INCOME TAX PROPOSAL -2007

1. INCOME TAX PROPOSAL -2007 NAEEM AKHTAR SHEIKH FCA

2. 2 (1A), 57(A) Amalgamation Concessions available on account of set of losses and deductible expenses on amalgamation of companies extended to companies engaged in providing services other than trading companies. Adjustment of accumulated brought forward loss and capital loss for set off against business profit & gains of the amalgamated company and vice versa proposed to be withdrawn.

3. 2(59A) Small Companies The bill seeks to redefine the small companies with following characteristics: Paid up capital 25 million. ( P 20) Employment limit 250 persons.( P Nil) Annual Sales 250 million. (P 200)

4. Private equity and venture capital fund The bill seeks to introduce various incentives for promotion of equity funds and venture capital fund. The same are listed as under: Amount received by banking companies or NBFC’s from above funds out of income from profit on debt to be chargeable to tax under the head “income from business.”

5. Private equity and venture capital fund Income of funds to be exempt in case of distribution of more than 90% of its income among its shareholders/unit holders. Any distribution received by a taxpayer from the above funds out of capital gains on which tax has already has been paid are also proposed to be exempt from tax.

6. Private equity and venture capital fund Income of the funds exempt up to 2014 without any condition. The exemption from provisions of the withholding tax under section 150, 151 and 233. Exemption from minimum tax under section 113. A tax @ 10 % on capital gains on account of sale of shares /assets of a private limited company to the above fund.

7. 59AA Group Taxation The bill seeks to provide certain incentives and rules and procedures to encourage the concept of holding companies. The salient features of the concessions are as under: The holding companies and 100% subsidiary companies may opt to be taxed as one fiscal unit. The companies shall give irrevocable option for taxation as one fiscal unit. The group taxation shall be available only to locally incorporated companies.

8. 59AA Group Taxation The relief under group taxation would not be available to losses prior to formation of the group Accounts of the group companies to be prepared and audited by Chartered Accountants as prescribed for listed companies. Group taxation may be regulated through rules.

9. 59B Group relief The bill proposes to substitute the existing law of group relief with new section. The salient feature of changes proposed are as under: The group relief of surrendering of assessed losses (other than brought forward losses and capital losses) of being a subsidiary of a holding company, in favor of its holding company or between subsidiaries of holding companies, extended to both listed and non listed holding companies.

10. 59B Group relief Relief extended across the board to all types of companies except trading. Presently it is restricted to companies owning and managing industrial undertaking or an undertaking engaged in providing services.

11. 59B Group relief The holding companies to directly acquire 55% or more share capital of subsidiary in case of a listed holding company and 75% or more share capital of a subsidiary company in case of non listed holding company. The loss surrendered by subsidiary may be claimed by the holding companies against its income under the head income from business in the tax year and following two tax years subject to following conditions:

12. 59B Group relief Continued ownership for 5 years. None of the group companies engaged in the business of trading. Holding company being a private limited company to get itself listed within 3 years. The group companies to be locally incorporated companies.

13. 59B Group relief The Board of Directors to approve the loss surrendered and claimed under the above section. The subsidiary company continues the same business during the said period of 3 years. The accounts to be audited by a Chartered Accountants as prescribed for listed companies. The group companies to observe the code of corporate governance.

14. 59B Group relief The loss claiming company may transfer cash to the loss surrendering company equal to the amount of tax saving. The transfer of cash not to be taken as taxable event in case of either of the two companies. Subsidiary company not allowed to surrender its losses for set off against the income of the holding company for more than three years.

15. 59B Group relief Where losses surrendered by a subsidiary company are not adjusted against income of the holding company in the said three years, the subsidiary shall carry forward the unadjusted loss in accordance with section 57. The transfer of shares between companies and shareholders for formation of group not to be taken as taxable event provided the approval of the same has been obtained from SECP and State Bank of Pakistan as the case may be.

16. 59B Group relief In case of disposal of shares by holding company during the aforesaid period of five years to an extent that shareholding falls below the limits of holding, then the holding company will offer the tax saved on set off loss in the year of disposal.

17. 97A Disposal of asset under a scheme of arrangement and reconstruction The bill seeks to introduce a new section which provide exemption to any gain or loss arising on disposal of assets from one company to an another by virtue of amalgamation of NBFC’s under section 282L and compromise with creditors/members under section 284 of the Companies Ordinance 1984 and section 48 of the Banking Ord. 1962. The above concession is subject to the following conditions:- The transferee must undertake to discharge any liability in respect of the asset acquired.

