AMENDMENTS IN INCOME TAX ORD. 1979
Important IT provisions of Finance Act 1999 explained
From YOUSAF RAFIQ
Special Correspondent, Islamabad
August 9 - 15, 1999
The Central Board of Revenue has issued Circular Number 8 of 1999 delineating important provisions of the Finance Act 1999 relating to Income Tax. Through the Finance Act 1999 certain amendments have been made in the Income Tax Ordinance 1979. The important provisions of the Finance Act 1999 are explained in the following paragraphs.
Appointment of Director General
(Section 2(15), (17A), (19AA), (27), (28) and (37A), Section 3(bb) and Section 4(1). A new income tax authority designated as Director General of Tax Withholding has been created to monitor tax withholding. In order to enable the authority and its subordinates to discharge the assigned functions, the definitions of various income tax authorities have been modified. Sections 3 and 4 of the Ordinance have also been appropriately amended.
Director General Investigation and Intelligence
(Section 2(15), (17A),, (19), (27), (28) and (37A). The definitions of various income tax authorities have been expanded to include Director General (Investigation and Intelligence) and his subordinates among such authorities to enable them to perform various functions under the Income Tax Ordinance.
Out-sourcing of external revenue
(Section 4AA). A new section 4AA has been inserted in the Ordinance. The new provision authorizes CBR to appoint any private agency, firm or a company to carry out survey in respect of such persons or in such areas as it may assign by an order in writing. The scope of survey shall also be determined by the CBR by a written order.
Out-sourcing of audit of tax withholding
(Section 4AAA). A new section 4AAA has been introduced in the Ordinance which authorizes CBR to appoint a private agency, firm or a company for carrying out audit of tax withholding of a registered firm or a company. The scope of such audit would be determined by the Board.
Taxation of excess reserves of companies
(Section 12(9A). Where a company earns profits in any year but does not declare cash dividends and its reserves exceed 50 percent of its paid-up capital, or if it declares cash dividend but its balance reserves still exceed 50 percent of its paid up capital, such excess reserves shall be deemed to be the income of the company under sub-section (9A) of section 12 and tax shall be payable thereon at the rate of 10 percent in accordance with paragraph "F" of Part-V of the First Schedule. The said sub-section further provides that the companies distribute cash dividends within seven months of the end of the relevant income year. However, the companies whose income year ended on 30th June, 1999 can distribute the dividends within eight months. A special provision has been made for the assessment year 1999-2000 for companies whose accounting year ended on a date prior to 30th June, 1999 and such companies may distribute cash dividend within a period of three months reckoned from the 1st day of July, 1999 i.e. by 30th September 1999.
Taxation of unexplained assets
(Section 13(1) (b), (c) and (d). Section 13 provides for taxation of assets not disclosed in wealth statement, and the sources of which are unexplained, as deemed income. As the law requires filing of a wealth tax return in certain cases and a wealth statement is not required to be filed along with the return in such cases, clauses (b), (c) and (d) of sub-section 91) of section 13 have been amended to clarify that action can be taken under that section where an asset is not disclosed in a wealth tax return and the assessee is unable to explain its source.
Mark-up paid on loans
(Section 44B). A new section 44B has been introduced in the Ordinance to make the mark-up paid on any loan borrowed for and invested in the construction/purchase of a house or apartment under the Prime Minister's above mentioned housing program, deductible from the income of the borrower - purchaser of such house/apartment.
Rationalization of withholding tax
(Section 50(2B). Tax withholding rate on issuance of bank drafts, outstation cheques, rupee traveler cheques and other instruments of transfer of funds by non-NTN holders has, from the first day of July, 1999 been revised from 0.20 percent to 0.30 percent. The transaction threshold has also been reduced from Rs 50,000 to Rs 25,000.
