Brief on Amendment made in Income Tax Ordinance, 2001 vide Finance Bill, 2023

All amendments, if approved, will be applicable from July 1, 2023.

Scope and Powers

Bill proposes to

• Broad scope of section 147 to Super Tax on high earning persons under section 4C of the Ordinance.
• Insert a new section 44A – Exemption under Foreign Investment (Promotion and Protection) Act, 2022 is proposed to be inserted to protect the already available exemptions provided to investments made in Reko Diq projects as qualified under Foreign Investment (Promotion and Protection) Act, 2022.
• A new section 146D to empower the Commissioner Inland Revenue [the CIR] to recover outstanding liability constructed in any other law wherein the CIR is required to be collect/recover such liability. This section will allow CIRs to recover ancillary liabilities like WWF from taxpayers.
• Establish “International Centre of Tax Excellence” to help contribute to the development of tax policy, prepare model national tax policy, deliver interdisciplinary research in tax administration and policy, international tax cooperation, revenue forecasting, conduct international seminars, workshops and conferences on the current issues faced by tax authorities in the field of international taxation, capacity building of Inland Revenue Officers, tax analysis, improve the design and delivery of tax administration for maximising revenue.

Definitions

Bill proposes to

• Include “bonus shares issued by companies” in the definition of income.
• Wide the scope of “permanent establishment” by substituting “fixed place of business” with “place of business”. Bill, further proposes to include furnishing of services, including consultancy services by “entity”.
• Broad definition of associate by introducing following:

1. one person sufficiently influences, either alone or together with an associate or associates, the other person; or
2. one person enters into a transaction, directly or indirectly, with the other who is a resident of jurisdiction with zero taxation regime.

However, definition of “jurisdiction with zero taxation regime” is not provided and left for Board to prescribe.

Issuance of Bonus Shares

• Proposes to include income arising to the shareholder of a company, from the issuance of bonus shares as Income from Other Source.
• No tax credit is allowed against aforementioned income.
• Advance tax is charged at 10% of the value of bonus share.
• Advance tax collected by the companies against issuance of bonus shares shall be final tax.
• Advance tax collected by the company shall be deposited within 15 days from closure of books.
• Company has the right to recover the tax from shareholder even if it has to sell the bonus shares up to such extent.

Super Tax on high earning persons

• New slabs and rates are proposed for tax year 2023 onwards:

• Bill proposes to withdraw super tax under section 4C on banking companies for tax year 2022.
• Bill proposes that NCCPL [in addition to capital gains tax] shall also compute and collect tax under section 4C on the amount of capital gains.

Additional tax on certain Income Profits and Gains

• A new section 99D is proposed to charge additional tax on every person [including insurance business, exploration and production of petroleum, banking companies] due to any economic factor resulting in unexpected income, profits and gains.
• Federal Government in empower to determine such economic factor(s), provide rate of tax [not exceeding 50% of such income, profits and gains], time-mode-manner of payment and exempt person or class of person.
• Recognition of such income, profits and gains by taxpayer is not mandatory for application of this section.

Small and Medium Enterprise

Change in Definition

Propose to broad scope of “small and medium enterprise” [the SMEs] by extending business turnover limit from Rs.250 million to Rs.800 million. Bill further proposes to include IT services or IT enabled services in scope of SMEs.

Change in Registration Requirements

SMEs engaged in IT services or IT enabled services shall be required to be registered with and duly certified by the Pakistan Software Export Board, in addition to registration on SMERP.

Change in Taxability

Bill proposes a new slab for taxability of income of SMEs:

Exemption

Bill proposes to provide exemption on profits and gains of a SMEs setup exclusively as agro based industry in a rural area duly notified for a period of five tax years commencing from tax year 2024 and up to tax year 2028. Subject to the condition that it is setup on or after July 1, 2023.

Start-ups – Youth Enterprises

An exemption is proposed against profit and gains chargeable to tax under “Income from Business” for Youth Enterprises.

