tjif budget overview 2012 13

TJIF Budget Overview 2012-13 2

Contents

Economic Overview ……………………………………… 03

Salient Features ……………………………………………. 07

Significant Amendments:

Income Tax …………………………………………………… 10

Sales Tax ………………………………………………………. 20


Economic Overview The resilience of the economy of Pakistan has been tested several times by one crisis after

another. The economy has witnessed numerous domestic and external shocks from 2007

onwards. The sharp rise in international oil and food prices, the internal security hazards

brought on by the campaign against extremism and the repeated natural disasters in the

form of successive floods have buffeted the macroeconomic strategy with shock after shock

There have been some successes. Pakistan has been able to withstand the pressures and

improve its performance in some key areas such as the check on inflation, the increase in

exports and revenue generation and maintenance of comfortable foreign exchange reserve

levels. The economy is now showing signs of modest recovery. GDP growth for 2011-12 has

been estimated 3.7 percent as compared to 3 percent in the previous fiscal year 2011.

Commodity Producing Sector: The commodity producing sector has performed better in the

outgoing fiscal year as compared to last year. Its growth rate this year was 3.3 percent

against 1.5 percent during last year.

Agriculture Sector is a key sector of the economy and accounts for 21 percent of GDP. The

supportive policies of the government resulted in a growth of 3.1 percent against 2.4

percent last year.

Manufacturing Sector: The growth of the manufacturing sector is estimated at 3.6 percent

compared to 3.1 percent last year. Small scale manufacturing maintained its growth of last

year at 7.5 percent and slaughtering growth is estimated at 4.5

GDP growth clocked in at 3 % in

FY11 due to destruction of major

crops caused by the floods.

However, with flood waters now

receded, crop yields have

improved and resultantly, GDP

growth is estimated at 3.7% in

FY12.


Economic Overview percent against 4.4 percent last year. Large Scale Manufacturing (LSM) has shown a growth

of 1.1 percent during July-March 2011-12 against 1.0 percent last year.

Services Sector: The Services sector has registered a growth rate of 4.0 percent during July-

March of the fiscal year 2011-12 against 4.4percent last year. It is dominated by Finance and

Insurance at 6.5 percent, Social and Community Services 6.8 percent and wholesale and

Retail Trade 3.6 percent.

Foreign Direct Investment stood t $ 668 million during July-April 2011-12 as against $

1293million last year. The capital flows were affected because of global financial crunch and

euro zone crisis. Oil and Gas Exploration remained the Major sector for foreign investors.

The share of Oil and Gas Exploration in total FDI during July-April2011-12 stood at 70

percent.

Public Debt: Pakistan’s public debt stood at Rs. 12,024 billion as of March 31, 2012. During

first nine months of the ongoing fiscal year, total public debt registered an increase of Rs.

1,315billion which includes Rs. 391 billion consolidated by the Government into public debt

against outstanding previous year’s subsidies related to food and energy sectors

Per Capita real income grew at

2.3 percent in2011-12 as

compared to 1.3 percent growth

last year. In dollar terms, it

increased from $ 1258 in 2010-

11 to $ 1372 in 2011-12.

Real Investment has declined from 13.1 Percent of GDP last year to 12.5 percent of GDP in 2011-12. .

Public debt as a percent of GDP stood at 58.2 percent by end-March 2012.During July-March 2012; $179 million was added to the EDL stock. At the end of March 2012, servicing of the public debt stood at Rs.720.3billion against the budget amount of Rs. 1034.2billion.


Economic Overview Fiscal Indicators

Despite the numerous challenges the country has faced since 2001 including the continued

and intensified security issues, the fiscal position last year in terms of key fiscal indicators

such as revenues, expenditures and the fiscal deficit indicates a notable change.

On the revenue side the tax to GDP ratio either remained stagnant or showed a secular

decline. Consequently the budget deficit widened during the past four years. However, it

was well contained during fiscal year 2010-11 despite the challenges faced due to the flood

and security related expenditures.

