These comments summarise important changes introduced by the Finance Act, 2015 in respect of Income Tax, Federal Sales Tax and Islamabad Capital Territory Sales Tax. For better understanding of the effect of changes in the Income Tax Ordinance, 2001 Sales Tax Act, 1990 and Islamabad Capital Territory Tax on Services Ordinance, 2001 we suggest, these should be read with reference to the main provisions of the law.
Amendments contained in the Finance Act, 2015 only to correct the mistakes of words, spellings etc., having no effect on the existing provisions and those of administrative nature with no fiscal or legal effect, have been ignored.
Unless otherwise indicated, all the changes are effective from the Tax Year 2016. For the purpose of collection or deduction of tax, changes take effect from July 01, 2015.
July 01, 2015
Salient features 03
Income tax 04
Federal Sales Tax 30
Islamabad Capital Territory Sales Tax 38
Limit of aggregate amount of paid up capital plus undistributed profit for a small company increased from Rs. 25 million to Rs. 50 million
Super tax has been imposed for the tax year 2015 as below:
At the rate of 4% of prescribed income for a banking company
At the rate of 3% for any other company whose aggregate income from all sources is equal to or exceeds Rs. 500 million
Income tax has been imposed on a public company, not being a scheduled bank or a Modaraba, at the rate of 10% of the amount of undistributed revenue reserve exceeding 100% of paid up capital. This tax has been made applicable for the tax year 2015
Capital gain tax on sale of securities will now be chargeable on securities held for different periods of less than 4 years at different rates of taxation
Upper limit for investment in shares and insurance for claiming tax credit increased from Rs. 1 million to Rs. 1.5 million
Profit on debt or share in rent etc. in respect of housing loan will now be allowed as admissible deduction instead of allowance of tax credit
Minimum tax on builders has been suspended up to June 30th, 2018
Basis for payment of advance tax for an AOP or a company has been modified.
Tax deducted from profit on debt paid by national savings schemes or post office savings accounts or a banking company or a financial institution or federal government or provincial government or local government or finance societies or a company, shall no more be considered as final tax
Rate of default surcharge and penalty has been reduced from 18% to 12%
Banking transactions by non-filers through cash or otherwise than through cash, exceeding Rs 50,000 in each case, have been subjected to collection of advance tax at the rate of 0.6%
Rate on cash withdrawal also increased to 0.6% for non-filers
Rate of tax on dividend received from a company increased from 10% to 12.5% and rate of tax on dividend from mutual fund will be 10%
Right to revise the return of income allowed upto 60 days after filing the return, without the prior permission of Commissioner.
Requirement of filing wealth statement and reconciliation statement by every filer of return of income or statement is restored.
“Consumer goods” have been defined to mean goods that are consumed by the end consumers rather than used in production of other goods.
“Fast moving consumer goods” have been defined to mean consumer goods which are supplied in retail market as per daily demand of consumer.
Definition of “income” now also includes bonus shares issued by companies not quoted on stock exchange.
Definition of a “small company” has been amended to prescribe the upper limit of paid up capital plus undistributed reserves at Rs. 50 million (previously Rs. 25 million).
Super tax for rehabilitation of temporarily displaced persons
This new section imposes super tax for the tax year 2015 as under:
Banking company – 4% of income
Persons other than a banking company having income equal to Rs. 500 million or more – 3% of income
Income for this purpose will be sum of profit on debt, dividend, capital gains, brokerage and commissions, taxable income under section 9, imputable income and income computed under 4th, 5th, 7th and 8th schedules.
Tax on undistributed reserves
If a public company’s reserves, other than a schedule bank or Modaraba, exceed 100% of its paid up capital, the portion of reserves exceeding 100% of the paid up capital will be treated as income and tax thereon be imposed at the rate of 10%.
This provision shall be applicable for the tax year 2015 and the cut-off period for the evaluation of reserves shall be before the filing of the tax return for the said tax year.
Tax on shipping of a resident person
This new section has been inserted to incorporate the provisions which were contained in clause (21) of Part-II of Second Schedule. Consequently, clause (21) has been deleted. Provisions of this section will be applicable up to June 30th, 2020.
