The government has introduced major changes through Finance Bill 2018 for broadening the tax base and makes it mandatory purchases of immovable properties and vehicles only by filers of income tax returns.

A fundamental step has been taken in order to curb acquisition of certain assets by persons who are outside the taxation regime.

FBR has extended the date of filing of Income Tax Return for salaried individual and Statement of final taxation u/s 115(4) for Tax Year 2018 up-to September 30, 2018.

 

It explains following:
1. The Finance Bill 2018 includes certain policy changes in the taxation regime that have been there over three to four decades.

Following revolutionary positive measures have been introduced:

a) Valuation of Immovable Properties and the pre-emptive right of the Government to acquire under-declared properties;

b) Restriction on acquisition of immovable properties and new vehicles by nonfilers;

c) Measures relating to non-cash gifts between persons who are not relatives;

d) Abolition of presumptive tax regime for commercial Importers;

e) Introduction of the concept of year of discovery for taxation of unexplained foreign sourced income and foreign assets;

f) Withdrawal of immunity of foreign remittances exceeding certain threshold; and

g) Substantial reduction in tax rates for Individuals including salaried class.

2. As a result of the reduction in tax rates for businesses undertaken by Individuals, the difference in tax incidence for similar businesses undertaken by corporate sector and Association of Persons (AOP) vis-à-vis an Individual has widened.

The net effective take home income through a corporate business and AOP is limited to Rs 60 if the profit is Rs 100 whereas same business undertaken by an individual will result in take home income of Rs 85.

This difference may lead to de-corporatization of businesses. We propose that the gap should be reduced.

Generally accepted international measure for the same is to treat tax on dividend as adjustable against corporate tax liability so as to avoid economic double taxation.

3. The Government has introduced one time compliance scheme for disclosure of undeclared income and assets. The Finance Bill has proposed certain measures to curb the possibility of future accumulation of undeclared foreign assets and foreign income.

4. In order to incorporate tax measures for proper disclosure of foreign assets and foreign income and enhance the ambit of anti-avoidance provisions, the Finance Bill has introduced certain provisions which may deem a foreign source income as Pakistan source income.

This aspect needs to be examined in relation to the generally accepted principle of international taxation.

5. In order to avoid protracted litigation and delay in settlement of cases, the whole concept of Alternative Dispute Resolution (ADR) has been revamped.

Now, the ADR Committee (ADRC) will comprise of three members, out of which two will be independent persons.

If the taxpayer decides to opt for ADR regime instead of appellate regime then the recommendations of ADRC will be binding on both the parties.

6. In the past, certain anti-corporate tax measures such as levy of tax on bonus shares, tax on undistributed profits and super tax had been introduced.

Through the Finance Bill, corrective actions have been taken in respect of all these measures and tax on bonus shares has been abolished whereas the other two taxes are to be phased out over the period of time.

7. In the past, regressive measures were adopted that had rolled back the business oriented regime for group taxation.

It was expected that certain measures will be introduced to reinstate all-inclusive group taxation system.

No such measures are, however, appearing in the Finance Bill. It is expected that these measures will be taken care of in the Finance Act, 2018.

8. There has been disputes between taxpayers and tax department on the matter of taxability of composite contracts undertaken by non-residents.

These disputes inter alia primarily relate to taxation of offshore supplies being part of an overall arrangement.

The Finance Bill has proposed deeming provisions for taxation of income from such supplies which, in our view, overrides the principles of nexus as laid down in international taxation system.

This matter requires reconsideration to bring it in line with the generally accepted principles especially in the cases where the contracts are executed by a person resident in a tax treaty jurisdictions.

 

9. Domestic tax laws around the globe invariably provide principles to curb tax avoidance measures, however, details guidelines and processes are laid down for this purpose.

Substantial powers have been provided to taxation authorities for undertaking actions in case of tax avoidance schemes which include disregarding a legal entity and protection provided under the tax treaties.

These provisions without substantive guidelines and safeguards are prone to abuse by the tax authorities.

It is suggested that the application of the same be subject to the adoption of detailed guidelines for General Anti-Avoidance Regulations (GAAR).