On the other hand the expenditure to GDP ratio witnessed a similar pattern to that for total

expenditures; showing an overall decline since 2007-008

During July- March,, 2011-12 period total expenditures stood at Rs. 2,641.9 billion

against Rs. 3,721.2 billion budget for the fiscal year 2011-12. During the period under

review total revenues were Rs. 1,747.0 billion against the budgeted estimates off Rs.

2,870.55 billion. The fiscal deficit has declined from 7.6 percent in 2007-008 to 5.9

percent in 2010 -11 on account of reduction in development expenditure

Fixed investment has declined to

10.9 percent of GDP in 2011-12

from 11.5 percent of GDP last

year. Similarly Private

investment also contracted to

7.9 percent of GDP in 2011-12 as

compared to8.6 percent of GDP

last year.

Pakistan’s foreign exchange

reserves reached o $16.5 billion

at the end-April 2012 compared

to $17.0 billion at end-April 011.

The exchange rate averaged at

Rs. 85.50/US$ during July-April

2010-11, whereas it averaged at

Rs. 88.55/US$ During July-April

2011-12.

Workers’ Remittances

witnessed a strong growth of

25.8 percent in 2011 over the

previous year 2010. During July-

April 2011-12, worker’s

remittances grew by 20.2

percent at $ 10.9 billion.


Economic Overview Inflation has declined for the third consecutive year. CPI was 10.8 percent during

July-April, 2012 from a high of 25 percent in October 2008. This has been achieved

despite sharp increase in international oil prices, effect of upward adjustment in the

administered prices of electricity and gas, supply disruptions due to devastating

floods of 2010 and heavy rains of 2011and bank borrowings. food and non-food

inflation averaged 11.1 percent and 10.7 percent respectively against 18.8 percent

and 0.8 percent in the same period of last year.

Trade and Payments: Exports during July-April 2012 were $ 20.5 million compared to $

20.46 billion last year. The Afghan Transit Trade Agreement (APTTA) has encouraged formal

trade between Pakistan and Afghanistan and the volume has risen to around $2.5 billion

annually.

Imports grew by 14.5 percent and stood at $ 3.1billion during July-April 2012. The current

account deficit stood at $ 3.4 billion in the same period. It was largely as a result of high oil

prices and import of fertilizers. Continued support from current transfers in the form of

workers’ remittances helped in containing current account balance.

Food and non-food inflation

averaged 11.1 percent and 10.7

percent respectively against 18.8

percent and 0.8 percent in the

same period of last year.

The current account deficit

stood at $ 3.4 billion in the same

period. It was largely as a result

of high oil prices and import of

fertilizers. Continued support

from current transfers in the

form of workers’ remittances

helped in containing current

account balance.

Workers’ Remittances witnessed a strong growth of 25.8 percent in 2011 over the previous year 2010. During July-April 2011-12, worker’s remittances grew by 20.2 percent at $ 10.9 billion.


Salient Features

Income Tax Capital Gain Tax (CGT) is proposed to be levied on the sale of property if it is

disposed off within two years of its acquisition.

The dividend income of banks from money market funds and income funds is proposed to be taxed at 25% for 2013 and 35% from 2014 instead of 10%.

Limit on 0.2% advance tax on cash withdrawal from bank is proposed to be increased from RS. 25,000 to Rs. 50,000 per day.

Basic exemption limit is now being raised for salaried and business individuals to Rs.400,000 from 350,000. Further the slabs are reduced and the concept of marginal relief is proposed to be abolished.

Taxpayer Honour Card scheme is proposed to be introduced. The holders of the card will be entitled to various privileges and benefits.

The normal progressive slab rates are being introduced for the Association of Persons (AOPs) instead of fixed tax at the rate of 25 percent of profit.

Collection of tax by manufacturer at the rate of 1% of gross sales from dealers/ whole sellers and distributors.

The option to opt out of presumptive tax regime is allowed to importers, exporters and suppliers subject to certain conditions.

