Budget Chemistry 2010

Budget Chemistry 2010
Over view
INDEX
Particulars Overview Headlines Pakistan Economy at a Glance Proposed Changes in the Income Tax Ordinance, 2001 Tax rates Proposed Changes in 2nd Schedule to 7th Schedule to the Income Tax Ordinance 2001 Proposed Changes in the Sales Tax Act, 1990 Proposed Changes in Federal Excise Duty Act VAT Value Added Tax. Page No. 2 3-4 5-11 12-22 23-31 30-32
33-36 37-39 40-42
Note. The Comments included in this commentary are of general nature and represent our interpretation and do not constitute to be the part of the legislation. We recommend that the reference should be made to the specific wording of the Finance Bill and the Statutes literature. It is in the better interest of the reader to take appropriate professional opinion before make a conclusion. This publication is being issued exclusively for the information of clients only.
Over view
By and large the Finance Bill 2010-2011 was appreciated among the business community. The main factor behind this acceptance was one of the major decisions of Federal Government for deferment of VAT law 2010 for next three months, furthermore no other significant taxation measures was taken which gives a sigh of relief to the trade and business. This clearly suggest consistency and continuity of the fiscal policy is how important for the trade. Though the business community got relieved at the taxation side, the governments efforts at fiscal side are not very commendable. Despite adopting donor agencies program, countries external account remains exposed to multitude of uncertainties. The dependence on external borrowed inflows needs some rationalization for which additional domestic resource mobilization is the need of the hour. Pakistans economy has lost significant momentum in the last few years due to which GDP growth was fallen drastically, though it shows some upward trend this year but that also not seems on strong footing. Nevertheless, Pakistans economy still faces pressures from uncertain security environment, higher inflation driven by spike in food prices, the acute power shortages, and uncertain stock market, non performing large-scale manufacturing sector and slowdown in services sector; resultantly the job absorbing capacity of the economy also shrank significantly. The whole year interest rates were kept above double digit level despite tall claims of reducing it into a single digit to coop up with the higher double digit inflation. The higher interest rate and tight monetary stance of the government has substantially hurt the scope of domestic growth. After real estate bubble busting in emirates, the government got an opportunity to tap the local and foreign investment in Pakistan but unfortunately no serious efforts were shown by the government to attract and divert the investment outflow in our country. FBRs tax collection policy remain at the conventional techniques and despite availability of data base no innovative measures were taken for enhancing narrow tax base. The whole emphasize of the Federal Board remain on introduction of value added tax despite overwhelming opposition by all the counters. The new Act was though drafted by the local tax officials but even than it contains a number of complexities and cumbersome procedures; it seems that prevailing ground realities, lower rate of literacy and tendency to avert documentation of trade was not kept in mind. Focus for increasing Pakistani exports is also missing in government policy. The government remain non focal during the tug of war between exporters of yarn and value added items at the eve of internationally lower than expected cotton production, no timely measures were taken to safeguard the national interest. The government could easily earn more foreign exchange by timely regulating the yarn exports as the Indian government did. In our view the settled fiscal trend of the government suggest bigger upcoming economic challenges in the near future. The repayment schedule of foreign debt, non performing exports and domestic sector and over dependency on imports may hit masses more ruthlessly, who already are in a very miserable shape. We need to sort out our energy and water shortage issues on war footing bases, immediate adoption of exports and growth oriented policy required to curtail fiscal deficit. Federal Board of Revenue need to encourage simplified taxation modules to bridge the trust deficit of the taxpayers community on it, besides enlarging narrow tax based through mobilization of its field formation with the introduction of common incentive for taxpaying community and restraining themselves from taking regressive taxation measure.
Headlines
VAT has been delayed by 3 months, hence it is expected that a supplementary budget in September 2010 will follow this budget. The much debated Capital Gain on Trading of shares at Stock Exchange is proposed, through which the tax would be levied as follows: Where holding period of a security is 10%. less than six months. Where holding period of a security is 7.5% more than six months. Security sold after the holding period NIL of 12 months or more, Salary and Low level income earners, will get an extra relief of Rs. 100,000, as the limit of Basic Exemption is proposed to be enhanced from Rs.200,000/- to Rs.300,000/-, while the NonSalaried taxpayers limit is enhanced from Rs.100,000/- to Rs.300,000/-. The Bill proposes to enhance the tax rate on imports from 4% to 5%. Like advance tax on cash withdrawals, now the Finance Bill proposes advance tax deduction on the different modes of banking transactions including withdrawals through Demand Draft, Pay Order, Online Transfer, Telegraphic Transfer, TDR, CDR, STDR and RTC at the same rate and threshold as applicable for the cash withdrawals. The definition of Withholding Agent is proposed to be changed by virtue of which an Individual having the turnover above Rs. 50 million is also made the withholding agent, If the said change come into effect the following will be the withholding agents; Individuals AOP Companies Turnover above 50 m. Turnover above 50 m. Any Turnover.
4 It is proposed that turnover tax rate shall be enhanced from existing 0.5% to 1% and would now be applicable on the following: All Companies; AOPs subject to turnover exceeding 50 million in tax year 2007 or later; and Individuals having turnover above 50 million in tax year 2009 or later. Commercial consumers of electricity got relief in tax rates from 10% to 5%. Threshold of the relief to senior citizens (60 years or above) has been proposed to be enhanced from Rs.750,000 to Rs.1,000,000 The dates for filing the tax returns for PTR, Annual Statement of deduction of Tax from the Salary of the employee and Non PTR cases (other than company) has been fixed as 31 August, 31 August and 30 September respectively. The commercial and industrial taxpayers of Khyber Paktunkhwa, FATA and PATA are given relief in taxation except manufacture and suppliers of cement, sugar, beverages and cigarettes. In lieu of e-filing of monthly statement, the bill proposed the filing of quarterly and annual withholding tax statements. The bill proposed the exemption of taxation on amount of waiver of interest from employers to the employees on loans. The Bill proposed to give 10% tax credit to a company which invests any amount in the purchase of a plant and machinery for installation, for the purposes of balancing, modernization and replacement in an industrial undertaking owned and set up in Pakistan.
Headlines
To encourage the listing of companies at the stock exchange, a 5% tax credit is proposed to be allowed to a company in the tax year of its enlistment. 10% withholding tax deductible on Government Securities is proposed to be the final discharge of the tax liability. To facilitate the Non residents giving loans in Pakistan, the following has been proposed; Tax-free repatriation of profits earned on foreign industrial loans; and Withholding tax, if deducted on debt instruments would be the final tax.
5 The AOPs would be the major losers in this budget since the Finance Bill proposes the flat rate of 25% on their taxable Income, which will bring them at par with the Tax rate for the small companies. The tax rates for transport carrying goods has been rationalized as; the Finance Bill proposes to tax @ Rs. 1 per Kilo, however, no change is proposed for Tax on Goods Forwarders which remains at 2%. Tax payers under Presumptive Tax Regime having annual tax of Rs. 35,000 and above would be required to file the wealth statement. In order to streamline accounting of Advance Tax payments, certain amendments are proposed, so that quarterly advance tax payments are paid by 25th of last month, as compared to earlier requirement of such payments by 15th of every following month after the end of a quarter. Following the theme of Active Tax Payer in Sales tax, the Finance Bill proposed to include the concept of Compliant Tax Payers and Non Compliant Taxpayer. Sales Tax rate has been increased from 16% to 17%. FED on Natural gas is increased from Rs. 5.09 to Rs.10. per MMBTu. FED on cigarettes is levied @ Rs. 1 per filter rod of cigarettes. Federal Excise Duty @10% on electricity intensive home appliances.
An important change has been made to facilitate transactions with the non- residents, by virtue of which the tax rate on payment to non residents has been squashed to 20%, instead of 30%, (except for the payments on account of Royalty, Fee for Technical services and payments exempt under the double tax treaties.) To promote the prize and winnings through cross word puzzle, the Finance Bill proposed to the change the tax rate on winnings of cross word puzzle from existing 20% to 10%. As proposed by Finance bill, local air travelling is now subjected to advance tax @ 5% on gross value of ticket which would be paid with ticket price and the same will adjustable against the tax liability of the payer.
Pakistan Economics
Receipts (a)Tax revenue (b)Non tax revenue Gross revenue receipts Less provincial share 1) Net revenue receipts 2).Net capital receipts 3) External receipts 4)Self-finance of PSDP by provinces 5)Change in provincial cash balance 6)Bank borrowing BUDGET AT A GLANCE - (Rupees in billion) Expenditure 1,778.7 (A) Current 632.2 General public service 2,411.0 Defence affairs and services 1,033.6 Public order safety affairs 1,377.4 Economic affairs 325.4 Environment Protection 386.6 Housing an community 341.6 Health affairs and services 166.9 Recreational culture services 166.5 Educational affairs service (B) Development PSDP Provincial government Federal government Est. operational shortfall Other development expenditure Total resources 2764.4 Total Expenditure
1997.9 1387.7 442.2 51.3 66.9 0.4 1.8 7.3 4.4 34.5 766.5 663.0 373.0 290.0 -20.0 123.5 2764.4
This year has shown some sign of recovery in the economic conditions of the country. Although the economic condition is still fragile yet some indicators depict a slight recovery in the economic recovery, which is quite encouraging in the given circumstances. Economy grew at a provisional rate of 4.1% as compared to modest 1.2% in 2008-09. However, it is noteworthy that the said GDP is lowest among important SAARC countries where the average provisional GDP is around 6%. Budget Chemistry 2010
Pakistan Economics
Pakistan Economics
FACTS
44 % of population has access to sanitation, while 65 % to clean water. Pakistan has become the largest user of Compressed Natural Gas (CNG) in the world, as per the statistics issued by International Association of National Gas Vehicles on CNG. Presently, 3105 CNG stations are operating in the country and 2.4 million vehicles are using CNG as fuel. Literacy Rate has improved from 56% to 57%. Literacy rate in Punjab is (59 %), Sindh, (59%), Khyber Pakhtunkhwa (50%) and Balochistan at (45%). Pakistan is the worlds sixth most populous country with an estimated population of 169.9 million as at endJune 2009, and an annual growth rate (revised) of 2.05 percent. It is expected that Pakistan will become the fourth largest nation on earth in population terms by 2050. With a median age of around 20 years, Pakistan is also a young country. It is estimated that there are currently approximately 104 million Pakistanis below the age of 30 years. Total working age population is 121.01 million, with the size of the employed labour force estimated at 52.71 million as of 200809, and is the 10th largest country in the world according to the size of the labour force. Agriculture is the largest sector of Pakistans economy employing nearly 45.1 percent of the countrys work force in 200809. In 2009, the flow of workers abroad reached 600,000 est. which is a major factor in the increase in remittances
Sufferings to the Economy Pakistan suffered a cumulative direct and indirect loss of USD 43 billion since 2001 on account of the involvement in the War against Terrorism. The global economy remained in turmoil, with uncertain prospects for demand for Pakistans exports. In addition, the energy and water shortage, and the internal security situation, could constrain growth in 201011. Despite severe challenges, the economy has shown resilience in the outgoing year. Causes of hampering the growth of the country: Limited fiscal space and rising spending, Debt, and inflationary pressures, significantly reduce the governments ability to spend in order to stimulate the economy and Adverse security conditions.
