Budget Brief 2018.pdf

KPMG Taseer Hadi & Co. Chartered Accountants

Budget Brief 2018 An Economic and Tax Commentary

The Budget Brief 2018 contains a review of the economic scenario and highlights of the Finance Bill 2018 as they relate to direct and indirect taxes and certain other laws. The provisions of the Finance Bill 2018 are generally applicable from 01 July 2018, unless otherwise specified. The Budget Brief contains the comments, which represent our interpretation of the legislation, and we recommend that while considering their application to any particular case, reference be made to the specific wordings of the relevant statutes. This publication will be updated, after enactment of the Bill, to provide comments on enacted provisions, including changes in the proposals contained in the Bill. The update will be posted on our website www.kpmg.com.pk subsequent to the enactment of Finance Act 2018. 28 April 2018

Contents Budget at a Glance

Contents

1

Economic Analysis

3

Economic Scenario

7

Highlights - Income Tax - Sales Tax - Federal Excise - Customs - Petroleum Levy

13 15 16 16 17

Significant Amendments - Income Tax - Sales Tax - Federal Excise - Customs - Petroleum Levy - Tax Amnesty Schemes

19 41 49 53 59 61

Budget at a Glance Budget Estimate 2017-18

%

Revised Estimate 2017-18

%

Budget Estimate 2018-19

%

------------------(Rupees in billion) ---------------Revenue Tax Revenue

4,330

78.4

4,147

81.9

4,889

84.5

980

17.7

845

16.7

772

13.3

5,310

96.1

4,992

98.6

5,661

97.8

213

3.9

69

1.4

127

2.2

5,523

100.0

5,061

100.0

5,788

100.0

Less: Provincial Share

2,384

44.9

2,316

46.4

2,590

45.8

Net Revenue

3,139

55.1

2,745

53.6

3,198

54.2

Development

1,340

25.8

1,063

19.3

1,152

18.7

Current

3,852

74.2

4,450

80.7

5,023

81.3

5,192

100.0

5,513

100.0

6,175

100.0

2,053

44.9

2,768

46.4

2,977

45.8

Capital Receipts

428

20.9

678

24.5

559

18.8

Domestic Debt - Banks

390

19.0

586

21.2

1,015

34.1

External Debt

838

40.8

1,230

44.4

1,118

37.5

Privatization Proceeds

50

2.4

-

-

-

-

Surplus from Provinces

347

16.9

274

9.9

285

9.6

2,053

100.0

2,768

100.0

2,977

100.0

Non Tax Revenue

Public Accounts Receipts - Net

Expenditure

Deficit

Funded by

Source: Budget Brief 2018-19

© 2018 KPMG Taseer Hadi & Co., a Partnership firm registered in Pakistan and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Budget Brief 2018

1

2

Budget Brief 2018

© 2018 KPMG Taseer Hadi & Co., a Partnership firm registered in Pakistan and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Economic Analysis Macroeconomic Indicators Budget

Revised

Budget

Forecast

Forecast

17-18

17-18

18-19

19-20

20-21

Real GDP Growth (%)

6.0

5.8

6.2

6.5

7.0

Inflation (%)

6.0

4.5

6.0

6.0

6.0

(as percentage of GDP) Total Revenue

17.2

16.0

16.3

16.4

16.5

Tax Revenue

13.7

13.2

13.9

14.1

14.3

FBR Tax Revenue

11.2

11.4

11.6

11.8

12.1

Non Tax Revenue

3.5

2.8

2.4

2.3

2.2

Total Expenditure

21.3

21.5

21.2

21.1

21.0

Current

15.0

16.6

16.5

16.1

16.0

6.3

4.9

4.7

5.0

5.0

-4.1

-5.5

-4.9

-4.7

-4.5

Revenue Balance

2.2

-0.6

-0.2

0.3

0.5

Total Public Debt

61.4

70.1

68.0

65.2

62.1

35,919

34,396

38,388

43,458

49,452

Development Fiscal Balance

GDP at market prices (Rs. In billions) Source: Budget Brief 2018-19

GDP Growth 17-18 (P) Nominal GDP US$ billion Nominal GDP Rs. billion Real GDP Growth %

16-17

15-16

14-15

13-14

12-13

11-12

10-11

09-10

08-09

311

305

279

271

244

231

224

214

177

168

34,396

31,962

29,075

27,443

25,168

22,385

20,047

18,276

14,867

13,200

5.8

5.3

4.6

4.1

4.1

3.7

3.8

3.6

2.6

0.4

Sectoral GDP Growth % Agriculture

3.8

2.7

0.2

2.1

2.5

2.7

3.6

2.0

0.2

3.5

Industry

5.8

5.4

5.7

5.2

4.5

0.7

2.6

4.5

3.4

-5.2

Services

6.4

6.5

5.7

4.4

4.5

5.1

4.4

3.9

3.2

1.3

Agriculture

19.0

19.5

19.9

20.7

21.1

21.4

21.6

21.7

22

22.5

Industry

21.0

20.9

20.9

20.7

20.5

20.3

21.0

21.2

21.0

20.9

Services

60.0

59.6

59.2

58.6

58.4

58.2

57.4

57.1

56.9

56.6

Sectoral Share in GDP %

Source: Pakistan Economic Survey 2017-18

© 2018 KPMG Taseer Hadi & Co., a Partnership firm registered in Pakistan and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Budget Brief 2018

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Public Debt 17-18 (Dec)

16-17

15-16

14-15

13-14

12-13

11-12

10-11

09-10

Public Debt (Rs. billion)

22,820

21,407

19,678

17,381

15,991

14,318

12,695

10,767

9,006

Domestic

15,438

14,855

13,627

12,199

10,920

9,522

7,638

6,017

4,654

7,382

6,552

6,051

5,182

5,071

4,797

5,057

4,750

4,352

Public Debt (% of GDP)

66.3

67.0

67.6

63.3

63.5

64.0

63.3

58.9

60.6

Domestic

44.9

46.5

46.8

44.5

43.4

42.5

38.1

32.9

31.3

Foreign currency

21.5

20.5

20.8

18.8

20.1

21.4

25.2

26.0

29.3

Foreign currency

Source: Pakistan Economic Survey 2017-18

Overall Deficit 40,000 35,000

5.5%

30,000

9.0%

8.2%

4.9% 4.6%

5.3%

25,000

6.8%

8.0% 6.5%

6.2%

5.5%

6.0% 5.0%

20,000 Rs. Billion

7.0%

4.0%

15,000

3.0%

10,000

2.0%

5,000

1.0% 0.0%

0 17-18

16-17

15-16

14-15 GDP(mp)

13-14

12-13

11-12

10-11

09-10

Overall Deficit

Source: Pakistan Economic Survey 2017-18 Budget Brief 2018-19.

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Budget Brief 2018

© 2018 KPMG Taseer Hadi & Co., a Partnership firm registered in Pakistan and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Social Indicators 17-18 Population (millions)

16-17

207.8

Unemployment rate (%)

15-16

199.1

195.4

14-15

13-14

12-13

191.71

188.02

184.35

11-12

10-11

178.9

175.3

09-10

08-09

171.7

168.2

5.9

5.9

5.9

5.9

6.0

6.2

6.0

6.0

5.5

5.2

1,640

1,632

1,529

1,514

1,389

1,334

1,320

1,274

1,072

1,026

Total investment - % of GDP

16.4

16.1

15.7

15.71

14.65

14.96

15.08

14.1

15.8

17.5

National Savings - % of GDP

11.4

12.0

13.9

14.7

13.4

13.9

13

14.2

13.6

12.0

GNP per capita – US$

Source: Pakistan Economic Survey 2017-18 Unemployment rate not given since 2014-15

Exchange Reserves 17-18

16-17

15-16

14-15

13-14

12-13

11-12

10-11

09-10

08-09

17.3

21.4

23.1

18.7

14.1

11.0

15.3

18.2

12.2

11.5

Exchange reserves (US$ billion) Imports Cover (months) Rupee to USD parity

3.5

4

7.9

4.9

3.7

2.9

4.4

5.0

4.2

3.9

110.4

104.8

104.8

101.8

98.8

99.7

94.5

86.0

83.8

78.5

Source: Pakistan Economic Survey 2017-18

Inflation

Inflation 25

23.1 20

18 15

9

10.5 11

8.4

10

5 2 3.8

4

8.4

2.1

4.2

17-18 (Jul- 16-17 (JulMar) Mar)

17 13.7

7.1

3.8

0

8.6

3.4 2.9

15-16

10.7 8.3

5.3

5

13.4

12.9

3.5 14-15

4.5

CPI

13-14

12-13

7.4

Food *

11-12 11 Non Food *

10-11

09-10

08-09

10.1

Source: Pakistan Economic Survey 2017-18 © 2018 KPMG Taseer Hadi & Co., a Partnership firm registered in Pakistan and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Budget Brief 2018

5

6

Budget Brief 2018

© 2018 KPMG Taseer Hadi & Co., a Partnership firm registered in Pakistan and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Economic Scenario Going into the final stretch, the sitting government, despite substantial gains in various areas, specifically overcoming load shedding, and a 13 year record GDP growth of 5.79%, struggles with the nemesis of twin deficits; which only proves the dictum that it is, and will always be, all about the economy. National security, national defense, sovereignty, social cohesion, political evolution, provincial autonomy and general stability are all dependent on a strong and stable economy. Even in normal circumstances, financial dependency unequivocally marginalizes the ability to negotiate game changing opportunities, let alone in a crisis; the looming threat of being black listed by FATF might only make the situation worse.

stance. As a result, foreign exchange reserves have been declining, reaching 2.3 months of imports as of mid-February 2018, despite significant external borrowing. Net international reserves have declined from $7.5 billion at the end of the EFF to negative $0.7 billion in mid-February 2018. As a result of fiscal slippages in FY 2016/17, debt-related vulnerabilities have increased”- International Monetary Fund, Executive Summary, First PostProgram Monitoring Discussions, March 2018. This IMF Country Report 18/78 includes the following key indicators for Pakistan, past, present and projected.

In the previous year’s commentary, we had tabled concerns that the earlier exceptional macro level gains may not have been sufficiently robust enough to stimulate the micro economy. Regrettably, economics is not an exact science; while economic indicators can raise red flags, it is near to impossible to exactly predict the timeline for any financial storm. In fact, absolute reliance on one indicator for growth might even be misleading; while the domestic economy has taken off, going forward the external economy can potentially have ominous repercussions for the overall economic situation. These concerns have been explicitly raised in recent views on Pakistan’s economy at the international level. “Economic growth has continued to strengthen. Improved energy supply, investment related to the China-Pakistan Economic Corridor, strong credit growth, and continued investor and consumer confidence, have been underpinning growth, which could reach 5.6 percent this fiscal year within a favorable inflation environment. Yet, macroeconomic stability gains achieved during the 2013–16 EFF have been eroding, putting this outlook at risk. The current account deficit has been quickly widening, reflecting strong domestic demand amid an overvalued exchange rate, fiscal slippages, and an accommodative monetary policy

2014/15

2017/18

2019/20

2022/23

Real GDP at factor cost

% change

4.1

5.6

4.9

5.0

Consumer prices (average)

% change

4.5

5.0

5.0

5.0

Gross National Savings

% of GDP

14.7

12.2

12.4

13.2

Current Account Balance

US$ billions

(2.7)

(15.7)

(15.4)

(17.4)

Balance on goods, service and Income

US$ billions

(24.74)

(39.58)

(41.87)

(46.70)

Worker’s remittance

US$ billions

(18.72)

(19.63)

(22.24)

(24.88)

External Debt

US$ billions

(65.08)

(93.27)

(114.12)

(144.95)

Gross International Reserves

US$ billions

13.5

12.1

9.5

7.0

Gross external financing requirements

US$ billions

9.1

24.5

33.8

41.2

To say the projected numbers are worrisome might perhaps be an understatement. While IMF projects that going forward, GDP growth might be maintained around 5%, the external economy is expected to have a crippling overall effect. Perhaps, even controlling inflation might become a challenge, and may exceed estimates of 5%, considering the

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Budget Brief 2018

7

envisaged pressure on the rupee due to the external imbalance. How will we finance US$ 33.8 billion in 2019/20 is a bigger mystery. Ironically, IMF projects that Gross International Reserves will collapse to US$ 7 billion only by 2022/23; just 5 years down the road. Rationally, we assume that IMF has factored in gains from CPEC in its projections, which all the more raises concerns.

shallow capital markets hinder stable domestic financing of sizeable budget deficits. The material foreign currency portion of outstanding government debt (approximately 30.6% of general government debt as of the end of 2017) also exposes the government’s balance sheet to foreign exchange risk”- Moody’s Investor Service, Credit Opinion, 20 March 2018, Government of Pakistan- B3 Stable.

“However, as growth picked up, imbalances reemerged on the internal and external front. On the domestic side, fiscal pressures increased. After having fallen significantly till FY16, the consolidated fiscal deficit widened (excluding grants), reaching 5.8 percent of GDP, compared to 4.6 percent in FY16. A less-than-satisfactory tax collection effort by the center and the provinces, combined with an unprecedented increase in development spending, led to this slide. The provinces have posted fiscal surpluses over the past few years, but these turned into a deficit of 0.5 percentage point of GDP in FY17. On the external side, the current account deficit widened substantially. The trade deficit widened as imports surged and exports declined marginally. While structural issues have caused a long-term decline in Pakistan's export competitiveness, exchange rate flexibility remains critical to supporting competitiveness. Furthermore, international remittances, which have been resilient to previous international and domestic shocks, declined. As a result, Pakistan's official reserves fell to US$16.2 billion at the end of FY17 compared to a high of US$18.1 billion at the end of FY16- enough to cover imports for 3.1 months”- Pakistan Development Update, The World Bank, November 2017.

Admittedly, while the above three extracts paint a dismal picture, there are always two side of the picture, as evident from the table below.

“Other factors that drive Pakistan’s sovereign credit rating are its relatively weak fiscal profile and high susceptibility to event risk. The score for fiscal strength is set at “Very Low (-)” to reflect our assessment of the country’s narrow revenue base, which hinders debt affordability and increases the debt burden. In particular, Pakistan’s limited tax base restricts its fiscal space, while low savings and

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Budget Brief 2018

2012-13

2014-15

2016-17

2017-18 (T/A)

GDP growth

%

3.68

4.06

5.28

5.80

Inflation

%

7.36

4.53

4.16

3.78

FBR revenue

Rs trillion

1.94

2.59

3.37

4.01

FBR revenue growth

%

3.38

14.86

8.22

19.15

Development Spending

Rs billion

348.3

502.2

733.3

1001

Transfer to provinces from divisible pool

Rs trillion

1.30

1.59

1.99

Budget deficit

% of GDP

8.22

5.30

5.80

Remittances

US$ billion

13.90

18.70

19.30

20.60

Foreign Exchange reserves

US$ billion

11.02

18.69

21.40

17.79

FDI

US$ million

1,456

987

2,411

4,183

Credit to private sector

Rs billion

185

223.8

747.9

Agri credit disbursement

Rs billion

336.2

515.8

704.4

1001

PSX Index

Points

21,006

34,399

46,565

45,560

Market Capitalization

Rs trillion

5.15

7.42

9.52

9.49

Companies incorporated

Nos

3,960

5,001

8,286

Petrol Prices

Rs Per liter

106.6

88.07

Pakistan seemingly, today, is a tale of two economies, domestic and external; albeit distress in

© 2018 KPMG Taseer Hadi & Co., a Partnership firm registered in Pakistan and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

the one will invariably, eventually, impact the other. The reverberations can already be felt vis-à-vis the recent devaluation of the rupee in 2018, which currently trades at around Rupees 119=US$ 1. Going forward the State Bank of Pakistan, to manage the exchange rate, will require more dollars, which is dependent upon the ability of the government to borrow more, pursuant to an out of control trade deficit and depleting foreign exchange reserves. Any further rupee devaluation can spark inflation resulting in adverse consequences for the domestic economy. Going forward, there is perhaps a need to revisit our singular reliance on GDP growth. GDP as an indicator of economic growth, especially for developing economies, is at best a distraction and at its worst, an impostor. The proof of these assertions lies in Pakistan’s own experience; with GDP growth improving from 3.5% in 2012 to around 5.79% in 2017 we continue to face economic challenges. For the record our GDP growth for 2006 stood at 6.17%. In general, knowledge about and understanding of GDP, critically its components (Consumption +Investment +Net Exports + Government expenditure), is scarce. For instance if the government borrows and increases spending, which in substance may well have risks for the economy, it will on the other hand result in GDP growth; essentially Pakistan’s recent experience. Further a GDP growth of say 4% brought about by increase in net exports, is qualitatively far better than a 6% growth brought about by consumption; again in Pakistan’s case approximately more than 90% of GDP is consumption based with exports in the red, our imports are way more than our exports. Additionally, an absolute focus on growth, Keynesian style, is not without perils. Development expenditure had increased considerably over the last few years but so has debt servicing. Currently, federal revenue receipts are only sufficient to cover debt servicing and the defense budget; the situation

might further deteriorate in the coming year. All other expenditures are met through borrowings; capital receipts, in substance, primarily are in the nature of borrowings. Hence it is not surprising that Pakistan’s total debt and liabilities increased to Rs 26.8 trillion at 31 December 2017; current figures are not available at SBP website. And this does not include circular debt which is currently estimated by certain analysts at Rs 900 billion. At June 2013, Pakistan’s total debt and liabilities stood at Rs 16.3 trillion, with zero circular debt. Undoubtedly, the component of GDP which does requires an obsessive government focus is net trade. To say we have been underperforming over the last decade in external trade is perhaps an understatement. Notably, every time you import, you are exporting jobs. This dictum works for FDI as well, since management jobs are retained by the foreign investor and all profits get remitted outside Pakistan. Beyond loss of jobs, trade deficits need to be financed. Pakistan’s external debt and liabilities, included in total debt above, stood at US$ 88.89 billion at 31 December 2017; current figures are not available at SBP website. To clarify at June 2013 external debt stood at US$ 60.9 billion with official liquid reserves at US$ 6 billion; official liquid reserve at 31 December 2017 stand at US$ 14.3 billion. Over the last four and a half years, whilst official reserves have increased by US$ 8.3 billion, debt has gone up by US$ 28 billion. Considering we continue to run high twin deficits, budget and trade, it can be concluded that we might well be in a debt trap. We feel it is also important, at this stage, to clarify certain misconceptions generally associated with exports and imports.

