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Amendments enacted by Finance Act, 2022 vis-a-vis those proposed in Finance Bill, 2022
The Federal Government presented Finance Bill 2022 in the National Assembly on June 10, 2022. After the debate in the Senate and National Assembly, the Government has passed Finance Act, 2022 which contains those proposals of Finance Bill which were eventually approved with certain modifications and certain new amendments made in the Bill during the above process. The amendments made in the fiscal laws by the Finance Act, 2022 are made effective from July 1, 2022.
COMMENTS ON FY2022-23 BUDGET
Significant modifications to the Finance Bill 2022 are summarised as under:-
Slab rates for super tax introduced for taxpayers having income in excess of Rs 150 million. The Bill earlier proposed such threshold at Rs 300 million at a standard rate of 2%.
Super tax rate is enhanced to 10% for certain specified sectors for tax year 2022 whereas for banking companies such enhanced rate of super tax will be applicable for tax year 2023.
The proposal of final tax regime for commercial importers is withdrawn. Consequently, commercial importers will remain under minimum tax regime.
The proposal to restrict income tax holiday of certain IPPs withdrawn.
The standard rate of tax for banking companies revised at 39%.
The revised slab rates for salaried individuals introduced by setting below taxable limit at Rs 600,000 as against the original proposal of Rs 1,200,000. Further, the reduction in tax rates proposed in Finance Bill has not only been reversed but the tax incidence has also been enhanced (as compared to position prior to Finance Bill).
The right to carry forward minimum tax retained, however, the period is reduced from five to three years.
The tax credit on contributions to Voluntary Pension Scheme retained.
The resident individual will now also include a citizen of Pakistan who was not in any one foreign country for more than 182 days.
The credit for income covered by final tax in respect of assets declared in wealth statement or books of account in excess of imputable income is inter alia subject to submission of audited financial statements.
Advance tax on sale of immovable properties to be collected irrespective of holding period.
The rate of advance tax on imports mentioned in Part II of the Twelfth Schedule enhanced from 2% to 3.5%.
Reduced rate of Capital Gains Tax on listed securities based on holding period to apply on securities purchased on or after July 1, 2022.
The requirement of CNIC / NTN for the purposes of invoices issued to unregistered persons and restriction of input tax attributed to such supplies retained to the extent of supplies to unregistered distributors.
Sales tax regime of pharma sector revamped with 1% final sales tax on manufacturers and importers without any input adjustment.
The rate of fixed tax on other than Tier-1 retailers shall be increased by 100% if the said retailers are not appearing on the Active Taxpayer List.
Fertilizers exempted from sales tax.
Value of supply not to include the amount of subsidy provided by the Federal Government or Provincial Government to the electricity consumer.
Through the Bill, ‘locally produced coal’ was proposed to be taxed at 17% which has not been approved in the Act. It has now been subject to sales tax at higher of 17% ad valorem or Rs 700 per metric tonne.
The proposed increase in sales tax rate from 5% to 10% for following has not been approved in the Act.
Electric vehicle in CBU condition of 50 kwh battery or below is now subject to sales tax @12.5%.
Electric vehicle transport buses of 25 seats or more in CBU condition are now subject to sales tax @1%.
Changes proposed in the rate of sales tax on different categories of mobile / satellite phones have not been approved in the Act.
Online marketplace is now required to withhold sales tax @1% (instead of 2%).
The rate of CVT to be collected with effect from July 1, 2022 on motor vehicles to be 1% (as against 2% proposed through Finance Bill).
CVT on foreign assets is applicable for tax year 2022 and onwards, on the basis of cost translated into Rupees at the latest exchange rates.
INCOME TAX RECORD OF BENEFICIAL OWNERS [Sections 2(yA) & 181E]
Every company and Association of Persons (AOP) will now be required to electronically submit details of beneficial owners and any change in their particulars. Specific rules are expected to be promulgated in this regard.
A penalty of Rs 1 million will be levied for each default.
The expression ‘beneficial owner’ has been defined to mean a natural person who:
(a) ultimately owns or controls a company or AOP, whether directly or indirectly, through at least 25% shares or voting rights; or
(b) exercise ultimate effective control, through direct or indirect means, over the company or AOP including control over the finances or decisions or other affairs of the company or AOP.
THE TERM ‘DISTRIBUTOR’DEFINED [Section 2(i8A)]
There are various provisions which apply on a distributor; however, the term ‘distributor’ was not defined in the Ordinance. To bring clarity, the term ‘distributor’ has now been defined to mean a person appointed by a manufacturer, importer, or any other person for a specified area to purchase goods from him for further supply.