Pakistan Economics
Growth and Investment
Investment levels in some sectors remained healthy, including in Oil and Gas exploration (FDI of US$ 605 million), Communications (US$ 222 million), Transport (US$ 104 million), Construction (US$ 86 million), and Paper and Pulp (US$ 81 million).
Factors Gross Fixed Capital Foreign Direct Investment Agricultural Sector
% Increase / (Decrease) (0.6%) (32%)
The Agriculture sector continues to play a central role in Pakistans economy. It is the second largest sector, accounting for over 21 percent of GDP, and remains by far the largest employer, absorbing 45 percent of the countrys total labour force. Nearly 62 percent of the countrys population resides in rural areas, and is directly or indirectly linked with agriculture for their livelihood. Production of major crops 000 Tons Cotton (bales) Sugarcane Rice Maize Wheat Figures are provisional 2007-08 11655 63920 5563 3605 20959 2008-09 11819 50045 6952 3593 24033 2009-10* 12,698 49,373 6,883 3,487 23,864
Pakistan Economics
Area and Production of Major Crops 2008-09 Area Production (000 (000 Tons) hectares) 1052 3593 470 296 263 165 1081 741 86 82 233 188 50 105 2009-10 Area Production (000 (000 Tons) hectares) 950 3487 476 293 248 154 1050 571 80 78 185 202 49 104 % change
Maize Bajra Jawar Gram Barley Rapeseed & Mustard Tobacco
(3) (1) (6.7) (23) (4.9) 7.4 (1)
Pakistan Economics
Factors Major Crops Minor Crops Live Stock Cotton Sugarcane Rice Wheat Contribution in Agriculture 32.8% 11.1% 53.2% 8.6% 3.6% 6.4% 14.4% Contribution in GDP
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11.4% 1.8% 0.8% 1.4% 3.1%
Factors Live Stock Fishery Fertilizers Masoor Onion Potato Moong Mash Chillies Manufacturing
% Increase /( Decrease) 4.1% 1.4% 4.5% 1.4% 9.0% 15.9% (24.6%) (20.6 %) (0.5%)
Pakistan exported textiles worth $7.19 Billion and clothing worth $3.9 Billion. The Garment Industry provides highest value addition in Textile Sector. The industry enjoys the facilities of duty free import of machinery and Income Tax exemption. There are about 7500 Towel Looms in the country in both organized and unorganized sector. This Industry is dominantly export based and its growth has all the time depended on export outlets. Budget Chemistry 2010
Pakistan Economics

11 The total sugar production capacity is 6.8 million tons in a season and about six hundred thousand (600,000) tons per day. Capacity utilized is 6070% depending upon sugarcane production. Pakistan Steel production during July, 2009 to February, 2010, has remained at 43 percent capacity utilization. However, financial loss during the year 200910 is expected to be much lower than the loss suffered in the year 200809.
Balance of Payments The external current account deficit is expected to contract to around 2.8 percent of GDP in the outgoing year because of a steep decline in imports for much of the year, improving exports as world demand is gradually restored, and a continued increase in worker remittances, which are expected to reach 4.8 percent of GDP for the full fiscal year. Factors Worker Remittances Merchandise trade deficit Exports Textile Exports Non-textile Exports Export receipts from raw cotton Export receipts from cotton yarn Export of knitwear garments Export of readymade garments Petroleum Group Export Cement Export Imports Food group imports Machinery group import Import of agricultural machinery Textile machinery import Import of Gold Current account deficit Income account deficit Increase / (Decrease) $ 7.3 billion ($ 12238 million) 8.0% $ 556.2 million 9.2% 140.2% 32.1% 8.1% 7.4% 7.3% (17.1%) (2.8%) (21.3%) (10.6%) 130.6% 20.5% 267.7% ($ 3.06 billion) (29.9%)
Energy Liquefied Petroleum Gas (LPG) contributes about 0.7 percent of the countrys total energy supply mix. LPG marketing companies have imported around 62,920.3 MT of LPG during JulyMarch, 200910. Due to existing price differential between CNG & Petrol, vehicles are being converted to CNG and approximately 2.0 million vehicles are using CNG in the country, resultantly there are about 3,116 established CNG Stations operational in the country.
Pakistan Economics
Factors Primary energy supply Supply of Gas Production of Coal Production of Crude Oil Production of natural gas Increaae / (Decrease) (0.64%) 1.6% 10.0% (1.9%) 1.56%
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Inflation For the corresponding period in 200809, average inflation stood at 22.3%.While the world price of sugar has fallen dramatically since its peak in January 2010, it is still up 21% yearonyear. Dairy prices, on the other hand, have resumed their upward march. Factors CPI Inflation Food Inflation Non-food Inflation Overall Inflation Actual 13.3 14.5% 12.2% 11.5% Increase / (Decrease) 4.4% 7.0% 2.2%
Monetary policy stance The policy discount rate and the Cash Reserve Requirement (CRR) and Statutory Liquidity Requirement (SLR) were raised throughout calendar 2008. In real terms, however, with year on year CPI inflation at over 13%, the current stance of monetary policy would appear to be neutral, rather than tight. SBP Discount Rate
Income Tax
PROPOSED SIGNIFICANT CHANGES IN INCOME TAX ORDINANCE, 2001 Tax on taxable income Section 4(1)
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The phrase Division IB is inserted to incorporate the rate of taxes applicable on the Association of person, as previously applicable on the Association of Person abolished to bring the AOP under the ambit of flat rate of tax of 25%. Capital gain Section 37(3)
Through this amendment where shares or securities are hold by a person for more than a year he will not have to go through the same mechanism of calculating the Capital Gain arising on the disposal of it as applicable on all other Capital Assets. Capital gain Section 37(5)(a)
The amendment is brought in to include in the definition of Capital Assets the shares and securities which were previously excluded from the definition. Capital gains on sale of securities Section 37A
This new section is inserted in the Income tax Ordinance with the view to include the gain arising from the sale of shares/ securities under the taxable income of the person however the impact of this section is merely on the sale proceeds of the shares and securities giving rise to capital gain where the shares are held by the person for the period of less than 12 months. However, the banking companies are still exempt from the implication of this section and the gain arising from the sale of such shares and securities shall be treated as a separate block of income. Under this section Division VII of Part I of the First Schedule is added where rate of tax on gain arising from the sale of securities, when securities are hold for a period of less than six months, for tax year 2010 and 2011 is 10% and tax rates for tax years 2012, 2013 and 2014 are 12.5%, 15% and 17.5% respectively and when the securities are hold for a period of more than six but less than 12 months the rates applicable for the tax year 2010, 2011, 2012, 2013, 2014 and 2015 are 7.5%, 8%, 8.5%, 9%, 9.5%, 10% respectively. Tax credit for investment Section 65B
This new section is inserted through the Finance Bill 2010 to give an incentive to companies, which own industrial undertakings established in Pakistan, for invest any amount in the purchase of a plant and machinery for installation on account of balancing, modernization and replacement. Tax credit allowed under this section is 10% of the taxable income for the tax year in which such investment is made. The time period to avail this benefit is between 1st day of July 2010 to 30th day of June 2015.
Income Tax
Tax credit on enlistment Section 65C
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This new section offers an incentive to the companies to get them listed in any of the stock exchanges in Pakistan. A tax credit of 5% of the tax payable shall be allowed to the Company for the tax year in which the company is enlisted. Another apparent reason to introduce this section is to increase the number of companies whose shares can be traded at the stock exchange since through the Finance Bill 2010 the gain arising on the such listing are chargeable to tax under section 37A. Deceased individuals Section 87(2A)
This new subsection will create the first charge of Income Tax on the assets of the deceased individual. Unexplained income or assets is charged to tax under the head Section 111 from Other Source Presently, unexplained income or assets is charged to tax under the head from Other Source in the year immediately preceding year in which it is discovered by the Commissioner. A number of cases are pending with Tribunal and high courts as to what constitute discovery and conflicting decisions have been issued by different courts. Now amendment has been proposed to tax such income in the relevant tax year to which it relates. Previously the operation of this clause was limited to five years. This limitation has been proposed to be withdrawn. This omission shall have serious impact on the tax payer and he has to explain even his asset purchased beyond five years. Minimum tax on the income of certain persons Section 113(1) (a)(e)(2)(d)
The Bill propose to levy Minimum Turnover Tax on individuals having annual turnover of fifty million rupees or more during the Tax year 2009 or in any subsequent year and Association of Persons having annual turnover of rupees fifty million rupees or more during the tax year 2007 or in any subsequent year and are now liable to pay minimum tax based on their annual turnover. Rate of minimum tax which was previously 0.5% of the turnover is now increased to 1% in all cases. Return of Income Section 114(6)
Through this newly substituted sub section the procedure for revising the return of income is streamlined where a person on the discovery of any omission or misstatement in the return of income now revise the return by submitting with the return of Income revised audited accounts and a written representation duly signed by the taxpayer stating the reasons for revising the previously filed return.