18. 97A Disposal of asset under a scheme of arrangement and reconstruction Any liability in respect of asset must not exceed the transferor’s cost of the asset at the time of disposal. The transferee must not be exempt from tax for the tax year in which the disposal takes place and ; Scheme is approved by the High Court, State Bank of Pakistan or Securities & Exchange commission of Pakistan as the case may be on or after 1st day of July 2007.

19. 97A Disposal of asset under a scheme of arrangement and reconstruction the asset acquired by the transferee shall be treated as having the same character as it had in the hands of the transferor; the transferee's cost in respect of acquisition of the asset shall be- (i) in the case of a depreciable asset or amortized intangible, the written down value of the asset or intangible immediately before the disposal;

20. 97A Disposal of asset under a scheme of arrangement and reconstruction (ii) in the case of stock-in-trade valued for tax purposes under sub-section (4) of section 35 that value; or (iii) in any other case, the transferor's cost at the time of the disposal.

21. 97A Disposal of asset under a scheme of arrangement and reconstruction The proposed amendment seeks to describe deduction against the transferor income as follows: if, immediately before the disposal, the transferor has deductions allowed under sec. 22, 23 and 24 in respect of the asset transferred which have not been set off against the transferor's income. The amount not set off shall be added to the deduction allowed under those sections to the transferee in the tax year in which the transfer is made; and

22. 97A Disposal of asset under a scheme of arrangement and reconstruction In determining whether the transferor's deductions under sections 22, 23 or 24 in respect of the asset transferred have been set off against income for the purposes of clause (c) of subsection (2), those deductions shall be taken into account last. The proposed sub-section (5) also defines the cost of shares issued vested by virtue of above said scheme and propose that the cost of shares shall be the cost prior to the operation of this

23. 97A Disposal of asset under a scheme of arrangement and reconstruction Similar exemptions are also proposed to gain or loss on issue, cancellation, exchange or receipt of shares as a result of scheme of arrangement and reconstruction under the provisions of Companies Ordinance as listed above provided the same are approved by High Court and State Bank of Pakistan or Security & Exchange Commission of Pakistan

24. 100A Special Provisions related to banking business The bill seeks to add schedule seven dealing with the computation of profits and gains of banking companies to be effective from tax year 2008. It is recognized that the total income of a banking company, as a taxpayer, will be accepted by the tax department which is the balance of the income, from all sources before tax, as disclosed in the annual accounts required to be furnished to the State Bank of Pakistan (SBP) subject to certain adjustments which are enumerated below;

25. 100A Special Provisions related to banking business Deduction shall be allowed in respect of depreciation, initial allowance and amortization under sec. 22, 23 & 24 and all accounting dep.and amortization shall be added. No allowance on deduction admissible on assets given on finance lease. Classified advances and off balance sheet items to be allowed as claimed in the accounts in line with the requirement of prudential regulations subject to certification by the external auditor to this effect.

26. 100A Special Provisions related to banking business Advances classified as 'substandard' under such regulations would not be allowed as an expenditure. Subsequent treatment of substandard advance. Treatment of Unpaid Liability (other than irrevocable debt). No adjustment on account of application of International Accounting Standard 39 & 40.

27. 100A Special Provisions related to banking business Provisions relating to sec. 22 (Inadmissible deductions), 22(8) (Disposal of assets), 68 (Fair market value) will apply accordingly. The gains on sale of shares of listed companies and dividend be taxed @ 10%. Gain on sale of shares of listed companies disposed off within one year to be taxed at the normal rate of tax i.e. 35%.

28. 100A Special Provisions related to banking business No special treatment to be allowed for Shariah Complaint Banking. Advance tax under section 147 to be paid in twelve equal installments on 15th of each month. Provision of withholding tax not to apply to banking company as recipient of the amount. Provision of section 113 to apply to banking company as they apply to any other resident company.

29. 100A Special Provisions related to banking business Tax concessions and exemptions as provided under second schedule shall not be applicable to a banking company. The group relief also to be available to banking companies provided the holding and subsidiary companies are both banking companies.

30. 100A Special Provisions related to banking business The head office expenses to be allowed on proportionate basis based on world wide turnover. The head office exp. to be allowed if charged in accounts of PE and duly certified by the external auditor that they are in accordance with the provisions of this rule and are reasonable in relation to PE operation in Pakistan.

31. 100A Special Provisions related to banking business The holding and subsidiary companies of 100% owned group of banking companies may opt to be taxed as one fiscal unit as per provision of section 159A. Provisions of the Income Tax ordinance not specially dealt with shall apply mutatis mutandis to a banking company.