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Budget Brief 2018

9

EXPORT RECEIPTS BY COMMODITY (Thousand US Dollar) Commodity FY08 FY17 FY13

FY18 P (July - Feb)

Amount (Thousand US Dollar) A. Food Group

2,587,775

4,142,290

3,611,952

2,766,429

10,354,218

12,832,240

12,453,506

8,851,323

C. Petroleum Group

1,330,786

677,014

410,718

386,255

D. Other Manufacture

3,399,937

4,658,544

3,654,627

2,709,961

E. All Others

809,598

1,383,023

1,218,618

886,480

less: Freight on Export

359,200

563,079

196,042

169,627

2,324,424

1,672,291

784,620

538,879

20,447,539

24,802,323

21,938,000

15,969,700

B. Textile Group

add: Other Exports Total Export as per BOP

As evident from the above, the Textile group is more than 50% of all exports, and coupled with the Food group, it would appear that Pakistan’s exports are primarily agriculture based. We seem to have had limited success on the industrialization front. IMPORT PAYMENT BY COMMODITY (Thousand US Dollar) FY08

FY13

FY17

Commodity

FY18 P (July - Feb)

Amount (Thousand US Dollar) A. Food Group

3,526,450

3,913,885

5,419,457

3,656,381

B. Machinery Group

5,749,967

4,013,689

7,910,007

5,725,909

C. Transport Group

1,199,524

1,706,876

2,643,253

1,965,627

10,496,045

14,065,724

10,606,793

8,619,953

E. Textile Group

1,820,656

2,563,063

3,968,310

2,446,283

F. Agri. & Other Chemical

5,111,673

6,322,737

7,122,563

5,289,077

G. Metal Group

2,314,723

2,441,535

3,785,646

3,050,667

742,934

879,871

1,195,983

848,230

I. All Others

3,128,180

3,413,796

4,628,874

2,949,570

less: Freight & Insurance

2,727,212

2,359,271

1,654,831

1,209,309

add: Other Imports

3,919,759

3,194,988

2,879,959

2,318,612

D. Petroleum Group

H. Miscellaneous Group

Total Imports as Per BOP

35,282,697

40,156,892

48,506,014

35,661,000

As evident from the above, petroleum imports in the last ten years have not exceeded 35% of all imports and currently are under 25% of all imports; after the fall in international oil prices. Further even with CPEC, machinery and petroleum group imports have not exceeded worker’s remittances in any year. While we cautiously view the government decision vis-à-vis the domestic assets and foreign assets Amnesty schemes, announced just recently, to address the twin deficits, we are of the view that in isolation they might not completely address the problem. Tax collection and remittances relating to foreign monetary assets are expected to significantly reduce external financing requirements, and domestic amnesty can be expected to alleviate the fiscal burden; both resulting in transiting the informal economy to the formal. However, there is a need to take necessary steps to address future drainage; the stick with the carrot. In addition, unless, going forward, the trade deficit is significantly reduced; there is a risk that gains because of the twin amnesty may be floundered. Albeit at the time of writing this commentary, the fate of the twin amnesty schemes remains uncertain. Invariably, the age old solution of investment in export oriented and import substitution industry remains the preferred option for Pakistan today. However investment, domestic predominantly and foreign, is dependent upon perceptions. Index

2008

2013

Ease of doing business

76/178

107/185

147/190

Global Competitiveness Index

92/131

124/144

122/137

Global Corruption Perceptions Index

134/180

127/177

117/180

World Press Freedom Index

152/173

159/179

139/180

Democracy Index

108/167

107/167

110/167

9/178

13/178

17/178

Fragile States Index

2017

The above table of global rankings, despite positives, is perhaps less than encouraging. At the

10

Budget Brief 2018

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outset there is an urgent need to focus on improving the ease of doing business climate. That might even require a complete revamping of the taxation policy with a view to discourage trade and encourage investment in manufacture. There is an urgent need to strengthen domestic investment much more than pursuing the mirage of Foreign Direct Investment.

situation is not irreversible, however remedies may include tightening of the belt; especially on the consumption front which has ran unbridled for a few years. Remains to be seen whether political manifestos will inform respective voters about the impending tough times. We conclude with the message, that there is a need to do more, differently.

Regarding CPEC, we have maintained previously that it is indeed an opportunity of game changing dimensions. However, since information relating to CPEC, by and large, is not generally available in the public domain, it is perhaps impractical to comment upon the related benefits. Pakistan however needs to ensure that future exports receipts are sufficient to meet its obligations arising from the current costs of CPEC. Additionally concerns relating to export of domestic jobs, acquisition of national assets and unfair market advantages need to be monitored and proactively addressed. We are conscious, that the underlying current in our economic scenario leads towards an anti-free markets regime, state capitalism, protectionism, import tariffs and more particularly planned industrialization. Albeit, adhering to the Washington consensus over the last decade and more has not borne desired fruitful results. Perhaps it is time to realize that a developing economy like Pakistan cannot flourish under an “A one fit all” doctrine. Every economy has its own intricacies which require varying economic strategies. Unfortunately, the situation was never expected to improve in the election year in any case, especially on the fiscal front; which creates a paradox. Those vying for electoral success, don’t appear to understand, that whoever wins might well have to manage an economy rushing towards the Minsky moment; sudden collapse of asset pricing sparked by debt or currency pressures; in the case of Pakistan perhaps both, and the signs are arguably already there. While we remain optimistic that the

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Budget Brief 2018

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Budget Brief 2018

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Highlights Income Tax •

Offshore Digital Services to be taxed at 5% under the Final Tax Regime.

•

Tax on bonus shares abolished.

•

The definition of Permanent Establishment brought in line with OECD requirements and extended to include the concept of cohesive business operations.

•

Income from offshore supplies in relation to construction, assembly or installation contracts proposed to be brought into tax net.

•

Super tax for TDPs extended upto tax year 2020 with reduction in tax rates.

•

Tax rate and limit on distribution of profit reduced. Further bonus shares no longer to qualify for distribution of profits.

•

Applicability of non recognition rules restricted to gifts from relatives only.

•

Only 50% of business income of a tax year can be set off against unabsorbed tax depreciation and amortization brought forward from previous year. This limit of 50% will not be applicable if the taxable income for the year is less than Rs. 10 million.

•

•

•

•

Non-Profit Organization, trusts and welfare institutions may claim 100% tax credit against income from investment in micro finance banks.

•

Gain arising to a non-resident company from disposal or alienation outside Pakistan of an asset located in Pakistan will be treated as Pakistan source income and chargeable to tax at 15%.

•

Tax authorities’ powers to re-characterize income and deductions further enhanced to disregard corporate structures created as part of tax avoidance scheme.

•

Income attributable to a controlled foreign company is to be included in the taxable income of a resident person for a tax year in case where capital or voting rights of the resident person is 10% or more and income of the controlled foreign company exceeds Rs. 10 million.

•

Resident persons will be required to provide details for remittances in excess of Rs. 10 million in a tax year.

•

The provision pertaining to unexplained income and asset are being amended as follows:

The threshold for the purpose of tax credit on investment in shares and insurance premium to be enhanced from Rs. 1.5 million to Rs. 2 million. Period of investments in plant and machinery, BMR and new industrial undertakings, under sections 65B, 65D and 65E extended to 2021.

•

Transfer pricing regulations and provision relating to geographical source of income made applicable to banking companies.

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-

Addition in income of a person on account of an unexplained Pakistani asset or income will be made in the year to which these relate.

-

Addition in income of a person on account of an unexplained offshore asset or income will be made in the immediately preceding tax year in which these are discovered by the Commissioner.

Resident individual taxpayers are required to file foreign income and asset statement in case where foreign income exceeds USD 10,000 or foreign asset exceeds USD 100,000.

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•

ATIR restrained to grant stay beyond 180 days.

•

The amount required to be deposited to qualify for an automatic stay of demand reduced from 25% to 10%.

•

Taxation of commercial importers changed to minimum taxation.

•

Tax deducted on payment against services to permanent establishment of non-residents to be treated as minimum tax.

•

Minimum limit for tax deduction on payments for goods enhanced from Rs. 25,000 to Rs. 75,000 and on services enhanced from Rs. 10,000 to Rs. 30,000.

declared price for 2018-19; at 1.75 times for 2019-20; and at 1.5 times for 2021.

•

Tax on commission earned by member of stock exchange at 0.02% made adjustable.

•

Tax Rates for individuals, recently reduced through an Income Tax Amendment Ordinance 2018, have also been included in the finance bill.

•

Corporate tax rate reduced to 29% for tax year 2019. Thereafter, the rate will reduce by 1% annually until 2023.

•

The maximum slab tax rate for AOP to be reduced from 35% to 30%.

•

In order to settle dispute through ADRC, now its decision shall be binding on the aggrieved person as well as the FBR. The ADRC will be required to pass the order within 120 days of its appointment. Further, the aggrieved person and the FBR will be required to withdraw appeal, if filed. On failure of making a decision within 120 days, the appeal shall stand restored under specified procedure.

•

Requirements for furnishing of information by banks have been modified by substituting online access with certain specific details relating to cash withdrawals.

•

Non filing of foreign income and asset statement to attract penalty at 2% of the value of such income and assets.

•

Automatic selection of audit being abolished. In a positive move, registered persons will only be subjected to audit once in three years.

•

Tax rate of withholding tax for non-filer on banking transactions in cash reduced from 0.6% to 0.4%.

Non-filers will not be eligible for registration of vehicles and immovable property.

•

Rate of tax on dividend received from a rental REIT by a filer reduced from 12.5% to 7.5%.

•

Bonus shares issued to mutual funds exempted from withholding tax.

•

Reduced minimum tax rate applicable to large trading houses extended to 2021.

•

Domestic film makers tax liability reduced by 50% for a period of 5 years while foreign film makers producing in Pakistan to get a tax rebate of 50%.

• •

14

Property rates declared by FBR to be abolished; all transactions to be recorded at actuals. Adjustable tax at 1% to be collected from the buyer on the declared value; existing withholding provisions abolished. Such advance tax may be recovered in installment if the purchase price is being paid in installments. Additional stamp duty at 1% payable to the Provinces at the declared value. Furhter, the FBR shall have the right to purchase any property transacted within 6 months at twice the

Budget Brief 2018

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•

Income of Pakistan Mortgage Refinance Company (PMRC) exempted from tax. Additionally, income on bonds issued by PMRC to be exempt from tax.

•

Import of coal to pay tax at 4% for filer and 6% for non-filer, in case of manufacturers as well as commercial importers.

•

Debit and Credit card transactions outside Pakistan to attract advance tax at 1% for filers and at 3% for non-filers.

•

Withholding tax rates for non-filers increased once again from 7% to 8% in case of companies and from 7.75% to 9% in case of other than companies in respect of sale of goods. For contracts, the rates have been increased from 12% to 14% for companies and from 12.5% to 15% in other cases.

Sales Tax •

•

•

•

“Further Tax” rate increased from 2% to 3%. The cost of doing business in the informal sector to be enhanced for nudging businesses towards registration under the Act. The rate of default surcharge on outstanding sales tax demand to be fixed at 12% per annum. Undoubtedly the continuing low KIBOR rate is the catalyst to replace the existing KIBOR plus 3% charge. Albeit, we believe that surcharge was previously rightly linked with the cost of borrowing in the country. The change however harmonizes the default surcharge rate for income tax. The tax collectors, specifically, the Chief Commissioner and his team, will no more be able to post officers at business premises without permission of FBR.

•

In another positive action, orders for appeal effects, as well as cases where fresh assessments need to be issued, will have to be made within one year. The stated objective is to quantify actual demands to facilitate registered persons.

•

In order to settle dispute through ADRC, now its decision shall be binding on the aggrieved person as well as the FBR. The ADRC will be required to pass the order within 120 days of its appointment. Further, the aggrieved person and the FBR will be required to withdraw appeal, if filed. On failure of making a decision within 120 days, the appeal shall stand restored under specified procedure.

•

A person will now be entitled for automatic stay of demand on payment of 10% of tax payable instead of 25% presently required.

•

Sales Tax on all kinds of fertilizers being reduced to 3%. Further, sales tax on natural gas used by fertilizer plants as feed stock is being reduced from 10% to 5%. LNG used as feed stock is being exempted.

•

Sales Tax on furnace oil reduced from 20% to 17%.

•

China State Construction Engineering Limited exempted from Sales Tax (and FED) on imported construction and related machinery not manufactured in Pakistan as well as material and goods, whether made in Pakistan or not, up to a limit of Rs 10.8 billion, for specified projects. Similar exemptions are proposed for the Chinese contractor for the Lahore based Orange Line Metro Train Project. Such blanket exemption may not be in the best interest of local businesses.

•

Import of specified parts of personal computers and laptops imported by manufacturers are being exempted from sales tax.

In a positive move, registered persons will only be subjected to audit once in three years.

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•

Reduced rates of 12% to apply on import of LNG by Pakistan State Oil Limited and Pakistan LNG Limited and on supply of RLNG by these companies to Sui Northern Gas Pipelines Limited.

Customs •

Reduction of Customs Duty on finished rooms (Pre-fabricated structures) from 20% to 10% for setting up of new hotels/motels.

•

Sales tax on cinematographic equipments reduced to 5%.

•

•

The rate on steel sector increased to Rs. 13 per unit of electricity.

Reduction of Customs Duty on growth promoters premix, vitamin premix, Vitamin B12 and Vitamin H2 for poultry sector from 10% to 5%.

•

The rate on finished articles of leather and textile sectors increased from 6% to 9%.

•

Exemption of 5% Customs Duty on specified LED parts and components for manufacturers of LED lights and levy of 2% Regulatory Duty on LED Bulb & Tubes, Energy Saving Bulbs & Tube to protect local industry.

•

Reduction of Customs Duty on import of coal, across the Board, from 5% to 3%.

•

Import of solar panels were exempted from the condition of ‘local manufacturing’ to 30 June 2018 which is extended to 30 June 2019.

•

Increase of Customs Duty on Soya bean oil from Rs.9,050/MT & Rs.10,200/MT to Rs.12,000/MT and Rs. 13,200/MT respectively.

•

Legal coverage for utilizing any information or data sharing obtained through mutual bilateral or multilateral agreement for the purpose of assessment and valuation, proposed.

Federal Excise Duty •

Similar changes made in the Sales Tax are being made for FED in respect of ADRC, appeal effect, audit, default surcharge rates and the amount to be deposited for automatic stay. In summary, if the changes go through, ADRC decisions will be binding on taxpayers and the FBR; taxpayers will only be subjected to audit once in three years; default surcharge will be charged at 12% per annum; and the amount required to be deposited for an automatic stay will stand reduced to 10%.