Income Tax
Return of Income Section 114(6A)
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A new sub-section (6A) has been proposed to harmonize the provisions of revision of return with the Sales Tax / Federal Excise Act. An opportunity is given to the tax payer that if any wrong doing or omission is pointed out by the department or otherwise it comes to his knowledge before the issue of notice of audit u/s 177 or notice of amendment of assessment u/s 122(9); the return can be revised by paying the amount of tax evaded along with default surcharge but without any penalty. However if the audit is started and during the course of audit the commissioner points out certain omissions or wrong-doing; the tax payer can revise the return before the issue of Show cause notice u/s 122(9) by paying tax sought to be evaded along with default surcharge and 25% of the penalties leviable under Ordinance. Further another opportunity has been given to the tax payer that the return can be revised even after the issue of show cause notice u/s 122(9) by paying the amount of tax sought to be evaded along with default surcharge and 50% penalty. Resultantly show cause notice stands abated. Persons not required to furnish a return of income (PTR cases) Section 115(4B)
The amendment has shifted the requirement to file the wealth statement under the section 116. Wealth Statement Section 116(2A)
It is now obligatory to file the wealth statement along with wealth reconciliation if the taxpayer file the return of income in response to assessment u/s 122C, It is to be filed within 60 days in response to the provisional assessment made by the Commissioner. Wealth Statement Section 116(4)
This new subsection was previously in the Section 115(4B) of the Income Tax Ordinance, 2001 which in now under this section. Previously wealth statement was mandatory if tax paid under PTR was Rs. 20,000 but, now it is enhanced to Rs. 35,000. These categories were not filing their wealth statements for the last twenty years and it and it will be cumbersome to reconcile their wealth and justify its source particularly when section 111 has been amended and limitation of five years has been omitted. By virtue of this amendment the tax payer is now required to explain the source even beyond five years Method of furnishing returns and other Documents Section 118(3)
Amendments are brought in to specify the dates for filling of returns and documents under the Ordinance which are as under: i. Annual Statement of deduction of Tax from the Salary of the employee, by the 31st day of August following the end of the tax year to which it relates. ii. A person not required to file return of income under section 115(4) of the Ordinance being income under FTR, a statement showing particulars related to the income of the person, by the 31 st day of August following the end of the tax year to which it relates. iii. Return of income for any person (other than a company), by 30th day of September next following the tax year to which it relates. Budget Chemistry 2010
Income Tax
Best judgment assessment Section 121(1)(a) and (d)
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Clause (a) of section 121(1) has been omitted whereby in case of non-filing of return in response to notice u/s 114; the Commissioner could proceed to best judgment assessment. Now for this purpose Section 122C has been proposed and commissioner can pass Provisional Order and has been discussed in following paras Now the professional firms of Cost and Management Accountants are allowed along with the firms of Chartered Accountants to exercise the powers granted under section 121. Amendment of assessment Section 122(5AA)
Through this newly proposed section, the Commissioner has been given discretionary powers to amend the assessment order on the basis of grounds which were not the point raised in the appeal against the earlier assessment order. Provisional assessment Section 122C
A new section is proposed to be added where the power has been assigned to the Commissioner to make provisional assessment of income of the person based on his judgment and information available to him where the person has failed to furnish the return of income after the issuance of notice by the Commissioner to furnish the return under section 114(3) and 114(4). The said provisional assessment shall be treated as final assessment after the expiry of sixty days from the date of provisional order if a person fails to file the return of income along with the wealth statement supported by wealth reconciliation statement during those sixty days. These provisions are already inserted through Finance (Amendment) Ordinance 2009. Appointment of the Appellate Tribunal Section 130(4)
Through this newly substituted subsection the eligibility criteria for Accountant member of the Appellate Tribunal is changed he should now be the Accountant Member of the tribunal if he is a Regional Commissioner, Commissioner Inland Revenue or Commissioner of Inland Revenue Appeals having at least five years experience as Commissioner or Collector. This amendment is not fair because the person of same grade shall be reviewing the order of the CIT(A); particularly when the limit of single bench member has been raised to Rs 1.5 million. Due date for payment of tax Section 137(2)
The proposed amendment seeks to provide a period of sixty days for the payment of tax as assessed under the provisional assessment made under section 122C from the date of the notice. Estate in bankruptcy Section 138A
A new section is introduced to shift the charge and recovery of tax in case of bankruptcy of the taxpayer on the estate of the taxpayer who has been declared bankrupt. Budget Chemistry 2010
Income Tax
Advance Tax Section 147(1)(a)
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Clause (a) of subsection 1 of section 147 is omitted and now Capital Gain arising out of sale of Capital Asset is also subject to Advance Tax liability. Advance Tax Section 147(2)
Previously Association of Persons having latest assessed income up to Rupees Two hundred thousand were excluded from the ambit of the provisions of the advance tax payment, however, they are now also included in the Advance Tax regime. Advance Tax Section 147(4)
Now the Associations of Person are required to calculate advance tax in the same manner as is required for the companies. Previously the advance tax on the income of Association of Person having latest assessed income of more than two hundred thousand rupees was calculated through the formula which was applicable to individuals. Advance Tax Section 147(4B)
By virtue of the proposed amendments the individuals having latest assessed income up to Rs. 500,000 are now required to pay Advance Tax, previously exemption limit was Rs.200,000. Advance Tax Section 147(5), 147(5A)
The last date for payment of advance tax for Association of Person now coincides with that of the companies and the last day to pay the advance tax which was previously 15th day of the month following the end of the quarter to which the advance tax relates is now changed to the 25th day of the last month of the quarter for which the computation of advance tax is made, i.e. they have reduced the time period to make the payment of advance tax approximately by 20 days. Advance Tax Section 147(5B)
This section is inserted through the Finance Bill 2010 to charge Advance tax on the capital gain on sale of securities, The rates to compute the advance tax on Capital Gain of sale of securities are as follows: i. Where the security is held for a period of less than six months, 2% of the capital gain is subject to payment of advance tax. ii. Where a security is held for more than six but lesser than twelve months, 1.5% is applicable as rate for computation of advance tax.
Income Tax
Tax on Imports Section 148(7)
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This amendment is suggested to clarify that tax paid on the imports of edible oil shall not be final but Minimum tax. Profit on Debt Section 151
The Finance Bill proposes to make tax deducted on profit on debt on Debt instruments, Government securities including Treasury Bills and Pakistan Investment Bonds as final tax. Payments to Non-residents Section 152
The Finance Bill proposes to introduce a procedural change by adding Tax deductible under subsection (1AA) of Section 152 in the sub section (2), by virtue of which tax rate on payment to non residents has been squashed to 20%, instead of the previous rate of 30%, (except for the payments on account of Royalty, Fee for Technical services and payments exempt under the double tax treaties.) Withholding Agent Payment for Goods & Services Section 153 (9)(h)
The Finance Bill proposes to make Individuals having Turnover of Rs 50 Million or more in Tax year 2009 or any subsequent year, since AOP(s) having turnover of Rs. 50 million and above) and the companies are already as Withholding Agents Income from Property Section 155
The Finance Bill proposes that now tax withheld from Income from property will not be the Final Taxation, but tax rates in the 1st Schedule remain unchanged, Thus proposed change will not make any change in ultimate tax liability. Failure to pay tax collected or deducted Section 161
The Finance Bill proposes to bring uniformity in the wording of additional taxes for nonpayment of taxes in respect of three domestic taxes. Statements Section 165
The Finance bill proposes to change the filing of Annual Statements of Withholding taxes to quarterly statements. Moreover, the filing of quarterly statements is proposed to make mandatory in those cases also where no withholding has been made.