Payments to branches
The second proviso to sub-section (3) of section 50 has been amended to exclude payments to branches of non-resident insurance companies, like non-resident banking companies, from the purview of tax withholding under this clause. The new provisions added to the law provide that where a person claims to be an agent of a non-resident, he must file a declaration to that effect, with the concerned Deputy Commissioner of Income Tax, before making any payment to such non-resident. Similarly, new provisions also provide that where a person does not intend to deduct tax from any payment falling within the ambit of sub-section (3), to a non-resident except payment on account of imports of goods or remittances on account of educational and medical expenses in accordance with the State Bank's regulations, he must furnish particulars of such non-resident and the nature and quantum of such payments to the concerned Deputy Commissioner of Income Tax. The new provisions further provide that where a person notifies that he does not intend to deduct tax from a non-resident but the Deputy Commissioner has reason to believe that the payment is chargeable to tax under the Ordinance, he may direct such person to deduct tax from such payment at the rates specified in the First Schedule or such lower rate as he may specify by a written order.
Persons earning commission
(Sub-section (4A) of Section 50 and Section 80C (2) (a) (ia). The sub-section (4A) of section 50 has been substituted by a new provision whereby tax at the rate of 10 percent is to be deducted from any payment on account of brokerage or commission paid by the government, a local authority, a company, a registered firm or a foreign contractor or consortium. Where the payment is first received by the agent itself on behalf of its principal, the principal would be responsible for collection and deposit of the tax in government treasury/bank. The provision equally applies to insurance agents and Board's notifications SRO No 933(I)/91 dated September 19, 1991 and SRO No 934(I)/91 dated September 19, 1991 regarding deduction of tax from commission on general and life insurance policies have been rescinded through notification SRO 671(I)/99 dated 12th June 1999. The provision also applies to advertising agents and travel agents. The tax collected/withheld under sub-section (4A) shall constitute full and final discharge of tax liability under section 80C.
Tax withholding on import of edible oils
(First proviso to section 50(5), Section 80DD, Clause (6AA) of Part-II (as substituted vide SRO 824(I)/99 dated 8th July, 1999) and clause (58) of Part-IV of the Second Schedule and notification no SRO 593(I)/91 dated 30th June 1991). A presumptive tax regime has been introduced for manufacturers of vegetable ghee/oil who import edible oils as raw materials for their own use. Such manufacturer importing edible oils for their own use would be liable to pay 2 percent tax at the import stage under section 50(5). The first proviso to sub-section (5) of section 50 and notification SRO 593(I)/91 dated 30th June, 1991 have also been amended so that no certificates of exemption from payment of tax under this sub-section can be issued by the RCIT or the CIT to such manufacturer-cum-importers. The method of calculation of 2 percent tax is the same as laid down in sub-section (5) of section 50 for imported goods. The tax rate applicable to commercial importers of edible oils, other than manufacturers importing it for their own use, will remain the same i.e. 5 percent.
Taxation of indenting agents
(Section 50(5A) and Section 80CC, paragraph CCC and CCCCC Part-I of First Schedule). Sub-section (5A) of section 50 has been amended to provide presumptive taxation of commission received in foreign exchange from foreign principals by indenting agents. The tax would be withheld at the rate of 10 percent by banks. The tax deducted at the rate of 10 percent shall constitute final discharge of tax liability in respect of such income from assessment year 2000-2001.
(Section 50(5AA) and Section 80CC). A new sub-section (5AA) of section 50 has been introduced in the Ordinance to provide collection of tax by banks when realizing proceeds of a back-to-back inland letters of credit opened by a direct exporter of goods in favor of an indirect exporter for the supply of goods for which the letter of credit has been opened in foreign exchange by a foreign buyer (in favor of direct exporter). The tax shall be collected by the banks at the same rates as applicable to direct exporters of those goods i.e. 0.5, 0.75 or 1 percent as the case may be, provided the transaction is supported by a back-to-back inland letter of credit.
