Tag Archives: Income Tax Ordinance 2001

Commercial importers to file mandatory income tax returns

KARACHI: The Federal Budget 2018-19 has proposed to treat income tax paid by the commercial importers as minimum tax instead of final tax, which means commercial importers are now required to file income tax returns.

At present the tax collected under section 148 of the Income Tax Ordinance, 2001 from commercial importers at the import stage is final tax, therefore, commercial importers are not required to file their return of income and compute their taxable income.

This leads to under-invoicing, domestic transfer pricing and evasion of tax. Tax collected from commercial importers at the import stage shall now constitute minimum tax instead of final tax, therefore, commercial importers shall be required to file their returns of income depicting their taxable income. This measure is also a step towards gradual phasing out of the final tax regime.

Income tax relief announce for corporate sector

KARACHI: The Federal Budget 2018-19 has introduced a number of income tax rationalization measures to provide relief to corporate sector and businessmen, which include gradual reduction in super tax and gradual reduction in corporate tax rate to 25 percent by 2023.
Presently the rate of super tax under section 4B of the Income Tax Ordinance, 2001 is 4.0 percent for banking companies and 3.0 percent for persons other then banking companies having income of Rs.500 million and above.
In order to encourage, incentivize and increase the competitiveness of companies and to enable them to contribute optimally towards economic growth, super tax shall be gradually withdrawn. It will be continued at the same rate for the financial year 2017-2018, however, the rate of super tax for both banking as well as non-banking persons shall be reduced by 1.0 percent for each successive year starting from the financial year 2018-19.
Presently under section 5A of the Income Tax Ordinance, 2001 public companies are obliged to distribute at least 40 percent of their after tax profits through cash or issuance of bonus shares within six months of the end of the financial year, failing which such companies are subjected to tax of 7.5 percent of their accounting profit before tax.
In order to create a balance between safeguarding the interest of shareholders as well as facilitating capital formation through retention of corporate profit earnings for future investments, the condition of distributing 40 percent of after tax profits is being reduced to 20 percent and the applicable tax rate on accounting profit in case of failure to distribute such dividend is being reduced from 7.5 percent to 5.0 percent.
Tax credit under section 65B is available to companies for the purpose of extension, expansion, balancing, modernization and replacement of plant and machinery at the rate of 10 percent of the amount invested.
Further, tax credit under section 65D is available to companies setting up a new industrial undertaking for a period of five years. Tax credit under section 65E is available to companies for the purchase and installation of plant & machinery through at least 70 percent new equity. The above tax credits can be availed by companies making investments up to June 30, 2019.

In order to incentivize investment and setting up of industrial undertakings /manufacturing concerns such tax credits are being extended for two more years up to June 30, 2021.
Presently, receipt of bonus shares is included in the definition of income and withholding tax under section 236M and 236N of the Income Tax Ordinance, 2001 is charged at 5.0 percent on the issuance of bonus shares to shareholders.
In order to encourage capital formation and enable companies to issue bonus shares in lieu of dividends to improve their liquidity, withholding tax on issuance of bonus shares has been withdrawn and receipt of bonus shares has been ousted from the definition of income under the Income Tax Ordinance, 2001.

Federal Budget seeks to institutes tax reforms in the real estate sector

KARACHI: The Federal Budget 2018-19 seeks to institute tax reforms in the real estate sector. Widespread tax reforms have been envisaged for streamlining the issues related to the real estate sector.

Property transactions shall be recorded at the value declared by the buyer and the seller. Property rates notified by Federal Board of Revenue (FBR) for the purpose of collection of taxes on sale purchase of property and DC rates are to be abolished.

At the federal level, a one percent adjustable advance tax from the purchaser on the declared value shall be collected and this tax shall replace the existing withholding tax on sellers and purchasers of property.

Non-filers shall not be permitted to purchase property having declared value exceeding 4.0 million rupees. Provinces shall be requested to abolish the provincial rates for the collection of stamp duty commonly known as DC rates and to collect a total of 1.0 percent tax under stamp duty and capital value tax on the value declared by the buyer and the seller of property.

In order to deter under-declaration and consequent loss of revenue, FBR shall have the right to purchase any property within six months of registration by paying a certain amount over and above the declared value which may be 100 percent in the fiscal year 2018-19, 75 percent in the fiscal year 2019-20 and 50 percent in the fiscal year 2020-21 and thereafter.