The limit on tax credit for investment and for life insurance premiums is further relaxed.


Salient Features

Sales Tax

Reduction in the higher rates of Sales Tax from 22% and 19.5% to 16%.

Streamlining the sales tax regime by substituting zero-rating on certain items with a view to stop illegal refunds

Grant of exemption to waste paper to enhance collection as well as restrict inadmissible input tax adjustment in this sector.

Increase in the rate of sales tax on steel sector from Rs. 6/ Kwh to Rs. 8/Kwh.

Substitution of zero-rating with exemption on supplies against international tender.

Substitution of zero-rating with exemption on certain items such as remeltable scrap and sprinkler.

Shifting of cotton seed oil from zero-rating regime to exemption.

Harmonize section 11 and 36 of the Sales Tax Act, 1990

Alignment of PCT Headings in various schedules to the Sales Tax Act, 1990, with the HS-2012 version of Pakistan Customs Tariff.


Salient Features

Federal Excise Duty

Reduction in Federal Excise Duty on cement from Rs. 500/ PMT to Rs. 400/ PMT

Elimination of excise duty on 10 items with the objective to further phasing out of Federal Excise regime.

Enhancing tax incidence on cigarettes by revising upward price tiers

Reducing federal excise duty on cement from Rs. 500/ PMT to 400/ PMT.

Phasing out of federal excise duty regime by reducing the number of goods

liable to federal excise duty.

Exemption of federal excise duty on livestock insurance.

Retrospective exemption of federal excise duty on services rendered by Asset Management Companies.

Revision in the upward limit of price tiers of cigarettes to enhance the Federal

Excise Duty on locally produced Cigarettes.

Revise Federal Excise Duty on foreign travel.

Simplification of collection procedure of FED on air travel from Pakistan by excluding the charge of FED on air travel to Pakistan.

Updation of the restriction related to prices of cigarettes.


Significant Amendments in Income Tax

Capital Gain from Disposal of Immoveable Property

Under the proposed amendment, the gain as sale of immovable property is taxable

as capital gain if the sale is made within two year of acquisition. The rate of tax on is

as follows:

Holding period is less than 1 year 10% Holding period greater than 1 year but less than 2 years 5% Holding period greater than 2 years 0%

Special Provision Relating To Capital Gain Tax on Listed Securities Special rules for calculation of capital gain on securities and other relaxation

regarding inquiry of sources of income are being introduced through the finance bill.

Under said rules the National Clearing Company of Pakistan Limited (NCCPL) will

develop automated system and it will calculate tax on the basis of transaction date

processed through its system and information provided by Central Depositary

Company (CDC).

NCCPL will issue certificate to taxpayer and this certificate will be submitted by

taxpayer along with the income tax return which shall be conclusive evidence in

respect of income from capital gain on shares.

Further, to encourage investment in capital market there will be no inquiry

regarding investment made in shares of companies listed in any of stock exchange in

Pakistan till 30th June 2014 provided that amount remains invested for the period of

120 days.

Cash Withdrawal from Bank – Section 231A

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

to Rs. 50,000.

Minimum Tax – Section 113

The rate of minimum tax is proposed to be reduced from 1% to 0.5%. However,

relevant amendment seems to be missing in section 113.

Dividend received by bank from Money Market or Income Funds

Currently the banks earning dividends from money market funds and income funds

which is taxed @10%. In this scenario the interest income from these funds was



taxed at reduce rates. It is proposed in finance bill that income of banks from

dividend income out of money market fund will be taxed at the rate of 25% for tax

year 2013 and 35% for the year 2014 onward.

Option to opt out of presumptive tax regime - Second Schedule – Part IV

Importers

The option is given to importers to opt out of presumptive tax regime subject to the

condition that minimum tax liability under normal tax regime shall not be less than

60% of tax already collected under section 148.

Exporters

The option is proposed to be given to exporters to opt out of presumptive tax

regime provided that minimum tax liability under normal tax regime should not be

less than 50% of the already deducted.