Tax on profit on debt
Division IIIA of Part-I of 1st Schedule
This new section now provides for separate taxation of profit on debt, earned by a Company and others, paid by national saving schemes or post office saving accounts or a banking company or a financial institution or Federal government or Provincial government or local government or finance societies or a company as per following tax rates:
Where profit on debt does not exceed Rs. 25 million – 10%
Where profit exceeds Rs. 25 million but does not exceed Rs. 50 million – Rs. 2.5 million plus 12.5% of the amount exceeding Rs. 25 million
Where profit exceeds Rs. 50 million – Rs. 5,625,000 plus 15% of the amount exceeding Rs. 50 million
Before amendment, capital gain was subject to tax if the securities disposed of were held for less than a year. Now the capital gains on securities held for less than four years, by persons other than companies, shall be taxed as under:
Where holding period of security is less than 12 months
Where holding period of security is 12 months or more but less than 24 months
Where holding period of security is 24 months or more but less than 4 years
The rate of tax for companies will be 33% for tax year 2015 and 32% for tax year 2016.
Mutual funds or a collective investment scheme or a REIT scheme shall deduct capital gain tax on redemption of securities as under:
Individual and AOPs
10% for stock funds, 10% for others
10% for stock funds, 25% for others
In case of stock fund, if dividend receipts of the fund are less than the capital gains, the rate of tax deduction will be 12.5%.
Exemptions and tax concessions in the Second Schedule
Powers of the federal government to provide or withdraw exemptions and tax concessions under the Second Schedule have been withdrawn. However, the federal government, subject to the approval of Economic Coordination Committee of Cabinet, can amend Second Schedule in following circumstances:
National security issues
National food security in emergency situations
Protection of national economic interests in situations owing to fluctuations in international commodity prices, removal of anomalies in taxes, development of backward areas, implementation of bi-lateral/multi-lateral agreements
However, such notification issued on or after July 1st, 2015 if not withdrawn earlier, will stand rescinded on the expiry of financial year in which it is issued.
The upper limit of admissible amount for computing tax credit has been increased from Rs. 1 million to Rs 1.5 million.
Deductible allowance for profit on debt
Presently, tax credit was available under section 64 (now omitted) in respect of any profit or share in rent and share in appreciation for value of house paid on a loan, by a scheduled bank or non-banking finance institution or advance by government or the local government etc. for the construction of a new house or the acquisition of a house.
This new section provides that any profit or share in rent and share in appreciation for value of house paid by an individual shall be admissible as a deductible allowance from the income of the tax year.
The allowable deduction will be the amount equal to lower of 50% of taxable income or Rs. 1 million.
Any unadjusted amount of the allowance shall not be carried forward to the following tax year.
Tax credit for employment generation by manufacturers
This new section provides for tax credit to new companies, formed between July 1st, 2015 to June 30th, 2018,for establishing and operating new manufacturing unit as under:
Period of tax credit will be 10 years from the date of setting up of new manufacturing unit
Tax credit will be allowed at 1% of tax payable for every 50 employees registered with EOBI and Employees Social Security Institutions (ESSI) subject to maximum of 10% of the tax payable
Employs more than 50 employees in tax year registered with EOBI and ESSI
The registered office of the new company should be in Pakistan
Miscellaneous provisions related to tax credits
In case of industrial undertakings entitled to tax credits under section 65B, 65D or 65E, restrictions placed on such entities for availing benefit u/s 113 (minimum tax) and u/s 169 (FTR) have been removed by amending this section.
Tax credit for investment
For availing tax credit, period of investment for extension, expansion and BMR extended to June 30, 2016.
Tax credit for enlistment
Tax credit for a company opting for enlistment in any registered stock exchange in Pakistan has been increased from 15% to 20%.
Principals of taxation of companies
By amending this sub-section, reference to resident has been deleted, thus, dividend paid by any company will be subject to tax under the provisions of section 5. However, corresponding amendment has not been made in sub-section (3) which can create misunderstanding about the application of this provision.