In order to implement the above measures, enabling provisions shall be incorporated in the Income Tax Ordinance, 2001. Detailed procedure and the date of coming into force of the above measures shall be notified later.

Email is not a legal mode serving notice: FBR

KARACHI: Federal Board of Revenue (FBR) has notified the procedure for serving a notice, which could be treated as properly served upon an individual or person.

Section 218 of the Income Tax Ordinance, 2001 describes various modes through which a notice shall be treated as properly served upon an individual or a person. The modes of service stated in section 218 are personal service on the individual or the representative of the person, service through registered post or courier service on the registered office or address and where the person does not have such office or address, to any office or place of business through registered post, to the last known address in Pakistan or in the manner prescribed for service of a summon under the Code of Civil Procedure, 1908.

Electronic mode of service is not expressly provided in section 218. However, electronic service is provided as substituted service in rule 20, Order V of the First Schedule to the Code of Civil Procedure, 1908. As per this rule, substituted service is ordered where there is reason to believe that the defendant is keeping out of the way for the purpose of avoiding service or for any other reason where the summons cannot be served in the ordinary way.

As electronic service of notices is mentioned as a substitute to normal service, service of notices only through electronic means is not likely to be treated as proper service by the appellate authorities. It is worth emphasizing that indiscriminate reliance on electronic mode of service also creates problems for taxpayers, as they in certain cases are unable to access electronically transmitted notices and orders.

It is therefore directed that all notices must be served as per any mode of service provided in section 218 and electronic service may be resorted to as  an additional means of service for facilitation of the taxpayer and may not be treated as a legal mode of service.

SHC orders decision in tax appeal filed by Interflow Communications in 30 days

KARACHI: An appellate bench of High Court of Sindh (SHC) comprising Justice Aqeel Ahmed Abbasi and Justice Abdul Maalik Gaddi disposed of a Special Tax Reference Application filed by Interflow Communications Private Limited directing the Commissioner Appeals, Inland Revenue to decide the appeal within 30 days time.

The bench also restrained the IR authorities from coercing recovery of alleged short levied amount.

The bench earlier heard Amjad Javed Hashmi, counsel for the applicant who impugned a show cause notice under section 138 (1) of the Income Tax Ordinance 2001 demanding a payment of rupees 294,831, 375. The counsel maintained that the amount demanded was twice the declared taxable income of rupees 10, 880,948.

The applicant sought a refund of rupees 29,277,390 for the tax year 2104. AT this moment the department swung into action and selected the return filed for an audit. The authorities later demanded a number of documents from the applicant to support their claims.

Today when the application was taken up for hearing, the counsel for applicant pointed out that comments  were not filed by the respondent side. The bench perusing the prayer clause and other points raised in the application by the applicant said that instant reference application can be disposed of in terms decided in case of identical nature.

The bench while disposing of the petition while asking the appellate authority to decide the appeal in 30 days also restrained the department from any coercive action for 15 days if any adverse order was passed against the applicant. The applicant was asked to obtain a stay from relevant forum within 15 days in case or order passed against him.

FBR further clarifies taxation of immovable property, Through finance Act 2016

KARACHI: Federal Board of Revenue (FBR) on Thursday said that about eight amendments have been introduced to Income Tax Ordinance, 2001 through Finance Act, 2016 regarding taxation of immovable properties in which withholding tax on transfer of property has been increased by 100 percent for filers and non-filers of income tax return.

The FBR said that amendments in respect of immovable properties had been made in Section 7C, 7D, 15, 15A, 37, 68, 236C and 236K of the Income Tax Ordinance, 2001.

Withholding Tax on Immovable Property:

Withholding tax was applicable on transfer of immovable property in the hands of a seller being filer at 0.5 percent and non-filer at one percent. Through Finance Act, 2016, this rate has been increased to one percent for filer and two percent for non-filer. The registration of immovable property shall not be less then value prescribed by the District Collector. Tax collected is adjustable against capital gains arising on disposal of such property. Moreover, this tax is applicable only if the immovable property was acquired within last five years, the FBR said.