Income Tax
Tax Collected or deducted as a Final Tax Section 169
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The Finance Bill proposes to make changes in taxation of Income from Property due to which reference of section 155 (2) is deleted. However, as the rate of tax on property has not been changed and as the withholding tax rate & the rate of tax on Income are same, thus the change will not affect the taxation of Property Income. Moreover, it has been explained that although in the case of final taxation, filing of return is not required but it will be assumed that the assessment has been made on the basis of statement u/s 115(4) or return as the case may be. Records Section 174
The Finance Bill proposes to extend the limitation of retention of record from five to six years and in case of proceedings pending before the authorities till the final decision of the proceedings. Notice to obtain information or evidence Section 176
The Finance Bill proposes to empower the Commissioner to authorize the firm of Chartered Accountant for calling information for conducting of audit. Audit Section 177
The Bill proposes to harmonize audit procedures of three domestic taxes. Time limit for selection and audit of tax payers has been proposed to increase to Six years from Five years. Moreover, Cost & Management Accountants have also been authorized to conduct Tax audits in addition to Chartered Accountants firms. It has also been proposed to empower Commissioner to make a Best Judgement Assessment u/s 121 in case a person fails to produce any accounts, documents and records required to be maintained u/s 174 before the Commissioner, Chartered Accountants Firm or a Cost & Management Accountants Firm, as the case may be. Active taxpayers list Section 181 A
The Finance Bill proposes to empower Board to institute and regulate Active Tax Payers List. Penalties & offences: Section 182
The Finance Bill proposes to rationalize the penalties section of The Income Tax Ordinance , 2001. Section 182 has been replaced in its entirety and all the penal provisions have been incorporated therein. These penal provisions are in addition to punishments prescribed The proposed Finance Bill also seeks to delete Sections 184 to 190 of The Income Tax Ordinance, 2001 as they have been covered in the proposed section 182. However, no penalty shall be payable until an order has been passed in writing after giving an opportunity of being heard. Summary of proposed penalties is given as hereunder: Budget Chemistry 2010
Income Tax
20
Nature of Default Penalty Non filing of Tax return, wealth statement or 0.1 %of the tax payable for each day of default reconciliation u/s 115 or a statement u/s 165. subject to a minimum penalty of Rs. 5,000 and a maximum of 25 % of tax payable. Non issuance of an invoice, cash memo or a receipt as Rs. 5,000 or 3 % of amount of tax involved required under ITO, 2001 or rules. whichever is higher. On failure to make an application for registration in Five thousand Rupees. accordance with the requirements of ITO, 2001. Failure to notify the changes of material nature in the Five thousand Rupees. particulars of registration. Failure to deposit any tax due within time. 5 % of tax in case of first default. Additional 25 % of tax payable in second default. Additional 50 % for each subsequent default. Any person who repeats an erroneous calculation of Tax Rs. 5,000 or 3% of the amount of the tax involved, resulting in a less payment of tax whichever is higher. Failure to maintain records required under ITO Rs. 10,000 or five per cent of the amount of tax on Ordinance or the rules. income whichever is higher Failure to produce record on Notice u/s 177 Rs. 5,000 in case of first Notice Rs. 10,000 in case of 2nd Notice Rs. 50,000 in case of 3rd Notice Failure to furnish the information required or to comply Rs 5,000 in case of first default and Rs. 10,000 in with any other term of the notice served under section case of each subsequent default. 176. On making a false or misleading statement to an Inland Rs 25,000 or 100% of the amount of tax shortfall Revenue Authority. whichever is higher On furnishing or filing a false or misleading information or document or statement. Omits from a statement made or information furnished any material information without which the statement is false or misleading On denial or obstruction of the access of the Rs 25,000or one hundred per cent of the amount Commissioner or any officer authorized by the of tax involved, whichever is higher Commissioner to the premises, place, accounts, documents, computers or stocks. Concealment of income, furnishing of inaccurate Rs 25,000 or equal to amount of tax sought to be particulars of income or claiming of excessive amount of evaded whichever is higher. expenditure. Obstruction of any Income tax Authority in the Rs. 25,000 performance of his official duties. Contravention of any provision of ITO, 2001 for which Rs. 5,000 or 3 % of amount of tax involved there is no specific penalty. whichever is higher. Failure to collect or deduct tax or depositing already Rs 25,000 or equal to 10 % of tax involved withheld tax, whichever is higher. Budget Chemistry 2010
Income Tax
Exemption from Penalty & Default Surcharge Section 183
21
The Bill proposes to empower Federal Government and Board to exempt any person or class of persons from payment of the whole or part of the penalty and default surcharge payable under this Ordinance subject to such conditions and limitations as may be specified. POWER TO COMPOUND OFFENCES Section 202
The word additional tax has been substituted by default surcharge because the caption of additional tax u/s 205 has been changed to default surcharge in order to harmonize the three statues. TRIAL BY SPECIAL JUDGE Section 203
Sub-section (1) has been substituted and (1A), (1B), (3) and (4) have been inserted. The Federal Government may appoint as many special judges as it may consider necessary and specify their territorial jurisdiction. Special judge shall be a person who is or has been a Session Judge, who shall try the offences punishable under part IX except section 198 which relates to prosecution for unauthorized disclosure of information by public servant. While trying a case the provisions of Code of Civil Procedure 1898 shall apply and such court shall be deemed as Court of Sessions and a person conducting prosecution shall be deemed to be a public prosecutor. The Federal Government may transfer any case at any stage from one Special Judge to another to meet the end of justice or general convenience of the parties or witnesses. Such judge shall proceed the case from stage it is transferred to him without recalling record / evidences already recorded ADDITIONAL TAX / DEFAULT SURCHARGE Section 205 and 205A
In order to harmonize the three statues the caption of Additional Tax has been changed to Default Surcharge. The rate of Default surcharge is charged on delayed payment of taxes and has been linked with KIBOR plus 3% per quarter, If the tax or penalty is reduced subsequently; the default surcharge already charged shall be reduced accordingly. INCOME TAX AUTHORITIES APPOINTMENT / JURISDICTION Section 207, 208 AND 209
The designation of the Income Tax Authorities has been changed to harmonize the three statues and there will be one authority to administer the three statutes i.e. Officers of Inland Revenue .Similar amendments have been proposed in Sales Tax and Federal Excise Act. Further the Inland Revenue Audit Officer, Superintendent Inland Revenue, Inspector Inland Revenue and Auditor Inland Revenue authorities have been designated to harmonize with other two statues. Surprisingly the authority of Special Officer of Inland Revenue has neither been designated under this section nor in clause 38A of Section 2. The Board shall supervise the overall administration of this Ordinance and commissioners shall be subordinated to the Chief Commissioner of Inland Revenue. Similarly the Additional Commissioner /Deputy Commissioner / Assistant Commissioner /Inland Revenue Officers/ Audit Officers and Inspectors /Auditor shall be subordinated to the Commissioner of Inland Revenue. The Board shall have the power to appoint as many officers mentioned above as may be necessary. The portfolio of Regional Commissioner has been substituted with Chief Commissioner and Taxation Officer has been substituted with Officer of Inland Revenue
Income Tax
DELEGATION Section 210 / 211
22
Sub-section 1B has been amended whereby the Commissioner may delegate his power to a firm of Chartered Accountants or Cost & Management Accountants appointed by the Board or the Commissioner. Through the proposed amendments the Cost & management Accountants shall also be eligible for appointment as auditor u/s 177 either by the Board or by the Commissioner. Further the portfolio of Taxation Officer has been changed to Officer of Inland Revenue. SELECTION FOR AUDIT BY THE BOARD Section 214C
The proposed section empowers the Board to select any person or class of persons for audit through computer ballot which may be random or parametric. Further application of first proviso of section 177 (1) has been done away with and the Board need not record any reason for selection of a case for audit. An attempt has been made to legitimize the selection of the cases of audit already declared illegal by the higher courts. The higher courts have also issued instructions to the Board to communicate reasons for selection to the tax payer. These instructions have been made binding on the Commissioner as per proviso of section 177(1) but not binding on the selection by the Board as per section 214C. Though it is mentioned in section 214C(3) that the Board shall be deemed always to have had the power to select any person or classes of person for audit of Income Tax affairs to cover the cases already selected by the Board. But the courts normally do not accept the retrospective effect of such provisions and may knock down such provisions. FURNISHING OF RETUTRN OR DOCUMENTS Section 215
Since the Taxation Officer has been re-designated to Officer of Inland Revenue any documents / return / accounts / certificate shall be filed to Officer of Inland Revenue. FORMS AND NOTICES Section 217
The Taxation Officer has been re-designated to Officer of Inland Revenue and computer generated notice which bears authentication in the prescribed manner has also been given legal cover in this section. COMPUTATION OF LIMITATION PERIOD Section 226
For the purpose of computation of time limitation, the period during which the proceedings are stayed are excluded. Now it is proposed that the period during with the case is pending before any authority shall also be excluded from the calculation of limitation period. BAR OF SUITS IN CIVIL COURTS Section 227
A protection has been provided to the officers that no investigation or inquiry shall be undertaken or initiated by any governmental agency against ay officer for any thing done in his official capacity under this Ordinance / Rules / Instructions / or direction made or issued there under without prior approval of the Board. DIRECTORATE GENERAL OF TRAINING AND RESEARCH Section 229
Complete directorate of training and research which was previously omitted in 2005 has now been restored for the purpose of training of officers. Budget Chemistry 2010
Income Tax
ADVANCE TAX ON TRANSACTION IN BANK Section 231AA
23
The scope of withholding tax has been further enhanced on all banking transactions on account of withdrawal through demand draft, pay-order, online transfer, telegraphic transfer, CDR, STDR, RTC if the total sum of such transaction exceeds Rs 25,000 a day. The tax rate is @ 0.3%. Previously only the cash withdrawal exceeding Rs 25,000 were hit by this provision. Now only payment through crossed cheques is saved from the atrocity of this section. Though it may be an attempt to document the economy; but a huge amount of the tax will be piled up which would be refunded after filing of return and with hectic efforts and cost. Now the people will prefer to cash transaction and will use other illegal means of payments. COLLECTION OF TAX BY STOCK EXCHANGE REGISTERED IN Section 233A PAKISTAN The tax collected at source on commission earned by the stock exchange brokers was originally final tax and it was changed to minimum tax vide Finance Act 2008. Now it is proposed to make it adjustable which means that if the tax deducted at source exceeds the actual tax liability; the excess tax paid shall be refunded to the broker. COLLECTION OF ADVANCE TAX FROM TELEPHONE USERS Section 236
The scope of advance tax has been extended to include sale of units through electronic medium or whatever form. Every person selling or issuing the units shall collect advance tax from the purchaser at the time of issuance or sale of units. ADVANCE TAX ON PURCHASE OF AIR TICKET Section 236 B
A new section has been proposed whereby advance tax has been levied @ 5% on gross amount of domestic air ticket. The person preparing air ticket shall collect advance tax at the time of issue of ticket. This provision shall not apply to international tickets. REFERENCE TO AUTHORITIES Section 239 B
In the course of harmonization of three statues; general legal cover has been proposed to any reference to the RCIT, CIT, CIT (Appeals) or Taxation Officer in respect of any provisions of the Ordinance , rules, notification, orders, circulars or clarifications or instructions issued shall be construed as reference to CCIR, CIR, CIR (Appeals) or Officer of Inland Revenue. REMOVAL OF DIFFICULTIES Section 240
The Federal Government was authorized to issue any notification in order to remove any difficulty arising in giving effect to any provision of this Ordinance. This power was restricted and remained ineffective after 30th June 2004. This restriction has been removed now.