Agreements for the avoidance of double taxation and prevention of fiscal evasion
This new sub-section empowers the Board to obtain and collect information when solicited by another country under a tax treaty, a tax information exchange agreement, a multilateral convention, an inter-governmental agreement, a similar arrangement or mechanism.
Minimum tax on builders
This new sub-section defers the provision of minimum tax under this section up to June 30th, 2018.
Rate of minimum tax under this section has now been prescribed at 2% of the value of land notified for the purpose of stamp duty.
Alternative Corporate Tax (ACT)
Provisions of this section will be applicable to a Company whose income is subject to taxation as a Company (other than a banking Company) under Division II of Part-I of 1st Schedule or subject to minimum tax under this Ordinance
“Corporate tax” means higher of tax payable at normal rate and minimum tax
Any income other than the income subject to tax at normal rate or minimum tax will not be considered for computing ACT.
Return of income
Under this sub-section, 2nd proviso has been added whereby Commissioner’s approval will not be required if the return is revised within 60 days of filing of the return of income.
In case the Commissioner has not approved the revision of return within 60 days of application for revision, permission will be deemed to have been given.
Procedure in appeal
This new sub-section empowers the Commissioner (Appeals) to stay recovery of tax for a further period of 30 day provided that order on appeal will be passed within this extended period of 30 days.
Due date for payment of tax
By amending this sub-section, period for deposit of tax against a notice of demand has been increased from 15 days to 30 days.
1st & 2nd proviso
Consequential to the amendment made in section 122C in last year, provisos have been amended to reduce the period of payment in cases of assessment u/s 122(c) from 60 days to 45 days.
Advance tax paid by the taxpayer
Previously, an association of persons (AOP) and a Company (Co), liable to pay advance tax, were required to estimate the tax payable for the relevant tax year before the 4th instalment was due and if it was more than the amount on the basis of which instalments of advance tax were paid the taxpayer would pay the total tax payable minus the tax already paid towards the advance tax.
Now an AOP and a Co are required to estimate tax payable for the relevant tax year before the 2nd instalment of advance tax is due and if it is more than the amount on the basis of which instalment of advance tax was paid, the taxpayer will pay 50% of such tax payable by the due date of 2nd instalment after adjusting the tax already paid in this respect. The balance 50% of estimated tax payable will be paid in equal instalments payable for the remaining 3rd and 4th quarters of the tax year.
By deleting sub-section (2), power of the Board to allow exemption or concession from collection of tax at import stage has been withdrawn.
However, any notification issued u/s (2) will remain in force until rescinded by the Board.
Tax on local purchase of cooking oil or vegetable ghee by certain persons.
This new section provides that tax shall be chargeable @ 2% on purchase of locally produced edible oil by manufacturers of cooking oil or vegetable gee or both.
This 2% tax will be final tax on income arising from locally produced edible oil.
Profit on debt
This substituted sub-section provides that tax deductible under section 151 will not be final tax in respect of:
A Company; and
Any other person, in respect of profit which is subject to tax u/s 7B on the following:
Yield on account, deposit or a Certificate under the National Savings Scheme or Post Office Savings account;
Profit paid by a banking Company or financial institution on an account or deposit;
Profit on any security (other than stated in (i) above, issued by the Federal or a Provincial Government or a local Government; or
Profit paid on any bond, Certificate, debenture, security or instrument (Other than a loan agreement) to any person other than a financial institution by a banking Company, financial institution, a Company defined in the Companies Ordinance, 1984 and a body corporate.
This change will not have any adverse effect on persons, other than a Company, on profit income upto Rs 25 million as the rate of tax u/s 7B is same as before.
Payments to non-residents
This new sub-section empowers the Commissioner to allow deduction of tax under section (2A) at Nil or reduced rate from payments to be received by a permanent establishment of a non-resident. The tax deductible u/s 152(2A) will be adjustable.
153 (3), proviso
Payments for goods, services and contracts
New clause (d) to proviso provides that tax deducted from contractual receipts of a sportsperson will be final tax from the Tax Year 2013.
This new sub-section provides that tax deducted from export proceeds will not be final tax of the person who irrevocably opts out of the Final Tax Regime.