The FBR further said that in the hands of the purchaser another withholding tax was applicable at the rate of one percent for filer and two percent for non-filer prior to Finance Act 2016. Through Finance Act 2016, the rate of withholding tax has been increased to two percent for filer and four percent for non-filer. The registration of immovable property shall not be less the value prescribed by the District Collector. The tax so collected is adjustable advance tax against the tax liability of the purchaser and if no liability exists the same can be refunded.

Taxation of Builders and Developers:

Income of builder or land developer was assessed on the net income basis where declared receipts were reduced by the claimed expenses. As these projects are on long term basis, therefore, provisional assessment on yearly basis on declared receipts was conducted which was followed by the appraisement at the end of the project. The FBR said sometime if construction is carried out under long term contracts the income tax assessed was on the basis of the percentage of completion method. However, due to non-documented economy receipts and expenses could not be verified and resultantly taxpayers inflated expenses and suppressed receipts and a very little revenue was contributed by this sector.

The FBR said that after amendments introduced through Finance Act, 2016, income of builder or land developer shall now be final taxation on the basis of specified rates based on cities and area of the property in respect of projects approved after July 01, 2016. For this purpose FBR shall prescribe rules regarding mode and manner of tax payment.

Capital Gain on Sale of Immovable Property:

Through Finance Act, 2016 gain arising on disposal of immovable property acquired within last five years has been made taxable at 10 percent. Previously it was taxable at a rate of five percent and 10 percent if the holding period was up to one year and two years respectively. However, there was no tax on gain arising out of immovable property where holding period was exceeding two years.

However, under the Ordinance, gain arising on the disposal of immovable property by a person in a tax year to a Rental REIT Scheme shall be taxed at the rate of five percent up to 30th day of June 2019, irrespective of the holding period.

Determination of Fair Market Value of Immovable Property:

Prior to Finance Act, 2016, fair market value for the purpose of probing the source of investment in acquisition of immovable property was determined by the commissioner. However, under the Income Tax Rules, fair market value was to be determined as value fixed for the purpose of collecting stamp duty by provincial revenue authorities and it was binding upon commissioner Inland Revenue. Now, the powers of commissioner have been withdrawn and valuation is to be made by a panel of approved valuers of State Bank of Pakistan. Similarly, the binding nature of the value determined by the provincial revenue authorities for the purpose of collecting stamp duty has also been withdrawn.

Property Income of Individuals and Association of Persons:

Through an amendment in Section 45 of the Income Tax Ordinance, 2001, the chargeability of tax on property income for an individual and AOP has been changed from ‘net income basis’ to ‘gross income basis’ as separate block of income for tax year 2017 and onwards. The gross rental receipts of individual and AOP shall be taxed at prescribed rates without allowing any deductions and allowances under Section 15A.

The tax deducted or deductible under section 155 in the case of individual and AOP shall constitute final discharge of tax liability.

A new tax card also has been inserted in First Schedule of the Ordinance, which prescribes the tax rates applicable to rental income of individuals and AOPs.

Similarly, withholding tax rates for rental payments to individual and AOPs have also been prescribed in the revised Table in the First Schedule. However, property income derived by an individual or AOP below Rs200,000 shall not be taxable if or individual or an AOP does not have income from any other head. The FBR said that this is effective from July 01, 2016 for individual and AOPs. Property income derived by companies shall continue to be taxed under the existing provisions as before.

0.4pc WHT to continue on banking transactions till April 30

KARACHI: The Federal Board of Revenue (FBR) has notified extension of reduced withholding tax rate at 0.4 percent on banking transaction up to April 30, 2016.

The government imposed 0.6 percent withholding tax on all banking transactions exceeding Rs50,000 per day under section 236P of Income Tax Ordinance 2001.

However, following protests the government reduced the tax rate to 0.3 percent of the transaction value and later it was increased to 0.4 percent.

The tax has been imposed for all non-filers irrespective of individual or company and sectors. An official said the tax was imposed for documentation of economy and to discourage untaxed money in banking system.

FBR unearths a number of unregistered units in cigarette manufacturing sector

KARACHI: The Federal Board of Revenue (FBR)’s wing, Directorate of Intelligence & Investigation-Inland Revenue (I&I-IR) has exposed several unregistered business units in cigarette manufacturing sector while action has been initiated against them.

