Juncta Juvant of Finance Act 2007

Much has been written in commentaries and said in seminars by the authoritative as the authoritative opinions are to be adduced and regarded in causes – Auctoritates sunt in causis allegandae et tenedae, however, in wordings, it is not the words but the substance and meaning that need to be sought. This article is an endeavor to find out the substance of fiscal laws in economic and accounting terms by correlating different amendments brought by Finance Act, 2007 – Juncta Juvant.

ECONOMIC UPFRONT
The economic upbeat sustained marginally upward for another year irrespective of downward trend in large and small scale manufacturing, livestock and service sector owing to the efficient tactical decisions of our economic managers in line with strategy. SPI showed a downward trend while food inflation has increased many folds and for the first time professionals questioned the integrity of statistics.

From the taxation side, the tax rate has not been reduced which was imperative for broadening the tax base. Although tax neutrality was absent except to some areas like elimination of CVT countered with increase in custom duty but owing to flexibility there are certain things like 1% special excise duty etc may move on positive side accordind to the intention of FBR. Consistency and coherence in tax policy is evident from various amendments like ADRC, period of retention for record keeping, etc, however, there are certain amendments which clearly shows a shift in policy like sales tax mechanism etc. Moreover, transparency is still a mirage except LTU while responsiveness to market failures is evident from the plethora of amendments brought into the bill before conversion into an Act.

Efforts are underway to improve the quality of governance but record trade and current account deficit, human resource, energy crises; high food inflation, high compliance cost and promotion of incentive in manufacturing sector were the new emerging challenges for the present government.

Human Resource
Amendments are made in Workmen’s Compensation Act, 1923 whereby maximum wage limit was removed to qualify as workmen, in West Pakistan Industrial and Commercial Employment (Standing Orders) Ordinance, 1968. Now the employer making more than fifty percent contribution to Approved Pension Fund is absolved from payment of Gratuity during such period. In Minimum Wages for unskilled Workers’ Ordinance, 1969 the minimum wage limit is enhanced to Rs4,600.

In furtherance, the scheme of Companies Profit (Workers’ Participation) Act, 1968 is extended to contractual worker, the wage limit is enhanced in all three categories for distribution of benefit to workers and maximum limit of benefit is enhanced to Rs18,400. Moreover, the pension under Employee’s Old Age Benefits Act, 1976 is to be calculated on the basis of last month apart from enhancement of minimum limit to Rs1,500 while the surviving spouse is entitled to pension.

In Pakistan, all individuals are paying same rate of taxes according to their bracket of income. In its present state, the Income Tax Ordinance, 2001 does not consider the family size, family burden – children education, Medical etc, commutation cost, personal training needs etc. These concepts as allowances need to be considered in order to make the levy of Income tax fair and equitable.

In furtherance, neither there is any incentive provided to the expatriate Pakistanis to remit their income to Pakistan nor were earlier incentives re-enforced. Moreover, there is no incentive for tax resident nationals to bring their income to Pakistan which is earned in Pakistan on foreign assignments.

Food inflation and tax on tax
It is a common misconception that supply of money and variability in interest rates are the key reason of inflation. Consequently, the monetary policy makers were normally be held liable for increase in inflation and this misconception is further reinforced when one see the reporting of inflation figures by the State Bank of Pakistan, hence, impact of fiscal policies over inflation has not been calculated till date which severely hits the purchasing power of a common man.

Food inflation, especially, will be expected to increase owing to the amendments made in section 148 of the Income Tax Ordinance, 2001, whereby Federal Excise Duty [FED] will be considered part of the cost for the purpose of computation of Income tax at import stage, duties will be added to the cost for the purpose of calculating sales tax on retail price under section 2(27) of the Sales Tax Act, 1990 and all duties and taxes excluding sales tax shall be added for the purpose of charging FED on retail price under section 12(4) of the Federal Excise Act, 2005. Further, the VAT mode 1% SED is also applicable on retail price according to the rules issued by CBR now FBR.

In furtherance, Section 113A and 113B of Income Tax Ordinance, 2001 has been co-related with special sales tax procedure for retailers whereby retailers having turnover up to Rs5 million will pay 0.5% turnover tax under section 113A but will be exempt from registration under Sale Tax Act, 1990.

On the other hand, retailers having more than Rs5 million but less than Rs10 million turnover will have to pay 0.5% Sales tax on the turnover exceeding Rs5 million and Income Tax of Rs25000 plus 0.5% of turnover exceeding Rs5 million. For retailers having more than Rs10 million turnover, they will be required to pay Rs25,000 plus 0.75% Sales tax on the turnover exceeding Rs10 million and Income Tax of Rs50000 plus 0.75% of turnover exceeding Rs5million.

The above referred turnovers of retailers are without any distinction and cover the turnover of goods under the third schedule of Sales Tax Act, 1990. Moreover, from the practical experiences, professionals believe that this mere percentage will be recovered from the consumers in general and will contribute to food and non-food inflation. As far as the items covered under third schedule are concerned, it is expected that retailers may switch to imported or smuggled goods.