BROADENING OF SCOPE OF ‘IT SERVICES’ AND ‘IT ENABLED SERVICES’ [Sections 2(3oAD) & (30AE)]
The inclusive definitions of captioned services provided in clauses (30AD) and (30AE) of section 2 have been elaborated and it has been provided that such services may also include services other than those enumerated in such clauses.
SYNCHRONISED WITHHOLDING ADMINISTRATION & PAYMENT SYSTEM (SWAPS) [Sections 2(62B), 164A and 182]
A new concept of collection or deduction of withholding taxes through SWAPS Agents has been introduced. Such agents will be the persons or class of persons as notified by the FBR who will be required to integrate with SWAPS. Such agents will be required to remit withholding tax to the respective Commissioner through digital mode and in this regard, a SWAPS Payment Receipt (SPR) shall replace Computerized Payment Receipts.
All persons from whom the tax has been collected or deducted by the notified SWAPS Agents shall be eligible for credit of tax withheld against SPR issued by SWAPS Agent.
Failure to integrate or perform roles and functions as SWAPS Agent can attract following penalties:
• Rs.50,000 for first default of seven days
• Rs. 100,000 for second default of next seven days
• Rs. 50,000 for each week after the second consecutive week of default
SUPER TAX ON HIGH EARNING PERSONS [Section 4C]
The Government has levied a special tax for tax year 2022 and onwards on high earning persons. This new tax will be applicable on all persons having ‘income’ more than Rs 150 million, with income being the sum of following:
(i) profit on debt, dividend, capital gains, brokerage and commission;
(ii) taxable income (other than brought forward depreciation and brought forward business losses) under section 9 of the Ordinance, excluding the amounts specified in (i);
(iii) imputable income as defined in clause (28A) of section 2 excluding amounts specified in (i); and
(iv) income computed, other than brought forward depreciation, brought forward amortisation and brought forward business losses under Fourth, Fifth and Seventh Schedules.
Corresponding amendments have also been made in the Fourth, Fifth and Seventh Schedules to levy this tax on insurance, oil exploration, mining and banking companies.
The rate of super tax is as under:
Enhanced super tax on specified sectors
Further, persons operating in following sectors are liable to super tax @ 10% for a specified single tax year, if the income exceeds Rs 300 million, as detailed below:
The taxpayers shall be required to pay this tax along with the return of income. In case of failure to do so, the tax authorities are empowered to recover the same through self- contained provisions.
Revised Effective Corporate Tax Rates
The effective corporate tax rates, after incorporating amendments of Finance Act, 2022 are as under:
Note: As per the charging provisions, banking companies will not be liable to pay super tax for tax year 2022; however, the Seventh Schedule provides for such tax to be applicable for tax year 2022 as well. It is expected that the FBR will clarify this ambiguity through an explanatory circular.
PAYMENTS TO NON-RESIDENTS FOR INTERNATIONAL FINANCIAL TRANSACTIONS AND FEE FOR OFFSHORE DIGITAL SERVICES [Sections 6 & 152]
Non-resident persons not having a Permanent Establishment in Pakistan deriving income in the form of fees for money transfer operations, card network services, payment gateway services, interbank financial telecommunications services will be taxed @ 10%.
Enabling withholding provisions have also been introduced in section 152 as under:
a) The banking companies will be responsible to withhold tax while making payments on account of any transaction fee or licensing fee or service charges or commission or fee or interbank financial telecommunication services.
b) The exchange company licensed by the State Bank of Pakistan will be required to withhold tax while making payment to non-resident global money transfer operators, international money transfer operators or other persons on account of service charges or commission or fee in relation to international money transfers or other cross border remittances facilitating outward remittances.
In case of retention of above amounts by the non-resident persons, the local banking or exchange company, will be required to collect the amount of advance tax from such persons.
Non-residents protected by the double tax treaties may be entitled to invoke the business profits article to claim exemption from such tax.
The rate of tax on ‘fees for offshore digital services’ has also been enhanced from 5% to 10%.
TAX ON VALUE OF CAPITAL ASSETS IN PAKISTAN (Section 7E)
A resident person owning capital assets in Pakistan will be taxed on deemed income arising from capital assets for tax year 2022 and onwards. For this purpose, such deemed income shall be computed as 5% of the Fair Market Value (as determined by the FBR under section 68) of capital assets. The rate of tax on such income is prescribed as 20%. This translates into an effective tax at 1% of Fair Market Value of capital assets.
