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A.F.FERGUSON & CO.a member firm of the PwC network

Finance Act, 2014

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A. F. FERGUSON & CO. Finance Act, 2014a member firm of the PwC network

A. F. FERGUSON & CO.

FINANCE ACT, 2014

The Finance Bill, 2014 was presented in National Assembly on June 3, 2014. Subsequently,various amendments were proposed by the Finance Minister and were incorporated in theFinance Bill. National Assembly of Pakistan passed the Finance Act, 2014 on June 21, 2014, andthe same was assented by the President of Pakistan on June 25, 2014.

Through the memorandum dated June 4, 2014, significant amendments proposed in fiscalstatutes by the Finance Bill, presented in the National Assembly on June 3, 2014, were describedin brief.

By way of the notes released by the firm on June 20, 2014, comments were made on furtheramendments in Finance Bill proposed by the Finance Minister.

The Act, as now passed by the National Assembly and assented by the President of Pakistan,represents the amended position of the respective laws as is applicable from July 1, except foramendments in First and Second Schedules to the Customs Act, 1969 and amendments in Fifth,Sixth, Eighth and Ninth Schedules to the Sales Tax Act, 1990, which have been made applicablefrom June 26, 2014, by virtue of assent of the President of Pakistan to the Finance Act, 2014 onJune 25, 2014.

These notes have been compiled in a manner that the same represent a self-contained documenton the amendments introduced by the Finance Act, 2014.

This memorandum also contains our views on the revised status of the respective fiscal statutes,after the enactment of the Finance Act, 2014. It is however advised that reference should bemade to the specific wordings in the relevant statute and the amendments made through theFinance Act, 2014 should be acted upon only after obtaining appropriate advice.

This memorandum can also be accessed on our website www.pwc.com/pk.

July 19, 2014

© 2014 A. F. FERGUSON & CO., Chartered Accountants, a member firm of the PwC network. All rights reserved. PwC refers to the network of member firms ofPricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

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Page

Income Tax 3

Sales Tax 18

Federal Excise Duty 24

Customs Duty 26

Other Laws 27

CONTENTS

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FILERS & NON-FILERS[Sections 2(23A) & 2(35C)]

The Finance Act, 2014 has introduced separateenhanced rates for withholding / collection oftax for ‘non-filers’ under the following heads:

S.No. Description Section

reference(1) (2) (3)1. Tax withholding on payment of Dividend 1502. Tax withholding on payment of Profit on

Debt151

3. Tax withholding on Cash withdrawals 231A4. Collection of Advance tax on registration

or transfer of registration of privatemotor vehicles

231B

5. Collection of Advance tax on motorvehicles

234

6. Collection of Advance tax from seller ofimmovable property

236C

7. Collection of Advance tax from purchaserof immovable property

236K

8. Collection of Advance tax on sale ofspecified products to distributors, dealersand wholesalers

236G

For the above purpose, new definitions of ‘filer’and ‘non-filer’ have been inserted in section 2 ofthe Ordinance. A ‘Filer’ has been defined as ataxpayer whose name appears on the ‘activetaxpayers list’ or is a holder of taxpayer card,whereas all other persons are defined to betreated as ‘non-filers’.

From practical perspective, a mechanism is to beplaced to ascertain the status of a person asbeing a non-filer at the time of withholding.

BONUS SHARES[Sections 2(29), 236M & 236N]

Definition of ‘income’ as per section 2(29) hasbeen amended and the words “but does notinclude, in case of a shareholder of a company,the amount representing the face value of anybonus share or the amount of any bonusdeclared, issued or paid by the company to theshareholders with a view to increase its paid upcapital” have been deleted.

This exclusion from income which wasapparently clarificatory in nature was necessaryto tax bonus shares in the hands of theshareholders. Through the Finance Act, 2014,the issuance of bonus shares has now been madetaxable under Final Tax Regime (FTR) in thehands of shareholders.

Two sections viz. 236M and 236N have beenintroduced which inter alia provide themechanism for collection of tax on bonus sharesissued by listed and unlisted companiesrespectively.

Under these sections, the issue of bonus shareshas been deemed to be income of theshareholders. Further, by an additional clause insection 39 of the Ordinance, income arising to ashareholder from the issue of bonus shares hasbeen made taxable under the head ‘income fromother sources’.

Brief outline of the new mechanism of taxationis as under:

a) Issuance of Bonus shares by acompany quoted on the StockExchange

A company which is quoted on the StockExchange and issues bonus shares to itsshareholders is required not to issue bonusshares equal to 5% of the number of bonusshares to be issued to shareholders.

Bonus shares will be issued by a company toa shareholder only after collecting tax equalto 5% of the value of the bonus shares to beissued to the shareholder (including5% bonus shares withheld as above) within aprescribed time.

For purpose of determining value of bonusshares, the ‘day-end price on the first day ofclosure of books’ is prescribed to be used.

The above referred tax is to be collected bythe company within 15 days from the firstday of closure of books.

INCOME TAX

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In case the shareholder fails to makepayment of 5% tax within 15 days or thecompany fails to collect the tax within15 days, the 5% bonus shares withheld bythe company will be deposited by thecompany with the Central DepositoryCompany of Pakistan Limited or any otherentity prescribed by FBR.

The bonus shares deposited with CDC orother entity, as mentioned above, will bedisposed of in the mode and manner to beprescribed by FBR, and the proceeds shall bepaid on behalf of the shareholder by way ofcredit to the Federal Government.

b) Issuance of Bonus shares by acompany not quoted on the StockExchange

A company which is not quoted on theStock Exchange and issues bonus shares toits shareholders will deposit tax, within15 days of the closure of the books, @ 5%of the value of the bonus shares on the firstday of closure of books, whether or not taxhas been collected from the shareholders bythe Company. Rules are to be issued byFBR for determining the value of bonusshares of unquoted securities.

Before the issuance of bonus shares, thecompany liable to deposit tax shall beentitled to collect and recover the amount oftax deposited from the shareholder onwhose behalf the tax has been deposited.

In case a shareholder neither makespayment of tax to the company nor collectshis bonus shares, within 3 months of thedate of issuance of bonus shares, thecompany may proceed to dispose bonusshares to the extent it has paid tax onshareholder’s behalf.

The validity of taxing bonus shares, value to betaxed and manner of collection are to beexamined. Case laws in the comparativejurisdictions support the view that bonus sharedo not per se represent ‘income’ under theOrdinance.

In addition to the same, the matter that needs tobe resolved especially in the case of listedcompanies is the right of surrender of certainpart of shares to CDC or other entity to beprescribed by FBR and disposal of shares for thepayment of tax for such purposes, and themanner of collection.

In case of unlisted companies, the consequencesunder the corporate law for disposal of shares tocollect tax on bonus shares, if shareholders donot pay tax on bonus shares, need to be thrashedout.

TAX ON DIVIDENDS FROM MUTUALFUNDS[Sections 2(61A) & 5 and Division I of Part IIIof the First Schedule]

Through the Finance Act, 2014, enhanced rate oftax withholding on dividends received fromStock Funds has been prescribed, if dividendreceipts of the Fund are less than capital gains.For that purpose, ‘Stock Fund’ has been definedto mean a collective investment scheme or amutual fund where the investible funds areinvested by way of equity shares in companies,to the extent of more than 70% of theinvestment.

The rate of tax withholding / liability ondividends received by a Company from otherthan ‘Stock Fund’ has also been enhanced from10% to 25%.

The rates of tax withholding on dividendsreceived from various categories of fund havenow been prescribed as under:

Description ofunit holder

StockFund

Money marketFund, IncomeFund or anyother fund

Individual 10% * 10%Company 10% * 25%AOP 10% * 10%

* If dividend receipts are less than capitalgains, the rate of tax for unit holders shall be12.5%.

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INITIAL ALLOWANCE ON BUILDINGS[Section 23 and Part II of the Third Schedule]

The rate of initial allowance on buildings hasbeen reduced from 25% to 15%.

CAPITAL GAINS ON DISPOSAL OFSECURITIES

Extension of holding period for purposeof taxability[Section 37A and Division VII of Part I of theFirst Schedule]

Gain on sale of securities was subjected to tax byFinance Act, 2010 in case such securities wereheld for less than 12 months. Through theFinance Act, 2014, the gain arising on disposal ofsecurities with holding period of 12 to 24 monthshas also been taxed and as such, zero rate of taxis now applicable only where the holding periodof securities exceeds 24 months.

Corresponding amendment is desired in thetime period for which Capital loss on disposal ofsecurities may be carried forward, which atpresent is not allowed to be carried forward tothe subsequent tax year.

