Deloitte. M. Yousuf Adil Saleem & CoChartered Accountants

Budget 2008-09

Budget 2006-07

1

C O N T E N T S

Preamble Budget at a Glance ………………………………………….2 An Overview of the Economy and Budget 08-09 ………3 Highlights of Important Fiscal Proposals ……………..11 Significant Proposed Amendments In: Income Tax Ordinance, 2001 ……………………………..16 Sales Tax Act, 1990 ………………………………………...35 Federal Excise Act, 2005 …………………………………..42 Customs Act, 1969 ………………………………………….48 Capital Value Tax (CVT) ……………………………………50 Federal Board of Revenue Act, 2007 ……………………..51 Economic Reforms Act, 1992 ……………………………...51 Labour Laws …………………………………………………52 Minimum Wages for Unskilled Workers Ordinance, 1969 …..52 Provincial Employees' Social Security Ordinance, 1965 ………..52 Industrial and Commercial Employment (Standing Orders) Ordinance, 1968 ……………………………………………………..52 Workers Welfare Fund Ordinance, 1971 ……………………….…52 The Employees’ Old-Age Benefits Act, 1976 …………………...53

Corporate Laws

Companies Ordinance, 1984 ……………………………………....55 Insurance Ordinance, 2000 ………………………………………...56 Securities and Exchange Commission of Pakistan Act, 1997 ….56 Securities and Exchange Ordinance, 1969 ……………………….57 Khushhali Bank Ordinance, 2000 ………………………………….58 Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 ……………………..58 Foreign Exchange Regulations Act, 1947 ………………………...59 Listed Companies (Substantial Acquisition of Voting Shares and Take-Overs) Ordinance, 2002 ……………….59 Significant Circulars / Notifications issued by The Securities and Exchange Commission of Pakistan (SECP) during 2007-2008 ………………….61 Overview of newly adapted IFRSs IFRS 7 Financial Instruments: Disclosures ……………….68 IFRS 8 Operating Segments ……………………………….69

Significant amendments made by IASB in IFRSs ..…..….70

P R E A M B L E

As a part of our ongoing efforts to meet the needs of our clients and staff, we prepare this memorandum each year which contains highlights and our comments on Finance Bill. This commentary is for general guidance as such before considering the precise effect of a particular change reference should be made to the provisions of the relevant statute. This memorandum contains an economic review, highlights of fiscal measures and explanatory description of the significant changes in the Income Tax, Sales Tax, Federal Excise, Custom, Corporate, Labour and other related laws proposed through Finance Bill, 2008. Certain other relevant information on corporate laws and IFRS are also included in this memorandum.

Amendments proposed in the Finance Bill 2008 will take effect from July 01, 2008, unless otherwise provided, once it is approved by the parliament.

The memorandum is prepared with a view to keep the clients and staff abreast of the changes in fiscal and other laws. The users are therefore advised to seek professional advice before exercising and applying any legal provision and acting thereupon. The firm accepts no responsibility for any action taken (or not taken) as a result of the information contained in this document.

The memorandum can also be accessed on our web side www.deloitte.com/pk

Karachi June 12, 2008

Budget 2008-09

Budget 2006-07

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11.01%

55.27%

7.41%3.93%

14.94%

1.25%

6.19%

*Net Revenue Receipts

Net Capital Receipts

External Receipts

Self Financing of PSDP byProvinces

Change in Provincial CashBalance

Privatization Proceeds

Bank Borrowing

46.24%

14.73%1.33%

25.70%

1.99%

10.01%

General Public Services(including Debt Servicing)

Defence Affairs andServices

Public Order & Safety Affairs

Economic Affairs

Others

Development Expenditure

Budget at a Glance Sources of Funds - 2008-09 (Estimated)

Rupees

in billion %

*Net Revenue Receipts 1,111 55.3

Net Capital Receipts 221 11.0

External Receipts 300 14.9

Self Financing of PSDP by Provinces

124 6.2

Change in Provincial Cash Balance

79 3.9

Privatization Proceeds 25 1.3

Bank Borrowing 149 7.4

Total Sources of Funds 2,010 100

Application of Funds - 2008-09 (Estimated)

Rupees

in billion %

General Public Services (including Debt Servicing)

930 46.3

Development Expenditure 516 25.7

Defence Affairs and Services 296 14.7

Public Order & Safety Affairs 27 1.3

Economic Affairs 201 10.0

Others 40 2.0

Total Application of Funds 2,010 100

*Net Revenue Receipts

Rupees in billion

%

a) Direct and Indirect Taxes 1,251.5 112.7

b) Non-Tax Revenue 427.8 38.5

Gross Revenue Receipts (a+b) 1,679.3 151.2

Less: Provincial Share in Taxes 568.3 51.2

1,111.0 100

Budget 2008-09

Budget 2006-07

3

An Overview of the Economy and Budget 08-09

Faced with multiple crises of Fuel, Food and Energy shortages and price spiral coupled with acute resource crunch, the Finance Minister and his team must be congratulated for presenting a record budget of over Rs. 2 trillion for 2008-09. The budget also includes an enhanced Public Sector Development Program, notwithstanding questions as how this program will be funded. The most distinguishing feature of this budget is the proposal for direct intervention through cash subsidies to the poorest segment of the country through budgetary allocation of Rs. 34 billion. This, together with subsidy on fertilizer, larger allocations for agriculture sector that has been badly neglected in the past, increase in salary & pension of government employees and increase in minimum wages to Rs. 6000 per month, clearly reflects on the government’s commitment to provide support to the weakest and the poorest segments of the populace. While these may be steps in the right direction, considering the unprecedented food inflation that may have pushed a very large section of the population to below poverty line, souring fuel prices that has forced the government to borrow nearly half a trillion rupees, they do raise some fundamental questions. The biggest question is how will this budget be financed in the back drop of slowing economic growth, stagnant tax collections during current year, dwindling proceeds from privatization, and continuing rise in oil prices that inherently erodes whatever fiscal space is available to the government? The other big question is whether and to what extent the government will be able to address the unprecedented food inflation that has climbed to over 15% as per the government’s own estimates? Before discussing the budget proposals and the fundamental questions on resource availability, it would be pertinent to analyze the current state of the economy, which has been depicted in the Economic Survey 2007-08 published a day before the budget. The most apparent message that has emerged from the analysis presented in the Economic Survey for the current year is that virtually all the targets for the current year have been missed. Salient features of economic performance during the year are summarized below: • The overall economic growth during the year, which had surged to around 7% in the past five years, reduced to

5.8%. While this growth is much lower than the target and the past performance, it nevertheless should be considered a good performance, especially considering the adverse internal and external environment that has prevailed during most of this year. At a time when the global economy was plagued with financial, fuel and food crises and in a year of massive uncertainty owing to elections, judicial crises, imposition of emergency, the assassination of the leader of the largest party in the country, most adverse law & order situation and lack of any governance during major part of the year, achieving a growth close to 6% clearly points to the strength and resilience of Pakistan’s Economy.

• The most conspicuous factor responsible for this slow down compared to growth momentum in the previous five

years, is the dismal performance of the Agriculture Sector. As shown in the table below, in a year when the world is facing one of the worst food crises, the growth of Agriculture this year decelerated to 1.5% compared to an average growth rate of 3.7% in the past five years, and 4.4% in the decade of 90s. In fact, as far as four major crops are concerned, their over all production actually declined by 3% compared to the previous year, and the above meager growth was also derived from significant growth in livestock of around 11%.

• Large-scale manufacturing registered a growth of 4.8% in 2007-08 against the target of 10.9% and last year’s

achievement of 8.6%., exhibiting signs of moderation on account of saturation in capacity utilization, power shortages and the questions about competitiveness of our industry.

• Total investment could not sustain its record level of 22.9 percent of GDP of the last fiscal year and declined to

21.6 percent of GDP in 2007-08, but this decline is considered marginal. In fact, even in this year of uncertainty, Pakistan did receive foreign direct investment of US $ 3.5 billion in the first 10 months, which is only $ 700 million less than last year, reflecting continued investor confidence on Pakistan’s economy.

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• National savings plummeted to 13.9% of the GDP compared to 17.8% in the previous year, primarily due to

steep rise in fiscal deficit to 7% of the GDP that caused the government to borrow an all time record amount of Rs.551 billion (upto May 2008) from the State Bank. As can be seen from the graph below, as the savings rates declines significantly, the gap between the savings and investment is widening, which will naturally increase the burden of loans on the government. Due to this, the public sector has, once again, become one of the largest borrower from the banking sector, as it used to be prior to September 11, 2001.

• The country is facing an all time high trade deficit of over US $ 21 billion, with imports rising to over $ 40 billion compared to the exports of around $ 19 billion. Consequently, the balance of payments deficit is expected to rise to 7% percent of the GDP, which resulted in depletion of foreign currency reserves by nearly $ 4 billion during the year despite significant rise in foreign remittances. As a consequence, rupee which had remained stable in comparison to US $ in the past five years, lost its value by 6.5% in the past few months. While the major culprit responsible for deterioration of external account as well as extremely adverse financial condition of the government was virtually an unthinkable rise in the price of fuel in the international market, the previous political and care taker governments remained virtually silent spectators to these adverse developments having failed to take any corrective action.

• As a consequence of global fuel and food crises, combined with total lack of government action and significant reduction in agricultural productivity, the country is witnessing one of the worst inflation in the past two decades or so. While the overall inflation climbed to 11% compared to 7.8% in the previous year, the food inflation has risen to 15%. As poor families spend 80% of their income on food, this has made tremendous impact on the daily lives of vast majority of poor. Although there are no estimates available, it must have increased significantly, the portion of population living below the poverty line.

• On the positive side, a part from achieving a reasonable overall GDP growth, the Services sector continued to maintain solid pace of expansion, growing by 8.2 percent. In the external account, the workers remittances have risen by 19.5 percent to $ 5.3 billion in 10 months. Also, another positive outcome of the year was that the Per Capita income continued to reflect healthy growth, as it registered a growth of 17.3 percent this year and crossed $ 1000 mark to US$ 1,085 as compared to US $925 last year, as the GNP grew by over six percent and the growth in population was contained to around 2%.

The above dismal performance in the external account, which has resulted in significant depreciation of Rupee, further reinforces the view that the previous government’s policies of pursuing growth through increase in consumption and unhindered imports rather than through investment and exports was seriously flawed and not sustainable. The other most conspicuous policy lapse of the previous government is the culpable neglect of Agriculture Sector, which has stagnated to 3.4% annual average growth compared to an average growth of 4.4% in the 90s, and in current year its growth plummeted to a meager 1.5% plunging the economy into worst food crises. Lack of investments in seed, technology, research and other measures to enhance productivity of Agriculture Sector in the past eight years, despite huge fiscal space created by unprecedented flows in the economy, is the most important factor responsible for falling agricultural productivity. Had the government focused on this sector, and even if the growth of agriculture this year would have been the same as average growth of 90s at 4.4%, the GDP growth this year would have been higher by 1 percentage point to 6.8%. And more importantly, had the major crops production not declined compared to the previous year, the country would have been saved from wheat shortages and unprecedented food inflation in the economy.

A brief summary of sector-wise performance and other key economic indicators are presented in the following tables and graphs depicting the state of the economy and its trend in recent years.

Sector Growth Performance (Percentage)

1990’s 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

GDP 4.6 4.7 7.5 8.6 6.6 6.8 5.8

Agriculture 4.4 4.3 2.3 6.7 1.6 3.7 1.5

Manufacturing 4.8 6.9 14.0 12.6 10.0 8.2 5.4

Large-scale manufacturing 3.6 7.2 18.1 15.6 10.7 8.6 4.8

Services 4.6 5.2 5.9 8.0 9.6 7.6 8.2

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5.86.8

4.7

7.58.6

6.64.6

6.16.7

8.3

6.47.3

6.3

4.0

-1.02.03.04.05.06.07.08.09.0

10.0

1990's 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

GDP GNP

-1.002.003.004.005.006.007.008.009.00

10.00

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Population growth GDP growth

GDP and GNP Growth (Percentage)

Population and GDP (Percentage)

Structure of Saving & Investment as percentage of GDP

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08*

TOTAL INVESTMENT 16.8 16.9 16.6 19.10 22.10 22.90 21.60

Gross Fixed Investment 15.5 15.3 15.0 17.5 20.5 21.3 20.0

Public Investment 4.2 4.0 4.0 4.3 4.8 5.7 5.7

Private Investment 11.3 11.3 10.9 13.1 15.7 15.6 14.2

NATIONAL SAVINGS 18.6 20.8 17.9 17.5 18.2 17.8 13.9

Domestic Saving 18.1 17.6 15.7 15.40 16.30 16.0 11.7

* Provisional

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370.00390.00410.00

430.00450.00470.00490.00510.00

530.00550.00570.00

590.00610.00

July August September October November December January February March April

2006-07 2007-08

10.0011.0012.0013.0014.0015.0016.0017.0018.0019.0020.0021.0022.0023.00

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08*

National Savings Total Investment

National savings to Total investment (percentage) Foreign remittances by workers

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7

Economic Growth and other key budget targets for fiscal year 2008-09 Owing to the current adverse economic conditions, having missed most of the economic targets during the year, and considering adverse impact of global slow down, food and fuel crises, the following key targets for fiscal year 2008-09 have been planned.

a) GDP growth is targeted at 5.5%, which will be lower than current year’s growth of 5.8%. This is a modest target, and it assumes expected increase of 3.5% for Agriculture sector and 6.1% growth for manufacturing and service sectors.

b) Inflation is targeted at 12%. c) Gross investment to GDP ratio is estimated at 25%, which appears to be an ambitious target,

considering the current turbulence in financial markets around the world.

d) Overall budget outlay is pitched at Rs. 2,010 billion which is nearly 30% higher than the size of budget estimates and only 3% higher than the revised estimates for the current year. While the current expenditure is proposed at 1,493 billion, 1.5% lower than the revised estimates for current year, the development expenditure is pitched at Rs. 550 billion being 20% higher than then the revised estimates for current year.

e) Fiscal deficit is targeted at 4.7% compared to 7% in the current year and the borrowing from the State

Bank, which is expected to be Rs. 424 billion during the year, is planned to be reduced to Rs. 149 billion next year. In order to achieve this, the government is planning to mobilize FBR tax revenue of Rs. 1.25 trillion, which means tax collections are planned to be increased by nearly 25% compared to current year’s collections. Additionally, to finance such a large budget outlay, the Capital Receipts are expected to rise to Rs. 220 billion, non-tax revenue to Rs. 428 billion and external loans to Rs. 300 billion compared to the revised estimates of current year of Rs. 143 billion, Rs 393 billion and Rs. 275 billion respectively. Additionally, the privatization proceeds are expected to be Rs. 25 billion compared to Rs. 75 billion and Rs. 1.6 billion respectively as per original and revised estimates for current year. Major increase expected in Non-tax revenue will be profit from State Bank estimated at Rs. 110 billion compared to Rs. 88 billion as per revised estimates. Within capital receipts, major increase is planned through additional resource mobilization from saving schemes (expected increase of Rs. 51 billion), short term credits (expected increase of Rs. 17 billion), Pakistan Investment Board (Rs. 13 billion).

f) Current Account deficit for the next year is pitched at 6% percent of the GDP compared to 7% of GDP

during the current year. The reduction is expected due to targeted deceleration in imports, which is expected to grow at the rate of 6.5% compared to nearly 30% increase during the current year. The imports are expected to be curtailed mainly through enhancement in custom’s duty rates by 10 to 15% on 300 non-essential and luxury items.

g) Foreign Exchange reserves are expected to remain at more or less the same level, which is $ 12 billion.

Key Changes in the policy framework for achieving sustainable economic growth and stability On the whole, the budget estimates and related policy framework, appear to be the right direction. The Finance Minister also announced the budget, to be a part of a medium term plan, which is under preparation, and there are some proposals that reflect strategic shift from the past. These are direct cash subsidies for the poor and focus on Agriculture Sector to enhance its productivity that can reduce rural poverty as well as stabilize prices of agricultural commodities, major investment to increase power generation in the shortest possible time to address the problem of power shortages. Rising inflation, investment on Agriculture and poverty The rate of inflation stood at 10.3 percent in the first 10 months (July – April) but it is expected to rise to 11 percent for the whole year, where as the food inflation is at all time high of 15%. Main cause of this inflation is steep rise in oil

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prices that has not been passed on to the consumer due to subsidies on petroleum and power amounting to Rs. 400 billion. The financing from the State Bank of Rs. 424 billion and fiscal deficit of 7% of the GDP, large trade and current account deficits, depreciation in the value of rupee have all contributed to price spiral, besides shortages, but the most important contributor to such price spiral is decline in agricultural productivity coupled with steep increase in such commodity prices in international market.

As per a recent report of the World Bank on Agriculture, the price of wheat has gone up by 125% and that of Rice by 75% compared to last year in the international market. Accordingly to commodity price index published in the Economist Magazine, the food commodity price index has gone up by 60% compared to last year. Soaring prices of agricultural commodities have been blamed on lower agricultural production, weather shocks, shift to bio fuels in the wake of higher cost of oil and higher cost of inputs like fertilizer.

Continuous increase in world food prices has brought into focus, the need for investing more in Agriculture to enhance its productivity. Although, contribution of Agriculture in overall GDP has declined over the years, it still remains the most important source of livelihood for majority of the people of this country. While its direct contribution to the GDP is around 21%, since most of the industry is agro based (Textiles, Sugar, Fertilizer, paper, dairy industry are closely connected with agriculture) and the services sector is also linked with agriculture, its contribution to national economy is pervassive. Nearly 75% of the poor in South Asian countries (including India and Pakistan) live in the rural areas, who are directly or indirectly dependent on agriculture. Consequently, economic growth and prosperity of largest number of people of countries like Pakistan depends on the Agricultural productivity. In India, the government spends nearly 8% of the GDP (including 6% as subsidies) on Agriculture. Compared to this, Pakistan’s spending on Agricluture is hardly 2 to 3% of the GDP. For instance, if Pakistan was to give subsidy to farmers at the same rate as India, the aggregate amount of subsidy would be Rs. 600 billion. Compared to this, the allocation on Fertilizer subsidy for 2008-09 (which is the only subsidy to the farmer) will be Rs. 35 billion.

After years of neglect and low investment, agriculture actually presents an unprecedented opportunity for a Country like Pakistan whose economy is largely agro based, to enhance prosperity of large section of its population, reduce massive poverty and confront widening rural and urban income disparities. Due to current price spiral, the support prices of agricultural commodities need to be raised significantly, which will make investment in Agriculture more profitable. While the government needs to enhance its public investment on Agriculture Research, Seed development, Rural Farm to Market Roads, Irrigation, Agricultural inputs like Fertilizer, and access to agricultural credit, there is significant incentive for the farmers to invest and grow more. In other words, Agriculture has to be at the center of the government’s development agenda if the country has to face current food shortages and increase overall prosperity of its people. Consequently, the government’s current focus on agriculture, which entails slight increase in subsidy on Fertilizers of Rs. 35 billion compared to currently year’s revised estimates of Rs. 29.5 billion and the provision of Rs. 75 billion in the PSDP to improve water availability and efficient use of water resources is welcome change. Clearly, more needs to be done by the Federal and Provincial Governments, in coordination with each other, to increase agricultural productivity.

Inflation Trend (Percentage)

0

2

4

6

8

10

12

1998-99 1999-00 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008*

* The figures of 2007-08 are from July to April only.

