.jpg "Explanation of Important Amendments made in the Income Tax Ordinance, 2001")
The Finance Act, 2022 has brought about certain amendments to the Income Tax Ordinance, 2001 (the Ordinance, hereafter). Some significant amendments are explained hereunder: -
1. Incorporation of Ordinances in Finance Act, 2022
During the financial year 2021-22, two Ordinances were issued. Some changes in the enactments through the Ordinances have now been made part of the Finance Act, 2022.
(a) Income Tax (Amendment) Ordinance, 2022.
Certain provisions were enacted through this Ordinance on 2'dMarch, 2022. However, section 59C, 65H and 100F have been omitted through Finance Act, 2022.
(b) Tax Laws (Third Amendment) Ordinance, 2021.
The Tax Laws (Third Amendment) Ordinance, 2021 Ordinance was promulgated on 15thSeptember, 2021 and lapsed on 11th May, 2022 during the currency of the financial year 2021-22. Certain amendments brought through this Ordinance have been incorporated in Finance Act, 2022 after necessary modification.
2. Disclosure of Beneficial Ownership.
Previously companies and AOPs were not required to disclose the natural individuals who are ultimate beneficial owners. Thus beneficial ownership could be hidden through intervening companies and trusts. To bring transparency and to remove this obscurity, as per best international practices, companies and AOPs are now required to disclose details of their beneficial owners who are natural persons. Definition of term 'beneficial owner' has been provided by inserting new clause (7A) in section 2 of the Ordinance. Corresponding new section 181E has been inserted in the Ordinance whereby every company and association of persons will furnish electronically, particulars of its beneficial owners and will be required to update these particulars as and when there is a change in particulars of beneficial owners. Penalty of Rs. 1,000,000 has also been prescribed by incorporating entry No. 30 in the Table, in sub-section (1) of section 182 for each default of company or association of persons who contravenes the provisions of section 181E of the Ordinance.
3 Banking Companies.
Tax rates for banking companies are enhanced as explained hereunder:
(i) The taxable income arising from the additional income of banking
companies earned from additional investment in Federal Government
securities for the tax year 2020 and 2021 was taxable at the rate of 37.5%
instead of the rates provided in Division II of Part I of First Schedule.
This provision was further amended through the Finance Act, 2021,
whereby income attributable to investment in the Federal Government
securities of banking companies was made taxable on the basis of
advances to deposit ratios at graduated tax rates of 40%, 37.5%, and
35%, if ratio was upto 40%, 40-50% and above 50% respectively.
The Finance Act, 2022 has introduced enhanced rates of tax on
taxable income of banks attributable to investment in Federal
Government securities. The enhanced rates for tax year 2022 are
55%, 49% and 35% if gross advances to deposit ratio was upto 40%,
40-50% or above 50% respectively. For tax year 2023, and onwards
tax rates will be 55%, 49% and 39% if gross advances to deposit ratio
is upto 40%, 40 -50% or above 50% respectively. The changes have
been incorporated by substituting sub-rule (6A) of rule 6C of Seventh
Schedule to the Ordinance.
(ii) The tax rate on income of banking companies has been enhanced to
39% for tax year 2023 from current 35% through amendment in
Division II of Part I of First Schedule of the Ordinance. Additionally,
the application of section 4B has been restricted upto tax year 2022
in case of banking companies.
4. Super tax on High Earning Persons
A new section 4C has been introduced through Finance Act, 2022 and this section will apply for tax year 2022 and onwards. Except for the persons whose income as envisaged in this section is below Rs. 150 million, all other persons including those assessed under Fourth, Fifth and Seventh Schedules to the Ordinance are liable to pay super tax on graduated rates ranging from 1% to 4% based on graduated income slabs provided in Division JIB of Part I of First Schedule given as under:
However, for tax year 2022 the rate of super tax under this section will be 10% instead of 4%, where the income of the persons engaged, partly or wholly, in business of airlines, automobiles, beverages, cement, chemicals, cigarette & tobacco, fertilizer, iron & steel, LNG terminal, oil marketing, oil refining, petroleum & gas exploration and production, pharmaceuticals, sugar and textiles exceeds Rs.300 million. For tax year 2023, this super tax on income of banking companies will be 10% if the income for the year exceeds Rs. 300 million. For the purposes of this section, the income will be the sum of the following:
(i) Profit on debt, dividend, capital gains, brokerage, and commission;
(ii) Taxable income (other than brought forward depreciation and
brought forward business losses) under section 9 of the Ordinance,
excluding amounts specified in (i) above;
(iii) Imputable income as defined in clause (28A) of section 2 excluding
amounts specified in clause (i) above; and
(iv) Income computed, other than brought forward depreciation, brought
forward amortization and brought forward business losses under
Fourth, Fifth and Seventh Schedule.