32. 92, 93 Principles of taxation of associations of persons The bill seeks to withdraw certain special provisions relating to taxation of association of persons i.e. professional firm. As per the proposed law the professional firms would also be liable to tax on their firm income and the amount received by the members out of income of the association shall be exempt from tax. This section will have the effect of enhancing the tax liability for partners which were being subjected to tax at low rate of the income slabs. Further it would also expose the professional firm to presumptive taxation in case of receipts being liable to withholding taxes under section 153.

33. 113A Tax on income of certain persons The above section provide for presumptive taxation for certain type of retailer with turn over up to Rs.5 million. The bill seeks to disentitle the retailers for claiming adjustment of any withholding tax as an adjustment against income tax liability under the above section The bill also seeks to reduce the rate of tax to 0.5% from 0.75%

34. 113B Taxation of income of certain retailers The bill seeks to reduce the rates of presumptive taxation for retailer with turn over of Rs.5 million or more as are subject to special procedure of sales tax. The rate proposed are as under:- Turnover Rate of Tax 5 M -10 M 25,000 plus 0.5% of turn over exceeding Rs. 5 M Exceeding Rs.10M 50,000 plus 0.75% of turn over exceeding Rs.10M .

35. 113B Taxation of income of certain retailers The bill seeks to disentitle the retailers for claiming adjustment of any withholding tax as adjustment against income tax liability under the above section.

36. 116 Wealth statement The bill seeks to provide for filling of wealth statement by every resident tax payer declaring income of Rs.500,000 or more.

37. 49 Federal and Provincial Government, and local authority income It is proposed that exemption under this section shall not be available in case of corporation, company, regulatory authority, a development authority or other body or institution established by or under a federal law or a provincial law or an existing law or a corporation, company or other body or institution set up, owned and controlled, either directly or indirectly by the Federal government or Provincial Government, regardless of the ultimate destination of such income, as laid down in Article 165 A of the Constitution of Islamic Republic of Pakistan.

38. 147 Advance Tax paid by the Taxpayer The bill seeks to provide for amendment in procedure relating to advance tax payable by a company. It is proposed that the taxpayer being a company would be liable to pay advance tax based on estimated quarterly accounting profit irrespective of it last assessed income after taking into account minimum tax and tax paid (if any). The bill also seeks to introduce tax liability of minimum tax for payment of advance tax.

39. 148 Imports The bill seeks to merge different sub-sections providing for issuance of exemption certificate on different conditions into one consolidated universal provision. The proposed provision provides for issuance of exemption certificate by the commissioner in all those cases where he is satisfied that the said person is not likely to pay any tax under the ordinance. This concession is proposed to be extended to all taxpayers which is presently limited to manufacturers only.

40. 148 Imports The bill seeks to extend the exception from presumptive tax regime to large import houses which fulfill certain conditions stipulated in the law. The large import house has been defined be a single object company having paid of capital of Rs.100 million and fulfilling the following conditions:-

41. 148 Imports Import exceeding Rs.500 million. Total assets exceeding Rs.100 million. Maintains computerized record. Maintains issuance of 100% cash receipts. Present accounts for tax audit every year. Registered with the sales tax department. Make sales to only registered person.

42. 149 Salary The bill seeks to amend the section to elaborate the adjustment that could be made for working out average rate of tax of employees for withholding tax from salaries. It is proposed that the tax withheld under any other provision and tax credit admissible under section 61 to 64 should be adjusted for working out average withholding tax rate after obtaining necessary evidence for the same.

43. 153 Payments for goods and services (1A) The bill seeks to omit the concession made available to indirect exporters last year for taxation at a reduce rate from payments made to them by exporters on account of services rendered or provided to them on account of stitching, dying, printing, embroidery, washing, sizing and weaving.

44. 153 Payments for goods and services (6) The bill seeks to exclude following type of tax deduction from the ambit of presumptive taxation: Advertisement services by owners of newspapers and magazines. Sale of goods and execution of contract by public companies listed on Stock Exchange in Pakistan.

45. 153 Payments for goods and services (6 ) The bill seeks to exclude companies from the ambit of presumptive taxation in so far as they relates to withholding tax on payments made on account of sale of goods w.e.f tax year 2007. After the proposed amendments all the listed companies will be out of presumptive tax regime under the provisions of above sections, whereas, private limited companies would only be liable to presumptive tax regime in case of execution of contracts.

46. 153 Payments for goods and services (6 B) The proposed amendment seeks to change principal of final tax under PTR for individuals and AOPs. Under the present provisions only those payments are subject to final Tax on which actual tax is deducted. Now it is proposed that even those payments on which tax was deductible would fall in the ambit of above regime with retrospective application .i.e. tax year 2007.