An exclusionary definition of ‘capital asset’ has been provided, which effectively means that such tax is leviable only in respect of ‘immovable property’ situated in Pakistan owned by resident persons.
For the purposes of such tax; however, while following immovable properties shall stand excluded, the Federal Government has been empowered to notify any exclusion or inclusion of any person and/ or property from the scope of such tax:
(a) one immovable property owned by the resident person;
(b) self-owned business premises from where the business is carried out by the persons appearing on the active taxpayers’ list at any time during the year;
(c) self-owned agriculture land where agriculture activity is carried out by person excluding farmhouse (defined in a specified manner) and land annexed thereto;
(d) immovable property allotted to:
(i) a shaheed or dependents of a shaheed belonging to Pakistan Armed Forces;
(ii) a person or dependents of the person who dies while in the service of Pakistan armed forces or Federal or provincial government;
(iii) a war wounded person while in service of Pakistan armed forces or Federal or provincial government; or
(iv) an ex-serviceman and serving personnel of armed forces or ex-employees or serving personnel of Federal and provincial governments, being original allottees of the capital asset duly certified by the allotment authority;
(e) any property from which income is chargeable to tax under the Ordinance and tax leviable is paid thereon;
(f) immovable property in the first tax year of acquisition where tax under section 236K has been paid;
(g) where the fair market value of the capital assets in aggregate excluding the capital assets mentioned in clauses (a) through (f) above does not exceed Rs 25 million;
(h) immovable property owned by a provincial government or a local government; or
(i) immovable property owned by a local authority, a development authority, builders and developers for land development and construction, subject to the condition that such persons are registered with Directorate General of Designated Non-Financial Business and Professions.
The constitutional validity of this tax in relation to entry 50 of the Fourth Schedule to the Constitution of Pakistan and the scope of any amount which can be deemed as income will have to be tested.
CONTRIBUTION TO APPROVED GRATUITY & PENSION FUNDS [Section 2i(ea)]
Amount in excess of 50% contributions to an approved gratuity, pension and superannuation fund will be an inadmissible expense in computing the income from business.
PAYMENTS THROUGH DIGITAL MEANS [Section 2i(la)]
Through the Tax Laws (Third Amendment) Ordinance, 2021, payments made by a company for a transaction under a single account head exceeding Rs 250,000 other than through ‘digital means’ was made inadmissible, subject to certain exclusions. Due to challenges and practical difficulties in the implementation of the said provision, the FBR deferred its implementation from time to time till December 31, 2021. Through Finance (Supplementary) Act, 2022 the effective date was deferred indefinitely till it is notified by the FBR.
It has been provided that when effective date of implementation of such provision will be notified, the companies will be required to make all payments through digital means only to claim as admissible business expense.
EXPENDITURE BY PERSONS FAILING TO INTEGRATE BUSINESS WITH FBR’S SYSTEM [Section 21(q)]
Through SRO 779(I)/2020 dated August 26, 2020, the FBR introduced a Chapter VIIA in the Income Tax Rules, 2002 whereby certain businesses were required to install prescribed fiscal electronic device and software for integration with FBR’s system.
A new provision has now been enacted to disallow expenditure attributable to sales claimed by any person who fails to integrate his business with the FBR’s system in the above prescribed manner. However, disallowance of expenditure shall not exceed 8% of the allowable deduction.
For depreciable assets used for the first time after July 1, 2020, the normal tax depreciation allowance was limited to 50% in the first year as well as in the year of disposal. Both these limits have now been withdrawn. As a result, the pre-2020 situation has been reinstated.
Furthermore, with regard to depreciation on passenger transport vehicles not plying for hire, the limit on cost at Rs 2.5 million has been enhanced to Rs 7.5 million. Where such vehicle is obtained on lease, the rentals relating to the principal amount are restricted to Rs 2.5 million. In line with the above enactment, this limit also needs to be enhanced.
INITIAL ALLOWANCE ON BUILDINGS [Section 23(5)]
Through Finance Act, 2019, initial allowance on buildings was removed from the Third Schedule. A corresponding amendment has been now made in section 23 whereby the building being immovable property including structural improvements (even if classifiable as part of plant & machinery) will no more be eligible for initial allowance of depreciation.
CAPITAL GAINS ON IMMOVABLE PROPERTIES (Section 37)
Taxation of capital gains on disposal of immovable property has been revamped.