Super tax payable under this section will be paid on the date and manner as
specified in under section 137(1) of the Ordinance. In case of default by the
person liable to pay super tax under this section, Commissioner through an
order in writing will determine the liability of the person and proceed to
recover the same under applicable provisions of the Ordinance.
5. Tax on Deemed Income from Immovable Property
A new section 7E has been introduced through Finance Act, 2022 whereby for tax year 2022 and onwards, a resident person is treated to have derived income equal to five percent of fair market value of the capital assets situated in Pakistan which will be chargeable to tax at the rate of 20% under Division VIIIC of Part I of First Schedule of the Ordinance. Following exclusions have been provided to which this section will not apply:
i. One capital asset owned by the resident person;
ii. Self-owned business premises from where the business is carried out by the persons appearing on the active taxpayer's list at any time during the year;
ii. Self-owned agriculture land where agriculture activity is carried out by the person but excluding farmhouse and annexed land. Farmhouse has been defined in this section;
iii. Capital asset allotted to —
(a) A Shaheed or dependents of a Shaheed belonging to Pakistan Armed Forces;
(b) A person or dependents of a person who dies while in the service of Pakistan armed forces or federal or provincial government;
(c) A war wounded person while in service of Pakistan armed forces or federal or provincial government;
(d) An ex-serviceman and serving personnel of armed forces or exemployees or serving personnel of federal and provincial governments who are original allotees of the capital asset as duly certified by the allotment authority;
iv. Any property from which income is chargeable to tax under the Ordinance and tax leviable has been paid;
v. Capital asset in the first year of acquisition on which tax under section 236K has been paid;
vi. Where fair market value of the capital assets in aggregate excluding capital assets mentioned in serial nos. (i) to (vi) above does not exceed rupees twenty-five million;
vii. Capital assets which are owned by a provincial government or local government;
viii. Capital assets owned by local authority, a development authority, builders and developers for land development and construction subject to the condition that such persons are registered with Directorate General of Designated Non-Financial Businesses and Professions.
6. Capital Gain on Disposal of Immoveable Properties and Other Capital Assets
Earlier, the gain arising on the disposal of immovable property after the holding period of 4 years was exempt from tax. Now the holding period concession will separately apply which for open plots is six years, for the constructed property is four years and for flats is two years. Further, the whole amount of gain on disposal of immovable property will be taxable at graduated rates provided in Division VIII of Part I of the First Schedule of the Ordinance given as under:
|
Sr. No. |
Holding Period |
Rate of Tax |
||
|
Open Plots |
Constructed Property |
Flats |
||
|
01 |
Where the holding period does not exceed one year |
15% |
15% |
15% |
|
02 |
Where the holding period exceeds one year but does not exceed two years |
12.5% |
10% |
7.5% |
|
03 |
Where the holding period exceeds two years but does not exceed three years |
10% |
7.5% |
0 |
|
04 |
Where the holding period exceeds three years but does not exceed four years |
7.5% |
5% |
- |
|
05 |
Where the holding period exceeds four years but does not exceed five years |
5% |
0 |
- |
|
06 |
Where the holding period exceeds five years but does not exceed six years |
2.5% |
- |
- |
|
07 |
Where the holding period exceeds six years |
0% |
- |
- |
The concessional taxation regime for capital gains has been made applicable
only to disposal of immovable properties situated in Pakistan. The benefit of
holding period and concessional rate of tax is not available in respect of
capital gains arising on the disposal of immovable property situated outside
Pakistan.
Furthermore, to streamline capital gains taxation regime, the concessions
earlier available under sub-sections (3) and (3A) of section 37 in terms of
reduction in capital gain by certain percentages on disposal of capital assets
held for more than one year has been withdrawn.
Sub-section (4A) of section 37 has been omitted. Accordingly, nonrecognition provision of section 79 will apply to determine the cost of
acquisition on transfer of capital asset under the circumstances contained
therein.
