (including the rights available under the group below taxable limit and who, in the relief provisions).
preceding tax year, had either not filed the return or had declared income below taxable COMPUTERISED NATIONAL IDENTITY
CARD (CNIC) NUMBER
(e) 25% higher than last year's tax liability has As a policy measure, the Federal Government had shown its intention to replace the National This regime has been introduced apparently to Tax Number (NTN) with CNIC number which is cater for the cases where compliance to the sales required to be obtained by every Pakistani tax laws were not being made on account of the perceived actions for income tax purposes on the basis of returns filed under the sales tax law.
Through this amendment, it is proposed that in the case of an individual, CNIC number shall Now an effective immunity from audit is replace NTN. The amendment appears to be in available irrespective of the amounts declared line with the aforesaid policy, however, it is for sales tax purposes if the income tax is paid in important to note that CNIC is issued to all excess of 25% of last year's tax liability. This is Pakistani Citizens irrespective of their tax status the introduction of another form of presumptive whereas all NTN holders are required to file a income tax and self-assessment scheme.
return of income. The policy measure appears to be in the right direction however substantive This regime shall be applicable from the date to provisions need to be aligned in relation to the be notified by the FBR.
persons holding CNIC not required to comply with the tax filing and other requirements for PRESUMPTIVE TAX ON PAYMENTS TO
NTN holders.
RESIDENTS FOR CERTAIN ROYALTIES
In practical sense, this amendment also implies A new presumptive tax at the rate of 10% has that henceforth, there is no requirement for an been introduced on payments to a resident individual to obtain an NTN for filing the return person for the use or right to use any industrial, of income. Now, a return of income can be filed commercial or scientific equipment. Presently, with reference to the CNIC of that person. If the such payments to non-residents are subject to objective is limited to this aspect then through final tax regime. Even in such cases of non- this amendment the process of obtaining NTN residents, presumptive tax is not applicable if for filing of return is removed.
the person has a Permanent Establishment in This provision requires to be re-examined in by way of dividend in specie. Withholding under relation to the activities undertaken by certain this provision will be on the amount institutions who are earning income by way of representing the value of asset released from the consideration for the use of equipment, etc.
reserves as per the financial statements.
Presumptive regime for such activities / transactions is not in line with the principle of TAX
BY
taxation especially for companies where such MERCANTILE EXCHANGE LIMITED
activities are supposed to be taxed on net income basis instead of a final tax liability based on gross consideration received. The correct A special regime of taxation has been introduced measure would have been the introduction of for transactions undertaken by Pakistan adjustable withholding regime if there is a Mercantile Exchange Limited.
perception of avoidance of tax on such RATE OF DEFAULT SURCHARGE &
COLLECTION OF TAX ON REMITTANCE
The rate of default surcharge in case of failure to OF EDUCATION RELATED EXPENSES
pay tax deducted or collected has been reduced from 18% to 12%. Similarly, the rate of statutory In line with the tax collection regime for compensation on delayed refund is proposed to payments of education fees to local institutions be reduced from 15% to KIBOR plus 0.5%.
in certain cases, a parallel regime is proposed to be introduced for tax collection at 5% on PAYMENT OF TAX ON DEMAND
adjustable basis for remittance of education expenses abroad.
A positive amendment has been made by reinstating the time period of 30 days instead of Under this provision, the banks, financial 15 days for payment of tax demand pursuant to institutions etc. shall collect tax on payment of educational expenses abroad. This regime has presumably been introduced to collect tax from persons outside the normal tax regime remitting MINIMUM TAX ON LAND DEVELOPERS
education fees abroad through banking channels. This provision is effectively applicable Enabling provisions to collect minimum tax on only where payments are to be made under land developers were introduced through the Foreign Exchange Act 1947.
Finance Act, 2013. Federal Government was supposed to prescribe the rate of tax. Since no rate has so far been prescribed, therefore, Notwithstanding the conceptual validity of the land developers were not subject to minimum provision introduced, for practical purposes tax. Now, a minimum tax is proposed @ 2% of usually in the case of persons outside tax regime, value of land notified by the authorities for payment on that account are generally routed through private foreign currency accounts where in practice, there is no enquiry for income tax purposes in respect of the purpose of remittance FILING OF REVISED RETURNS
made abroad.