A comparison of tax rates on gain on disposal ofsecurities for the Tax Year 2015, prior to andafter Finance Act 2014 is as under:

PRIOR TOFINANCE ACT, 2014

AFTERFINANCE ACT, 2014

Holdingperiod

Taxrate

Holdingperiod

Taxrate

(1) (2) (3) (4)0 - 6 months 17.5% 0 - 12 months 12.5%

6 - 12 months 9.5% 12 - 24 months 10%

Over 12 months 0% Over 24 months 0%

Consequent to this amendment, those investorswho acquired securities before July 1, 2014 withthe objective of deriving exempt capital gainsupon disposal after a holding period of one year,would now suffer tax incidence under theamended regime. However, such taxationmay be examined on the principle of estoppel /

vested right. As new tax rates have beenprescribed on tax year basis, issue would alsoarise for taxpayers following calendar year as taxyear and have derived exempt capital gains(based on one year holding period) in theTax Year 2015 before the enactment of theFinance Act, 2014.

Application of NCCPL’s mechanism forcollection / payment of capital gains taxto Foreign Institutional Investors[Section 100B and Eighth Schedule]

Prior to the Finance Act, 2014, the mechanismfor collection and payment of capital gains taxthrough a third party clearing house NationalClearing Company of Pakistan Limited (NCCPL),as laid down in the Eight Schedule, was notapplicable for taxing gain / losses on disposal ofsecurities by ‘Foreign Institutional Investors’(FII). Now such persons are subject to tax underthe regime unless they opt out with the approvalof the Commissioner Inland Revenue. FII aredefined in respective provisions.

Taxation of Debt Securities[Section 37A]

Prior to the Finance Act, 2014, capital gainson disposal of debt securities were taxableunder section 37 at the normal tax rate (i.e.,corporate tax rate in case of companies andapplicable slab rate in case of taxpayers otherthan companies).

Through the Finance Act, 2014, capital gainson disposal of debt securities listed onstock exchange have been made taxable undersection 37A, in the manner similar to ‘securities’previously included under section 37A ofthe Ordinance. It has however been prescribedthat in case of companies, capital gainson disposal of debt securities will be subject totax at the corporate tax rate (and not at theCGT rates prescribed for ‘securities’).

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The effects of including ‘debt securities’ in thedefinition of ‘securities’ under section 37A andthen prescribing corporate tax rate as theapplicable rate in case of companies (which ratewas already applicable, prior to the Finance Act,2014, on capital gains arising to a company fromdisposal of debt securities) are as under:

(a) There can be view that the benefit of 25%reduction in tax liability, which wasavailable under section 37(3) in case ofdisposal after a holding period of one year,will no longer be available.

(b) Zero rate of tax on capital gains nowavailable to ‘securities’ on disposal after aholding period of 24 months or more willnot be available to capital gains arising to acompany on disposal of debt securities.

The term ‘Debt securities’ is defined to mean:

(i) Corporate Debt Securities such as TermFinance Certificates (TFCs), SukukCertificates (Sharia Compliant Bonds),Registered Bonds, Commercial Papers,Participation Term Certificates (PTCs) andall kinds of debt instruments issued by anyPakistani or foreign company orcorporation registered in Pakistan; and

(ii) Government Debt Securities such asTreasury Bills (T-bills), FederalInvestment Bonds (FIBs), PakistanInvestment Bonds (PIBs), ForeignCurrency Bonds, Government Papers,Municipal Bonds, Infrastructure Bondsand all kinds of debt instruments issued byFederal Government, ProvincialGovernments, Local Authorities and otherstatutory bodies.

SALE OF SPECTRUM LICENSE[Section 49]

By way of a special provision, income fromsale of spectrum license by PakistanTelecommunication Authority (PTA) shall betreated as income of the Federal Governmentand not that of PTA for the purposes of taxationunder the Ordinance.

TAXATION OF INCOME OF A COMPANYBEING A MEMBER OF AN ASSOCIATIONOF PERSONS (AOP)[Section 92]

Under section 92 of the Ordinance, an AOP istaxable and the share of a member of suchAOP is exempt from tax in the hands of themember. Prior to Finance Act, 2014, thisprovision was applicable to all persons, even ifthe member was a company incorporated in oroutside Pakistan.

By way of an amendment in this section, in caseif a company is a member of an AOP, it shall betaxed separately at the rate applicable to thecompany on its respective share.

The procedure now prescribed is reinstatementof the concession provided earlier by way ofCBR’s Circular No. 4 of 1964 dated December 11,1964. The extract of the same is reproduced asunder:

“It has been brought to the notice of the CentralBoard of Revenue that Pakistani Companiesentering into a ‘Joint venture’ arrangementwith foreign companies are not quite clearabout their liability to Pakistan Income-tax.The position is that in the case of a jointventure, each participant in such ventureis liable to tax on its own share of profits andat the rates applicable to its total income.To avoid complications, when a Pakistanicompany desires to enter into a joint venturearrangement with a reputable and reliableforeign company, such arrangement may, ifnecessary, be got cleared before hand from theCentral Board of Revenue.”

As announced by the Finance Minister in theBudget Speech, this amendment has beenmade to provide the right of reduced rate of taxinter alia for local and foreign companies beingthe members of an AOP.

As a consequence of this amendment, thetaxation of non-resident companies is alignedwith the treatment prescribed in the respectiveAgreements for Avoidance of Double Taxation,wherever applicable.

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ZERO RATED TAXATION FOR CERTAINPERSONS[Section 100C]

A concept of zero rating, being tax credit equal to100% of tax payable including minimum tax,has been introduced for certain Non-ProfitOrganisations (NPOs), trusts and welfareinstitutions.

Previously such institutions were exempt fromtax under Clauses (58), (58A), (59) and (60) ofPart I of the Second Schedule to the Ordinance.Under the new scheme, such persons are nowsubject to zero rate of tax if the followingconditions are complied:

(a) return has been filed;

(b) tax required to be deducted or collectedhas been deducted or collected andpaid; and

(c) withholding tax statements for theimmediately preceding tax year have beenfiled.

Through an amendment in section 159,such persons shall be entitled to receive‘Nil’ withholding / collection of tax certificate onamounts subject to withholding tax provisions,which are eligible for tax credit undersection 100C. Through Circular No. 2 of 2014dated July 17, 2014, FBR has clarified that the‘Nil’ withholding / collection of tax certificatewill be issued if return and withholdingstatements for the immediately preceding yearhave been filed and withholding tax has alsobeen paid.

We consider that any default in respect ofwithholding / collection of taxes by these entitieswould not affect the tax credit available to themunder section 100C, and recourse at first stagewould be made under the respective provisionsof law on account of such default. Only in casewhere appropriate recourse cannot be madefor any reason, tax credit available undersection 100C, should be disallowed and that tooon proportionate basis and to the extent ofdefault. We expect FBR to clarify this matter.

MINIMUM TAX REGIME[Section 113 and Division IX of Part I of theFirst Schedule]

Minimum tax is payable under section 113 of theOrdinance. The rates of minimum tax have beenrevamped as under:

S.No. Person(s)

MinimumTax as

percentageof person’s

turnover forthe year

(1) (2) (3)1. (a) Oil marketing

companies, Oilrefineries, Sui SouthernGas Company Limitedand Sui Northern GasPipelines Limited ( forthe cases where annualturnover exceeds rupeesone billion.);

(b) Pakistani Airlines; and(c) Poultry industry

including poultrybreeding, broilerproduction, eggproduction and poultryfeed production.

0.5%

2. (a) Distributors ofpharmaceuticalproducts, consumergoods including fastmoving consumergoods, fertilizers, andcigarettes;

(b) Petroleum agents anddistributors who areregistered under theSales Tax Act, 1990;

(c) Rice mills and dealers;and

(d) Flour mills.

0.2%

3. Motorcycle dealers registeredunder the Sales Tax Act,1990.

0.25%

4. In all other cases. 1%

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ALTERNATIVE CORPORATE TAX (ACT)[Section 113C]

A new concept of ACT has been introduced.ACT is applicable from Tax Year 2014. Under theconcept, the minimum tax liability in case of acompany is higher of tax on accounting incomeor the corporate tax liability determined underthe Ordinance at the rates prescribed in the law.Tax liability under the Ordinance includes‘minimum tax on turnover under section 113 ofthe Ordinance.

ACT, if payable, shall be for the accounting yearended December 31, 2013, June 30, 2014, or anyperiod relevant to tax year 2014.

This concept is applicable for all companiesexcept insurance companies, companies engagedin exploration and production of petroleum,and banking companies, as per Fourth, Fifth andSeventh Schedule to the Ordinance respectively.