According to details, Directorate of I&I-I, Karachi, recently conducted a raid on a business place of manufacturer of cigarette rods, Paramount International (PVT) Limited and resumed important record while significant information regarding other unregistered units of this sector has been found and in this regard the series of actions would be conducted soon by the authority, sources told customnews.pk.

Sources sharing further details revealed that Paramount International is a private limited company engaged in the business of manufacturing of cigarette filter rods. Manufacturing unit of the registered person is located at shade no 2 plot no WH-7sector 16-B North Karachi while its registered office is located at A-15 Asmat Corner Block-7 FB Area Karachi.

Sources said that the Directorate General of I&I-IR Karachi, on the special instructions of recently appointed Deputy General (DG) IRS, Khawaja Tanveer Ahmad, has been active to identify tax defaulters as the Directorate General I&I-IR Karachi is vigorously taking actions against the tax evaders and recovering the evaded money which translates in to noteworthy contribution in national kitty by the Inland Revenue Service (IRS) Karachi.

Sources privy to the matter told Custom News that during scrutiny of tax profile of the Paramount International (Pvt) limited, a manufacturer of cigarette filter rods, I&I-IR observed that the registered person has misstated the values of sales purchase and exports in the Income Tax Returns compared with those of shown in the Sales Tax returns of the relevant tax periods.

I&I-IR further apprehended that Paramount International (PVT) Limited is engaged in supplies of filter rods to unregistered manufacturer of cigarettes; hence retrieval of information from the manufacturer of cigarette rods would be helpful for initiating action against the unregistered cigarette manufacturers.

Accordingly, I&I_IR Karachi, exercising its constitutional right under U/S 175 of the Income Tax Ordinance, 2001, section 38 of the Sales Tax act 1990 and section 45 of the Federal Excise Act, 2005, raided on the business location of Paramount International (PVT) Limited on 18 February 2016.During the search of the production unit, I&I-IR could not find any computer however partial record was found at the registered office by the special team.

The team members thoroughly examined the record available in the premises and resumed Filter Rod invoices, bank statements; sales tax invoices books, import registers, cash books and other relevant data and information under proper seizure/record resumption memo, duly signed by the officers as well as representatives/witnesses of the registered person.

The team members concluded the action and reported back to the office of Directorate of I&I-IR where the matter was reported and the resumed record/CPU were kept in safe custody.

Customs Tribunal decides assessment of goods under GD in appellant favour

KARACHI: The Customs Appellate Tribunal, Karachi bench I comprising Muhammad Yahya, Member Technical (I) Karachi deciding an appeal filed by M/s Al-Mastan Garments Karachi declared the assessment of goods under Goods Declaration by Model Customs Collectorate Appraisement-West as trespassing the jurisdiction of Customs law and specific provisions of Income Tax Ordinance 2001, Sales Tax Act 1990 and Federal Excise Act viz Adjudication and Recovery.

The assessment was not matching with the Customs law and against the benefit of SRO 1125(I)/2011 in the particular matter.

The tribunal held that orders-in-appeal by Collector of Customs (appeal) of December 16, 2014 suffers infirmity as rate of unit value did not match.

The Tribunal heard advocate representing the appellant. The counsel maintained that the appellant Al-Mastan is a registered manufacturer and entitled for exemption under SRO 1125(I)/2011 as amended vide notification 154(I)/2013 of February 28, 2013.

The Mastaan Garments did not violate the said SRO and the consignment/container of ‘raw silk’ from China imported by them was according to the value per unit and comes under the benefit of said SRO.

The tribunal disposed of the appeal by Collector of Customs (appeal) without imposing any cost upon the Mastaan Garments, Karachi.

Customs authorities bound to allow provisional release of goods

KARACHI: In case of dispute over valuation of imported consignment, “it is mandated upon the authority (Custom authorities) defined under section 81 are bound to allow the clearance of the consignment under the provisions of section 81 of the Customs Act 1969 upon presentation of photocopy of the Review application”, held the Customs Appellate tribunal in a judgment in an appeal filed by M/s A.F.U International.

The appellant company imported “Compound Chocolate” from Turkey and sought clearance while declaring the value of item at US $ 1. The Director, Valuation while determined the value to be US $ 2.15 per kg. The appellant filed the Review Application challenging the Valuation Ruling 28 of 2014 being contrary to section 25-D of the Custom Act 1969, Section 46 (d) and (g) of the sales Tax Act  1990 and Section 148 (6) and (9) of the Income Tax Ordinance 2001.