7. Capital Gain on Disposal of Securities
A separate block of taxation of capital gains on disposal of securities is available under the Ordinance. Earlier, flat tax rate of 12.5% was applicable on gain on disposal of securities irrespective of holding period. Now graduated tax rates have been provided with respect to securities acquired after 1" day of July, 2022, by substituting the Table in Division VII of Part I of First Schedule as under:
|
S. No |
Holding Period |
Rate of Tax for Tax year 2023 and onwards |
|
01 |
Where the holding period does not exceed one year |
15% |
|
02 |
Where the holding period exceeds one year but does not exceed two years |
12.5% |
|
03 |
Where the holding period exceeds two years but does not exceed three years |
10% |
|
04 |
Where the holding period exceeds three years but does not exceed four years |
7.5% |
|
05 |
Where the holding period exceeds four years but does not exceed five years |
5% |
|
06 |
Where the holding period exceeds five years but does not exceed six years |
2.5% |
|
07 |
Where the holding period exceeds six years |
0% |
|
08 |
Future commodity contracts entered into by members of Pakistan Mercantile Exchange |
5% |
However, gain on disposal of securities acquired on or before 30th day of June, 2022 will continue to be charged to tax at the earlier flat rate of 12.5% irrespective of the holding period.
8. Deductions not allowed
Section 21 of the Income Tax Ordinance provides for disallowance of
certain business expenditures as deductions. Following new clauses have
been inserted in this section as explained hereunder:
(i) Earlier, the whole amount of employer contribution to an approved
gratuity fund, an approved pension fund or an approved
superannuation fund was allowed as deduction. Now, clause (ea) has
been inserted whereby the allowable deduction is restricted to fifty
percent of employer contribution to these funds and the remaining
fifty percent of the employer contribution is not allowed as deduction.
(ii) he Board through notification in official gazette may require a
person to integrate his business with Board through approved fiscal
electronic device and software. If the notified person fails to integrate
his business with the Board, then any expenditure, not exceeding eight
percent of allowable deduction attributable to sales, will be disallowed
as deduction under newly inserted clause (r).
9. Depreciation and Initial Allowance
Finance Act, 2020 introduced restriction on claim of depreciation deduction by fifty percent on a depreciable asset used in a person's business for the first time. In continuation thereof, the person was allowed fifty percent deprecation deduction in the year of disposal of such depreciable assets. Now this restriction has been lifted and a person who introduces a depreciable asset in his business for the first time will be entitled to claim hundred percent deprecation deduction. The corresponding entitlement to claim fifty percent depreciation deduction during the year of disposal has been withdrawn. Furthermore, the cost of a depreciable asset being passenger transport vehicle not plying for hire was restricted to two and half million rupees for the purpose of deprecation deduction. This limit has been enhanced to seven and half million rupees. Immovable property or structural improvement to the immovable property have been excluded from the definition of eligible depreciable asset for the purposes of initial allowance.
10. Export of services
A special regime u/s 154A for export of IT and IT enabled services was
introduced though Finance Act, 2021 whereby 1% final tax was collected
on realization of export proceeds of these services. Moreover, hundred percent tax credit was available against this final tax to the exporters of IT
and IT enabled services u/s 65F upon fulfilling few conditions mentioned
therein.
In order to simplify the tax regime for exporters of IT and IT enabled
services, the 100% tax credit regime under section 65F has been withdrawn
and a reduced rate of final tax of 0.25% has been provided for exporters of
IT and IT enabled services who are registered with the Pakistan Software
Export Board (PSEB). Corresponding changes in section 65F have been
made accordingly. Furthermore, scope of definitions of IT services and IT
enabled services contained in clause (30AD) and clause (30AE) of section 2
of the Ordinance has been clarified and widened through the Finance Act,
2022.
Previously, the amount of foreign commission due to an indenting
commission agent was charged to tax, at the rate of 5%, under sub-section
(2) of section 154 of the Ordinance. Now, this rate has been reduced to 1%
by incorporating clause (da) in sub-section (1) of section 154A of the
Ordinance. Corresponding changes have been made in section 154
accordingly.
Moreover, provisions of Tenth Schedule will not apply on tax collectible
under section 154A of the Ordinance. Necessary change has been
incorporated in rule 10 of Tenth Schedule in this regard.
11. Elimination of certain tax credits and deductible allowance
Tax credits available to an individual u/s 62 for investment in shares and insurance, u/s 62A for investment in health insurance and deductible allowance u/s 60C for profit on debt have been omitted. Corresponding change in section 149 has also been incorporated accordingly.
12. Definition of Resident Individual
The scope of the definition of resident individual has been further expanded through insertion of clause (d) to section 82. Now a person being a citizen of Pakistan whose stay in any other country is not more than one hundred and eighty-two days during a tax year or who is not a resident taxpayer of any other country will also be treated as resident individual for the purpose of the Ordinance.
13. Exemption to Members in Case of Exempt Income of Association of Persons (AOP)
Under present legal dispensation, income of an AOP is taxed and the share income received by the partners is exempt. Where the income of AOP is exempt, the share income of partners is also exempt. In order to remove any ambiguity, an explanation has been inserted in section 92 of the Ordinance to the effect that if income of AOP is exempt then the share income of its partners shall also be exempt.