Suppliers of Goods

The option is proposed to be allowed to supplier of goods to opt out of presumptive

tax regime provided that minimum tax liability under normal tax regime should not

be less than 70% of tax already deducted.

Group Taxation Relief

Under the proposed amendment, the inter-corporate dividend and inter corporate

profit on debt within group companies that are entitled to group taxation relief are

not liable to withholding tax.

Initial Allowance Third Schedule

Presently initial allowance for industrial undertaking is available @ 50% for plant

machinery and building. The proposed amendment seeks to reduce the initial

allowance on building from 50% to 25% however, the initial allowance on plant and

machinery remains unchanged.

Income from Salary

Basic exemption limit is now being raised for salaried individuals to Rs.400,000 from

350,000. Further the slabs are reduced and the concept of marginal relief is

proposed to be abolished.



The new tax rates for individual salaried personal are as follows:

1.

Where taxable income does not exceeds Rs.400,000

0%

2.

Where the taxable income exceeds 400,000 but does not exceeds 750 ,000

5% of the amount exceeding Rs.400,000

3.

Where the taxable income exceeds 750,000 but does not exceeds 1,500 ,000

Rs. 17500 + 10% of amount exceeding Rs.750,000

4.

Where the taxable income exceeds 1,500,000 but does not exceeds 2,500 ,000

Rs. 92,500 + 15% of amount exceeding Rs.1,500,000

5.

Where the taxable income exceeds 2,500,000.

Rs. 242,500 + 20% of amount exceeding Rs.2,500,000.

The effect of the change in tax slabs on various levels of salary income is given in table A.



Table A

S. No.

Annual Salary

Income

Tax as per

existing slabs

Tax as per

Proposed

slabs

Relief

1

400,000

6,000

-

6,000

2

600,000

27,000

10,000

17,000

3

800,000

60,000

22,500

37,500

4

1,000,000

90,000

42,500

47,500

5

1,250,000

137,500

67,500

70,000

6

1,500,000

187,500

92,500

95,000

7

1,800,000

252,000

137,500

114,500

8

2,500,000

400,000

242,500

157,500

9

3,600,000

666,000

462,500

203,500

10

5,000,000

1,000,000

742,500

257,500

11

10,000,000

2,000,000

1,742,500

257,500



Value of Perquisites – Section 13 (Sub-Section 7 And 14)

The benefit provided by employer in the form of interest free loan or loan at concession rates in included in taxable income of employee. The benefit is calculated as difference between benchmark rate and rates changed by employer. Through the proposed amendment the benchmark rate is now fixed at 10 percent. Further, this benefit is not taxable in the hand of salaried individual if the loan amount is less than Rs.500,000. Tax Rate for Individual and Association of Person (AOP)

Basic exemption limit is now being raised for individuals and AOP to Rs.400,000 from 350,000. Further the AOP are now taxed at progressive rates instead of fixed rate of 25% on profit. The new tax rates for individual and Association of persons are as follows:

1.

Where taxable income does not exceeds Rs.400,000

0%

2.

Where the taxable income exceeds 400,000 but does not exceeds 750 ,000

10% of the amount exceeding Rs.400,000

3.

Where the taxable income exceeds 750,000 but does not exceeds 1,500 ,000

Rs. 35,000 + 15% of amount exceeding Rs.750,000

4.

Where the taxable income exceeds 1,500,000 but does not exceeds 2,500 ,000

Rs. 147,500 + 20% of amount exceeding Rs.1,500,000

5.

Where the taxable income exceeds 2,500,000.

Rs. 347,500 + 25% of amount exceeding Rs.2,500,000.

The effect of the change in tax slabs on various levels of income is given in table B.