•

FED on certain categories of cigarettes to be increased by around 6%.

•

FED on cement to be increased from Rs. 1.25 per kg to Rs. 1.50 per kg.

•

Commission paid by SBP and its subsidiaries to National Bank of Pakistan or any other banking company for handling banking services of the Federal or the Provincial Governments as SBP agents to be exempted from FED.

It is proposed that refund claim to be disposed of within 180 days; however extendable by 90 days.

•

It is proposed that the Collector of Customs shall ensure having accurate and complete information of passengers as well as crew of a conveyance in advance to avoid money laundering and currency smuggling.

•

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Budget Brief 2018

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•

The Bill seeks to extend the scope of section 138 to consignees into a Customs-station who have dishonored their commitments.

•

Collector (Appeals) is empowered to grant stay against recovery of duty and taxes for a period not exceeding thirty days on filing of appeal and after affording opportunity of being heard to the officer of the concerned Collectorate or Directorate.

•

Federal Government to devise authorized economic operator program to provide facilitations relating to secure supply chain of import and exported goods through simplified procedures proposed.

•

Opportunity to the public for offering comments before issuance of Rules proposed.

•

Validation of Regulatory Duty issued before the commencement of Finance Act, 2018 but after Finance Act, 2017 proposed in order to override the effect of any judgment of the Superior Courts of Pakistan.

Petroleum Levy •

In a major revenue measure in the Bill, the Government has enhanced petroleum levy on the price of POL products as high as Rs. 30 per liter. This is almost a 200% increase as compared to the existing rates of petroleum levy on specified POL products. Similarly, the rate of petroleum levy on LPG is also proposed to be enhanced from Rs. 11,486/MT to Rs. 20,000/MT.

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Budget Brief 2018

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Budget Brief 2018

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Income Tax Significant Amendments Fee for offshore digital services proposed to be taxed in the hands of non-resident person

Azad Jammu & Kashmir and GilgitBaltistan taxpayers included in the definition of “filer”

Sections 2(22B), 6, 101(12A), 152 and Division IV of Part I of First Schedule

Section 2(23A)

The Finance Bill proposes to charge income tax on Pakistan-source “fee for offshore digital services” in the hands of a non-resident person at the rate of 5% of the gross amount of such fee. The definition of “fee for offshore digital services” has been proposed as consideration for providing or rendering services by a non-resident person for online advertising including digital advertising space, designing, creating, hosting or maintenance of websites, digital or cyber space for websites, advertising, e-mails, online computing, blogs, online content and online data, providing any facility or service for uploading, storing or distribution of digital content including digital text, digital audio or digital video, online collection or processing of data related to users in Pakistan, any facility for online sale of goods or services or any other online facility.

The current definition of “filer” does not include AJ&K and Gilgit-Baltistan taxpayers. The Finance Bill proposes to include in the definition of “filer” the taxpayers included in the “active taxpayers’ list” issued by the AJ&K Council Board of Revenue and Gilgit-Baltistan Council Board of Revenue.

Tax on bonus shares abolished Sections 2(29), 39, 236M and 236N The Finance Act 2014 introduced tax on bonus shares issued by listed and non-listed companies as “income from other sources” with effect from tax year 2015 at the rate of 5% of the value of bonus shares.

“Fee for offshore digital services” will be Pakistansource if it is:

According to the representations made by the Pakistan Stock Exchange, tax on bonus shares did not contribute much to the Government treasury due to decline in the issuance of bonus shares by the companies.

(a)

The Finance Bill now proposes to abolish this tax.

(b)

paid by a resident person, except where the fee is payable in respect of services utilized in a business carried on by the resident person outside Pakistan through a permanent establishment; or borne by a permanent establishment in Pakistan of a non-resident person.

It has been proposed that the banking company or a financial institution remitting the fee, on behalf of resident or permanent establishment of a nonresident person in Pakistan, will deduct tax at the rate of 5% of the gross fee. This withholding tax shall be final tax in respect of the said fee.

While introducing the tax on bonus shares vide Finance Act 2014, the definition of “income” under section 2(29) was amended. Before introduction of tax on bonus shares, the definition of “income” specifically excluded “the face value of any bonus shares or the amount of any bonus declared, issued or paid by the company to the shareholders with a view to increasing its paid-up share capital”. Now since the Finance Bill is proposing to withdraw tax on bonus shares intending to restore the pre Finance Act 2014 position, therefore, there is a need to reinstate the aforesaid exclusion from the definition of income to avoid misinterpretation

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Budget Brief 2018

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on behalf of the person to which it is an associate.

regarding classification of bonus shares as income under any other head of income.

B. Fragmentation of activities

Permanent Establishment – Scope extended Section 2(41) The Finance Bill proposes to amend the definition of “permanent establishment” (PE) of a nonresident person in Pakistan to bring the definition in line with the suggested amendments proposed by the OECD in its report on Base Erosion & Profit Shifting Action Plan 7 namely “Preventing the Artificial Avoidance of Permanent Establishment Status”. The proposed amendments are as follows: A. Agency PE Current definition of PE interalia includes a dependent agent who has and habitually exercises the authority to conclude contracts on behalf of the non-resident principal. The proposed definition now seeks to extend the scope the agency PE to include an agent who plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the person and these contracts are:

(c) for the provision of services by that person.

Budget Brief 2018

For this purpose, a new clause in the definition of PE has been proposed to include a fixed place of business that is used or maintained by a person if the person or an associate of a person carries on business at that place or at another place in Pakistan and:

(ii) business carried on by the person or an associate of the person at the same place or at more than one place constitute complementary functions that are part of a cohesive business operation.

(b) for the transfer of the ownership of or for the granting of the right to use property owned by that enterprise or that the enterprise has the right to use; or

20

The proposed amendment is intended to address the avoidance of PE status by fragmenting a cohesive operating business into several small operations.

(i) that place or other place constitutes a permanent establishment of the person or an associate of the person; or

(a) in the name of the person

Further, it has been proposed to clarify that an agent of independent status acting in the ordinary course of business does not include a person acting exclusively or almost exclusively

Current definition of PE is in the context of one non-resident person and provides a room to associated non-resident persons to obtain tax advantage by splitting-up of business activities between them so that every associated person can claim its activity as mere preparatory or auxiliary in nature.

For this purpose, the inclusive definitions of the terms “cohesive business operation” and “supply of goods” have been proposed as follows: -

“Cohesive business operation” includes an overall arrangement for the supply of goods, installation, construction, assembly, commission, guarantees or supervisory activities and all or principal activities are

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(ii) Its permanent establishment whether or not the goods are imported in the name of the person, associate of the person; or

undertaken or performed either by the person or the associates of the person. -

“Supply of goods” include the goods imported in the name of the associate or any other person, whether or not the title to the goods passes outside Pakistan.

(iii) Any other person. B. Withholding tax

Income from offshore supplies in relation to a construction, assembly or installation contracts proposed to be taxed Sections 101(3)(e) and 152(7)(a) Currently, the income of a non-resident person from sale of goods where title to the goods passes outside Pakistan is not considered as Pakistansource income and the payment thereof is also not subjected to withholding tax other than in specified situations. The Finance Bill proposes to treat income from supply of goods from outside Pakistan in connection with construction, assembly, installation or similar contracts as Pakistan-source income and to make the related payments subject to withholding tax. These amendments are as follows:

Section 152(7) currently provides exemption from withholding tax to payment on account of import of goods where title to the goods passes outside Pakistan. This exemption excludes payment in given situations where the import of goods is part of an overall arrangement for the supply of goods, their installation, and any commission and guarantees in respect of the supply. The Finance Bill proposes to redefine the exclusions from exemption from withholding tax on payments for import of goods in the following situations: a) The supply of goods where the supply is made in connection with the overall arrangement for the supply of goods, installation, construction, assembly, commission, guarantees or supervisory activities and all or principal activities are undertaken or performed either by the:

A. Pakistan source income The Finance Bill proposes to treat income of non-resident person from supply of goods irrespective whether title to the goods passes outside Pakistan or not, if the import is part of an overall arrangement for the supply of goods, installation, construction, assembly, commission, guarantees or supervisory activities and all or principal activities are undertaken or performed either by the: (i) Associates of the person supplying the goods;

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(i) associates of the person supplying the goods; or (ii) its permanent establishment whether or not the goods are imported in the name of the person, associate of the person; or (iii) any other person. b) The supply is made by a resident person or a Pakistan permanent establishment of a nonresident person in connection with the overall arrangement.

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These proposed amendments to make income from offshore supplies, in connection with overall construction or like contract, as Pakistan source income and making the same as subject to withholding tax appear to be in line with the amendments proposed in the definition of “permanent establishment” whereby complementary function is treated as part of a cohesive business operation.

Super tax for rehabilitation of TDPs extended upto tax year 2020 Section 4B and Division IIA of Part I of the First Schedule The Finance Act 2015 imposed one time levy of super tax for rehabilitation for temporarily displaced persons [TDPs] on banking companies at the rate of 4% of income and other taxpayers having income equal to or exceeding Rs. 500 million at the rate of 3% of income. This one-time levy was extended to tax year 2016 and 2017. Now the Finance Bill proposes to extend the same upto tax year 2020 at the following rates: Tax year

Banking company

Other persons having income equal to exceeding Rs. 500 million

2018

4%

3%

2019

3%

2%

2020

2%

1%

2021

0%

0%

Rate of tax on undistributed profits and limit on distribution of profits reduced Section 5A Section 5A charges income tax at the rate of 7.5% on undistributed profits of a public company, other than a scheduled bank or a modaraba, that derives profit for a tax year but does not distribute at least forty percent of its after tax profits within six months of the end of the tax year through cash or bonus shares. The Finance Bill proposes to reduce the limit of profit distribution from forty percent to twenty percent and the rate of tax from 7.5% to 5%. It has also been proposed to exclude bonus shares from the distribution of profits for this purpose meaning thereby that the public company will have to distribute at least twenty percent cash dividend to avoid levy of this tax.

Taxation of gifts Sections 37(4) and 79(1) Section 79 currently provides tax neutrality in case of gift to any person. According to this section, no gain or loss is taken to arise on gifts and the cost of the gifted asset in the hands of the transferee is considered as equal to the cost of the transferor. However, if the gifted asset is a “capital asset” then, as per section 37(4A), the cost of the asset in the hands of the transferee is the fair market value of the asset, on the date of its transfer or acquisition by the person. The Finance Bill proposes to restrict the scope of gift only to gifts to a relative as defined in section 85(5) i.e.:

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Budget Brief 2018

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(a) an ancestor, a descendant of any of the grandparents, or an adopted child, of the individual, or of a spouse of the individual; or (b) a spouse of the individual or of any person specified in clause (a).

Set-off of unabsorbed depreciation, initial allowance and amortization etc. restricted to 50% of business income Sections 57(4) and 59A(5)

Consequently, gift of assets to non-relatives will be taxable. The Finance Bill also proposes that cost of the gifted “capital asset” will be fair market value only in case where such gift is to a relative as defined above.

Powers of exemptions proposed to be vested with the Federal Government instead of “Minister-incharge” Section 53 Section 53 requires that FBR has to take approval of the Federal Minister-in-charge pursuant to the approval of the Economic Coordination Committee of Cabinet for the exemptions from income tax, reduction of income tax or tax rates and exemption from operation of any provisions of the Ordinance. The Finance Bill proposes that FBR will have to obtain approval of the Federal Government for the exemptions and reductions instead of Federal Minister-in-charge. The amendment is pursuant to a recent judgment passed by the honorable Supreme Court of Pakistan that the Federal Government i.e. the Cabinet is empowered to allow exemptions etc.

Depreciation, initial allowance, first year allowance of eligible depreciable assets and amortization of intangibles not fully set-off against current year’s business income become part of these deductions of next tax years and set-off against business income of subsequent tax years until completely set-off. The Finance Bill proposes to restrict the set-off of carried forward unabsorbed depreciation and amortization etc. against fifty percent of the person's balance income chargeable under the head "income from business" after setting off normal business loss in the following tax year and so on until completely set off. However, if the taxable income for the year is less than Rs. 10 million, hundred percent of the income can be set off against unabsorbed depreciation and amortization etc. Under the proposed amendment, set-off of unabsorbed depreciation and amortization is to be restricted with reference to balance income for the year.

Limit for tax credit on investments in shares and insurance enhanced Section 62 A resident person, other than a company, is allowed tax credit for investment in shares of a public company and sukuks and life insurance premiums by applying persons’ average tax rate on the lower of:

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Budget Brief 2018

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(a) the total cost of acquiring the shares, or sukuks, or the total contribution or premium paid by the person; (b) twenty per cent of the person‘s taxable income for the year; or (c) Rs. 1.5 million. The Finance Bill proposes to enhance the limit of Rs. 1.5 million to Rs. 2 million.

Period of investment in industrial undertakings to claim tax credits extended upto 2021 Sections 65B, 65D and 65E Following tax credits are available upto 30 June 2019: (i)

10% tax credit for investment in extension, expansion, balancing, modernization and replacement of plant & machinery already installed in an industrial set up;

under the special provisions of the Seventh Schedule to the Ordinance. Rule (1) of the Seventh Schedule provides that income, profits and gains of banking company shall be taken as the balance of income from all sources disclosed in the audited accounts subject to specified adjustments provided in the said rule. Accordingly, it was generally considered that other substantive provisions contained in the Ordinance for determination of tax liability shall not apply to banking company. The Finance Bill proposes to amend section 100A to provide that the provisions dealing with international taxation, geographical source of income, double tax treaties and anti-avoidance rules including adjustment for transaction between associates (section 108) and re-characterization of income and deductions (section 109) shall now apply to banking companies.

Tax credits for religious and charitable purposes Section 100C(2)(e)

(iii) 100% tax credit for investment in existing industrial undertakings.

Income derived for religious and charitable purposes from various sources including profit on debt from scheduled banks is subject to 100% tax credit. The Finance Bill proposes to add profit on debt from microfinance bank as well for the purpose of this tax credit.

These tax credits have been proposed to be extended upto 30 June 2021.

Gain on disposal of assets outside Pakistan

Provisions dealing with international taxation and anti-avoidance made applicable to banking companies

Section 101A

(ii)

100% tax credit for investment in new industrial undertaking; and

Section 100A and the Seventh Schedule The income, profits and gains of banking companies and tax payable thereon are computed

24

Budget Brief 2018

Under the existing provisions, gain on sale of resident company is only considered as Pakistansource income. The Finance Bill seeks to treat the shares or interest in a non-resident company as Pakistan-source income chargeable to income tax if:

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(a) the share or interest derives, directly or indirectly, its value wholly or principally from the assets located in Pakistan; and (b) shares or interest representing ten per cent or more of the share capital of the non-resident company are disposed or alienated. For this purpose: (i) The share or interest shall be treated to derive its value principally from the assets located in Pakistan, if:

in a statement as may be prescribed. The Commissioner may also require through a notice in writing to furnish information, documents and statement within a period of less than sixty days as specified in the notice. The aforesaid deemed Pakistan-source income from sale of shares or interest in a non-resident company shall be taxed at the higher of: (a) 20% of fair market value less cost of acquisition of the asset; or (b) 10% of the fair market value of the asset.

a. on the last day of the tax year preceding the date of transfer of a share or an interest, the fair market value (without reduction of liabilities) of such assets exceeds Rs. 100 million; and b. represents at least fifty per cent of the value of all the assets owned by the non-resident company. (ii) Where the entire assets owned by the nonresident company are not located in Pakistan, the income of the non-resident company, from disposal or alienation outside Pakistan of a share of, or interest in, such non-resident company shall be treated to be located in Pakistan, to the extent it is reasonably attributable to assets located in Pakistan and determined as may be prescribed. It has also been proposed that where the asset of a non-resident company derives, directly or indirectly, its value wholly or principally from the assets located in Pakistan and the non-resident company holds, directly or indirectly, such assets through a resident company, such resident company shall, for the purposes of determination of gain and tax thereon shall furnish to the Commissioner within sixty days of the transaction of disposal or alienation of the asset by the non-resident company, the prescribed information or documents,

The above tax is required to be withheld as follows: (a) The person acquiring the asset from the nonresident person shall deduct tax from the gross amount paid as consideration for the asset at the rate of 15% and shall be paid to the Commissioner by way of credit to the Federal Government through remittance to the Government Treasury or deposit in an authorized branch of the State Bank of Pakistan or the National Bank of Pakistan, within fifteen days of the payment to the non-resident. (b) Where the assets in Pakistan are held directly or indirectly through a Pakistani company, such Pakistani company shall collect advance tax (higher of 20% of gain or 10% of FMV of shares) from the non-resident company within thirty days of the transaction of disposal or alienation of the asset by such non-resident company.