The appellant application was dismissed in Order in Review on 16-4-2015. The order in review was then questioned in the instant application. Nadeem Ahmed Mirza, Consultant/advocate appearing for the appellant contended at the outset that Director Valuation is not designated  as “Officer of Inland Revenue” under any provision of Sales Tax Act 1990 or Income Tax Ordinance 2001 and thus was not empowered to determine the value for levy of these taxes at  the import stage. He maintained that Director has acted in excess of jurisdiction and in fact has usurped the powers of Board (FBR) and thus the determination of value was also unlawful and not sustainable. During the course of arguments the respondents to a query by the court that why the provision of the Section 81 were not exercise despite availability, the respondent maintained that Collector of Clearance Collect orate has either issued verbal or written order not to allow clearance of the consignment made under section 81 of the Customs Act 1969 unless allowed by either the Additional Collector or the Collector.  The tribunal noti9ng that if a mandatory condition for exercise of jurisdiction is not fulfilled, then the entire proceedings which follows become illegal and suffer from want of jurisdiction, the tribunal sat a-side the Order in review and Valuation Ruling 625/2013 for determination of value for levy of Sales Tax  and Income Tax.

The tribunal also ordered the respondent Director General, Valuation to adhere observations made by the tribunal, to direct Clearance Collect orate to withdraw the issued verbal/written orders in derogation of the provision of Section 81 of the Customs Act 1969 and to allow the authority enunciated in the sub section (1) to exercise his powers independently, fairly and justly. The tribunal in its observation has held that in the instant case provisional determination of value could have been made while securing differential amount of duty, taxes, and other charges between the declared value and payable on the value determined through Valuation Ruling by the Director General of Valuation under section 25-A of the Customs Act 1969.

SHC holds Bonus Shares to be taxable, dismisses seven suits

KARACHI: A bench of High Court of Sindh (SHC) deciding a number of suits challenging the levy of income tax on “Bonus shares“ dismissed the same holding that bonus shares are also taxable.

Justice Muhammad shafi Siddiqui of SHC heard the suit filed by Muhammad Hussain Kassim and 12 others against Secretary Revenue Division/ Chairman FBR.

Seeking a declaration and permanent injunction, the plaintiff raised the law point that  whether Section 2 (29) , 39(1), 236 (M )and 236 (N) of Income Tax Ordinance 2001 as inserted through Finance Act are ultra vires of the law and the Constitution of Pakistan 1973.

The amendment paved the way for levy of income tax on bonus shares too.

The counsel for plaintiffs maintained that bonus share have not been defined in Companies Ordinance 1984 but defined in Section 2(9) of the Income Tax Ordinance 2001. He further contended that shares could be considered as a moveable property or an asset.

The plaintiffs side maintained that in case share holders are paid dividends they are liable to pay income tax but does not liable to pay such taxes on receipt of bonus shares since same is not the income in any rational sense but construed as an asset and moveable property in the hands of the shareholders.

The law permits a tax payer to arrange the tax affairs in ‘best tax efficient manner ‘which may be termed as “Tax avoidance” which is permissible under the law while tax evasion entails consequences of concealment and suppression of income and transaction prohibited and punishable under relevant laws.

The plaintiff’s counsel prayed to the court to declare the impugned legislative amendment as ultra virus of the Constitution read with Article 52 of the Constitution and thus annulled.

The counsel for defendants argued that legislature has the widest powers to levy taxes or any amount or value susceptible to income. They also contended that under the company law, the value of bonus share is implied /transferred from surplus account to the capital assets of the company in the name of the shareholders.

By issuing bonus shares, nothing in terms of money is relieved by the shareholder but it increases the ownership of shareholders in the company as the capacity to earn increases so does the capacity to tax increases.

They also argued that by taxing on “issuance of bonus shares“ legislature has not eroded any fundamental right of the subject. The learned judge held that bonus shares under the impugned amendment are lawfully considered as taxable.

Exemption is not a right to concession and can be lifted or withdrawn by the legislature at any time expressly or impliedly, the court held while dismissing the suit without any cost.