14. Payment of Tax Through Electricity Connections
In order to collect income tax from certain retailers and specified service providers a special fixed tax regime has been introduced though insertion of section 99A of the Ordinance. Now retailers, other than Tier-I retailers as defined in Sales Tax Act, 1990, and specified service providers will pay fixed income tax through their commercial electricity bills which has been provided in clause (3)of Division IV of Part IV of First Schedule to the ordinance in following manner;
|
S. No |
Holding Period |
TAX |
|
01 |
Where the amount does not exceed Rs. 30,000 |
Rs.3,000 |
|
02 |
Where the amount exceeds Rs. 30,000 but does not exceed Rs. 50,000 |
Rs.5,000 |
|
03 |
Where the amount exceeds Rs. 50,000 but does not exceed Rs. 100,000 |
Rs.10,000 |
|
04 |
Retailers and service providers as notified by the Board in the income tax general order |
Up to Rs.200,000 |
This is final tax on the income of persons covered in this section in respect
of business being carried out from the premises for which tax is collected
under this section. Retailers from whom tax has been collected in terms of
sub-section (9) of section 3 of Sales Tax Act, 1990 shall not be required to pay tax under section 99A of the Ordinance and the tax collected under the
Sales Tax Act, 1990 is also a final discharge of income tax liability under
section 99A of the Ordinance. The Board with the approval of Minister incharge is empowered to determine the scope, mode, manner, record keeping,
mechanism of collection and deduction etc and to include or exempt any
person or class of person, any income or class of income though issuance of
income tax general order for the purpose of this section.
Furthermore, enabling provision has been provided by inserting sub-section
(1A) in section 235 of the Ordinance to collect tax through electricity bills
from retailers other than Tier-I retailers as defined in Sales Tax Act, 1990
and specified service providers for the purpose of this section.
15. Separate Notice for Concealment of Income not Required.
In order to avoid duplication of notices and to streamline the amendment of assessment proceedings, an explanation has been inserted in section 111 whereby a separate notice under this section is not required to be issued if explanation regarding nature and source has been confronted under subsection (9) of section 122 of the Ordinance.
16. Minimum Tax on Turnover
Minimum tax on turnover under section 113 is payable by a resident
company, permanent establishment of a non-resident company, an
individual or an AOP having turnover of Rs. 100 million and above under
certain specific situations mentioned therein. Following major changes have
been introduced in the minimum tax on turnover regime:
(a) Previously, a person who had paid minimum tax on turnover under
section 113 was allowed to carry forward the said tax for five
succeeding tax years. Now this carry forward has been restricted to
three years.
(b) The rate of minimum tax on turnover of Oil Marketing Companies
have been brought down from 0.75% to 0.5%.
17. Time Limitation in Case of Best Judgment Assessment.
18. Revamping of Alternate Dispute Resolution Mechanism
Through the Finance Act, 2022, the mechanism of alternate dispute
resolution has been revamped. Major departure points from previous regime
are highlighted as under:
(a) Disputes involving tax liability of one hundred million or above only
can now be brought for settlement. Previously, there was no such bar
for filing of application under this mechanism.
(b) Disputes involving question of fact and law both can now be brought
by a taxpayer for settlement by the committee subject to the condition
\ L.... that decision by the committee will not be cited or taken as a precedent
in any other case or in the same case for a different tax year.
Previously, disputes involving interpretation of question of law having
effect on other cases were specifically excluded from the purview of
dispute resolution committee.
(c). The scope of initial proposition has been expanded which now includes
proposal from the taxpayer to settle the matter, including an offer for
payment of tax which cannot be withdrawn.
(d) The choice available to a taxpayer to appoint a member of dispute
resolution committee has been enhanced. Now a taxpayer can nominate
a member from a panel notified by the Board in this regard or an
Officer of Inland Revenue Service who has retired in B S21 or above or
a reputable business person as nominated by a Chamber of Commerce
and Industry. The third member of the committee will be selected
through consensus by Chief Commissioner Inland Revenue (being
other member of the committee) having jurisdiction over the case and
taxpayer's nominee member jointly from the panel notified by the
Board in this regard.
(e) axpayer and the Chief Commissioner Inland Revenue having
jurisdiction over the case either individually or both as the case may be,
will withdraw their appeal pending before a court of law or appellate
authority after the constitution of committee but before commencement
of proceeding by the committee. Previously, there was no requirement
of withdrawal of appeal and the taxpayer could choose to pursue his
appeals in case he did not accept the committee's decision.