Definitions

• Youth Enterprises means a start-up established by person(s) on or after July 1, 2023.
• Persons means:

1. In case of individual, person should be a natural person up to age 30 years.
2. In case of AOP, all members should be a natural person up to age 30 years.
3. In case of Company, 100% shareholding is held by a natural person(s) up to age 30 years.

Exemption

Amount of exemption will be:

• For Individuals and AOP, lower of:

–???????50%; and

–???????Rs.2 million.

• For Companies, lower of:

–???????50%; and

–???????Rs.5 million.

Restriction

• This exemption will be available for tax years 2024 to 2026.
• Start-up is not formed by the transfer or reconstitution or reconstruction or splitting up of an existing business.
• This exemption is not applicable for start-ups covered under “Women Enterprises”.

Provisions relating to Construction/Builders

Tax Credit for Construction of House

• Tax Credit is proposed for individuals undertaking construction of residential house.
• Tax Credit will be available for tax years 2024 to 2026.
• Layout plan is required to be approved on or after July 1, 2023 and completion certificate is required to be furnish along with income tax return.
• Tax credit can only be claimed in tax year in which completion certificate is issued.
• Amount of tax credit will be lower of:

–??????10% of tax assessed; and

–??????Rs.1 million.

Exemptions

• An exemption is proposed against profit and gains chargeable to tax under “Income from Business” for Builders registered with Directorate General of Designated Non-Financial Business and Professions.
• This exemption will be available for tax years 2024 to 2026.
• Layout plan is required to be approved on or after July 1, 2023 and completion certificate is required to be furnish along with income tax return.
• Exemption can only be claimed in tax year in which completion certificate is issued.
• Amount of exemption will be lower of:

–??????10%; and

–??????Rs.5 million.

• Amount of exemption can not be used to reduce tax payable below zero. In other words, it cannot create refund.

Minimum Tax

Minimum tax carried forward was considered adjustable against minimum tax liability due to the fact that in clause (c) of section 113(2) of Ordinance uses the term “aforesaid Part” inferring Pat I of First Schedule of the Ordinance including minimum tax.

Such understanding was also confirmed by honourable Appellate Tribunal Inland Revenue [2022 PTD 599].

The Bill proposes to insert an explanation to clarify that “aforesaid Part” means “clause (1) of Division I or Division II of Part I of the First Schedule” thereby excluding minimum tax liability.

A new category for charging minimum tax at 1% is propose for companies listed in Pakistan Stock Exchange.

Banking Companies

Reduce Rates

Bill proposes to

• Extend timeline for reduced rate of tax on additional advances for micro, small and medium enterprises, low-cost housing and Farms Credits till tax year 2025. Earlier it was up to tax year 2023.
• Provide reduce tax rate of 20% on additional advances for Information Technology Services and Information Technology Enabled Services for tax year 2024 to tax year 2025.

Exemptions

Bill proposes to

• Provide exemption against profit on debt and capital gains from Federal Government’s sovereign debt or a sovereign debt instrument chargeable under Ordinance, derived by any non-resident banking company approved by the Federal Government under a sovereign agreement.
• Provide exemption to banking companies from enhance rate of tax against taxable income attributable to investment in the Federal Government Securities.

Payment to Non-Resident

Bill proposes to

• Allow IRIS to issue exemption certificate automatically upon expiry of 30 days period excluding adjournments taken by applicant.
• However, CIR in allowed to modify or cancel such exemption certificate on the basis of reasons to be recorded in writing.

Undisclosed Income

Bill proposes to enhance the limit of undisclosed income from Rs.5 million to USD 100,000.

Export of Computer Software or IT Services or IT Enabled Service

Exporters of computer software or IT services or IT enabled services are now not required to file federal or provincial sales tax return to avail FTR status on receipt.

Bill proposes to restrict the applicability of reduce rate of 0.25% up to tax year 2026.