The condition of obtaining prior approval from the Commissioner for filing a revised return is DIVIDEND IN SPECIE
proposed to be dispensed with if the revised return is filed within 60 days of filing of the Dividend in specie was not subject to original return.
withholding and the said matter has been decided by the higher courts in favour of taxpayers. It is now proposed that withholding tax provisions will be applicable on distribution TAX ON RESIDENT SHIPPING
TAX DEDUCTION FOR PROFIT ON DEBT
ON HOUSE BUILDING LOANS INSTEAD
OF TAX CREDIT
The presumptive tax regime for resident shipping companies has been revamped.
A special provision has been introduced to allow At present, in case of a loss, the presumptive deduction for profit on debt or share in regime of tax was effectively not applicable.
appreciation of house by an individual on loan Now, such cases will also be subject to from a bank or other such institutions, obtained presumptive tax regime applicable to shipping for the construction of a new house or acquisition of a house. At present, a tax credit is allowed on this account which is now proposed MINIMUM TAX ON TRADING HOUSES
to be removed.
Large trading houses as defined under clause 57 The maximum amount of deduction allowed of Part IV of the Second Schedule are exempt under this provision shall be restricted to 50% of from payment of minimum tax for a period of taxable income or Rs 1 million, whichever is ten years. Disputes emanated in certain cases when the field forces denied exemption of minimum tax on the alleged contention that the INCOME FROM PROPERTY
minimal activity of preparation and sale of bakery items alters the character of entity from An important amendment has been proposed in trading house to a manufacturer. This action has respect of income from property. Expenses now been undone by a clarificatory amendment.
incurred to the extent of 6% of rent chargeable Now, the activity of preparation and sale of wholly and exclusively for the purpose of bakery items to the extent of 2% of total deriving rent are admissible against rental turnover shall not disqualify such companies income. Previously, such expenses were limited from the aforesaid exemption subject to to collection charges only. This amendment has fulfilment of other conditions.
principally brought the taxability of rental income in line with other heads of income.
TAX CREDIT ON INVESTMENT IN
SHARES & LIFE INSURANCE PREMIUM
The monetary threshold for claiming tax credit on investment in shares of public company and life insurance premium is enhanced from Rs 1 million to Rs 1.5 million.
TAX CREDIT ON ENLISTMENT OF
The tax credit on enlistment of companies is proposed to be enhanced from 15% to 20% of tax payable.
SALES TAX
INCREASE IN THE RATE OF FURTHER
The concept of ‘Active Taxpayers' is proposed to be introduced in line with that applicable under Supply of taxable goods to unregistered persons the Income Tax provisions. In the case of was subject to tax @ 18%. Such rate of 18% Income tax, a non-active taxpayer / non-filer is represents 17% being the standard sales tax and inter alia subject to higher rate of withholding 1% as the amount of further tax. Now, the rate of tax. In the case of sales tax, FBR will make rules tax on such supplies is proposed to be increased for restrictions and limitations in respect of to 19% on account of enhancement of further tax such persons which may inter alia include non-availability of input tax.
All registered persons are to be treated as active taxpayers except the following: Following regressive amendments have been made in respect of admissibility of input tax Black listed, blocked or suspended; representing a significant departure from the Fails to file return for 2 consecutive months; (a) Services for which input tax adjustment is Fails to file income tax return by due date; barred under respective provincial sales tax laws will not be allowed as input tax for Fails to file two consecutive monthly or determining the Federal sales tax liability.
annual statements under section 165 of the There is no rationale of relating the Income Tax Ordinance, 2001.
admissibility of input tax on genuine services rendered in relation to supply of goods under the Federal Sales tax law.