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Provided that where the tax has been deducted and paid by the person acquiring the asset from the non-resident person, the said tax of 15% shall be treated as tax collected and paid and shall be allowed a tax credit for that tax in computing the tax at higher of 20% of gain or 10% of FMV of shares.

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The gain on sale of such shares or interest as taxed above shall not be taxable as business income under section 22(8) or capital gains under section 37 or 37A.

Provisions dealing with re-characterization of income & deductions to curb misuse of provisions of double tax treaties

B. Definition of “tax avoidance scheme” The Commissioner is empowered to recharacterize a transaction or element of a transaction that was entered into as part of “tax avoidance scheme”.

Sections 107 & 109

The phrase “tax avoidance scheme” has been defined as any transaction where one of the main purposes of a person in entering into the transaction is the avoidance or reduction of any person‘s liability to tax under this Ordinance.

The Finance Bill proposes to amend the provisions of section 107 dealing with double tax treaties and section 109 dealing with powers of the Commissioner to re-characterize income and deductions. These amendments are to adopt the suggestions of the OECD’s reports on Action Plans of Base Erosion and Profit Shifting dealing with abuse of treaty provisions. The proposed amendments are:

In this context, the Finance Bill proposes to explain that a reduction of person’s tax liability means a reduction, avoidance or deferral of tax or increase in a refund of tax and includes a reduction, avoidance or deferral of tax that would have been payable under this Ordinance, but are not payable due to a tax treaty for the avoidance of double taxation as referred to in section 107.

A. Abuse of treaty provisions Section 107 provides protection to the provisions of double tax treaty interalia for taxation of non-resident persons’ Pakistansource income. Such provisions are inherently subject to anti-avoidance provisions including “re-characterization of income and deductions” to address the tax avoidance schemes. The Finance Bill proposes to specifically provide that the provisions of double tax treaty are subject to powers of the Commissioner to re-characterization of income and deductions whereby the Commissioner has specifically been empowered to disregard an entity or a corporate structure that does not have an economic or commercial substance or was created as part of the tax avoidance scheme.

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Transfer pricing documentation Section 108 Section 108 requires certain taxpayers to keep and maintain prescribed country-by-country report. For this purpose, FBR enacted rules under Chapter VIA of the Income Tax Rules, 2002 that requires furnishing of the said report to FBR within specified timelines. The Finance Bill now proposes to amend section 108 to bring it in line with the rules thereby requiring to furnish the report besides keeping and maintaining the same.

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(a) more than 80% of income of the company does not include income from dividend, interest, property, capital gains, royalty, annuity payment, supply of goods or services to an associate, sale or licensing of intangibles and management, holding or investment in securities and financial assets; and

Controlled Foreign Company - Rules for taxing passive income Section 109A As part of BEPS Action Points, provisions regarding Controlled Foreign Company [CFC] is proposed to be introduced for taxing passive income.

(b) principally derives income under the head “income from business” in foreign country.

An income attributable to CFC shall be included in the taxable income of a resident person. Salient features of these rules are as follows:

•

•

For this purpose, income of CFC shall be the amount equal to the taxable income of that company determined in accordance with the provisions of the Income Tax Ordinance 2001 as if that CFC is a resident taxpayer.

•

The amount of attributable income shall be computed according to percentage of capital or voting rights, whichever is higher, held by resident person directly or indirectly in CFC;

•

There will be no attribution of income in case capital or voting rights of the resident person are less than 10% or income of a CFC is less than Rs.10 million.

•

Income of CFC in respect of foreign tax year determined in foreign currency shall be converted at SBP rate applying on last date of the tax year;

•

Foreign tax year, means any year or period of reporting for income tax purposes by that nonresident company in the country or jurisdiction of residence or, if that company is not subject to income tax, any annual period of financial reporting by that company.

•

If income attributable to CFC is taxed in Pakistan in the manner discussed above, it shall not be taxed again when the same income is received in Pakistan by the resident taxpayer.

CFC means a non-resident company, if (a) more than 50% of the capital or voting rights of the non-resident company are held, directly or indirectly, by one or more persons resident in Pakistan or more than 40% of the capital or voting rights of the non-resident company are held, directly or indirectly, by a single resident person in Pakistan; (b) tax paid, after taking into account any foreign tax credits available to the nonresident company, on the income derived or accrued, during a foreign tax year, by the non-resident company to any tax authority outside Pakistan is less than 60% of the tax payable on the said income under this Ordinance; (c) the non-resident company does not derive active business income; and (d) the shares of the company are not traded on any stock exchange recognized by law of the foreign country of which the nonresident company is resident for tax purposes.

•

A company shall be treated to have derived active income if ─

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Validation of Income Tax Amendment Ordinance, 2018 Amendments introduced in sections 111, 114, 116A and 118 through Income Tax Amendment Ordinance, 2018 have also been proposed through the Finance Bill:

Taxability of unexplained income or asset

Section 111(2) provides that unexplained income or assets etc. shall be included in the person’s income chargeable to tax in the tax year to which such amount relates.

if amount represents investment, money, valuable article or expenditure situated or incurred in Pakistan or concealed income is Pakistan sourced then the same shall be included in the person’s income chargeable to tax in the tax year to which such amount relates.

Filing of prescribed foreign income and assets statement Sections 114, 116A, 118 and 182

However, if investment, money, valuable article or expenditure is situated or incurred outside Pakistan and concealed income is foreignsourced then such asset, income or expenditure shall be included in the person’s income chargeable to tax in the tax year immediately preceding the tax year in which it is discovered by Commissioner.

An explanation is also proposed to be introduced to provide cover to the effect that in case of asset situated outside Pakistan or expenditure incurred outside Pakistan, explanation offered, regarding acquisition of such asset or expenditure from

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Currently, any amount of foreign exchange brought in Pakistan through banking channel and a certificate produced to that effect from the bank is immune from any sort of inquiry from tax authorities. The bill proposes to restrict this immunity to Rs. 10 million in a tax year. This move may though help in curbing money laundering but on other hand may reduce inflow of foreign remittances.

Now, the concept of differentiating between Pakistan-sourced and foreign-sourced income is introduced whereby:

•

Immunity provisions restricted on remittance from abroad Section 111(4)

Section 111(2)

•

sources relating to tax year in which such asset was acquired or expenditure was incurred, shall not be rejected on the basis that the source does not relate to the tax year immediately preceding tax year in which the asset or expenditure was discovered by the Commissioner.

The bill proposes that every resident individual who is required to file foreign income and assets statement under section 116A shall also file return of income alongwith the prescribed foreign income and assets statement. Bill proposes new section 116A by virtue of which every resident individual having foreign income of not less than US$ 10,000 or having foreign assets with a value of not less than US$ 100,000 shall furnish a foreign income and assets statement in prescribed form and manner specifying: (a) the person’s total foreign assets and liabilities as on the last day of the tax year;

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(b) any foreign assets transferred by the person to any other person during the tax year and the consideration for the said transfer; and (c) complete particulars of foreign income, the expenditure derived during the tax year and the expenditure wholly and necessarily for the purposes of deriving the said income.

years from the end of the tax year in which notice to file return of income has been issued.

Restriction of stay of recovery granted by the Appellate Tribunal to 180 days Section 131

Section 116A also empowers Commissioner to issue a notice requiring filing, to an individual who in his view (with reasons to be recorded) is required to furnish this statement, on the date specified in the notice but has failed to do so. Section 118 of the Ordinance has also been amended to provide that foreign income and assets statement shall be furnished in the prescribed manner. Furthermore, foreign income and assets statement shall be accompanied with return filed by salaried person, if so applicable. Penalty of 2% of the foreign income or foreign assets for each year of default has also been introduced in section 182 for not filing of foreign income and assets statement within the due date.

Presently the Appellate Tribunal may stay the recovery of tax levied under the Ordinance for a period not exceeding 180 days in aggregate. In practice, the Appellate Tribunal grants stay beyond this period of 180 days depending upon merits of each case based on the decisions of higher courts that it is an inherent power of the court which cannot be restricted. Now the Finance Bill proposes to insert a new proviso whereby the stay order shall cease to have effect on the expiration of 180 days from the date of stay order and the Commissioner shall proceed to recover the tax. This is an attempt to counter courts decisions and we understand that it may still be a matter of dispute if taken to the apex court.

Finalization of Best Judgment Assessment

Alternative Dispute Resolution Committee decision binding on both the parties

Section 121

Section 134A

Notice to furnish a return of income under section 114(4) of the Income Tax Ordinance, 2001 can be issued for one or more of the last ten completed tax years to a person who has not filed return of income for any of the last five tax years.

The concept of alternative dispute resolution was introduced to provide an avenue for the expeditious settlement of disputes between the Board and taxpayers and to reduce the pendency of cases at various appellate forums.

However, presently best judgment assessment under section 121 of the Ordinance can only be made for the last five years.

Presently, role of the Alternative Dispute Resolution Committee (ADRC) is only recommendatory in nature and the Board may pass any order even against the recommendations. Therefore it has not been effective in mitigating the hardship of

Amendment has been proposed whereby best judgment assessment under section 121, in the aforementioned cases can be made within two

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taxpayers who are still compelled to go through a protracted litigation process.

Estimation of advance tax and its recovery

In a bid to make the mechanism of ADRC more effective, it is proposed that instead of the recommendations the ADRC will decide the matter and such decision will be binding on taxpayer and the department. This mechanism will progress only pursuant to withdrawal of appeals by the taxpayer as well as the department. The composition of the members of ADRC is also changed to enable retired High Court Judges to be included in ADRC in addition to tax professionals and representatives of the Board. Under the proposed amendments, the aggrieved person and the Board will withdraw the appeals pending before the appellate authority and an order to this effect will be communicated to the Board. If said withdrawal order is not communicated within 75 days of the appointment of ADRC, the ADRC shall be dissolved and this section shall not apply. The proposed amendments further seek to reduce the period for deciding the matter from 180 days to 120 days. However, if the ADRC fails to decide the matter within the prescribed time limit then the appeal(s) withdrawn shall stand reinstated as if these have never been withdrawn and the appellate authority will decide the appeal within 6 months of dissolution of the ADRC. We understand that proposed changes are substantial and far reaching to make this mechanism more effective.

Sections 137(2) and sub-sections (4), (4A) and (6) of section 147 The Finance Bill proposes to amend section 137(2) that due date for payment of advance tax under section 147 shall be the same as provided in relevant provisions of section 147 ‘advance tax’. This amendment is introduced to recover unpaid advance tax immediately which is presently recoverable only after passing of order and after expiry of prescribed 30 days from the date of service of order. It is also proposed that for estimation purposes if taxpayer is unable to estimate its turnover or turnover is not known for the quarter then it shall be taken to be one-fourth of one hundred and ten percent of the turnover of the latest tax year for which a return has been filed. At present, a taxpayer can file a lower estimate of advance tax without furnishing any basis of such lower estimate. Provisions of law are proposed to be amended so that a lower estimate is required to be accompanied by the following:

•

Turnover for the completed quarters;

•

Estimated turnover for the remaining quarters along with reasons for any decline in turnover;

•

Documentary evidence of estimated expenses or deductions which may result in lower advance tax payment; and

•

Computation of estimated taxable income for the relevant tax year.

The Commissioner shall have the mandate to reject the lower estimate in case the above details are not provided and the taxpayer shall be required to pay

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Budget Brief 2018

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advance tax on the basis of his turnover for the quarter. Currently, banking companies are required to pay advance tax in 12 monthly installments. In order to enable collection of advance tax from banks on the basis of higher of their actual income or last assessed income, it is proposed that banks would also file estimate of tax payable under sub-section (4A) but they are not allowed to file estimate of lower income under sub-section (6).

Threshold for automatic stay of demand reduced Section 140 The Commissioner is empowered to issue notice for recovery of tax due. However, if the taxpayer’s appeal before the Commissioner (Appeals) is pending and 25 percent of the due tax is paid by the taxpayer then Commissioner cannot issue such notice of recovery to persons holding money on behalf of taxpayer. It is proposed to reduce this limit to 10 percent from existing 25 percent so as to avoid issuance of recovery notice.

Commercial Importers excluded from Final Tax regime Section 148(8), Clause 56B Commercial importers selling goods in the same condition are currently subject to final taxation with an option to be taxed under normal taxation regime in term of clause 56B of Part IV of the Second Schedule. The Finance Bill proposes to change the taxation of such commercial importers from final taxation to Minimum taxation.

Such commercial importers are now required to compare the tax liability calculated under normal taxation regime with the tax collected at import stage. If tax liability under normal taxation regime is higher than the tax collected at import stage, then tax liability computed under normal taxation regime will become due otherwise tax collected at import stage will be their minimum tax. Consequently the aforementioned option to be taxed under normal taxation regime is proposed to be omitted.

Services rendered by PE of non-resident persons brought under minimum tax regime Section 152(2A) Presently services rendered by PE of a nonresident are subject to tax under normal taxation regime and tax deductible thereon is adjustable against the due tax liability. Similar services if rendered by resident persons are however subject to minimum tax regime. The resident persons falling under specified sectors also have an option to avail withholding exemption tax certificate by paying tax at two percent of gross amount of turnover from all sources and presenting their accounts for audit in terms of clause (94) of Part IV of the Second Schedule to the Ordinance. The PE of non-residents including those providing similar services in specified sectors were not treated at par with that of resident service providers. The Finance Bill now proposes to bring taxation of PE of non-resident service providers in line with that of resident service providers. The entitlement of afore-mentioned clause 94 has similarly been extended to service provided by PE of non-residents falling under specified sectors.

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Enhancement of monetary limits on withholding of taxes on goods and services Section 153 Currently SRO 586(I)/1991 provides monetary limits of exemption from withholding of taxes on payments in respect of goods and services at Rs 25,000 and Rs 10,000 respectively in a financial year. The Finance Bill proposes to enhance the aforementioned exemption limits in case of payments made on account of sale /supply of goods and providing / rendering of services to Rs 75,000 and Rs 30,000 respectively in aggregate during a financial year.

•

deriving income from business of construction and sale of residential, commercial or other buildings i.e. builders and

•

deriving income from business of development and sale of residential, commercial or other lands i.e. developers.

Requirements for furnishing of information by Banks to FBR enhanced Section 165A Section 165A requires every banking company to make arrangements to provide prescribed information to the Board. This section currently requires the bank to provide online access to its central database containing details of its account holders and all transactions made in their accounts.

Enhancing the scope of prescribed withholding agents Section 153 Enhancement of Withholding tax obligations on AOPs and Individuals Currently AOP’s and Individuals are prescribed to act as withholding agents in case they have turnover of 50 million or above in tax year 2007 and 2009 respectively or in any subsequent tax year.

Finance bill proposes to omit this requirement with an insertion of new requirement to provide a list of persons containing particulars of cash withdrawals exceeding Rupees fifty thousands in a day and aggregating to Rupees one million or more during each preceding calendar month including tax deductions thereon for filer and non-filer;

•

The requirement to provide list containing particulars of deposits is currently applicable in respect of deposits aggregating Rupees one million or more during preceding calendar month. The monetary limit is proposed to be increased to Rupees ten million;

•

The requirement to provide list of payments against bills raised in respect of credit card issued to that person is currently applicable on payments aggregating Rupees one million or more during preceding calendar month. The monetary limit is proposed to be increased to Rupees two million;

The Finance Bill proposes to extend the scope of withholding agent on AOP’s and Individual’s by applying prescribed turnover limits to all prior tax years. Inclusion of Builders and Developers in the prescribed withholding agents list Currently Builders and Developers are not included in the list of prescribed persons required to withhold taxes while making specified payments. The Finance Bill proposes to include persons engaged in following activities as withholding agents;

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A company being a member of AOP entitled to claim tax credit for withholding tax Section 168 Section 92 prescribes that AOPs shall be taxed separately from its members and accordingly share of income of members from AOPs shall be exempt from tax in the hands of member. This principle of taxation is however not applicable in case a company is a member of AOP. Hence companies are taxed separately in respect of their share of income from AOP which share is excluded from income of AOPs. The Finance Bill now proposes to allow credit of taxes collected or deducted in the hands of AOP to the companies proportionate to their share of income accordingly disentitling AOPs from claiming credit for such tax which has been allowed to the companies. This is a positive development for companies investing in AOP’s as now they shall be entitled to take due tax credits against their eventual tax liability. Further this will also result in curbing unnecessary accumulation of refunds in the hands of AOP.

