Relevant to Paper F6 (PKN)
This article is relevant to candidates taking Paper F6 (PKN) in either the June or December 2015 sittings, and is based on the tax legislation contained in the Finance Act 2014
In Pakistan, as in many jurisdictions, a tax can be levied only by, or under, the authority of an Act of the 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). In accordance with the guidelines issued by ACCA, relevant legislation (including Ordinance) which received President’s assent on or before 30 September 2014 will be assessed for the first time in the June 2015 sitting of Paper F6 (PKN).
The Finance Act 2014 is effective from 1 July 2014 and is therefore examinable in the June and December 2015 sittings of Paper F6 (PKN). Candidates are advised to go through these amendments carefully so that they can answer exam questions accurately and earn 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 taking F6 (PKN).
The examinable amendments are explained below:
Changes in the Income Tax Ordinance 2001
Change in the tax rates
General income tax rates are given in the exam paper. Candidates are expected to recognise which rates are to be applied to the given category of the taxpayer. Further the candidates should know whether tax withheld at source is a final tax, minimum tax, or advance tax, of which credit can be taken at the time of determination of tax liability on the basis of taxable income. Important changes in the tax rates effective from the tax year 2015 are discussed below:
- Tax rate of companies has been reduced to 33% from the existing 34%. This change does not apply to a small company or a banking company.
- New category of companies chargeable to tax at 20%
To attract Foreign Direct Investment (FDI'), generate employment and attract inflow of foreign exchange in Pakistan, the corporate tax rate has been reduced to 20% if the investment is in a new industrial undertaking set up between 1 July 2014 and 30 June 2017, and at least 50% of the project cost including working capital is through FDI in equity. The reduced rate shall be applicable for a period of five years beginning from the month in which the industrial undertaking is set up or commercial production is commenced, whichever is later. [Cl (18A) of Part IV of the Second Schedule.]
Such companies shall also be exempt from payment of Alternative Corporate Tax, discussed later in this article.
- In the tax year 2015, capital gains on account of a security shall be charged to tax at:
i. 12.5% if holding period of security is less than 12 months
ii. 10% if holding period of security is more than 12 months but less than 24 months, and
iii. 0% if holding period of security is 24 months or more.
- The rate of minimum tax computed on the basis of turnover (under Section 113) has been increased to 1% of the turnover. In some cases minimum tax is payable at a reduced rate but they are not examinable in F6 (PKN).
Changes in the existing withholding tax rates
The Finance Act, 2014 divides persons into two categories; filers and non-filers.
A filer means a taxpayer whose name appears in the active taxpayers' list issued by the Federal Board of Revenue ('FBR') from time to time or is a holder of taxpayer's card. All persons other than filers are to be treated as 'non-filers'. Many withholding tax provisions provide a higher rate for non-filers in a bid to force non-filers to become filers. Main changes brought about in the Finance Act, 2014 are as follows:
- General rate of tax to be deducted from dividend shall be 10% in case of a filer and 15% in the case of a non-filer recipient of a dividend. [s150]
- The rate of tax to be deducted from profit on debt shall be 10% of the yield or profit for a filer and 15% of the yield or profit paid for a non-filer:
Provided that for a non-filer, if the yield or profit paid is Rs500,000 or less, the rate shall be 10%. Further in the case of a non-corporate non-filer, the excess amount of tax deducted shall be adjustable. [s151]
- Rates of withholding tax on payment made to non-corporate persons on account of supplies made, services rendered or contracts executed have been revised upwards to 4.5%, 10% and 7.5%, respectively. [s153]
- Rates of withholding tax on payment made to companies on account of supplies made, services rendered or contracts executed have been revised upwards to 4%, 8% and 7% respectively.
The sportspersons shall pay 10% of their contract money as final tax. [s153]
- Rate of withholding tax on commission paid to an advertising agent has been increased to 7.5% from 5% and, in other cases, the rate has now been fixed at 12% of the amount paid. [s233]
- Rate of tax to be deducted on cash withdrawal from a bank shall be 0.3% for filers and 0.5% for non-filers. [s231A]
- Rate of withholding tax on imports has been fixed at 5.5% for industrial undertakings and companies. In the case of other taxpayers, it has been fixed at 6% of the value of goods imported. [s148]
(Some other imports have lower rates, but they are not examinable in F6 (PKN))
- Advance tax on the purchase of motor vehicles and registration thereof has been increased substantially upwards and the rate of tax to be collected is double for a non-filer as compared to a filer. [s231B]
Rates will be given in the question wherever required.