Under the newly inserted section 113C, the ACT,being the tax determined on accounting income,has been prescribed at 17% of such income.

The ACT is not applicable to:

exempt income;

income taxable under FTR;

gain on disposal of listed securities subjectto tax under the Eighth Schedule;

income entitled to 100% tax credit onaccount of equity investment;

income of non-profit organizations, trustsor welfare institutions to whom tax creditis available under section 100C of theOrdinance; and

income of a company setting up anindustrial undertaking between July 1,2014 to June 30, 2017, to whom reducedrate of tax is available under clause (18A)of Part II of the Second Schedule.

For the purpose of this section, following termshave been defined as under:

(a) “Accounting Income” means theaccounting profit before tax for the taxyear, as disclosed in the financialstatements or as adjusted under sub-section (7) or sub-section (11) excludingshare from the associate recognizedunder equity method of accounting;

(b) "Alternative Corporate Tax" means thetax at a rate of seventeen per cent of asum equal to accounting income less theamounts, as specified in sub-section (8),and determined in accordance withprovisions of sub-section (7) hereinafter;

(c) “Corporate Tax” means total tax payableby the company, including tax payable onaccount of minimum tax and final taxespayable, under any of the provisions ofthis Ordinance but not including thosementioned in sections 8, 161 and 162 andany amount charged or paid on accountof default surcharge or penalty and thetax payable under this section.

In case if the amount of ACT is higher than thecorporate tax then the excess so determinedshall be adjustable against the normal taxpayable for the following years. However, thesame cannot be carried forward for more than10 years succeeding the tax year in which theexcess was first computed. It has beenspecifically provided that mechanism ofadjustment of ACT shall not prejudice the rightof carry forward of the normal minimum taxunder section 113 of the Ordinance. Tax creditunder section 65B shall be allowed against ACT.

The Commissioner Inland Revenue has beenempowered to make adjustments in thecomputation of the accounting income as per thehistorical accounting pattern, after due notice.This clause requires reconsideration in the lightof prevalent accounting framework underGenerally Accepted Accounting Principlesadopted by the Institute of CharteredAccountants of Pakistan and approved by theSecurities and Exchange Commission ofPakistan.

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FBR is expected to clarify certain practical issuesrelating to ACT, including those relating toadvance tax liability for Tax Year 2014, whichhas already been discharged before theenactment of the Finance Act, 2014.

WEALTH STATEMENT[Section 116]

By way of SRO 978(I)/2013 datedNovember 13, 2013, relaxation from filing ofwealth statement for Tax Year 2013 only wasallowed to an individual or member of AOPwhose last declared or assessed income, ordeclared income for the year, is less thanRs. 1 million. Through the Finance Act, 2014,the same relaxation has been extended for TaxYear 2014.

ADVANCE TAX AT IMPORT STAGE[Section 148 and Part II of the First Schedule]

Prior to the Finance Act, 2014, advance tax atimport stage was collected by the CustomsAuthority at the general rate of 5% unlessreduced by specific notification / provisions.

A new regime has been prescribed for thecollection of advance tax at import stage.Details of the same are given below:

S.No. Persons Rate(1) (2) (3)1. (i) Industrial undertaking

importing remeltable steel(PCT Heading 72.04) anddirectly reduced iron for itsown use;

(ii) Persons importing potassicfertilizers in pursuance ofEconomic CoordinationCommittee of the cabinet’sdecision No. ECC-155/12/2004 dated December 9, 2004;

(iii) Persons importing urea; and(iv) Manufacturers covered

under SRO 1125(I)/2011 datedDecember 31, 2011.

1% of importvalue asincreased bycustomsduty, salestax andfederal exciseduty

2. Persons importing pulses 2% of importvalue asincreased bycustomsduty, salestax andfederal exciseduty

S.No. Persons Rate(1) (2) (3)3. Commercial importers covered

under Notification No. S.R.O.1125(I)/2011 dated December 31,2011.

3% of importvalue asincreased bycustomsduty, salestax andfederal exciseduty

4. Ship breakers on import of ships 4.5%5. Industrial undertakings not

covered under S. Nos. 1 to 45.5%

6. Companies not covered underS. Nos. 1 to 5

5.5%

7. Persons not covered under S. Nos.1 to 6

6%

The general rate has been increased to 5.5% inthe case of an importer being a company and 6%in other cases.

In terms of Clause (72B) of Part IV of theSecond Schedule, the concerned Commissioneris empowered to issue exemption certificate ifthe tax liability for the current tax year, on thebasis of determined tax liability for any of thepreceding two tax years, whichever is the higher,has been paid. Now, a proviso has been insertedunder Clause (72B), whereby it is clarified thatthe aforesaid exemption certificate shall beissued by the Commissioner only if anapplication for the said certificate is filed beforethe Commissioner, in the manner and afterfulfilling the conditions as specified in a circularissued by the Board for the purpose of theclause. For that purpose, FBR has already issuedCircular No. 8 of 2013. Therefore, the apparentpurpose of inserting the proviso is to providelegal cover to that Circular.

WITHHOLDING TAX ON DIRECTORS’FEE[Section 149]

Under section 2(22) of the Ordinance,directorship or any other office involved in themanagement of the company is treated as‘employment’. Accordingly, in all cases,withholding on such payments is to be made atthe rate applicable for the income under thehead ‘Salary’.

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A new provision has been inserted in theOrdinance, being clarificatory in nature,whereby every person responsible for makingpayment for directorship fee or fee for attendingboard meeting or such fee by whatever namecalled shall, at the time of payment, deduct tax@ 20% of the gross amount payable.

This amendment is expected to remove certainother interpretation or manner of application oflaw in respect of directorship fee and other suchpayment.

FINAL TAX LIABILITY IN CASE OFNON-FILERS[Sections 150 & 151, and Divisions I & IA ofPart III of the First Schedule]

Profit on debt

Enhanced rate of withholding tax has beenprescribed in case if a person is a non-fileras defined in the newly inserted section 2(23A)of the Ordinance. For such persons, thewithholding rate is prescribed @ 15% of theamount of profit on debt if such payment ofprofit is more than Rs. 500,000.

The aforesaid threshold of Rs. 500,000 shouldstrictly apply in relation to a transaction forpayment. However, the intent of law appears tobe that aforesaid limit of Rs. 500,000 isapplicable on annual basis for a withholdingagent. We expect FBR to clarify this matter.

Through Circular No. 2 of 2014 dated July 17,2014, FBR has clarified that in case a jointaccount is held in a bank by more than oneperson, joint account holders as an entity shallbe treated as filer if at least one person in thejoint account is a filer. Similarly, in case anaccount is held in a bank in the name of a minor,the minor shall deemed to be filer if the parent,guardian or any person who has made depositsin the minor’s account is filer.

It has been provided that final liability of anon-filer will remain equal to the filer being 10%of the profit on debt and the excess withholdingwill be adjustable against tax liability.

These provisions apparently imply that a personbeing a non-filer at the time of withholding isentitled to adjust the excess withholding by filingthe tax return.

The enhanced withholding rates for non-filersare also applicable to a company, however, theentire withholding in case of a company will beadjustable as profit on debt is taxable atcorporate tax rate, and tax withholding made isadjustable.

Dividend (other than from Mutual Fund)

The rate of withholding tax on dividend fornon-filers has been enhanced from 10% to 15%,except where special rate of tax is prescribed@ 7.5% or where the dividend income is derivedfrom Mutual Fund, for which separate rates areprescribed.

Unlike the adjustment for excess withholding fornon-filers in the case of profit on debt, noparallel provision has been expressly provided inthis case. Through Circular No. 2 of 2014 datedJuly 17, 2014, FBR has clarified that upon filingof return, the recipient of dividend can applythe rate of 10%; resulting that additional5% withholding on account of non-filer would beadjustable / refundable.

ENHANCEMENT IN GENERALWITHHOLDING TAX RATES

[Sections 153,156A & 233; Divisions III, IV &IVA of Part III and Division II of Part IV of theFirst Schedule]

The rates of withholding tax have been enhancedas under:

S.No. Description

Tax withholdingrate

Previous Revised(1) (2) (3) (4)1. Supply of goods by Companies 3.5% 4%2. Supply of goods by other than

companies4% 4.5%

3. Services rendered byCompanies

6% 8%

4. Services rendered by otherthan companies

7% 10%

5. Execution of contract byCompanies

6% 7%

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S.No. Description

Tax withholdingrate

Previous Revised(1) (2) (3) (4)6. Execution of contract by other

than companies6.5% 7.5%

7. Export oriented services 0.5% 1%8. Commission or discount on

Petrol Pump Operators10% 12%

9. Commission or brokerageother than advertising agents

10% 12%

There is no change in the mechanism of taxationin respect of aforesaid withholding taxprovisions.