Moreover, limiting the Sales Tax input to 90% of the output will drastically effect the cash flows of businesses which will be coped with high cost loans by the businesses and ultimately be passed on to the end consumers in case the business profits are not sacrificed. However, this may not be the case where compensation will be awarded to genuine refund holders at end as this may relieve the consumers by the spread of compensation and cost of loans.

Compliance Cost
The compliance cost will increase considerably owing to the various amendments in Income Tax Ordinance, 2001 and Sales Tax Act, 1990 whereby different certificates were prescribed for categories of taxpayers to be obtained from Auditor who has become a blood hound instead of a watchdog. Moreover, the levy of fees and service charges under section 18D of Custom Act, 1969 will not only increase the compliance cost but also have an impact over the cost of imports apart from 1% SED.

The retention of record period has been increased from three to five years in all fiscal laws for alignment with Income Tax Ordinance, 2001, that is, section 24 of Sales Tax Act, 1990, Section 17(1) of Federal Excise Act, 2005 and section 211 (2) of Custom Act, 1969.

Energy crises
I was sitting and wondering in a pre-budget talk show at a private channel whereby trade bodies are not concerned with expectation from budget but asking for uninterrupted power supply, simply to carry out the business. The scope of clause 132 of Part I of Second Schedule of Income Tax Ordinance, 2001 relating to power projects has been extended to hydel projects. Moreover, reduced custom rates are announced for goods imported for alternate energy projects like solar, wind and bio tech. One must wait and see whether they will be sufficed to meet the requirement or not!

Investment and Manufacturing

The special 1% rate under section 148 of ITO, 2001 in respect of capital goods, adjustment of Sales Tax on Fixed Asset in 12 equal installments and 1% SED are the major impediments in investments.

Many professionals believe that the claim of input tax paid on Fixed Asset is restricted twice through section 8B of Sales Tax Act, 1990. Firstly, according to the proviso of section 8B (1), the tax charged on the acquisition of Fixed Asset shall be adjustable against the output tax in twelve equal months installment after the start of production of new unit. Secondly, the purchaser of fixed asset shall not be allowed to adjust input tax in excess of 90% of the output tax for that period.

However, other word new unit is highly debatable in professional circles as some professionals believe that new unit means an altogether new set up while others believe that it also encompass acquisition of fixed asset in an old set up, hence, an issue to be decided either by quasi judicial or judicial set ups.

Normally the main function of a proviso is to vary the meaning or operation of the section, sub-section to which it is attached, that is, it either restricts the meaning or operation of the main provision or enlarges it. Hence, many professional believes that the proviso attached to section 8B enlarges its scope. Consequently the input tax shall not exceed 90% of output plus installment of fixed asset.

It is also obvious from the induction of separate proviso which is prima facie evident of the intent of law. This concept will now be the part of investment policy decision making of organized taxpayers. This may also lead to deference of investment by the taxpayers for avoiding the risk of keeping too much idle input tax not compensated through section 67 for more than a year.

Moreover, only a company is allowed to adjust the excess of input tax over 90% plus the installment of fixed asset after 14 months after fulfilling certain requirements, hence, the rest of taxpayers are obliged to corporatize them. One wonders, Central Board of Revenue or now FBR might have introduced the accrual base concept instead of 90% restriction whereby the input tax of closing stock will automatically be deferred.

Moreover, previously the capital goods were normally been exempted from the application of 6% adjustable Import Stage Withholding Tax under section 148 of the Income Tax Ordinance, 2001. The rates have been reduced to 1% but now the application of exemption needs to be addressed to the Central Board of Revenue now the FBR is empowered to exempt goods and persons.

DIRECT TAXES – Income Tax Ordinance, 2001

HONORING CNIC IN THE ABSENCE OF NATIONAL TAX NUMBER – SECTION 2(19A), 153 (8A) & 181

Central Board of Revenue is empowered to allow the use of Computerized National Identity Card Number instead of National Tax Number. Consequently, an individual may use CNIC number instead of NTN number after permission from CBR. Moreover, the requirement to deduct additional 2% tax for non availability of CNIC or NTN has been omitted.

An amendment is also made in sub-section (19A) – Eligible person under Voluntary Pension System Rules, whereby a person becomes an eligible person in case s/he holds a CNIC but has not obtained an NTN.

PRIVATE EQUITY AND VENTURE CAPITAL FUND MANAGEMENT COMPANY [PE & VCFM] – SECTION 2(45A) & (45B), 18(4) and Second Schedule

PE & VCF means a fund registered with while a PE & VCFM means a company licensed by Securities and Exchange Commission of Pakistan under Private Equity and Venture Capital Fund Rules, 2007 [PE & VCF Rules, 2007]. PE & VCF is a closed end trust comprised of dedicated pool of capital raised through private placement and vested in trustees through a trust deed. This is managed through a fund management company which may either be an asset management company or investment advisor.

In order to promote this infant industry a plethora of exemptions are provided. The income of PE & VCFM will be exempt from tax where 90% of income is distributed among shareholders while the income of taxpayer, being recipient of distribution from PE & VCFM, will be exempt only to the extent of distribution from Capital Gain. In furtherance, the PE & VCF will be exempt from the payment of minimum tax under section 113 - Clause (11)(xii) of Part IV of Second Schedule..