47. 153 Payments for goods and services (8 A) The bill seeks to withdraw the provisions relating to additional withholding tax@ 2% over and above the specified rate in case of recipient failure to disclose his NTN or CNIC No.

48. 169 Tax collected or deducted as a final tax The bill seeks exclude inter group dividend within group companies as referred in section 59B from the ambit of person not required to furnish a return of income and treated to have been assessed under section 20.

49. 231B Purchase of Motor Cars The bill seeks to introduce a new tax to the collected by every manufacturer or authorized dealer of motor cars at the time of sale of motor cars @ 5% of the value of vehicle. The bill seeks to provide the exception to the above collection in case of purchases made by Federal Government or Provincial Government or a foreign diplomat or diplomatic mission in Pakistan.

50. 234 A CNG Stations The bill seeks to introduce a new sub-section providing the tax withheld on electricity consumption as the minimum tax on income of the person other than company. Only companies are proposed to be entitled to refund, in case the tax so collected is in excess of the amount for which the taxpayer is chargeable under this Ordinance.

51. 1st Schedule Part IRates of Taxes The bill seeks to provide universal rate of tax of 10% on account of dividend received from a company. The reduce rate of 5% in case of dividend received by a public company or an insurance company or any other resident company is proposed to be withdrawn.

52. 1st Schedule Part IIRate of Advance TaxImport The rate of withholding tax on imports is proposed to be reduced to 5% from 6%.

53. 2nd Schedule Part IExemptions from total income 66 Income of a Micro Finance Bank is proposed to be exempted for a period of five years starting from 1st day of July, 2007. 99 Exemption proposed to be withdrawn on income arising from continuous funding system to mutual funds NBFC’s, Unit Trust & REIT Fund. 110 Exemption to capital gains on sale of shares public company, modaraba certificates or any other instruction of redeemable capital to be extended to 30 June, 2008 from 30 June, 2007.

54. 2nd Schedule Part IExemptions from total income 110A Exemption proposed on gains on transfer of capital assets of existing stock exchanges to new stock exchange in the course of corporatization of an existing exchange. 110B Exemption proposed on any gain on transfer of a capital assets, being membership right held be a member of an existing stock exchange, for acquisition of shares or clearing rights acquired by such member in new corporatization of an existing stock exchange.

55. 2nd Schedule Part IExemptions from total income 133A Exemption to income derived by an individual from transfer of his membership rights or share of a stock exchange in Pakistan proposed to be extended to 30 June, 2006 from 30 June, 2007.

56. Part IIReduction in Tax Rates 5A The bill seeks to add a new clause providing for rate of withholding tax in respect of payment on profit from debt payable to a non-resident person, having no PE in Pakistan to, be the rate as provided in Avoidance of Double Taxation Treaty of the respective country of the Non-resident country.

57. Part IIReduction in Tax Rates 13 The bill seeks to provide withholding tax on imports @ 1% on import of capital goods and raw material (other than Polyester filament) imported exclusively for its own use by a manufacture registered with sales tax department.

58. Part IIReduction in Tax Rates 13 H The bill seeks to extend the reduced rate of withholding tax 2 % on imports of following items: Edible oils including crude oil imported as raw material for manufacture of ghee or cooking oil; Energy saver lamps; Bitumen; Fixed wireless terminal; Pesticide and wedicides

59. Part IVExemptions from Specific Provisions 41 B The bill seek to provide exemption to foreign news agencies, syndicates and non-resident contributors, who have no PE in Pakistan from provisions of withholding tax relating to payments to non-residents u/s 152 of the Income Tax Ordinance, 2001. 43B The bill seeks to exempt the payment from withholding tax received on account of sale of Air Ticket by travel agent, provided tax have been withheld on their commission income.

60. Part IVExemptions from Specific Provisions 56 The bill seeks to exempt imports of following item form withholding tax at import stage u/s 148: Capital goods and raw material imported by manufacture cum exporter registered with Sales tax department as a manufacture. Petroleum (E&P) companies covered under SRO678(I)2004 dated 07-08-2004 except motor vehicles imported by such companies.

61. Part IVExemptions from Specific Provisions Companies importing high speed diesel oil, light diesel, high octane blending component or motor spirit, furnace oil, JP-1, MTBE, Kerosene oil, crude oil for refining and chemical use in refining thereof in respect of such goods; and The re-importation of re-useable containers for re-export qualifying for custom duty and sales tax exemption on temporary import under the Customs notification no SRO344(I)95 dated 25th day of April, 1995”

62. Part IVExemptions from Specific Provisions 57A Large Import House The bill seek to exempt the large export house from Presumptive Tax Regime under section 169 and provision of withholding tax u/s 153 provided they comply with the condition given in 148.