DR. IKRAMUL HAQAdvocate Supreme CourtHUZAIMA & IKRAM (Taxand Pakistan)

Income Tax Ordinance, 2001

Sales Tax Act, 1990 Customs Act. 1969 Federal Excise Act, 2005 Capital Value Tax

Basic income tax exemption limit for salaried and non-salaried individuals for tax year 2012 raised from PKR 300,000 to PKR 350.000.

Tax credit equal to 100% of the tax payable by a newly established company.

Tax credit equal to 100% of tax payable for equity investment in balancing, modernization, replacement, or for expansion of the plant and machinery already installed, in an industrial undertaking .

For companies getting enlisted on stock exchange rate of tax credit enhanced from 5% to 15%.

Period for carry forward and adjustment of minimum tax enhanced to five years from three years.

Turnover for the purposes of minimum tax will be gross sales or gross receipts.

Holders of commercial or industrial connection of electricity where the amount of annual bill exceeds rupees one million, compulsorily required to file return of income.

Individuals having income from business between PKR 300,000 and PKR 350,000 to file return of income despite having zero percent tax.

Threshold for compulsory filing of wealth statement and its reconciliation increased from PKR 500,000 to PKR 1,000,000.

Monthly, instead of quarterly statements of withholding tax to be filed. Statements to include Computerized National Identity Card (CNIC) or National tax Number (NTN) of the persons from whom tax was withheld/collected.

Annual withholding tax statement to be filed by employers for tax withheld and also for employees earning non-taxable salaries.

Adjustment period of minimum tax extended from 3 to 5 years.

Non-resident taxpayers having permanent establishment in Pakistan shall not be entitled to Advance Ruling.

Banks have been allowed 5% provision of total advances to small and medium enterprises (SMEs). Earlier this limit was only 1%.

Rate of tax on dividend received by a bank from its asset management company enhanced from 10% to 20%.

10% tax deducted on profit from instruments, government securities including treasury bills and Pakistan Investment Bonds from a non-resident person having no permanent establishment in Pakistan shall be a “final tax” where the investments for purchase of these instruments are exclusively made through a Special Rupee Convertible Account maintained with a Bank in Pakistan.

Appeal to the Commissioner (Appeals) not permissible against provisional assessment order.

Tax payable as a result of provisional assessment order shall be payable immediately after a period of sixty days from the date of service of notice.

Single member bench of the Tribunal to dispose of cases involving tax or penalty not exceeding PKR 1,000,000 instead of PKR 5,000,000.

Advance tax on capital gains on sale of securities shall be payable within a period of 21 days after the close of each quarter.

Profit on debt on securities issued by Federal Government, Provincial Government or Local Government to be taxed under final tax regime for resident individuals and Association of Persons (AOPs).

Threshold for withdrawal from pension fund enhanced from 25% to 50% of accumulated balance in order to attract withholding tax.

Promulgated by the President on 24 April 2012 providing that: Source of investment in the shares

would not be probed till June 30, 2014 provided that amount remains invested for a period of 120 days.

Amount of investment shall be calculated in the prescribed manner, excluding market value of net open sale position in futures and derivatives, if such sale is in a security that constitutes the said investment.

Where a person has made any investment in the listed securities, enquiries as to the nature and source of the amount invested shall not be made for any investment made prior to the introduction of Eighth Schedule, provided that a statement of investments is filed with the Commissioner along with the return of income and wealth statement for tax year 2012 within due date as given in section 118, in the manner prescribed & the amount remains invested for a period of 45 days up to June 30, 2012, in the prescribed manner.

Capital gains on disposal of listed securities shall be computed and determined under Eighth Schedule and tax thereon shall be collected and deposited on behalf of taxpayers by National Clearing Company of Pakistan Limited (NCCPL) in the manner prescribed.

The Central Depository Company of Pakistan Limited shall furnish information as required by NCCPL for discharging obligations under this Schedule.

The Central Depository Company of Pakistan Limited to furnish information to NCCPL .

Rate of sales tax reduced to 16% from 17%

Several exemptions have been withdrawn notably: Bricks, building blocks, and ready mix

concrete; Aircraft & ships, machinery for pilotage

& towage, air navigation equipment;

Bull-dozers, harvesters, CNG Euro-2 buses, trucks for highways;

Agricultural machinery; CNG kits & cylinders.

Zero rating facility withdrawn on CNG buses in CBU (completely built unit) or CKD (completely knocked down) condition, trucks & dumpers, trailers & semitrailers, road tractors, etc.

Restriction of claiming input tax up to 90% of output tax on fixed assets and capital goods stands withdrawn.

Returns can also be revised after approval from the Commissioner.

No refund of sales tax is admissible, if incidence of sales tax has already been directly or indirectly passed on to the consumer.

Specific and express provisions introduced for inadmissible claim of input tax credit against invoices issued by suspended or blacklisted parties.

Withdrawal of sales tax exemption on plant, machinery, equipment, etc. relating to specified sectors/industries/capital goods.