Table B

S. No.

Individual

Annual

Income

Tax as per

existing slabs

Tax as per

proposed slabs Relief

1

400,000

30,000

-

30,000

2

700,000

70,000

30,000

40,000

3

1,000,000

150,000

72,500

77,500

4

1,250,000

250,000

110,000

140,000

5

1,800,000

450,000

207,500

242,500

6

2,500,000

625,000

347,500

277,500

7

5,000,000

1,250,000

972,500

277,500

8

10,000,000

2,500,000

2,222,500

277,500



Payment to Traders and Distributors – 153A

A new section 153A is introduced whereby every manufacturer at the time of

sale to distributor, dealers and wholesaler shall collect withholding tax at the

rate of 1% of gross amount of sales.

The tax collected under this section is adjustable against tax liability of the

distributor, dealer and whole seller.

Tax Payer Card – Section 181B

It is now proposed that Board may introduce a scheme for large taxpayers

whereby “Honor Card” would be issued to individual taxpayers who fulfill a

minimum criterion to be eligible for the benefits as contained in the scheme.

Tax Credit For Investment In Shares and Insurance

The limit on tax credit for investment is further relaxed and it is enhanced to

20% of taxable income from 15%. Further, the current of investment available

for tax credit is increased from 500,000 to 1,000,000 and the minimum holding

period is reduced for 03 years to 2 years.

Tax credit on Investment

It may be recalled that Section 65E was introduced vide Finance Act, 2011,

wherein the tax credit was allowed on investment by a company with 100%

equity investment in BMR of plant and machinery already installed, in an

industrial undertaking setup in Pakistan before the 1st day of July 2011. The said

credit was allowed subject to the fulfillment of certain conditions. The bill with a

view to remove ambiguities and elaborate these conditions seeks to substitute

those conditions. The proposed conditions are as follows:

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

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



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

The tax credit would be allowed:

Where a tax payer maintain separate account of an expansion project or a new project, the tax payer should be allowed a tax credit equal to 100% of the tax payable, including minimum tax and final tax payable under any of the provisions of the Ordinance attributable to such expansion project or new project. In all other cases the credit under this section would be such proportion of the tax payable, including minimum tax and final tax payable under any of the provisions of Income Tax Ordinance 2001 as is the proportionate between the new equity and total equity including new equity.

The tax credit would be available against the tax payable in the year in which the plant and machinery is installed and for subsequent 4 years. Taxable Income – Section 9, 10 And 53 (1A)

The bill seeks to include the exempt income in the definition of total income

previously this was included in section 53(1A) which is now omitted.

Income from Other Sources – Section 39 Clause (CC) To Sub-Section (1)

It is clarified that additional payment received on delayed refund as

compensation will be treated as income from other source.

Filing of Revised Return – Section 120, (6)

A new condition for filing revised return is proposed where the return of income

can only be revised to enhance the income as determined by an order issued

under sections 12, 122, 122A, 122C, 129, 132, 133 or 221.

Amendment of Assessment by the Additional Commissioner – 122(5A)

Under the proposed amendment, the Additional Commissioner is now

empowered to make inquiries before amendment of assessment order under

section 122(5A).



Procedure in APPEAL – SECTION 128

The bill proposes to empower the Commissioner (Appeal) to stay recovery of tax

for a period of 30 days.

Decision in Appeal – Section 129

At present, under sub-section (5) of section 129 if the Commissioner (Appeal)

has not made an order within 4 months, the relief sought by tax payer is

deemed to be allowed. However, this sub-section is now proposed to be

omitted and it is now unclear that what will be the position if the decision is not

given with time limit allowed.

Notice To Obtain Information Or Evidence – Section 176 (1) (C)

According to existing position, the tax officer cannot enter into taxpayers’

premises for obtaining information unless the case is selected for audit.

However, the condition for selection of audit is now proposed to be removed

and the tax officer can now enter into taxpayers’ premises even if case is not

selected for audit.

Additional Payment For Delayed Refund – Section 171

Under the proposed amendment the KIBOR rates used for calculating of delayed

refund is now proposed to be replaced by a standard rate of 15 percent.