Toll manufacturing represents supply of goods (b) Input tax on certain goods and services to be taxable under the Federal Sales tax laws.
identified by the FBR has been declared Provincial revenue authorities have incorrectly inadmissible for the buyer if the supplier has considered the same as being a service rendered not declared the output for the same in the subject to tax by Provincial governments under return. This amendment effectively means respective provincial sales tax laws. This that an eligible input tax shall become amendment has been proposed to reiterate the inadmissible only for the reason that the Federal Government's stance on this matter.
supplier of goods has not declared such supply in his return of sales tax. There is no Toll manufacturing is effectively a part of the rationale for relating these two different whole process of manufacturing of goods aspects with the admissibility of input tax.
undertaken by two persons. An amendment is The items which will fall within this mischief proposed in the definition of supply to will be notified by the FBR.
consolidate the aforesaid status of toll manufacturers as being a supplier of goods for (c) Input tax on import or purchase of agricultural machinery or equipment which Federal sales tax purposes.
is subject to sales tax at 7% under Eighth Schedule shall not be admissible as input tax in respect of supply of goods.
The absurdity of the aforesaid restrictions could SIXTH SCHEDULE - EXEMPTIONS
lead to a challenge for the same under the Import or supply of the following goods is proposed to be exempted: Input tax paid in respect of prefabricated buildings are proposed to be allowed, previously this was not an allowable adjustment.
Aircraft, whether imported or acquired on wet or dry lease It is proposed to introduce prize schemes to Maintenance kits for use in encourage the general public to make purchases trainer aircrafts of PCT headings from registered persons issuing sales tax 8802.2000 and 8802.3000 invoices. Such provisions exist in many other Spare parts for use in aircrafts, jurisdictions and the entitlement to prize is trainer aircrafts or simulators usually made on the basis of lottery where the Machinery, equipment and tools possession of a receipt / invoice of sales tax is an for setting up maintenance, repair eligible criteria.
and overhaul (MRO) workshop by MRO company recognized by Aviation Division Any person having utility bills of Rs 800,000 or Operational tools, machinery, equipment and furniture and more during the last 12 months instead of fixtures on one-time basis for previous limit of Rs 700,000 has been excluded setting up Greenfield airports by a from the definition of cottage industry.
company authorized by Aviation JOINT AND SEVERAL LIABILITY
Aviation simulators imported by In the context of joint and several liability airline company recognized by related provision, onus to prove collusion for Aviation Division avoidance of payment of sales tax shall be on the Local supply of the following goods is proposed TAX
PCT Heading
Raw and pickled hides and skins, wet Input tax adjustment on imports based on blue hides and skins provisional bill of entry or goods declaration under section 81 of the Customs Act, 1969 is now proposed to be allowed.
FIFTH SCHEDULE – ZERO RATING
Bricks (upto June 30, 2018) Supply of locally manufactured plant and Crushed stone (upto June 30, 2018) SRO 397(I)/2001 are proposed to continue to be Items exempted under SRO 880(I)/2007, SRO zero rated under Fifth Schedule.
408(I)/2012 and SRO 760(I)/2012 are proposed to continue to be exempted under Sixth Export of exempted goods by manufacturer shall be zero rated. Accordingly, respective input tax adjustment would be available to such Supplies of marble and granite by manufacturers Following items subject to reduced rate of 5% exempted under SRO 76(I)/2008 are proposed are proposed to be omitted from the Eighth to continue to be exempted under Sixth Schedule subject to conditions of annual turnover of less than Rs 5 million and annual PCT Heading
utility bills not more than Rs 800,000.
Following items imported by Call Items covered under Fifth Schedule to the Centers, Business Processing Customs Act, 1969 now proposed to be Outsourcing facilities duly approved exempted under Sixth Schedule.
by Pakistan Telecommunication Import and supply of equipment under PCT (1) Telephone sets/head sets.
codes 3006.9100, 3926,9050 and 8539.3930 are (2) Cat 5/Cat 6/Power cables proposed to be exempted under Sixth Schedule.
(5) Dedicated telephone exchange system for call centres.
(6) Other digital cell recorders Following items are proposed to be subject to reduced rate of 7%: Proprietary Formwork System for PCT Heading
building/structures of a height of 100 Tillage and seed bed preparation ft and above and its various items/ components consisting of the following, namely:- Seeding or planting equipment (1) Plastic tube.