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Benazir Income Support Program Rs. 34 billion have been earmarked for income support program aimed at helping the poorest of the poor. The program is planned to be expanded to Rs. 50 billion and every deserving household will be provided Rs. 1000 per month. This is the first time that any Pakistan government has decided to provide direct cash grant targeted at the poorest of the poor, who are living below subsistence level. In the current situation of spiraling commodity prices, this appears to be the only option to provide some relief to the poor. In fact, once this program is in place, the government should consider reducing large amounts of subsidies of over Rs. 400 billion this year, which are given to all consumers in fuel and power rates, and transfer such relief to targeted poorer segments of the population. As generally, subsidy given on petroleum prices treats all segments of the society, rich and the poor, alike, which is neither fair nor efficient to use of limited resources at the disposal of the government. Although the Finance Minister looked confident in implementing this program through NADRA data base, given the quality of administrative machinery of the government, it is not going to be easy. The program appears to be at the initial design stage and perhaps, it may take some time to fully design and implement it. Nevertheless, this is a right initiative under the circumstances. Key risks and challenges for achieving sustained growth and poverty alleviation Considering the economic potential of Pakistan, with its strategic geographic location being in the midst of fastest growing countries : China in the North east which has been growing at the rate of over 10% since last 25 years, India in the East which is growing at the rate of over 9%. On the western side, it has oil and gas rich Iran which can meet the energy requirements of Pakistan & India, and at a distance of just two hours flying time, oil rich middle eastern countries that are awash with liquidity (estimated fcy reserves of GCC countries are estimated to be more than $ 2 trillion, even higher than China) and starved of human capital. The fifth neighboring country is Afghanistan, where substantial investment for its reconstruction and development will continue to flow from the west in the foreseeable future; being a land locked country, it is entirely dependent on Pakistan for its trade. Pakistan, being in the middle of this region, needs to develop an appropriate strategy to take full benefit of its location. With over 160 million people, a large portion of young population in a world that is ageing, a considerable number of which have English speaking skills, fertile land and tremendous natural resources, Pakistan has a tremendous potential to move forward on high growth path. The biggest misfortune of this country is not economic but political instability. The fact is that economic stability and progress is not possible without a sustainable system of government, and consistent economic policies. Now that we have returned to democratic dispensation after over eight years of military lead government, the biggest risk to this country is whether the political leaders will demonstrate enough maturity, tolerance and sagacity to move forward rather than backward, and allow current nascent democratic dispensation to continue, resolving their differences through compromise and dialogue. . As far as the GDP growth target is concerned, considering that it is even lower than the current year, it should not be difficult to achieve. As the major reason for lower GDP growth this year was poor performance of agriculture, and given the attractive prices of agricultural commodities, it is only natural that this sector should attract substantial investment. Also, historically, whenever the agricultural productivity goes down in one year, it always rebounds in the ensuring year. Therefore, with focused of government intervention, it is highly likely that the growth of agriculture will rebound to around 4 to 5 percent, giving the necessary boost to services and agro based industry as well. Tax and non-tax receipts and investment Unless the government is able to mobilize significant external resources from friendly countries and International Financial Institutions, the overall resource picture looks quite uncertain. As far as tax collections are concerned, it is extremely unlikely for FBR to increase tax collections by 25%, and most likely, we may see a shortfall of at least Rs. 100 billion. Therefore, the government must look for alternative resources, such as enhancing the proceeds from privatization through expediting this program. Target of achieving gross investment of 25% of the GDP also looks extremely optimistic. Amongst other things, both local and foreign direct investment in Pakistan is largely dependent on the political stability of the country. Therefore,

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the government must take extra efforts to ensure timely resolution of judges issue, tactful handling of Pakistani tribal areas to ensure better law & order situation in the country in order to attract reasonable level of capital investment in the country. Policy on boosting manufacturing Unfortunately, after the end of Multi Fiber Agreement leading to quota free trade in textiles, Pakistan has not been able to gain any significant market share and despite substantial investment in textiles in the past eight years, our main export based industry textile seems to be struggling in wake of tough competition from China, India and other South East Asian countries as is apparent from sluggish exports and liquidity crisis being faced by this industry. Also, previous governments have not taken any tangible steps that were required to enhance the competitiveness of our textiles, especially the value added products by lowering the cost of production. Not only most of the irritants such as high cost of inputs like electricity, business disruptions, and law & order remain unresolved, they have aggravated due to high cost and non-availability of power and gas. It is high time that the Government did some rethinking to make our textiles and other manufacturing industries competitive. In India, the government in partnership with professional organizations and businesses, has been organizing an annual international conference to enhance competitiveness of manufacturing and reduce cost of doing business. Such a conference can help in identifying new ways and solutions to making our industry competitive. Boosting Export of Services through skill development In the backdrop of stagnant exports, growth in the last few years was largely contributed by investment and consumption arising from domestic demand. In the long-run, a sustained economic growth of an emerging economy will not be possible without surge in our export of goods and services. Pakistan’s strategy of enhancing exports has not worked and therefore, it requires serious rethink. Besides working on enhancing export competitiveness of the manufacturing sector, significant focus is required to develop and enhance export of services, including the export of IT software and IT enabled services such as business process outsourcing and off shoring that has brought handsome dividends to Indian economy. In this area, we need to learn from the example of India, which has similar systems, culture and heritage, and has done remarkably well in developing services industry that is expected to earn over US $ 117 billion foreign exchange in 2007-08, where as its expected services exports (which has been growing at the compound rate of 28%) is likely to reach $ 311 billion in 2012. The key to India’s success is the quality and quantity of educated and skilled manpower. Why can’t Pakistan emulate India by investing more in its human resources? Without enhancing the number of qualified and skilled people, it will be extremely difficult to compete with China, India and other emerging markets to realize the full potential of Pakistan. For this purpose, the primary investment in future will need to be in our Human Resources in terms of higher investment on education, skill development and health. Looking at the budget, both the investment as well as focus on human development is much below the required level.

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Highlights of Important Fiscal Proposals Income Tax

• Basic threshold of exemption in respect of salaried person is to increase to Rs 180,000 and for a woman salaried taxpayer to Rs 240,000. Moreover marginal tax relief measure is allowed to lessen adverse impact on change of income slabs.

• Minimum tax on turnover at the rate of 0.5% is withdrawn. • For specified rural and undeveloped areas, First Year Allowance of accelerated deprecation at 90% is

proposed on plant, machinery and equipment which are put to use after July 01, 2008. • Companies eligible for group taxation under section 59B are also entitled for relief in respect of inter-

corporate dividends. • Exemption of taxation on capital gains on the disposal of shares of the listed companies has been extended

to the tax year ending on June 30, 2010. • In case of amalgamation of the banking companies, NBFCs, modaraba and insurance companies, the

“accumulated business loss” of an amalgamating company or companies shall be set off or carried forward against the business profits an gains of the amalgamated company and vice versa.

• Concept of progressive slab rates from 20% to 35% has been introduced for small companies. Small

companies are now require to affect tax withholding law on certain payments/ • Unrealized gains or losses on investments of non-life insurance companies are excluded from the taxable

income. • Progressive slab rates would apply on income from property from 5% to 15% based on different income

slabs.

• Uniform rate of withholding tax at 2%is introduced for both commercial and industrial importers. • 10% withholding tax on profit from pensioners benefit scheme and behbood fund for pensioners, senior

citizens and widows has been levied. • Exemption of Pakistan Cricket Board from income tax is withdrawn. • Tax amnesty has been introduced, by virtue of which no probe is likely on any unexplained assets or

undisclosed income declared by a tax payer subject to payment of investment tax on the value of asset. • Individuals and AOP having annual turnover of Rs. 25 million or more and Rs 50 million or more respectively

are become liable to withhold tax on payments made by them for the sale of goods, services rendered and on execution of contracts.

• Remittance of profit by a branch of a foreign company is proposed to be treated as dividend. • For claiming tax credit or direct deduction from income, the limit for donations made by the individuals, AOP

and companies has been reduced to 10% of their taxable income. • Remittance of insurance or reinsurance premium to overseas insurance or reinsurance companies is subject

to tax withholding tax at 5% which is to be considered as final tax.

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• Rate of tax withholding on cash withdrawal from banks has been enhanced from 0.2% to 0.3%. • Builders and developers are required to pay minimum tax for the constructed property at Rs 50 per sq. ft of

the covered area and for developed plots at Rs.100 per sq. yard. • Cooperative societies and finance societies to be taxed at corporate tax rate. • Tax exemptions under any other statutes are no more available unless specified in the Second Schedule to

the Income Tax Ordinance, 2001. • Payment to media companies outside Pakistan would be subject to a withholding tax at 10%, treated as final

tax. • Foreign currency payments made through the foreign currency accounts or through exchange companies

would be subject to tax withholding unless specifically notified for exemption. • Branches of foreign companies operating in Pakistan are subject to thin capitalization rules. • A uniform rate of withholding tax at 1% has been made applicable on all the exporters. • Members of Stock Exchanges will now be assessed under normal tax regime. However, tax collected by

them in lieu of commission income and trading on shares will be treated as minimum tax. • Time frame for the payment of tax due has been reduced from thirty days to fifteen days. • Filing of wealth statement is mandatory for all salaried tax payers having income of Rs 500,000, irrespective

of the requirement of the filing of tax return • Cash payment of salary exceeding Rs.15,000 not to be allowed as deductible expense to the employer. • Provision for deductions of non performing loans, as per prudential regulations for banking companies will

now be subject to the criteria laid down under section 29 and 29A of the Income Tax Ordinance, 2001. • Requirement of prior approval from the Commissioner of income tax for making payments to non resident

without deduction of tax or reduced tax has been done away with, where the payment is liable to reduced rate of tax under the tax treaty.

• The limit of amount exempted from the employer contribution to recognized provident fund is fixed to 1/10th of

salary or Rs.100, 000 whichever is lower. • Income tax rate on purchase of locally produced edible oil is increased from 1% to 2%.

Sales tax

• General rate of sales tax has been enhanced from 15% to 16% for goods and services. • Period of twelve months is proposed to be reduced to six months to claim unadjusted input tax in the return. • The condition to adjust the input tax on purchase of fixed assets after start of production of a new unit is

proposed to be removed

• Period of filing the revised return extended from 90 days to 120 days.

• Excess input tax against non-zero rated supplies can now be carried forward or refunded

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• Rate for the default surcharge has been increased from 1% to 1.5% per month. • Local and imported fertilizer and pesticides have been exempted from sales tax. • Biscuits, confectionary, snacks, electric bulbs and tube lights have been excluded from retail based tax

regime of the Third Schedule. • Energy saver lamps have been exempted from sales tax. • Molasses, as raw material used in the production of acetic acid has been brought in the category of zero

rated supplies. Also, caustic soda flakes/ solid, cotton linter and sequins linter are brought into this category. • Persons registered in Azad Jamu and Kashmir making zero rated supplies, are now eligible for claiming

sales tax refunds on the purchase of taxable goods from Pakistan. • Supplies to hospitals run by Federal or Provincial Government or charitable hospitals having at least 50 beds

are proposed to be exempted. • General amnesty is given to unregistered persons, having taxability falling under the ambit of sales tax, can

now apply for registration and henceforth comply with the return filing requirements. The scheme envisages amnesty for payment of any past sales tax dues.

Federal Excise

• Rate of federal excise duty has also been enhanced from 15% to 16% on goods and services under VAT mode.

• Excise duty on telecommunication services has been increased to 21%. • Federal excise duty on cement has been raised to Rs 900 per Tonne from the existing base of Rs 750 per

tonne. • Purchase of motor vehicles exceeding engine capacity of 850 cc, imported or local, will now be subject to a

levy of federal excise duty of 5%. • Federal excise duty on certain banking, insurance and franchise services had been increased from 5% to 10%.

• Increase in retail price and rate of federal excise duty on cigarette notified. • Amendments have been made to charge duty from local recipients of services coming from abroad and

terminating in Pakistan. • 5% Federal excise duty on crop insurance has been abolished

• Period of filing the revised return extended from 90 days to 120 days. • Rate for the default surcharge has been increased from 1% to 1.5% per month.

Customs

• Custom duty has been increased by 10% on old and used automotive vehicles of different capacity specified in SRO 577(I)/2005 dated 6th June, 2005 meant for transport of persons.

• Further, capital value tax is abolished on import of above mentioned vehicles. Previously CVT was recovered

in addition to custom duty, sales tax, withholding taxes.

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• Vehicles imported in violation of Import Policy Order as well as smuggled vehicles has been allowed release

on payment of redemption fine at 30% of the value of vehicles along with leviable duty/taxes.

• Fully dedicated CNG buses exempted from duty.

• Pharmaceutical industry relates specified active ingredients, chemicals and packing materials are subjected to 5 % duty.

• Manufacturers have been allowed to import duty free samples as per specified conditions in chapter 99 of

PCT.

• Custom duty at Rs. 500 per set levied on import of mobile phone.

• Custom duty on betel leaves increased from Rs. 150/Kg to Rs. 200/Kg.

• Duty rate increased on CKD/SKD of sewing machines from 5 % to 20 %

• A uniform rate of 30 % specified for import of special purpose motor vehicles.

• Duty rates on non-essential and luxury items such as dairy products, fruits, chewing gum, chocolate, processed food, fruit juices, aerated waters, ceramic products, air conditioners/ refrigerators, electric fans, toasters, micro wave ovens, television, furniture and lighting equipment etc increased from 25 % to 35 %.

• Duty rates on cosmetics increased from 20 – 25 % to 35 %.

• Duty rates on electric ovens/ cooking ranges etc. increased from 20 % to 30 %.

• The concessionary duty on import of raw materials such as Palm Stearin, Coconut Crude Oil, Crude Palm

Kernel Oil, Surface Active Agents, PFAD, Palm Kernel Acid Oil and Palm Kernel Fatty Acid Distillate for manufacture of Toilet and Laundry Soap have been allowed to the industrial units located in the State of Azad Jammu and Kashmir after meeting general conditions.

• Duty concessions and sales tax exemption on import of capital goods, even if manufactured locally. • Higher incidence of import duty on cars/jeep above 1800 cc.

• Rationalization of customs duty rates on cascading principle on import of industrial inputs.

• Additional customs duty on import of components and sub-components of auto sector.

Capital Value Tax

• In the case of bank no CVT will be charged on General Power of Attorney unless it is used to enforce the mortgage of property offered as collateral against a loan.

Companies Ordinance

• Period of holding annual general meeting increased again to four months. • Ineligibility of certain persons to become directors redefined.

• Certain exemptions on appointment of managing agents, sole purchase, sales agents, etc. • Power of Commission enhanced to bring under the ambit of Section 208 all types of companies making

investment in associated companies and undertakings. • Commission empowered to determine the time limit for payment of dividend.

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Insurance Ordinance

• Increase in annual supervision fee payable to the SECP. • Extension of the power of the SECP to prescribe maximum levels of acquisition costs and management

expenses. • Application of certain rules and restrictions to reinsurance brokers, which were previously only applicable to

direct insurance intermediaries. Securities and Exchange Commission of Pakistan Ordinance

• Provisions to curb insider trading re-enacted and reinforced. • Inside information and insider defined. • Obligation on listed companies to disclose inside information. • Enhancement of power of enquiries, penalties and appeals. • Enlargement of powers to make rules and regulations.

Securities and Exchange Commission of Pakistan Act

• Terms of office of the Commissioner regulated. • Securities and Exchange policy board regulated. • Powers and functions of the commission enlarged.

Take-over Ordinance

• Changes in the applicability criteria of the Ordinance. • SECP to prescribe percentage of shares to be acquired, instead of acquirer. • Scope of obligation of the acquirer for public announcement enlarged. • Increase in penalties for non-compliances. • Commission empowered to make regulations and issue directives, circulars, etc.

Modaraba Ordinance

• Registrar of Modarabas empowered to issue directions. • Registrar empowered to make regulations. • SECP empowered to issue directives, circulars, codes, guidelines, etc.

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Significant Proposed Amendments in: Income Tax Ordinance, 2001 1. Definitions Section 2 Asset Management Company (5B)

The amendment seeks to modify the definition to align with the definition as provided in the Non-Banking Finance Companies and Notified Entities Regulations, 2007. Dividend (19)

The proposed insertion seeks to expand the definition of dividend. As a result, the remittance of profit after tax by branch of foreign company operating in Pakistan shall be treated as dividend. The Ordinance provides the general tax rate of 10% applicable on dividend. The proposed amendment does not specify the mechanism for the levy, collection / payment of tax on dividend. Necessary amendment may be required to be made in this regard. Eligible person (19A)

Under the Voluntary Pension system Rules, 2005, an individual Pakistani holding a valid National Tax Number or a Computerized National Identity Card is specified as eligible person. The proposed amendment seeks to extend the eligibility also to overseas Pakistanis having National Identity for Overseas Pakistanis.

Proposed definitions (19B), (19C), 19(D) and 19(E) A new clause (19B) seeks to define the terms “addressee”, “automated”, “electronic”, “electronic signature”, “information”, “information system”, “originator” and “transaction” as defined in the Electronic Transactions Ordinance, 2002 (LI of 2002).

Clause (19C) seeks to define the term ”electronic record” to include the contents of communications, transactions and procedures under this Ordinance, including attachments, annexes, enclosures, accounts, returns, statements, certificates, applications, forms, receipts, acknowledgements, notices, orders, judgments, approvals, notifications, circulars, rulings, documents and any other information associated with such communications, transactions and procedures, created, sent, forwarded, replied to, transmitted, distributed, broadcast, stored, held, copied, downloaded, displayed, viewed, read, or printed, by one or several electronic resources and any other information in electronic form.

Newly inserted clause (19D) seeks to define “electronic resource” to include telecommunication systems, transmission devices, electronic video or audio equipment, encoding or decoding equipment, input, output or connecting devices, data processing or storage systems, computer systems, servers, networks and related computer programs, applications and software including databases, data warehouses and web portals as may be prescribed by the Board from time to time, for the purpose of creating electronic record.

Newly inserted clause (19E) proposes to define the term “telecommunication system” to include a system for the conveyance, through the agency of electric, magnetic, electro-magnetic, electro-chemical or electro-mechanical energy, of speech, music and other sounds, visual images and signals serving for the impartation of any matter otherwise than in the form of sounds or visual images and also includes real time online sharing of any matter in manner and mode as may be prescribed by the Board from time to time.

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Investment Company (30A)

The amendment proposes to substitute the definition to mean an investment company as defined under the Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003 as a consequence of promulgation of Non-Banking Finance Companies and Notified Entities Regulations, 2007.

Leasing company (30B)

The amendment proposes to replace the definition to mean a leasing company as defined under the Non-Banking Finance Companies and Notified Entities Regulations, 2007.

Local government (31A)

A general amendment has been proposed by virtue of which for the words “local authority” wherever occurring in the Ordinance, the words “Local Government” is to be substituted.

Consequential to the above proposed amendment, the term “Local Government” is proposed to be defined to have the same meaning as defined in the Punjab Local Government Ordinance, 2001 (XIII of 2001), the Sindh Local Government Ordinance, 2001 (XXVII of 2001), the NWFP Local Government Ordinance, 2001 (XIV of 2001) and the Balochistan Local Government Ordinance, 2001 (XVIII of 2001);

Under the Income Tax Ordinance, 2001 the term local authority has been referred in sections 27, 49, 61, 64, 80, 83, 153, 155 and 172.