Capital gains relating to disposal of immovable properties situated in Pakistan will be taxed at the following rates:-
CAPITAL ASSETS HELD FOR MORE THAN ONE YEAR [Section 37(2)]
Capital gains arising on disposal of capital assets (other than certain securities) held for more than one year are now fully taxable. The reduction of 25% (in computing taxable gain on disposal of such assets held for more than one year) has been done away with.
CAPITAL ASSETS ACQUIRED IN CERTAIN TAX NEUTRAL TRANSACTIONS [Section 37(4A)]
Capital assets acquired under certain tax neutral transactions such as by way of gift, succession, inheritance, devolution, distribution of assets on dissolution of AOP or on liquidation of company are deemed to have a cost equal to the FMV of such assets at the time of acquisition. However, where such assets were acquired by way of a gift and are disposed within two years as part of a tax avoidance scheme, their cost was deemed as the cost as was in the hands of the transferor. Section 37(4A) allowing FMV at the time of such transfer was in conflict with section 79(3) of the Ordinance. The said provision has now been omitted through the Finance Act.
EXEMPTION UNDER INTERNATIONAL AGREEMENTS (Section 44)
Presently, income received by any person (not being a citizen of Pakistan) engaged as a contractor, consultant, or expert on a project in Pakistan is exempt from tax to the extent provided for in a bilateral or multilateral technical assistance agreement between the Federal Government and a foreign government or public international organization, subject to certain conditions. Such exemption is limited to agreements where ‘technical assistance’ is being provided.
The Finance Act 2022, has enhanced the scope of above exemption by removing the term ‘technical assistance’ from the above provision, meaning thereby now all sorts of agreement between Federal Government and a foreign government or public international organization would be covered under the above exemption. Furthermore, the exemption would also be available to a citizen of Pakistan provided such person is either a non-resident person or a resident person solely by reason of the performance of services under the agreement.
The Act has also empowered the Federal Government to grant exemption on income of any person on a case-to-case basis through a notification in the Official Gazette in respect of an official development assistance financed loans and grant-in-aid, subject to such conditions and limitations as may be specified.
TAX AMNESTIES FOR PROMOTION PACKAGE OF INDUSTRIES WITHDRAWN [Sections 59C, 65H & 100F]
Amnesties, introduced vide the Income Tax (Amendment) Ordinance, 2022, with respect to the following investments have been withdrawn with effect from March 2, 2022:-
a) New & existing industrial undertakings - Section 59C;
b) Industries owned by overseas Pakistanis and resident Pakistanis having declared foreign assets
c) Revival of sick units - Section 100F.
TAX CREDITS / DEDUCTIBLE ALLOWANCE WITHDRAWN [Sections 60C, 62 & 62A]
Tax credits and deductible allowances in respect of the following, have been withdrawn:-
a) Profit on debt incurred on house financing - Section 60C;
b) Investment in new shares of listed companies, mutual funds or life insurance policies, Sukuk, etc. - section 62; and
c) Purchase of Health insurance policies - section 62A.
Previously, an individual was only considered as resident in Pakistan if his stay was for more than 182 days in any tax year. The definition of resident individual has been amended to include those Pakistani citizens who are either not tax residents of any other country or have not stayed in one foreign country for more than 182 days during a tax year.
There may be certain practical difficulties in application of this amendment.
SIMPLIFIED TAX REGIME FOR RETAILERS & SPECIFIED SERVICE PROVIDERS [Section 99A & 235(iA)]
For other than Tier - 1 retailers and specified service providers, a ‘final tax’ has been levied on the basis of gross amount billed for commercial electricity connections at the following rates:
The aforesaid tax shall be collected by the electricity companies through monthly bills in addition to withholding tax under section 235.
However, in case sales tax is collected from such retailers through electricity bills under section 3(9) of Sales Tax Act, 1990, the sales tax will constitute discharge of tax liability under this section and thus no tax will be charged/ collected along with electricity bills.
The Federal Government is empowered to issue income tax general order for implementing this scheme and to specify service providers eligible for this regime.
NON-PROFIT ORGANISATIONS (NPO) [Section 100C]
Institutions mentioned in Table II of Clause (66) of Part I of the Second Schedule are eligible for income tax exemption subject to certain conditions under section 100C, including an approval from the Commissioner as an NPO under section 2(36).
The waiver from requirement of NPO approval, currently available till June 30, 2022, has been extended up to June 30, 2023.