Power to include foreign expert or specialist in Special Audit panel

(iii)

A firm of Cost and Management Accountants; or

(iv)

Any other person as directed by FBR

The Finance Bill proposes to empower FBR to include:

•

Foreign experts or specialist; and

•

A tax audit expert deployed under an audit assistance programme of an international tax organization or tax authority outside Pakistan

The Finance Bill also proposes that person other than Officer Inland Revenue shall only be included in the panel if an agreement of confidentiality has been entered into between the Board and the person, international tax organization or a tax authority, as the case may be

Reduction in penalty on non-filing of prescribed statements Section 182(1A) Currently the law has prescribed penalty for nonfiling of following at Rs 2,500 per day subject to minimum of Rs 10,000.

•

Withholding Statements to be filed section 165;

•

Information to be furnished by banks under section 165A

•

Information to be furnished by banks under section 165B;

•

Statement of final tax under section 115

Section 177 The Finance Act 2015 introduced a concept of special audit panels empowering FBR to appoint audit panels to conduct an audit under section 177 including a forensic audit of the income tax affairs of taxpayers. Such panel is headed by a Chairman, being an Officer of Inland Revenue, and to comprise two or more members from the following:

The Finance Bill proposes to reduce this penalty as follows:

(i)

An Officer or Officers of Inland Revenue

•

(ii)

A firm of Chartered Accountants

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Rs 5,000 in case the tax has been duly deducted and collected and the statement has been filed within ninety days from the due date;

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•

Rs 10,000 in other cases

Such provision was however not applicable in cases where:

Penalty on non-filing of Statement of foreign assets and liabilities

(i)

25 percent higher tax than the previous tax year has been paid by such registered person and had declared taxable income in the return for immediately preceding tax year.

(ii)

2 percent tax on turnover under section 113 has been paid by such registered person who files the return below taxable limit and in the preceding tax year has either not filed the return or had declared income below taxable limit; and

Section 182(1AA) A penalty of two percent of foreign income or value of foreign assets for each year of default in case a person fails to file statement of foreign assets and income proposed to be introduced under section 116A of the Ordinance.

Non filing of return of income within due date entail consequences

The Finance Bill proposes to delete this section.

Section 182(A)

Utilization of information from National Database and Registration Authority-

The Finance Bill proposes a new section introducing certain restrictions whereby non-filing of return of income within the due date prescribed by the law or as extended by the Board or the Commissioner shall be subject to following consequences in addition to penal provisions;

•

The name of the person shall not be included in the Active Taxpayers List for that year; and

•

Such person shall not be allowed to carry forward any loss for that tax year.

Section 216 The Finance Bill proposes to include information received from National Database and Registration Authority for broadening of tax base within framework of publicly available information.

Service of notices and other documents Section 218 The Finance Bill proposes to include the electronic servicing of notice, order or requisitions in the prescribed mode of servicing.

Automatic selection of cases for audit abolished Section 214D

Restriction on purchase of certain assets by non-filers

The Finance Act 2015 introduced automatic selection of audit in cases where:

Section 227C

(i)

Complete return of total income not has been filed within the due date including the date extended by FBR or Commissioner;

The Finance Bill proposes restriction on non-filers for registration of vehicle and immovable property.

(ii)

The tax payable based on the return of total income has not been paid;

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As per salient features a limit of Rs. 4 million value shall apply.

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Pre-emptive measure for undervaluation of Immovable property

•

The provision of withholding taxes on the sale and purchase of immovable property shall no more be applicable.

Section 230F This Finance Bill proposes that the Director General of Immovable Property may be appointed by the board through notifying in the official Gazette. The Board may also prescribe the function and Jurisdiction of the Directorate General and its officers. The Director General will have the power to initiate the proceedings where he has a reason to believe that the consideration agreed between the transferor and the transferee to acquire the immovable property is less than fair market value of the property for the purpose of evasion of tax, concealment of unexplained amount or reduction in capital gain tax. The Directorate General will have the power to appoint any expert for determining fair value of the immovable property. The proceedings shall be initiated by the Director within 6 months of the date of registration, recording or attestation of the immovable property after providing an opportunity of being heard to the transferee.

Advance tax on purchase of immovable property can be paid in installments Section 236K Currently advance tax is collected by the person responsible for registering, recording or attesting transfer from purchaser of immovable property at the time of purchase or transfer of such property. The taxes so collected are adjustable. Now the Finance Bill proposes to facilitate the purchaser to make payment of advance tax in installments in cases where the property is purchased in installments. Upon appointment of Directorate General Immovable Property withholding tax rate applicable at the time of purchase shall be reduced to 1% from 2% and 4% for filer and non-filer respectively.

Validity of Order passed by DirectorateGeneral (Intelligence and Investigation), Inland Revenue Section241

The Finance Bill proposes to provide the right to approach appellate authorities in case of disagreement between transferee and Directorate General.

This Finance Bill proposes to provide validity to orders passed, notices issued and actions taken by Directorate-General (Intelligence and Investigation), and his subordinate authorities notwithstanding any omission, irregularity or deficiency in its establishment conferment of powers and function.

The afore-mentioned provision shall become applicable after being notified in the Official Gazette by the Federal Government. Upon appointment of such official:

Taxation of Commission Income earned by Member of Stock Exchange

•

Section 233A(2) Withholding tax rate applicable at the time of purchase shall be reduced to 1% from 2% and 4% for filer and non-filer respectively.

Advance tax collected by Stock Exchange from its Members on commission earned by them from

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purchase and sale of shares is subject to final taxation regime.

Second Schedule Part I – Exemptions

The Finance Bill proposes to change the taxation regime in the hands of member of stock exchange from final tax to adjustable tax.

The Bill proposes to insert and modify certain exemptions in Part I of the Second Schedule, as listed below:

Tax on Petrol Pump Operator and Distributor

New Exemptions:

Section 236HA Under section 156A, every person selling petroleum products to petrol pump operators are required to deduct tax on commission or discount. The taxes required to be collected at the rates of 12% and 17.5% in case of filer and non-filer petrol pump operators respectively are final. The Finance Bill proposes to broaden the scope of withholding taxes on petrol pump operators as well as distributors who are not allowed commission or discount. The proposed rates of deductible taxes are 0.5% and 1% of ex-depot sale price of specified products in case of filer and non- filer respectively.

Exemption of certain allowances to Armed Forces Personnel - Clause 39A Any amount paid as kit allowance, ration allowance, special messing allowance, SSG allowance, Northern Areas compensatory allowance, special pay for Northern Areas and height allowance to the Armed Forces personnel. Exemption of income from voluntary contributions, house property and investment in securities of the Federal Government derived by following further funds and institutions - Clause 57

•

Khyber Pakhtunkhwa Retirement Benefits and Death Compensation Fund,

•

Khyber Pakhtunkhwa General Provident Investment Fund,

•

Khyber Pakhtunkhwa Pension Fund.

The tax so deducted proposed to be final tax.

Advance tax on online payment through credit/ debit and prepaid card Section 236Y This Finance Bill imposes the responsibility on every banking company to collect advance tax at the time of transfer of any sum remitted outside Pakistan on behalf of any person who has completed a credit/ debit/ prepaid cards transaction with a person outside Pakistan. Prescribed rates are 1% or 3% of gross amount in case of filer or non-filer respectively. The aforementioned tax so collected shall be adjustable in nature.

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Budget Brief 2018

Taxpayers to be allowed direct deduction from taxable income on amount paid as Donation to following further institutions - Clause 61

•

Pakistan Sweet Home, Angels and Fairies Place.

•

Al-Shifa Trust Eye Hospital.

•

Aziz Tabba Foundation.

•

Sindh Institute of Urology and Transplantation, SIUT Trust and Society for the Welfare of SIUT.

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•

Sharif Trust.

•

The Kidney Centre Post Graduate Institute.

•

Pakistan Disabled Foundation.

Exemption of income to following further entities Clause 66

market, for a period of five years with effect from 1st July 2018 Exemption provided on capital gain derived from bond issued by Pakistan Mortgage Refinance Company - Clause 110C Any gain by a person on transfer of a capital asset, being a bond issued by Pakistan Mortgage Refinance Company to refinance the residential housing mortgage market, during the period from the1st July 2018 till 30th June 2023.

•

Third Pakistan International Sukuk Company Limited.

•

SAARC Energy Centre.

•

Pakistan Bar Council.

•

Pakistan Centre for Philanthropy.

•

Pakistan Mortgage Refinance Company Limited.

•

Aziz Tabba Foundation.

•

Al-Shifa Trust Eye Hospital

•

Saylani Welfare International Trust.

Exemption under this clause shall also be available to existing refineries, if

•

Shaukat Khanum Memorial Trust.

•

•

production capacity is enhanced by at least 100,000 barrels per day;

Layton Rahmatullah Benevolent Trust (LRBT).

•

•

The Kidney Centre Post Graduate Training Institute.

it maintains separate accounts for income arising from this additional production capacity; and

•

Pakistan Disabled Foundation.

•

this is a deep conversion refinery.

•

Forman Christian College.

Exemption Withdrawn:

Exemption of profit on debt derived from bond issued by Pakistan Mortgage Refinance Company Clause 90A Any profit on debt derived by any person on bonds issued by Pakistan Mortgage Refinance Company to refinance the residential housing mortgage

Exemption of profits and gains derived by Refinery Clause 126BA Profits and gains derived by a refinery set up between the 1st day of July, 2018 and the 30th day of June, 2023 with minimum 100,000 barrels per day production capacity for a period of twenty years beginning in the month in which the refinery is set up or commercial production is commenced, whichever is later.

Exemption on Income from Manufacturing Activity of Modaraba withdrawn - Clause 100 Exemption from income earned by Modaraba registered under Modaraba Companies (Floating and Control) Ordinance 1980 is proposed to be

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37

Tax liability of resident companies shall be reduced by fifty percent on income earned by them from film-making business.

withdrawn on manufacturing activity. Previously only trading activity was excluded.

Part II – Reduction in Tax Rates Rate of tax deduction under section 152 reduced to 6% for M/s CR-NORINCO JV as recipient of specified project - Clause 24AA earlier introduced vide SRO 44(I)/2017 dated 27 January 2017 proposed to be revalidated through this Finance Bill The rate of tax, under section 152 in the case of M/s CR-NORINCO JV (Chinese Contractor) as recipient, on payments arising out of commercial contract agreement signed with the Government of Punjab for installation of electrical and mechanical (E&M) equipment for construction of the Lahore Orange Line Metro Train Project, shall be 6% of the gross amount of payment. This clause was earlier introduced vide SRO 44(I)/2017 dated 27 January 2017 and is now proposed to be revalidated through this Finance Bill

Part III – Reduction in Tax Liability

Tax payable in respect of any amount paid as yield or profit on investment earned from Shuhada Family Welfare Account shall not exceed 10% of such profit.

The bill proposes to provide exemption from application of minimum tax under section 113 to public sector universities established solely for educational purposes and not for profit with effect from tax year 2014. Exemption from withholding tax under section 153(1)(b) on Regasification charges received by SSGCL and Pakistan LNG Terminal Limited from SNGPL - Clause 11E Exemption from withholding tax under section 153(1)(b) proposed for payments received by Sui Southern Gas Company Limited and Pakistan LNG Terminal Limited from Sui Northern Gas Pipelines Limited on account of re-gasification charges.

Exemption proposed from withholding of tax under section 150 on payment of dividend to Transmission Line Projects under Transmission Line Policy 2015. FTR regime withdrawn in the case of tax collected at import stage from Commercial Importer and made minimum tax – Clause 56B omitted

This payment is also absolved from withholding of tax under section 151(1)(a) through clause 36A of Part IV of Second Schedule. Tax payable on income derived from Film-making to be reduced by 50% - Clause 7 and 8 Tax liability on income from film-making in Pakistan shall be reduced by fifty percent in case of foreign film makers.

Budget Brief 2018

Minimum taxation - Clause 11A

Exemption from withholding tax on Dividend Clause 12A

Profit on Investment earned from Shuhada Family Welfare Account not to be taxed more than 10% Clause 6

38

Part IV – Exemptions from application of specific provisions

Income of commercial importer is brought under normal tax regime with the condition that tax collected at import stage will be treated as minimum tax. Therefore, clause 56B being redundant is proposed to be omitted.

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Minimum taxation under section 113 at reduced rate of 0.5% for trading houses extended to tax year 2021 - Clause 57

This concessional regime is also being extended to tax year 2019 for which an option can be exercised by November 2018.

The bill seeks to extend the period of applicability of minimum tax under section 113 of 0.5% for trading houses from tax year 2019 up to tax year 2021.

Profit on Debt on investment in Bahbood Savings Certificate or Pensioner’s Benefit Account - Clause 103

Collection of tax at import stage not to apply on China State Construction Engineering Corporation for specified project - Clause 60AA

The Finance bill seeks to provide the benefits of revised rates being specified for individuals in Division I of Part I of the First Schedule to profit on investment in Bahbood Saving Certificate or Pensioner’s Benefit Account taxable under section 7B however rate of tax should not be less than 10%.

The bill proposes to provide that section 148 will not apply for import of construction material or goods up to a maximum of Rs. 10,898.000 million imported by China State Construction Engineering Corporation for construction of Sukkur – Multan section of Karachi – Peshawar project of National Highway Authority under CPEC. Lahore University of Management Sciences, Lahore treated as approved NPO u/s 2(36)(c) – Clause 63 Lahore University of Management Sciences Lahore is proposed to be treated as approved NPO under section 2(36)(c) notwithstanding the conditional provisions of clause (c). Clauses earlier introduced through various SROs are proposed to be validated through this Finance Bill Clauses 60A, 60B, 86, 95, 96 and 100 through various earlier SROs are now proposed to be provided validity through this Finance Bill. Reduced Rate of taxation on service providers Clause 94

Section 5A (tax on undistributed profits) not to apply in the case of companies abstained from distribution of dividend under agreement with Government of Pakistan - Clause 104 The Finance bill seeks to provide exemption from applicability of tax under section 5A on companies having an agreement with Government of Pakistan for restriction on distribution of Dividend. Tax audit to be conducted once in three years Clause 105 The Finance bill proposes to restrict selection of a case for audit under section 214C if audit has been conducted in any of the three preceding tax years. However, the Commissioner shall have the powers to select the case for audit under section 177 for any tax year but after seeking approval of the Board.

Scope of minimum tax under section 153(1)(b) has reduced for specified service industries. This is proposed to be further extended to services of ‘inspection’, ‘certification’ and ‘testing & training’.

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Budget Brief 2018

39

40

Budget Brief 2018

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Sales Tax Significant Amendments Rate of ‘Further Tax’ increased Section 3(1A) Levy of ‘further tax’ chargeable on taxable supplies made to the non-registered persons is proposed to be increased from 2% to 3%. Thus, the supplies made to persons who have not obtained sales tax registration will be subject to sales tax at 17% plus 3%. The proposed change will enhance cost of doing business in the informal sector, to nudge businesses towards sales tax registration.

Input tax credit not allowed Section 8(1)(m) Claim of input tax deduction or refund is proposed to be debarred on import of scrap of compressors classifiable under PCT heading 7204.4940. The rate of sales tax on imported waste/scrap of compressors is prescribed at fixed rate of Rs.5,600 per metric ton under Rule 58H(2A) of Sales Tax Special Procedures Rules, 2007. It is also provided in the afore-said Rule that the sales tax on such imported scrap is non-adjustable and sales tax is exempt on its local supply.

appellate / litigation authority, the Commissioner or adjudicating authority is mandatorily required to give appeal effect by passing the assessment order within one year from the end of the financial year in which the order of higher authority is served. Under proposed insertion, it is also being provided that where the original assessment order is setaside wholly or partly, the Commissioner IR or Commissioner (Appeals) or adjudicating authority shall pass a fresh assessment order also within one year from the end of the financial year in which the order of the higher authority is served. However, the time limit of one year shall not apply if department prefers appeal against the order passed by the higher appellate / litigation authority. This is a tax facilitation drive that will largely help to settle the cases, where the appellate authorities remand back or set-aside appeals for readjudication either to Commissioner (Appeals) or Inland Revenue authorities, yet the matters remain stuck-up for long time.