Taxation of windfall gains
(Section 50 (5AAA) and Section 80C). A new sub-section (5AAA) has been introduced in section 50, to provide for collection of tax at import stage from those importers of wheat who opened letters of credit before May 19th, 1999, when foreign exchange rates were unified, and booked or paid for the foreign exchange at rates less than those prevailing at the close of banking hours on the said date (as notified by the National Bank of Pakistan). However, the provisions shall not apply to those importers of wheat who filed Bills of Entry on or before the 19th day of May, 1999. The provision has been effective from the twelfth day of June, 1999. The tax is collectable by the Collector of Customs at the rate of 90 percent of the difference between the amount paid for booking or purchasing the foreign exchange and the amount computed on the basis of rates of conversion prevailing at the close of banking hours on 19th May, 1999, as notified by the National Bank of Pakistan. The tax so collected shall be treated as the final discharge of tax liability in respect of aforementioned gains.
Liability of NGOs
(Section 50(7B). An amendment has been made in sub-section (7B) of section 50 with the result that now all non-government charitable institutions, private hospitals, maternity homes, clinics and private educational institutions are required to withhold tax from rent paid to any person, in respect of buildings hired by them, where the annual rent exceeds Rs 100,000.
Prize bonds, raffles and lotteries
(Paragraph CC, clause (b) and Paragraph HHHH of Part-I of the First Schedule). The rate of tax withholding on prizes and prize bonds, raffles and lotteries etc has been revised and with effect from Ist July, 1999 it would be 10 percent of the value of such prizes.
Tax withholding on gas bills
(Section 70(7G). The new sub-section (7G) of section 50 requires gas companies to collect tax along with the gas bills from the industrial and commercial consumers at the following rates: Commercial Consumers (nil where the bill does not exceed Rs 2500), (Rs 150 where the bill exceeds Rs 2500 but does not exceed Rs 4000), (Rs 300 where the bill exceeds Rs 4000 but does not exceed Rs 6000), (Rs 400 where the bill exceeds Rs 6000 but does not exceed Rs 7500) and (Rs 500 where the bill exceeds Rs 7500). For Industrial Consumers (nil where the bill does not exceed Rs 2500), Rs 250 where the bill exceeds Rs 2500 but does not exceed Rs 5000), (Rs 500 exceeding Rs 5000 but does not exceed Rs 10000), (Rs 1000 exceeding Rs 10000 but does not exceed Rs 20000), (Rs 2000 exceeding Rs 20000 but does not exceed Rs 30000) and Rs 3000 where the bill exceeds Rs 30000). The tax collected under this section is adjustable advance tax.
Action against defaulting withholding agents
(Explanation in Section 52). An explanation has been added in Section 52 to clarify that the action under this section is to be taken by the DCIT holding jurisdiction over the case of the "assessee in default".
Recovery of tax
(Section 52A). A new section 52A has been introduced which provides that if tax has not been deducted or collected under section 50 from any person from whom it should have been deducted or collected, the DCIT having jurisdiction over such person may recover the amount not so deducted or collected from him. This collection would, however, not absolve the person responsible for deduction or collection from any penal consequences that he may have incurred because of the default. It is, however, clarified that the tax involved if recovered from the payee, would not be recovered again from the payer.
(Sub-section (1) of Section 55). The law required the taxpayers, earning income of Rs 100,000 or more to file their returns of wealth along with their returns of income. This income threshold has been raised to Rs 200,000.
Universal self assessment scheme
(Section 59(1) paragraph "AA" of First Schedule). Sub-section (1) of section 59 has been amended to provide for the introduction of a Universal Self Assessment Scheme from which more classes of taxpayers could benefit. The scheme would also apply to companies except public companies, companies engaged in the business of banking, leasing and modarabas and non-residents. Separate rates have been prescribed, under paragraph "AA" of the First Schedule, for those availing USAS.
Fixed or minimum tax
A new section 59E has been inserted in the Ordinance to enable the Board to promulgate scheme for the payment of fixed or minimum tax in respect of sales tax payers falling within the ambit of section 3AA of the Sales Tax Act, 1990.
Royalty paid to non-residents
Through the Finance Act, 1998, withholding tax rate on royalties paid to non-residents was reduced from 30 percent to 15 percent. A new section 80AAA has been introduced in the Ordinance in order to bring the income by way of royalties received by non-residents under 'presumptive tax regime'. The 15 percent tax withheld from payments on account of royalties would constitute full and final discharge of tax liability in respect of such income of a non-resident. However, in case of a Treaty for Avoidance of Double Taxation, which Pakistan has with another country, the tax would be withheld at any lower rate specified in such Treaty.