ANTI-AVOIDANCE PROVISIONS FOR COHESIVE BUSINESS OPERATION [Section 109]
The general Anti-avoidance provisions of section 109 have been amended with retrospective effect from tax year 2018 to empower the Commissioner to apply the concept of ‘cohesive business’ in cases of suspected tax avoidance. This reaffirms the position that the concept of cohesive business operation was only applicable where the activities were split by a non-resident person for tax avoidance purposes.
As the concept of cohesive business operation was effective from tax year 2019, the amendment to take effect from tax year 2018 appears to be a mistake.
INCOME SUBJECT TO FINAL TAX - SOURCE EXPLANATION [Section 111(4A)]
The credit for income subject to final tax (such as exports) in the wealth statement or books of account of a taxpayer in excess of ‘imputable income’ will only be acceptable if the same is supported by financial statements audited by a Chartered Accountant and is reasonably attributable to such business.
The carry forward of unadjusted minimum tax credit (i.e., minimum tax paid in excess of normal tax liability) for subsequent five tax years has been reduced to three tax years.
Furthermore, the rate of minimum tax in case of Oil Marketing Companies has been reduced to 0.5% from 0.75%.
Further, for determining the applicability of minimum tax, super tax, levied on high earning persons, paid by a person is not to be taken into account.
The time limitation for passing a best judgement assessment has been enhanced from five to six years.
TIME PERIOD FOR AMENDMENT PROCEEDINGS [Section 122]
The time period of 120 days to pass an amendment order from the issuance of a show cause notice has been extended to 180 days.
ALTERNATIVE DISPUTE RESOLUTION (ADR) [Section 134A]
Under the revamped procedure for ADR in all three fiscal laws, an aggrieved person may apply for resolution of a dispute pending before any court of law or appellate forum, through ADR mechanism in following cases:-
a) Where the liability of tax is Rs 100 million or above or admissibility of refund;
b) The extent of waiver of default surcharge & penalty; or
c) Any other specific relief required to resolve the dispute.
However, any case where criminal proceedings have been initiated fall outside the purview of ADR mechanism.
Previously, in case of a dispute where a mixed question of law and fact was involved, the FBR was empowered to examine as to whether ADR Committee should be constituted or not. This hindrance has been removed.
Under the new mechanism, the taxpayer has a right to nominate a person from the panel notified by the FBR except where the relevant Chartered Accountant or an Advocate has been an authorised representative of the taxpayer.
Furthermore, the taxpayer will have to withdraw his appeal for seeking relief under ADR.
Previously, in case of goods imported by an industrial undertaking for own use, the advance tax on imports did not constitute minimum tax if the same were subjected to advance tax collection @ 1% or 2%. There were various items which were in the nature of raw material but were subjected to standard rate of 5.5%. The tax authorities were misinterpreting these provisions to deny the adjustability of tax collected @ 5.5%.
This regime has been amended and now the advance tax on raw materials imported by an industrial undertaking for own use will not be minimum tax irrespective of the applicable rate. However, advance tax on import of following items will be treated as minimum tax in respect of income arising from such imports:-
c) Paper and paper board; or
REDUCTION IN TAX RATE ON INDENTING COMMISSION [Sections 154 & 154A]
Rate of tax on indenting commission, remitted in foreign currency through banking channels, has been reduced from 5% to 1%.
INCOME FROM EXPORT OF SOFTWARE & INFORMATION TECHNOLOGY SERVICES [Section 154A]
Income tax holiday upto tax year 2025 was available on income from export of software, IT services and IT enabled services. Through Tax Laws (Second Amendment) Ordinance, 2021, the said exemption was withdrawn and a concept of 100% tax credit was introduced as part of section 65F upto tax year 2025, subject to certain conditions. Taxpayers of the same sector who did not qualify for tax credit were being subjected to 1% withholding income tax on export proceeds under section 154A.
With effect from July 1, 2022; 100% tax credit regime on export of software, IT services and IT enabled services has been withdrawn. Withholding tax under section 154A at 0.25% of export proceeds has been levied on the entire sector and such reduced rate of tax has been made conditional upon registration with Pakistan Software Export Board.
LIMITATION FOR MAINTENANCE OF RECORDS IN CASE OF OFFSHORE ASSETS & FOREIGN SOURCE INCOME [Section 174]
Through Finance Act, 2018, the provisions of section 111 were amended to empower the tax authorities to probe into the source of unexplained offshore assets and foreign source income irrespective of any limitation period.
In relation to the above provision, the Appellate Tribunal held that the provisions of section 111 cannot be applied without any regard to the limitation period particularly when section 174 only requires a taxpayer to maintain his record for a period of six years.