Consequently, either in the absence of explicit method for segregation of different heads of income including capital gain, the top slice of income will be treated as distribution from capital gain. However, there is no corresponding amendment is made for PE & VCFM for not withholding tax from such taxpayers where distribution is made out of capital gain. Consequently, the taxpayers will be required to submit normal tax return under section 114 along with refund application under section 170. – Clause 57(2) and (103) of Part I of Second Schedule.

In furtherance, according to clause (5B) of Part II of Second Schedule, the capital gain shall be charged at the rate of 10% in respect of sale of shares by a person or sale of asset by private limited company to a PE & VCF. However, it seems that this may not be the intention of amendment.

Moreover, the provision of section 150 - Dividend, 151 – Profit on Debt and 233 – Brokerage and Commission shall be inapplicable over PE & VCF as recipient.

Previously, any amount received by a banking or non-banking finance company representing distribution of income from profit on debt by mutual fund shall be chargeable to tax under the head Income from Business instead of income from other sources. Bill seeks to include PE & VCF apart from mutual fund.

SMALL COMPANY – SECTION 2(59A)

The criterion for small company has been changed as follows.
Paid up capital plus undistributed reserves	not exceeding 25 Million
Annual Turnover	not exceeding 250 Million
Number of Employees	not exceeding 250 any time during the year

A small company is subject to 20% tax rate and is absolved from deduction of tax under section 153 as payer. In order to provide a level playing field, the 20% tax and absolution from the Withholding Tax under section 153 need to be extended to all companies fulfilling the criterion referred for small companies instead of limiting it for companies incorporated after July 01, 2005. However, the anti avoidance measure of splitting up needs to be retained and reinforced.

INTERCORPORATE DIVIDEND INCOME AND RATE OF WHT ON DIVIDEND INCOME – SECTION 8, 169 (3) AND FIRST SCHEDULE

Dividend received by a company from a company will be taxed under the head Income from Other Sources under section 39 at a normal rate of 35% and expenses will be apportioned under section 67. However, a company responsible for paying dividend to another company will be required to deduct Withholding Tax under section 150 @10%.

Moreover, the existing 5% and 10% Withholding Tax rate on Dividend income applicable on various categories of taxpayers are now replaced with a single rate of Withholding Tax on Dividend income for all categories of taxpayers, that is, 10%.

SET OFF OF LOSSES

COMPANIES OPERATING HOTELS IN PAKISTAN AND AJ & K – SECTION 56A

The Act has specifically provided for adjustment of losses, sustained under the head Income from Business owing to its operation in Pakistan or AJ & K – as the case may be, irrespective of the place of registration of company – Pakistan or AJ & K. These adjustments are subject to the restrictions mentioned in section 56 and 57.

LOSS IN THE TAX YEAR OF AMALGAMATION – SECTION 2(1A) & 57A (1)

The definition of amalgamation has been amended to include service sector apart from banking, non-banking financial institutions, insurance companies and companies owning and managing industrial undertakings but exclude trading sector.

The loss sustained by the amalgamating company or companies during the year of amalgamation can be off set against the business profits and gains of the amalgamated company. Consequently, the profits of the amalgamated company or companies during the year of amalgamation can be off set against the business and capital loss of the amalgamated company.

The loss or profit, as the case may be needs to be an assessed loss or profit and must not include brought forward profit or loss and capital loss. Moreover, the unadjusted profit or loss can be carried forward for adjustment up to a period of six tax years after the year of amalgamation.

The only modus operandi available to convert the loss of amalgamating companies into an assessed loss is to give notice under section 117 – discontinuance of business. A notice under sub-section (1) to commissioner followed by a return under sub-section (2) shall effectively convert the loss into an assessed loss by virtue of operation of sub-section (4).

GROUP OF COMPANIES

TYPES OF GROUP
After the incorporation of proposed amendments, there will be three types of groups in the Income Tax Ordinance, 2001, namely as follows.

1. 100% Group
2. 75% Group
3. 55% Group

All the group companies must be comprised of companies incorporated in Pakistan under Companies Ordinance, 1984. The relationship between holding companies and subsidiary companies must be direct in all cases - 100%, 75% and 55% group. The 75% and 55% will be taxed as one fiscal unit. However, there is a practical difficulty whereby the 100% group will almost be absent owing to the nominee shareholding, unless and until a beneficial circular will be issued declaring 100% shareholding include nominee shareholding.

Moreover, the 55% group can only be formed where any company in the group is a listed company while where none of the group company is listed holding company, hence, it must own 75% of the subsidiary’s share capital and holding company, being private limited company which must get itself listed within three years of claiming the loss of its subsidiary. However, listing requirement is not applicable where the holding company of a 75% group is an unlisted limited company.

In furtherance, a 100% group may include any type of companies, however, in case of 75% and 55% group, any trading company will not be considered as part of the group. Moreover, according to section 59B (2) (h), additional conditions may be prescribed by legislature not CBR!

