Comments on Finance Bill-2012-13

Comments on Finance Bill-2012-13

______

TABLE OF CONTENTS

Page #

Income Tax 4

Sales Tax 14

Federal Excise 19

Comments on Finance Bill 2012-13

The Comments on Finance Bill-2012-13 contains highlights of Finance Bill 2012 relating to Income Tax, Sales Tax, Federal Excise Duty and Custom Duty.

All changes through the Finance Bill 2012-13 are effective July 1, 2012, except for the amendments made inTable-I of the Federal Excise Act, 2005 effective from 2.6.2012 and Sales Tax Act, 1990 which are effective from June 1, 2012.

FEDERAL BUDGET 2012-13

INCOME TAX

SECTION 2

Definitions

35AA

New definition of NCCPL is proposed to be inserted in section 2. NCCPL means National Clearing Company of Pakistan Limited, which is a company incorporated under the Companies Ordinance, 1984 (XLVII of 1984) and licensed asclearing House by the Securities and Exchange Commission of Pakistan.

SECTION 9 & 10

Taxable Income

Total Income

Exempt income is proposed to be included in the definition of total income.

SECTION 13

VALUE OF PERQUISITES

13(7)

Concessional loans given by employers to employee are proposed to be exempt upto Rs. 500,000/-

14(a)(ii)

Cap of 10% on interest rate is proposed to be fixed on concessional loans obtained by the employees.

SECTION 37

CAPITAL GAINS

37(1A)

Capital gain on sale of immovable property is now proposed to be taxable if sold within two years from the date of purchase. New slab of tax rates for the purpose is proposed to be inserted as Division VIII of Part I of First Schedule.

S.No. / Period / Rate of Tax
1 / Where holding period of Immovable property is up to one year / 10%
2 / Where holding period of Immovable property is more than one year but not more than two years."; / 5%

37(5)

Immovable property is proposed to be included in the list of capital asset for the purpose of taxation as defined in proposed sub section (1A) of section 37 of the Income Tax Ordinance, 2001.

37A & 100B

Capital Gain on Sale of Securities

Special Provisions related to Capital Gain Tax

37A(1A)

In order to calculate gain on sale of securities, a formula / method, which is self- explanatory, is proposed to be introduced, as under:

A-B

A is the consideration received by the person on disposal of the security; and

B is the cost of acquisition of the security;

100B

Under the rules, National Clearing Company of Pakistan Limited (NCCPL) will develop automated system and it will calculate tax on the basis of transaction date processed through its system and information provided by Central Depositary Company (CDC).

NCCPL will issue certificate to taxpayer and this certificate will be submitted by taxpayer along with the income tax return which shall be conclusive evidence in respect of income from capital gain on shares.

Further, to encourage investment in capital market there will be no inquiry regarding investment made in shares of companies listed in any of stock exchange in Pakistan till 30th June 2014 provided that amount remains invested for the period of 120 days.

SECTION 39

Income from Other Sources

(cc)

An amount of additional payment on delayed refund is proposed to be included in the list of “income from other sources”.

By adding new clause, the amount received as additional payment on delayed refund is now taxable.

SECTION 62

Tax Credit for investment in shares

62(2)

The limit on tax credit for investment is further relaxed and it is enhanced to 20% of taxable income from 15%. Further, the current of investment available for tax credit is increased from 500,000 to 1,000,000 and the minimum holding period is reduced for 03 years to 2 years.

SECTION 65B & D

Tax Credits for Investment:

65B(1,4,5)

It may be recalled that Section 65E was introduced vide Finance Act, 2011, wherein the tax credit was allowed on investment by a company with 100% equity investment in BMR of plant and machinery already installed, in an industrial undertaking setup in Pakistan before the 1st day of July 2011. The said credit was allowed subject to the fulfillment of certain conditions. The bill with a view to remove ambiguities and elaborate these conditions seeks to substitute those conditions. The proposed conditions are as follows:

Tax payers shall be a company set up in Pakistan before 1st day of July 2011.

Investment should be raised through issuance of new equity shares and the amount should be invested in purchased and installation of plant and machinery for an industrial undertaking including corporate dairy farming, for the purpose of expansion of the plant and machinery already installed therein or undertaking a new project.

A tax credit would be allowed for period of 5 years from the date of setting up or commencement of commercial production from the plant or expansion project, whichever is later .