Non banking finance company (35B)

The proposed amendment seeks to replace the reference of ‘an institution’ with the term ‘NBFC’ for revamping the definition of such company.

Omitted clauses (45A) & (45B)

The terms Private Equity and Venture Capital Fund and Private Equity and Venture Capital Fund Management Company as currently defined in clauses (45A) and (45B) respectively are proposed to be omitted.

Real Estate Investment Trust

Consequent to the promulgation of Real Estate Investment Trust Regulations, 2008, definitions of the following are proposed to be replaced to have the same meaning as defined in the said regulations.

• Real Estate Investment Trust (REIT) Scheme (47A) • Real Estate Investment Trust Management Company (REITMC) (47B)

2. Income from business Section 21 As per current provisions, salary, exceeding Rs.10,000, paid otherwise than by a crossed cheque or direct

transfer of funds to the employee’s bank account is not allowed as a deductible expense while computing the taxable income from business of the employer.

The limit of Rs.10,000 is proposed to be increased to Rs.15,000. 3. First Year Allowance (FYA) Section 23A The newly introduced section seeks to allow FYA at the rate of 90% in respect of plant, machinery and

equipment against the cost of such eligible depreciable assets, in lieu of initial allowance as currently allowed in section 23 at the rate of 50%, to an industrial undertaking subject to the following conditions:

• It is set up in rural and under developed areas as specified by the Federal Government.

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• It is owned and managed by a company. • The plant, machinery and equipment are put to use after July 01, 2008.

It is further proposed that the sub-sections (3) to (5) of section 23 shall apply mutatis mutandis with reference to defining the term eligible depreciable assets as well as determining their costs for the purpose of newly inserted section. Similarly a leasing company or an investment banks or a modaraba or a scheduled bank are allowed to claim the FYA as a deduction against their lease rental income in respect of assets owned by such entities.

4. Exemptions and tax provisions in other laws Section 54

The proposed amendment seeks to modify the section by virtue of which any exemptions from levying

income tax available under the other statutes are proposed to be withdrawn unless specifically provided under 2nd Schedule to the Income Tax Ordinance, 2001.

In line with the proposed amendment, following two exemptions are proposed to be inserted which were

earlier available in other statutes:

• Pension of former President of Pakistan and his widow under the President Pension Act, 1974 (IX of 1975).

• State Bank of Pakistan and State Bank of Pakistan Banking Services Corporation. 5. Set off of business loss consequent to amalgamation. Section 57A

This section was first time introduced through Finance Ordinance, 2002. Over the period of time this law was developed to extend its scope and by virtue of which the carry forward and set off of accumulated assessed business losses at the time of amalgamation of a banking company, NBFC, and insurance company and industrial undertakings and companies engaged in providing services not being a trading company(s) was allowed for a period of six tax years. However, consequent to the amendment made via Finance Act, 2007, benefits of brought forward accumulated business losses of amalgamating company were not available for set off against the profits and gains of the amalgamated company instead only the business losses assessed for the year of amalgamation were allowed to be set off against the business profits and gains of the amalgamated company.

Now by virtue of the proposed insertion of new sub-section (2A), the legislature proposes to restore the relief

in case of amalgamation of Non-banking Finance Company, modaraba or insurance company, with respect to set off and carry forward of the accumulated losses under the head “income from business” (not being speculations business losses) against the business profits and gains of the amalgamated company and vice versa, up to a period of six tax years immediately succeeding the tax year in which the loss was first computed in the case of amalgamated company or amalgamating company or companies.

For banking companies, the subject relief is proposed to be provided in Seventh Schedule to the Ordinance. The proposed amendment will certainly continue to encourage the acquisition of sick companies in the above

mentioned sectors. 6. Charitable donations Section 61 and Clause (61) of the

Second Schedule

Currently a company is allowed a tax credit in respect of any sum paid, or any property given in the tax year as a donation upto a limit of 15% of its taxable income for the year. For an individual or an association of persons the said limit is 30% of its taxable income for the year.

Now through the proposed amendment, the aforesaid limit of 15% in case of a company and 30% in case of an individual and association of persons is proposed to be reduced to 10% of the taxable income for all the taxpayers.

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Similarly through proposed amendment in clause (61) of the Second Schedule to the Ordinance, the direct deduction of amount donated to specified institutions is also restricted to 10% respectively to companies and individual and association of persons.

7. Geographical source of income Sections 101, 152 and 4th Schedule The newly inserted sub-section 13A proposes to treat the amount paid on account of insurance or re-

insurance premium by an insurance company to overseas insurance or re-insurance company as Pakistan source income.

Consequential amendment is also proposed is section 152 by virtue of which every person making payment on

account of insurance premium or re-insurance premium to an overseas insurance or re-insurance company is required to withhold tax at 5% of the gross amount paid. It is further proposed that the tax withheld in the above manner is to be treated as discharge of full and final tax liability of aforementioned overseas entities.

Through proposed amendment in the 4th Schedule to the Ordinance, it is also envisaged that a non-

deduction of tax would result in disallowance of premium for such insurance or reinsurance. 8. Thin Capitalization Section 106

As an anti avoidance tax measure, a new concept of thin capitalization was first time introduced in the Income Tax Ordinance, 2001.

Under this section deduction to foreign controlled resident companies other than financial institutions and banking companies, for returns on foreign controlled debt are to be restricted by applying the ratio of foreign debt to foreign equity of three to one based on the actual debt and equity during any time in the tax year. This disallowance is not restricted only to one year. The debt to equity ratio is to be calculated for each and every year separately and then financial charges on foreign debt are be allowed accordingly.

This provision was introduced with the objective to discourage a non-resident from minimizing equity investment and investing through loans, to achieve greater returns from Pakistan by placing of debt in Pakistani subsidiaries to take advantage of higher tax rates in Pakistan whereby the interest expense on such debts will be allowed in Pakistan and concurrent taxation of interest income at nil or lower rates.

It is now proposed to extend the thin capitalization rule to a branch of a foreign company operating in

Pakistan. The intent appears to be to discourage the non-resident from achieving greater returns from Pakistan by funding its branches through debt.

However, it is important to note that since a branch usually does not have equity, so the mechanism through

which the debt to equity ratio is to be applied in the absence of any equity needs to be defined clearly otherwise it is apprehended that the branch offices of the foreign companies operating in Pakistan will not be able to claim deduction in respect of interest paid to its foreign entity on interest bearing loans.

9. Minimum tax on income of certain persons Section 113

Currently a resident company is required to pay minimum tax at 0.5% of its turnover from all sources for that year for any reason including sustaining of a loss, the setting off of a loss of an earlier year, exemption from tax, the application of credits or rebates, or the claiming of allowances or deductions (including depreciation and amortization deductions) allowed under the Income Tax Ordinance, 2001.

The proposed amendment seeks to omit application of minimum tax by virtue of which now a resident company is not required to pay income tax if it does not have taxable profit / income. Consequent amendments are also proposed to withdraw all related amendments where relief was given or the application of law restricted to certain extent and also in respect of tax payable on advance tax.

This amendment is likely to reduce the cost of doing business of sick entities and will have a positive impact on their cash flows.

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10. Taxation of builders and developers Section 113C Part I, Division IAA of the First Schedule

Considering the long standing demand and considering the high level of returns in the real estate business, the legislature proposes to tax this untapped source of revenue. Although there is no specific exemption available in the law with respect to real estate business; however, some how due to lack of will and non-implementation of the laws, the highly profitable sector has been able to successfully evade the tax on the gains. Now the legislature proposes to tax a person who is a developer of land for residential, commercial or industrial purposes or a builder engaged in construction of houses, commercial or industrial property, shall be liable to pay tax at the following rates:

(a) in the case of a builder Rs.50 per sq. ft. on covered constructed area; and (b) in the case of a developer Rs.100 per sq. yard on the area of land developed.

It is also proposed that the tax paid in the above manner is to be considered as minimum tax on the income of the builder and / or developer.

11. Persons not required to furnish a return of income Section 115

The current section provides that where the employer has furnished the annual statement of tax withholding from salary for the tax year as required under section 165, then the employee is not required to file his / her return of income for the said tax year. Similarly the section 116 requires that every individual filing a return of income for any tax year whose last declared or assessed income or the declared income for the year is Rs.500,000 or more is required to furnish a wealth statement for that year along with return of income. Collective reading of section 115 and 116 shows that an ambiguous situation was created whereby an individual not required to file his / return of income due to filing of annual statement of tax withholding by the employer was considered to be exempt from filing of wealth statement. To remove the anomaly, the sub-section (1) is proposed to be substituted by virtue of which now the section requires the filing of wealth statement where salary income for the tax year or the last tax year is Rs.500,000 or more irrespective of the fact whether the annual tax withholding statement has been filed by the employer or not.

12. Investment tax on income Section 120A

The proposed insertion empowers the Federal Board of Revenue (herein after referred as “FBR”) to make a scheme of payment of investment tax in respect of undisclosed income, representing any amount or investment made in movable or immovable assets.

It is further proposed that where any person declares undisclosed income in accordance with the said scheme and the rules, the tax on such income called investment tax shall be charged at such rate as may be prescribed.

It is further proposed that where a person has paid tax on his undisclosed income in accordance with the scheme and the rules, he shall

(a) be entitled to incorporate in his books of account such undisclosed income in tangible form; and (b) not be liable to pay any tax, charge, levy, penalty or prosecution in respect of such income

under the Ordinance.

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The proposed section also seeks to define the following terms: “undisclosed income” means any income, including any investment to be deemed as income under section 111 or any other deemed income, for any year or years, which was chargeable to tax but was not so charged; and “investment tax” means tax chargeable on the undisclosed income under the scheme under sub-

section (1) and shall have the same meaning as given in clause (63) of section 2 of the Income Tax Ordinance, 2001. It appears that the legislature has provided a money whitening scheme to the benefit of all those whose actual wealth is not reconcilable with their declared taxable income. The proposed amendment simply makes the provisions of section 111 related to concealment of income as useless. Such schemes were also introduced in the past and ended without any much success. It is hoped that this time strong campaign will be launched to encourage the affluent to bring in the tax net their undisclosed income and wealth. However, there is a possibility that the legislature has further plans to levy wealth tax or similar type of tax on the wealth which may be disclosed through the above mentioned scheme.

13. Asse ssment giving effect to an order Section 124

As per the current provisions of sub-section (2), the Commissioner is required to pass an order within one year from the end of the financial year in which the Commissioner was served with the order passed by the Commissioner (Appeals), Appellate Tribunal, High Court or Supreme Court setting aside the order wholly or partly with the directions to make a new assessment order.

Now by virtue of the proposed insertion in the aforesaid sub-section, the Commissioner (Appeals) is also required to pass the order, on the basis of directions given by the Appellate Tribunal, High Court or Supreme Court, within one year from the end of the financial year in which he was served with the order. It may be pointed out that the section still refers to only assessment order and no insertion has been made to include appellate order as well. Necessary amendment should be made to remove this anomalous position. The proposed amendment is likely to expedite the settlement of the pending appeals at Commissioner (Appeals) level and may also reduce the hardship being faced by the tax payers due to long and cumbersome appellate processes.

14. Decision in appeal Section 129

The current provisions require the Commissioner (Appeals) to pass an order within three months from the end of the month in which the appeal was lodged, otherwise the relief sought by the appellant is to be treated as having been given and all the provisions of the Ordinance are to have effect accordingly.

The proposed amendment seeks to extend the period of three months to four months. 15. Alternative Dispute Resolution Section 134A

The section was initially introduced vide Finance Act, 2004 whereby the concept of alternative dispute resolution was brought in the law.

The section provides that an aggrieved person, in connection with any matter pending before an Appellate Authority, may apply to Board for the appointment of a committee for the resolution of any hardship or dispute mentioned in detail in the application. The Board after examination of the application of an aggrieved person is to appoint a committee.

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The committee constituted is to examine the issue and may, if it deems necessary, conduct inquiry, seek expert opinion, direct any officer of Income Tax or any other pers on to conduct an audit and make recommendations in respect of the resolution of dispute as it may deem fit. The Board may, on the recommendation of the committee, pass such order, as it may deem appropriate. Now a new sub-section (4A) is proposed to be inserted by virtue of which the Chairman FBR is empowered to pass such order as he deems fit on the application of an aggrieved person, for reasons to be recorded in writing, on being satisfied that there is an error in order or decision.

16. Due date for payment of tax Section 137

As per current provisions, the tax payer is required to make payment of tax within 30 days from the date of services of notice creating tax demand.

By virtue of the proposed amendment, the period of 30 days has been reduced to 15 days. This proposed amendment is likely to create problems for the tax payer and may also cause increase in disputes and litigation with the tax authorities.

17. Tax arrears settlement incentives scheme Section 146B

The proposed amendment seeks to authorize the FBR to make scheme in respect of recovery of tax arrears or withholding taxes and waiver of additional tax or penalty levied thereon.

It is further proposed that the Board may make rules under section 237 for implementation of such scheme.

18. Advance tax paid by the tax payer Section 147

Consequential to the proposed deletion of section 113 – minimum tax, sub-section (4AA) is proposed to be deleted and sub-section (6A) is proposed to be amended to give effect to the proposed deletion of section 113.

19. Imports Section 148

Consequential to the proposed deletion of section 113 – minimum tax, sub-section (4A) is proposed to be deleted.

20. Payment to non-residents Section 152 (5) & (7) The current provisions of sub-section (5) requires the person making payment to the non resident person

to notify the Commissioner if such person intends to make payment to a non resident person without deduction of tax.

The proposed amendment seeks to provide that the person is not required to notify the Commissioner where the payments are liable to reduced rate under the relevant agreement for avoidance of double taxation.

The proposed amendment is likely to facilitate the prompt payments to non residents.

The sub-section (7) provides that the person intends to make payment to a non resident person without tax withholding on account of import of goods is not required to notify the Commissioner where title of goods being imported passes outside Pakistan. Now the proposed insertion seeks to provide for the import documents as evidence to support the assertion that the title was transferred outside Pakistan. In view of this amendment, now the payers will be required to maintain the record of the import documents which may be required by the tax authorities during tax audit or monitoring of withholding taxes.

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21. Payments for goods and services Section 153

The following is the brief of various changes proposed: • Through the proposed amendment, the clause (e) of sub section (5) and clause (b) of sub-section (9) are

proposed to be deleted by virtue of which the “small company” is now also become prescribed as a withholding agent.

• Due to some drafting anomalies in sub-section in (6A) and (6B), there was some ambiguity with respect to a the taxation of a company as a manufacturer under final tax regime. Now the proposed amendment seeks to delete sub-section (6B) and also specify a company being a manufacturer of goods to be taxed under normal tax regime.

• The sub-section (9) is proposed to be amended to include following persons in the definition of “prescribed” persons” for the purpose of tax withholding under this section. § an association of persons, having turnover of fifty million rupees or above; or § an Individual, having turnover of twenty-five million rupees or above.

• By virtue of the proposed amendment, now the professional firms having abovementioned turnover are

liable to withhold tax on their payments. Similarly individuals having turnover of Rs.25 million or more are now required to withhold tax. These measures are in the nature of enhancing the process for bringing un-documented sector under the tax net.

• For the first time, the term “manufacturer” is proposed to be defined to mean a person who is

engaged in production or manufacturing of goods, which includes-

(a) any process in which an article singly or in combination with other articles, material, components, is either converted into another distinct article or produce is so changed, transferred, or reshaped that it becomes capable of being put to use differently or distinctly; or

(b) a process of assembling, mixing, cutting, packing, repacking or preparation of goods in any

other manner.

It is important to note that the above definition is only for the purpose of section 153.

22. Payments to non-resident media persons Section 153 A Part III, Division IIIA of the First Schedule

A new section is proposed to be inserted by virtue of which every person making a payment for advertisement services to a non-resident media person relaying from outside Pakistan is required to deduct tax from the gross amount paid at the rate of 10% of the gross amount paid. The tax withheld is proposed to be final discharge of tax liability.

23. Income from property Section 155

Through Finance Act, 2006, the tax withheld at the rate of 5% was treated as discharge of final tax liability of the person with respect to such rent. Through Finance Act, 2007, full and final tax liability was made subject to the provisions of section 15. Now the proposed amendment seeks to omit the words “subject to section 15”. First Schedule is also proposed to be amended to provide progressive tax rates in the range of 5%, 10% and 15% for the taxation of rent. However, the tax liability will still be discharged on final tax basis based on applicable withholding tax rate.

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The proposed insertion of progressive tax rates is based on the concept that the more you earn more you pay and is likely to generate more revenue for the government.

24. Exemption or lower rate certificate Section 159

The proposed amendment seeks to empower the FBR to amend the rates of withholding tax prescribed under the Ordinance or exempt person, class of person, goods or class of goods from withholding tax under the Ordinance.

25. Records Section 174(5)

This section provides for the maintenance of accounts, documents and records by the tax payer. A new sub-section (5) is proposed to be added by virtue of which the Commissioner is empowered to require any person to install and use an Electronic Tax Register of such type and description as may be prescribed for the purpose of storing and accessing information regarding any transaction that has a bearing on the tax liability of such person.

26. Tax Payers Registration Section 181

Section 181 is proposed to be substituted. The substituted section proposes to provide every taxpayer to apply in the prescribed form and in the prescribed manner for registration. It is further proposed that the Commissioner having jurisdiction over a case, where necessitated by the facts of the case, may also register a taxpayer in the prescribed manner. Taxpayers’ registration scheme is proposed to be regulated through the rules to be notified by the Board.

27. Penalty for concealment of income Section 184

This section provides for the levy of penalty where the Commissioner, Commissioner (Appeals), or the Appellate Tribunal is satisfied that any person has concealed income or furnished inaccurate particulars of such income. A new sub-section (5) is proposed to be inserted which provides that in consequence of any order under this Ordinance, the amount of tax in respect of which any penalty imposed is reduced, the amount of penalty is to be reduced accordingly.

28. Prosecution for failure to maintain records Section 193

This section provides for the prosecution of the person who fails to maintain record as required under the Ordinance. It is provided that where the failure was deliberate, a fine or imprisonment for a term not exceeding two years, or both; or in any other case a fine.

The proposed amendment seeks to prescribe a maximum limit of Rs.50,000 for the fine in any other case.

29. Purchase of motor cars and jeeps Section 231B Part IV, Division III

of the First Schedule

As per current provisions, every manufacturer or authorized dealer of motor cars is to collect tax at the time of sale of motor car at the rate of 5% or at reduced rate of 2.5% as a result of reduction in rate allowed in Second Schedule to the Ordinance.

Now this section is proposed to be substituted by new section by virtue of which every person is required to pay, at the time of registration of a new motor car or a jeep, advance tax at the rates specified in First Schedule to the Ordinance based on the engine capacity of the motor cars and jeeps.

It is proposed that the provisions of this section shall not be applicable in the case of:

(i) the Federal Government; (ii) the Provincial Government; (iii) a foreign diplomat; or a diplomatic mission in Pakistan.

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31. Collection of tax by stock exchange registered in Pakistan Section 233 A This section provides for the stock exchange registered in Pakistan to collect advance tax,-

(a) at the rate of 0.01% of purchase value from its Members on purchase of shares in lieu of tax on the commission earned by such Members;

(b) at the rate of 0.01% of sale value from its Members on sale of shares in lieu of tax on the commission earned by such members.