Audit to be conducted only once in three years Proviso to Section 25(2)

Nevertheless, the restriction on input tax credit is now proposed to be generalized through main statute.

Time limit prescribed to pass appeal effect order Section 11B

The authorized officer of Inland Revenue Audit may conduct audit of the records of the registered person once in a year. Now, the Bill proposes to insert a new proviso to clarify that routine audit of sales tax records shall be conducted only once in every three years. Yet, this immunity from audit may not apply for investigative audit initiated under the provisions of Sections 38 of the Act.

The Bill proposes to insert a new provision to provide mechanism of giving appeal effects on the orders of appellate / litigation fora, which was missing in the sales tax laws all-together. The proposed insertion provides that in consequence of any finding and direction of the

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Budget Brief 2018

41

Board empowered to notify functions and powers of the Directorate General (Intelligence & Investigation) Section 30A The Bills proposes to substitute the provisions of Section 30A in order to provide legal backing to the sales tax notification SRO. 116(I)/2015, dated 9 February 2015. The said SRO inter-alia describes the functions and jurisdictions of the officers of the Directorate General (Intelligence & Investigation), despite the fact that no such powers are vested to the Board under existing version of Section 30A.

Rate of default surcharge rationalized Section 34(1)(a) The rate of default surcharge levied on outstanding amount of sales tax due is proposed to be fixed at 12% per annum. The existing rate is KIBOR plus 3% per annum, which was first introduced vide Finance Act, 2009 linking the rate of default surcharge with the cost of borrowing rate in the country. This seems a revenue measure which will also help to avoid tedious computations based on KIBOR rates, which fluctuates on daily basis.

intervention of the tax authorities in their business affairs.

Revamping of mechanism of Alternative Dispute Resolution Section 47A The concept of alternative dispute resolution was introduced to provide an avenue for the expeditious settlement of disputes between the Board and taxpayers and to reduce the high pendency of cases at various appellate forums. Presently, the recommendations of the Alternative Dispute Resolution Committee (ADRC) are not binding upon the taxpayer or the Board, therefore it has not been effective in mitigating the hardship of taxpayers who are still compelled to go through a protracted litigation process. In a bid to make the mechanism of ADRC effective, the Bills proposes to substitute the provisions relating to ADRC and revamping the entire mechanism. Following are the key features of the revamped scheme:

•

FBR after examining the application of an aggrieved person shall appoint a Committee within 60 days consisting of Commissioner and two persons from a panel comprising of retired High Court Judge, retired District & Sessions Judge, Chartered Accountant, Advocate, etc.

•

ADR Committee shall not commence the proceedings until the order of withdrawal is notified by the appellate authority to FBR. If such withdrawal order is not communicated within 75 days, the Committee shall stand dissolved.

•

ADRC will be required to pass the order within 120 days of its appointment excluding the time taken for communication of withdrawal order. On failure of making a decision within 120 days,

Posting of officers at business premises Section 40B The Bill proposes to amend Section 40B to withdraw the discretionary powers of the Chief Commissioner and Commissioner Inland Revenue to post the officer of Inland Revenue at the business premises of the registered person to monitor production, sales of taxable goods and stock-checks. This would be a sigh of relief for the taxpayers to mitigate the risk of unwarranted

42

Budget Brief 2018

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the appeal shall stand restored under specified procedure.

•

In order to settle dispute through ADRC, now its decision shall be binding on the aggrieved person as well as FBR.

Pakistan in Civil Appeals 1428 to 1436 of 2016, dated 18 August 2016 in connection with the following provisions / matters:

•

Exclusion of applicability of further tax under Section 3(1A);

•

Mode and manner of chargeability, collection and payment of any taxable goods at any rate of tax;

•

Levy of extra tax in addition to sub-section (1), (2) and (4) of Section 3;

Automatic stay on payment of tax at 10%

•

Goods chargeable to tax at the rate of zeropercent;

Section 48

•

Special Order/Notification for adjustment of input tax against output tax;

•

Chargeability of sales tax on the difference between the value of supply for which the goods are acquired and the value of supply for which the goods, either in the same state or on further manufacture are supplied;

•

For minimum value addition required to be declared for supply of goods and to waive the requirement of audit or scrutiny of records if such minimum value addition is declared.

•

Non claimability / deduction of input tax;

•

Exemption of any taxable supplies;

•

Import of goods/class of goods without payment of the whole or any part of tax payable to the registered persons for temporary import with a view to subsequent exportation and registered manufacturer-cum-exporters who import raw materials and intermediary products for further manufacture of goods meant for export;

•

Exemption of tax not levied or short levied as a result of general practice;

•

If the ADRC fails to decide the dispute within the period of 120 days, FBR shall dissolve the Committee and the matter shall be decided by the appellate authority and the withdrawn appeal of the taxpayer shall stand reinstated.

Through Finance Act, 2017, the tax authorities were debarred from issuance of recovery notice to the taxpayer if he has filed appeal with Commissioner (Appeals) alongwith payment of 25% of the tax demand. Now, the Bill proposes to reduce the quantum of advance payment of tax due for seeking automatic stay from 25% to 10%. However, this is still not be a mandatory requirement for filing of appeal before the Commissioner (Appeals), who is otherwise empowered under Section 45(1A) to grant 100% stay against the recovery proceeding for a period not exceeding 30 days in aggregate, in genuine cases of undue hardship.

Federal Government’s powers restored Sections 3(2)(b), 3(3A), 3(5), 4(c), 7(3), 7(4), 7A(1), 7A(2), 8(1)(b), 13(2)(a), 60, 65, and 71(1) The Bill empowers the Federal Government to issue notifications under various provisions of the Act. Through Finance Act, 2017, the Board with the approval of the Minister Incharge was delegated such powers in the backdrop of the landmark judgment of the Honourable Supreme Court of

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43

•

Entry No.

Description of goods

PCT heading

12(xxii)

Erasers

4016.9210 and 4016.9290

It seems that the Government has relinquished the powers back to Federal Government, which means that the notifications to be issued in future shall be ratified through Cabinet in light of decisions of the superior courts.

12(xxiii)

Exercise books

4820.2000

12(xxiv)

Pencil sharpeners

8214.1000

12(xxv)

Geometry boxes

9017.2000

12(xxvi)

Pens, ball pens, markers and porous tipped pens

96.08

Validation of notifications / orders issued before Finance Act, 2018

12(xxvii)

Pencils including color pencils

96.09

Special procedure for scope and payment of tax, registration, bookkeeping and invoicing requirements and returns etc.

Exemptions proposed under Sixth Schedule

Section 74A Section 74A was inserted vide Finance Act, 2017 to validate the notifications and orders issued by the Federal Government before the commencement of the Finance Act, 2017, so as to override the effect of any judgements of the honourable superior courts of Pakistan. The Bill proposes to give effect to the validation provision for Finance Act, 2018 also. Going a step ahead, the Bill additionally proposes to provide legal backing to the orders passed, notices issued and actions taken before commencement of Finance Act, 2018 by the officers of Directorate General (Intelligence & Investigation), FBR.

Zero-rating under Fifth Schedule Zero-rating on following exempt stationery items is proposed to be restored under Fifth Schedule for the registered manufacturers of such goods who adhere to the provisions of Chapter XIV of Sales Tax Special Procedures Rules, 2007: Entry No.

Description of goods

12(xx)

Colors in sets

12(xxi)

Writing, drawing and marking inks

44

Budget Brief 2018

Table-1 (Import & Supplies) Entry No.

Description of goods

137

Paper weighing 60 g/m2 for printing of Holy Quran imported by Federal or Provincial Governments and Nashiran-eQuran as per quota determined by IOCO

4802.5510

138

Fish Feed

Respective heading

139

Fans for dairy farms

8414.5990

140

Bovine semen

0511.1000

141

Preparations for making animal feed

2309.9000

142

Promotional and advertising material including technical literature, pamphlets, brochures and other give-aways of no commercial value, distributed free of cost by the exhibitors

143.

Hearing aids of (all types and kinds) and hearing assessment equipment i.e. Audiometers, Tympanometer, ABR and Oto Acoustic Omission

144.

Liquefied Natural Gas imported by fertilizer manufacturers for use as feed stock

PCT heading 3213.1000

PCT heading

9920(3)

9937

2711.1100

3215.9010 and 3215.9090

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Entry No.

Description of goods

145.

Plant, machinery, equipment including dumpers and special purpose motor vehicles, if not manufactured locally, imported by M/s China State Construction Engineering Corporation Limited for the construction of Karachi – Peshawar Motorway (Sukkur – Multan Section) and M/s China Communication Construction Company for the construction of Karakorum Highway Phase-II (Thakot - Havellian Section) subject to the specified conditions which inter-alia include furnishing of prescribed indemnity bond.

Respective heading

Equipment, whether or not locally manufactured, imported by M/s China Railway Corporation to be furnished and installed in Lahore Orange Line Metro Train Project subject to the specified conditions inter-alia include furnishing of indemnity bond in prescribed format.

Respective heading

Goods supplied to German Development Agency

Respective heading

(iii) Microprocessor / Controllers

85.42

Imported construction materials and goods imported by M/s China State Construction Engineering Corporation Limited, whether or not locally manufactured, for construction of Karachi-Peshawar Motorway (Sukkur-Multan Section) subject to fulfilment of specified conditions, limitations and restrictions as are specified under Serial No. 145 of this table, provided that total incidence of exemptions of all duties and taxes in respect of construction materials and goods imported for the project shall not exceed ten thousand eight hundred ninetyeight million rupees.

Respective heading”;

(iv) Equipment for SMT manufacturing

8486.2000

(v) Laptop batteries

8506.5000

(vi) Adopters

8504.4020

(vii) Cooling fans

8414.5190

(viii) Heat sink

7616.9920

(ix) Hard disk SSD

8471.7020

(x) RAM/ROMS

8471.7060 and 8471.7090

146.

147. 148.

PCT heading

Table-3 (Plant, machinery and equipment)

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Entry No.

Description of goods

17

Machinery, equipment, raw materials, components and other capital goods for use in building, fittings, repairing or refitting of ships, boats or floating structures imported by Karachi Shipyard and Engineering Works Limited.

18

The following parts for assembling and manufacturing of personal computers and laptops:

PCT heading

Conditions for exemption

Respective heading

Nil

(i) Bare PCBs

8534.0000

(ii) Power Amplifier

8542.3300

(xi) System on Chip / FPGA-IC

If imported by manufacturers and assemblers of computers and laptops, registered with and certified by Engineering Development Board in accordance with quota determined by IOCO

85.42

(xii) LCD / LED Screen

8528.7211

(xiii) Motherboards

8534.0000

(xiv) Power supply

84.73

(xv) Optical Drives

8471.7040

(xvi) External Ports

8536.2090

Budget Brief 2018

45

Entry No.

19

Description of goods

PCT heading

(xvii) Network cards

8517.6990

(xviii) Graphic cards

8471.5000

(xix) Wireless cards

8517.6970

(xx) Micro phone

8518.3000

(xxi) Trackpad

8471.6020

Plant and machinery, except the items listed under Chapter 87 of the Pakistan Customs Tariff, imported for setting up of a Special Economic Zone (SEZ) by zone developers and for installation in that zone by zone enterprises, on one time basis, as prescribed in the SEZ Act, 2012 and rules thereunder subject to such conditions, limitations and restrictions, as a Federal Board of Revenue may impose from time to time.

9917(2)

Conditions for exemption

Entry No.

Description of goods

PCT heading

Rate of sales tax

Conditions

M/s Pakistan LNG Limited to M/s SNGPL 52

Fertilizers (all types)

53

The cinematograp hic equipment imported during the period commencing on the 1st day of July, 2018 and ending on the 30th day of June, 2023, as per the list of goods specified with respective PCT headings.

54

Lithium iron phosphate battery (Li-FePO4)

Nil

Respective heading

8506.5000

3%

Nil

5%

Subject to limitations and conditions as are specified in Part-1 of the Fifth Schedule to the Customs Act, 1969 for availing 3% concessionary rate of customs duty on the import of these equipment.

12%

Nil

Table-2

Reduced rates proposed under Eight Schedule Table-1 Entry No.

Description of goods

PCT heading

Rate of sales tax

Conditions

50

LNG

2711.1100

12%

If imported by M/s Pakistan State Oil and M/s Pakistan LNG Limited

51

RLNG

2711.2100

12%

If supplied by M/s Pakistan State Oil and

46

Budget Brief 2018

Entry No.

Description of goods

PCT heading

Rate of sales tax

Conditions

9

Capital goods otherwise not exempted, for Transmission Line Projects.

Respective heading

5%

The concession will be available in respect of those Transmission Line Projects which are being executed under Standard Implementation Agreement under Policy Framework for Private Sector Transmission

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Entry No.

Description of goods

PCT heading

Rate of sales tax

Conditions

Entry No.

Line Projects, 2015 and Projects Specific Transmission Services Agreement. Provided that sales tax charged under this provision shall be nonadjustable and nonrefundable.

Reduced rates proposed to be rationalized Entry No.

Rate of sales tax Description of goods Existing

Proposed

26

Tillage and seed bed preparation equipment under respective headings as specified

7%

5%

27

Seeding or planting equipment under respective headings as specified

7%

5%

28

Irrigation, drainage and agro chemical application equipment under respective headings as specified

7%

5%

29

Agriculture machinery of respective heading i.e. harvesters, threshers and others

7%

5%

30

Post-harvest handling and processing miscellaneous machinery

7%

5%

33

Urea, whether or not in aqueous solution

5%

35

DAP

Rate of sales tax Description of goods Existing

36

NP (22-20)

Rs.168 per 50 kg bag

37

NP (18-18)

Rs.165 per 50 kg bag

38

NPK-I

Rs.251 per 50 kg bag

39

NPK-II

Rs.222 per 50 kg bag

40

NPK-III

Rs.341 per 50 kg bag

41

SSP

Rs.31 per 50 kg bag

42

CAN

Rs.98 per 50 kg bag

43

Natural gas

Proposed

10%

5%

Reduced rate of sales tax proposed to be withdrawn with simultaneous grant of exemption under Sixth Schedule Table-I

48

Liquefied Natural Gas (if imported by fertilizer manufacturer for use as feed stock)

2711.1100

49

Fish feed

2309.9090

Changes in H.S Codes/Tariff heading under Table-1 of the Eighth Schedule

3% Rs.100 per 50 kg bag

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Entry No.

Description of goods

25

Agricultural Tractor

PCT heading Existing 8701.9020

Proposed 8701.9220 and 8701.9320

Budget Brief 2018

47

Proposed amendments through SROs effective from 01 July 2018 (notifications yet to be issued) •

Import of LNG under Rule 58B of Sales Tax Special Procedure Rules, 2007 will be exempted from value addition tax of 3%;

•

Further tax of one per cent will be charged on local supply of finished fabric under SRO 1125(1)/2011;

•

Exemption from extra tax and further tax of two per cent will be granted to Pakistani foam manufacturers;

•

Import of second hand worn clothing and footwear will be exempted from value addition tax;

•

SRO 962(1)/2015 dated 30 September 2015 will be rescinded to provide for standard rate of sales tax on import and supply of furnace oil, instead of 20% rate;

•

Input tax adjustment will be allowed on packing materials to five export oriented sectors covered under SRO 1125(1)/2011 dated 31 December 2011;

•

The rate of sales tax on import and supply of finished articles of leather and textile sector will be increased to 9%. However, all those branded outlets which will be integrated through electronic fiscal devices with FBR online system shall be charged sales tax at 6%.

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Budget Brief 2018

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Federal Excise Significant Amendments Federal Government’s powers restored Sections 3(1)(c), 3(4) and 16(2) The Bill empowers the Federal Government to issue notifications under various provisions of the Act. Through Finance Act, 2017, the Board with the approval of the Minister Incharge was delegated such powers in the backdrop of the landmark judgment of the Honourable Supreme Court of Pakistan in Civil Appeals 1428 to 1436 of 2016, dated 18 August 2016 in connection with the following provisions / matters:

•

Excise duties shall be charged on notified goods as are produced or manufactured in the non-tariff areas and are brought to the tariff areas for sale or consumption therein.

•

Levy and collection of duty on any class or classes of goods or services at such higher or lower rates as specified in the notification.

•

Exemption on specific circumstances

It seems that the Government has given the powers back to Federal Government, which means that the notifications to be issued in future shall be ratified through Cabinet in light of decisions of the superior courts.