The tax credit would be allowed:

Where a tax payer maintain separate account of an expansion project or a new project, the tax payer should be allowed a tax credit equal to 100% of the tax payable, including minimum tax and final tax payable under any of the provisions of the Ordinance attributable to such expansion project or new project.

In all other cases the credit under this section would be such proportion of the tax payable, including minimum tax and final tax payable under any of the provisions of Income Tax Ordinance 2001 as is the proportionate between the new equity and total equity including new equity.

The tax credit would be available against the tax payable in the year in which the plant and machinery is installed and for subsequent 4 years.

SECTION 122

Amendment of Assessment

122(5A)

Under the proposed amendment, the Additional Commissioner is now empowered to make inquiries, as he deems necessary, before amendment of assessment order under section 122(5A).

The Commissioner has also been empowered to ask for details and to place his enquiries before he decides to amendany assessment order in cases where he thinks that the earlier assessment order was wrong and inflicted the interest of Tax Revenue. This provision appears to harmonize the law with the already prevalent practice in such cases.

122C(2) Proviso

A provisional assessment becomes final assessment after expiry of sixty (60) days. As and when the provisional assessment becomes final then all the provisions under the Ordinance will follow. The order shall take no effect if anIndividual taxpayer and a firm / partners files their income tax return alongwith wealth statement its reconciliation statement and other documents required u/s 116(2A) of the Ordinance.

It has now been provided that a company can also skip the same where it e-files it return along with its Audited Accounts within the said 60 days.

SECTION 128

Procedure in Appeal

128(1A)

The bill proposes to empower the Commissioner (Appeal) to stay recovery of tax for a period of 30 days.

SECTION 129

Decision in Appeal

Sub-section 5,6,7-Omission

At present, under sub-section (5) of section 129 if the Commissioner (Appeal) has not made an order within 4 months, the relief sought by tax payer is deemed to be allowed. However, this sub-section is now proposed to be omitted.

In the light of proposed amendment that the taxpayer would not allow stay for more than 30 days and the Commissioner (Appeals) not bound to any time limit, the decision seems to be harsh and become a stone in the way of relieving the taxpayer in appeal forum.

SECTION 152

Payments to Non-Residents

152(1AAA)

A new sub Section 152(1AAA) is proposed to be inserted after Sub-Section (1AA) of 152, where by every person is liable to deduct tax @ 10% while making paymentfor advertisement services to a non-resident media outside the Pakistan.

The payment to a Permanent establishment in Pakistan of a non-resident company regarding the good, transportation or any other case have been omitted from the 153 Section and now have been covered under Section 152, so as to put together all theprovisions for a Permanent establishment in Pakistan of a non-resident company under a single section.

SECTION 153

Payments for goods, services and contracts

153(1)

Before amendment this section was dealt with withholding tax of both resident and non-resident persons. After proposed amendment, this section now deals with WHT of resident persons only.

153A

A new section 153A is introduced whereby every manufacturer at the time of sale to distributor, dealers and wholesaler shall collect withholding tax at the rate of 1% of gross amount of sales.

The tax collected under this section is adjustable against tax liability of the distributor, dealer and whole seller.

This newly introduced strategy is to catch un-registered / un-documented persons, however, registered distributor, dealer and wholesaler shall bear unnecessary burden of 1% WHT on gross amount of their purchases.

SECTION 231A

Cash Withdrawal from a bank

The daily limit for cash withdrawal is now proposed to be increased from Rs. 25,000 to Rs. 50,000.

FIRST SCHEDULE

Rates of tax for individuals and AOP

The basic limit of exemption is proposed to be enhanced upto Rs. 400,000/- from the existing limit of Rs. 350,000/- for both individual and AOP.

The slab rates are proposed to be re-introduced for Associations of Persons(AOPs) instead of fixed rate at 25%.The income of an AOP will be taxed at a flat rate of 25% in TY 2012.