(c) at the rate of 0.01 % of traded value from its Members in respect of trading of shares by the members.

(d) at the rate of 10% of the carry over charge from its Members in respect of financing of carryover trades in share business.

The tax collected under clause (a) and clause (b) are treated as discharge of full and final tax liability of the members with respect to such income. Now by virtue of the proposed amendment, the tax collected through clause (a) to (c) in the above manner is proposed to be treated as minimum tax of the members. Thus by virtue of the proposed amendment, now the members of stock exchange will be taxed under normal tax regime. Through the proposed amendment, the approach apparently is to collect more tax from the members of stock exchange without removing the exemption from capital gains tax on sale of listed securities. This will be a source of good amount of revenue for the government especially considering the large number of transactions at the Pakistan stock exchanges which are likely to increase further due to extension in exemption on listed securities.

32. Electricity consumption Section 235

This section provides for the collection of advance tax at the rate provided in the First Schedule to the Income Tax Ordinance, 2001 on the amount of electricity bill of a commercial or industrial consumer.

The tax collected under this section is treated as minimum tax on the income of a person (other than a company).

The proposed amendment seeks to provide that the tax collected on electricity bill amounting to Rs.20,000 per month is to be treated as minimum tax.

Consequent to the proposed amendment, tax collected on bills exceeding Rs.20,000 is to be treated as adjustable against the final tax liability of an individual or an association of persons.

33. Electronic record Section 237 A

The newly inserted section 237A seeks to empower the FBR to require any person to use its information system and electronic resource, in order to replace or supplement, its manual business processes by automated business processes and substitute its paper based records by electronic record.

It is further proposed that electronic record generated, maintained, issued, served, received, filed or requisitioned through the electronic resource of the Board shall by itself sufficiently and conclusively prove its validity, authenticity and integrity and shall be treated to have been done so according to the provisions of this Ordinance.

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The First Schedule Part I Division I Clause (1A) Rate of tax for salaried individuals Under the existing clause (IA), tax rates for the salaried individuals are proposed to be revised as follows: S. No Taxable Income Rate of tax 1. Where the taxable income does not exceed Rs.180,000, 0% 2. Where the taxable income exceeds Rs.180,000 but does not exceed Rs.250,000, 0.50% 3. Where the taxable income exceeds Rs.250,000 but does not exceed Rs.350,000, 0.75% 4. Where the taxable income exceeds Rs.350,000 but does not exceed Rs.400,000, 1.50% 5. Where the taxable income exceeds Rs.400,000 but does not exceed Rs.450,000, 2.50% 6. Where the taxable income exceeds Rs.450,000 but does not exceed Rs.550,000, 3.50% 7. Where the taxable income exceeds Rs.550,000 but does not exceed Rs.650,000, 4.50% 8. Where the taxable income exceeds Rs.650,000 but does not exceed Rs.750,000, 6.00% 9. Where the taxable income exceeds Rs.750,000 but does not exceed Rs.900,000, 7.50% 10. Where the taxable income exceeds Rs.900,000 but does not exceed Rs.1,050,000, 9.00% 11. Where the taxable income exceeds Rs.1,050,000 but does not exceed Rs.1,200,000, 10.00% 12. Where the taxable income exceeds Rs.1,200,000 but does not exceed Rs.1,450,000, 11.00% 13. Where the taxable income exceeds Rs.1,450,000 but does not exceed Rs.1,700,000, 12.50% 14. Where the taxable income exceeds Rs.1,700,000 but does not exceed Rs.1,950,000, 14.00% 15. Where the taxable income exceeds Rs.1,950,000 but does not exceed Rs.2,250,000, 15.00% 16. Where the taxable income exceeds Rs.2,250,000 but does not exceed Rs.2,850,000, 16.00% 17. Where the taxable income exceeds Rs.2,850,000 but does not exceed Rs.3,550,000, 17.50% 18. Where the taxable income exceeds Rs.3,550,000 but does not exceed Rs.4,550,000, 18.50% 19. Where the taxable income exceeds Rs.4,550,000 but does not exceed Rs.8,650,000, 19.00% 20. Where the taxable income exceeds Rs.8,650,000. 20.00% In case of a woman taxpayer, no tax shall be charged if the taxable income does not exceed Rs.240,000. However, to lessen the adverse impact of the change in income slabs, it is also proposed that where the total income of a taxpayer marginally exceeds the maximum limit of a slab in the table, the income tax payable shall be the tax payable on the maximum of that slab plus tax on – (i) 20% of the amount by which the total income exceeds the said limit where the total income does not exceed

Rs.500,000.

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(ii) 30% of the amount by which the total income exceeds in each slab but total income does not exceed

Rs.1,050,000. (iii) 40% of the amount by which the total income exceeds in each slab but total income does not exceed

Rs.2,000,000. (iv) 50% of the amount by which the total income exceeds in each slab but total income does not exceed

Rs.4,450,000. (v) 60% of the amount by which the total income exceeds in each slab but the total income exceeds

Rs.4,450,000. Division IAA Rate of tax on Builders and Developers Pursuant to the introduction of section 113C, rate of payment of tax has been respectively imposed as follows: a) in the case of a builder at Rs.50 per sq. ft. on covered constructed area; and b) in the case of a developer at Rs.100 per sq. yard on the area of land developed. Division II Clause (ii) Rate of tax on Society or a Cooperative Society Paragraph (ii) of Division II under Part I of the First Schedule is proposed to be omitted whereby a society or a cooperative society was required to pay tax at the rates applicable to a company or an individual, whichever is beneficial. Now said option is proposed to be withdrawn. Consequent to the proposed deletion, society or cooperative society will be chargeable at the same tax rate of 35% as applicable to the company, as the society or cooperative society falls under the definition of ‘Company’ as provided in section 80. Division II Clause (iii) Rate of tax on small companies Presently, a small company as defined in Section 2 is required to pay tax at the rate of 20%. It is proposed that tax at the rate of 20% be imposed up to the extent whereby the turnover of such company does not exceed Rs. 250 million, however, where the turnover exceeds the prescribed limit of Rs.250 million, tax shall be payable at the following graduated rates based on the quantum of turnover. Rate (i) Income attributable to turnover exceeding Rs.250 million but does not exceedRs.350 million 25% plus (ii) Income attributable to turnover exceeding Rs.350 million but does not exceed Rs.500 million 30% plus (iii) On the income attributable to turnover exceeding Rs.500 million. 35% plus Division VI & Part II Division V Rate of tax on income from property Currently, the rate of tax to be paid under section 15 is 5% of the gross amount of rent chargeable to tax. Finance Bill 2008 has proposed the following rates of tax for discharge as well as for the tax withholding

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a) in the case of individual and association of persons

S.No. Gross amount of rent Rate of tax imposed on payment

(1) Where the gross amount of rent does not exceed Rs.150,000. Nil.

(2) Where the gross amount of rent exceeds Rs.150,000 but does not exceed Rs.400,000

5 per cent of the gross amount exceeding Rs.150,000.

(3) Where the gross amount of rent exceeds Rs.400,000 but does not exceed Rs.1,000,000.

Rs.12,500 plus 10 per cent of the gross amount exceeding Rs.400,000

(4) Where the gross amount of rent exceeds Rs.1,000,000 Rs.72,500 plus 15 per cent of the gross amount exceeding

Rs.1,000,000.

S.No. Gross amount of rent Rate of tax applicable for tax

withholding

(1) Where the gross amount of rent does not exceed Rs.150,000.

Nil.

(2) Where the gross amount of rent exceeds Rs.150,000 but does not exceed Rs.500,000

5 per cent of the gross amount exceeding Rs.150,000.

(3) Where the gross amount of rent exceeds Rs.500,000 but does not exceed Rs.1,300,000

Rs.17,500 plus 10 per cent of the gross amount exceeding

Rs.500,000.

(4) Where the gross amount of rent exceeds Rs.1,300,000. Rs.97,500 plus 15 per cent of the gross amount exceeding Rs.1,300,000.

* There appears to be calculation error as tax withholding rates are not in line with tax discharge rates. b) in the case of company

S.No. Gross amount of rent Rate of tax imposed on payment

(1) Where the gross amount of rent does not exceed Rs.400,000.

5 per cent of the gross amount of rent

(2) Where the gross amount of rent exceeds Rs.400,000 but does not exceed Rs.1,000,000.

Rs.20,000 plus 10 percent of the gross amount of rent exceeding Rs.400,000.

(3) Where the gross amount of rent exceeds Rs.1,000,000. Rs.80,000 plus 15 percent of the gross amount of rent exceeding

Rs.1,000,000. * Same rates are applicable for tax withholding. Part II Rate of advance tax on imports

The general rate of advance tax to be collected by the Collector of Customs under section 148 is proposed to be reduced from 5% to 2% of the value of the goods. However, special rate of 1% is still available on some items mentioned in clause 13 G of Part II of the Second Schedule. Part III Division II Rate of tax deduction on payments to non – residents on account of Insurance premium or re -insurance premium

As a consequence of insertion of sub-section (13A) of section 101, the rate of tax deduction from payments to non residents on account of insurance premium or re-insurance premium in sub-section (1AA) of section 152 is proposed to be 5% of the gross amount paid.

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Division IIIA Rate of tax deduction on payments to non – resident media persons Pursuant to the insertion of section 153A, the rate of tax to be deducted from payments to non resident media persons on account of advertisement services to a non-resident person relaying from outside Pakistan, is proposed to be 10% of the gross amount paid. Part IV Division III Tax on Motor Vehicles

Rates of tax on other private motor cars falling under clause (3), Division III of Part IV, are proposed to be revised as follows:

Engine Capacity Rate of tax (Rs.)

(a) upto 1000cc 500 (b) 1001cc to 1199cc 750 (c) 1200 to 1299cc 1,000 (d) 1300cc to 1599cc 2,000 (e) 1600cc to 1999cc 3,000 (f) 2000cc and above 5,000

Division IV Tax on Electricity Consumption

Tax on electricity consumption is to be collected as per the existing slab rates mentioned in Division IV of the Part IV. However, where the amount of electricity bill exceeds Rs. 20,000, the rate of tax to be collected is proposed to be 10% of the bill instead of Rs. 2,000 presently applicable. Division V Tax to be collected from Telephone users

The Bill proposes to abolish different slabs given for collection of tax, instead it proposes to collect tax at 10% of the bill amount exceeding Rs. 1,000. However, in case of subscribers of mobile and prepaid telephone cards, tax will remain collectible at 10% of the amount of bill or sale price of prepaid telephone cards. Division VI Cash withdrawal from bank

The rate of tax to be deducted under section 231A is proposed to be increased from 0.2% to 0.3% of the cash amount withdrawn. However, daily withdrawal up to Rs. 25,000 would remain exempt for tax withholding. Division VIII Tax to be collected on purchase of motor cars and jeeps

The current rate of tax to be collected under section 231 B is 5% of the gross amount payable for the purchase of motor vehicle. However, the rate was reduced to 2.5% as a result of insertion of clause 9A in Part II of the Second Schedule. Now the single rate is abolished and following rates are proposed based on cubic capacity of cars and jeeps.

Engine Capacity Amount of Tax Rupees

upto 850cc 10,000 851cc to 1000cc 14,000 1001cc to 1300cc 22,500 1301cc to 1600cc 22,500 1601cc to 1800cc 35,000 1801cc to 2000cc 30,000 Above 2000cc 50,000

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Second Schedule Part I Exemption from total Income Clause 57 Paragraph (x) of sub-clause (3) is proposed to be deleted. Consequently exemption available to

the accumulated balance upto 25% received from the voluntary pension system offered by a pension fund manager under the Voluntary Pension System Rules, 2005 will be no more available

Clause 61 Sub paragraph (a) (b)

The amount of donation for the purpose of direct deduction from taxable income proposed to be restricted to 10% from 30% in the case of individual and AOP, and from 15% in the case of company.

Clause 66 Consequent to the amendment proposed in section 54, the following are exemption available in other statutes to become part of Second Schedule.

• Pension of a former President of Pakistan and his widow under the President Pension Act, 1974 (IX of 1975)

• State Bank of Pakistan and State Bank of Pakistan Banking Services Corporation

Clause 98

The Bill proposes to insert a new proviso by virtue of which the income of Pakistan Cricket Board is taxable.

Clause 103A At present intercorporate dividend in respect of companies entitled to group relief under section 59AA is exempt from tax. This relief is proposed to be extended to the companies eligible for group taxation under section 59B.

Clause 110 Exemption on capital gains on sale of listed securities, modaraba certificates or any instrument of redeemable capital etc. is proposed to be extended upto tax year ending on June 30 2010.

The following clauses have been omitted

Clause 2 Salary of employees of Shaukat Khanum Memorial Hospital & Research Centre.

Clause 6 Salary of foreign employees of British Council.

Clause 21 Annuity from State Life Insurance Corporation of Pakistan.

Clause 62 Direct deduction from taxable income in respect of donation given to Liaquat National Hospital.

Clause 63A Deduction from taxable income in respect of donation to President’s Relief Fund for Earthquake Victims.

Clause 63B Direct deduction from donation to World Islamic Economic Forum, 2006.

Clause 77 By virtue of deletion of the clause, exemption currently available on profit derived by non-resident person (whether a citizen of Pakistan or otherwise) on Islamic mode of financing including istisna, modaraba, musharika is withdrawn

Clause 82 Exemption available to profit on Special US Dollar Bonds issued under the Special US Dollar Bond Rules, 1998 is withdrawn.

Clause 83 Exemption available to profit from Pak rupee accounts converted from a Foreign Currency Account or deposit held on the 28th May 1998 is withdrawn.

Clause 132A Income of non-resident person on supply of plant, equipment and machinery to Hub Power Company Limited, clause being redundant hence proposed to be deleted.

Clause 133A Exemption on gain on transfer of membership right, shares and room by a member of an existing stock exchange is barred by time limitation.

Clause 138 Exemption on Income form Kot Addu Power Station is time barred by time limitation.

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Part II Reduction in Tax Rates Clause 13C Increase in income tax rate on purchase of locally produced edible oil from 1% to 2% is proposed

in respect of manufacturers of cooking oil or vegetable ghee or both.

Clause 13G Reduced tax rate of 1% of the import value was available on 24 items. Now through to Finance Bill, all other items have been deleted with the exception of following 3 items:

i) Gold

ii) Mobile telephone sets

iii) Silver

Clause 13HH The Bill proposes to insert a new clause by virtue of which tax is to be deducted under section 153 at the rate of 1% on the sale value of rice to be sold by Rice Exporters Association of Pakistan (REAP) to Utility Store Corporation, in accordance with the provisions of the agreement, signed with Ministry of Food, Agriculture and Livestock (MINFAL) on May 5, 2008.

The following clauses have been omitted

Clause 6 Reduced rate f tax u/s 151 on Profit on Special US Dollar Bonds.

Clause 9A Tax u/s 231B collected @ 2 ½ % at the time of sale of motor car.

Clause 10 Reduced rate of tax of 20% on the Income from business of Fauji Foundation and Army Welfare Trust.

Clause 13 1% tax on imports of raw materials and capital goods imported for own use by a manufacturer.

Clause 13A Reduced tax rate of 1% on import of Phosphatic fertilizers.

Clause 13B Reduced tax rate of 2% on import of certain goods.

Clause 13H Tax at 2% on import of certain raw material and other goods.

Clause 14 & 15 Reduced tax rate of 0.75% u/s 154 on export of rice, fish and stones.

Clause 16 Reduced tax rate of 7.5% on the dividend income of the non resident company engaged exclusively in mining operations.

Part III Reduction in Tax Liability Clause 5 The finance bill proposes to rearrange clause 5

Existing clause Proposed clause

Whereas the corporatised entities of Pakistan Water and Power Development Authority (DISCOs) and National Transmission and Dispatch Company (NTDC), are required to pay minimum tax under section 113, the purchase price of electricity shall be excluded from the turnover liable to minimum tax upto the tax year 2013

The tax payable under clause (a) of sub-section (1) of section 151, in respect of any amount paid as yield or profit on investment in Bahbood Savings Certificate or Pensioners Benefit Account shall not exceed 10% of such profit.

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The following clauses have been omitted

Clause 3 Minimum tax for cigarette distributors Part IV Exemption from specific provisions Clauses 16, 19 & 57

To withdraw the operation of section 113 (Minimum tax)

Clause 43A & 46

To rearrange the clause as clause (46). The effect of change is that the payment to permanent establishment against supply of petroleum products will remain exempt from tax withholding on supplies.

Clause 46A To withdraw the exemption from the provisions of sub-section (6B) of section 153 and include exemption from the provisions of sub-section (6) of section 153

Clause 47B To substitute the clause in order to streamline the provision in accordance with the NBFC Rules, 2007. Apparently there is no change in the status of exemption already available.

Clause 56 Clause 56 is proposed to be substituted. The substituted clause read as under:

The provisions of section 148 shall not be applicable to the import of goods classified under Pakistan Customs Tariff falling under Chapters 27, 52.01, 86 and 99.

Clause 65 To insert a new clause by virtue of which any income derived by a project, approved by Designated National Authority (DNA), from the transfer or sale of Clean Development Mechanism Credits i.e. Certified Emission Reductions, verified Emission Reductions, is proposed to be exempt.

Clause 66 The Bill proposes to insert a new clause by virtue of which the provisions of section 235 (electricity consumption) shall not be applicable to the exporters-cum-manufacturers of -

(a) carpets; (b) leather and articles thereof including artificial leather footwear; (c) surgical goods; (d) sports goods; and (e) textile and articles thereof.

The following clauses have been omitted for becoming redundant, etc.

Clause 3A Waiver of profit on debt or the debt itself

Clause 11 Consequent to the deletion of section 113 this clause mandating the non-application of minimum tax in various circumstances and the parties is proposed to be withdrawn.

Clause 33 Exemption in respect of non-withholding of tax on payment to National Investment (Unit) Trust or a mutual fund is proposed to be withdrawn.

Clause 36 No tax deduction on profit on Special US Dollar Bonds

Clause 41A Manufacturer, where declaration of option for the presumptive tax regime has been furnished

Clause 42A President Relief Fund for Earthquake Victims, 2005

Clause 58 Exemption available to Telecom companies from the levy of additional tax for default of not collecting tax withholding tax is no more available.