Income Tax
CHANGES IN 1 SCHEDULE INDIVIDUAL TAX RATE
st
24
The Finance Bill 2010 proposes to make following changes to the First Schedule of the Income Tax Ordinance 2001. Tax Rate for Individual First Schedule, Part I, Division I The Finance Bill has proposed following relief measures for Salaried and Non-Salaried Individuals: The basic exemption for salaried and non-salaried has been increased to Rs 300,000 which was Rs 200,000 for salaried men and Rs 100,000 for non-salaried men. The discrimination of men and women has been withdrawn. The slabs of both categories have been reduced and re-shuffled The rate for AOP has been fixed at 25% instead of slab applicable to non-salaried individual S.No. 1 2 3 4 5 6 7 8 Tax Rate Table for Business Individual for Tax Year 2011 Where taxable income does not exceed Rs.300,000 Where the taxable income exceeds Rs.300,000 but does not exceed Rs.400,000 Where the taxable income exceeds Rs.400,000 but does not exceed Rs.500,000 Where the taxable income exceeds Rs.500,000 but does not exceed Rs.600,000 Where the taxable income exceeds Rs.600,000 but does not exceed Rs.800,000. Where the taxable income exceeds Rs.800,000 but does not exceed Rs.10,00,000 Where the taxable income exceeds Rs.10,00,000 but does not exceed Rs.13,00,000 Where the taxable income exceeds Rs.13,00,000 Rate of Tax 0% 7.50% 10.00% 12.50% 15.00% 17.50% 21.00% 25.00%
SALARIED INDIVIDUAL TAX RATE FOR TAX YEAR 2011 Tax Rate for Salaries Individual S.No. 1. 2. 3. 4. 5. First Schedule, Part I, Division I Rate of Tax 0% 0.75% 1.50% 2.50% 3.50%
Tax Rate Table for Salaried Persons for Tax Year 2011 Where the taxable income does not exceed Rs.300,000, Where the taxable income exceeds Rs.300,000 but does not exceed Rs.350,000, Where the taxable income exceeds Rs.350,000 but does not exceed Rs.400,000, Where the taxable income exceeds Rs.400,000 but does not exceed Rs.450,000, Where the taxable income exceeds Rs.450,000 but does not exceed Rs.550,000,
Income Tax
6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. Where the taxable income exceeds Rs.550,000 but does not exceed Rs.650,000, Where the taxable income exceeds Rs.650,000 but does not exceed Rs.750,000, Where the taxable income exceeds Rs.750,000 but does not exceed Rs.900,000, Where the taxable income exceeds Rs.900,000 but does not exceed Rs.1,050,000, Where the taxable income exceeds Rs.1,050,000 but does not exceed Rs.1,200,000, Where the taxable income exceeds Rs.1,200,000 but does not exceed Rs.1,450,000, Where the taxable income exceeds Rs.1,450,000 but does not exceed Rs.1,700,000, Where the taxable income exceeds Rs.1,700,000 but does not exceed Rs.1,950,000, Where the taxable income exceeds Rs.1,950,000 but does not exceed Rs.2,250,000, Where the taxable income exceeds Rs.2,250,000 but does not exceed Rs.2,850,000. Where the taxable income exceeds Rs.2,850,000 but does not exceed Rs.3,550,000, Where the taxable income exceeds Rs.3,550,000 but does not exceed Rs.4,550,000. Where the taxable income exceeds Rs.4,550,000. 4.50% 6.00% 7.50% 9.00% 10.00% 11.00% 12.50% 14.00% 15.00% 16.00% 17.50% 18.50% 20.00% First Schedule, Part I, Division I
25
Tax on Salary Marginally accelerated tax rates
Where the income of a taxpayer marginally exceeds the maximum limit of a slab in the table, the income tax payable shall be the tax payable on the maximum of that slab plus tax on: where the total income does not exceed Rs.550,000 total income does not exceed Rs.1,050,000 total income does not exceed Rs.2,250,000 total income does not exceed Rs.4,550,000 Where the income exceeds 4,550,000 20% 30% 40% 50% 60%
Minimum Tax Rate under Section 113A First Schedule, Part I, Division IA The rate of minimum tax have been proposed to be enhanced form 0.5% to 1% and its also made applicable in case of Individual and AOP if there turnover is Rs. 50 Million & above Budget Chemistry 2010
Income Tax
Rates of Tax for Association of Persons (AOP) First Schedule, Part I, Division IB The rate of tax imposed on the taxable income of Association of Persons (AOP) for the tax year 2010 and onward shall be 25%. Rates of Tax for Small Company Small Company First Schedule, Part I, Division II Proposed amendment enhanced the tax rate for small companies from 20% to 25%. Banking Company Public Company other than a Banking Company 35% Private Company other than A banking Company 35% Small Company 25% AOP (Association of Person) 25%
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35%
Tax Rate on Capital Gains on Sale of Securities The rate of tax to be paid under section 37A shall be as follows S.No 1 Period Where holding period of a security is less than six months.
First Schedule, Part I, Division VII
Tax Year 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 2015
Tax Rate 10% 10% 12.5% 15% 17.5% 7.5% 8% 8.5% 9% 9.5% 10%
Where holding period of a security is more than six months but less than twelve months.
Advance tax on Transactions in Bank
First Schedule, Part IV, Division VIA
The Bill now proposes a yet another provision whereby apart from cash withdrawals, all banking transactions are now proposed to be subject to advance tax at the rate of 0.3%. Accordingly, the new Section proposes to subject payments made through any mode of banking transaction including Demand Draft, Payment Order, Online Transfer, Telegraphic Transfer, TDR, STDR, RTC to an advance tax of 0.3% if the aggregate of payments on account of such transactions exceed Rs 25,000/- in a day. Tax rates for Income earned from Property by the individual and AOP First Schedule, Part I, Division VI (a) for Income earned u/s 15 of the ITO 2001
The rental income of individuals, AOPs and companies will be subject to tax under Normal by way of tax withholding at the following progressive rates:
Income Tax
1 2 3 Gross amount of rent Where the gross amount of rent does not exceed Rs.150,000. Where the gross amount of rent exceeds Rs.150,000 but does not exceed Rs.400,000. Where the gross amount of rent exceeds Rs.400,000 but does not exceed Rs.1,000,000 Where the gross amount of rent exceeds Rs.1,000,000 Rate of Tax Zero %
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5 per cent of the gross amount exceeding Rs.150,000 Rs.12,500 plus 7.50% per cent of the gross amount exceeding Rs.400,000 Rs.57,500 plus 15 per cent of the gross amount exceeding Rs.1,000,000 First Schedule, Part I, Division VI (a) for Income earned u/s 15 of the ITO 2001 Rate of Tax 5 per cent of the gross amount of rent. Rs.20,500 plus 7.50 per cent of the gross amount of rent exceeding Rs.400,000. Rs.65,000 plus 10 per cent of the gross amount of rent exceeding Rs.1,000,000 First Schedule, Part III, Division V for Payments u/s 155 of the ITO 2001 Rate of Tax Zero % 5 per cent of the gross amount exceeding Rs.150,000 Rs.12,500 plus 7.50 per cent of the gross amount exceeding Rs.400,000 Rs.57,500 plus 10 per cent of the gross amount exceeding Rs.1,300,000 First Schedule, Part III, Division V for Payments u/s 155 of the ITO 2001
Tax rates for Income earned from Property by the Company Gross amount of rent Where the gross amount of rent does not exceed Rs.400,000. Where the gross amount of rent exceeds Rs.400,000 but does not exceed Rs.1,000,000 Where the gross amount of rent exceeds Rs.1,000,000.
1 2
Withholding Tax on Payment of Rent by the AOP and Individual Gross amount of rent Where the gross amount of rent does not exceed Rs.150,000. Where the gross amount of rent exceeds Rs.150,000 but does not exceed Rs.400,000. Where the gross amount of rent exceeds Rs.400,000 but does not exceed Rs.1,000,000 Where the gross amount of rent exceeds Rs.1,000,000
1 2 3
Withholding Tax on Payment of Rent by the Company
Income Tax
Gross amount of rent 1 2 Where the gross amount of rent does not exceed Rs.400,000. Where the gross amount of rent exceeds Rs.400,000 but does not exceed Rs.1,000,000 Where the gross amount of rent exceeds Rs.1,000,000. Rate of Tax 5 per cent of the gross amount of rent.
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Rs.20,500 plus 7.50 per cent of the gross amount of rent exceeding Rs.400,000. Rs.65,000 plus 10 per cent of the gross amount of rent exceeding Rs.1,000,000
COLLECTION / DEDUCTION OF TAX AT SOURCE Section 148 149 Responsible Custom Authorities Employer Company 150 Nature of Payment Imports Salary Dividend paid (Company and Individual) Power sectors Rate 5% F As per First Schedule 10% (F) 7.5% (F) for Companies not final but maximum. 10% of profit as reduced by Zakat paid. As above
All payers 151 (a) Banking Company, Financial Institutions Federal Govt, Provincial Govt, Local Authority Banking Company Financial institution, company, Finance Society
Profit on National Saving Deposits certification including a Defense saving certificate Profit on account of deposits.
(b)
(c) (d)
Profit to any person other than a financial instruction, on any security issued.
As above
Profit to any person other than a financial As above institution, on any bond, certificate, debenture, security or instrument of any kind (other than a loan agreement between a borrower & a banking company or a development finance institution).