100% GROUP – SECTION 59AA

The introduction of a new section 59AA – Group Taxation under the chapter losses which contains the postulates that are more appropriately suited to be reflected in section 18 – Income from Business, section 59B – Group relief, section 114 – Return of Income and Section 118 – Method of furnishing returns and other documents.

The holding and subsidiary companies forming a 100% direct or indirect group may opt to be taxed as one fiscal unit after filing an irrevocable option for taxation as one fiscal unit but this irrevocable option is optional. A group can still claim the loss in case it does not opt to file an irrevocable option for being taxed as one fiscal unit.

In case a group opts file the irrevocable option, the group is required to compute the income and tax payable for tax purposes beside consolidated accounts according to the rules which may be issued near future. It is expected that Intra Company adjustments which include elimination of profits etc will be considered for tax purposes, every group company’s income will form part of any consolidating income schedule and all this will be at the cost of sacrificing the losses incurred by the companies prior to formation of the group.

Practically, it would be difficult for a group operating in the territorial boundaries of Pakistan to present its books of accounts at one location. Moreover, it would be difficult for any taxation officer to check a groups transaction which may comprised of unlimited companies and their books of accounts contain million or sometimes billion of transaction. However one of the major incentive to opt this option is exemption of inter group dividend under clause (103) of Part I of Second Schedule.

55% AND 75% GROUP’S LOSS RELIEF – SECTION 59B

The subsidiary of a 55% group can only surrender its losses to its holding company while the subsidiaries of a 75% group can surrender their losses either among themselves or to their holding companies. The holding company cannot surrender its losses to subsidiary company, in case of 55% group, or subsidiary companies in case of 75% group.

The term loss means current tax year’s loss but exclude current tax year’s and brought forward capital loss apart from brought forward losses, however, the set off of losses is subject to following conditions.

1. Continued ownership of 75% and 55%
2. None of group company is engaged in trading
3. A 75% holding company must get itself listed from three years from the year of claiming the loss
4. All group companies must be incorporated under Companies' Ordinance, 1984.
5. Loss surrendered or claimed must be approved from the respective board of directors.
6. The loss can only be claimed in the tax year of loss and following two tax years while the subsidiary company must continue the same business for another two years.
7. Group must observe code of corporate governance issued by SECP.

The purchase and sale of shares within the group to form the 75% or 55% group will not be a taxable event but purchase and sale of share from third party will be a taxable event. The third party issue will be a subject matter of future interpretation. The holding company will be required to pay the tax on profit saved by offsetting of loss of subsidiary where its shareholding falls below 55% or 75%, as the case may be.

PRINCIPLES OF TAXATION OF AOP - SECTION 92 & 93

The preferential treatment of professional association of person is now no more the part of law and all the AOP's will pay tax on their profits as an entity, however, the distribution of profit after tax will be exempt in the hands of members.

DISPOSAL OF ASSET UNDER A SCHEME OF ARRANGEMENT & RECONSTRUCTION - SECTION 97A

Disposal of asset and issue, cancellation, exchange or receipt of shares by one company from another owing to the operation of scheme of Arrangement and Reconstruction under section 282L, 284 to 287 of Companies Ordinance, 1984 and section 48 of Banking Companies Ordinance, 1962, shall not be considered as taxable event subject to satisfaction of following conditions.

1. Transferee undertakes to discharge liabilities in respect of asset acquired.
2. Liability must not exceed the cost of assets at the time of disposal.
3. Transferee must not be exempt from tax during the tax year of disposal.
4. Scheme is approved by High Court, SBP or SECP on or after July 1, 2007.

Only condition number 4 above is applicable on both transactions, that is, Disposal of asset and issue, cancellation, exchange or receipt of shares while first three conditions are only applicable in case of disposal of shares.

In furtherance, the asset will not change their primary characteristics on transfer and the cost of transferee shall be the WDV of depreciable or intangible asset immediately before the disposal, as the case may be, while the lower of cost or net realizable value shall be the cost of stock.

Depreciation, initial allowance and amortization of intangibles not set off against the transferor's income, during the year of transfer, shall be added to the deduction allowed to transferee during such year but will be taken into account last. There seems to be a typographical error in sub-section (4) where sub-section 2(c) was referred instead of sub-section 3(c).

RETURNS AND STATEMENTS - SECTION 114, 115 & 116

Electronic filing of returns was part of section 114 explicitly, however, the phrase and other matters relating to the electronic filing of returns, statements or documents etc has been added to sub-section (2A) of section 114. I wonder why section 115, 116, 118, 127, 131 and 165 has not been considered for this very purpose and section 118 was not amended appropriately.
In furtherance, commissioner is now authorized to call statement under section 115(4), in respect of one or more of last five completed tax years, from a person who has failed to file such statement, hence, proof of filing would be suffice where the statement has already been filed. Moreover, commissioner is now authorized to ask for the submission wealth statement from any person. On the other hand, now the Taxpayer whose current years income is Rs500,000 is also required to file wealth statement apart from the Taxpayers whose last assessed or declared income was Rs500,000.