Through Finance Act, 2022 section 174 has been amended to nullify the effect of such interpretation.
BROADENING OF TAX BASE THROUGH NADRA [Section 175B]
Section 175B was added through Tax Laws Amendment Ordinance 2021 whereby National Database and Registration Authority (NADRA) was allowed to share its records and any information with FBR for broadening of tax base or carrying out any other purpose.
The said provision has now been enacted through Finance Act, 2022.
PENALTY FOR NON-FILING OF RETURN OF INCOME WITHIN DUE DATE [Section 182]
Serial No. 1 of table in subsection (1) of section 182 provides for penalty for non-filing of return of income within the time limit specified in law. Through the Finance Act, the following amendments have been made so as to ratify the amendments earlier introduced through Tax Laws (Third Amendment) Ordinance, 2021:
• Higher of 0.1% of the tax payable for each day of default or Rs. 1,000 per day;
• Maximum - 200% of tax payable;
• Minimum - Rs. 10,000 if 75% or more is salary income and Rs. 50,000 in other cases;
• Amount of penalty reduced by 75%, 50% & 25% in case return is filed within one, two & three months respectively after the due date.
PENALTY FOR NON-ISSUANCE OF PRESCRIBED INVOICE NUMBER OR WITHOUT QR CODE [Section 182]
Penal provisions have been introduced in law for persons who are integrated with FBR’s system but who avoid monitoring, tracking, reporting or recording of transactions or issued prescribed invoice without invoice number or QR code or bears duplicate invoice number or counterfeit QR code or defaces the prescribed invoice number or QR code or any person who abets commissioning of such offence. Such person shall pay a penalty of Rs. 500,000 or 200% of the amount of tax involved, whichever is higher.
PENALTY FOR FAILURE TO INTEGRATE WITH FBR [Section 182]
Penal provisions have also been introduced for any person who is required to integrate his business for monitoring, tracking, reporting or recording of sales, services and similar business transactions with the Board or its computerized system, and who fails to get himself registered under the Ordinance, and if registered, fails to integrate in the manner as required under law.
Such person shall be liable to:
Penalty up to Rs 1,000,000, and
If the offence continues after a period of two months of imposition of penalty as aforesaid, his business premises shall be sealed till such time he integrates his business in the manner as stipulated under sub-section (3) of section 237A of the Ordinance, as the case may be.
PENALTY FOR NOT GENERATING FISCAL INVOICES [Section 182]
A specific penalty provision has also been introduced for a person required to integrate his business in the prescribed manner for generating fiscal invoices as stipulated under sub-section (3) of section 237A of the Ordinance, who fails to get himself registered under the Ordinance, and if registered, fails to integrate in the manner as required under the law and rules made thereunder.
Such person shall be liable to penalty of:
• Rs 500,000 for first default, provided that such penalty shall be waived if business is integrated with in fifteen days of first default;
• Rs 1,000,000 for second default after fifteen days of order for first default;
• Rs 2,000,000 for third default after fifteen days of order for second default;
• Rs 3,000,000 for fourth default after fifteen days of order for third default;
• Sealing of business premises after fifteen days of fourth default.
CONDONATION OF TIME LIMIT [Section 214A]
The FBR is empowered to extend the time limitation for any application to be made or any act or thing to be done. In this context, the Courts and Appellate Tribunal have interpreted that such powers cannot be exercised by the FBR once the limitation period for amendment proceedings has already elapsed.
In order to nullify the effect of such judgements, an amendment has been made in relevant provisions empowering the FBR to extend the time period even after the expiry of such period.
ADVANCE TAX ON IMMOVABLE PROPERTIES [Section 236C]
Currently, no advance tax is collected from the seller or transferor of immovable property in case the holding period is more than four years as the gain arising on such properties is not taxable. Whilst the said holding period of four years has now been amended to six years for open plots, the advance tax provisions have been made applicable irrespective of the holding period.
This advance tax collection needs to be harmonized with corresponding taxation regime as where no tax is chargeable on disposal, collection of advance tax loses its rationale.
WITHHOLDING TAX ON EDUCATION FEES ABOLISHED [Section 236I]
Previously, advance tax was collected by educational institutions @ 5% on the amount of fee paid to such institutions subject to certain specific exclusions. Through the Finance Act, 2022, the said provisions have been omitted, and resultantly, such advance tax collection is no longer required.