10. Banking companies are subject to tax on their profits as determined by the regulations prescribed by State Bank of Pakistan (being the Regulator of Banking Sector in Pakistan).

The application of recharacterisation provisions in the case of banking companies is undesirable where the amount of profit is the one as determined in accordance with SBP regulations.

11. It should be the objective of every growth based taxation policy to encourage capital investment in plant and machinery.

This objective is achieved by allowing charge for depreciation against taxable income and the right to carry forward in subsequent year.

The Finance Bill has proposed certain measures whereby the right to adjust brought forward unabsorbed depreciation is being deferred.

This negates the very objective of the concept as described above which may lead to curtailment of industrial investment without any real benefit to the Government.

12. There has been a general and genuine complaint of taxpayers for repetitive selection for tax audits.

A corrective measure has been proposed whereby a composite audit, covering Income Tax, Sales Tax and Federal Excise, shall be undertaken not more than once in three years.

There are cases of abuse of provisions relating to amendment of assessment in order to create tax demands. Corrective measures are required in this regard also.

 

Introduction to ACT :

–    A new section 113C titled as “Alternative Corporate Tax” has been introduced through Finance Act, 2014, which starts with a “non-obstante clause” i.e. Notwithstanding anything contained in this Ordinance (Income Tax Ordinance, 2001)

–   Applicable for tax year 2014 and onwards

–    Tax payable by a “Company” will be higher of the “Corporate Tax” (generally includes minimum and final taxes apart from certain exceptions) or “Alternative Corporate Tax” (17% of Accounting Income subject to certain adjustments and exclusions)

–    Rationale for introduction of ACT was explained in the “Salient features” of Budget documents “to discourage perpetual declaration of losses or very low income using tax avoidance means by Companies”.

–    The  Finance  Minister  in  his  Budget  Speech  also  mentioned  that  “ACT  is  being introduced for  corporate  cases where  taxable  income  is  usually far less than accounting income due to careful tax planning to avail all possible avenues of tax avoidance technically.”

International Examples :

–   India

18.5% of book profits of the Company (termed as adjusted accounting profits).

–   Argentina

Applicable at 1% of the value of fixed and current assets.

–   Mexico

17.5% of Flat Tax Base computed on the basis of certain cash inflows and outflows

–   Austria

Minimum amounts of tax have been prescribed for certain types of companies.

–   Mauritius

7.5% of book profits or 10% of dividends, whichever is higher.

Except for Mauritius, in all the above cases, adjustment is allowed for next 10 years.

Effect of non-obstante clause :

–    The provisions of section 113C only have an overriding effect over other provisions of the Income Tax Ordinance, 2001

–    In  case  of  any  conflict  between  the  provisions  of  section  113C  and  any  other provision of the Income Tax Ordinance, 2001, the provisions of section 113C will prevail

–    If, however, there is a conflict between section 113C and any other provision  of a Special Statute, the provisions of section 113C will remain subservient to the provisions of such Special Statute. Much would, however, depend upon the language of such Special Statute and the nature of conflict.

–    The provisions of section 113C are in the nature of “Self Contained code”. Other provisions of the Income Tax Ordinance cannot be applied automatically except to the extent permitted by Section 113C itself.

Effective year & retrospective application :

–    Specifically mentioned to be applicable for tax year 2014 and onwards.

–   Not a one-time levy but also intended to be applicable for subsequent tax years.

–    Companies  following  Special  Tax  Years  already  ended  before  introduction  of section 113C are affected by this levy.

–    Even for Companies following June 30 as their year-end are also affected by this law as all advance tax payments were already made in accordance with normal provisions.

–    ACT,  thus,  has  a  retrospective  effect  for  tax  year  2014  by  way  of  expressed language and not by way of any intendment.

–    Constitutional validity of the retrospective application is to be decided by the Courts. It is, however, generally believed that a retrospective law is valid if made through expressed legislation.

Taxpayers covered by ACT :

–    ACT  is  only  applicable  on  a  “Company”  and  as  such,  all  other  categories  of taxpayers, such as Individuals and Association of Persons are not covered.