WITHHOLDING OF TAX FROM SPORTSPERSON[Section 153(1)(c) and Division III of Part IIIof the First Schedule]

A special withholding rate of 10% has beenprescribed in respect of amount payable in thecase of sports persons.

COMPULSORY REGISTRATION SCHEMEFOR COMMERCIAL AND INDUSTRIALCONSUMERS OF ELECTRICITY ANDNATURAL GAS[Section 181AA]

Commercial and industrial connection forelectricity and natural gas shall not be processedunless the person is registered as a taxpayerunder the provisions of the Ordinance.

Taxpayers’ registration scheme has beenprescribed in section 181 of the Ordinance.

COLLECTION OF TAX ON CASHWITHDRAWALS[Section 231A and Division VI of Part IV of theFirst Schedule]

Enhanced advance tax rate of 0.5% of theamount of cash withdrawal has been prescribedfor a non-filer, as against the general rate of0.3% on cash withdrawals.

COLLECTION OF ADVANCE TAX ONMOTOR VEHICLES

First-time registration or transfer ofregistration[Section 231B and Division VII of Part IV ofthe First Schedule]

Prior to the Finance Act, 2014, advance tax wasrequired to be collected under section 231B ofthe Ordinance only at the time of first-timeregistration of new locally manufactured motorvehicles.

Section 231B has been substituted with followingconsequential implications:

(a) The word ‘new locally manufactured’ hasbeen omitted which inter alia means thatadvance tax collection is now also requiredat the time of registration of importedmotor vehicles. However, advance tax shallnot be collected on registration if evidenceis provided that taxes have been collected atthe time of sale by the manufacturer orcollected at import stage in respect of thesame person for the same vehicle.

(b) Advance tax is now also required to becollected at the time of transfer ofregistration or ownership; however, suchtax collection not is required on transferafter 5 years from the date of firstregistration in Pakistan.

(c) Advance tax collection by everymanufacturer is now also required at thetime of sale of motor car or jeep.

(d) The revised rates, including enhanced ratesfor non-filers, are as under:

S.No.

EngineCapacity

Tax forfiler

Tax forNon-filer

(1) (2) (3) (4)----Rupees----

1. Upto 850cc 10,000 10,0002. 851cc to 1000cc 20,000 25,0003. 1001cc to 1300cc 30,000 40,0004. 1301cc to 1600cc 50,000 100,0005. 1601cc to 1800cc 75,000 150,0006. 1801cc to 2000cc 100,000 200,0007. 2001cc to 2500cc 150,000 300,0008. 2501cc to 3000cc 200,000 400,0009. Above 3000cc 250,000 450,000

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(e) The rate of advance tax on transfer ofregistration or ownership of a privatemotor vehicle are to be reduced by 10%each year from the date of first registrationin Pakistan.

Payment of Motor Vehicle Tax oninstallment / lump sum basis[Section 234 and Division III of Part IV of theFirst Schedule]

Section 234 of the Ordinance requires collectionof advance tax along with Motor Vehicle Tax,either on installment basis or in lump sum, atthe discretion of the owner of motor vehicle.

Through the Finance Act, 2014, the rates ofcollection of tax under section 234 have beenrevised, besides prescribing enhanced rates fornon-filers. The revised rates, including enhancedrates for non-filers, are as under:

S.No.

Enginecapacity

Advance tax oninstallment

basis

Advance tax onlump sum

basis

for filerfor

Non-filer

forfiler

forNon-filer

(1) (2) (3) (4) (5) (6)-----------Rupees----------

1. Upto 1000cc 1,000 1,000 10,000 10,0002. 1001cc to 1199cc 1,800 3,600 18,000 36,0003. 1200cc to 1299cc 2,000 4,000 20,000 40,0004. 1300cc to 1499cc 3,000 6000 30,000 60,0005. 1500cc to 1599cc 4,500 9,000 45,000 90,0006. 1600cc to 1999cc 6000 12,000 60,000 120,0007. 2000cc & above 12,000 24,000 120,000 240,000

TAX COLLECTION ON DOMESTICELECTRICITY CONSUMPTION[Section 235A and Division XIX of Part IV ofthe First Schedule]

Every person preparing bill for domesticconsumption of electricity shall collect advancetax in the following manner:

(i) 7.5% if the amount of monthly bill isRs. 100,000 or more.

(ii) 0% if the amount of monthly bill is less thanRs. 100,000.

Previously, such tax was collected only in thecase of industrial and commercial consumers.

TAX ON STEEL MELTERS ANDRE-ROLLERS ETC.[Section 235B and Clause (9A) Part IV ofSecond Schedule]

A new provision has been inserted to introducecollection of tax from steel melters, steelre-rollers, composite steel units registered underthe Sales Tax Act on their electricity bills.

This tax shall be collected by the personpreparing electricity consumption bill.

The rate of collection shall be Re 1 per unit ofelectricity consumed for the production of steelbillets, ingots and mild steel products excludingstainless steel.

The aforesaid collection, which is optional, shallbe treated as tax on the payment of localpurchases of scrap and shall be non-adjustableand credit shall not be allowed to any person. Ifsuch person opts not to pay tax on electricity bill,then withholding on payment of local purchasesof scrap would apply.

TAX COLLECTION ON MOBILE PHONESUBSCRIBERS[Section 236 and Division V of Part IV of theFirst Schedule]

The rate of advance tax collection on mobilephone bills has been reduced from 15% to 14%.

RATE OF ADVANCE TAX ON FUNCTIONSAND GATHERINGS, ETC[Section 236D and Division XI of Part IV ofthe First Schedule]

The rate of adjustable withholding tax onfunctions and gatherings has been reduced from10% to 5%.

13


COLLECTION OF ADVANCE TAX ONSALE TO DEALERS, DISTRIBUTORS &WHOLESALERS[Section 236G and Division XIV of Part IV ofthe First Schedule]

Prior to the Finance Act, 2014, a uniform rate of0.1% for collection of advance tax was applicableon sale to distributors, dealers or wholesalers ofitems specified in Section 236G. Through theFinance Act, the rates of advance tax have beenprescribed as under:

Category of Sale

Rate

Filer Non-Filer

(1) (2) (3)

Fertilizers 0.2% 0.4%

Other than fertilizers 0.1% 0.2%

TAX ON PURCHASE, SALE ORTRANSFER OF IMMOVABLE PROPERTY[Sections 236 C & 236K and Divisions X &XVIII of Part IV of the First Schedule]

In addition to the tax incidence on seller /transferor of immovable property undersection 37A read with section 236C of theOrdinance, a new section 236K has beeninserted for the collection of tax by theRegistering or Attesting authority, as the casemay be, from the purchaser or transferee of theproperty. Furthermore, rate of tax collectionunder section 236C for the non-filer seller /transferor has been prescribed at 1%, as againstthe general rate of 0.5% which is applicable to afiler seller / transferor.

The amount so collected under this provision isadjustable against tax liability of the purchaser /transferee or seller / transferor, as the casemay be. Through Circular No. 2 of 2014 datedJuly 17, 2014, FBR has clarified that in the caseof inheritance, since the property is neitherpurchased nor any consideration is paid,withholding tax under this section shall not beapplicable. However, in case of gifts, as itsgenuineness cannot be determined at that stage,withholding tax shall be paid on the valuenotified by the provincial governments. In caseof genuine gift, the taxpayer may claim refundafter filing the return.

This scheme is not applicable for purchasersbeing expatriate Pakistanis.

The revised rates of tax to be collected onpurchase or transfer of an immovable propertyare as under:

S.No. Period Rate of Tax(1) (2) (3)

1. Where value ofimmovable property isupto Rs. 3 million.

0%

2. Where the value ofimmovable property ismore than Rs. 3 million

Filer 1%

Non-Filer 2%

Provided that the rate of tax for Non-Filer shallbe 1% upto the date appointed by the Boardthrough notification in the official gazette.

The matter of right of taxation on thetransactions involving immovable property bythe Federal Government is to be re-examined inthe light of Constitutional provisions.

COLLECTION OF TAX ON PURCHASE OFINTERNATIONAL AIR TICKET[Section 236L and Division XX of Part IV ofthe First Schedule]

Through the Finance Act, 2014, every airline,operating in Pakistan, has been required tocollect advance tax on the gross amount ofinternational air tickets issued to the passengersbooking one-way or return tickets for Pakistan.

The tax so collected under this section shall beadjustable.

