Pakistan's tax laws: Finance Act 2013 amendments

Relevant to Paper F6 (PKN)

This article is relevant to candidates taking Paper F6 (PKN) in either the June or December 2014 sittings, and is based on the tax legislation contained in the Finance Act 2013.

In Pakistan, as in many jurisdictions, a tax can be levied only by, or under, the authority of an Act of Parliament. While taxation of income (other than agricultural income) is governed by the Income Tax Ordinance 2001 as amended from time to time, the Sales Tax Act 1990 deals with sales tax at Federal level. Sales tax on services is a provincial subject and not examinable in Paper F6 (PKN). According to the guidelines issued by ACCA, relevant legislation (including Ordinance) which receives President’s assent on or before 30 September 2013 will be assessed for the first time in the June 2014 sitting of Paper F6 (PKN).

The Finance Act 2013 is effective from 1 July 2013 and is therefore examinable in the June and December 2014 sittings of Paper F6 (PKN). It has been observed that many candidates do not give due attention to the changes brought about in the latest examinable Finance Act. Therefore, candidates are advised to go through these amendments carefully so that they can answer exam questions accurately and earn good marks accordingly.

It should be noted that references to the different sections of the Income Tax Ordinance 2001 and the Sales Tax Act 1990 are for additional information only, as candidates are not required to be able to quote these when answering the F6 (PKN) paper.

The examinable amendments are explained below.

Changes in the Income Tax Ordinance 2001

New withholding taxes

With effect from 1 July 2013, a number of new withholding taxes have been introduced. The examiner does not expect candidates to memorise these rates; however, the examiner does expect candidates to have knowledge of the withholding agents, consequences of non-compliance with the withholding tax provisions and to recognise whether the tax withheld is allowed as a tax credit or is the final tax.

The tax withheld on the transactions discussed below are allowed as a tax credit against the tax liability of a tax payer and are not covered under the final tax regime.

  1. Advance tax on functions and gatherings at 10% of the amount of the bill from the person arranging a function in a marriage hall, marquee, hotel, restaurant, commercial lawn, club, or any place used for such purpose shall be collected by the owner, operator or manager of such premises. [s236D]
  2. Advance tax on foreign-produced TV drama plays or serials shall be collected at the rate of Rs. 100,000 per episode of the drama or play by the licensing authority certifying any foreign TV drama serial or a play dubbed in Urdu or any other regional language, for screening and viewing on any landing rights channel. [s236E]
  3. Advance tax from cable operators and other electronic media shall be collected by the Pakistan Electronic Media Regulatory Authority (PEMRA) at the rates specified in the Division XIII of Part IV of the First Schedule. The rates vary from Rs.10,000 to Rs.900,000 depending upon the category of licence. [s236F]
  4. Advance tax on sales to distributors, dealers and wholesalers shall be collected by every manufacturer or commercial importer of electronics, sugar, cement, iron and steel products, fertilizer, motorcycles, pesticides, cigarettes, glass, textile, beverages, paint or foam sector, at the time of sale of these goods to distributors, dealers and wholesalers at a rate of 0.1% of the gross amount of sales. [s236G]
  5. Advance tax on sales to retailers shall be collected by every manufacturer, distributor, dealer, wholesaler or commercial importer of electronics, sugar, cement, iron and steel products, fertilizer, motorcycles, pesticides, cigarettes, glass, textile, beverages, paint or foam sector, at the time of sale to retailers at a rate of 0.5% of the gross amount of sales. [s236H]
  6. Advance tax on fees paid to educational institutions shall be charged by the person preparing the fee voucher or challan at 5% of the amount of the fee where the annual fee paid to an education institution exceeds Rs. 200,000 [s236I]
  7. Advance tax on dealers, commission agents and arhatis (vernacular for a 'commission agent' dealing in agricultural products) shall be collected by every market committee at the time of issuance or renewal of licences. The rate of tax varies from Rs. 5,000 to Rs. 10,000 per annum depending upon category of the dealer, etc [s236J]

Changes to the tax rates

The following changes have been made to the tax rates, which are examinable in the June and December 2014 exams:

  1. A company, not being a small company, shall be charged to tax at 34% of its taxable income. This rate is given to candidates in the tax rates and allowances at the front of the exam paper.
  2. Non-corporate taxpayers pay tax at different rates depending upon the bracket of income into which their income falls. Tax rate tables of salaried and non-salaried individuals and association of persons have been amended to add new brackets of income. These rates are given to candidates in the tax rates and allowances at the front of the exam.
  3. Withholding tax on the value of imports shall be 5 % in the case of goods imported by a company or by an industrial undertaking. In other cases, the rate shall be 5.5%. These rates are given to candidates in the tax rates and allowances at the front of the exam. However, in the case of a foreign produced film imported for screening and viewing, the withholding tax rate shall be 12% of the value of the film. [s148]
  4. The withholding tax rates on the gross amounts paid to non-corporate persons for the supply/sale of goods, rendering of services (other than transport services) and execution of contracts have been amended as follows:
    i. supply of goods   4%
    ii. rendering and providing of services 7%
    iii. execution of a contract [other than for supply of goods or providing of services]  6.5% [s153]

    These rates are given to candidates in the tax rates and allowances at the front of the exam paper.

  5. The withholding tax rate on prize money on prize bonds draws, etc. has increased from 10% to 15% [s156]
  6. The rate of minimum tax on the basis of turnover has increased from 0.5% to 1%. [s113]
  7. The rate of deduction of income tax by every banking company on cash withdrawals has increased to 0.3%. [s231A]
  8. The rate of collection of income tax under section 236 in the case of subscribers of mobile telephone and pre-paid telephone cards has increased from 10% to 15%. [s236]
  9. The rate of collection of advance tax at the public auction of any property or goods under section 236A has increased from 5% to 10% of the gross sale price of the property or goods [s236A]
  10. Rates of advance tax payable at the time of registration of a private motor vehicle under section 231B and at time of the payment of provincial motor vehicle tax [commonly known as 'token tax'] under section 234 have substantially increased.

New withholding agents

Apart from new persons designated as withholding agents in respect of the transactions mentioned under the new withholding taxes section of this article, the legislation has introduced new withholding agents in respect of the existing withholding tax provisions as follows:

  1. Every person registered under the Sales Tax Act, 1990 shall also be a withholding agent in respect of payments made on account of purchases made, services received or on the execution of a contract. [s153]
  2. The following entities are required to deduct tax on account of payment of rent under section 155:
    (i) a charitable institution,
    (ii) a private educational institution,
    (iii) a boutique,
    (iv) a beauty parlour,
    (v) a hospital,
    (vi) a clinic,
    (vii) a maternity home, or
    (viii) individuals or association of persons paying gross rent of Rs.1.5 million and above in a year.

    The rate of withholding tax has also changed.

  3. Persons prescribed to deduct tax under section 153 have also been made prescribed persons in respect of payments to non-residents. [s152]

Minimum tax on builders and land developers

Two new legislative provisions have been introduced providing a minimum tax on the income of builders and land developers. The mode, manner and time of payment of such amount of tax shall be notified separately by the Federal Board of Revenue (FBR). [s113A &113B]

Dividend income received by a company

Dividend income received by a company is now liable to a fixed and final tax of 10% [the same rate which previously applied to non-corporate taxpayers]. [s5 &8]. This rate is given to candidates in the tax rates and allowances at the front of the exam paper.

Income from property

Some very important changes have been introduced in relation to the taxation of income from property. Candidates are advised to thoroughly review the amendments made to this important area of taxation discussed below.

With effect from the tax year 2014, income from property shall NOT be taxed under the fixed/final tax regime. Instead, income shall be taxed by adding such income to the income from other heads of income, if any, to determine total income and taxable income. [s15]

In arriving at income under the head, ‘Income from property’, a list of allowable deductions has been given in the legislation. Any deduction not mentioned in this list, is NOT allowable. [s15A]. The deductions are:

  1. 1/5th of the gross amount of rent as an allowance in respect of repairs to the building being rented out, irrespective of the actual expenditure incurred.
  2. Any rent collection charges incurred subject to a maximum deduction of 6% of the gross rent.
  3. Any insurance premium incurred to insure the building against the risk of damage or destruction
  4. Any local rate, tax, charge or cess paid in respect of the property, other than income tax.
  5. Any ground rent paid in respect of the property (where the ground belongs to another person).
  6. Any share of rents paid on debt obtained to acquire, construct, renovate, extend, or reconstruct the property.
  7. Any interest paid on a mortgage of the property.
  8. Any expenditure on legal services acquired to defend the title to the property or any court suit connected with the property.
  9. Unpaid rent subject to certain detailed conditions.