APPELLATE TRIBUNAL - SECTION 130 & 132

Now Commissioner Income Tax and Commissioner Income Tax Appeals having five years experience as commissioner shall be eligible to become the accountant member of Tribunal apart from any officer of Income Tax equivalent to the rank of Regional Commissioner.

Moreover, now the Appellate Tribunal cannot set aside any assessment order coupled with direction to the commissioner to make new assessment order in accordance with Tribunal's directions or recommendations. Consequently, it can only affirm, modify or annul the assessment or remand the case to Commissioner or Commissioner Appeals for enquiry and action according to the direction of Tribunal.

QUARTERLY ADVANCE TAX - SECTION 147

Presently, quarterly Advance Tax is payable on the basis of latest tax year’s assessed tax excluding the tax assessed under final tax regime, Income from Property and Capital Gain explicitly and minimum tax regime by implicit inference. The scope is broadened to latest tax year’s assessed tax by including minimum tax paid under section 113 – 0.5% for the purposes of calculation of installment of Advance Tax through a new sub section (4AA).

Moreover, in case of a new corporate taxpayer’s, being company, quarterly advance tax shall be payable on the basis of estimated quarterly accounting profit, including any tax liability under section 113, but after adjustment of tax already paid.

I feel that such a new company must be exempted from the application of section 205 for first year of its operation in order fully endorse the concept of estimated quarterly accounting profit.

IMPORTS - SECTION 148

Sub-section (2) of has been has been proposed to be replaced while sub-section (3) and (4) are proposed to be deleted while sub-section (4A) is redrafted which would result in powers to exempt person or goods by Central Board of Revenue against consideration of special circumstances of each category of Goods, Taxpayer, class of Goods or Taxpayers, removal of specific product categories exemptions, removal of reduced rate exemption certificate by commissioner upto 75% and widening of scope of exemption from manufacturers to all persons.

The general WHT rate is reduced to 5% from 6% while 1% rate is prescribed for imports of capital goods and raw material exclusively for own use by manufacturers who are registered with Sales Tax. Moreover, no tax shall be collected on import of raw material and capital goods by manufacturer exporter registered as manufacturer with Sales Tax Department.

A redrafted version of sub-section (4A) is proposed to replace the existing provision whereby commissioner is empowered to issue only a reduced rate certificate up to 0.5% to person whose income is covered under Final Taxation and is not likely to pay any tax, other than section 113, on a case to case basis which may include the following.

1. Depreciation,
2. Unabsorbed losses,
3. Person liable to pay advance tax under section 147
4. Income exempt from tax, or
5. Manufacturer importing raw material for own use having huge refundable.

The phrase final taxation may not serve the purpose as this term is not correlated with either section 169 or 115(4) and may be a subject matter of interpretation. Moreover, the term final taxation is not defined in Income Tax Ordinance, 2001.

In furtherance, blanket exemption available on import of raw material, plant, machinery, equipment, parts by an industrial undertaking for its own use, fertilizer by fertilizer manufacturer and motor vehicle in CBU condition by the Motor vehicle manufacturer has now proposed to be extended to a new sub-category of taxpayer, namely, large import houses. A new clause (d) is added to sub-section (7) to define the term large import houses. A quantitative, qualitative and documentary criterion is prescribed and is as follows.

	Quantitative	Qualitative	Documentation
Paid up Capital	100 million
Import	500 million (during tax year)
Total Asset	100 million (at close of tax year)
Single object		Import
Import and Sale of goods			Computerized
100% cash receipt		System
Offer for tax audit every year			Financial statements
Sales Tax		Registered
Sales		Only to sales tax registered taxpayer

It seems that the criterion is interdependent in terms of qualitative and documentation but it was not clear regarding the application of monetary criterion where each criterion is to be applied independently or not.

The definition of value of goods provided in sub-section (9) has been amended to include federal excise duty with retrospective effect. Retrospective substantive increase in taxpayers’ obligation was always discouraged in the past in the decision of various judicial forums on taxation policy. However, this amendment is made in second schedule of ITO, 2001 across the board. Some professionals believe that when retrospective amendment is not possible then earlier collection of Advance Tax under section 148 to the extent of FED is now refundable!

SALARY – SECTION 149

The word adjustment used in relation to adjustment of taxes has been elaborated to include the other advance tax withheld from employees and employer’s are obliged to consider tax credits - charitable donation, investment in share, retirement annuity scheme and profit on debt, available to employees after obtaining documentary evidence. There seems to be a need to supplement the word withheld with collected to fully show the intention.

In furtherance, the phrase any excess deduction or deficiency arising out of any previous deduction or failure to make a deduction during the year has been replaced with three new sub-clauses to sub-section instead of clause which is normally added to a sub-section.

These new sub-clauses has specifically provided for consideration of tax withheld under the ordinance during a tax year, excess deduction or deficiency of previous deductions and failure to make deduction during the year. However, the word previous as used in sub-clause (ii) is a very wide term and needs to be restricted.