Amendments in section 80c
(Sub-section (2) of section 80C). Sub-clause (I) of clause (a) of sub-section (2) has been amended and three new sub-clauses (ia), (iia) and (iv) have been inserted in that clause. As a result, the amounts representing payments on account of 'services rendered' other than the professional services rendered by doctors, lawyers, accountants, auditors, architects, surveyors, actuaries, engineers, advisors and consultants, on which tax is deductible under section 50(4) would be the final discharge of tax liability from assessment year 2000-2001. The brokerage and commission from which tax is deductible under section 50(4A) would be covered by section 80C and the tax deductible would be the final discharge of tax liability of such person.
A new sub-section (5A) has been inserted in section 80C which provides that where an assessee derives any income to which the said section applies and the tax liability so computed is less than the tax liability worked out as if the said section was not applicable, the difference in tax shall be payable in accordance with section 54 along with the return of income. The tax collected from certain importers of wheat falling within the ambit of sub-section (5AAA) of section 50 would also be the final discharge of tax liability in respect of such income. The tax deductible under section 50 (7H) from the commission/discount allowed to petrol pump operators by petroleum product sellers/distributors/suppliers would constitute final discharge of tax liability in respect of such income of petrol pump operators.
Amendments in section 80c
By virtue of amendments made in section 80CC, the tax collectable from commission received in foreign exchange by indenting agents under section 50(5AA) and the tax collectable from indirect exporters under section 50(AA) shall constitute final discharge of tax liability in respect of such income. Consequently, amendments have been made in the First Schedule.
(Section 80D). The scope of section 80D has been extended to individuals, association of persons, unregistered firms and Hindu Undivided Families as well. However, this section would not apply to registered firms, individuals, URFs, HUFs and AOPs which are covered by the Universal Self Assessment Scheme.
Income tax incentives for sales tax payers
(Section 80E and section 143B). A new section 80E has been introduced in the Ordinance which allows individuals, AOPs, HUFs and URFs paying turnover tax under section 3A of the Sales Tax Act, 1990, the option to pay income tax at the rate of 1 percent of such turnover along with their sales tax returns. The option would be available in respect of income assessable for the assessment year 2000-2001. The Sales Tax payers can, therefore, exercise this option when they pay sales tax for the period falling within income year commencing on July 1, 1999. The persons opting for payment of income tax under this section would not be required to file a return of income under Section 55 and would, instead, file a statement under section 143B.
Compulsory registration of withholding agents
(Section 143E). Under the new section 143E every person responsible for withholding tax in accordance with the provisions of this Ordinance must get himself registered with the Directorate of Tax Withholding. The persons who fail to get themselves registered would render themselves liable to penalty of upto two thousand rupees. However, the DCIT shall not impose any such penalty unless such person has been given a reasonable opportunity of being heard.
Publication of directories of taxpayers
(Section 150 - clause (q) in sub-section (3) and sub-section (5A). Section 150 has been amended to authorize disclosure of information about a taxpayer to the Federal Tax Ombudsman. The amended section also authorizes the Federal Government to publish particulars of income and the amount of tax paid by holders of a public office as defined in the Ehtesab Act, 1997 (IX of 1997).
New tax rate slabs
(Paragraph A of Part-I of the First Schedule and clause (g), (h) and (i) in said Paragraph). Hitherto, the maximum rate applicable to individuals, AOPs, URFs and HUFs was 20 percent. Three new slabs of 25 percent, 30 percent and 35 percent have been added. Besides, the perquisites of salaried persons whose salary and perquisites exceeded Rs 300,000 were taxable as a separate block. This distinction has been removed with effect from the assessment year 2000-2001. Consequently, tax would be deductible from salaries and perquisites with effect from July 1, 1999, in all such cases, in accordance with the new rates. However, persons whose salary and perquisites are less than Rs 300,000 would continue to benefit from the concessional treatment already available to them under the Income Tax Rules, 1982.