The proposed Slab as would be applicableboth for business Individuals and firms is as

under;

Individual & AOP

S.# / TAXABLE INCOME / RATE OF TAX
1 / Upto 400,000 / Nil
2 / 400,001 -750,000 / 10% of the amount exceeding 400,000
3 / 750,001-1,500,000 / 35,000+15% of the amount exceeding 750,000
4 / 1,500,001-2,500,000 / 147,500+20% of the amount exceeding 1,500,000
5 / 2,500,001 and above / 347,500 + 25% of the amount exceeding 2,500,000

Salaried Persons

S.# / TAXABLE INCOME / RATE OF TAX
1 / Upto 400,000 / Nil
2 / 400,001 -750,000 / 5% of the amount exceeding 400,000
3 / 750,001-1,500,000 / 17,500+10% of the amount exceeding 750,000
4 / 1,500,001-2,500,000 / 92,500+15% of the amount exceeding 1,500,000
5 / 2,500,001 and above / 242,500 + 20% of the amount exceeding 2,500,000

Minimum Tax

Reduction in minimum tax from 1% to 0.5% was announced in budget 2012 but no amendment was made in first schedule of the Ordinance to the effect by Finance Bill, 2012.

However, as per news of business Recorder dated 4.6.2012, FBR will rectify an error in the Finance Bill 2012 by amending section 113(2)(b) of the Ordinance for reduction in the turnover tax rate from 1% to 0.5% as announced in Budget.

Rate of Tax on capital gain of Immovable Property:

Advance Tax on Goods Transport Vehicles

The advance tax is proposed to be enhanced from Rs. 1 per KG of the laden weight to Rs. 5.

Goods transport vehicle having laden weight of8,120 kilo gram or more, Rs. 1200 per annum shall continue to be collected after a period of ten years from the date of first registration in Pakistan.

SECOND SCHEDULE

Exemptions

Part II-Reduction in Tax Rates

Clause / Description / Status
9-A / Reduced rate of collection of tax on imports / By inserting the proposed proviso, exemption certificate for imports at reduced rate of 3% is required from concerned commissioner, mentioning the status of the taxpayer as industrial undertaking.

Part IV- Exemption from specific provisions

Clause / Description / Status
41A / Tax collected at import stage is final tax-Option available. / The option is given to importers to opt out of presumptive tax regime subject to the condition that minimum tax liability under normal tax regime shall not be less than 60% of tax already collected under section 148
41AA / Tax collected at the time of realization of foreign exchange proceeds on account of export of goods by an exporter shall be the final tax / The option is proposed to be given to exporters to opt out of presumptive tax regime provided that minimum tax liability under normal tax regime should not be less than 50% of the already deducted.
41AAA / tax deducted from payments in respect of sale of goods, in certain cases, shall be the final tax. / The option is proposed to be allowed to supplier of goods to opt out of presumptive tax regime provided that minimum tax liability under normal tax regime should not be less than 70% of tax already deducted.

THIRD SCHEDULE:

Depreciation:

Section / Description / Status
23 / Initial allowance on assets / It is proposed that rate of initial allowance on building (only) be reduced to 25% as compared to existing 50%.

FORTH SCHEDULE

Rate of tax on capital Gain on Sale of Shares:

Rule / Description / Status
6B / Rate of tax on gain on disposal of shares. / The rate of tax on capital gain is proposed to be changed. Proposed rates are 8.5% for the year 2013 & 9% for the year 2014 & 2015, as compared to existing rates of 9% , 9.5% and 10% respectively, subject to the condition that securities are held for more than 6 months but less than 12 months

EIGHTH SCHEDULE- Newly inserted

Rules for the computation of capital gain on listed securities:

As discussed earlier, eighth schedule is proposed to be inserted to make rules for the computation of capital gain on listed securities.

SALES TAX

SECTION-11

Assessment of tax and recovery of tax not levied or short levied

or erroneously refunded:

In order to streamline the provisions of law, merger of section 11 and 36 is proposed which pertains to assessment and recovery of tax not levied or short levied or erroneously refunded.

Before amendment, the time period for issuance of show cause notice under section 11 was 3 years whereas the time limit for issuance of show cause notice under section 36 was five years, which is now uniformly 5 years for both assessment of tax and recovery.

Section 36 of the Act, is proposed to be deleted.

5th and 6th SCHEDULE:

Under the proposed amendment, zerorating of sales tax on supplies againstinternational tender, appearing at Serial No.4 of the Fifth Schedule to the Act, has beenwithdrawn w.e.f. 02 June 2012. The same is proposed to be included in Table II of the Sixth Schedule.