Indirect Exporters under Export Facilitation Scheme, 2021

Direct exporters are proposed to deduct 1% tax on payments made to indirect exporters registered under Export Facilitation Scheme, 2021. Earlier, such requirement was only applicable for indirect exporters registered under DTRE.

Advance Tax/Income Tax Withholding

Bill proposes to

• Restore adjustable advance tax on cash withdrawal of Rs.50,000/day on aggregate basis at the rate of 0.6% from persons not appearing in ATL. Originally this section was introduced vide Finance Act, 2005 then omitted vide Finance Act, 2021.
• Charge adjustable advance tax of Rs.200,000 from agency, sponsor or any person hiring a foreign national.
• Provide exemption to buyer/transferee to non-resident individuals having Pakistan Origin Card or NIC and acquired immovable property through Foreign Currency Value Account or NRP Rupee Value Account. Earlier tax deducted under this section was final for such non-resident individuals.
• Charge advance tax at 6% for commercial importers importing goods classified in Part III of the Twelfth Schedule. Earlier it was 5.5%.
• Increase advance income tax on payment to permanent establishment of a non-resident person:

• Increase advance income tax on payment to a resident person:

• Increase rate of advance tax from 1% to 5% amount remitted abroad through credit, debit or prepaid cards.

Exemptions

For the purpose of harmonizing, exemption from advance income tax against Corp Loan Insurance Scheme and Livestock Insurance Scheme has been withdrawn. The withholding section – i.e., section 236U; was already omitted vide Finance Act, 2020.

Changes in Exemptions

Bill proposes to

• Extend the timeline of exemption on profit and gains accruing to a person on the sale of immovable property or shares of Special Purpose Vehicle to any type of REIT scheme up to the June 30, 2024. Earlier it was up to June 30, 2023.
• Extend the timeline of exemption on any income of any individual domiciled or company and association of persons resident in the Tribal Area forming part of the Provinces of Khyber Pakhtunkhwa and Balochistan till June 30, 2024. Earlier it was up to June 30, 2023.

Broadening of Exemption

Bill proposes to

• Exempt income of following institutions, foundations, societies, boards, trusts and funds:

–??????The Prime Minister's Relief Fund for Flood, Earthquake and Other Calamities with effect on and from the August 5, 2022;

–?????Film and Drama Finance Fund;

–?????Export-Import Bank of Pakistan;

–?????Shaheed Mohtarma Benazir Bhutto Institute of Trauma, Karachi; and

–?????Shaheed Zulfikar Ali Bhutto Institute of Science and Technology.

• Extend exemption from minimum tax and income tax withholding on profit on debt to Prime Minister's Relief Fund for Flood, Earthquake and Other Calamities with effect on and from the 5th August, 2022.
• Exempt advance income tax on amount donated through SMS to the Prime Minister's Relief Fund for Flood, Earthquake and other calamities with effect on and from the 5th day of August, 2022.

Retrospective Exemptions

Bill proposes to

• Extend the benefit of exemption under clause (150) of Part I of Second Schedule to M/s Alteraz Engineering Consultant from contract dated 23rd day of May 2017 with Earthquake Reconstruction and Rehabilitation Authority, financed by the Saudi Fund for Development with effect from tax year 2017.
• Exempt application of section 148 during December 1, 2022 to February 28, 2023 on goods imported for relief operation for flood affectees, duly certified by the National Disaster Management Authority or the Provincial Disaster Management Authority.
• Exempt application of section 148 till December 31, 2022 on import of tomato [0702.0000] and onion [0703.1000].

Miscellaneous Changes

Bill proposes to

• Include following in list of eligible parties for tax credit on donation:

–?????The Prime Minister’s Relief Fund for Flood, Earthquake and other Calamities with effect on and from the 5th August, 2022; and

–?????Film and Drama Finance Fund.

• Change name of section 164A from “Payment of tax collected or deducted by SWAPS agents” to “Settlement of transactions liable to Withholding Tax by SWAPS agents”.