The rate of advance tax shall be as under:

S. No. Type of Ticket Rate

(1) (2) (3)

1. Economy 0%

2. Other than Economy 4%

14


REDUCED TAX RATE FOR DISABLEDPERSONS[Division I of Part I of the First Schedule]

A relief has been provided by way of reducedrate to the extent of 50% for the employmentincome of disabled persons in case their incomeis less than Rs. 1 million.

RATE OF TAX FOR COMPANIES[Division II of Part I of the First Schedule]

The corporate tax rate for Tax Year 2015 hasbeen reduced to 33%. However, this relief in taxrate is not available to banking companies,which will continue to be taxed @ 35%.

EXEMPTION FOR MUTUAL FUNDS[Clause (99) of Part I of the Second Schedule]

Prior to the Finance Act, 2014, income of mutualfunds was exempt from tax provided 90% of theaccounting income as reduced by realized orunrealized capital gains is distributed to unitholders.

A proviso has been inserted in Clause 99 ofPart I of the Second Schedule which states thatfor the purpose of claiming above exemption,bonus shares, units or certificates are not to beconsidered as distribution of 90% of income.It consequently means that only cash dividendshall be taken into consideration forcomputation of 90% limit to claim exemption.

This amendment is similar to the existing clause(100) of Part I of the Second Schedule to theOrdinance in respect of modarabas.

EXEMPTION TO PUBLIC SECTORUNIVERSITIES[Clause (126) of Part I of the Second Schedule]

Through the Finance Act, 2014, exemption fromincome tax has been made available to thosepublic sector universities which are establishedsolely for educational purposes and not for thepurpose of profit. The said exemption is effectivefrom July 1, 2013.

This retrospective amendment has been made toprovide exemption to certain entities whichwere generally exempt from tax under theomitted provisions of Clause (92) of Part I of theSecond Schedule to the Ordinance (deleted bythe Finance Act, 2013) and were not coveredunder Clause (58A) of the said schedule.

EXEMPTION TO CHINA OVERSEASPORTS HOLDING[Clause (126A) of Part I of the SecondSchedule]

Prior to the Finance Act, 2014, exemption wasavailable for a period of 20 years to the incomeof the following:-

(a) Gwadar Free Zone Company Limited(b) PSA Gwadar International Terminal

Limited(c) Gwadar Marine Services Limited(d) PSA Gwadar (Pte) Limited

This exemption is now available for incomederived by China Overseas Ports Holding fromGwadar Port operations for a period of 20 yearswith effect from February 6, 2007.

EXEMPTION FOR FRUIT PROCESSINGOR PRESERVATION UNIT[Clause (126H) of Part I of the SecondSchedule]

Through the Finance Act, 2014, profits and gainsderived by a taxpayer, from a fruit processing orpreservation unit set up in Balochistan province,Malakand Division, Gilgit – Baltistan orFATA between July 1, 2014 to June 30, 2017,provided that the taxpayer is engaged inprocessing of locally grown fruits have beenexempted from tax

This exemption is available for a period of5 years commencing from the month in whichthe industrial undertaking is set up orcommercial production is commenced,whichever is later.

15


COAL MINING PROJECT IN SINDH[Clause (132B) of Part I of the SecondSchedule]

Profits and gains derived by a taxpayer from acoal mining project in Sindh, for supply of coalexclusively to power generation projects, havebeen exempted from tax.

Such entities have also been exempted fromminimum tax under section 113 of theOrdinance.

The words ‘from sale of coal’ are to be insertedafter the word ‘sale of electricity’ in the saidclause to clarify the matter. This appears to bean omission.

Dividends paid by a company supplying coalexclusively to power generation projects havealso been made taxable at a reduced rate of 7.5%.

WITHHOLDING TAX FOR RICEEXPORTERS’ ASSOCIATION[Clause (13HH) of Part II of the SecondSchedule]

Following reduced rates of withholding taxunder section 153 on sale value of rice sold byRice Exporters Association of Pakistan to UtilityStore Corporation have been withdrawn:

(i) 1% on the sale value of rice sold inaccordance with the agreement signed withMinistry of Food, Agriculture and Livestock(MINFAL) on April 30, 2008.

(ii) 0.75% on the sale value sold in accordancewith the agreement signed with MINFALon May 5, 2008.

NEW INDUSTRIAL UNDERTAKINGSET UP WITH FOREIGN DIRECTINVESTMENT (FDI)[Clause (18A) of Part II of the SecondSchedule]

Reduced tax rate of 20% has been prescribed forthe investment in new Industrial Undertakings iffinanced on equity basis by way of FDI.

This concession shall be available provided thecompany sets up an industrial undertakingbetween July 1, 2014 to June 30, 2017 and 50%of the cost of the project including workingcapital is through owner equity FDI.

This reduced rate would be available for a periodof 5 years beginning from the month in whichthe industrial undertaking is set up orcommercial production is commencedwhichever is later.

WITHHOLDING TAX ON ADVERTISINGAGENTS[Clause (26) of Part II of the SecondSchedule]

The reduced rate of 5% withholding tax in thecase of payments of commission to AdvertisingAgents has been increased to 7.5%.

ALLOWANCES OF PILOTS[Clause (1AA) of Part III of the SecondSchedule]

Prior to the Finance Act,2014, flying allowanceof certain pilots to the extent of amount notexceeding Basic Salary were taxed @ 2.5% as aseparate block of income.

Through the Finance Act, 2014, total allowancesreceived by pilots of any Pakistani Airlines havenow been made taxable at the rate of 7.5%provided that such reduction will be available toso much of the allowance as exceeds an amountequal to the basic pay.

The reduction should have been restricted to theallowances not exceeding the amount equal tothe basic pay as was previously available forflying allowance.

16


WITHHOLDING TAX EXEMPTION ONPAYMENT OF GOODS[Clause (9A) of Part IV of the SecondSchedule]

Amendments have been made in provisionsof section 153(1)(a) to the effect that taxwithholding is not required on:

(i) payments for purchase of scrap by steelmelters, steel re-rollers, composite steelunits; and

(ii) payments received by ship breakers forships imported after July 1, 2014.

FOREIGN NEWS AGENCIES[Clause (41B) of Part IV of the SecondSchedule]

The exemption from withholding tax undersection 152(2) has been withdrawn in respect ofpayments to foreign news agencies, syndicateservices, and non-resident contributors havingno Permanent Establishment in Pakistan.

OPTION TO CERTAIN PERSONS FORTAXATION UNDER NORMAL REGIME[Clauses (41A), (41AA) & (41AAA) of PartIV of the Second Schedule]

Through Finance Act, 2012, an option wasintroduced for commercial importers, traders,exporters and indenting commission agents tobe taxed under Normal Tax Regime (NTR),subject to a condition that minimum tax liabilityin respect of such income is not less than:

60% of tax collected at import stage

70% of tax deducted at source on such sales

50% of the tax collected at the time ofrealization of export proceeds andindenting commission

Provisions relating to this option have beenrevamped. Further, the scope of the regime hasbeen extended to certain other persons wherebythe provisions relating to FTR would not apply ifthe person opts to file return of total income

along with accounts and documents as may beprescribed. Minimum tax payable to be eligiblefor the regime is as follows:

(a) Commercial importer: 5.5% of the importsif the person is a company and 6% in othercases.

(b) Sale of goods: 3.5% of the gross amount ofsales if the person is a company and 4% inother cases.

(c) Contracts: 6% of contract receipts if theperson is a company and 6.5% in othercases.

(d) Services provided to Exporter & ExportHouse, Services of stitching, dying,printing, embroidery, washing, sizing, andweaving to an Exporter or Export House:0.5% of the gross amount of servicesreceived.

(e) Petrol Pump Operators: 10% of thecommission or discount received on sale ofpetroleum products by Petrol PumpOperators.

(f) Commission agents: 10% of the amount ofbrokerage or commission.

The option available to exporters of goods fortaxation under NTR has been withdrawn byFinance Act, 2014.

COMPANIES OPERATING TRADINGHOUSES[Clause (57) of Part IV of the SecondSchedule]

An explanation has been inserted to the effectthat exemption from applicability of section 153on companies operating certain trading housesis restricted to their capacity as ‘recipient’, andnot as ‘payer’.

It has been further clarified that exemptionunder section 113 and 153 for such companies issubject to the condition that such companiesshould be registered with Sales Tax departmentunder the Sales Tax Act, 1990.

17


DIVIDEND AND CAPITAL GAINS OFBANKING COMPANIES[Seventh Schedule]

Prior to the Finance Act 2014, income of bankingcompanies by way of dividend and capital gainsfrom sale of listed shares held for more than oneyear were chargeable to tax @ 10% under theSeventh Schedule, except for the dividendsreceived from its Asset Management Companyand money market and income funds whichwere taxed @ 20% and 25% respectively.