The aforementioned three additional tax rate slabs of 25 percent, 30 percent and 35 percent for the higher income groups are as under: (i) Income from Rs 500,001 to 700,000 (Rs 70,000 plus 25 percent of amount exceeding Rs 500,000), (ii) Income from Rs 700,001 to 1,000,000 (Rs 120,000 plus 30 percent of amount exceeding Rs 700,00) and (iii) Income exceeding Rs 1,000,000 (Rs 210,000 plus 35 percent of amount exceeding Rs 1,000,000).
The maximum rate slab in case of salaried persons having income of more than one million rupees, shall, however, be 30 percent instead of 35 percent. The tax from salaries for income year Ist July, 1999 to 30th June, 2000 shall be withheld under sub-section (1) of section 50 with effect from Ist July, 1999, at the new rates (assessment year 2000-2001). For the assessment year 1999-2000 the tax shall be payable by salaried persons at the rates as they stood before the amendment through the Finance Act, 1999 and in cases where the salary inclusive of perquisites was more than Rs 300,000, such perquisites would be taxable as a separate block at the rates given in clause (h) of proviso to the Paragraph A of Part-I of the First Schedule. The 10 percent surcharge on salary income has also been withdrawn with effect from assessment year 1999-2000.
Dividend income of insurance companies
(Proviso to Paragraph 'D' of Part-V of the First Schedule). Paragraph 'D' of Part V of First Schedule has been amended by adding a new proviso in the paragraph. Consequently, dividend income of insurance companies, whose income is computed under the Fourth Schedule to the Income Tax Ordinance, would be taxable at the tax rates applicable to such companies.
Taxation of trading income of modarabas
(Para 'B', Part V of the First Schedule, clause (102E) of Part I of Second Schedule and supersession of para 2(I) of Circular No 24 of 1992). Through the Finance Act, 1998, income of modarabas, other than "trading modarabas" was exempted from tax under clause (102E) of Part I of Second Schedule with effect from assessment year 1999-2000. As trading can be done by other modarabas as well, the clause has been amended. Under the substituted clause (102E) income of a modaraba from any 'trading activity' has been excluded from the purview of exemption available under this clause. Besides, Paragraph 'B' of Part V of the
First Schedule has also been amended to provide taxation of such income and the income from exports of modarabas in accordance with section 80C or 80CC, as the case may be.
The substituted clause (102E) further provides that any amount transferred to a reserve required to be maintained by a modaraba under the Modaraba (Floatation and Control) Ordinance or the rules made thereunder, shall be excluded in determining the 90 percent profit to be distributed for claiming income tax exemption. The clause also provides that with effect from Ist July, 1999, any bonus certificates or shares issued to modaraba certificate holders would not be treated as distribution of profit for computation of the 90 percent distribution condition for availing exemption and paragraph 2(I) of CBR's circular no 24 of 1992, stands superseded to that extent.
Exemption of National Investment Unit Trust
(Clause (102F) of Part-I of the Second Schedule). A new clause (102F) has been added to Part-I of the Second Schedule to exempt National Investment (Unit) Trust's income for the assessment year 1999-2000 and 2000-2001.
Exemption of special purpose companies for securitization
(Clause (184) of Part-I and clauses (32A) and (57) of Part-IV of Second Schedule). The special purpose companies called "Special Purposes Vehicles" (SPVs) which would be involved in securitizing the receivables of Provincial Governments and the private sector have been exempted from tax under the new clause 9184) of Part-I of the Second schedule. These SPVs have also been exempted from 0.5 percent minimum tax under section 80D by virtue of clause (32A) of Part-IV of the second schedule. Tax withholding provisions of sub-sections (2), (2A) and (7D) of section 50 shall also not apply to such "Special Purposes Vehicles" for the purpose of securitization and for that purpose a new clause (57) has been added in Part-IV of the Second Schedule.