Income Tax
152 All Tax payers Payment to non resident except u/s149 (salary), 150 (dividend), 153 (Goods & Service), 155 (Income from Property) or 156 (Prizes & Winnings); Royalty / Fee for Technical Services. Services Rendered / contracts / advertisement by 15% F Satellites Channels. 6% insurance premium or re-insurance premium Others 5% 20% Payments to resident person or permanent establishment of non resident for; Sale of Goods: Sale of Rice, Cotton seeds oil, Edible Oil. 1.5% F Sale of any other goods. 3.5% F Rendering of Services. 6% (Minimum Tax in case of Individual and AOP) Payment to resident persons or permanent 2% F establishment of non resident for Transport Services Goods transport vehicles, tax of the laden weight one rupee per kilogram Services rendered in connection with export of 0.5% F goods Payments to non-resident media persons 10% Export proceeds / Supply of goods to exporter under 1.00% F in land back to back letter of credit, export proceeds. Commission due to an indenting commission agent. 155 Federal Govt., Provincial Govt., Local authority company, Non profit Org., Diplomatic Mission All payers 5% Rent of Immovable property including Furniture & Various Fixtures)
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153 (1)
Several
153
Transport Services
153 (1A) Every exporter or Export house 153A Non Resident 154 Authorized foreign exchange dealers Banking company
156
156-A
All Payers
Prize on Prize bonds and cross word puzzle 10 % F Winning from raffle, lottery, Prize on winning quiz, 20 % F Prize offered by companies for promotion of sale Petroleum products to Petrol Pump operator 10 %F Budget Chemistry 2010
Income Tax
231-A All banks Demand Draft, Pay Order, Online Transfer, Telegraphic Transfer, TDR, CDR, STDR,RTC and Cash withdrawals exceeding Rs.25,000 in day. Purchased of Motor Cars and Jeeps Brokerage or commission paid to advertising agents. Brokerage or commission In other cases Commission on purchase and sales of Shares: Purchase of Shares. Sales of Shares. Trading/Sale of Shares. Markup and commission on Badla transaction. 0.30%
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231B 233 233 233-A
Cars & Jeeps Federal Govt., Provincial Govt., Local Authority Company, AOP Stock Exchanges Registered in Pakistan
As per Schedule 5% F 10 % F
0.01% 0.01% 0.01% 10%
234 235 236 236B
Person Collecting motor vehicle tax Person preparing the bills Person preparing the bills. Purchase of Air Ticket
To be Collected at the time of registration of the Various vehicle Commercial / Industrial consumer of electricity. Various PTCL telephones Mobiles phones & prepaid telephone cards. tax to be deducted on gross amount of air ticket Various 5%
F = full and Final Discharge of Tax
Income Tax
CHANGES IN 2ND SCHEDULE
31
The Finance Bill 2010 propose following changes to the Second Schedule of the Income Tax Ordinance 2001. Exemption for profit on debt payable to non-residents persons Second Schedule Part I Clause 72(iii)
Provide exemption for profit on debt payable to non-residents in respect of foreign loan for Industrial Investment in Pakistan. New clause added through Finance Bill 2010, 72(iii) being a foreign individual, company, firm or association of persons in respect of a foreign loan as is utilized for industrial investment in Pakistan provided that the agreement for such loan is concluded on or after the first day of February, 1991, and is duly registered with the State Bank of Pakistan New Clause Exemption to Khyber Pakhtunkhwa PTA and FATA Second Schedule Part I Clause 92A, 126F Second Schedule Part IV Clause 10A
The Finance Bill 2010 proposes the following special relief measures for PATA / FATA amendment: Clause 92A: Exempt educational institutions established in the Most/Moderately affected areas of Khyber PakhtunkhwaPTA and FATA for two years ending on 30th June 2011 Clause 126F: Profits and gains derived by a taxpayer located in the most affected and moderately affected areas of Khyber Pakhtunkhwa, FATA and PATA for a period of three years starting from the tax year 2010. Provided that this concession shall not be available to the manufacturers and suppliers of cement, sugar, beverages and cigarettes Clause 10A(i), (ii). (iii) and (iv) : provide exemption from penal provisions (section 182) default surcharge(section 205) to business located in Most/Modarated areas of Khyber Pakhtunkhwa FTA/PATA provided that principal amount tax due is paid by 30.06.2010. Exemption under section 235 for commercial and industrial consumers till 30.06.2011 has also been provided in the said area. Exemption of provision of section 154 has also been provided to exporter based in above areas till 30.06.2011. Exemption from provision of section 148 on import of plant and machinery for establishment of businesses in above mentioned areas has also been provided till 30.06.2011. This concession will not available to manufacturers of cement/sugar/cigarette and beverages. Explanation.- For the purpose of this Schedule,- (a) most affected areas means district Peshawar, Malakand Agency, and districts of Swat, Buner, Shangla, Upper Dir, Lower Dir, Hangu, Bannu, Tank, Kohat and Chitral; and (b) moderately affected areas means district of Charsadda, Nowshera, DI Khan Batagram, Lakki Marwat, Swabi and Mardan. Dividend income from Investment Corporation of Pakistan& Second Schedule Part I Clause 102, 110 Gain on Sales of Share/Securities and Transfer of Capital Assets and 110A These Clauses shall be omitted by Finance Bill 2010. Clause (102) Any dividend received by the Investment Corporation of Pakistan from any other company which has paid or will pay tax in respect of the profits out of which such dividends are paid. Budget Chemistry 2010
Income Tax
32
Clause 110: (110) Any income chargeable under the head "capital gains", being income from the sale of modaraba certificates or any instrument of redeemable capital as defined in the Companies Ordinance, 1984 (XLVII of 1984), listed on any stock exchange in Pakistan or shares of a public company ( 5[as defined in subsection (47) of section 2] ) and the Pakistan Telecommunications Corporation vouchersissued by the Government of Pakistan, derived by a taxpayer 6[upto tax year ending on the thirtieth day of June, 7[2010] Caluse [(110A) Any gain on transfer of a capital asset of the existing stock exchanges to new corporatized stock exchange, in the course of corporatization of an existing stock exchange.] Reduced tax rate facility to large Import houses Second Schedule Part II Clause 24A Proposed change is as under: Large Distribution houses who shall fulfill the requirement as defined in Section 148(7)(d) for Large Import house have been benefited and they shall pay only 1% for supply of goods u/s 153 instead of 3.5%. Such facility is already available to cigarette and pharmaceutical product. Reduce Tax Rate for Seiner Citizen & increase the Income Limit Second Schedule Part III Clause 1A Proposed change is as under: Senior citizens are the person who have attained age of 60 years on the first day of tax year. Their income tax liability is reduced by 50%; provided their taxable income is Rs 750,000/= The Finance Bill proposed to increase the limit of taxable income to Rs 1,000,000 and also the income covered under PTR is excluded from this threshold. Import engaged in Vanaspati Ghee or Oil Second Schedule Part IV Clause 52 Proposed that this Clause shall be omitted by Finance Bill 2010. The provisions of clause (vi) of Notification No. SRO 593(I)/91, dated the 30th June, 1991, shall not apply to any importer being an industrial undertaking engaged in the manufacture of vanaspati ghee or oil Income tax payable by a foreign experts Second Schedule Part IV Clause 73 New clause added through Finance Bill 2010 To mitigate part of the cost of obtaining foreign support to fill productivity gap, income tax payable by a foreign experts shall be exempted provided that such expert is acquired with the prior approval of the Ministry of Textile Industry.
Income Tax
CHANGES IN 3 SCHEDULE
rd
33
Depreciation for Ramp access to Disable Persons Third Schedule Part I Clause V A sub-clause V has been proposed in Third Schedule whereby 100% depreciation shall be allowed to any tax payer who shall build ramp to provide access to disabled person to the extent of cost not exceeding Rs 250,000 each. CHANGES IN 5th SCHEDULE Limitation on Payment to Federal Government and Taxes Fifth Schedule Part I Rule 4A It is proposed through Finance Bill 2010, provide de-commissioning cost over a period of ten years or life of development and production / mining lease which ever is less. Briefing of new rule shall be as follows: 4A. Decommissioning cost.- With effect from the Tax Year 2010, Decommissioning Cost, as certified by a Chartered Accountant or a Cost Accountants, in the manner prescribed, shall be allowed over a period of ten years or the life of the development and production or mining lease whichever is less, starting from the year of commencement of commercial production or commenced prior to the 1st July, 2010, deduction for decommissioning cost as referred earlier shall be allowed from the Tax Year 2010 over the period of ten years or the remaining life of the development and production or mining lease, which ever is less. CHANGES IN 7th SCHEDULE Classified Advances and Off Balance sheet items Seventh Schedule clause 1 Sub clause C Following changes proposed in the Finance Bill 2010: Provisions for advances and off-balance sheet items shall be allowed at 5% of total advances for consumers and small and medium enterprises (SMEs) (as defined under the State Bank Prudential Regulations) shall be inserted Irrecoverable/doubtful transactional provision. advances written off against Seventh Schedule Rule 8A
Following new rule shall be inserted through Finance Bill 2010, namely (1) Amounts provided for in the tax year 2008 and prior to the said tax year for or against irrecoverable or doubtful advances, which were neither claimed nor allowed as a tax deductible in any tax year, shall be allowed in the tax year in which such advances are actually written off against such provisions, in accordance with the provision of sections 29 and 29A. (2) Amounts provided for in the tax year 2008 and prior to the said tax year for or against irrecoverable or doubtful advances, which were neither claimed nor allowed as a tax deductible in any tax year, which are written back in the tax year 2009 and thereafter in any tax year and credited to the profit and loss account, shall be excluded in computing the total income of that tax year under rule 1 of this Schedule (3) The provisions of this Schedule shall not apply to any asset given or acquired on finance lease by a banking company up to the tax year 2008, and recognition of income and deductions in respect of such asset shall be dealt in accordance with the provisions of the Ordinance as if this Schedule has not come into force. Provided that un-absorbed depreciation in respect of such assets shall be allowed to be set-off against the said lease rental income only
Sales Tax
Proposed Significant Changes in Sales Tax Act, 1990
Appellate Tribunal Section 2(1)
34
Appellate Tribunal constituted under section 130 and 131 of Income Tax Ordinance 2001 is suggested to be works as Appellate Tribunal under Sales Tax Act., 1990. Change of functionaries after introduction of Inland Revenue Section 2(2)
In order to incorporate the major reformative changes introduced earlier through the presidential ordinance, through which the amalgamation of two major revenue arms of the Federal Board of Revenue i.e. income tax and sales tax comes into Inland Revenue. Now all those amendments made part of this bill to get approval from the parliament. Accordingly, in the Sales Tax Act., 1990 the term office of the Sales Tax is suggested to be replaced with term office of the Inland Revenue and designation of Collector replaced with Commissioner, appearing in all the section and sub section in this act. Chief Commissioner Inland Revenue Section 2 (4)(a)
The designation of Chief Commissioner Inland Revenue is suggested to be introduced in Sales Tax Act., 1990 through seeking insertion of a new sub section 4(a) is in Section 2. Scope of Tax Section 3
The 16% standard rate of Sales Tax is suggested to be increased 1% upward, now the standard rate under section 3 is suggested is to be 17%, all other higher rate of sales tax applicable vide notification 644/2007 are increased upward to the same extent of 1% through notification 395(I)2010. The rate will be effective from 1st July 2010 subject to approval of the bill. Retention of Records and documents for six years Section 24
The time limit for retention of record is suggested to be increased from five years to six years or till the conclusion of any legal or litigation proceeding if involved in any particular situation at any adjudication, appellate or any other alternate dispute resolution forum. Access to record, documentation, etc Section 25
The powers for determination of tax liability and recovery demand along with imposition of default surcharge and penalty is suggested to be conferred to a taxation / audit officer by seeking amendment in section 25(3) of the sales Tax Act., 1990. The proposed amendment was come into the field through presidential ordinance and now the same proposed to be get approved through parliament as well. These powers are requires to be delegated after omission of section 45 from the Sales Tax Act., 1990.