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The Third Schedule Part II First Year Allowance (FYA) Pursuant to the insertion of section 23A, FYA at 90% is now proposed to be allowed on plant, machinery and equipment installed by any industrial undertaking set up in specified rural and under developed areas, and owned and managed by a company Such allowance is proposed to be allowed in lieu of initial allowance as allowed under section 23 against the cost of the “eligible depreciable assets” put to use after July 1, 2008. The Fourth Schedule General Insurance Rules Rule 5(b) Appreciation / Depreciation of investment not taxable / deductible By virtue of proposed amendment, while computing the taxable income of any business of the insurer (other than life insurance), any amount taken to reserve to meet depreciation of investments is not allowed as deduction and any amount taken credit for in the accounts on account of appreciation of investment is not treated as part of the profits and gains unless these have been crystallized as gains or losses on the realization of investments. Previously unrealized gains and losses on investments were taxable or allowable, as the case may, while computing the taxable income of any business of the insurer (other than life insurance) Rule 5(d) Payment of insurance or re-insurance premium to non–resident without deduction of tax at source While computing the taxable income of any business of the insurer (other than life insurance), no deduction is proposed to be allowed on account of insurance premium paid to an overseas insurance or re-insurance company or a local agent of an overseas insurance company until tax has been deducted at the rate of 5% on the gross amount under newly inserted sub-section (1AA) of section 152. Rule 6A Extension of period for exemption of capital gains from sale of shares Exemption available on the gains from sale of following has been extended up to tax year ending on June 30, 2010:

a) modaraba certificates; b) any instrument of redeemable capital as defined in the Companies Ordinance, 1984 (XLVII of 1984),

listed on any stock exchange in Pakistan; c) shares of a public company (as defined in sub-section (47) of section 2); and d) the Pakistan Telecommunications Corporation vouchers issued by the Government of Pakistan,

The Sixth Schedule Provident Fund Rule 3(a) Part I Employer's annual contributions, when deemed to be income received by employee. Presently, contributions made by the employer in a recognized provident fund in excess of 1/10th of the salary of the employee are deemed to be the income of the employee. Finance Bill 2008 proposes to amend this limit as lower of 1/10th of salary and Rs. 100,000.

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Superannuation Fund Rule 5 Part II Deduction of tax on contributions paid to an employee. Presently, tax on receipt by employees other than the amount exempt under clause (25) of Part I of the Second Schedule, from superannuation fund is required to be deducted by the trustees at the average rate of tax at which the employee was liable to tax during the preceding three years or during such period, if less than three years, as he was a member of the fund. Now the Finance Bill 2008 proposes that the tax shall be deducted by the trustees at the rate applicable to the year of withdrawal. The Seventh Schedule Rule 1(c) Inadmissibility of Specific Provisions The newly introduced schedule, effective from the tax year 2009 onward, provided the allowability of provisions for classified advances and off balance sheet items as claimed in the accounts, provided these are certified duly from the external auditors to the effect that such provisions were in line with the requirements of the Prudential Regulations. Finance Bill 2008 proposes to withdraw such relaxation and specific provision is no more allowed as deduction while computing the taxable income of a banking company instead provisions under section 29 and 29A of the Ordinance as related to allowability of bad debts are applicable. Rule 7 Withdrawal of requirement of minimum tax liability Pursuant to the proposed omission of section 113 for minimum tax liability, banking company is also not required to pay minimum tax. Rule 8 (1A) Set off of losses pursuant to the Scheme of Amalgamation The accumulated loss under the head “Income from Business” (not being speculation business losses) of an amalgamating banking company or banking companies shall be set off or carried forward against the business profits and gains of the amalgamated company and vice versa, up to a period of six tax years immediately succeeding the tax year in which the loss was first computed in the case of amalgamated banking company or amalgamating banking company or companies. It means that by virtue of proposed amendment, brought forward losses and capital losses of amalgamating banking company or banking companies are available for set off and carry forward against the business profits and gains of amalgamated company and vice versa.

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Sales Tax Act, 1990 Proposed Amendments 1. Definitions

Arrears (2A) Section 2 The definition of ‘arrears’ is proposed to be substituted to mean, on any day, the sales tax due and payable by the person under the Act before that day but which has not yet been paid. The definition is revamped in view of the specific definition of ‘sales tax’ which has been added in the Act. Associate (associated persons) (3) The Finance Bill seeks to substitute the definition of ‘associated persons’. The proposed definition is in line with the term ‘associate’ defined in the Income Tax Ordinance, 2001. Board (4) The name of Central Board of Revenue was changed to Federal Board of Revenue as a result of promulgation of the Federal Board of Revenue Act, 2007. The definition of ‘Board’ is proposed to be substituted to make the consequential amendment therein. Now the term ‘Board’ is defined to mean the Federal Board of Revenue established under section 3 of the Federal Board of Revenue Act, 2007. Importer (13) Presently, the term ‘importer’ is defined to mean any person who lawfully imports any goods into Pakistan. The word ‘lawfully’ appears to be superfluous so it is proposed to be omitted from the definition. Input and output tax (14 and 20) The Finance Bill seeks to redefine the terms ‘input tax’ and ‘output tax’ to streamline them. However, from the definition of ‘input tax’, the sales tax levied in Azad Jammu and Kashmir (AJK) on supply of goods is proposed to be excluded. It transpires that such input tax paid in AJK can not be claimed by person registered in Pakistan. Person (21) The term ‘person’ is proposed to be redefined to specifically mention the following persons which will fall under this definition:

(a) an individual;

(b) a company or association of persons incorporated, formed, organized or established in Pakistan or

elsewhere;

(c) the Federal Government;

(d) a Provincial Government;

(e) a local authority in Pakistan; or

(f) a foreign government, a political subdivision of a foreign government, or public international organization;

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Provincial sales tax (22A) The Financial Bill seeks to define the ‘Provincial Sales Tax’ to enumerate all Provincial Sales Tax Ordinances at one place in this definition. Sales Tax (29A) The definition of ‘sales tax’ is proposed to be added in the Act. It is defined to mean:

(a) the tax, additional tax, or default surcharge levied under this Act;

(b) a fine, penalty or fee imposed or charged under this Act; and

(c) any other sum payable under the provisions of this Act or the rules made thereunder. Supply (33) The present definition of ‘supply’ is very broad and it includes lease, other disposition of goods, business or non-business of goods, etc. The proposed definition is very specific and it means a sale or other transfer of the right to dispose of goods as owner including such sale or transfer under hire purchase agreement. However, the Federal Government has been given power to declare any transaction as supply through a notification in the official Gazette. Tax (34) The term ‘tax’ is proposed to be redefined to mean sales tax. As the definition of ‘sales tax’ has been added in the Act, the consequential amendment is proposed to be made in the definition of ‘tax’. Taxable Activity (35) ‘Taxable activity’ is proposed to be redefined as any economic activity carried on by a person whether or not for profit, and includes-

(a) an activity carried on in the form of a business, trade or manufacture;

(b) an activity that involves the supply of goods, the rendering or providing of services or both to another

person;

(c) a one-off adventure or concern in the nature of a trade; and

(d) anything done or undertaken during the commencement or termination of the economic activity, but does not include-

• the activities of an employee providing services in that capacity to an employer;

• an activity carried on by an individual as a private recreational pursuit or hobby; and

• an activity carried on by a person other than an individual which, if carried on by an individual,

would fall within clause (b).

Time of supply (44) Presently, the ‘time of supply’ is taken to be a time when the goods are delivered by the registered person. However, in the case of a supply to associated person, the ‘time of supply’ is considered to be a time when the goods are made available to it although such goods are not delivered. Now by virtue of proposed definition, the time of supply in the case of both associated and non-associated persons would be taken to be time when the goods would be delivered or made available to the recipient.

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The proposed definition of ‘time of supply’ in relation to- (a) a supply of goods, other than under hire purchase agreement, means the time at which the goods

are delivered or made available to the recipient of the supply;

(b) a supply of goods under a hire purchase agreement, means the time at which the agreement is entered into; and

(c) services, means the time at which the services are rendered or provided. The Bills seeks to define the following terms in the Act which are in line with the Income Tax Ordinance, 2001:

• Association of persons (3A) • Firm (11A) • Company (5AA) • Trust (44A) • Unit Trust (44AA)

2. Scope of tax Section 3

The general rate of sales tax on supply of goods is proposed to be increased from 15% to 16%.Rate of sales tax on services is also expected to be increased from 15% to 16%. Since increase in such rate has already been proposed to be made in Islamabad Capital Territory (Tax on Services) Ordinance.

3. Retail Tax Section 3AA, 26AA & 32AA The sales tax on retailer is now separately covered by the Sales Tax Special Procedure Rule, 2007. These

sections in the main Act dealing taxation for retailer had been become redundant and not proposed to be deleted.

4. Determination of tax liability Section 7

Presently, where the taxpayer could not claim the input tax in the relevant month, he is entitled to adjust such input tax in the succeeding twelve months against output tax in the return. Now, this period of twelve months is proposed to be reduced to six months to claim previous input tax in the return. However based on the change, the taxpayer would not be required to specify the reasons for such delayed input tax adjustment.

5. Adjustable input tax Section 8B

The condition given authorizing adjustment of the input tax on purchase of fixed assets against output tax after start of a production of a new unit is proposed to be removed, hence such input tax will be allowable on purchase of fixed assets subject to the compliance of other general conditions given in this regard in the Act.

6. Refund of input tax Section 10

Presently, the facility of refund of excess input tax is available against the exports or zero rated local supplies. Now, in case of excess input tax against supplies other than zero rated or exports, such excess input tax may be carried forward to the next tax period and shall be treated as input tax for that period and the refund may be allowed in respect of such excess input tax in accordance with the refund procedure prescribed by notification in the official Gazette.

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7. Assessment of tax Section 11

This section empowers the sales tax officer to make assessment of tax including levy of penalty and default surcharge in case the taxpayer has not fully discharged his sales tax liability. By virtue of proposed amendment in this section, the sales tax officer is bound to issue show cause within five years to make such assessment of tax. Moreover, the time limit for passing an order within 90 days of issuance of show cause notice has been extended to 120 days. The power available to the Collector to extend such time for further 90 days has also been extended to 120 days.

8. Access to record, documents, etc Section 25

Sub section (2) of section 25 empowers the sales tax officer to conduct audit of the records of the taxpayer once in a year. By virtue of proposed amendment, it has been clarified that sales tax officer may carry out such audit despite the records of that year have earlier been audited by the Auditor-General of Pakistan.

9. Return Section 26

The period of filing of revised return is proposed to be extended from 90 days to 120 days.

10. Default Surcharge Section 34

Presently, the rate of default surcharge i.e. additional tax is 1% for first six month of default in payment of sales tax and where default continues, the rate is 1.5% for the seventh month onwards. The Bill seeks to introduce uniform rate of 1.5% since first day of default.

11. Recovery of tax not levied or short levied or erroneously refunded Section 36

The time limit for passing an order under section 36 within 90 days of issuance of show cause notice is proposed to be extended to 120 days. The power available to the Collector to extend such time for further 90 days has also been extended to 120 days.

12. Power of the Board and Collector to call for records Section 45

By virtue of proposed amendment in this section, the Collector can not call for and examine the records of any proceedings under the Act where an appeal before Collector (Appeals) or the Sales Tax Appellate Tribunal is pending.

13. Appeals Section 45B

The time limit for passing an order by Collector (Appeals) within 90 days of filing of appeal is proposed to be extended to 120 days. The time available to the Collector (Appeals) to pass such order within further extended period of 90 days has also been enhanced to 120 days.

14. Appeals to Appellate Tribunal Section 46

Presently, appeal may be filed before the Tribunal against the order passed by the Collector (Appeals) under section 45B or against any order passed by the Board or the Collector under section 45A. The Bill now seeks to allow filing appeal before the Tribunal against any order passed by the Collector of Sales Tax through adjudication or under any of the provisions of the Act or rules made thereunder. The maximum time limit for passing an order in appeal by the Tribunal is also proposed to be extended to 8 months from 6 months.

Moreover, the single bench may now adjudicate the cases involving tax or penalty upto Rs.10 million. Previously, this limit was 1.5 million.

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15. Alternative Dispute Resolution (ADR) Section 47A

In settlement of disputes through ADR Committee, the Federal Board of Revenue is required to pass an appropriate order on the recommendation of the Committee. Presently, there is no provision in the Act which authorizes the Board to modify its order in case of any mistake therein. The proposed new sub section 4(A) empowers the Chairman to pass a revised order, upon filing of application by the aggrieved person, in case there is an error in the original order passed by the Board or when Chairman considers it just and equitable to modify the said order.

16. Power to make rules Section 50

A new sub-section (2) is proposed to be inserted in this section whereby all rules made under any provisions of the Act shall be collected, arranged and published alongwith general orders and departmental instructions and rulings, etc. at appropriate intervals and sold to the public at reasonable price.

17. Representatives and their liabilities and obligation Section 58A & 58B

The concept of ‘representative’ is proposed to be introduced now in the Act. The similar provisions regarding representative and its liabilities already exist in the Income Tax Ordinance, 2001. The elaborative definition of ‘representative’ has been given in the Finance Bill. A person is usually considered to be a representative of a taxpayer if he has business or similar connections with the taxpayer. The law requires the representative of a taxpayer to perform duties and obligations imposed under the Act on the taxpayer including the payment of tax subject to the conditions and limitations prescribed in this regard.

18. Repayment of tax to persons registered in Azad Jammu and Kashmir Section 61A

This proposed new section seeks to allow the refund of the input tax paid on any goods acquired in or imported into Pakistan by the persons registered in Azad Jammu and Kashmir as are engaged in making of zero-rated supplies.

19. Issuance of duplicate of sales tax documents Section 69

This section is proposed to be substituted, whereby the procedure for issuance of duplicate sale tax documents has been elaborated as well as fee for issuance of attested duplicate of any such document has been increased from Rs.10/- to Rs.100/-.

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1. Schedules 1.1 Item subject to Sales Tax on Retail Prices Basis Third Schedule

• The Finance Bill seeks to exclude biscuits, confectionary, snacks, electric bulbs from Third Schedule to

the Sales Tax Act, 1990. Accordingly, sales tax on such goods is proposed to be charged in VAT mode. 1.2 Exemption Sixth Schedule

• Exemption on packaged edible vegetables and edible fruits is proposed to be removed. • The Finance Bill seeks to extend exemption on ready mix concrete blocks. Previously, building blocks of

cement were only exempted under this Schedule.

• Energy saver lamps are proposed to be exempted as a measure to overcome electricity crises.

• Supplies to hospitals run by Federal or Provincial Government or charitable operating hospitals having at least 50 beds are proposed to be exempted under this Schedule.

• The Finance Bill seeks to exempt goods and services purchased by non-resident entrepreneurs in trade

fairs and exhibitions subject to reciprocity and conditions and restriction as may be specified by the Board.

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Significant Notifications Reference Summary S.R.O. 524(I)/2008 11-06-2008

General Amnesty Scheme from payment of past liability (i.e. prior to June 11, 2008) to persons opting to get themselves registered under Sales Tax Act, 1990 Amnesty has been allowed to exempt the whole Sales Tax amount, default surcharge and penalties on supplies made prior to June 11, 2008 by an unregistered person who was otherwise liable to be registered under Sales Tax Act, 1990 and would get himself registered during the period June 01, 2008 to July 31, 2008 and thereafter file Sales Tax Returns and pay tax due regularly.

S.R.O. 535(I)/2008 & 536(I)/2008 11-06-2008

Exemption of fertilizers and pesticides from payment of Sales Tax at import and supply stage By virtue of these SROs, different types of fertilizers and pesticides as mentioned in the said SROs have been exempt from Sales Tax at the time of import and on local supply.

S.R.O. 540(I)/2008 11-06-2007 & S.R.O. 863(I)/2007 24-08-2007

Zero-rating of molasses and other raw materials for the manufacturing of acetic acid For providing relief to textile industry which extensively uses acetic acid the SRO proposes for zero-rating of raw materials used in making of acetic acid according to criterion mentioned in SRO 863(I)/2007 .

S.R.O. 541(1)/2008 & 542(1)/2008 11-06-2008

Maintenance of exemption of Sales Tax on the import and supply of cellular telephone sets subject to the payment of Rs.500 per mobile phone/connection Previously under SRO 541(I)/2006 dated June 05, 2006 custom duty and sales tax were exempted on import and supply of mobile phones to the extent that combined effect of both the levies should be Rs.500 per cellular set, which was collectible from user by the cellular company operator on activation of a mobile phone/ new connection or giving a new number. Now by SRO 542(1)/2008 the levy of Rs.500 per cellular set/ connection has been confined to Sales Tax and separate custom duty of Rs.500 per mobile set will be charged at import stage aggregating to Rs.1,000.

S.R.O. 537(1)/2008 11-06-2008

Enhancement of rate of tax on the import or supply of goods mentioned in the SRO 644(I)/2007 Rate of tax has been enhanced from 20% to 21% on the goods mentioned in Table I and from 17.5% to 18.5% on the goods mentioned in Table II of the SRO 644(I)/2007

S.R.O. 538(1)/2008 11-06-2008

Zero Rating of Caustic soda flakes in solid form, Cotton linter and Sequins The said SRO proposes for the zero rating of Sales Tax on supply and import of Caustic soda flakes in solid form, Cotton linter and Sequins and deletion of Maize (corn) starch from zero rated thereof.

530(1)/2008 11-06-2008

Through this SRO an insertion has been made in rule 18 of the Sales Tax Rules, 2006 interalia extending the date of filing of return. In cases where due date has been prescribed as 15th of a month, the tax due shall be deposited by the 15th and the return shall be submitted electronically by 18th of the same month

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Significant Proposed Amendments in Federal Excise Act, 2005 1. Definitions Section 2 Duty Due Section 2(9a)

Present definition of ‘duty due’ does not cater for the duty in respect of services. The Finance Bill proposes to redefine the ‘duty due’ to mean duty in respect of clearances made or services provided or rendered during a month and shall be paid at the time of filing of return.

Franchise Section 2(12a)

Presently, the definition of ‘Franchise’ has been given in the Federal Excise Rules. The term ‘Franchise’ is now proposed to be defined in the Act which means an arrangement under which the franchisee is contractually or otherwise granted any right to produce, manufacture, sell or trade in or do any other business activity in respect of goods or to provide service or to undertake any process identified with franchiser against a fee or consideration including royalty or technical fee, whether or not a trade mark, service mark, trade name, logo, brand name or any such representation or symbol, as the case may be, is involved.

2. Duties specified in First Schedule Section 3 Finance Bill proposes that duties of excise shall also be levied at the rate of 15% ad valorem on services originating outside but terminating in Pakistan. Pursuant to the aforementioned change, where services are rendered by the person out of Pakistan, the recipient of such service in Pakistan shall be liable to pay duty.

3. Time period for filing of revised return Section 4 Time period for filing a revised return to correct any omission or wrong declaration made therein is proposed to be extended from 90 days to 120 days from filing of original return. Finance Bill provides that a composite return as may be prescribed for the purpose of sales tax and duty chargeable under the Act shall, unless otherwise directed by the Board, be deemed to be a return for the purpose of this section. It transpires that where any such composite return is filed by the registered person, no separate return shall be required to be filed under this Act.

4. Application of provisions of Sales Tax Act, 1990 Section 7

The Finance Bill seeks to insert sub section (2) to the section 7 whereby the Federal Government may declare, by notification in the official Gazette, that any of the provisions of the Sales Tax Act, 1990,relating to the levy of and exemption from sales tax, registration, book keeping and invoicing requirements, returns, offences and penalties, appeals and recovery of arrears shall , with such modifications and alterations as it may consider necessary or desirable to adapt them to the circumstances, be applicable in regard to like matters in respect of the duty leviable under this Act.

5. Default Surcharge Section 8

Presently, the rate of default surcharge i.e. additional tax is 1% for first six month of default in payment of duty and where default continues, the rate is 1.5% for the seventh month onwards. The Bill seeks to introduce uniform rate of 1.5% since first day of default.

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6. Determination of value for the purpose of duty Section 12

Presently, where any goods are liable to duty under this Act at a rate dependent on their value, duty shall be assessed and paid on the basis of wholesale cash price of those goods and where such price is not available, of identical or similar goods, on which goods are capable of being sold to general body of retail traders and if there is no such body, to the general body of consumers on the day of its sale without any deduction whatever except the amount of duty and sales then payable. The Finance Bill proposes that now duty on such goods shall be assessed and paid on the basis of value as determined in accordance with sub-section (46) of section 2 of the Sales Tax Act, 1990, excluding the amount of duty payable thereon.