Exemption from withholding tax
(Clause (6B) of Part II and clause (37A) of Part-IV of Second Schedule). Exemption from tax withholding has been extended to those persons who provide services to manufacturers-cum-exporters. Clause (6B) of Part-II of Second Schedule which provided for 2 percent reduced rate of tax withholding under sub-section (4) of section 50 has, therefore, been omitted. As a result, manufacturer-cum-exporters while making payments in respect of services utilized in respect of goods exported by them would not be required to withhold tax from such payments. They shall, however, continue to withhold tax from other non-export related payments.
Exemption on certain payments to NIT or mutual funds
(Clause (2A) of Part IV of Second Schedule). A new clause (2A) has been inserted in Part IV of Second Schedule which provides exemption from tax withholding provisions of sub-sections (2), (2A), (4A), and (7D), of section 50 for any person making payment to National Investment (Unit) Trust and the mutual funds established by ICP or an Investment Company registered under the Investment Companies and Investment Advisors Rules, 1971, or a unit trust scheme constituted by an asset management company registered under the Asset Management Companies Rules, 1995.
Extension of exemption from TFCs
(Clause (10B) of Part IV of Second Schedule). Companies and registered firms were liable to 10 percent tax withholding on their income from Term Finance Certificates (TFCs), whereas individuals holding such certificates were exempt from tax withholding. This exemption from tax withholding, under sub-section (7D) of section 50, has now been extended to the income of companies and registered firms from TFCs issued on or after the first day of July, 1999.
First year allowance
(Entry 'E', rule 5A in the Third Schedule). First Year Allowance at the rate of 40 per cent in addition to normal depreciation allowance, as provided under entry 'E' in Rule 5A of Third Schedule to the Ordinance has been extended to 'service, infrastructure, social and agriculture sector'.
Prime Minister's urban transport strategy
(Clause (17A) of Part IV and rule 5A in the Third Schedule). The bus-operation/buying has been declared an "industry". A new category 'F' has, therefore, been added in rule 5A of the Third Schedule in order to provide for First Year Allowance (FYA) at the rate of 100 percent subject to the condition that the buses continue to ply in the urban areas throughout their running life. The provisions of sub-section (5) of section 50 shall also apply to one Completely Built Unit (CBU) bus imported under the Non-Repatriable Investment (NRI) Scheme. The new clause also exempts motor cars imported under the fixed customs duty scheme, from tax withholding under section 50(5).
(Rule 5 of Fourth Schedule). A new clause (b) has been added in rule 5, in the Fourth Schedule, to clarify that any expenditure, allowance, reserve or provision in excess of the limits laid down in Insurance Act, 1938 (IV of 1938) is not an admissible deduction from profits in computing the income from business of insurance other than life insurance under the Fourth schedule.
Provision for Common Taxpayer Identifier (CTI)
(Clause 20 of the Finance Act, 1999). In order to facilitate cross matching of information available with various wings of CBR, help detect non-filers of tax returns and create linkages between parallel tax databases, a scheme of Common Taxpayer Identifier (CTI) has been introduced which makes it obligatory for the taxpayers to quote 'CTI' in all tax-related transactions and documents and display it at their business premises. The legal sanction for the scheme has been provided under section 20 of the Finance Act, 1999.
Repeal of tax exemption provisions
The tax exemption provisions contained in the following statutes stand repealed by sections 21 to 26 of the Finance Act, 1999: (21. Section 27A of the Agricultural Development Bank Ordinance, 1961 (IV of 1961); (22. Section 27 of the Peoples Finance Corporation Act, 1972 (XXIX of 1972); (23. Section 17 of the Pakistan Broadcasting Corporation Act, 1973 (XXXI of 1973); (24. Section 38 of the Establishment of the Federal Bank for Cooperatives and Regulation of Cooperative banking Act, 1977 (IX of 1977); (25. Section 31 of the Regional Development Finance Corporation Ordinance, 1985 (XXXII of 1985); and (26. Sections 51 and 56 of the Pakistan Telecommunication (Re-Organization) Act, 196 (XVII of 1996).