As a result supplies againstinternational tender will now be an exempt supplyinstead of being zero rated

The substitution of zero rating with sales taxagainst international tender as enforcedthrough Finance Bill seems to discouragerefund claims as accrued on supplies somade against international tenders. Theproposed amendment through Finance Billcomes into force at once on 02 June 2012.

SRO 589(1)/2012 dated 1 June 2012

Rule 5- Power of Board to Transfer the Jurisdiction

The bill seeks to amend the rule 5 of the sales tax act regarding registration whereby the FBR may transfer the registration of any registered person or any business of a registered person to an area of jurisdiction where the place of business or registered office or manufacturing unit is located.

Rule 7 -Change In Particulars

Presently under the rule 7 of the Sales Tax Rules, 2006 the only procedure required was to file ST-2, whereas the sales tax department had their own Standard Operating Procedure which it was following for changes in particular. The amendment seeks to elaborate the procedure for change in particulars in the following manner:

 In case of transfer of individual business from any person to his spouse or children, the change shall be made by Local Registration Office (LRO) on receipt of verification of documents from RTO.

 In case of change in nature of business from individual to AOP, the change shall be made by LRO on receipt of verification of documents from RTO.

 In case of change of nature of business from AOP to corporate entity, the same shall only be allowed by LRO on receipt of verification from RTO or LTU, however, this change shall only allowed in case where same persons who are the members of AOP are nominated as directors in the corporate entity.

 In case of transfer of business or change in nature of any other account, a new sales tax registration number shall be issued to the entity.

Rule 12- Blacklisting and Suspension of Registration:

The bill seeks to substitute rule 12 which deals with blacklisting and suspension of suspected units. After the amendment, where the Commissioner or Board has reason to believe that the registered person is to be suspended or blacklisted, the procedure as prescribed by the board shall be followed.

No rule / procedure is prescribed till date by the FBR, which is likely to be prescribed at an early date.

S.R.O. 590(1)/2012 & S.R.O. 592(1)/2012

Commercial Importers - Value Addition at Import Stage and Immunity from Audit –

Presently sales tax value addition on import stage is fixed at 10% for commercial importers. The same is abolished w.e.f. 02 June 2012.

At present those commercial importers who do not claim refund of excess input tax are not subjected to audit except with the permission of the Board. After introduction of S.R.O. 592(1)/2012 the immunity to the importer stands abolished w.e.f. 2 June 2012. The records of the commercial importers will now be subjected to audit under section 25 of the Sales Tax Act, 1990.

SRO 594(I)/2012 (effective 01 June 2012)

Withdrawal of higher rate of sales tax

Presently there are three different rates prevailing in Sales Tax regime, 22%, 19.5% and 16%. The amendment seeks to remove various rates of sales tax to standard rate of 16%.

This will helps to reduce the direct cost of product in which various items areused as raw materials and may also providedesired fiscal space especially to the steel industry inlowering their selling prices

SRO 595(I)/2012(effective 2 June 2012)

Re-meltable scrap

Zero rating of Remeltable Scrape (PCTHeading 72.04) notified through SRO549(I)/2008 dated 11 June 2008 has beenwithdrawn and shifted to exemption throughinsertion at Serial No. 31 of SRO595(I)/2012.

Zero rating of remeltable scrap wasintroduced with the objective to collect salestax effectively from steel melters/re-rollersthrough electricity bills. The Governmentapprehends that zero rating on re-meltablescrap was misused by some steel meltersby charging sales tax only on processingcharges. Apparently, to control suchmisuse, zero-rating on re-meltable scrap issubstituted with sales tax exemption.

Exemption on waste paper

Local supply of waste paper is proposed to be exempt.

The idea behind the decision is to curtail loss of revenue on account of illegalinput tax adjustments.

S.R.O. 591(1)/2012 dated 1 June 2012, (effective 2 June 2012)

Substitution of Zero-Rating with Exemption on Monofilament Yarn and Net Cloth

Presently the import of and supply of polyethylene and polypropylene falling under the PCT heading nos. 3901.1000.1000, 3901.2000, 3902.1000 is zero-rated for the manufacturing of mono filament yarn and net cloth. Now S.R.O. 591(1)/2012 substitutes the word “zero rating” with “exemption”; however other conditions provided in S.R.O 811(1)/2009 dated 19 September, 2009 shall remain unchanged.