7. Recovery of unpaid duty or of erroneously refunded duty or arrears of duty, etc. Section 14

Presently, in the case of non-payment or short payment of duty, erroneous refund of duty, etc., the Federal Excise Officer may issue a show cause notice for payment of such duty within three years from the relevant date. The Finance Bill seeks to extend the period of issuance of show cause notice upto five years where such non or short payment of duty or erroneous refund is attributable to collusion or deliberate act.

8. Offences, penalties, fines and allied matters Section 19 Following are the proposed amendments in the rates of penalties:

Penalty for non filing of return

Present Rate Proposed Rate

Rs. 10,000 Rs. 5,000, however, where a person files the return within 15 days after the due date he shall pay a penalty of Rs.100 for each day of default.

Penalty for non or short payment of duty Present Rate Proposed Rate

Rs. 10,000 Rs. 10,000 or 5% of duty involved whichever is higher

9. Power of adjudication Section 31 (3)

Federal Excise Officer invested with the power to adjudicate is presently required to decide the case within 90 days of the issuance of show cause notice or within such extended period as he may fix but not exceeding 90 days. Finance Bill 2008 proposes this limit to be extended up to 120 days.

10. Appeal to Collector (Appeals) Section 33

The time limit for passing an order by Collector (Appeals) within 90 days of filing of appeal is proposed to be extended to 120 days. The time available to the Collector (Appeals) to pass such order within further extended period of 90 days has also been enhanced to 120 days.

11. Power of Board or Collector to pass certain orders Section 35 The time period to call for and examine the records by the Board or Collector in respect of any proceedings

relating to any decision or order passed by any Federal Excise Officer has been extended to 5 years from 2 years.

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12. Power to rectify mistakes in orders Section 36

The time period to rectify any apparent mistake in the order passed by the Federal Government, the Board or any Federal Excise Officer has been extended to 5 years from 3 years.

13. Alternate dispute resolution Section 38 (4) In settlement of disputes through ADR Committee, the Federal Board of Revenue is required to pass an appropriate order on the recommendation of the Committee. Presently, there is no provision in the Act which authorizes the Board to modify its order in case of any mistake therein. The proposed new sub section 4 empowers the Chairman to pass a revised order, upon filing of application by the aggrieved person, in case there is an error in the original order passed by the Board or when Chairman considers it just and equitable to modify the said order.

14. Issuance of duplicate federal excise documents Section 43A

Finance Bill seeks to empower an officer of federal excise not below the rank of Assistant Collector to issue, on payment of one hundred rupees, an attested duplicate of any federal excise document as is available with the department or has been filed under this Act or rules made there under to a relevant registered person applying for the same.

15. Franchise services Rule 43A

Banks have been required to deduct FED on the remittance by franchisee on account of franchise fee, technical fee or royalty if it is satisfied that franchisee has not paid duty as required.

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1. Schedules 1.1 Table - I (Excisable Goods): First Schedule

• In consequence of enhancement of sales tax rate by one per cent, the Federal Excise Duty is also

proposed to be increased from 15 % to 16 % on edible oils, vegetable ghee and cooking oil.

• The Bill seeks to substitutes serial no. 9, 10, 11 pertaining to duties on cigarettes as under:

Existing Proposed

S. No.

Description of Goods

Rate of duty Description of Goods

Rate of Duty

9. Locally produced

cigarettes if their retail price exceeds fifteen rupees per ten cigarettes.

Sixty-three per cent of the retail price.

Locally produced cigarettes if their retail price exceeds sixteen rupees per ten cigarettes.

Sixty-three per cent of the retail price.

10. Locally produced

cigarettes if their retail price exceeds six rupees and fifty seven paisas per ten cigarettes but does not exceed fifteen rupees per ten cigarettes.

Two rupees and eighty paisas per ten cigarettes plus sixty-nine per cent per incremental rupee or part thereof.

Locally produced cigarettes if their retail price exceeds seven rupees and forty three paisas per ten cigarettes but does not exceed sixteen rupees per ten cigarettes.

Three rupees and seventeen paisa per ten cigarettes plus sixty-nine per cent per incremental rupee or part thereof.

11. Locally produced

cigarettes if their retail price does not exceed six rupees and fifty seven paisas per ten cigarettes.

Two rupees and eighty paisas per ten cigarettes.

Locally produced cigarettes if their price does not exceed seven rupees and forty three paisas per ten cigarettes.

Three rupees and seventeen paisas per ten cigarettes.

Further, Bill also restricts that no cigarette manufacturer shall reduce adopted price level on the day of the announcement of this Bills for the purpose of FED.

• The Federal Excise Duty on cement is proposed to be enhanced from Rs. 750 to Rs. 900 per metric

ton.

• The Finance Bill seeks to levy 5 % Federal Excise Duty on the import and local supply of motorcars and other motor vehicles principally designed for the transport of persons, including station wagons and racing cars of cylinder capacity exceeding 850cc.

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1.2 Table - II (Excisable Services): First Schedule

• FED rate is proposed to be enhanced by one per cent and new FED rate will be 16 % on services

charges of the following: o Advertisement on closed circuit T.V and cable T.V network o Inland carriage of goods by air o Other shipping agents as specified in serial 5 (ii)

• The Finance Bill seeks to increase FED rate on all type of telecommunication services from 15 % to 21 % except those which are already exempt.

• The Federal Excise Duty in respect of the following services rendered are proposed to be enhanced by

five per cent and increased FED rate will be 10 %:

o All type of insurance including re-insurer and direct insurance service o Non – fund services provided by banking and non-banking financial companies o Franchise services

• It is proposed to substitute serial no. 3 relating to services rendered for domestic and international

traveling by air.

Facilities for travel Existing Proposed (a) Services provided or rendered in

respect of travel by air of the passenger within the territorial jurisdiction of Pakistan.

Fifteen per cent of the charges.

Sixteen per cent of the charges plus rupees twenty per ticket.

(b) Services provided or rendered in

respect of travel by air of the passengers embarking on international journey to or from Pakistan.

(i) Passengers embarking to or from

SAARC region, UAE (Middle East), Saudi Arabia, Africa, Afghanistan.

Three thousand two hundred rupees for economy and economy plus classes and four thousand two hundred and for club, business and first classes.

Three thousand two hundred and forty rupees for economy and economy plus classes and four thousand two hundred and forty rupees for club, business and first classes.

(ii) Passengers embarking to or from

Europe, Far East, China, USA, Canada, Australia, South America, others.

Four thousand and two hundred rupees for economy and economy plus classes and five thousand and seven hundred rupees for club, business and first classes.

Four thousand two hundred and forty rupees for economy and economy plus classes and five thousand seven hundred and forty rupees for club, business and first classes.

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1.3 (Conditional Exemption) - Table - I (Goods): Third Schedule

• The Finance Bill seeks to extend exemptions to registered manufacture of carbon black oil (carbon black feed stock). Previously it was available for only National Petrocarbon (Pvt) Limited, Pipri, Karachi.

• It is proposed to enter the exemption in Third Schedule on goods imported or purchased locally for use in

further manufacture of goods in Export Processing Zone as previously this exemption was being enforced through SRO 333(I)/2002.

1.4 (Conditional Exemption) - Table - II (Services): Third Schedule

• The exemptions on life and health insurance are proposed to transfer from Table – I to Table – II of the Third Schedule as earlier it was mentioned under wrong Table – I (Goods)

• It is proposed to exempt FED @ 5 % on insurance premium on crops insured by farmer.

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Significant Proposed Amendments in: Customs Act, 1969 1. Directorate General of Post Clearance Audit (PCA) Section 3DD

This new section is introduced to constitute a Directorate General of Post Clearance Audit (PCA) in order to conduct post clearance audit.

2. Use of unique user identifier Section 155F

By virtue of new proviso, the Collector of Customs may suspend the use of unique user identifier of any person on receipt of any complaint or information about violation of the Customs Act, 1969.

3. Punishment for offences Section 156(1) - S.No. 43

It is proposed that the person having custody of the goods will also be penalized if that person is involved in any offence by the time good already landed and awaiting process of clearance.

4. Power of adjudication Section 179(3)

It is proposed to extend time limit from 90 days to 120 days for deciding cases relating to confiscation of goods or imposition of penalty by Customs Officers.

5. Procedure of Appellate Tribunal Section 194 – C (4) (c)

The proposal is with regard to extension in limit of tax involved in the case from Rs. 5 million to 10 million to adjudicate the case by single member bench.

6. Alternative Dispute Resolution Section 195 – C (4A)

In settlement of disputes through ADR Committee, the Federal Board of Revenue is required to pass an appropriate order on the recommendation of the Committee. Presently, there is no provision in the Act which authorizes the Board to modify its order in case of any mistake therein. The proposed new sub section (4A) empowers the Chairman to pass a revised order, upon filing of application by the aggrieved person, in case there is an error in the original order passed by the Board or when Chairman considers it just and equitable to modify the said order.

7. Other signification amendments

• The concessionary duty on import of raw materials such as Palm Stearin, Coconut Crude Oil, Crude Palm Kernel Oil, Surface Active Agents, PFAD, Palm Kernel Acid Oil and Palm Kernel Fatty Acid Distillate for manufacture of Toilet and Laundry Soap have been allowed to the industrial units located in the State of Azad Jammu and Kashmir after meeting general conditions.

• Custom duty has been increased by 10 % on old and used automotive vehicles of different capacity

specified in SRO 577(I)/2005 dated 6th June, 2005 meant for transport of persons.

Further, capital value tax is abolished on import of above mentioned vehicles. Previously CVT was recovered in addition to custom duty, sales tax, withholding taxes.

• Vehicles imported in violation of Import Policy Order as well as smuggled vehicles has been allowed

release on payment of redemption fine at 30% of the value of vehicles along with leviable duty/taxes except those vehicle which have already been auctioned.

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• Fully dedicated CNG buses exempted from duty.

• Pharmaceutical industry related specified active ingredients, chemicals and packing materials at 5 %

duty.

• Manufacturers have been allowed to import samples duty free as per specified conditions in chapter 99 of PCT.

• Custom duty at Rs. 500 per set levied on import of mobile phone.

• Custom duty on betel leaves increased from Rs. 150/Kg to Rs. 200/Kg.

• Duty rate increased on CKD/SKD of sewing machines from 5 % to 20 %

• A uniform rate of 30 % specified for import of special purpose motor vehicles.

• Duty rates on non-essential and luxury items such as dairy products, fruits, chewing gum, chocolate,

processed food, fruit juices, aerated waters, ceramic products, air conditioners/ refrigerators, electric fans, toasters, micro wave ovens, television, furniture and lighting equipment etc increased from 25 % to 35 %.

• Duty rates on cosmetics increased from 20 – 25 % to 35 %.

• Duty rates on electric ovens/ cooking ranges etc. increased from 20 % to 30 %.

The amendments set out in the First Schedule regarding rate of custom duties are being enforced from the 12th day of June, 2008.

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Capital Value Tax (CVT) Levy of tax on Capital Value on certain assets Section 7

• The Bill proposes to extend its scope whereby in the case of a bank, the capital value tax shall be paid when general power of attorney is used to enforce the mortgage of property offered as collateral for obtaining loan.

• In the “explanation” appended with section 7 (levy of tax on capital value on certain assets), the term

“Urban areas” has been redefined as follows:

“(e) urban area” means area falling within the limits of

(i) the Islamabad Capital Territory;

(ii) a Cantonment Board;

(iii) the rating areas as defined under the Urban Immovable Property Act, 1958 (W.P V of 1958) as inforce in Punjab, NWFP, Sindh and Balochistan except where the rate under section 117 of the respective Provincial Local Government Ordinance, 2001 is zero;

(IV) in addition to (iii) up to forty kilometres from the outer limits of the Cantonment Boards in Karachi and up

to forty kilometres from the notified rated areas of Karachi City District; (V) in addition to (iii) up to thirty kilometres from the outer limits of the Cantonment Boards in Lahore

and Faisalabad and up to thirty kilometres from the notified rated areas of Lahore and Faisalabad City District;

(vi) in addition to (iii) in all cases other than Karachi, Lahore and Faisalabad up to ten kilometres from

the outer limits of the Cantonment Boards and up to ten kilometres from the notified rated areas; and (vii) such areas the Federal Board of Revenue may, from time to time, by notification in the official

Gazette, specify.”.

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Federal Board of Revenue Act, 2007 The following amendments are proposed in the Act:

Section 4

In section 4, for clause (m) the following shall be substituted, namely:-

“(m) to establish a Foundation and a Fund relating thereto so as to provide support and incentives such as subsidy in the housing, transport, medical, education, uniform or liveries and such other matters to the employees and for the welfare of the present and retired employees and their families and to create, establish, organize, assist in the social and cultural activities;”

Section 5 Following new clauses are proposed to be added in section 5:

"(k) power to grant incentives and rewards to the employees;

(l) power to establish performance standards for employees on the basis of merit and specified performance standards;

(m) power to prescribe mode and method of continuous appraisal for employees; and (n) power to process matters incidental to or conducive to the attainment of all or any of the foregoing

Section 7 In section 7 a proviso is to be added which provides that the Chairman, may by notification in the official Gazette and by recording reasons thereof in writing, exclude certain classes of representations from the purview of this section. Economic Reforms Act XII of 1992 Section 3 of the Act is proposed to be substituted by a new section which provides that the provisions of this Act would have effect notwithstanding any thing contained in the Customs Act, 1969 (IV of 1969) and the Income Tax Ordinance, 1979, or any other law for the time being in force. It is further proposed that the Foreign Exchange Regulations Act, 1947 (VII of 1947) and the rules and regulations made thereunder, shall prevail over the provisions of this Act. Thus, by virtue of the proposed amendment, the provisions of the Act shall over ride the provisions of other laws with the exception of Foreign Exchange Regulations Act, 1947.

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Amendments Proposed in Labour Laws Amendments have been proposed in the following labour laws:

a) Minimum Wages for Unskilled Workers Ordinance, 1969;

b) Workers' Provincial Employees' Social Security Ordinance, 1965;

c) West Pakistan Industrial and Commercial (Standing Orders) Ordinance, 1968;

d) Workers Welfare Fund Ordinance, 1971,

e) Employees' Old-age Benefits Act, 1976. a) Minimum Wages for Unskilled Workers Ordinance, 1969

Similar to the pervious years, the Government in this year’s budget has also proposed an increase in the Minimum Wages for unskilled workers. This year the increase is from Rs. 4,600 to Rs. 6,000 per month.

b) Provincial Employees' Social Security Ordinance, 1965

The Provincial Employees' Social Security Ordinance, 1965, is applicable to industrial and commercial establishments. The purpose of this ordinance is to provide for a scheme of social security of the insured employees and their dependents in case of sickness, maternity, employment injury or death.

Under this ordinance at present only those employees are covered, whose wages are less than or equal to Rs. 5,000 per month. Keeping in view of the proposed increase in the minimum wages of unskilled worker to Rs 6,000 per month in the Finance Bill 2008, an enhancement of the wage limit from Rs 5,000 to Rs 10,000 per month for the continued applicability of this Ordinance has been proposed.

At present, the employers covered under the Social Security Scheme contribute at the rate of seven percent (7%) of the wages paid to insurable employees. In the Finance Bill 2008, it has been proposed that the rate of contribution to be decreased from seven percent (7%) to six percent (6%) of the wages.

Currently, the maximum monthly payment of employer contribution at the rate of 7% of Rs. 5,000 amounts to Rs. 350 per month. The proposed enhancement of the wage limit to Rs. 10,000 per month and the proposed reduction of contribution rate to 6% will result in the maximum contribution per secured employee up-to Rs. 600 per month.

The employers, who have opted to secure their employees through the Self Assessment Scheme contributes a fixed rate of Rs. 210 (Rupees Two Hundred and Ten only) per month. In the Finance Bill 2008, it has proposed that the fixed rate of contribution under the self assessment scheme be raised to Rs. 360 (Rupees Three Hundred and Sixty only).

c) Industrial and Commercial Employment (Standing Orders) Ordinance, 1968

At present under the section 15 (5) of the Industrial and Commercial Employment (Standing Orders) Ordinance, 1968, where the employer is conducting an inquiry of an alleged misconduct of a worker, he can suspend the worker for a total period of four weeks. During this suspension period, the worker is entitled for a subsistence allowance equal to fifty percent of the monthly wages. In the Finance Bill 2008, the allowance during the suspension period has now been proposed to be increased to an amount equal to full wages of the worker.

d) Workers Welfare Fund Ordinance, 1971

The purpose of this law is to provide for the establishment of a Workers’ Welfare Fund (WWF), for providing residential accommodation and other facilities to workers.

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At present under the provision of this Ordinance, every industrial establishment is required to pay two percent (2%) of the total income every year towards the workers welfare fund and it is only applicable on those industrial establishments, whose total income in a financial year is Rs. 500,000 or more. In the Finance Bill 2008, it has been proposed to amend the definition of Industrial Establishment in order to bring in the workers of all commercial and services sector in the ambit of this Ordinance by extending its coverage to all the establishments to which the West Pakistan’s Shops and Establishments Ordinance, 1969, is applicable.

Through Finance Act, 2006, the definition of total income for the purpose of Workers’ Welfare Fund was amended to mean higher of the profit (before taxation or provision for taxation) as per accounts or the declared income in the return of income, where return of income is required to be filed.

It was further provided that In case where return of income is not required to be filed, the total income for the purpose of fund will be the profit (before taxation or provision for taxation) as per accounts or four percent of the receipt as per the final tax statement under section 115 of the Ordinance, whichever is higher.

Although, the definition of total income was defined in the above manner by virtue of which WWF was payable on the basis of accounting profit; however, as per provision of section 4 of the Ordinance, WWF was payable equal to 2 percent of so much of the total income as is assessable under the Ordinance, thus creating an erroneous interpretation that WWF is still payable on the basis of taxable profit as declared in the return of income despite change in the definition of total income.

The proposed amendment seeks to remove this anomaly by deleting the reference of “as is assessable under the Ordinance”.

Similarly sub-section (4) is also proposed to be amended to streamline the same in accordance with the intent of the legislature i.e. WWF is to be paid on the basis of higher of accounting profit or income declared or four percent of the receipt relating to final taxation, as the case may be, applicable.

The proposed amendments also provide for corresponding change in the levy based on increase or reduction of total income.

e) The Employees’ Old-Age Benefits Act, 1976

The purpose of Employees’ Old Age Benefit Act in 1976, is to provide some subsistence level of support through pension to employees after retirement during their old age.

At present, this law is applicable to every industry or establishment, wherein twenty or more persons are employed, if the organization has been set up on or after July 1, 2006. While for the organizations established before July 1, 2006 the limit of number of persons employed was ten. In the Finance Bill, it is proposed to bring down the applicability of this Act to all the establishments, where five or more persons are employed.

At present, the employers are required to contribute six percent (6%) of the wages of the insured persons, however in the Finance Bill 2008, the rate of contribution is recommended to be reduced to five percent (5%). At present, with a maximum wage limit for coverage of Rs. 4,600 per month (current minimum wage of unskilled worker), the maximum monthly contribution by employer (6% of Rs. 4,600) comes to Rs.276/ -. Now, with the proposed changes in the contribution rate to 5% and minimum wage to Rs. 6,000, the maximum contribution by employer per worker will increase to Rs. 300 per month (5% of Rs. 6,000).