Irrigation, drainage and agro- (2) Plastic tie slot filters/plugs, chemical application equipment plastic cone.
Harvesting, threshing and storage (3) Standard steel ply panels, Special sized steel ply panels, wedges, tube Post-harvest handling and processing clamps (B-Type & G Type), push/pull & miscellaneous machinery props, brackets (structure), steel soldiers (structure), drop head, Following items are proposed to be subject to standard, prop tic, buard rail post (structure), coupler brace, cantilever reduced rate of 10% instead of 5%: frame, decking beam/Infill beam and doorway angles.
PCT Heading
(4) Lifting Unit (Structure) Machinery and equipment for (5) Bolts, tie bolts, anchor bolt assembly (fastener), anchor screw development of grain handling and storage facilities.
Complete plants for relocated (7) Steel pins, tie wing nut (fastener).
(8) Steel washers, water plate Machinery, equipment and other (9) Adjustable base jack (thread rod initial installation, balancing, with nut and steel plate), adjustable fork head (threaded rod with nut and modernization, replacement or steel channel).
expansion of oil refining (mineral oil, hydro- cracking and other Import and supply of ingredients of poultry and products), petrochemical and cattle feed exempt under SRO 1007(I)/2005 are proposed to be taxed at 5% under Eighth products including fibers and cryogenic facility for ethylene storage and handling.
Reduced rate notified vide the following SALES TAX ON DAIRY PRODUCTS
notifications are proposed to be subject to same reduced rate and conditions under the Eighth In case of both processed and unprocessed milk existing status for the levy of sales tax has been retained, however, the sales tax regime for other SRO 69(I)/2006 @ 16% dairy products like flavoured milk, yogurt etc.
SRO 313(I)/2006 @ 6% has been revamped by way of substitution into SRO 657(I)/2013 @ 5% either exemption or reduced tax rate of 10%.
SRO 572(I)/2014 @ 10% REVAMPING OF SALES TAX REGIME
FOR CERTAIN ITEMS
Sales tax rates under the Ninth Schedule on Sales tax regime for certain items identified in import and/or registration of IMEI by Cellular the Annexure A has been revamped.
Mobile Operators have been doubled.
This revamping inter alia includes substitution of zero rating with the exemption regime and introduction of reduced rate of tax for certain items which were earlier exempt / zero rated. All these aspects have been identified in the Annexure referred above.
ANNEXURE A
Current Law
Poultry feed and Cattle feed ingredients except soyabean meal of PCT heading 2304.0000 and oil-cake of cottonseed falling under PCT heading 2306.1000.
concentrated or containing added sugar or other sweetening matter Processed cheese not grated Directly reduced iron Incinerators of disposal of waste management, motorized sweepers and Current Law
Re-importation of foreign origin goods which were temporarily exported out of Pakistan subject to similar conditions as are envisaged for the purposes of applying zero-rate of customs duty under the Customs Act, Plant, machinery, equipment and specific items used in production of Reclaimed lead, if supplied to recognized manufacturer of lead batteries Oilseeds meant for sowing.
Plant and machinery not manufactured locally and having no compatible local FEDERAL EXCISE DUTY
The rate of duty is proposed to be enhanced Travel by air on socio economic routes
from 9% to 12% of retail price with effect from July 1, 2015.
It has been proposed to exempt excise duty on services provided or rendered in respect of travel LOCALLY PRODUCED CIGARETTES
by air of passengers on socio economic routes.
Duty is currently payable at Rs 500 per Description of and duty on the locally produced cigarettes (PCT heading 24.02) is proposed to be enhanced as under, with effect Socio economic routes are proposed to be from July 1, 2015: redefined as the shortest part of journeys starting from or ending at an airport located in Makran coastal region, FATA, Azad Jammu and Description of goods
Kashmir, Gilgit-Baltistan or Chitral. The phrase "the shortest part of journeys" needs to be Locally produced cigarettes if further clarified to avoid tax disputes.
their on-pack printed retail price exceeds Rs 3,350 per Exemptions available under notification
consolidated in 3rd Schedule
Locally produced cigarettes if The exemptions earlier available in respect of their on-pack printed retail following goods/ services under notification price does not exceed SRO 778(I)/2006, notification SRO 474(I)/ Rs 3,350 per 1,000 cigarettes 2009, notification SRO 802(I)/2009 and 81(I)/2010 are proposed to be incorporated in It appears that average tax incidence would Third Schedule to the Federal Excise Act, 2005 increase from 58% to 63%.