Set off of Losses

Under the Finance Act 2013, a person sustaining a loss under any head of income as specified in section 11 cannot set off such loss against income under the head 'Salary' or 'Income from property'. [s56]

Definition of a company

The definition of 'company' has been extended to include the following:

  • a cooperative society, a finance society or any other society
  • a non-profit organisation
  • a trust, an entity or a body of persons established or constituted by or under any law for the time being in force. [s80]

Unexplained income or assets

Where a taxpayer has unexplained income or assets and explains the nature and source of these assets as being from agricultural income, such an explanation shall be accepted only to the extent of agricultural income worked back on the basis of agricultural income tax paid (subject to the taxpayer furnishing of proof of payment of agriculture tax under the relevant provincial law). [s111(1)]

Tax administration

Return of income
The following persons will be required to file income tax return irrespective of their quantum of taxable income:

  • A person paying commercial or industrial electricity bills of Rs. 500,000 per annum.
  • A person registered with any Chamber of Commerce and Industry or any trade or business association or any market committee or any professional body. [s114]

With effect from 1 July 2013, prior approval of the Commissioner of Inland Revenue shall be mandatory for the filing of a revised return. [s114]

All salaried persons deriving taxable income will now be required to file their income tax returns. Prior to this change, a statement filed by an employer could be treated as a return of income for certain taxpayers. [s115]

Wealth statement
Every taxpayer being an individual or a member of an association of persons shall file a wealth statement along with their return of income, irrespective of their declared or assessed income. [s116]

Provisional assessment
The previous time limit of sixty days for any provisional assessment order to be treated as the final assessment order has been reduced to 45 days. [s122C]

Additional payment for delayed refunds
An ‘Explanation’ to s171(2) has been issued to clarify that where a refund order is made on an application under s.170(1), the refund becomes due from the date the refund order is made and not from the date the assessment of income is treated as having been made by the Commissioner under s120 of the Income Tax Ordinance, 2001.

Penalties for violations of different provisions of the Ordinance have been increased. [s182]

Reduction in tax liability

The reduction in the tax payable on the income from salary of a full time teacher or researcher employed in a duly recognised non-profit educational or research institution has been decreased to 40% (previously 75%).

A duly recognised non profit educational or research institution is one recognized by the Higher Education Commission, a Board of Education or a University recognized by the Higher Education Commission, including government training and research institutions.

 It has been further clarified that a full time teacher means a person employed purely for teaching and not performing any administrative or managerial jobs e.g. principals, headmasters, directors, vice-chancellors, chairmen, controllers etc. Similarly a full time researcher means a person purely employed in a research role within a research institution which purely performs research activities.

Capital allowances

The rate of initial allowance under section 23 for plant and machinery has been reduced from 50% to 25%. This rate is given to candidates in the tax rates and allowances at the front of the exam paper.

Note: FBR has also outlined the above amendments in the Finance Act 2013 in its Circular No. 06 of 2013, dated 19 July 2013, which can be accessed at

Amendments to the Sales Tax Act 1990

A number of changes have been made to the Sales Tax Act 1990. The examinable amendments are briefly discussed below:

Rate of sales tax

The general rate of sales tax has been increased from 16% to 17%. [s3] In addition, where supplies are made to an unregistered person, a further tax of 1% shall be charged. [s3(1A)]

Alternative basis of assessment

The FBR, by notification in the official Gazette, in lieu of levying and collecting tax on taxable supplies, may levy and collect tax:

  • on the basis of production capacity of plants, machinery, undertaking, establishments or installations producing or manufacturing such goods, or
  • on a fixed basis, as it may deem fit, from any person who is in a position to collect such tax due to the nature of the business.

Recoverability of input tax

A person shall not be eligible to claim input tax paid on purchases in respect of which a discrepancy is indicated by CREST (the computerised program for analysing tax returns) or which is not verifiable in the supply chain. [s8]

Rectification of mistakes

From 1 July 2013 , rectification of mistakes (of law or facts) can be made by the Commissioner, the Commissioner (Appeals) or the Appellate Tribunal in the same manner as it can be done under s.221 of the Income Tax Ordinance, 2001. [s57]. Previously, the scope of rectification was limited to minor clerical mistakes.

Third Schedule goods

More goods have been added to the Third Schedule which lists goods liable to sales tax at 17% of their retail price. Candidates are advised to familiarise themselves with these goods.

Written by a member of the Paper F6 (PKN) examining team