Through the Finance Act, 2014 the net incomeof a banking company from dividend and netincome from capital gains on disposal of sharesheld for more than one year are to be taxed @10% and 12.5% respectively.

There is no change in the taxation of dividendreceived from Asset Management Company andmoney market and income funds.

The concept of attribution of expenses has beenintroduced for entities subject to tax under theSeventh Schedule also.

Net income from dividend is to be computedaccording to the following formula:-

Total amount ofexpenditure as perSeventh Schedule X Gross amount of

dividend receivedGross amount of receiptincluding dividend

Net income from capital gains is to be computedaccording to the following formula:-

Total amount ofexpenditure as perSeventh Schedule X Gross amount of

Capital GainsGross amount of receiptsincluding capital gains

Attribution of expenses in relation to the amountof capital gains instead of ‘cost of shares’requires re-examination.

10

18


DETERMINATION OF RETAIL PRICE[Section 2]

Presently, manufacturers of goods subject tosales tax on retail price basis are required to paysales tax at the highest retail price where morethan one retail price is fixed by themanufacturers for any particular brand orvariety of such goods.

Through the Finance Act, 2014, FBR has beenauthorised to specify ‘zones’ or ‘areas’ only forthe purposes of determining highest retail pricefor any brand or variety of goods. This effectivelyseems to be a positive amendment aimed atresolving the long outstanding grievance of suchmanufacturers with regard to payment of salestax on highest retail price without taking intoaccount geo-economics of various zones andareas.

RETAILERS[Section 3 and SRO 608(I)/2014 dated July 2,2014]

Through SRO 608(I)/2014 dated July 2, 2014whole system of sales tax for ‘retailers’ has beenrevamped. Special Procedures for the retailers asearlier prescribed have been repealed.

Under the new procedures retailers have beensegregated into two categories, viz.:

Retailers subject to tax under thenormal regime [Category 1]

(a) National or international chain of stores(b) Retailers operating in an air-conditioned

shopping mall etc(c) Retailer who has a credit or debit card

machine

(d) Retailers whose cumulative electricity billduring the previous twelve months exceedsix hundred thousand rupees

(e) Wholesaler-cum-retailer, engaged in bulkimport and supply of consumer goods onwholesale basis to retailers as well as onretail basis to the general body of theconsumers.

The term ‘national and international chain ofstores’ has been defined in the rules.

Other retailers [Category 2]

All other persons engaged in the business ofretail sale of goods.

Retailers classified under category 1 above shallbe subject to tax under regular procedures oflaw. This inter alia means charge of sales tax atthe rate of 17% with relevant input adjustment,however, retailers making supplies of finishedgoods of 5 export-oriented sectors, shallcontinue to pay sales tax at reduced rate asspecified in SRO 1125(I)/2011 dated December31, 2011. Other salient features specified forretailers falling in category 1 are:

(a) these retailers shall install and operateFiscal Electronic Cash Registers (FECR), forwhich seamless and real time access shall beprovided to FBR. CIR having jurisdictioncan also made on-site physical inspection ofFECR;

(b) these retailers shall issue invoices fromFECR from the date to be specified by FBR,and until such time, shall issue seriallynumbered invoices or cash memos forsupplies made; and

(c) the retailers shall be subject to audit undernormal procedure.

SALES TAX

19


Retailers classified under category 2 above haveeffectively been exempted from sales tax onad-valorem basis. Their sales tax liability shall beequal to the amount charged to such personthrough electricity bill at following rates forwhich purpose sub-section (9) has been insertedin section 3 of the Act:

S.No.

Description Rate

(1) (2) (3)

1. In case of monthly electricity bill uptoRs. 20,000

5%

2. If monthly electricity bill exceedsRs. 20,000

7.5%

This effectively means that now there is nospecial rate of sales tax on retailers. Retailershave been excluded from the ambit of sales taxregime if such persons do not fall within theclassification referred to in (1) above.

Retailers of category (2) shall not be required tofile monthly returns, and will be exempt fromaudit

A close analysis of these procedures reveals thatit would be extremely difficult to implement thesystem as in practical sense it is very difficult toregister retailers which have been so classifiedsuch as persons having credit or debit cardmachine etc.

Exclusions

Vehicle dealers paying sales tax in the mannerprescribed in Chapter VIII and registeredretailers exclusively making supplies of goodsspecified in Chapter XIV on which extra tax wasalready been paid have been excluded from theapplicability of above new Scheme for retailers.

NO ADJUSTMENT ON INPUT FORFURTHER TAX[Section 7]

On account of specific provisions introduced inthe Act, the amount collected by a seller of goodsas further tax shall be deposited separatelywithout adjustment of any input tax.

This effectively means that if the input tax is inexcess of the aggregate of output tax and furthertax, then the amount of further tax shall be paidseparately and such excess shall be carriedforward for adjustment against the output taxfor subsequent tax periods.

INPUT TAX ADJUSTMENT – VATREGIME[Section 8]

Specific provisions have been introduced insection 8 to restrict admissibility of input taxwith respect to:

(i) Goods and services not related to thetaxable supplies;

(ii) Goods and services acquired for personal ornon-business consumption;

(iii) Goods used in immovable property; and

(iv) Vehicles, their parts, electrical appliances,furniture, furnishings, office equipmentother than goods acquired for sale orre-sale.

Through SRO 490(I)/2004 dated June 12, 2004issued under section 8(1)(b) of the Act, inputadjustment on following items were alreadynotified to be inadmissible, unless the same wereacquired as stock-in-trade:

(a) vehicles falling in Chapter 87 of the FirstSchedule to the Customs Act, 1969 (IV of1969);

(b) food, beverages, garments, fabrics, etceteraand consumption on entertainment;

(c) gifts and give-aways;

(d) supply of electricity and gas to residentialcolonies of registered persons;

(e) building materials including cement,bricks, paints, varnishes, distempers etc.;

(f) office equipment and machines (excludingelectronic fiscal cash registers), furniture,structure, fixture and furnishings excludingthose directly used in taxable activity;

20


(g) electrical and gas appliances, pipes, fittingsexcluding those directly used in taxableactivity;

(h) wires, cables, ordinary electrical fittingsand sanitary fittings, excluding thosedirectly used in taxable activity;

(i) crockery, cutlery, utensils etc., excludingthose directly used in taxable activity; and

(j) goods on which adjustment or deduction ofduty and sales tax is claimed under sub-rule (1) of rule 6 of the Federal Excise Dutyand Sales Tax on Production Capacity(Aerated Water) Rules, 2013 in excess ofseventy two percent of the gross amountpayable in the month as determined underrule 4 read with rule 5 of the said Rules.The excess unadjusted amount may becarried forward to the subsequent month,subject to the condition that no refund onaccount of unadjusted duty and taxes shallbe admissible.

After the incorporation of the new clauses insection 8(1) of the Act, the entries underlinedabove should have been deleted fromSRO 490(I)/2004 dated June 12, 2004.Subsequent to the Finance Act, 2014, FBR hasissued SRO 570(I)/2014 dated June 26, 2014through which only entry No. (j) appearingabove has been deleted consequent to repeal ofProduction Capacity (Aerated Waters) Rules,2013. This means that entries underlined aboveappear in section 8(1) of the Act as well as inSRO 490(I)/2004 as it stands today. FBR isexpected to further amend SRO 490(I)/2004 tothe extent of duplicate entries referred above.

EXTENSION OF POWERS OF THE TAXOFFICER / FBR[Section 50B]

Board and its officers have been proposed tobe empowered to monitor production, saleof taxable goods and stock position withoutobtaining warrants from Magistrate. Theamendment seeks to undo the decisions ofthe Appellate Tribunal on this matter.

Electronic scrutiny of data filed throughreturns or otherwise available with theBoard has been introduced. It has beenproposed that an advance notice ofdeficiencies would be provided to registeredpersons before any legal or penal actions.

FIFTH SCHEDULE

Under SRO 549(I)/ 2008 and SRO 670(I)/2013,certain goods were subject to tax at zero rate.Same concessions have been allowed to continueunder the Fifth Schedule. Both these SROs havebeen withdrawn through SRO 573(I)/2014 datedJune 26, 2014 with effect from June 26, 2014.

Zero rating for Stationery, Dairy andBicycle Industries

Stationery, Dairy and Bicycle industries areeligible for zero-rating. Previously, such zero-rating was prescribed under SRO 670(I)/2013dated July 18, 2013. This SRO has now beenincorporated as part of statute by an entry in theFifth Schedule to the Act. Such items have alsobeen included in the Sixth Schedule representinggoods exempt from tax.