Sales Tax
35 In our opinion the suggested amendment is against the very spirit of fair and equitable adjudication process. The taxation officer is now become the judge of its own cause, which altogether in confrontation with the norms of natural justice. The current government though speaks loudly regarding distortion in the General Sales Tax Act., but such sort of legislation reflects their narrow vision. The board seems to be desirous to delegate more and more discretionary powers to their field formation. In order to place a fair and balance taxation system, impartial and separate adjudication mechanism is the need of the hour. The government could not achieve the faith of the masses until unless they did not provides level playing field to the all stake holders through ensuring a fair adjudication system. The word adjudge, implies a judicial decision. In a dispute between taxation officer and a taxpayer, a judicial approach requires essentially, it is incumbent on the part of taxation authority to follow the elementary rules of natural justice, where delegation of adjudication and tax demand determination powers to the same taxation officer, tilt the balance entirely towards one end. Transactions between associates Section 25
A new section 25AA for the purpose to determine fair transfer price in between associate person is proposed to be inserted, the provision for application of fair open market price was already been part of the Sales Tax Act., under the definition and scope of value of supply, it seems that regulator deem it appropriate to further strengthen this provision through insertion of this new section. Appointment of authorities. Section30
Powers and appointment of authorities available with Collectors has been replaced with Commissioners with the insertion of a new designation of Chief Commissioner, through amendment proposed in this section. The Chief Commissioner and Commissioner Appeal with perform their duties as a subordinate of the Board whereas all other officers below the rank of the Commissioners will work and perform as a sub ordinate of Chief Commissioner and as the case it may be. Delegation of powers Section32
The delegation of additional powers to the subordinate staff, earlier laying with only board is now suggested to be extended to chief commissioner as well subject to approval from the board, for performing and exercising any jurisdiction of an officer to the extent of its immediate superior level. The amendment is more of an administrative nature and nothing to do with the taxpayer. Special audit by Chartered Accountant Section32A
The powers for appointment of an external auditor by appointing Chartered Accountant or a firm of Chartered Accountant or the Cost and Management Accountant for conduction a special audit is suggested to be extended to the Commissioner, Earlier this power rest with the board only. Budget Chemistry 2010
Sales Tax
The condition of appointment through notification and official Gazette is also eliminated. The proposed amendment may now raise provision for finger pointing under this system as the in built transparency is seems to be compromised by the regulator. Adjudication Section45
36
Section 45 relating to adjudication modalities is proposed to be deleted from the Sales Tax Act., 1990. This section was inserted in the Sales Tax Act., being a part of the reforms process initiated in 2000. It was got overwhelmed respond by the trade and business community at that point of time since it was their prolonged demand to introduce impartial adjudication system in the Sales Tax Act., 1990. The omission of this section will result transferring of the adjudication powers to taxation / audit officer, which in our opinion may widen distrust between taxpayer and tax collecting authority Appeals Section45B
Since the provisions for adjudication has been omitted from the Sales Tax Act., accordingly provision for filing appeal against it, also need to be amended through seeking correction in this section Appeals to Appellate Tribunal Section46
Jurisdiction of second appeal under Sales Tax Act., 1990 laying with Appellate Tribunal, Customs is now suggested to be transferred to Appellate Tribunal formed under section 131 and 132 of the Income Tax Ordinance 2001, all appeals pending before the Customs Appellate Tribunal stands transferred to the Appellate Tribunal Inland Revenue with effect from 28 Oct 2009. The amendment is the part of presidential Ordinance earlier promulgated to form Inland Revenue. being a part of reform measures and now its included in the finance bill for formal approval from the parliament Service of orders, decisions, etc. Section56
The procedure for service of notice, orders and other documents as required under this act is suggest to be elaborated through seeking suitable amendments in this section, now service of notice or other requisition is deem to be properly been served to a person and unquestionable, if it served: Personally to an individual In case legal disability of an individual or a non resident individual to its representative,. By sending through registered post or a courier service to their registered address or any of their office or at the last known address. In the manner provided under Code of civil procedure 1908. In case of non resident individual personal service to its representative In case AOP become dissolved, to any member of AOP or to a principle officer of AOP. In case of business stands discontinued, to a person who discontinue the business or the person who was the representative at the time of discontinuance. Budget Chemistry 2010
Sales Tax
Reference to authorities. Section72A
37
Though authorities and offices defined in Sales Tax Act, 1990 before constitution of office of the Inland Revenue is seems to be replaced in the Act., but in order to avoid any omission a new section 72A is proposed to be inserted for referring and replacing all previous authorities with newly defined authorities appearing wherever in this Act, rules, notification, general order or standing orders . Selection for audit by the Board. Section72B
A new sub section 72 is proposed to be inserted to empower board to select cases for audit through computer rballoting which may be on random or under some set parameters bases. The audits selected under this section will be conducted in a manner prescribed under section 25 of the Sales Tax Act., 1990. In our opinion selection of audit through computer balloting and under some set parameters reflects more rational approach and carries transparency. The focus need to pay by the regulator on such sort of audit selection modalities rather adopting other discretionary way and means. In particular after introduction of electronic return filing and other documentation, there might not remain room for selection of audit in conventional manner hence we suggests regulator pay attention on more analytical audit as its in practice in other part of the world. Sales Tax Notifications Higher rate of Sales Tax i.e. 18% and 21% increased further to the extent of 1% through notification 396/2010 dated 5th June 2010 Increase of one percent sales tax from 6% to 7% on value of import of soya bean seed by solvent extraction industries subjection to restriction on claiming refund vide notification 397(I)/2010 dated 5th June 2010 Increase of one percent sales tax from 25% to 26% on supply of natural gas to CNG station, the gas transmission and distribution company through amendment in special procedure vide issuance of notification 398(I)/2010 dated 5th June 2010 Increase of one percent sales tax from 25% to 26% on supply of natural gas to CNG station, the gas transmission and distribution company through amendment in special procedure vide issuance of notification 398(I)/2010 dated 5th June 2010
Federal Excise Duty

Proposed Significant Changes in Federal Excise Duty Act, 2005
Definition of Appellate Tribunal Section 2(3) /Section 34
38
As a consequence of this change, appeals under this law will now be dealt by the Appellate Tribunal Inland Revenue established under section 130 of the Income Tax Ordinance 2001 instead of Custom, Excise and Sales Tax Appellate Tribunal constituted under Section 194 and procedures laid down under section 194A, 194B and 194C of the Custom Act, 1969. Accordingly sub-section (2) of section 34 has been omitted. Definition of Chief Commissioner and Commissioner Section 2(4A), 2(5) and 2(12A)
The posts of Chief Commissioner Inland Revenue which have been introduced in this statute through the substituted Section 29 have been defined under the section. In addition to this, the Collector of Federal Excises and Federal Excise Officers definitions have been replaced by the definitions of Commissioner Inland Revenue and Officer of Inland Revenue, respectively. Records Section 17
The basic objective of this amendment is to extend the limitation period of retention of record from five years to six years and in case of proceedings pending before any authority at the time of completion of six year, the period of retention of record will be extended till the final decision of the proceedings. Appointment of Federal Excise Officers Section 29
Through the substitution of the Section 29(1) vide Finance Bill, 2010, the Board has derived authority to appoint in relation to any area, any person or any class of persons, any person to be (a) Chief Commissioner Inland Revenue; (b) Commissioner Inland Revenue; (c) Commissioner Inland Revenue (Appeals); (d) Additional Commissioner Inland Revenue; (e) Deputy Commissioner Inland Revenue; (f) Assistant Commissioner Inland Revenue; (g) Inland Revenue Officer; (h) Superintendent Inland Revenue; (i) Inspectors Inland Revenue; (i) Inland Revenue Audit Officer; and (k) Officer of Inland Revenue with any other designation. The said designations have been changed to harmonize the three statues as similar amendments have been proposed in Sales Tax Act, 1990 and Income Tax Ordinance, 2001. Section 29(1A), (1B) and (1C) has been inserted for the elaboration of the functional and structural hierarchy of the tax authorities. Budget Chemistry 2010
Federal Excise Duty
39
Under subsection 3 of Section 29, Chief Commissioner with the approval of the Board or the Board itself, may empower tax authorities, by name or designation, without notifying in the official Gazette, to exercise the power of Commissioner of Inland Revenue, Additional Commissioner Inland Revenue, Deputy Commissioner Inland Revenue and Assistant Commissioner Inland Revenue in a hierarchical manner. Powers of Adjudication Section 31
Adjudication powers given to the different Officers of Federal Excise has been withdrawn by omitting Section 31 of the Federal Excise Act, 2005 through Finance Bill, 2010. Now the adjudication shall be in the relevant sections. Reference to High Court Section 34A
This Section allows the aggrieved person or Commissioner of Inland Revenue to file reference before the High Court within ninety days of the communication of the order of the Appellate Tribunal under section 34, stating any question of law arising out of such order. The high court shall fix, hear and decide the reference as per High courts rules and Code of Civil Procedures 1908. All the provisions applicable to an Income Tax or Sales Tax appeal shall apply to FED reference. Reference to authorities Section 42A