PAYMENT FOR GOODS AND SERVICES – SECTION 153

A new clause (bb) is proposed to be inserted in sub-section (5) whereby tax will not be withheld from cotton ginners who provide evidence to the person responsible for deduction of tax regarding the fact that amount equal to deduction of tax on payment has already been made.

This provision is a clear shift in policy towards the concept of WHT Agent’s responsibility; however, modus operandi regarding showing such transaction in annual statement needs to be considered in advance. The 2% rate of deduction is prescribed from transport services. This tax is only deductible where the transport services provider's transport is not covered under section 234.

In more furtherance, tax withheld from advertisement of services by owners of newspapers and magazines shall not constitute full and final discharge of tax liability. It is worthwhile here to note that tax under section 153 is withheld on 15% of amount of the agent according to circular 25 of 1980. However, the circular was silent regarding payment to principal – owner of newspaper and magazines, hence, this deficiency is now provided a new proposed proviso. One wonder regarding application of this proviso over electronic media!

There is a clear shift in policy of Governments towards listed corporate entities whereby no deduction is required from payments on account of sale of goods and execution of contract from companies listed on registered stock exchange in Pakistan. Moreover, Tax deducted on account of sale of goods shall only be considered full and final discharge of tax liability in respect of an Individual and AOP.

Moreover, the provisions of section 153 (1) (a) shall not be applicable to payments received on sale of air tickets by traveling agents who have paid WHT on their commission income. This misconception has now become the part of law and one wonders in the presence of section 233, commission and brokerage, how section 153 (1) (a) is applicable over travel agents!

EXPORTERS – 153 (1A) & 154 (4)

The proposal to bring out the service provider from Final Tax Regime and eliminate special rate has not been accepted, however, the rates are reduced to 0.5%. Moreover, the transactions referred in section 154 have been brought within the ambit of final tax regime instead of merely export or sale to an exporter. Moreover, the range of tax rates has been replaced with 1% for all export related transactions.

INCOME FROM PROPERTY – 15 & 155

Now the income from property shall only be treated as treated as full and final discharge of tax liability. Income from property does not include lease of building together with plant and machinery and any amount of rent on account of provision of amenities, utilities or any other services connected with the renting of building.

PURCHASE OF MOTOR CARS – SECTION 231B

Every manufacturer or authorized dealer of motor cars shall collect 2.5% adjustable advance tax at the time of sale of a motor car excluding sale to federal or provincial government and foreign diplomat or diplomatic mission in Pakistan.

It may require collection of 2.5% advance tax from every point of sale in the current state of sub-section (1), that is, the manufacturer shall also collect the advance tax from the authorized dealer. The rate of tax is reduced to 2.5% from August 31, 2007 by virtue of SRO 661(I)/2007 dated July 02, 2007 which inserted clause (9A) in Part II of Second Schedule, however, from July 1 to August 31, 2007 the tax rate is 5% - one wonders!

CNG STATIONS – 168, 169 and 234A

This new section seeks to impose tax at the rate 4% on the amount of gas bill of compressed natural gas station which will be treated as full and final discharge of tax liability in respect of such consumption. Corresponding amendments were made in section 168 and 169 while section 115 (4) is lost in the way!

The expected practical problem relating to that is the bill for the last month of Tax Year normally comes after the end of Tax Year. There is no concept of cash or accrual basis accounting under Final Tax Regime. In such a case how the last month of the Tax Year’s income be assessed – one wonder! Moreover, sub-section (4) is an example of bad drafting and may not be able to serve its purpose of induction.

ELECTRICITY CONSUMPTION – SECTION 235

A new sub-section (4) is proposed to be inserted whereby the tax collected under this section shall be the minimum tax on the industrial and commercial consumers of electricity except companies. However, in case of companies, this minimum tax is only refundable where the tax chargeable is less than tax collected under this ordinance. One wonder about the need of second sentence of sub-section (4)!

FEDERAL BOARD OF REVENUE – SECTION 239A & 159

Central Board of Revenue has suggested a new section 239A in the Income Tax Ordinance, 2001 whereby the word Central Board of Revenue is to be read and understood as Federal Board of Revenue instead of replacing the name Central Board of Revenue with Federal Board of Revenue spread all over the Income Tax Ordinance, 2001. This is because of the fact a lot of circulars, notifications and S.R.O’s are in field containing the old name – Central Board of Revenue.

FBR is also empowered to amend the WHT rates prescribed under this ordinance and shall not be applicable in respect of income on which tax withheld is treated as discharge of final tax liability. FBR is required to place such amendment before the Majlis-e-Shoora during the financial year, that is, after every such amendment.

SIGNIFICANT AMENDMENT IN SECOND SCHEDULE

Micro Finance Banks
Micro Finance Banks shall be exempt from tax for a period of five years starting from July 1, 2007, provided they take it as a social responsibility and do not distribute dividend among shareholders.

Profit on Sale of Immovable Trust to REIT
The profit on sale of immovable property to a Real Estate Investment Trust is exempt from tax upto June 30, 2010.

Corporatization of existing Stock Exchanges
Any gain on transfer of capital assets of existing stock or transfer of membership of existing stock exchange to new corporatized stock exchange shall be exempt.