Rate of default surcharge rationalized Section 8

cost of borrowing rate in the country. This seems a revenue measure which will also help to avoid tedious computations based on KIBOR rates, which fluctuates on daily basis.

Assessment giving effect to an order Section 14B The Bill proposes to insert a new provision to provide mechanism of giving appeal effects on the orders of appellate / litigation fora, which was missing in the Federal Excise laws all-together. The proposed insertion provides that in consequence of any finding and direction of the appellate / litigation authority, the Commissioner or adjudicating authority is mandatorily required to give appeal effect by passing the assessment order within one year from the end of the financial year in which the order of higher authority is served. Under proposed insertion, it is also being provided that where the original assessment order is setaside wholly or partly, the Commissioner IR or Commissioner (Appeals) or adjudicating authority shall pass a fresh assessment order also within one year from the end of the financial year in which the order of the higher authority is served. However, the time limit of one year shall not apply if department prefers appeal against the order passed by the higher appellate / litigation authority. This is a tax facilitation drive that will largely help to settle the cases, where the appellate authorities remand back or set-aside appeals for readjudication either to Commissioner (Appeals) or Inland Revenue authorities, yet the matters remain stuck-up for long time.

The rate of default surcharge levied on outstanding amount of duty due is proposed to be fixed at 12% per annum. The existing rate is KIBOR plus 3% per annum, which was first introduced vide Finance Act, 2009 linking the rate of default surcharge with the

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Board empowered to notify functions and powers of the Directorate General (Intelligence & Investigation) Section 29 The Bill proposes to insert the new provision of Section 29 in order to provide legal backing to the FED notification SRO.26(I)/2006, dated 9 January 2006. The said SRO inter-alia describes the functions and jurisdictions of the officers of the Directorate General (Intelligence & Investigation).

Presently, the recommendations of the Alternative Dispute Resolution Committee (ADRC) are not binding upon the taxpayer or the Board, therefore it has not been effective in mitigating the hardship of taxpayers who are still compelled to go through a protracted litigation process. In a bid to make the mechanism of ADRC effective, the Bills proposes to substitute the provisions relating to ADRC and revamping the entire mechanism. Following are the key features of the revamped scheme:

•

FBR after examining the application of an aggrieved person shall appoint a Committee within 60 days consisting of Commissioner and two persons from a panel comprising of retired High Court Judge, retired District & Sessions Judge, Chartered Accountant, Advocate, etc.

Through Finance Act, 2017, the tax authorities could not proceed for recovery against the taxpayer if he has filed appeal with Commissioner (Appeals) alongwith payment of 25% of the duty demanded. Now, the Bill proposes to reduce the quantum of advance payment of duty due for seeking automatic stay, from 25% to 10%. However, this is still not a mandatory requirement for filing of appeal before the Commissioner (Appeals), who is otherwise empowered under Section 33(1A) to grant 100% stay against the recovery proceeding for a period not exceeding 30 days in aggregate, in genuine cases of undue hardship.

•

ADR Committee shall not commence the proceedings until the order of withdrawal is notified by the appellate authority to FBR. If such withdrawal order is not communicated within 75 days, the Committee shall stand dissolved.

•

ADRC will be required to pass the order within 120 days of its appointment excluding the time taken for communication of withdrawal order. On failure of making a decision within 120 days, the appeal shall stand restored under specified procedure.

Revamping of mechanism of Alternative Dispute Resolution

•

In order to settle dispute through ADRC, now its decision shall be binding on the aggrieved person as well as FBR.

•

If the ADRC fails to decide the dispute within the period of 120 days, FBR shall dissolve the Committee and the matter shall be decided by the appellate authority and the withdrawn appeal of the taxpayer shall stand reinstated.

Automatic stay on payment of tax at 10% Section 37

Section 38 The concept of alternative dispute resolution was introduced to provide an avenue for the expeditious settlement of disputes between the Board and taxpayers and to reduce the high pendency of cases at various appellate forums.

50

Budget Brief 2018

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Posting of officers at business premises Section 45 The Bill proposes to amend Section 45 to withdraw the discretionary powers of the Chief Commissioner and Commissioner Inland Revenue to post the officer of Inland Revenue at the business premises of the registered person to monitor production, removal or sale of goods and stock-checks. This would be a relief for the taxpayers to mitigate the risk of unwarranted intervention of the tax authorities in their business affairs.

officers of Directorate General (Intelligence & Investigation), FBR.

FED rates proposed to be enhanced Table-I of the First Schedule

Audit to be conducted only once in three years

S. No.

Proposed Description of goods

Existing FED Rate

Proposed FED Rate

9

Locally produced cigarettes if their onpack printed retail price exceeds four thousand five hundred rupees per thousand cigarettes.

Rs. 3,740 per 1000 cigarettes

Rs. 3,964 per 1000 cigarettes

10

Locally produced cigarettes if their onpack printed retail price exceeds two thousand nine hundred and twentyfive rupees per thousand cigarettes but does not exceed four thousand five hundred rupees per thousand cigarettes.

Rs. 1,670 per 1000 cigarettes

Rs. 1,770 per 1000 cigarettes

10a

Locally produced cigarettes if their onpack printed retail price does not exceed two thousand nine hundred and twenty-five rupees per thousand cigarettes.

Rs. 800 per 1000 cigarettes

Rs. 848 per 1000 cigarettes

13

Portland cement, aluminous cement, slag cement, super sulphate cement and similar hydraulic cements, whether or not coloured or in the form of clinkers

Rs. 1.25 per kg

Rs. 1.50 per kg

Section 46 The authorized officer of Inland Revenue Audit may conduct audit of the records of the registered person once in a year. Now, the Bill proposes to insert a new provision to clarify that routine audit of FED records shall be conducted only once in every three years.

Validation of notifications/orders issued before Finance Act 2018 Section 47C Section 47C was inserted vide Finance Act, 2017 to validate the notifications and orders issued by the Federal Government before the commencement of the Finance Act, 2017, so as to override the effect of any judgements of the honourable superior courts of Pakistan. Going a step ahead, the Bill additionally proposes to provide legal backing to the orders passed, notices issued and actions taken before commencement of Finance Act, 2018 by the

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Exemptions proposed under Third Schedule

Levy on Mobile handset The Federal Board of Revenue shall collect levy on mobile handsets in the following manner:

Table-I (Goods) S. No.

Description of goods

22

Equipment, whether or not locally manufactured, imported by M/s China Railway Corporation to be furnished and installed in Lahore Orange Line Metro Train Project subject to the similar conditions proposed in the Sales Tax Act, 1990 in this regard.

23

Imported construction materials and goods imported by M/s China State Construction Engineering Corporation Limited (M/s CSCECL), whether or not locally manufactured, for construction of KarachiPeshawar Motorway (Sukkur-Multan Section) subject to fulfilment of same conditions, limitations and restrictions as are specified under S. No. 145 of Table-1 of Sixth Schedule to the Sales Tax Act, 1990, provided that total incidence of exemptions of all duties and taxes in respect of construction materials and goods imported for the project shall not exceed ten thousand eight hundred ninety-eight million rupees.

S. No

Category of smart phone

Rate of levy per Set in rupees

1

Where Import value of handset (including duties and taxes) does not exceed Rs. 10,000

Nil

2

Where Import value of handset (including duties and taxes) exceeds Rs. 10,000 but does not exceed Rs. 40,000

1,000

3

Where Import value of handset (including duties and taxes) exceeds Rs. 40,000 but does not exceed Rs. 80,000

3,000

4

Where Import value of handset (including duties and taxes) exceeds Rs. 80,000

5,000

Table-II (Service) S. No.

Description of services

14

Commission paid by State Bank of Pakistan and its subsidiaries to National Bank of Pakistan or any other banking company for handling banking services of Federal Or Provincial Governments as State Bank of Pakistan’s agents

Health levy on tobacco The Bill proposes to introduce the health levy to be collected on tobacco at the rate of ten rupees per kilogram of tobacco from every person purchasing tobacco including manufacturers of cigarettes by the Pakistan Tobacco Board or its contractors at the time of collection of cess on tobacco.

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Budget Brief 2018

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Customs Significant Amendments Proposed relief measures •

•

To standardize printing and preservation of Holy Quran, import of duty free paper weighing 60 g/m2 is allowed besides extending this facility to Nashir-e-Quran registered with the government. For promotion of exports, Customs Duty on raw materials / inputs (104 PCTs) withdrawn and (28 PCTs) reduced.

•

Reduction of Customs Duty on Multi-ply and Aluminum foil from 20% to 18% for Liquid Food Packaging Industry.

•

Reduction of Customs Duty on finished rooms (Pre-fabricated structures) from 20% to 10% for setting up of new hotels/motels.

•

To support dairy sector, Customs Duty exempted on bovine semen, and preparations for making animal feed reduced from 10% to 5% and import of fans for corporate dairy farmers allowed at concessionary rate of 3%.

•

Reduction of Customs Duty on growth promoters premix, vitamin premix, Vitamin B12 and Vitamin H2 for poultry sector from 10% to 5%.

•

To encourage local manufacturing of Optical Fiber Cables, Customs Duty on input materials i.e. Optical fiber (20%), Cable filing compound (11%), Polybutylene (20%), Fiber reinforced plastic (20%) and Water blocking/ swellable tape (11%) reduced to 5% besides reduction of Regulatory Duty on Optical Fiber Cables from 20% to 10%.

•

Customs Duty on specified equipment used in cinema industry reduced to 3%.

•

Withdrawal of 11% Customs Duty on acrylic tow.

•

Exemption of 3% Customs Duty on Micro Feeder Equipment used for food fortification.

•

Exemption of 5% Customs Duty on Tasigna (an anti-cancer medicines).

•

Reduction of Customs Duty on Acetic Acid from 20% to 16%.

•

Exemption of 16% Customs Duty on charging stations for electric vehicles.

•

Reduction of Customs Duty on plasters from 16% to 11%.

•

Reduction of Customs Duty on film of ethylene from 20% to 16% for Liquid Food Packaging Industry.

•

Reduction of Customs Duty on Carbon Black (rubber grade) from 20% to 16%.

•

Reduction of concessionary rate of Customs Duty from 10% to 5% on silicon electrical steel sheets for manufacturing transformers.

•

Exemption of 5% Customs Duty on specified LED parts and components for manufacturers of LED lights and Levy of 2% Regulatory Duty on LED bulb & Tubes, Energy Saving Bulbs & Tube to protect local industry.

•

Exemption of 3% Customs Duty on tanned hides in wet state.

•

Withdrawal of Customs Duty on two catalysts for use by PTA industry i.e. Hydrogen Bromide (11%) and Palladium-on-carbon (3%)

•

Reduction of Customs Duty from 16% to 8% on Coils of aluminium alloys used in manufacturing of Aluminium beverage cans

•

Reduction of Customs Duty on import of coal, across the Board, from 5% to 3%.

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•

Reduction of Customs Duty on import of Fire fighting vehicles from 30% to 10%

•

•

Concessionary import of vintage or classic cars and jeeps at fixed duty/taxes of US$ 5,000.

•

Reduction of Customs Duty from 50% to 25% and Exemption of 15% Regulatory Duty on Electric Vehicles and Customs Duty on kits of electric vehicle reduced from 50% to 10%.

•

Import of solar panels were exempted from the condition of ‘local manufacturing’ till 30 June 2018 which is extended till 30 June 2019.

Regulatory duty under review •

Levy of 30% Regulatory Duty on export of waste & scrap of copper

Increase of Customs Duty on double-sided tape from 3% to 11%.

•

Review of Regulatory Duty on non-essential and luxury items

To protect domestic manufacturers, increase of Customs Duty on rickshaw tyres from 11% to 20%.

•

10% Regulatory Duty levied on CKD/SKD kits of specified Home Appliance

•

Levy of Regulatory Duty @ Rs.175/set on CKD/SKD kits of mobile phone

Proposed tariff rationalization • •

•

Increase of Customs Duty on Soya bean oil from Rs.9,050/MT & Rs.10,200/MT to Rs.12,000/MT and Rs. 13,200/MT respectively.

•

Increase of Customs Duty on aluminum auto parts scrap from 30% to 35%.

• •

Increase of Customs Duty on Di-octyl Terephthalate (DOTP) from 3% to 20%. Reduction of Customs Duty from 16% to 11% and levy of 5% Regulatory Duty on Medium Density Fiber.

•

Reduction of Customs Duty on corrective glasses from 11% to 3%.

•

Reduction of Customs Duty on Lithium iron phosphate battery (LiFePO4) from 11% to 8%.

54

New PCT codes created for Radial tyres, CKD/SKD kits for home appliances, CKD / SKD of Mobile Phone, Semi-automatic washing machines, Petrol Generating sets, Kerosene based mineral oils, Relays, Fuses, Gear pumps and Turbo chargers for vehicles, Electric conductors, Light fittings with fixed/fitted LED/SMD, Refrigerated out door cabinet designed for insertion of electric and electronic apparatus, Digital/Processed Printing Inks, DOTP (Di-Octyl Terephthalate) and Pigments and preparations based thereon.

Budget Brief 2018

Proposed revenue measures Increase of additional customs duty from 1% to 2% on certain items.

Pakistan Customs Waters Section 2(p) The Bill proposes to amend the definition of Pakistan Customs Waters by extending the Customs enforcement activities in the sea to a distance upto 24 nautical miles. Presently, the Customs enforcement in the sea is restricted to 12 nautical miles.

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Person Section 2(pa)

Now, the Bill proposes to extend the expiry for its enforcement from 30 June 2018 to 30 June 2019.

The Bill proposes to extend the definition of person by including local manufacturer therein.

Power to use data exchange information for determination of customs value

Federal Government’s powers restored

Section 25AA

Sections 18(3), 19(1) The Bill empowers the Federal Government to issue notifications under various provisions of the Act. Through Finance Act, 2017, the Board with the approval of the Minister Incharge was delegated such powers in the backdrop of the landmark judgment of the Honourable Supreme Court of Pakistan in Civil Appeals 1428 to 1436 of 2016, dated 18 August 2016 in connection with the following provisions / matters:

•

Levy of regulatory duty

•

Exemption from custom duties

It seems that the Government has given the powers back to Federal Government, which means that the notifications to be issued in future shall be ratified through Cabinet in light of decisions of the superior courts.

General Power to exempt from customs duties Section 19(5) The second proviso of the sub-section explains that all notifications issued on or after first day of July 2016 and placed before the National Assembly as required under sub-section (4) of this section shall continue to be in force till 30 June 2018, if not earlier rescinded by the Federal Government or the National Assembly.

The Bill proposes to insert the new section by giving legal coverage for utilizing any information or data sharing obtained through mutual bilateral or multilateral agreement under clause (b) of subsection (1) of section 219A for the purpose of assessment and valuation.

Power to take over the imported goods Section 25C Presently, any person who makes an offer in writing to buy the imported goods sought to be cleared at value declared by an importer in the goods declaration and the Collector of Customs is satisfied that the declared value is not the actual transactional value, he may after approval of the Board order to entertain the offer of the person to buy these goods at substantially higher value than the declared value. The Bill proposes to transfer the power of approval from the Board to the Chief Collector.

Voluntary payment of Duty and Taxes Section 32(3) Presently, by reason of any inadvertence or error, any duty, tax or charge has not been levied or has been short levied, the person shall be served with a

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notice requiring him to pay the amount specified in the notice. The Bill proposes to insert a new proviso restricting the Customs Authorities for issuing such notice to the person where such person pays any short paid duty, tax or other charges voluntarily prior to the initiation of audit inquiry or investigation.

Disposal of refund claim

Presently, the time limit for applying for refund on the part of taxpayer is one year. However, there is no time limit for the disposal of the refund claim on the part of Customs Authorities.

Section 138

Offences and Penalties Section 156 The Bill seeks to prescribe a new penalty clause under section 156 as under:

The bill now proposes that the refund claim to be disposed of within 180 days by the Customs Authorities. However, the Collector of Customs may, for reasons to be recorded in writing, extended the time limit for further 90 days.

Prevention from money laundering and currency smuggling Section 42(2) The Bill proposes amendments in second proviso of section 42(2) that the Collector of Customs shall ensure having accurate and complete information of passengers as well as crew of a conveyance in advance to thwart attempts of money laundering and currency smuggling.