Any reference to Collector, Additional Collector, Deputy Collector, Assistant Collector, Superintendent and an officer of Federal Excise, wherever occurring, in this Act and the rules, notifications, clarifications, general orders or orders made or issued thereunder, shall be construed as reference to Commissioner Inland Revenue, Additional Commissioner Inland Revenue, Deputy Commissioner Inland Revenue, Assistant Commissioner Inland Revenue, Superintendent Inland Revenue and an officer of Inland Revenue, respectively. Selection for audit by the Board Section 42B
This new Section has empowered/ensured the Boards power to select persons or classes of persons for audit of records and documents through computer ballot which may be random or parametric as the Board may deem fit. Departmental Audit Section 46
In addition to the Board, Commissioner of Inland Revenue has also delegated with the powers to authorize the Officer of the Inland Revenue to conduct the audit of the registered person along-with the power to pass an order under Section 14 of Federal Excise Act, 2005 after obtaining the registered persons explanation on all the issues raised in the audit. Service of notices and other documents Section 47
This section has been substituted with the objective of the harmonization of the services of notices and other documents of taxes to be managed under one roof in line with other two statutes wherein the identical provisions already exist. Budget Chemistry 2010
Federal Excise Duty

First Schedule Table-I
40
Rate of duty on locally produced cigarettes (if their retail price exceeds nineteen rupees and fifty paisa per ten cigarettes) and their substitutes has been increased from sixty four (64) percent to sixty five (65) percent of the retail price. Rate of duty on locally produced cigarettes (if their retail price do not exceeds nineteen rupees and fifty paisa per ten cigarettes) and their substitutes has been increased from four rupees and seventy five paisa to five rupees and twenty five paisas. Rate of duty on cigarettes manufactured in non tariff areas has been increased from sixty four (64) percent to sixty five (65) percent of the retail price. Levy of Federal Excise Duty @ Rs.1/- per filter rod for cigarettes filter rods to unregistered and illicit manufacturers of cigarettes. Levy of 10% Federal Excise Duty on electricity intensive home appliances i.e. Air Conditioners and Deep Freezers. Rate of duty on Natural Gas and other petroleum gases have been increased from Rs.5.09 per MMBTu to Rs.10/- per MMBTu which is effective from July 1st, 2010 General Through the withdrawal of Notification number S.R.O. 650(I)2005,dated July 1st, 2005 by the virtue of Notification number S.R.O. 399(I)2010,dated June 5th, 2010, the adjustment of the Federal Excise Duty paid on the beverage concentrate is now allowed from July 1st, 2010. Following is the summary of changes proposed with regard to nomenclature of the tax authorities designations in the different sections of the statue: Previous Collector of Federal Excise Collector (Appeals) of Federal Excise Additional Collector of Federal Excise Assistant Collector of Federal Excise Federal Excise Officer Current Commissioner Inland Revenue Sections References 4(4), 9(2), 19(4), 19(10), 22(8), 22(14), 27(3), 33, 34, 35, 43(2), 44(2), 45(2), 46(2), Third Schedule 37(1), 37(2), 37(3)
Commissioner Inland Revenue (Appeals) Additional Commissioner 33(1), 38(2) Inland Revenue Assistant Commissioner Inland 46(2) Revenue 14(2), 19(2), 19(6), 21(4), 22(1), 22(5), 22(6), 22(7), 22(8), 22(10), 22(11), 22(13), Officer of Inland Revenue 23(1), 24, 30(2), 33(1), 34, 35, 36, 38(2), 43(2), 44(2), 45(1), 45(2), 46(1), 46(2)
Unless mentioned specifically, all the proposed changes in the Federal Excise Act, 2005 shall take effect and shall be deemed to have taken effect from the June 5th, 2010. Budget Chemistry 2010
Value Added Tax

VAT - Federal Value Added Tax, Act 2010 (Deferred Till 01, October 2010)
41
The Government has a view that the revenue collection is now come to a stagnant position and therefore suggests introducing VAT on all economic sectors including sales and services. The Idea to introduce VAT is not new, in fact GST on Vat mode is already applicable in our country since 1996, however the government has yet failed to extend its application to the last chain supply element i.e. wholesale/retail. The services sector also remains out of its ambit at large, hence expansion of its application to all segment of the economy is unenviable, However, the modus operandi adopted in proposed VAT bill suggest altogether a different picture. The withdrawal of number of special procedures and making all export zero rated may not pay such dividends as claimed by the regulator, The vast discretionary powers given in the proposed VAT law is also need to be revisited. Therefore rather disturbing settled areas of legal framework, the government may fetch better results by extending its application on services and other untapped sectors. Furthermore one should not overlook that the key to increase in Tax to GDP ratio remains with increase in the tax base and not in the introduction of entirely a new law. Therefore, we are in considered view that government should take business community on board to bring the non tax paid elements / society into the tax net to put equal and fair responsibility on all segment of economy. Open Realities of VAT Law Under upcoming VAT, it is on agenda that the information and record from all directly related personals including any department, trade bodies or trade association could be sought. The upcoming VAT may contain the provisions for Forensic audit Act 2010 which will be the first of its kind to be introduced in Pakistan and will give extension of unlimited powers to the tax officials. The upcoming VAT may give supremacy powers for tax official who may reject the refund claim or adjustment on its suspicion. Under the upcoming VAT, for the recovery of amount, the Commissioner may have powers to raid on business premises without serving prior notices. Under the upcoming VAT, Officer of the Inland Revenue may have the same powers as enjoyed by civil court for recovery of unpaid amount which tantamount to create a state within state. The upcoming VAT may include that the taxpayers will not be allowed to go to any court including High Court to seek remedy or justice against the order passed, assessment made, tax levied, penalty imposed, audit etc, against any action taken by an officer of Inland Revenue. This measure is against all norms of justice and tantamount to denying a tax payer of his basic right of justice, given in the constitution of Pakistan. Provisions in the upcoming VAT may contain clauses regarding suspension and cancellation of registration on the belief of non compliance of VAT law or Customs Law which are again an example of vast discretionary powers of the tax officials.
Value Added Tax
42
Tax Invoice under the VAT will contain a plethora of information about the buyer such as NTN. CNIC etc. However, the supplier will be Implicated /panellized if he is given fake or forge CNIC. The upcoming VAT may bar on payment of refund and will give exceptional powers to the officer of Inland Revenue to reject claims for refunds only on the basis of his belief or suspicion, thus opening avenues for corruption. Under the VAT mode, registration threshold may increase from Rs.5 million to Rs.7.5 million and most of the exemptions are being withdrawn, people are generally expecting that VAT will bring economic equity and price stability in the market. Five Zero Rated Sector Facility available on domestic supply chain of five export oriented sectors and reverting back to refund regime under which refunds were more than the collection, will again open flood gate of corruption as it will increase interaction between taxpayer and tax official and encourage Bawan Shah like Scandals. Therefore, the zero rating facility on domestic supply chain for five export oriented industrial sectors should be resorted. Moreover, the delay in refund will create liquidity crunch for the exporters who will be constraint to take loan form bank at higher mark-up rate. This will result in reduction of competitive edge of our products both in local and foreign markets, against the foreign product. The government is yet failed to come up with any scientific study of how much revenue they are expecting from discontinuing this regime. The major argument taken by the government counter is that why sales for domestic consumption is also remained zero rated. The matter of fact is that at the time of zero rating of textile sector the total revenue collected from the sector and refund paid were evaluated by then officials and it was found that out of total collection of 48 bn approx 45 bn was paid as refund, therefore in order to facilitate the export oriented sectors government sacrificed 3 bn net receipts. At the other hand the government was able to pay more focus on other potential revenue generation sectors, through this step liquidity and cash flow problems of the export sectors were also well taken. VAT Internationally. Currently VAT is being practiced in 130 countries. However, we have observed that all these countries have adopted VAT after due diligence and considering their ground realities through a gradual process. Unfortunately in Pakistan no such prerequisite were followed, instead it was done in extreme haste. Countries like UAE and India also intend to adopt VAT system. They are still studying its pros and cons since last couple of years. They have shown no hesitation to defer its implementation till completion of their home work. Countries like China and South Africa where VAT is in practise, they have adopted lower rate for retail and SME sector, whereas in Pakistan, the government is working on introducing 15% single rate of tax on all segment of business, despite considering the grave picture of tax net, where insignificant number of retailers are in tax net and they are also paying 1.5% of their turnover.
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Value Added Tax

Tax Fraud Element in VAT Where ever in the world VAT is in practice the fraud on account of bogus refund is an integral part of it. Even in the developed countries like U.K and Europe this phenomena is hurting the government. Tax losses in the EU can be estimated at approximately $23 billion per year in the restaurant sector alone. Germany tops the list followed by the UK, France, Italy and then Spain. The ratio of defrauding the National Exchequer in Pakistan is quite high as compared to other developing countries because of non availability of proper infrastructure and complete computerization. The past poor experience of the refund regime where bona fide refund claimants were deprived from their rights and even still following their cases. On the other hand certain unscrupulous elements got benefited grossly and the government is not yet able to fix them. Interestingly, in some cities literally processions were taken out in favour of sales tax refund regime. Therefore we suggest that countries like Pakistan, we should workout the modalities where refunds should not arise if at least not eliminated to keep at bare minimum extent, and regulator should entirely pay their focus on revenue generation and its acceleration. Where the number of sales tax payers are only 157000 is a big question mark for the performance of the revenue enforcement authority.
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Budget Chemistry 2010

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