Construction Contract outside Pakistan
1% tax on gross receipt brought into Pakistan through normal banking channel.

Tax Rate on Profit on Debt under ADTT
The rate of WHT in respect of payments for profit on debt payable to a non-resident person having no PE shall be the rate prescribed under Avoidance of Double Tax Treaty. The Phrase having no PE will have no significance where this is not provided in ADTT.

CONVENTIONAL AND SHARIAH COMPLIANT BANKING – SECTION 100 AND 7TH SCHEDULE

Banking Company’s income, profits, gains and tax payable thereon shall be computed in accordance with the rules in seventh schedule from Tax Year 2009. Banking Company means a banking company defined in Banking Companies Ordinance, 1962 or a body corporate which transacts the business of banking in Pakistan which is required to furnish the annual accounts to the State Bank of Pakistan.

Types of Income

Seventh Schedule has not retained the concept of heads of Income enunciated in section 11 of Income Tax Ordinance, 2001. Consequently, income, profits and gains from all sources shall be aggregated to arrive at Income from Business.

Income or loss on disposal of a depreciable asset shall be computed in accordance with section 21(8) while section 75 – Disposal and Acquisition of Assets, section 76 – Cost, Section 77 – Consideration received, Section 78 – Non-arm’s length transactions and section 79 – Non-recognition rules shall apply mutatis mutandis.

Income arising from the fair valuation, in accordance with IAS 39 and 40 - being unrealized, will be excluded from accounting profit to arrive at the taxable income. Consequently, historical cost will be considered as the cost of assets or value of liability, covered under IAS 39 and 40, that is, before the fair value adjustment, during the year of disposal. However, increase in value of asset on account of fair valuation, for instance under IAS 40 etc, shall not be excluded from accounting profit.

Types of Expenses

Deduction for Depreciation, initial allowance and amortization shall be allowed according to section 22, 23 and 24. The re-classification of substandard irrevocable debt as doubtful, loss or recoverable, in accordance with prudential regulation, will be allowed as expense.

Provisions for classified advances and off balance sheet items shall be allowed according to the claim in accounts. However, a certificate from external auditor will be required for compatibility of such provision with the requirements of the Prudential Regulations.

Banking companies and their external auditors need to consider the implication of section 73 – Rules to prevent double derivation and double deduction in respect of provision for debts.

Types of Inadmissible Expenses

The schedule has specifically mentioned the deduction not allowed by cross referencing Section 21 – Deductions not allowed. Accounting depreciation and depreciation on asset subject to finance lease shall be added back to the accounting profits. The substandard irrevocable debt, according to the Prudential Regulations, shall not be allowed as expense.

Set off and Carry Forward of Losses

The loss on sale of shares of listed companies disposed of within one year of the date of acquisition shall adjustable during current year's income from business while the un adjustable part of such loss can only be set off against capital gain subject to the limitation of six years. No loss can be carried forward for more than six years while the limitation of six year includes the year of loss.

Head Office Expenditure

Any expenditure incurred by the foreign bank's Head Office, being non-resident, outside Pakistan for the purposes of business of the Pakistan PE may be termed as Head Office Expenditure [HOE]. HOE means any executive and general administration expenditure and includes rent, local rates and salary paid to an employee employed by the HO outside Pakistan including traveling of such employee but excludes insurance against risks of damages or destruction outside Pakistan and any profit paid or payable by the HO on debt to finance the operation of PE including any insurance premium in respect of such debt.

HOE shall be allowed as deduction subject to the condition that the expenditure is charged in the books of accounts of the PE. Moreover, a certificate from external auditor is also required mentioning the fact that expenditure is reasonable in relation to operation of the PE in Pakistan, according to the rules and following formula:

(Gross Receipt (GR) / Global GR X HOE XXX

It is next to impossible that an auditor, who is a watch dog not a blood hound, could assesses the reasonableness of HO expenditure charged in the books of accounts. The core reason is the non-availability and lack of access to the breakup of HO expenditure. The only way to assess the verifiability of Global GR and HOE is confirmation from consolidated financial statement auditor who will also not be in a position to identify the individual amounts.

Group Relief

The provision of section 59AA and section 59B shall also be applicable over a banking company where the holding and subsidiary companies are banking companies. However, the approval of State Bank of Pakistan is required for the purposes of these sections while the accounts must be audited by the Chartered Accountants firm on the panel of auditors for the purpose of section 59B. The inter group dividend is not exempt for Banking Companies Group.

Advance Tax

A banking company shall be required to pay advance tax in twelve equal installments, instead of four, on 15th of every month in accordance with section 147. Moreover, no deduction shall be made from the payments to banking company under any WHT provisions of Income Tax Ordinance, 2001.

Applicable Tax Rates

Income from Business	35%
Gain on sale of Shares of listed companies disposed of in one year	35%
Dividend	10%
Gain on sale of Shares of listed companies disposed of after one year	10%

The provision of section 113 shall only be applicable over the resident banking company while and exemptions under second schedule shall not be available for banking companies.

Computation of Taxable Income
The computation of income from banking company business under the seventh schedule can be summarized as follows.