–   Unlike section 113, ACT is also applicable on non-resident companies.

–    Section 113C itself does not define the term “Company” and, therefore, the term has to be construed as per section 80 to include the following.

(a)       Locally incorporated Companies, body corporates,  Small Companies

(b)       Modarabas

(c)        Foreign companies

(d)       Co-operative societies, Finance societies and other societies

(e)       Non-profit organisations

(f)        Trust, an entity or body of persons established or constituted by any law

(g)       Foreign associations declared by FBR as a Companies

(h)       Provincial Governments

(i)        Local Governments in Pakistan

Companies not covered by ACT :

–     ACT is specified to be non applicable on Taxpayers chargeable to tax in accordance with the following provisions of Income Tax Ordinance, 2001

(a)        Fourth Schedule (Insurance Companies)

(b)        Fifth Schedule (Mining Companies)

(c)        Seventh Schedule (Banking Companies)

–    By implication, ACT is also not applicable on following companies:

(i)         Companies setting up an Industrial Undertaking between July 1, 2014 to June 30, 2017 and subject to certain conditions, eligible for a reduced tax rate of 20% for a period of five years

(ii)        Non-profit organisations and certain trusts and welfare institutions eligible for 100% tax credit under section 100C

(iii)       Companies  eligible  for 100% tax credit under section  65D not having  any other income

(iv)       Companies  not  deriving  any  income  other  than  exempt  or  certain incomes subject to final taxation or Capital Gains under section 37A

(v)        Non-resident companies not having any presence in Pakistan

Computation of ACT :

–    ACT is defined as the tax at a rate of 17% of a sum equal to “Accounting Income” as reduced by certain specific adjustments.

–    “Accounting Income” is defined as the accounting profit before tax for the tax year, as disclosed in the financial statements, excluding share from the associate recognised under equity method of accounting.

–   Following amounts are also excluded from accounting income for computing ACT.

(a)       exempt income

(b)       income subject to tax under section 37A (capital gains on securities)

(c)        income subject to final taxation under section 148(7) – Imports, Section 150 (Dividends),  Section 153(3) – Resident Suppliers and Contractors, Section 154 (Exports), Section 156 (Prizes & winnings) and section 233 (3) – Brokerage and Commission

(d)         income subject to tax credit under sections 65D and 65E (equity investment in certain Industrial Undertakings)

(e)         income  subject  to  tax  credit  under  section  100C  (NPOs  and  certain  trusts  & welfare institutions); and

(f)          income of the Company subject to reduced rate of tax under  newly inserted clause 18A of Part  II of the Second Schedule

–      The sum equal to accounting income less any amount to be excluded therefrom  (as  mentioned in (a) to (f) above)  is to be treated as “Taxable income” for the purposes of section 113C.

–      For the purposes of  determining the “Accounting Income”, expenses are required to  be apportioned between the “excluded amounts” and the balance accounting income  (being treated as “taxable income”). FBR’s Circular suggests the apportionment on turnover basis.

–      The  Commissioner  is  empowered  to  make  adjustments  and  proceed  to  compute  accounting income as per historical accounting pattern after providing an opportunity of being heard.

–    Tax credit under section 65B (on investment  in BMR Plant & Machinery)  is allowed against ACT.

Corporate Tax :

Defined as total tax payable by the Company, including-

1. tax  payable on  account  of minimum tax (e.g.  Minimum tax  on  turnover under section 113, Minimum tax on builders under section 113A, Minimum tax on land developers under section 113B, minimum tax under section 148(8) on importers of edible oil and packing material, minimum tax under clauses 56B, to 56G for certain persons opting to be taxed under normal tax regime)
2. final taxes payable under any provision of the Ordinance but not including those mentioned in Section 8 (FTS and royalty of non-resident persons not having Permanent Establishments in Pakistan, incomes of non-resident shipping & airlines, dividend income)

Following taxes are excluded:

–    Section 161 (tax recovered from payer due to default in withholding tax compliance)

–    Section  162  (tax  recovered  from  the  recipient  due  to  withholding  tax  non- compliance of payer)

–   Default Surcharge or penalty

–   ACT payable under section 113C

Carry forward of ACT :

–    The excess of Alternative Corporate Tax paid over the Corporate Tax payable for the tax  year  is  to  be  carried  forward  and  adjusted  against  the  tax  payable  under Division II of Part I of the First Schedule for following year.