OMISSION OF WITHHOLDING TAX ON RENT OF MACHINERY [Section 236Q]
Every prescribed person was previously required to deduct tax @ 10% on payment to a resident person for use or right to use industrial, commercial and scientific equipment, and on account of rent on machinery. The tax so deductible was considered as minimum tax on the income of such resident person.
Through the Finance Act, 2022, the said provisions have been omitted.
REINSTATEMENT OF ADVANCE TAX ON REMITTANCES THROUGH CREDIT OR DEBT OR PREPAID CARDS [Section 236Y]
Every banking company is now required to collect advance tax, at the time of transfer of any sum remitted outside Pakistan, on behalf of any person who has completed a credit card or debit card or prepaid card transaction with a person outside Pakistan @ 1% of amount remitted. The advance tax collected under this section shall be adjustable. The said provision was introduced in 2018 and was withdrawn through Finance Act, 2021.
FIRST SCHEDULE TAX RATES FOR SALARIED INDIVIDUALS - Revised rates
For securities (other than future commodity contracts entered into by members of Pakistan Mercantile Exchange):
(i) the above-referred revised rates shall apply on disposal of securities acquired on or after July 1, 2022; and
(ii) rate of 12.5% shall apply on disposal of those securities which were acquired on or before June 30, 2022 irrespective of holding period.
Previously, in respect of Mutual Fund or Collective Investment Scheme or a REIT scheme, no capital gains tax was deductible if the holding period of the security was more than 4 years. Through Finance Act, such holding period has now been increased to 6 years.
RATE OF TAX WITHHOLDING ON IMPORT OF MOBILE PHONES
Tax collection on import of mobile phones of the below stated values has been revised as under:
REDUCED RATE OF TAX WITHHOLDING FOR CERTAIN SERVICES
Withholding tax rate on payments against rendering of services is 8%; however, a reduced rate of 3% is specified for certain service providers. The benefit of 3% reduced rate has also been extended to REIT Management services and services rendered by National Clearing Company of Pakistan Limited.
ADVANCE TAX ON PASSENGER TRANSPORT VEHICLES
Advance tax on passenger transport vehicles plying for hire that was previously required to be collected on a uniform basis subject to seating capacity, has now been revised as below:
ADVANCE TAX ON REGISTRATION / TRANSFER OF MOTOR VEHICLES
Rates of advance tax on registration of the motor vehicles have been revised as follows:
The Act has also imposed advance tax of Rs. 20,000 on transfer of motor vehicles of unspecified engine capacity (e.g. electric vehicles) having value of Rs. 5 million or more. The said rate of Rs. 20,000 shall be reduced by 10% each year from the date of first registration in Pakistan.
For the purposes of tax collection under section 231B, the definition of ‘motor vehicles’ has been amended and now defined to include car, caravan automobiles, jeep, limousine, pickup, sports utility vehicle, trucks, vans, wagon and any other automobile excluding:
(i) a motor vehicle used for public transportation, carriage of goods and agriculture machinery;
(ii) a rickshaw or a motorcycle rickshaw and
(iii) any other motor vehicle having engine capacity upto 200cc.;
ADVANCE TAX ON TRANSFER OF IMMOVABLE PROPERTY
Advance tax required to be collected from the buyer and seller of immoveable property has been increased from 1% to 2% of the fair market value.
Advance tax on commercial for advertisement starring foreign actors has been reduced from Rs. 500,000 per second to Rs. 100,000 per second.
SECOND SCHEDULE WITHDRAWAL OF TAX EXEMPTIONS [Clauses (5) & (23B) of Part I]
The legislature has withdrawn tax exemptions in respect of following incomes:
(i) Receipt of monthly installment from income payment plan invested out of accumulated balance of specified individual pension accounts or approved annuity plan;
(ii) Allowance/ perquisite paid or allowed outside Pakistan by Government to a Pakistani citizen for rendering services outside Pakistan.
TAX EXEMPTION FOR CERTAIN CHARITABLE ORGANIZATIONS [Clause (66) of Part I]
Income of following organizations has been exempted from income tax by way of inclusion in Table I of Clause (66):
(i) The Pakistan Global Sukuk Programme Company Limited;
(ii) Karandaaz Pakistan from tax year 2015 onwards;
(iii) Public Private Partnership Authority for tax year 2022 and subsequent four tax years; and
(iv) Hamdard Laboratories (Waqf) Pakistan.