- Similarly advance tax to be collected at the time of payment of annual or lump sum motor vehicle tax has been revised upwards and rate for vehicles above 1000CC will be double for non-filers as compared to filers. [s234]
Rates will be given in the question wherever required.
- Rate of tax to be collected from the seller of an immovable property shall be 0.5% for a filer and 1% for a non-filer. [s236C]
- The advance tax rate has been reduced from 10% to 5% on the total amount of the bill from a person arranging or holding a function in a marriage hall, marquee, hotel, restaurant, commercial lawn, club, a community place or any other place used for such purpose. [s236D]
New withholding taxes
The following new withholding taxes have been introduced to broaden the tax base:
- If a person purchases an immovable property having value exceeding Rs3m, an adjustable advance tax shall be collected from the purchaser. In the case where the purchaser is a filer, the rate of tax shall be 1% and, in the case of a non-filer, the rate shall be 2% of value of the property. [s236K]
- An adjustable advance withholding tax has been imposed on domestic electricity consumption at 7.5% of the bill amount where the monthly electricity bill is Rs100,000 or more. [s235A]
- Another adjustable advance withholding tax has been imposed on international air tickets at 4% of the ticket for non-economy classes. [s236L]
- Director's fee, etc, subjected to withholding tax. Every person responsible for making payment for directorship fee or fee for attending a board's meeting, or such fee by whatever name called, shall deduct adjustable advance tax at 20% of the gross amount. [s149(3) and (4)]
Bonus shares to be treated as income
Definition of the word ‘income’ given in s2(19) of the Income Tax Ordinance 2001 has been amended. When read with newly incorporated sections 236M and 236N, it means that value of the bonus shares issued by a company to a shareholder shall be treated as income of the shareholder and shall be liable to tax collection at 5% of the value of shares determined on the basis of day-end price on the first day of closure of books.
Where tax is not paid by a shareholder, sections 236M and 236N authorise the listed and non-listed companies, respectively to deposit the tax by selling the bonus shares. The tax collected from the shareholders shall constitute the final tax liability in respect of their income arising from issuance of the bonus shares.
The definition of securities has further been elaborated to include debt securities in its fold. The debt securities mean:
- Corporate debt securities such as term finance certificates (TFCs), Sukuk certificates (Sharia compliant bonds), registered bonds, commercial papers, participation term certificates (PTCs) and all kinds of debt instruments issued by any Pakistani or foreign company or corporation registered in Pakistan, and
- Government debt securities such as treasury bills (T-bills), federal investment bonds (FIBs), Pakistan investment bonds (PIBs), foreign currency bonds, government papers, municipal bonds, infrastructure bonds and all kinds of debt instruments issued by federal government, provincial governments, local authorities and other statutory bodies.
Taxation of an association of persons (AOP) having one or more companies as its members
An association of persons is taxed separately from the members of the association. However, where a company is a member of the association, its share from the AOP is taxed in the hands of the company and the company is allowed a tax credit of the amount of tax paid by the AOP attributable to the share of profit of the company in the AOP.
Now, according to the Finance Act, 2014, where at least one member of the AOP is a company, it shall be taxed separately from the AOP on its share of income from the AOP at the applicable rate to the company. Other members of the AOP shall continue to be taxed as an AOP.
Alternative corporate tax (ACT)
To discourage perpetual declaration of losses or very low income using tax avoidance means by companies, an alternate corporate tax at 17% has been imposed on accounting income. However, the following amounts shall not be included in the accounting income for ACT purposes:
- Share from the associate recognised under equity method of accounting
- Exempt income
- Capital gain on securities [s37A]
- Income chargeable to tax under final tax regime (FTR) arising from commercial imports [s148(7)]
- Dividend income [s150]
- Income chargeable to tax under FTR arising from supplies, and contract, etc under s153(3)
- Income chargeable to tax under FTR arising from exports under s154
- Income chargeable to tax under FTR arising from prizes and winnings [s156]
- Income chargeable to tax under FTR arising from brokerage and commission [s233]
- Income subject to tax credit under s65D and s65E
- Income subject to tax credit under section 100C
- Income of the company eligible for taxation at 20% under clause (18A) of Part II of the Second Schedule.
For the purposes of determining the ‘accounting income’, expenses shall be apportioned between the amounts mentioned above to be excluded from accounting income and the amount to be treated as taxable income and only the amount relatable to taxable income shall be allowed while computing ‘accounting income’.