–    If the excess tax is not wholly adjusted the unadjusted amount is to be carried forward to the following tax year and so on, however, the excess cannot be carried forward to more than ten tax years immediately succeeding the tax year for which the excess was first computed.

–    The  entitlement  to  carry  forward  minimum  tax  under  section  113  will  remain unaffected by ACT.

–    If Corporate Tax or ACT is enhanced or reduced as a result of any amendment or as a result of any order, the excess amount to be carried forward will be adjusted accordingly.

FBR’s computational examples :

Example 1 – Explanation of carried forward minimum tax & ACT

Example 1 – Explanation of carried forward minimum tax & ACT

Corporate Tax (excluding minimum tax)	(A)                 Rs 100
Minimum tax under section 113	(B)                  Rs 140
ACT	(C)                 Rs 200
Corporate Tax under section 113C	(D=A+B)      Rs 140
Excess amount of ACT over Corporate Tax carried forward for next ten tax years	(C-D)                     60
Excess amount of Minimum tax carried forward for next five years	(B-A)                     40

–    Discriminatory  to  Corporate  Sector  which  is  documented  and  subject  to Corporate Regulatory requirements whereas other taxpayers such as sole proprietors and AOPs are not subject to ACT regime. The possibility of extending ACT to other taxpayers cannot be ruled out.

–    The provision penalises the so-called low tax / no tax paying companies by ignoring the overall contribution to the economic development and omitting to take into account the effect of contribution to the Exchequer by way of other indirect taxes, such as Sales Tax, Provincial Sales Tax, FED and Customs Duty, etc.

–    The rationale for 17% of accounting profit is not known and there is no surety if the rate of ACT will remain static in future years depending upon the revenue pressures.

–    Arbitrary  powers  of  the  Commissioner  to  determine  the  accounting  profit especially with regard to the unclear terms “historical accounting pattern” and “profit   before   tax   for   the   tax   year   as   disclosed   in   the   financial

statements.”

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–   Lack of clarity on the basis of computing excluded items such as exempt income.

–    No  rationale  for  apportionment  of  all  expenses  especially  when  there  are identifiable direct expenses and the Company is liable to WWF and WPPF.

–    Treatment  of  non-taxable  items  (such  as  capital  receipts  /  gain  on  sale  of immovable property held for more than 2 years / 25% of capital gains on long term assets).

–    No tax credit other  than section 65B  will  be  allowed  against  ACT,  such  as Charitable donations (under section 61), sales to registered persons (section 65A) and enlistment (65C).

–    Likely to have an impact for small companies entitled to be taxed at a reduced rate of 25% under normal basis.

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–    Companies having brought forward tax losses and unabsorbed depreciation may also be affected by ACT, which is only applicable on accounting profit for the tax year without any impact of brought forward losses and unabsorbed depreciation

–   Following classes of income and persons (otherwise covered by FTR) have not been

excluded from Accounting Income:

(a)       Import of ships by ship breakers

(b)       Non-resident contractors opting for taxation under FTR

(c)        Commission / discount of petrol pump operators

(d)       Income of a CNG station

(e)       Shipping business qualifying for reduced rate on tonnage basis as final tax

(f)        Income from services rendered and construction contracts outside Pakistan subject to tax at 1% of gross receipts

–    Adjustment  of  ACT  against  taxes  payable  under  the  above  categories  is  not provided

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–    No consequential amendment has been made in section 147 thereby creating an ambiguity as regards the payment of ACT by way of advance tax

–   Likely mismatch between the income taxable under FTR (generally on receipt basis)

with the corresponding amounts disclosed in financial statements (on accrual basis)

–   Application of ACT on companies opted for group taxation as single fiscal unit

–       Treatment of remittance of after tax profits by branches of non-resident companies deemed as dividend requires clarity as the same does not form part of accounting income before tax

Presentation on Alternate Corporate Tax (ACT)