FILTER ROD FOR CIGARETTES
 Services of air travel for Hajj passengers, diplomats and Supernumerary crew; It is proposed to charge duty on filter rod for  White cement (PCT heading 25.23) ; cigarettes (PCT heading 5502.0090), with effect  Motor cars and other motor vehicles from July 1, 2015: principally designed for the transport of persons including station wagons and racing cars of cylinder capacity exceeding 850cc; Description of goods
 Services provided or rendered by banking Filter rod for cigarettes companies and non-banking financial companies in respect of Hajj and Umrah, cheque book, insurance, Musharika and Modaraba financing and utility bill  Advertisement COMMON PROVISIONS RELATING TO FISCAL STATUTES
It is, however, apt to highlight that powers available with the Federal Government to A new concept of ‘whistleblower' is proposed to subject specified goods to ‘lower rate' of tax/ be introduced in income tax, sales tax and duty, available under section 3(2)(b) of ST Act federal excise duty laws. This will empower FBR and section 3(4) of FE Act, have not been to reward persons in addition to its officers who proposed to be made subject to above provide information regarding concealment or evasion of tax/duty, tax fraud, corruption or The relevance of the SROs already in force prior POWERS TO GRANT EXEMPTIONS BY
to omission of relevant provisions will be FBR/ FEDERAL GOVERNMENT
ascertained on the basis of principle of prospective application of legal provision. It is As a positive policy measure, the discretionary considered that retrospective application is not powers of the Federal Government and the FBR envisaged, however, in order to avoid to grant ‘exemptions' from taxes and duties unnecessary litigation and disputes at field level, under all the four fiscal legislations have been it is essential that the protection / savings for the proposed to be abolished. However, in special substantive provision are introduced.
notifications can be issued by the Federal Government subject to approval of Economic AGREEMENTS FOR EXCHANGE OF
Coordination Committee of Cabinet: INFORMATION & DISCLOSURE OF
national security; natural disaster; New provisions are proposed to be introduced in national food security in emergency the income tax, sales tax and federal excise duty laws whereby Federal Government has been empowered for entering into bilateral or interests in situations arising out of multilateral agreements with the provincial abnormal fluctuation in international governments as well as the governments of commodity prices; foreign countries with respect to exchange of information concerning all three levies.
removal of anomalies in taxes; development of backward areas; and Further, in line with the provisions already there in the Income Tax Ordinance, information obtained under such agreements or that in possession of public servants under ST Act and This amendment was introduced recently FE Act have been prescribed to be confidential through Presidential Ordinance. Through the notwithstanding other laws.
Finance Bill, 2015 the contents of the Ordinance have been adopted in the respective taxing MONITORING & TRACKING OF GOODS
Further, it has been proposed that exemptions to By virtue of certain amendments introduced be granted by Federal Government under through Finance Act, 2013, certain provisions these provisions have to be placed before were inserted in sales tax/excise duty law vesting National Assembly (a requirement already FBR with the powers to require specific goods to there in the Income Tax Ordinance) and that be affixed with stamps, banderols, stickers, exemptions would not extend beyond the labels etc. so as to these could be electronically end of financial year in which these are granted.
An amendment is proposed in these provisions whereby ‘barcodes' could also be used as electronic identifiers and FBR to be empowered to prescribe vendors from which such identifiers could be procured at notified prices.
SPECIAL AUDIT PANELS
The provisions relating to conduct of special audit, as described earlier in income tax section of this memorandum has also been placed for sales tax and excise duty purposes.