Capital Gain on sale shares of listed company

The rate of tax on capital gain tax is proposed to be changed the comparison of

existing and proposed rates is as follows:



S.

No. Period. Tax Year

Tax Rate

existing

Tax Rate

proposed

1

Where holding

period of a security

is less than six

months. 2011-2015 10.00% 10.00%

2

Where holding


is more than six

month then but

less than twelve

months.

2011 7.50% 7.50%

2012 8.00% 8.00%

2013 8.50% 8.00%

2014 9.00% 8.00%

2015 9.50% 9.50%

2016 10.00% 10.00%

3.

Where holding


is more than one

year . - Nil Nil


Significant Amendments in Sales Tax

Assessment of Tax and Recovery of Tax Not Levied or Short-Levied or

Erroneously Refunded- Section 11 and 36

Through the proposed amendment the provisions of section 11 and section 36

are being merged and streamlined. Before amendment, the time period for

issuance of show cause notice under section 11 was 3 years whereas the time

limit for issuance of show cause notice under section 36 was five years, which is

now uniformly 5 years for both assessment of tax and recovery.

Changes Proposed in Sales Tax Rules, 2006 – SRO 589(1)/2012 dated 1 June

2012

Power of Board to Transfer The Jurisdiction – Rule 5

The bill seeks to amend the rule 5 of the sales tax act regarding registration

whereby the FBR may transfer the registration of any registered person or any

business of a registered person to an area of jurisdiction where the place of

business or registered office or manufacturing unit is located.

Change In Particulars – Rule 7

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

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

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

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

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



Blacklisting and Suspension of Registration – Rule 12

The bill seeks to substitute rule 12 which deals with blacklisting and suspension

of suspected units. After the amendment, where the Commissioner or Board

has reason to believe that the registered person is to be suspended or

blacklisted, the procedure as prescribed by the board shall be followed.

Commercial Importers - Value Addition at Import Stage and Immunity from

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

Presently sales tax value addition on import stage is fixed at 10% for commercial

importers. The same is abolished w.e.f. 02 June 2012.

At present those commercial importers who do not claim refund of excess input

tax are not subjected to audit except with the permission of the Board. After

introduction of S.R.O. 592(1)/2012 the immunity to the importer stands

abolished w.e.f. 2 June 2012. The records of the commercial importers will now

be subjected to audit under section 25 of the Sales Tax Act, 1990.

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

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

Presently the import of and supply of polyethylene and polypropylene falling

under the PCT heading nos. 3901.1000.1000, 3901.2000, 3902.1000 is zero-

rated for the manufacturing of mono filament yarn and net cloth. Now S.R.O.

591(1)/2012 substitutes the word “zero rating” with “exemption”; however

other conditions provided in S.R.O 811(1)/2009 dated 19 September, 2009 shall

remain unchanged.

Uniformity of Sales Tax Rate At 16% – S.R.O. 594(1)/2012 Dated 1 June 2012

Presently there are three different rates prevailing in Sales Tax regime. The

amendment seeks to remove aberrations in rates of sales tax to standard rate of

16%.

Exemption of Certain Items – S.R.O.595 (1)/2012 Dated 1 June 2012

Through the amendment, the following new items are now exempt from sales

tax:



30. Waste paper Supply is exempted

31. Re-melt able Scrap (PCT heading

72.04)

Import and supplies thereof

32. (i) Sprinkler equipment Supplies thereof

(ii) Drip equipment Supplies thereof

(iii) Spray pumps and nozzles Supplies thereof


© Tahir Jawad Imran Fecto 2012

This work is copyright. Apart from any use as permitted under the Copyright Act no part may be reproduced by any process without prior written permission from TJIF. Any requests and inquiries should be addressed to:

Tahir Jawad Imran Fecto Chartered Accountants Suit # 509, 5th Floor, Progressive Center, 30-A, Block 6, P.E.C.H.S., Karachi – 74500, Pakistan. Call: 0092 21 343 04082 Email: [email protected]

tjif budget overview 2012 13

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