Under the Section 22 subsection (2) of this Act, certain relaxations in terms of the period of insurable employment of the insured persons are provided for the applicability of this Act. In the Finance Bill 2008, these relaxations in the insurable employment period are proposed to be withdrawn for the persons of the registered on or after July 1, 2008.

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Currently, the Banks and Banking Companies are exempt from the applicability of this Act. In the Finance Bill 2008 by amendment in section 47, (which describes the persons on which the Act do not apply), the exemption given to the banks and banking companies are being proposed to be withdrawn.

In the Schedule to the Employees’ Old Age Benefits Act, to calculate the old age pension, invalidity pension for living pensioners and pension for surviving spouse the following formula is provided:

Monthly Wages X Number of Years of Insurable Employment

The computation of the Monthly Wages in the above formula has also proposed for revision. Presently, last month’s wages were used, while calculating the monthly wages. In the Finance Bill 2008, it has been proposed that the monthly wages should now be calculated on the basis of last twelve calendar months wages on which contributions were paid.

In the Finance Bill 2008, the minimum old-age and invalidity pension to insured persons or to the survivors is being recommended to be increased to Rs. 2,000 per month from Rs. 1,500 per month. This enhanced pension will be effective for the new pensioners from July 1, 2008. In case of the current pensioners, an increase of 15% has been recommended. Furthermore, the minimum pension survivor’s pension amount (i.e. Rs. 2,000 per month) has now been offered to all survivors of the insured persons, previously it was restricted to the surviving spouse only.

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Corporate Laws Significant changes proposed are as under: Companies Ordinance, 1984 1. Annual general meeting Section 158(1) & (4)(a) & (b)

The period for holding an Annual General Meeting is proposed to be extended from “three” months to “four” months following the close of its financial year. The proposed amendment, which was desperately sought by the corporate sector, will ease out the pressure on the management for preparation of the accounts in a short time of two months. Minimum fine for default by listed companies in holding the AGM has been enhanced to Rs.50,000 but not exceeding Rs.500,000. For other companies it is minimum Rs.10,000 but not exceeding Rs.100,000.

2. Ineligibility of certain persons to become director Section 187(j)

A person is not eligible to be appointed as a director of a listed company if he is engaged in the business of brokerage or he is spouse of such person or is sponsor, director or officer of a corporate brokerage house.

A new proviso has been added by relaxing the above restriction if the company itself is a stock exchange. 3. Bar on appointment of managing agents, sole purchase, sales agents, etc Section 206

The Federal Government may also exempt appointment of managing agent or a person, firm or company entitled to the management of the affairs of a company, who has entered into an agreement or contract with an NBFC licensed to undertake asset management services in relation to an investment company, and venture capital company in relation to a fund, registered with the Commission.

4. Investments in Associated companies and undertakings Section 208 (2A)

By excluding the words “such class of” the Commission is proposed to be empowered to make regulations with respect to nature, period, amount of investment and terms and conditions of investments by all types of companies in their associated undertakings.

5. Annual accounts and balance-sheet Section 233 (1) & (4)

As the period for holding the annual general meeting has been once again extended and accordingly the period for laying the audited accounts at the annual general meeting is also extended from “three” months to “four” months. In order to facilitate transmission of annual accounts electronically, the Commission is proposed to be empowered to specify the form and manner in which the company shall send its annual accounts to the members.

6. Period for payment of dividend Section 251

The Commission is now proposed to be empowered to specify the time period of payment of dividend by the company, instead of previous requirement of 45 and 30 days for listed and other companies, respectively.

7. Power to make Rules Section 282G, J , K & M

The word “regulations” has been inserted after the word “rules” wherever mentioned in Section 282G, J, K, and M to enable the Commission to formulate appropriate regulations for NBFCs.

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Insurance Ordinance, 2000 1. Conditions imposed on registered insurers Section 11

The annual supervision fee payable by an insurer to the Commission is proposed to be increased from the existing limit of Rs.100,000 or Re.1 per thousand of gross direct premium written in Pakistan whichever is higher to Rs.500,000 or Re.1 per thousand of gross direct premium written in Pakistan.

2. Power to prescribe maximum levels of acquisition costs and maximum levels of management expenses Section 66

By deletion of sub section (4), the power granted under section 66 to the Commission has been extended for an indefinite period.

3. Intermediaries Part XIII – Section 94

Certain provisions of the law which were previously applicable only to direct insurance intermediaries, such as brokers, is now proposed to be made applicable to the reinsurance brokers also.

Securities and Exchange Commission of Pakistan Act, 1997 1. Term of Office of the Commissioners Section 7 The bill seeks to amend the term of the Commissioner while filling casual vacancy. Further, it is proposed

that a person appointed as a Commissioner shall not be older than sixty two of age on the date of his appointment. A Commissioner shall stand retired upon reaching the age of sixty five year.

2. Securities and Exchange Policy Board Section 12

The proposed amendments are of administrative nature, the main one being the designation of one of the members to be the Chairman of the Policy Board by the Federal Government. As a result of the reduction in the number of members from 10 to 9 as proposed in Section 12(1), sub clause 2(i) has been deleted, whereby the Finance Minister or the Adviser to Prime Minister on Finance, are proposed not to be a member of the Securities & Exchange Board anymore. Sub-Rule (7) of this Ordinance is replaced with a new one, whereby it is proposed that the Federal Government shall designate / empower one of the Members to act as the Chairman of the Board who shall in the event of a tie, have a casting vote.

3. Power and Functions of the Board Section 20

A new clause (ha) is proposed to be added in section 20(4), whereby a Commission is empowered to hear and decide investor complaints against persons involved in brokerage business for violations of securities laws, rules, regulations, directives, codes, etc. A new clause (jb) is proposed to be added in section 20(4), whereby a Commission is empowered to maintain and issue panels of auditors from which companies may appoint auditors, and approving audit firms for financial institutions, listed companies and NBFIs. A new clause (w) is proposed to be added in section 20(4), whereby a Commission is empowered to promote and regulate any scheme, fund, arrangement or undertaking (including but not limited to pension, superannuation gratuity and provident funds and schemes) established by or on behalf of companies and state owned corporations as employers, for entitlement of post employment benefits of their employees.

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4. Power to call for examination Section 32

Under section 32(5)(d), the Commission is empowered to call for examination a person willfully refuses to obey or disregard any lawful order of the Commission, passed under this Act or any other law administered by the Commission.

5. Implementation of orders of the Commission Section 32A After Section 32, it is proposed to add new Section 32A whereby the Commission may issue such

directions as may be necessary or expedient to give effect to its orders or to prevent abuse of it s process, including seeking the assistance of the local administration or Police who shall be bound to provide such assistance.

6. Appeal to the Appellate Bench of the Commission Section 33

Section 33(1)(c) states that no appeal shall lie against a sanction provided or decision made by a Commissioner or an officer of the Commission to commence legal proceedings in a court of law. It is proposed to delete the words “court of law” from this sub section. As such, there will be no restriction to go for an appeal in the court of law.

Securities and Exchange Ordinance, 1969 1. Prohibition of insider trading Section 15A, B, C, D & E

Insider trading is prohibited under this Ordinance. It is proposed to substitute Section 15A whereby specifying in detail the persons, activities and transactions included and not included in the insider trading. It is proposed to substitute Section 15B, specifying in detail what “inside information” would include. Section 15C is proposed to be added wherein the word “Insiders” has been defined in detail. Section 15D, is proposed to be added wherein listed companies will be responsible to inform / disclose inside information to the public which directly concerns the listed securities. Section 15E, is proposed to be added wherein imposing, on any person who is found involved in insider trading, a penalty of Rs.10 million or three times the amount of gain made or loss avoided by such person, or loss suffered by another person, whichever amount is higher or surrender to the Commission, an amount equivalent to the gain made or loss avoided by him; or pay any other person who has suffered a loss, an amount equivalent to the loss so suffered by such person. Where such person is an executive officer, director, auditor, advisor, consultant of a listed company, he be removed from such office by an order of the Commission and debarred from auditing any listed company for a period of upto three years. Where such person is registered as a broker or agent, he will be liable to cancellation of registration. Further, an insider person found disclosing inside information to any person, will be liable to a fine upto Rs.30 million.

2. Corporatisation, demutualisation and integration of the stock exchanges Section 32E

After Section 32E (1), a new sub section 1A is proposed to be added related to the provision to be made in the rules made in pursuance of Section 32E. These provisions shall specify the matters to be included in any scheme of demutualization and corporatization and the manner of its approval by the members of the stock exchange, Commission’s power to approve the scheme and impose any conditions, the process and procedure to be followed for purposes of demutualization and corporatization and the matters regarding appointment of directors and chairman of the board of a stock exchange after demutualization including

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restrictions on such appointments, restriction of rights attached to the shares issued, various restrictions on disinvestment, further issue and sale and purchase of shares of a stock exchange after demutualization, on holding of shares by different categories of shareholders of a stock exchange and trading rights on a stock exchange and its restrictions.

Khushhali Bank Ordinance, 2000 It is proposed by the Federal Government to repeal Khushhali Bank Ordinance, 2000. It is further elaborated that in case of any difficulty arising in giving effect to the provisions of this section, the Federal Government may make such order as may appear to it to be necessary for the purpose of removing the difficulty. Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 1. Power to issue directions Section 18A It has been proposed by the insertion of new section to vest powers in the Registrar to issue such

directions, as he deems fit, to a modaraba company in the interest of public and Modaraba Certificate holders, and the modaraba company and its management shall be bound to comply with such directions. Further, the Registrar may, on a representation made or on his own motion, modify or withdraw such direction, with or without conditions.

2. Power to make regulations Section 41A New section 41 A has been proposed to be inserted wherein the power of the Commission to make such

regulations as are necessary to carry out the purposes of the Modaraba Ordinance. Such powers shall be subject to the condition of previous publication and before making any regulations the draft thereof shall be published by the Commission for eliciting public opinion thereon within a period of not less than fourteen days from the date of publication and the regulation may provide a fine upto Rs.100,000 and in case of default, a further fine of Rs.1,000 per day.

3. Power to issue directives, circulars, codes, guidelines, etc. Section 41B

New section 41B has been inserted wherein it is proposed to empower the Commission to issue directives, circulars, codes, guidelines or notifications necessary and the rules and regulations made under this Ordinance.

Foreign Exchange Regulations Act, 1947 Powers to impose penalty Section 23K New section is proposed to be inserted empowering the SBP to impose penalty on any person who contravenes any provision of this Act, or any order, rule, regulation or direction issued by the State Bank, upto Rs.1,000,000 for each contravention and where the contravention is a continuous one with a further penalty upto Rs.20,000 for each day during which such contravention continues. Same powers shall be utilised in case contravention is committed by a company or other body corporate, every director, manager, secretary or other officer or agent thereof shall also be deemed guilty of such contravention, if committed with his knowledge or consent. The SBP shall be liable to take any action in case of default made in payment of penalty by any person and recover the amount of penalty from any account, or assets, monetary or otherwise, of the defaulter held with State Bank or any bank or a financial institution.

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Further, the SBP shall be liable to take any action in case any bank or financial institution, to which notice has been sent pertaining to the above defaulter, fails to debit the amount of penalty, it shall itself be liable to pay such amount to the State Bank, as if it had itself committed the contravention. Listed Companies (Substantial Acquisition of Voting Shares and Take-Overs) Ordinance, 2002 1. Definitions Section 2(1)(k)

It is proposed to add the words “or regulations” after the words “rules” empowering the Commission to make regulations for this Ordinance.

Section 2(1)(l)

The definition of “Promoters” is proposed to be deleted, being irrelevant. 2. Ordinance not to apply to certain transactions Section 3(b)

The provisions of this Ordinance are not applicable on allotment of shares pursuant to a right issue. However, by re-arrangement Section 3(1)(b), it is proposed that allotment and issuance of shares by the directors, against the right shares offered but declined or not subscribed u/s. 86(7) of the Companies Ordinance, 1984, shall not be exempted from the non applicability of this Ordinance.

Section 3(f) In order to make the Takeover Ordinance applicable, it is proposed to delete Section 3(f) pertaining to non applicability of the provisions of this Ordinance on transfer of voting shares from financial institutions to co-promoters of the company pursuant to an agreement between them.

Section 3(m) to (q)

Insertion of the new clauses (m), (n), (o), (p) and (q) to Section 3 are proposed to be added in order to facilitate of exemption of the Ordinance in case of transfer of voting shares to a person’s relative without monetary consideration, acquisition of voting shares by CFS financier, rehabilitation scheme of a company, transfer of sponsors shares of holding or subsidiary company and acquisition of voting shares by strategic investor in case of disinvestment by existing shareholders of a stock exchange pursuant to the demutualization process respectively.

Section 3(2)

Insertion of new sub section 3(2) proposes that the acquirers of shares, even if exempt under clauses (a), (b), (c), (d), (e), (g), (i), (j), (m) and (o) of sub-section (1), will be required to make disclosures of their respective acquisition. This will enable declaration of the entire shareholding of the acquirer.

3. Number of voting shares to be acquired Section 12(1) It is proposed to add the words “Commission may prescribe” in place of the words “acquirer may decide” in

order to empower the Commission to control the percentage of voting shares to be acquired by the acquirer. 4. General obligations of the acquirer Section 13(1) & (5)

It is proposed to add the words “whether incorporated in Pakistan or outside Pakistan” after the word “company,” making the directors responsible for the documents / information issued to the shareholders, without considering the place of registration of the company i.e. origin of the acquirer.

The words “in the public announcement of offer” is proposed to be inserted at the end of the proviso. This proposed change is to safeguard the interest of general public, in case any director desires to exempt himself from the responsibility for the information disclosed in the offering documents such director will have to issue a statement to this effect.

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5. General obligations of the manager to the offer Section 15 Section 15 is proposed to be re-numbered as sub-section (1). It also proposes to delete clauses (f), (h), (i)

and (j) related to responsibility for the submission of public announcement and offer letter to the Commission, target company and Stock Exchange(s), compliance of other laws, release the balance amount from the Bank to the acquirer and submission of compliance report to the Commission.

It is proposed to add new sub section (2)(a), (b) and (c), which shall cover the requirement of the above

deleted sub sections related to the filing of public announcement of offer with the Commission, target company and the stock exchanges, fulfillment of the necessary obligations by the acquirer and reporting to the Commission.

5. Penalties for non-compliance Section 26 The penalty by the Commission against willful refusal, failure or contravention is proposed to be enhanced

from Rs.1 million to Rs.50 million and in the case of a continuing default, Rupees two hundred thousand for every day after the issue of such order during which the refusal, failure or contravention continues, instead of Rupees ten thousand per day.

6. Power of the Commission to make Regulations Section 29A New section 29A empowering the Commission to make such regulations not inconsistent with provisions of

this Ordinance and the rules necessary to carry out the purposes of the Ordinance, has been proposed. Such regulation shall be related to the form, manner, timing and submission of offers letters, public announcements,public offers, independent advice to shareholders, obligations of directors, obligations and restrictions of the acquirer and manager to the offer, standard of care and responsibility, timing and content of documents, offer timetable, asset valuations and offer pricing and mode of payment, restrictions on dealings before and during the offer, disclosure of dealings, security to ensure completion of a takeover offer, acceptable securities, mandatory offers, offer size and acquisition, conditional offers, competitive bids and conduct of enquiry.

Such powers shall be subject to the condition of previous publication and before making any regulations the draft thereof shall be published by the Commission for obtaining public opinion thereon within a period of not less than seven days from the date of publication.

7. Power of the Commission to issue directives, circulars, guidelines, etc. Section 29B

New section 29B is proposed to be inserted empowering the Commission to frame the regulations and to issue such directives, codes, guidelines, circulars or notifications for the prompt compliance of the Ordinance.

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Significant Circulars / Notifications issued by The Securities and Exchange Commission of Pakistan (SECP) during 2007-2008

Reference Subject Matter Circular 04, 2007 dated May 03, 2007

Small Disputes Resolution Committee To resolve the disputes between an insurer and a policyholder, in respect of claims the amount of which does not exceed five hundred thousand rupees, the Small Disputes Resolution Committee has been constituted by the Federal Government having jurisdiction in respect of life insurance policies not being group life policies, domestic insurance policies and private motor insurance policies.

Circular No. 05 of 2007 dated May 28, 2007.

Undertaking Insurance Business in Pakistan by Foreign Companies. 100% foreign equity in the insurance business in Pakistan has been allowed subject to the following conditions: - i) Minimum equity amount of US$ 4 million by the foreign companies but not less

than US$ 2 million shall be brought from abroad. No restriction on the number of branches.

ii) No restriction on the employment policy for the foreign insurance companies. All

the facilities as enjoyed by local companies shall be given. Minimum paid up capital requirement enhanced from Rs.150 million to Rs.500 million for life/family takaful operators and from Rs.80 million to Rs.300 million for non-life/general takaful operators. Foreign investors shall be required to bring in minimum paid up capital of Rs.500 million in case of life/family takaful and Rs.300 million in case of non-life/general takaful.

Circular No. 06 of 2007 dated June 13, 2007.

Opening of New Accounts with Brokers In order to ensure proper documentation, the Commission in exercise of powers conferred under Section 282D of the Companies Ordinance, 1984, has directed NBFCs to strictly comply with all the documentary requirements at the time of opening of trading accounts with their panel of brokers i.e. execution of account opening forms and submission of prescribed documents, including Memorandum & Articles of Association, Board Resolution and the list of authorized signatories.

Circular No. 07 of 2007 dated June 27, 2007

Deferment of Application of IFRIC Interpretation for 'Determining whether an Arrangement Contains A Lease' For Independent Power Producers (IPPS) The Commission has extended the period for deferment of the implementation of IFRIC-4 for a further period of two years i.e. till 30th June 2009.

Circular No. 11 of 2007 dated October 23, 2007

Deposit of Margins and Mark to Market Losses by Collective Investment Schemes with National Clearing Company of Pakistan Limited (NCCPL) In terms of Regulation 12A.5.3 of National Clearing and Settlement Systems Regulations, 2003 (NCSS), all Non Broker Clearing Member are required to deposit margins and mark to market losses with NCCPL, when they affirm trades entered on their behalf by their brokers.

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Reference Subject Matter The deposit of securities by a Collective Investment Scheme with the clearing system for

settlement of its own trades is not prohibited under the NBFC Rules. As the Settlement System has made it obligatory for the clearing members to deposit margins, it is clarified that a Collective Investment Scheme (CIS), on acquiring membership (full or associate) of clearing company / settlement system may deposit margins and mark to market losses in the form of securities or any other prescribed collateral for facilitation or guaranteeing settlement of its own trade and transaction in favour relevant Exchange or NCCPL, in compliance with regulations of the Exchange and/or NCCPL. A CIS shall, however, not pledge its securities for any other purposes including borrowing except as allowed under the NBFC Rules, 2003.