(f) e committee members will decide the dispute pending before the
committee through majority. Earlier, consensus decision by committee
members was required for dispute resolution.
(g) he decision by committee will be binding on both the taxpayer and
Chief Commissioner Inland Revenue having jurisdiction over the case.
Previously, it was binding on Chief Commissioner only after it had
been accepted by the taxpayer though withdrawal of appeal.
The changed procedure of dispute resolution will ensure that it is focused on
high revenue yielding cases and does not result in wastage of time and
resources for the taxpayer as well as field formations by being an effective
alternative and not a parallel mechanism to the appeal process.
19. Withholding Tax on Imports for Industrial Undertaking:
Following changes have been incorporated with regard to WHT on import
under section 148 of the Ordinance.
a) Withholding tax on imports collected at 1% and 2% on goods falling
under Part I and II of Twelfth Schedule to the Ordinance respectively is
adjustable for an industrial undertaking if goods have been imported for
own use. In numerous circumstance, goods imported by an industrial
undertaking for own use may fall under Part III of Twelfth Schedule to
the Ordinance on which tax at 5.5% is collectible at import stage. This
resulted in a situation whereby tax collected at 5.5% on import of goods
by an industrial undertaking for its own use became minimum tax. For
the purpose of streamlining, tax collectible from an industrial undertaking on import of all goods for own use has been made
adjustable.
(b) Tax collectible under section 148 on import of edible oil, packaging
material, paper and paper board, and plastics has been made minimum
tax whether imported by an industrial undertaking for own use or by a
commercial importer.
(c) The rate of withholding tax on import of goods falling in Part II of
Twelfth Schedule of the Ordinance has been enhanced from 2% to
3.5% for commercial importers, which shall be minimum tax.
(d) Certain goods have been shifted from Part II to Part I of the Twelfth
Schedule. The goods included in Part I are subject to tax @ 1%
irrespective of import by industrial undertaking or commercial
importers.
20. Taxation of Certain Payments to Non-Residents:
Two new sub-sections (1DC) and (1DD) have been inserted in section 152
of the Ordinance. Under sub-section (DC), service charges/commission/fee,
by whatever name called, paid by an exchange company licensed by the
State Bank of Pakistan to a non-resident person has been brought under the
tax net. Now, these exchange companies have been made liable to deduct tax
at the time of making payment of service charges or commission or fee to
the global money transfer operators, international money transfer operators
or such other persons engaged in international money transfers or cross-border remittances for facilitating outward remittances.
Similarly, under sub-section (1DD), every banking company has been made
liable to deduct tax at the time of making payment to a card network company
or payment gateway or any other person, on any transaction fee or licensing
fee or service charges or commission or fee by whatever name called or
interbank financial telecommunication services.
This final tax on the income of non-resident person and rates have been
provided in Division IV of Part I of First Schedule. Corresponding changes
in this regard have been made in sections 6 and 8 of the Ordinance.
21. Automated System of Collection and Deduction of Withholding Taxes
Currently, withholding agents are required to collect and deduct tax at the
time of making payment and deposit the same in government treasury within
the prescribed time period. Similarly, withholding agents are required to file
quarterly and annual withholding statements which consumes time and
resources of taxpayers leading to increased compliance cost. Moreover,
certain large withholding tax agents like banks, DISCOs, TELCOs,
Government institutions etc. are still depositing tax through a single payment
receipt for multiple taxpayers. In order to streamline withholding tax
collection and deduction mechanism, enabling provision for the placement
of a fully automated system by the name Synchronized Withholding
Administration and Payment System (SWAPS) has been introduced under
section 164A of the Ordinance. A withholding agent notified under section
164A will be called a SWAPS agent. The notified SWAPS agent will be
integrated with Board and withholding tax will be deposited in government
treasury on real time basis simultaneously at the time of making third party
payment processed through SWAPS by the SWAPS agent. It will also result
in auto-populated withholding statements thereby saving time and reducing
cost of compliance for the business.
SWAPS Payment Receipt (SPR) will be generated upon deposit of tax in
this manner which will be a valid document for the purpose of claiming
credit against tax payable under the provisions of this Ordinance. In case if a
notified SWAPS agent fails to integrate with the Board in the manner
prescribed, the said agent will not be eligible for credit under Part X of
Chapter III of the Ordinance and exemption under any of the provisions of
the Ordinance. All other provisions of the Ordinance not specifically dealt
with in newly inserted section 164A will mutatis mutandis apply on a
notified SWAPS agent. Corresponding changes have been made in section
164 of the Ordinance.
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