Provisional release of imported goods Section 83B In terms of the Trade Facilitation Agreement, a new section is proposed empowering the Collector of Customs to allow the objectionable imported goods

Budget Brief 2018

Frustrated cargo how dealt with

The Bill seeks to broaden the scope of section 138 to cover the consignee into a Customs-station who has dishonored his commitments.

Section 33(3A)

56

to be released on written request from owner of such goods subject to the furnishing of bank guarantee or pay order alongwith the payment of duty, taxes or other charges/fine levied thereon.

S. No.

Offences

Penalties

63(i)

If any goods which are loaded for transshipment, are pilfered, replaced enroute or failed to reach the port of destination, or any person tranships goods not allowed to be transshipped:

Such goods and the conveyance illegally carrying these goods shall be liable to confiscation and any person including the custodian and the bonded carrier shall be liable to a penalty not exceeding ten times the value of the goods and he shall further be liable, upon conviction by a Special Judge, to imprisonment

Section reference 121

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S. No.

Offences

Penalties

Section reference

Section 207

for a term not exceeding seven years; 63(ii)

If any person contravenes any rule relating to transshipment other than mentioned in clause (i),

Such person including the custodian and the inland carrier shall be liable to penalty not exceeding five hundred thousand rupees or three times the amount of duties and taxes involved.

Customs agent to be licensed

121

Possession of confiscated goods Section 182 The Bill seeks to amend section 182 to empower an officer or person authorized by the Collector or Director to take and hold possession of confiscated goods. Presently, the power is restricted to an officer of customs authority.

Stay of recovery by the Collector (Appeals)

The Bill seeks to amend section 207 providing special reference to the shipping agents and for providing legal cover to the shipping agents for licensing purpose. Presently, only custom agents are required to be licensed under this section whereas, in practice Shipping Agents are also required the license to transact any business relating to the entrance or departure of any conveyance on behalf of its principal.

Authorized Economic Operator Programme Section 212A The Bill proposes to insert a new section empowering Federal Government to devise authorized economic operator program to provide facilitations relating to secure supply chains of imported and exported goods through simplified procedures in order to meet the obligations of the Trade Facilitation Agreement. The Board may prescribe rules or matters relating to authorized economic operator program with the approval of the Federal Government.

Opportunity to the Public for offering comments

Section 193A(2A) Section 219(3A) The Bill proposes to insert a new sub-section by empowering the Collector (Appeals) to grant stay against recovery of duty and taxes for a period not exceeding thirty days on filing of appeal and after affording opportunity of being heard to the officer of the concerned Collectorate or Directorate.

The Bill proposes to insert new sub-section whereby providing opportunity to the public to offer comments on rules made by the Board before their enforcement in order to comply with the requirements of Trade Facilitation Agreement.

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Validation of Regulatory Duty Section 221A(2) A new sub-section is proposed to be inserted to validate the levy and collection of Regulatory Duty before the commencement of Finance Act, 2018 and after the commencement of Finance Act, 2017, so as to override the effect of any judgement of the honorable superior courts of Pakistan.

Third Schedule under Section 219 (Power to make Rules) Item 22C The Board with the approval of the Federal Government may make rules relating to Authorized Economic Operator (AEO) programme, including criteria for granting status of AEO to an applicant, suspension and revocation of the AEO status; and the extent of benefits under AEO programme.

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Budget Brief 2018

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Petroleum Levy Rates of ‘Petroleum Levy’ enhanced Fifth Schedule to the Petroleum Products (Petroleum Levy) Ordinance, 1961 The Bill proposes to substitute the Fifth Schedule to enhance the maximum limit of ‘Petroleum Levy’ as follows:

S. No.

Petroleum Product

Unit

Maximum Rat of Petroleum Levy (Rupees per unit) Existing

Proposed

1

High Speed Diesel Oil (HSDO)

Litre

8

30

2

Motor Gasoline 87 ROM

Litre

10

30

3

Superior Kerosene Oil (SKO)

Litre

6

30

4

Light Diesel Oil (LDO)

Litre

3

30

5

High Octane Blending Component (HOBC)

Litre

14

30

6

E-10 Gasoline

Litre

9

30

7

Liquefied Petroleum Gas (produced)/ extracted in Pakistan)

Metric Litre

11,486

20,000

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Budget Brief 2018

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Budget Brief 2018

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Tax Amnesty Schemes The President of Pakistan promulgated following two Ordinances on 08 April 2018 to allow Companies, Association of persons and Citizens of Pakistan to whiten their un-reported assets and income:

•

The Voluntary Declaration of Domestic Assets Ordinance, 2018

•

The Foreign Assets (Declaration and Repatriation) Ordinance, 2018

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Parliamentary Secretary, Member of the Provincial Assembly, Advocate- General for a Province including Additional Advocate-General and Assistant Advocate- General, Political Secretary;

The Voluntary Declaration of Domestic Assets Ordinance, 2018 Important definitions Section 2

(iv)

the Chief Justice or, as the case may be, a Judge of the Supreme Court, Federal Shariat Court, a High Court or a Judicial Officer whether exercising judicial or other functions or Chairman or member of a Law Commission, Chairman or Member of the Council of Islamic Ideology;

(v)

holding an office or post in the service of Pakistan or any service in connection with the affairs of the Federation or of a Province or of a local council constituted under any Federal or Provincial law relating to the constitution of local councils, co-operative societies or in the management of corporations, banks, financial institutions, firms, concerns, undertakings or any other institution or organization established, controlled or administered by or under the Federal Government or a Provincial Government or a civilian employee of the Armed Forces of Pakistan;

(vi)

the Chairman or Mayor or Vice Chairman or Deputy Mayor of a zila council, a municipal committee, a municipal corporation or a metropolitan corporation constituted under any Federal or Provincial law relating to local councils;

(a) "declarant" means a person making a declaration under section 5; (b) “domestic assets” means assets of every kind other than foreign assets under the Foreign Assets (Declaration and Repatriation) Ordinance, 2018; (c) "holder of public office" means a person who is or has been at any time since 1st day of January 2000: (i)

the President of the Islamic Republic of Pakistan or the Governor of a Province;

(ii)

the Prime Minister, Chairman Senate, Speaker of the National Assembly, Deputy Chairman Senate, Deputy Speaker National Assembly, Federal Minister, Minister of State, AttorneyGeneral for Pakistan and other Law Officers appointed under the Central Law Officers Ordinance, 1970 (VII of 1970), Adviser or Consultant or Special Assistant to the Prime Minister and holds or has held a post or office with the rank or status of a Federal Minister or Minister of State, Federal Parliamentary Secretary, Member of Parliament, Auditor - General of Pakistan, Political Secretary;

(iii)

62

the Chief Minister, Speaker Provincial Assembly, Deputy Speaker Provincial Assembly, Provincial Minister, Adviser or Consultant or Special Assistant to the Chief Minister and who holds or has held a post or office with the rank or status of a Provincial Minister, Provincial

Budget Brief 2018

(vii) a District Nazim or District Naib Nazim, Tehsil Nazim or Tehsil Naib Nazim or Union Nazim or Union Naib Nazim;

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Ordinance to override other laws

S.No. Undisclosed Income and Asset

Value

Section 3

1

Undisclosed Income

As declared

2

Open plots and land

Cost of acquisition or FBR rates, whichever is higher

3

Super structure

Rs. 400 per square feet

4

Apartment and flats.

Cost of acquisition or Provincial stamp duty rates, whichever is higher

5

Imported motor vehicles

CIF value plus the amount of all charges, customsduty, sales tax, levies, octroi, fees and other duties and taxes leviable thereon and the costs incurred till their registration

The provisions of the Ordinance will prevail notwithstanding anything contrary contained in any other law for the time being in force. Provisions of the Ordinance shall apply to every Company, Association of persons and all citizens of Pakistan wherever they may be except for (a) holders of public office, their spouses and dependent children, (b) those having undisclosed income and domestic assets in respect of which any proceedings are pending in a court of law, (c) any proceeds or assets that are involved in or derived from any criminal offence.

Less: a sum equal to 10% of the said value for each successive year upto a maximum of five years

Declaration, Due Date and Valuation Sections 5, 6, 10, 12 & 14

6

The declaration of domestic assets and undisclosed income can be made between 10 April 2018 and 30 June 2018 for assets acquired before 10 April 2018.

Motor vehicles purchased from a manufacturer or assembler or dealer in Pakistan

The declaration has to be made in specified format i.e. Form “A” and is to be accompanied by evidence of payment of tax. The Ordinance provides that the declaration will not be considered as admissible evidence against the declarant for imposition of penalty proceedings or for prosecution under any law including the Income Tax Ordinance, 2001. On the other hand, an incorrect declaration or declaration containing suppression of facts will be considered void and will be deemed as never to have been made.

The price paid by the purchaser, including the amount of all charges, customs duty, sales tax and other taxes, levies, octroi, fees and all other duties and taxes leviable thereon and the costs incurred till their registration Less: a sum equal to 10% of the said value for each successive year upto a maximum of five years

7

Used motor vehicles Value determined in the purchased locally manner specified in Sr.No. 5 or 6, as the case may be, as reduced by an amount equal to 10% for every year following the year in which it was imported or purchased from a manufacturer

8

Securities and shares traded on stock exchange

The valuation of assets declared is required to be made in the following manner:

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Break-up value or face value, whichever is higher. Breakup value shall be the sum of paid- up capital, reserves and balance as per profit and loss account as reduced by the value of preference shares and divided by the amount of the

Budget Brief 2018

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S.No. Undisclosed Income and Asset

9

10

Value

S.No. Assets

paid up ordinary share capital

1

Securities and Break-up value or face shares not traded on value, whichever is higher. stock exchange Breakup value shall be the sum of paid- up capital, reserves and balance as per profit and loss account as reduced by the value of preference shares and divided by the amount of the paid up ordinary share capital National saving schemes, postal certificates, bonds, securities and other similar investments in capital instruments not traded or quoted on stock exchange

Face value

11

Gold

Rupees 4,000 per gram

12

Other precious stones and metals

Market rate as on the 09 April 2018 or cost of acquisition, whichever is higher

13

Stock-in-trade

Market rate as on the 09 April 2018

14

Plant and machinery Actual cost of acquisition with no depreciation

15

Accounts receivable

Actual cost of acquisition

16

Other assets

Actual cost of acquisition

17

Prize bonds, cash and bank accounts including foreign currency accounts

Face Value

Sections 7 & 8 The domestic assets declared within due date shall be chargeable to tax at the following rates:

Budget Brief 2018

Foreign currency held in a foreign currency account in Pakistan as on the 31 March 2018 and encashed in equivalent Rupees Foreign currency held in a foreign currency account in Pakistan as on the 31 March 2018 which is invested in Government securities upto 5 years in US Dollars denominated bonds with six-monthly profit payment in equivalent Rupees (rate of return 3%) and payable on maturity in equivalent Rupees.

2

Other assets

5

Incorporation in books of account

Charge and payment of tax

64

2

Rate %

Section 9 Consequent to payment of tax on undisclosed income or domestic asset as the case may be, the person is entitled to record such assets in his / its books. For the purpose of the Income Tax Ordinance, 2001, the date of acquisition and cost of acquisition of domestic assets shall deemed to be considered the date on which declaration was made on the value specified above in terms of section 10 of the Ordinance.

Confidentiality Section 11 The information of person making a declaration shall be kept confidential irrespective of the provisions of section 216(3) of the Income Tax Ordinance, 2001, the Right of Access to Information Act, 2017, and any other law for the time being in force. A person who disclose a confidential information will commit an offence punishable on conviction with a fine of not less than Rs. 500,000 but not exceeding one million rupees or imprisonment for a term not exceeding one year or with both.

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The Foreign Assets (Declaration and Repatriation) Ordinance, 2018 Important definitions Section 2 (a) “cost of acquisition of the mortgaged asset” means the sum of mortgaged payments and other mortgaged cost of acquisition; (b) "declarant" means a person making a declaration under section 5; (c) “fair market value” means price of foreign asset determined and declared by a declarant himself, but in no case is less than the cost of acquisition of the foreign asset; (d) “foreign assets” means any movable or immovable assets held outside Pakistan and includes real estate, mortgaged assets, stock and shares, bank accounts, bullion, cash, jewels, paintings, accounts and loan receivables, beneficial ownership or beneficial interests or contribution in offshore entities and trusts; (e) “government security” means a bond, note or other debt instrument issued by the Federal Government with a promise of repayment upon maturity; (f) “liquid assets” means cash or an asset that can be readily converted into cash with a minimal impact on the assets’ value and includes bank notes, marketable securities, stocks, promissory notes, government bonds, deposit certificates and other similar instruments; and (g) “holder of public office” has the same meaning as defined under the Voluntary Declaration of Domestic Assets Ordinance, 2018.

Ordinance to override other laws Section 3 The provisions of the Ordinance shall prevail notwithstanding contrary to anything contained in any other law for the time being in force.

Application Section 4 Provisions of the Ordinance shall apply to all citizens of Pakistan wherever they may be except for (a) holders of public office, their spouses and dependent children having foreign assets except where any proceedings are pending in a court of law in respect of such assets. The provision of this Ordinance shall not apply to any proceeds or assets that are involved in or derived from the commission of a criminal offence.

Declaration, Due Date and Valuation Sections 5, 6, 14 16 The declaration of foreign assets should be made at fair market value and in specified format i.e. Form “A” and should be accompanied by payment of tax receipt, otherwise the declaration will not be considered valid. The description of foreign assets declared are to be in terms of specified Form “B”. A person declaring foreign liquid assets is to repatriate these assets to Pakistan by 30 June 2018. The Ordinance provides that the declaration will not be considered as admissible evidence against the declarant for imposition of penalty proceedings or for prosecution under any law including the Income Tax Ordinance, 2001.

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•

On the other hand, an incorrect declaration or declaration containing suppression of facts will be considered void and will be deemed as never to have been made.

The value in rupee shall be converted into US Dollars at the SBP rate prevailing on the date of declaration and payment of tax.

Mode and manner Charge and payment of tax Section 10 Sections 7, 8 & 12 The SBP shall notify the mode and manner of: The foreign assets declared and repatriated into Pakistan shall be chargeable to tax at the following rates: S.No. Foreign assets

repatriation of liquid assets in Pakistan;

•

deposit of tax in US dollars with SBP; and

•

deposit of tax in Rupees in the income tax account of the Federal Consolidated Fund.

Rate %

1

Liquid assets not repatriated

5

2

Immovable assets outside Pakistan

3

3

Liquid assets repatriated and invested in Government securities upto 5 years in US dollars denominated bonds with sixmonthly profit payment in equivalent Rupees (rate of return 3%) and payable on maturity in equivalent Rupees

2

Liquid assets repatriated

2

4

•

Incorporation in books of account Section 11

The due date of payment of tax shall be the date of declaration of foreign assets. No further tax is payable either under the Ordinance or under the Income Tax Ordinance, 2001 if the person discharges his tax liability on the foreign assets.

Consequent to payment of tax on foreign assets, the declarant will be entitled to record such assets in his books. For the purpose of the Income Tax Ordinance, 2001, the date of acquisition and cost of acquisition of foreign assets shall deemed to be considered the date on declaration was made on the value declared by the declarant.

Confidentiality For the purpose of S.No.3, the investment in Government securities shall be made in accordance with the scheme introduced by the Federal Government through SBP.

Currency and Rate Conversion Section 9

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The value of foreign assets shall be in Rupees.

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The tax shall be paid in US Dollars

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Section 13 The information of person making a declaration shall be kept confidential irrespective of the provisions of section 216(3) of the Income Tax Ordinance, 2001, the Right of Access to Information Act, 2017 and any other law for the time being in force. A person who discloses a confidential information shall commit an offence punishable on conviction with a fine of not less than Rs. 500,000 but not

© 2018 KPMG Taseer Hadi & Co., a Partnership firm registered in Pakistan and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

exceeding one million rupees or imprisonment for a term not exceeding one year or with both.

Amendment in Section 5 of Protection of Economic Reforms Act, 1992 Section 5 of Protection of Economic Reforms Act, 1992 is suitably being amended to insert a proviso in sub section (4) of section 5 making it mandatory that no cash shall be deposited in a foreign currency account of a resident citizen of Pakistan unless the account holder is a filer as per Income Tax Ordinance, 2001.

© 2018 KPMG Taseer Hadi & Co., a Partnership firm registered in Pakistan and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Budget Brief 2018

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© 2018 KPMG Taseer Hadi & Co., a Partnership firm registered in Pakistan and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. The KPMG name and logo are registered trademarks or trademarks of KPMG International.