Postulates - Revenue and Inadmissible Expenses
Income from all sources	XXX
Dividend Income	XXX
Capital Gain on Shares of listed companies	XXX
Liability not paid for more than three years	XXX
Accounting Depreciation and Amortization	XXX
Depreciation on Asset Subject to Finance Lease	XXX
Sub-standard irrecoverable debt per Prudential Regulations	XXX
Income/Loss on disposal of fixed asset	XXX
Increase in value of Asset on Valuation – Other than IAS 39 & 40	XXX
Inter Banking Companies Group Dividend	XXX
Expenses
Liability not paid for more than three years – paid during the year	XXX
Tax Depreciation, Initial Allowance and Amortization	XXX
Sub-standard irrecoverable debt re-classified as doubtful, loss or rcoverable oer prudential regulations	XXX
Head Office Expenditure (HOE)	XXX
– (Gross Receipt (GR) / Global GR X HOE
Other admissible expenditure	XXX

Shariah Compliant Banking
The Shariah Compliant Banks [SCB] and conventional banks providing such services shall also be required to compute income from business under this schedule. No excessive profit or gain on any product will be recognized by SCB's nor will the commissioner be authorized to invoke any provision of the Income Tax Ordinance, 2001 which arose solely because of following the Shariah Model advised by the Shariah Advisors.

In other words, any reduction or addition will not be taken into consideration while computing the income from Shariah Compliant Banking. In furtherance, the conventional banks providing SCB services shall be required to compute the income of conventional banking and SCB services separately, hence, the provision of section 67 – Apportionment of deduction and related rules shall be applicable.

The auditor is required to disclose the comparative position of transactions as per Islamic mode of financing and as per normal accounting principles. Adjustment, on this account, shall be made to the income according to the accounting income for the purpose of this schedule.

There are three views in relation to the statement of comparative positions. One school of thought believes that it is a simple statement stating nature of Islamic mode of financing and comparative normal accounting principles like ijara transaction may include repayment of principle and rent while the comparative transaction may include principal and interest.

The second school of though believes that the term normal accounting principles applicable to a SCB are meant to include either the International Islamic Accounting Standards or Islamic Accounting Standards adopted by the Institute of Chartered Accountants of Pakistan.

A more rigid third school of thought believes that this condition is ab initio void owing to the reason that accounting caters the transaction by recording it and the principles of recording in normal accounting are based on the nature of transaction which includes its legal form, purpose etc.

However, under the concept of all three schools of thoughts, no question of adjustment arises. Moreover, it is not possible that legislature could introduce an amendment whereby millions of transaction will be converted into conventional transaction means making either another set of books of accounts or investing millions into another tailor made accounting which amounts to nothing but considerable increase in compliance cost.

One wonders, in case the intention of legislation is to re-compute the profit of SCB according to the conventional banking by changing its legal form, purpose etc then this is against the fundamental rights of doing business provided in the Constitution of Islamic Republic of Pakistan.

CONCLUSION
The average economic growth of Pakistan was more than average growth of the world. The negative balance of payment and current account deficit were no longer be viewed as short term problems when trade policies show a budgeted gap and the shortfall cannot be met by selling the nationalized assets to foreign investors.

Economy can no longer rely on non-productive investment in sectors like construction and nature dependent agriculture while the investments in newly set up manufacturing sectors is not at par and this condition further deteriorates on decisions by multinational like one taken recently by Mercedes.

Energy crises seem to further grow not only the gap between imports and exports but also the GDP and GNP. The PESTL analysis stops at the unrest country although unrest ness is not a part of Political, Economic, Social, Technological and Legal analysis.

In a post budget seminar, one learned speaker passed remarks that Income Tax was un-Islamic, hence, don't bother about its sanctity. I wonder, extremism from any side may lead to chaos, as the pin pointer from either side normally loses its sight from the overall picture by concentrating and revolving around extremist presumption. The sole reason for existence of such concentration is the reversal of hierarchy to identify the truth from Quran, Sunnah and the Knowledgeable Person to Knowledgeable Person, Sunnah and Quran.

Shariah Compliant Banking is recognized in Income Tax Ordinance, 2001 while legislature was silent in other laws. On the other hand, new avenue of investment namely Islamic Insurance – Takaful was missed altogether in fiscal policy where millions of investment already brought in!

Unemployment is expected to increase while food inflation will continue its journey owing to the tax on tax scenario now present in almost every law, imposition of SED on retail price and increasing fuel cost. The element of consistency is almost missing at least in indirect taxes while the direct taxes are showing a matured consistent and better transformation trend.

FBR is currently judging its policy towards Final Tax Regime but is not distinguishing appropriately between WHT and FTR. A policy of reduced WHT to cater the transaction but such transaction will not fall outside the ambit of FTR may prove to be a worthwhile exercise in near future for all corporate entities initially.

(The writer is an International Tax Advisor and can be contacted through taxonomy.ashraf@gmail.com. The views expressed in the article are personal while no liability will be assumed unless specially agreed)

Article courtesy of Muhammad Ashraf