Option will have to be exercised at the time of filing the return of income and the tax deducted will be the minimum tax.
Exemption or lower rate Certificate
Sub-sections (3),(4) and (5) provided powers to the Board to issue notification to amend the prescribed rates of withholding tax, exempt persons, class of persons etc. from withholding tax and procedure, their application and placing them before Majlis-e-Shoora. To withdraw these powers of the Board, these sub-sections, have been deleted. However, any notification issued will remain in force until rescinded by the Board.
Failure to pay tax collected or deducted
Rate of default surcharge has been reduced from 18% to 12% per annum.
Furnishing of information by Financial institutions including banks.
The new section makes it obligatory for every financial institution to provide information to the Board regarding non-resident persons for the purpose of automatic exchange of information under bilateral agreement or multilateral convention.
Additional payments for delayed refunds
Sub-section has been amended to replace the present rate of compensation with the rate KIBOR + 0.5 percent.
Notice to obtain information or evidence
This clause has been substituted to enhance its scope to also call for information to fulfil any obligation under any agreement with a foreign government.
This new sub-section empowers the Commissioner to permit a special audit panel appointed u/s 177(11) to enter the business premises of a taxpayer to obtain information, require production of any record and examine it within the premises.
The Commissioner can delegate his power to the special audit panel.
Now the Board has been empowered to appoint as many “special audit panels” as may be necessary comprising two or more members from:
Officers of Inland Revenue;
A firm of Chartered Accountants;
A firm a cost and management Accountants; or
Any other person.
The panel will conduct audit of tax payers’ tax affairs, scope of which will be determined by the Board or the Commissioner on case to case basis.
Special audit panel will be headed by a Chairman who will be an officer of Inland Revenue.
Information u/s 175 and 176 can be called for and premises entered only by a member of the panel who is an officer of Inland Revenue.
Commissioner or the panel can make best judgement assessment if the requisite record etc. are not provided by the taxpayer.
In the absence of any member of the panel not being the chairman, proceedings may be continued by the remaining members.
This new sub-section provides that from the tax year 2015 the CNIC will be used by individuals as NTN.
In November, 2013 minimum penalty for default in filing statements under sections 115, 165 or 165 as per S. No (1A) was reduced from Rs 50,000 to Rs 10,000 by inserting clause (16) in Part – III of 2nd Schedule. Now the S. No. (1A) has been amended to incorporate the reduction in its proper place.
S. No. 1AA
Before the amendment, penalty for default in furnishing wealth statement or wealth reconciliation statement was Rs 100 for each day of default.
After the amendment, penalty will be higher of 0.1% of taxable income per week or Rs 20,000.
Prosecution for making false or misleading statements
This sub-section contained reference to section 187(3) whereas section 187 was omitted by the Finance Act, 2010.
Now this sub-section has been amended to replace the reference to section 187(3) by S. No. 10 of section 182(1). S. No. 10 of section 182(1) provides penalty for making false or misleading statement relevant to sections 114, 115, 116, 174, 176, 177 and general at higher of Rs 25,000 or 100% of tax short fall.
Rate of default surcharge for failure to pay tax, advance tax etc. has been reduced from 18% to 12% per annum.
Automatic selection for audit
This new section provides that case of a person shall be automatically selected for audit if he does not meet following conditions:
Complete return u/s 114(2) is filed within the due time including the time extended by the Board and Commissioner for 30 days;
Tax payable with the return is paid;
2% tax on turnover or tax on the basis of return whichever is higher, is paid by the person who files return within 90 days after the due date and in the preceding tax year, either did not file return or declared income BTL; and
A person who had filed return of income of previous tax year declaring taxable income, if 25% higher tax than the previous tax year is paid and files the return of income within 90 days after due date.
A person will be immune from selection for audit under sections 177 and 214C if he is registered as a retailer under rule (4) of Sales Tax Special Procedure Rules, 2007 and he was active taxpayer throughout the Tax Year.
Application of this section will be from the date as notified by the Board.