Zero rating facility shall be available subject tocompliance with the conditions, limitations andrestrictions as specified in the Sales Tax SpecialProcedure Rules, 2007 amended throughSRO 608(I)/2014 dated July 2, 2014. In casesuch conditions, limitations and restrictions arenot complied with, the exemption regime shallbecome applicable which would disentitle theclaim for tax refund on input tax borne by suchpersons.

Salient features of amendments made in theSales Tax Special Procedure Rules, 2007through SRO 608(I)/2014 dated July 2, 2014 areas under:

(i) These are applicable to manufacturers ofDairy products, Stationery and Bicycles.

(ii) Zero rating of goods shall be subject toinput-output ratios, to be determined in aprescribed manner, and approved by theCommissioner.

21


(iii) Input goods approved by the Commissionerwill be supplied to registered persons atzero rate. Input tax paid, if any, will berefundable as per provisions of the Act.

(iv) Provision of information to Commissionerand maintenance of records is alsoprescribed.

SIXTH SCHEDULE AND EIGHTHSCHEDULE

New Exemptions

Sixth Schedule provides exemption from salestax. Following new entries have been inserted inthe said Schedule.

S.No.

Description HS Code

IMPORTS ORSUPPLIES

1. In serial No 24 ofthe Schedule

Crude palm oil 1511.1000

2. In serial No 59 ofthe Schedule

Cochlear implantssystems – hearingaids

99.37

3. Serial No 109 ofthe Schedule

Goods importedtemporarily subjectto certainconditions

Respectiveheadings


High efficiencyirrigationequipment

8413.7010,8424.8100,8424.2010,8481.1000,8481.3000,9026.2000,9032.8990


Green HouseFarming and otherrelated equipment

8430.3100,8430.3900,9406.0010


Plant, machineryand equipment forfruit processingand preservationunits in Gilgit-Baltistan, Makranand MalakandDivisions uptoJune 30, 2019subject toconditionsapplicable underCustoms Act, 1969.

Respectiveheadings


Plant, machineryand equipmentimported forsetting upindustries in FATAupto June 30, 2019subject toconditionsapplicable underCustoms Act, 1969.

Respectiveheadings

Abolition of notifications for exemptionsand reduced rates and insertion of therespective provisions in the Act

Exemptions/reduced rates previously allowedunder Sixth Schedule, SRO 551(I)/2008, SRO575(I)/2006, SRO 501(I)/2013, SRO 727(I)/2011and 69(I)/2006, other than the following, areproposed to be continued under Sixth Schedule:

S.No

Description HS Code Applicablesales tax

rate

Comments

1. Retailers whoseannual turnoverfrom supplies inany tax periodduring the last12 monthsending any taxperiod does notexceedRs 5 million

Respectiveheadings

Seesection 3(9) ofthe ST Act

Previouslyexemptedunderitem 3 ofSixthSchedule.

2. Oilseeds meantfor sowing,subject tocertainconditions

Respectiveheadings

5% reducedrate underEight Schedule

Previouslyitem 10 ofSRO 551(I)/2008

3. Cinematographicfilm exposed anddeveloped

3706.1000,3706.9000

17% standardrate


4. Platinum 7110.1100,7110.1900

17% standardrate

Previouslyitem 20 ofSRO 551(I) /2008

5 Palladium 7110.21007110.2900

17% standardrate

Previouslyitem 21 ofSRO 551(I) /2008

6. Diamonds 7102.2100,7102.2900,7102.3900

17% standardrate


7. Precious stones 7103.1000,7103.9100,7103.9900

17% standardrate


8. Synthetic orreconstructedstones, preciousor semi-precious

7104.1000,7104.2000,7104.9000

17% standardrate


9. Re-meltablescrap

72.04 17% standardrate


10. Raw cotton andginned cotton

Respectiveheadings

5% reducedrate only atimport stageunder EighthSchedule.

Previouslybothimport andsupplywereexemptvide item33 of SRO551(I)/2008

22


S.No


rate

Comments

11. Soya bean meal 2304.0000 5% reducedrate underEighthSchedule.

Previouslyexemptvide item15 of SRO501(I)/2013

12. Oil cake andother solidresidues,whether or notground or in theform of pellets

2306.1000 5% reducedrate underEighthSchedule.


13. Directly reducediron

72.03 5% reducedrate underEighthSchedule.


14. Purpose buildtaxis, subject tocertainconditions

8703.3226,8703.3227

17% standardrate


15. Machinery andequipment fordevelopment ofgrain handlingand storagefacilities

Respectiveheadings

5% reducedrate underEighthSchedulesubject toconditions.

Previouslyexemptvide item 2of SRO575(I)/2006

16. Cool chainmachinery andequipment

Respectiveheadings


Previouslyexemptvide item 3of SRO575(I)/2006.

17. Certain itemsimported by callcentre, businessprocessingoutsourcingfacilitiesapproved bytelecommunication authority

Various 5% reducedrate underEighthSchedulesubject toconditions.


18. Machinery,equipment andother itemsrequired byhotels,recreationalservices relatedprojects etcapproved byTourismMinistry

Respectiveheadings

17% standardrate

Previouslyexemptvide items8 of SRO575(I)/2006.

19. Machinery,equipment andcapital goods,specializedvehicles, spares,chemicals andconsumables etcmeant formineralexplorationphase

Respectiveheadings



S.No


rate

Comments

20. Complete plantsfor relocatedindustries

Respectiveheadings


Previouslyexemptvide item15 of SRO575(I)/2006.

21. Machinery,equipment andother capitalgoods etc forcertain servicesectors

Respectiveheadings

17% standardrate


22. Machinery,equipment andcapital goodsimported forestablishingwholesale /retail chainstores

Respectiveheadings

17% standardrate


23. Machinery,equipment andcapital goods foroil refining,petrochemical,etc.

Respectiveheadings



24. Air handlingunits

Respectiveheadings

17% standardrate


25. Certain Valves,tubes, fans etcitems importedbymanufacturingsectors

Respectiveheadings

17% standardrate


26. Proprietaryformworksystems forbuildingstructuressubject tocertainconditions

7308.4000,3917.2390,3926.9099,7308.4000,7308.9090,7318.1590,7318.1690,7318.1900,7318.2290,8205.2000,8205.5900,8425.4900



27. Heat ventilationair conditioner


Previouslyexempt videitem 32 ofSRO 575(I)/2006.

28. Certainmachinery andequipmentrelated tobroadcasting

Various 17% standardrate


29. Machinery andequipmentimported bysurgical industry



30. Machinery andequipmentimported bycutlery industry

Various 17% standardrate


23


S.No


rate

Comments

31. Import of plantand machinerynotmanufacturedlocally andhaving nocompatible localsubstitutesubject tocertainconditions

Respectiveheadings


Previouslyexemptvide SRO727(I)/2011.

32. Import ofrapeseed,sunflower seedand canola seedby solventextractionindustries.

Respectiveheadings

16% reducedrate underSRO 571(I)/2014 datedJune 26,2014.

Previouslysubject toreducedrate of 14%coveredunder SRO69(I)/2006.

SRO 551 (I)/ 2008 dated June 11, 2008,SRO 727 (I)/ 2011 dated August 1, 2011 andSRO 501 (I)/ 2013 dated June 12, 2013 haveconsequently been withdrawn throughSRO 573(I)/2014 dated June 26, 2014 witheffect from June 26, 2014. Also,SRO 575(I)/2006 dated June 5, 2006 has beenwithdrawn through SRO 564 (I)/2014 datedJune 26, 2014 whereas amendment inSRO 69(I)/2006 dated January 28, 2006 hasbeen made through SRO 571(I)/2014 datedJune 26, 2014, both having effect from June 26,2014.

SALES TAX ON CELLULAR MOBILEPHONES & SIM CARDS[Ninth Schedule]

Specific provisions for levy of sales tax oncellular mobiles were laid down inSRO 460(I)/2013 dated May 30, 2013. Suchprovisions have now been made part of the lawby way of Ninth Schedule to the Act.

In addition to the same, the concept of paymentof sales tax at fixed amount on registration ofIMEI number by the CMO has been newlyintroduced in the amended provisions of theNinth Schedule to the Act.

The amended position now appears to be a fixedsales tax of Rs. 150, Rs. 250 and Rs. 500 by theimporter for the different categories of mobilephones, a fixed tax of Rs. 250 on registration ofIMEI number by the CMO and Rs. 250 on sale ofSIM card by the CMO. There is a view that saleof SIM card does not represent ‘supply of goods’covered under the Sales Tax Act, 1990.