POWERS OF BOARD OR
COMMISSIONER TO REVIEW THE
ORDER BY SUBORDINATE OFFICERS
Under the section 45A of ST Act and section 35 of FE Act, FBR and Commissioner Inland Revenue are empowered, on a suo moto basis, to examine/call for the record of any proceedings and review an order passed by any of An amendment is proposed in these legal provisions which will effectively enable the FBR to undertake revisionary powers even on the basis of application by the taxpayer in addition to the right of ‘suo moto' action.
Similar amendment is also required in provision relating to revisionary powers of the relevant Commissioner in both Statutes.
ISLAMABAD CAPITAL TERRITORY (TAX ON SERVICES)
ORDINANCE, 2001 (ICTO)
In 2001, certain services were subjected to Sales In order to harmonise the tax regime on services Tax in the four Provinces and Islamabad Capital on national basis, the list of services taxable in Territory (ICT) through respective Ordinances.
ICT has been enlarged. Now the services taxable Since promulgation of ICTO, no addition / under the ICTO are generally in line with the amendment to the list of services taxable in ICT prevalent basis in the three other provinces.
was made although after the 18th amendment, the Provinces whilst reiterating their right to tax services, have expanded their list of taxable services. Furthermore, Sindh, Punjab and KPK have formed their own regulatory bodies to collect the taxes whereas FBR regulates the collection of sales tax on services rendered in Baluchistan and ICT.
CUSTOMS DUTY
TRANSHIPMENT OF GOODS
Minimally utilized concessions are being Under the Customs Act, 1969, transhipment of Socially sensitive concessions are goods is allowed without payment of duty, if goods are transported to other station. It has now been clarified that assessment and payment Remaining concessions are either of duties and other charges in case of withdrawn or continued at enhanced transhipment of goods will be made at the port of destination. Some other procedural aspects have been clarified in this respect.
Through this Budget, being the second phase of implementation of aforesaid policy, some more OFFENCES AND PENALTIES
SROs are expected to be withdrawn, which have not been notified so far. The concession in A new penalty of Rs 50,000 is being introduced respect of following sectors has been withdrawn for a person contravening the requirement of by virtue of amendment in the Fifth Schedule, placement of invoice and packing list inside the resulting that regular rate is applicable thereon: import container or consignment. Furthermore, offence relating to untrue declaration and illegal removal or concealment of goods during transit Sector / Goods
has also been penalised.
rate (now
WITHDRAWAL OF EXEMPTIONS AND
Business Processes Outsourcing / Call Center Last year, the Government announced a policy Relocated Industries to withdraw concessionary SROs in three phases Proprietary Formwork system (years). For that purpose, Fifth Schedule to the for building / structures of Customs Act, 1969 was introduced through Finance Act, 2014, and SROs 575(I)/2006 and Petroleum oils and oils 567(I)/2006 were consolidated therein with obtained from bituminous certain changes. The framework for review of minerals, crude, motor sprit, SROs, as announced, is based on following: Sector / Goods
Customs duty on various rate (now
items used in aviation sector reduced to 0%, subject to certain conditions.
Certain Medecaments INCREASE IN CUSTOMS DUTY
Certain poly items Certain textile products (of / As part of review / rationalization of or relating to yarn customs duty, following major changes have REDUCTION IN CUSTOMS DUTY
By virtue of amendment in First Schedule, Goods subject to duty at the rate of reduction in customs duty has been provided for 1% under the First Schedule, will the following, in addition to reduction in now be subject to duty at the rate of maximum tariff rate from 25% to 20% across the Concessionary rate under the Fifth Schedule is increased for the Machinery Equipment installation , BMR or Reduction in customs duty in respect of following sectors has been provided by placing chemical and petro chemical downstream the same under the Fifth Schedule: chemical industry Reduction in customs duty on machinery from 5 – 20% to industrial concern Fresh and Dry Fruits Construction Reduction in customs duty to Preparations of a kind construction machinery in used in animal feeding Nucleic acids and their salts (Furazolidone) excluding those of the National Logistic Cell

Source: https://www.pwc.com.pk/en/tax-memorandum/taxmemorandum2015.pdf