Circular No. 13 of 2008 dated November 12, 2007

Eligibility Criteria under Rule 12(1) of the Voluntary Pension System Rules, 2005 The SECP in exercise of its powers conferred under sub-rule (2) of rule 12 of the Voluntary Pension System Rules, 2005 (the "VPS Rules"). (the "('Commission") has reviewed and revised The eligibility criteria under the Voluntary Pension System Rules, 2005 (the "VPS Rules") has been revised by the Commission as under to bring it in line with the provisions of the Income Tax Ordinance, 2001 : 1. All Pakistani nationals who have valid National Tax Number or Computerized

National Identity Card issued by National Database and Registration Authority (NADRA) shall be eligible to contribute to the Pension fund authorized under the Voluntary Pension System Rules.2005.

2. Commission’s Circular No. I of 2007 has been withdrawn.

Circular No. 17 of 2007 dated December 18, 2007

Applicability of Regulation 23 of Non-Banking Finance Companies and Notified Entities Regulation, 2007 relating to classification and provisioning of Non-Performing Assets. In order to avoid practical difficulty in implementation of Regulation 23 of the Non Banking Finance Companies and Notified Entities Regulations, 2007, it has been clarified that the said regulation is not applicable for the period ended 31st December, 2007. The effective date of applicability of the said regulation shall be intimated later.

Circular No. 01 of 2008 dated January 07, 2008

Publication of Notices in Urdu Newspaper Various provisions of the Companies Ordinance, 1984 and the Rules made there under require companies to publish the notices, prospectuses, etc at least in one English language and one Urdu language daily newspaper having circulation in the province in which, in case of a listed company the stock exchange on which the company is listed and in case of other company where the registered office of the company, is situated. In most cases the material is published in Urdu newspapers in English language, which does not serve the purpose of publication. The publication of the material in Urdu newspaper is required to be published in Urdu language which is meant for encouraging dissemination of information in local language, for the better comprehensibility of various stakeholders, investors and general public. All companies are, therefore, directed to publish the material in the national English and Urdu newspapers in English and Urdu languages respectively

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Reference Subject Matter Circular No. 02 of 2008 dated January 22, 2008

Amendments in the Guidelines for Issue of Term Finance Certificate to the General Public In order to develop primary Debts Capital Market and encourage new corporate bond issue, amendment have been made in the Guidelines for Issue of Term Finance Certificate to the General Public which provided that TFCs to be offered to general public should be listed at least on any one Stock Exchange of the country. Now, the corporate bonds issued by the companies to general public may or may not be listed on the Stock Exchange(s).

Circular No. 04 of 2008 dated April 04, 2008

Amendments in the Guidelines Approved by the Religious Board for Issuance of Certificates of Musharika by Modarabas The Religious Board approved the following amendments in Clause Nos. 9 and 11 of the Guidelines for issuance of Certificates of Musharika : 1. Insertion of the following sub-clause 9.5 in “Musharika Certificates Redemption

Reserve Fund” :

9.5 The Modaraba may make investment from the Redemption Reserve Fund in liquid, investment grade Shariah compliant instruments only to maximize on the returns without exposing the Redemption Reserve Fund to any risk. The investment from the Redemption Reserve Fund will be disclosed in the quarterly and annual accounts of Modaraba under a separate head “Redemption Reserve Fund”. The Modaraba shall replenish any shortfall in the Redemption Reserve Fund at the time of “mark to market” on the balance sheet dates.

2. Amendment made in clause 11(iii) of the “Conditions of eligibility” as under :

(iii) The Modaraba is actively engaged in business for a period of two years and

has obtained credit rating of minimum investment grade from a credit rating agency registered with the Commission and such credit rating shall be updated at least once every year during the currency of the issue.

Circular No. 05 of 2008 dated April 14, 2008

Sharing of Expenses of Insurance Ombudsman's Secretariat by Insurance/Takaful Companies 1. The costs of maintaining the Insurance Ombudsman's secretariat would be shared

by insurance companies in such proportions, as may be determined by the Commission as provided in sub-Section 4 of Section 126 of Insurance Ordinance, 2000.

2. Total expenses incurred in respect of Insurance Ombudsman's Secretariat by the

Commission during the period from 2 May 2006 to 31st December, 2007 amounts to Rs.9,250,705/ -.

3. For the purpose of sharing of the costs of the Insurance Ombudsman's Secretariat,

the Commission has decided to recover the same from insurance and takaful companies on the following basis:

"greatest of Rs.150,000 or Rs.0.09 per mille of 2006'.

“gross direct premium written in Pakistan in case of insurance companies, CJ-gross direct contributions collected in Pakistan in case of takaful companies".

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Reference Subject Matter 4. All insurance and takaful companies (registered on or before 31 December 2007)

are advised to ensure that a cross cheque or bank draft drawn in favour of "Securities and Exchange Commission of Pakistan" for their share of the Insurance Ombudsman's Secretariat costs (for the period form 2 May 2006 to 31 December 2007) should reach the Finance & Administration Department of the Commission in Islamabad, under advice to the Insurance Division, Karachi, by 30 April 2008.

Circular No. 06 of 2008 dated May 08, 2008

Model Financing Agreements For Modarabas The Religious Board has approved various Model Financing Agreements for Modarabas which includes Diminishing Musharaka, Ijarah, Istisna, Mudarabah, Musawamah, Musharaka, Murabahah, Salam, Syndicate Mudarabah, Syndicate Musharakah, Islamic CFS Murabahah.

The Religious Board approved the conceptual framework for issuance of Sukuk by

Modarabas. The Modaraba Companies are required to adopt the following procedure : i) Modaraba intending to issue Sukuk, will ensure that the transaction conforms

to the admissible modes provided to its Prospectus approved by the Religious Board and that the basic concepts of Shariah compliance are fully adhered to in the proposed instruments in accordance with the general structure for issuance of Sukuk.

ii) The respective Modaraba will submit its draft instrument to the Religi ous Advisor

of the Modaraba Association of Pakistan (MAP) who would examine and certify that the instrument is fully compliant with the Shariah requirements and also conforms to various aspects of the proposed module

iii) The instrument will be submitted to the Registrar (Modarabas) along with the

Compliance Certificate of the Religious Advisor of MAP, who after examining and satisfying himself on all of conceptual and operational aspects, would approve the instruments for issuance.

The Religious Board approved issuance of “Modaraba Sukuks” to corporate as well as individual investors by Modarabas. These Modaraba Sukuks will be different from other Sukuks due to their tenure and modes i.e. these will be issued for a period from 90 days to 365 days.

Circular No. 08 of 2008 dated May 08, 2008

Extension in the Period of Companies Easy Exit Scheme (CEES) 2007. The time period of the applicability of the Company Easy Exit Scheme, 2007 is extended till June 30, 2008.

Circular No.09 of 2008 dated May 16, 2008

Permission for Insertion of the Word “ An Islamic Financial Institution” after the name of a Modaraba Insertion of the words “An Islamic Financial Institution” in brackets, after the name of a Modaraba managed by the Modaraba Companies, has been permitted by the Religious Board to represent the functions and businesses of a Modaraba under the shadow of Islamic financial services.

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Reference Subject Matter S.R.O. 819(1)/2007 dated August 10, 2007.

The following class of companies have been exempted from the requirement of obtaining the authority of a special resolution for making investment in associated companies or undertakings as required under subsection (1) of section 208 through Section 208 (2A) (a) of the Companies Ordinance, 1984 : (a) Banking company duly licensed by the State Bank of Pakistan (SBP), to the extent

of investments made in the ordinary course of its business, excluding equity investments;

(b) Development Finance Institution duly licenced by the SBP, to the extent of

investments made in the ordinary course of its business, excluding equity investments;

(c) NBFC duly licenced by the Commission, to the extent of investments made in the

ordinary course of its business, excluding equity investments; (d) NBFC duly licenced by the Commission to carry out Investment Advisory Services

or Asset Management Services, to the extent of investments made in a Collective Investment Scheme being managed by such NBFC.

(e) Modaraba Management Company, to the extent of investments made in a

Modaraba being managed by such company; (f) Holding company, to the extent of investments made in its wholly owned

subsidiary: Provided that any disinvestment by a holding company which would reduce its

holding in the subsidiary, in which an investment was made pursuant to this exemption, to less than 75% shall be made under the authority of a special resolution.

(g) Company whose principal business is the acquisition of shares, stock, debentures

or other securities, to the extent of acquisition of such securities on behalf of its clients in the ordinary course of its business.

S. R. O. 859(I)/2007 –dated August 21, 2007

The Accounting and Financial Reporting Standards for Medium-Sized Companies and Small-Sized Companies, in regard to accounts and preparation of balance sheet and profit and loss account specified in the Fifth Schedule to the Companies Ordinance, 1984 has been substituted by the SECP.

S.R.O. 860(1)/2007 dated August 21, 2007

The SECP has directed that the Accounting and Financial Reporting Standards for Medium and Small Sized Entities approved by the Council of the Institute of Chartered Accountants of Pakistan shall, without any modification or alteration unless such modification or alteration is approved by the Commission, be followed in regard to the accounts and preparation of balance sheet and profit and loss accounts of non-listed companies. Further, in this regard, Medium-Sized Company and Small Sized Company shall mean as follows: (A) Medium-Sized company shall be a company that:

(a) is not a listed company or a subsidiary of a listed company;

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Reference Subject Matter (b) has not filed, or is not in the process of filing, its financial statements with

the SECP or other regulatory organisation for the purpose of issuing any class of instruments in a public market;

(c) does not hold assets in a fiduciary capacity for a broad group of outsiders,

such as a bank, insurance company, securities broker/dealer, pension fund, mutual fund or investment banking entity;

(d) is not a public utility or similar company that provides an essential public

service; (e) is not economically significant on the basis of criteria as defined below: Provided that an entity is considered to be economically significant if it has:

i) turnover in excess of Rs.1 billion, excluding other income; ii) number of employees in excess of 750; iii) total borrowings (excluding trade creditors and accrued liabilities) in excess

of Rs.500 million.

Provided further that in order to be treated as economically significant any two of the criterion mentioned in (i), (ii) and (iii) above have to be met and that the criteria followed shall be based on the previous year’s audited financial statements. Companies can be excluded from this category where they do not fall under aforementioned criteria for two consecutive years.

(f) is not a Small-Sized company.

(B) A Small-Sized company shall be a company that:

i) has paid up capital plus undistributed reserves (total equity after taking

into account any dividend proposed for the year) not exceeding Rs.25 million; ii) has employees not exceeding two hundred and fifty at any time during the

year, and

iii) has annual turnover not exceeding Rs.200 million, excluding other income. Non-listed companies that are not Medium-Sized companies or Small-Sized companies shall follow the International Accounting Standards and International Financial Reporting Standards notified by the Commission for the listed companies.

S.R.O. 1131 (10/2007 dated November 21, 2007

The SECP, with the approval of the Federal Government, has made certain amendments in the Non Banking Finance Companies (Establishment and Regulation) Rules, 2003 pertaining to the NBFCs carrying out leasing, investment finance services, housing finance services, asset management services, discounting services, investment advisory services and venture capital investments. These extensive amendments have been made through insertion / deletion / substitution in the definitions and clauses under NBFC Rules, 2003.

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Reference Subject Matter S.R.O. 1132 (10/2007 dated November 21, 2007

Non Banking Finance Companies Notified Entities Regulation, 2007 have been promulgated by the SECP. These regulations shall be applicable to NBFCs carrying out leasing, investment finance services, housing finance services, asset management services, discounting services, investment advisory services and venture capital investment, including their business activities and to the notified entities being managed by such NBFCs unless specified regulation for such notified entities have been issued.

S.R.O. 36(1)/2008 dated January 08, 2008.

Exemption to the listed companies and their subsidiaries from the application of Clause 6 of Part 1 of the 4th Schedule regarding disclosure in the financial statements to use a price other than the arm’s length price, has been further extended till June 30, 2008.

S.R.O. 411(1)/2008 dated April 28, 2008

The SECP has directed that the International Financial Reporting Standards 7 and 8 (IFRS 7 - Disclosure of information about the significance of financial instruments for an entity's financial position and performance.) (IFRS 8 - Consolidated financial statements of a group with a parent company and to the separate or individual financial statements of an entity) issued by the International Accounting Standards Board shall be followed in regard to the accounts and preparation of balance sheet and profit and loss accounts of the listed companies. The requirements of IFRS 7 shall not, till further orders, apply to banks and such non banking finance companies as are reengaged in investment finance services, discounting services and housing finance services. The Commission may, of its own motion or upon an application made to it, grant exemption to any company or any of the requirements of the aforesaid standards.

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Overview of newly adapted IFRSs IFRS 7 Financial Instruments: Disclosures

Effective date To be notified by the ICAP

Objective To prescribe disclosures that enable financial statement users to evaluate the significance of financial instruments to an entity, the nature and extent of their risks, and how the entity manages those risks

Summary • IFRS 7 requires disclosure of information about the significance of financial instruments for an entity's financial position and performance. These include:

- disclosures relating to the entity's financial position - including information about financial assets and financial liabilities by category, special disclosures when the fair value option is used, reclassifications, derecognitions, pledges of assets, embedded derivatives and breaches of terms of agreements;

- disclosures relating to the entity's performance in the period - including information about recognised income, expenses, gains and losses; interest income and expense; fee income; and impairment losses; and

- other disclosures - including information about accounting policies, hedge accounting and the fair values of each class of financial asset and financial liability .

• IFRS 7 requires disclosure of information about the nature and extent of risks arising from financial instruments:

- qualitative disclosures about exposures to each class of risk and how those risks are managed; and

- quantitative disclosures about exposures to each class of risk, separately for credit risk, liquidity risk and market risk (including sensitivity analyses).

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IFRS 8 Operating Segments

Effective date To be notified by the ICAP

Core principle An entity shall disclose information to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates.

Summary • IFRS 8 applies to the consolidated financial statements of a group with a parent (and to the separate or individual financial statements of an entity):

- whose debt or equity instruments are traded in a public market; or

- that files, or is in the process of filing, its (consolidated) financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market.

• An operating segment is a component of an entity:

- that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity);

- whose operating results are regularly reviewed by the entity's chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance; and

- for which discrete financial information is available.

• Guidance is provided on which operating segments are reportable (generally 10% thresholds).

• At least 75% of the entity's revenue must be included in reportable segments.

• IFRS 8 does not define segment revenue, segment expense, segment result, segment assets or segment liabilities, nor does it require segment information to be prepared in conformity with the accounting policies adopted for the entity's financial statements.

• Some entity-wide disclosures are required even when an entity has only one reportable segment. These include information about each product and service or groups of products and services.

• Analyses of revenues and certain non-current assets by geographical area are required from all entities - with an expanded requirement to disclose revenues/assets by individual foreign country (if material), irrespective of the entity's organisation.

• There is also a requirement to disclose information about transactions with major external customers (10% or more of the entity's revenue).

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Significant amendments made by IASB in International Financial Reporting Standards July 1, 2007 to June 11, 2008

(The list is indicative, not exhaustive)

Name of IFRS Date of

amendment Significant

amendments Consequent changes in

Effective date of amendment

IFRS 2 – Share Based Payments

January 17, 2008

Amendments made to clarify the terms ‘vesting conditions’ and ‘cancellations’

January 01, 2009

IFRS 3 – Business Combinations

January 10, 2008

§ Acquisition costs to be recognized as expenses

§ Criteria for recognition and measurement of ‘contingent considerations’ under various conditions has been added

§ An option is added to recognize goodwill on ‘full goodwill method’ i.e. including non-controlling interest

§ Measurement of gain or loss in pre-existing relationships and re-acquired rights has been introduced

§ Exception of ‘reliable measurement’ of intangible assets removed

§ Initial investment, in entity in that subsequently control is obtained, is re-measured and resulting adjustment is recognized in profit or loss

§ Treatment given for gain or loss when partial disposal of an investment in a subsidiary is made when:

w Control is retained w Control is lost

§ Goodwill is not re-measured on acquiring additional shares in subsidiary after control was obtained

§ The scope of IFRS 3 has been expanded to include combinations of mutual entities and combinations without consideration (dual listed shares)

Also affects IAS 27

Also affects IASs 27, 28 and 31

Also affects IASs 27, 28 and 31

July 01, 2009

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Name of IFRS Date of

amendment Significant

amendments Consequent changes in

Effective date of amendment

IFRS 5 – Non-current assets held for sale and discontinued operations

May 22,

2008

Treatment when an entity plans to sell the controlling interest in a subsidiary regardless of whether the entity will retain a non-controlling interest in the subsidiary after the sale has been introduced

July 01, 2009

IAS 1 – Presentation of Financial Statements

September 06, 2007

§ Titles of components of financial statements have been changed

§ Concept of ‘comprehensive income’ has been added

IAS 7: Re-titled ‘Statement Of Cash Flows’ as a consequential amendment to IAS 1

January 01, 2009

IAS 10 – Events After Reporting Date

September 06, 2007

Title of IAS 10 has been changed form ‘Events after the balance sheet date’ to ‘Events after the reporting date’

IAS 16 – Property Plant and Equipment

May 22, 2008 § ‘Net Selling price’ is replaced with ‘Fair Value less costs to sell’ in the definition of ‘Recoverable amount’

§ Treatment of sale of assets held for rental given

January 01, 2009

IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance

May 22, 2008 Requirements added to government loans with a below-market rate of interest to bring it in line with IAS 39

January 01, 2009

IAS 23 – Borrowing Cost

May 22, 2008 Borrowing costs amended to refer to interest expense calculated in accordance with ‘effective interest rate method’ in IAS 39

January 01, 2009

IAS 27 – Consolidated and Separate Financial Statements

January 10, 2008

Refer IFRS 3 for amendments in IAS 27

January 01, 2009

May 22, 2008 Determination of cost of a subsidiary in the separate financial statements of a parent on first time adoption of IFRSs has been included

January 01, 2009

IAS 28 – Investment in Associates

January 10, 2008

Refer IFRS 3 for amendments in IAS 28

January 01, 2009

IAS 31 – Interests in Joint Ventures

January 10, 2008

Refer IFRS 3 for amendments in IAS 31

January 01, 2009

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Name of IFRS Date of

amendment Significant

amendments Consequent changes in

Effective date of amendment

IAS 32 – Financial Instruments: Disclosure

February 14, 2008

‘Puttable instruments’ and ‘Obligations arising on liquidation’ on meeting certain criteria are to be classified as equity instruments

IAS 1 : New disclosure requirements for puttable instruments and obligations arising on liquidation

January 01, 2009

IAS 38 – Intangible Assets

May 22, 2008 Recognition of advertising and promotional activities as expenses or pre-payments added

January 01, 2009

IAS 39 – Financial Instruments: Recognition and Measurement

May 22, 2008 § Amendments set out a number of changes in circumstances that are not considered to be reclassifications for this purpose

§ Requirements of ‘Designating and Documenting Hedges at the segment level’ amended to bring these in line with the requirements of IFRS 8 – Operating Segments

January 01, 2009

IAS 40 – Investment Property

May 22, 2008 ‘Property under Construction or Development for future use as Investment Property’ previously fell within the scope of IAS 16. Now, amended to bring such property under IAS 40

January 01, 2009

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Touche Tohmatsu, a Swiss Verein, and its

network of member firms, each of which is a

legally separate and independent entity. Please

see www.deloitte.com/about for a detailed

description of the legal structure of Deloitte

Touche Tohmatsu and its member firms.

In Pakistan, M. Yousuf Adil Saleem & Co.

Chartered Accountants is the member firm of

Deloitte Touche Tohmatsu, and is among the

nation's leading professional accounting firms,

providing audit, tax, consulting, and corporate

finance services through nearly 550 people in

four cities.