SPECIAL SALES TAX REGIME FOREXPORT ORIENTED SECTORS

SRO 1125(I)/2011 dated December 31, 2011provides special sales tax regime for exportoriented sectors. As a result of amendmentmade in the above referred SRO throughSRO 420(I)/2014 dated June 4, 2014 followedby an amendment through SRO 575(I)/2014dated June 26, 2014, sales tax at the standardrate of 17% (previously 5%) shall be payable onthe import and supply of articles of leatherand textile etc., ready for use by the generalpublic.

REDUCTION IN TAX RATES ON IMPORT& LOCAL SUPPLY OF TRACTORS

Through SRO 572(I)/2014 dated June 26, 2014,the rate of sales tax on import and local supplyof agricultural tractors has been reduced from16% to 10%.

24


HIGHEST RETAIL PRICE[Section 12]

Presently, manufacturers of goods subject toduty on retail price basis are required to payduty at the highest retail price where more thanone retail price is fixed by the manufacturers forany particular brand or variety of such goods.

Through the Finance Act, 2014, FBR has beenauthorised to specify zones or areas only for thepurposes of determining highest retail price forany brand or variety of goods. This seems to be apositive amendment aimed at resolving the longoutstanding grievance of such manufacturerswith regard to payment of duty on highest retailprice without taking into account geo-economicfactors.

REVISION IN SCOPE AND RATE OFDUTY

Locally Produced Cigarettes[S. Nos. 9 & 10 in Table I of the First Schedule]

The rates of FED on cigarettes were enhancedw.e.f. June 4, 2014 through SRO 422(I)/2014dated June 4, 2014:

Description of goods Revisedrate

Locally produced cigarettes if theiron-pack printed retail price exceedsRs. 2,706 per 1,000 cigarettes.

Rs. 2,632per 1,000cigarettes.

Locally produced cigarettes if theiron-pack printed retail price doesnot exceed Rs. 2,706 per 1,000cigarettes.

Rs. 1,085per 1,000cigarettes.

SRO 422(I)/2014 dated June 4, 2014 has nowbeen rescinded vide SRO 574(I)/2014 datedJuly 1, 2014 as the same rates have now beenincorporated in First Schedule to the Act.

For the purpose of levy, collection and paymentof above duty, cigarette manufacturers are notallowed to reduce price from the level adoptedon the day of announcement of the latestBudget. Further, manufacturers and importersare restricted from fixing the price of a newcigarette brand variant, of the same existingbrand family, at a price below the lowest actualprice of existing variant in the same brandfamily on the day of announcement of theBudget for the current financial year, which forthe purposes of the forthcoming financial yearwould be June 3, 2014.

Further, price of any new brand introduced inthe market shall not be less than 95% of theprice at which the highest number of excise dutypaid on cigarettes were sold in the previousfiscal year.

Cement[S. Nos. 13 in Table I of the First Schedule]

The duty on Portland cement, aluminouscement, super sulphate cement, whether ornot coloured or in the form of clinkers(PCT heading 25.23) has been levied at 5% of theretail price, as defined under the Act. Prior tothe Finance Act, 2014, the rate of duty wasRs. 400 per metric ton.

Motor Vehicles[S. Nos. 55 in Table I of the First Schedule]

In order to promote the local industry, it appearsthat the government intends to withdraw dutyon the locally manufactured motor vehicleshaving cylinder capacity of 1800cc or above.

However, the amendment does not seem to be inline with the above intention as the current draftleaves the phrase ‘other motor vehicles’ intact.

FEDERAL EXCISE DUTY

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Domestic Travel by Air[S. Nos. 3(a) in Table II of the First Schedule]

Prior to the Finance Act, 2014, duty on travel byair, embarking on journey within the territorialjurisdiction of Pakistan, was levied @ 16% of thecharges plus Rs. 60 per ticket.

Through the Finance Act, 2014, the rate of dutyhas been enhanced as under:

Description of routeRevisedrate inRupees

Long routes(journeys exceeding 500 kilometers) 2,500Short routes(remaining journeys other than socio-economic routes) 1,250Socio-economic routes(journeys along the Balochistancoastal belt) 500

International Travel by Air[S. Nos. 3(b) in Table II of the First Schedule]

Duty on travel by air, embarking oninternational journey from Pakistan, has beenenhanced as under, with effect from July 1,2014:

For economy and economy plus – Rs. 5,000(previously Rs. 3,840)

For club, business and first class –Rs. 10,000 (previously Rs. 6,840)

Such duty is payable at the time of issue oftickets under the rules.

Telecommunication Services[S. Nos. 6 in Table II of the First Schedule]

The rate of duty on telecommunication serviceshas been reduced from 19.5 % to 18.5% of thecharges.

Further, telecommunication services which aresubject to provincial sales tax and where suchtax is being collected by the respective provincethrough its own board or authority are excludedfrom the purview of duty.

CHARTERED FLIGHTS[S. Nos. 15 in Table II of the First Schedule]

Duty at the rate of 16% has been levied onchartered flights (PCT heading 98.03). Earlier,no duty was payable on such flights.

This amendment appears to have been made toclarify the status of charge of duty on charteredflights which were earlier laid down only in theRules, and not in the First Schedule to the Act.

SALES TAX AND DUTY ON AERATEDBEVERAGES

Through SRO 569(I)/2014 dated June 26,2014, Production Capacity (Aerated Waters)Rules, 2013 have been repealed with effect fromJuly 1, 2014. As a result, aerated watersmanufacturers are now subject to FED onbeverages concentrate @ 50% of its valuewhereas FED @ 9% and sales tax @ 17% will bechargeable on aerated waters.

This would end the ongoing litigation oncapacity tax, the imposition of which wasconstitutionally challenged by some beveragecompanies.

Transitional issues such as the treatment ofduties / sales tax paid on input goods notallowed earlier as a result of ceiling prescribedunder the capacity regime and existing stocks onwhich capacity tax was paid and which is to besold after June 30, 2014, are to be settled.

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ABOLITION OF SROs AND INSERTIONIN THE RESPECTIVE PROVISIONS OFTHE CUSTOMS ACT, 1969

Fifth Schedule has been enacted to CustomsAct, 1969. This schedule prescribesconcessionary duty rates on various goods whichwere earlier applicable under variousnotifications.

POWER OF CUSTOMS AUTHORITES TOCOLLECT TAXES[Sections 32, 80 & 81]

Customs authorities have now been empoweredto collect taxes, in addition to duty, which wereshort collected or erroneously refunded. Theamendment has been made in view of certainjudgments of the courts where the recovery oftaxes was held to be beyond jurisdiction ofcustoms authorities.

NARCOTICS AND NARCOTICSUBSTANCES[Section 185B]

Cases involving narcotics and narcoticsubstances are now to be tried in Special Courtscreated under the Control of NarcoticsSubstances Act, 1997 (Act).

VALUE OF IMPORTED AND EXPORTEDGOODS[Section 18(1A)]

Certain amendments have been introduced inthe provisions relating to valuation of importedgoods in respect of transaction value of identicalgoods.

IMPOSITION OF REGULATORY DUTY

Through SRO 568(I)/2014 dated June 26, 2014,the Federal Government has imposed regulatoryduty @ 5% on import of certain specified goods.

CUSTOMS DUTY

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INCOME SUPPORT LEVY

Income Support Levy was introduced by way ofIncome Support Levy Act, 2013 in the FinanceAct, 2013 on ownership of certain movableassets.

The matter was challenged at various judicialforums. Through the Finance Act, 2014, IncomeSupport Levy Act, 2013 has been repealed.

GAS INFRASTRUCTUREDEVELOPMENT CESS (GIDC)

Through the Finance Act, 2014, the GIDC rateshave been increased for Industrial sectorincluding Fertilizer – Fuel Stock, CNG sectorand Captive Power Producers.

A comparative analysis of the GIDC rates is asunder:

S.

No.Sector

Maximum rate

of cess

(Rs. / MMBTU)

Previous Revised

(1) (2) (3) (4)

1. Fertilizer – Feed Stock 300 300

2.Industrial includingFertilizer – Fuel Stock

100 150

3. Compressed Natural Gas (CNG)- Region-I:

KPK, Balochistan& Potohar region (Rawalpindi,Islamabad & Gujarkhan)

263.56 300

- Region-II:Sindh & Punjab (excludingPotohar region)

200 300

4. Captive Power 100 2005. WAPDA / KESC / GENCOs 100 1006. Independent Power Plants (IPPs) 100 100

OTHER LAWS

2014 act, finance - pwc pakistan · finance act, 2014 should be acted upon only after obtaining...

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