Advance tax on private motor vehicle
By amending this sub-section (3) and adding section (7), definition of motor vehicle meant for private purpose has been enlarged.
Telephone and internet users
This section has been amended to extend the scope of collection of advance tax on internet bills “and” prepaid cards for internet.
Advance tax on purchase of air tickets
After adding the proviso, no advance tax will be collected on air tickets issued for Baluchistan Coastal belt, Azad Kashmir, FATA, Gilgit – Baltistan and Chitral.
Advance tax on sales to retailers
By amending this sub-section, advance tax shall not be collected on sale of fertilizer and scope extended to “wholesalers” for collection of advance tax on sale of other prescribed goods.
Collection of advance tax by educational institutions
This new sub-section exempts a non-resident person from collection of tax on the fee provided he:
Furnishes a copy of passport to the educational institution as evidence that his stay in Pakistan in previous tax year was for less than 183 days;
Furnishes a Certificate that he has no Pakistan source income; and
Fee is remitted directly from abroad through normal banking channel to the educational institution.
Advance tax under this Chapter (XII)
Previously, individual sections under this Chapter provided that deduction or collection of advance tax will not apply to the following:
The Federal or a Provincial Government;
A foreign diplomat or a diplomatic mission in Pakistan; or
A person who produces a NIL tax withholding Certificate from the Commissioner.
This new section now provides for overall non-applicability of Chapter XII to above categories and their reference in individual sections has been omitted.
Advance tax on banking transactions otherwise than through cash
Division XXI of
Part-IV of 1st Schedule
This new section provides for collection of advance adjustable tax from Non-filers @0.6% in respect of following bank transactions:
Sale of any instrument including demand draft, pay order, special deposit receipt, cash deposit receipt, short-term deposit receipt, call deposit receipt, rupee traveller’s cheque etc.
Transfer of any sum through cheque or clearing, interbank or intra bank transfers through cheques, online transfer, telegraphic transfer, mail transfer, direct debit, payments through internet or mobile phone, account to account funds transfer, ATM transfers etc.
Provisions of this section will not apply to PRISM transactions or payments made for Federal, Provincial or local Government taxes.
Payment to residents for use of machinery and equipment.
This new section now makes a payment to a resident person for use or right to us industrial, commercial and scientific equipment (rent) a separate class of income.
Tax will be deductible @10% from the gross payment whether made in full or in part or by way of advance by the persons prescribed in section 153(7).
The tax deducted will be final tax.
Provisions of this section will not apply to the following:
Rate of tax increased from 10% to 12.5% in case of clause (b)
Rate of tax of 10% on dividend from mutual fund.
If a Developmental REIT Scheme with the object of development and construction of residential buildings is set up by thirtieth day of June, 2018, dividend received by a person from such Developmental REIT Scheme shall be reduced by fifty percent for three years from thirtieth day of June, 2018.
Rate for Profit on Debt
This new Division provides rates of tax for profit on debt imposed under new section 7B as under:
Where profit on debt does not
exceed Rs 25,000,000
Where profit on debt exceeds
Rs 25,000,000 but does not
exceed Rs 50,000,000
2,500,000 + 12.5% of the amount exceeding Rs 25,000,000
Where profit on debt exceeds
Rs 5,625,000 + 15% of the amount
exceeding Rs 50,000,000”;
Capital Gains on disposal of Securities
The rates for payment of tax under section 37A are as under:
Tax Year 2015
Tax Year 2016
Where holding period of a security is less than
Where holding period of a security is twelve months or more but less than twenty four months
Where holding period of a security is twenty four
months or more but less
than four years
Where holding period is more than four
The rate for companies shall be same as specified in Division II of Part I of First Schedule i.e. rate applicable on taxable income of a company.
Mutual fund or a collective investment scheme or a Capital Gains Tax shall be deducted by REIT scheme at the rates as under on redemption of securities:
association of persons
10% for stock funds
10% for other funds
10% for stock funds
25% for other funds
In case of a stock fund, if dividend receipts of the fund are less than capital gains, the rate of tax deduction will be 12.5%.
No capital gain tax will be deducted if the holding period of securities is more than four years.