Special excise duty leviable at the rate of 2.5% on imported and manufactured goods abolished across the board.

Rate of Federal Excise Duty (FED) introduced on aerated waters and fruit juices, etc. reduced to 6% of retail price .

Rate of duty on various types of cement slashed from Rs. 700 PMT to Rs. 500 PMT.

Rate of duty enhanced on locally produced cigarettes, unmanufactured tobacco and filter rods of cigarettes.

FED abolished on 15 different types of goods including solvent oils, other fuel oils, greases, MBTE, viscose staple fibre, motor cars, air-conditioners, deep freezers, etc.

FED in sales tax mode imposed at the rate of 8% ad valorem on white crystalline sugar to substitute sales tax.

FED on services rendered or provided by property developers and promoters stands withdrawn.

Transit fee: For the first time transit fee is levied on any goods or class of goods in transit across Pakistan to a foreign territory at such rates as the Federal Board of Revenue (FBR) may, by notification in the official Gazette.

Power to prohibit, withdrawn on import or export of goods on the belief that the importer has submitted false statements.

Duty drawback facility allowed for supplies against international tenders.

Enhancement of time limit from 3 years to 5 years for issuance of show cause notice on account of audit.

One year time period for refund, to be reckoned from the date of the decision of the appropriate authorities.

Regulatory duty abolished on a number of items.

Incentives to local industry by reduction of duty through a concessionary notification.

CVT was abolished w.e.f. July 1, 2011 on the purchase of modaraba certificates, instruments of redeemable capital and shares of listed companies. But the Presidential (Amendment) Ordinance, 2012 has re-imposed 0.01% CVT on purchase of shares of public listed companies from 24 April 2012.

Section 152(5) of the Income Tax Ordinance, 2001 requires that where a person intends to make any payment to a non-resident without deduction of tax, he must inform the Commissioner and wait for his ruling—which Commissioner is bound to issue within 30 days.

Section 152(1AA) requires every person to withhold tax of 5% while making a payment of reinsurance premium to a non-resident person.

EFU Insurance Pakistan [EFU] neither deducted tax while making payments to non-resident companies [having DTAs with Pakistan] nor sought prior clearance from the Commissioner.

The Commissioner started penal proceedings which were challenged in High Court by way of writ petition on the following grounds: Treaty provisions override domestic law; and Payments to non-resident companies, having

no PE in Pakistan, were exempt under DTAs.

Tax Department pleaded that section 101(13A) deemed any amount paid on account of insurance or re-insurance as ‘Pakistan-source’ income.

Since EFU did not deduct tax while making payment mentioned in section 101(13A) read with section 152(1AA) and 152(5), penal action was correctly initiated.

It was incumbent upon EFU to intimate the Commissioner even if payments were exempt under DTA.

EFU countered by relying on American Express Bank Karachi v. Commissioner of Income Tax (2009 PTD 1791) that "provisions of the treaty prevail over provisions of the Income Tax Ordinance—it is a settled law that special laws prevail over general laws“.

In Mountains Estate Mineral Enterprises v. Commissioner of Income Tax (2008 PTD 1087) it was held that "where no PE in Pakistan exists, business income is exempt and no tax can be levied under domestic law“.

The argument of EFU (petitioner) was two-fold: First submission: provisions of the

treaty have an overriding effect over domestic tax laws. Payment of re-insurance premium could not be taxed as ‘Pakistan-source’ income even under a deeming provision.

Second submission: since payments to the non-resident enterprises were not liable to tax in Pakistan, there was no legal obligation to deduct tax at source or seek approval from Commissioner.

Court held that “the question of deduction of tax does not arise where payments made to the non-residents are exempt from tax under any provision of applicable DTA”.

It is also a settled law that in the case of an enterprise of contracting State with which Pakistan has a treaty, provisions of the treaty will determine the rights and obligations of the said non-resident company.

Although the provisions of section 152(5) of the Ordinance direct a taxpayer to seek approval from the Commissioner before remitting any payment to a non-resident without deduction of tax, however, it does not entail any penal consequences if the approval is not obtained.

While interpreting the statutes, the court has to find out as to what was the intention of the legislature. Intention is the essence of the statute—Legislature has not made section 152(5) mandatory.

Department’s view that by using the word "shall“ in section 152(5), the legislature has made it mandatory is incorrect. The provision does not specify any consequences of not following the requirement of informing the Commissioner if the person chooses to make the payment without deduction of tax.

Merely on the basis of the use of the word "shall" it could not be construed that it is a mandatory provision of law—we hold that it is a directory provision.

EFU did not press non-discrimination provision in DTAs providing that non-resident ‘nationals’ [expression includes legal persons] could not be subjected to any taxation [section 101(13A) or any requirement connected therewith [section 152(5)] as no such taxation or condition was imposed on Pakistani nationals by the other contracting states .

The Court also did not take cognizance of the matter from this perspective.