The companies shall have to pay ACT or corporate tax, whichever is higher.
In order to facilitate companies that have genuinely low income for some period of time, the ACT paid is allowed to be carried forward up to 10 years and adjustable against corporate tax.
It has been further clarified that:
(a) if corporate tax or alternative corporate tax is enhanced or reduced as a result of any amendment, or as a result of any order under the ordinance, the excess amount to be carried forward shall be reduced or enhanced accordingly.
(b) ACT will not apply to taxpayers chargeable to tax in accordance with the provisions contained in the Fourth, Fifth and Seventh Schedules. [Such taxpayers are not examinable in F6 (PKN)].
(c) The commissioner may make adjustments and proceed to compute accounting income as per historical accounting pattern after providing an opportunity of being heard.
(d) Tax credit under s65B shall be allowed against ACT liability.
(e) The ACT shall be applicable with effect from the tax year 2014.
Compulsory registration in certain cases
Any application for commercial or industrial connection of electricity or natural gas shall not be processed and such connection shall not be provided unless the person applying for connection is registered under the Income Tax Ordinance 2001. [s181AA]
The Finance Act 2014 provides for the following important exemptions from tax under Part I of the Second Schedule to the Ordinance.
- Any income of a public sector university established for educational purposes and not for the purposes of profit, with effect from 1 July 2013, shall be exempt. [Cl (126)]
- Profits and gains derived by a taxpayer, from a fruit processing or preservation unit, set up in Balochistan province, Malakand Division, Gilgit-Baltistan and FATA between 1 July 2014 to 30 June 2017, engaged in the processing of locally grown fruits shall be exempt for a period of five years beginning with the month in which the industrial undertaking is set up or commercial production is commenced, whichever is later. [Cl (126H)]
- Profits and gains derived by a taxpayer from a coal mining project in Sindh, supplying coal exclusively to power generation projects shall be exempt from tax. [Cl (132B)]
Amendments to the Sales Tax Act 1990
- A two-tier system of taxation has been introduced for retailers by withdrawing Rs5m exemption threshold as under:
(a) retailers operating as units of a national or international chains of stores, retailers operating in air-conditioned shopping malls, retailers having credit or debit card machines, retailers having electricity bills exceeding Rs600,000 during the last 12 months and wholesaler- cum-retailers engaged in bulk import and supply of consumer goods shall pay sales tax at the standard rate. [Note: goods of five sectors for which different rate has been prescribed in SRO No 1125(I)/2011, dated the 31 December, 2011, are not examinable in F6 (PKN)]
Such retailers shall be required to get registered and shall issue sales tax invoices generated from fiscal electronic cash register installed and operated on the premises. [Sales tax special procedure rules, 2007]
(b) Other retailers shall be charged sales tax on monthly electricity bills at 5% where the monthly bill does not exceed Rs20,000 and at 7.5% where the monthly bill exceeds Rs20,000. This tax shall be in addition to sales tax already being charged on electricity bills on account of consumption of the electricity.
- Tax credit of input tax paid on the following shall not be allowable:
(a) goods and services not related to the taxable supplies made by the registered person
(b) goods and services acquired for personal or non-business consumption
(c) goods used in, or permanently attached to, immoveable property, such as building and construction materials, paints, electrical and sanitary fittings, pipes, wires and cables, but excluding such goods acquired for sale or re-sale or for direct use in the production or manufacture of taxable goods
(d) vehicles falling in Chapter 87 of the First Schedule to the Customs Act, 1969, parts of such vehicles, electrical and gas appliances, furniture, furnishings, office equipment (excluding electronic cash registers), but excluding such goods acquired for sale or re-sale. [s8]
- Changes in the schedules:
A number of changes have been made in the schedules to the Sales Tax Act, 1990. Candidates are advised to consult the same to update their knowledge.
(a) New goods have been added in the Fifth Schedule, which contains zero-rated goods.
(b) A number of goods have been added in the Sixth Schedule, being exempt goods.
- Introduction of new schedules
(a) An Eighth Schedule has been introduced to charge tax on goods specified therein at 5%, subject to certain conditions mentioned therein. Such goods include soybean meal, directly reduced iron, oilseeds meant for sowing shall be taxed at 5% of their value.
(b) A Ninth Schedule has been introduced, which currently contains specific rates in rupees instead of ad valorem rate for charging sales tax on different stages on SIM cards, cellular mobile phones and satellite phones. [Note: Schedule Nine is not examinable in F6 (PKN)]
Written by a member of the Paper F6 (PKN) examining team