It is apt to mention here that income derived by The Pakistan Global Sukuk Programme Company Limited was earlier exempted from income tax through Notification SRO 1457(0/2021 dated November 11, 2021; however, through the Act, such tax exemption has been ratified by the Parliament. Further, the following Organizations, earlier entitled to tax exemption subject to fulfillment of conditions specified in section 100C of the Ordinance, are now extended unconditional tax exemption as was earlier available to them prior to Finance Act, 2020:
(i) Pakistan Mortgage Refinance Company Limited;
(ii) Pakistan Sweet Homes Angels and Fairies Place; and
Further, the following Organizations have been extended tax exemption subject to fulfillment of conditions specified in section 100C:
(i) Burhani Qarzan Hasnan Trust;
(ii) Saifee Hospital Karachi; and
(iii) Safiyah Girls Taalim Trust.
RATIONALIZATION OF EXEMPTION FOR COLLECTIVE INVESTMENT SCHEMES OR REIT SCHEMES [Clause (99) of Part I]
The Collective Investment Schemes or REIT Scheme are entitled to income tax exemption subject to distribution of 90% of accounting income, excluding capital gains, amongst the unit/ certificate holders.
Through the Act, adjustment of ‘accumulated loss’ against ‘accounting income’ has been allowed for the purposes of meeting the specified criteria.
The above amendment is aimed at addressing the impracticality associated with profit distribution by the Schemes, who having incurred accounting losses in previous tax years are not able to meet the said exemption criteria owing to lower retained earnings/ accumulated profits.
TAX EXEMPTION FOR SIYAHKALEM ENGINEERING CONSTRUCTION AND TRADE COMPANY LIMITED (‘SECTCL) [Clause (150) of Part I]
Income derived by SECTCL from contract dated May 23, 2017 entered into with Earthquake Reconstruction and Rehabilitation Authority has been exempted from tax, with effect from tax year 2017.
EXEMPTION OF INCOME OF CINEMA OPERATIONS AND PRODUCTION OF FEATURE FILMS [Clauses (151) & (153) of Part I]
Income from cinema operations has been exempted from tax for a period of five years from commencement of cinema operations.
Further profits and gains derived by a resident producer or production house from production of feature films have been exempted from tax upto June 30, 2027.
EXEMPTION OF PROFITS AND GAINS BY A VENTURE CAPITAL COMPANY AND FUND [Clause (152) of Part I]
Profits and gains derived by a venture capital companies and venture capital funds were exempted from levy of tax upto June 30, 2024 which exemption was withdrawn through Finance Act, 2021. Such exemption has now been restored with its validity also extended to June 30, 2025.
REDUCED RATE OF WITHHOLDING TAX IN CASE OF SUPPLIES OF GOLD & SILVER [Clause (31) of Part II]
A reduced rate of withholding tax of 1%, applicable under section 153, has been prescribed in respect of supplies of gold and silver which is also ‘adjustable’.
REDUCED RATE OF MINIMUM TAX AND WITHHOLDING TAX IN CASE OF CERTAIN PERSONS [Clause (24C) & (24D) of Part II]
Through the Tax Laws (Third Amendment) Ordinance, 2021, rate of ‘turnover tax’ (leviable under section 113 of the Ordinance) and ‘withholding tax’ (deductible on supply of goods) was reduced to 0.25% in case of distributors, dealers, sub-dealers, wholesalers and retailers of ‘steel’. Now, such amendments have been ratified by the Parliament.
WITHDRAWAL OF TAX CONCESSIONS [Clauses (1) & (1AA) of Part III]
Tax concessions earlier available to following persons are now withdrawn:
TAX CONCESSION ON PROFIT ON CERTAIN INVESTMENTS [Clause (6) of Part III]
The rate of tax on profit from investment in Bahbood Savings Certificate or Pensioners Benefit Account and Shuhada Family Welfare Account has been further reduced from 10% to 5%.
WITHDRAWAL OF EXEMPTION FROM MINIMUM TAX IN CASE OF SEZ DEVELOPERS AND ENTITIES [Clause (11A) of Part IV]
Exemption from levy of minimum tax under section 113 of the Ordinance available to entities operating from and developers of special economic zones has been withdrawn.
This is in contrast with exemption provided in SEZ legislation and thus litigation may ensue in this respect.
EXEMPTION FROM MINIMUM TAX TO LOCAL MOBILE PHONE MANUFACTURERS [Clause (11A) of Part IV]
Exemption from levy of minimum tax under section 113 of the Ordinance earlier introduced in the case of local mobile phone manufacturers through Tax Laws (Third Amendment) Ordinance, 2021 has now been ratified through the Act.
EXEMPTION FROM APPLICABILITY OF TAX ON IMPORTS [Clauses (12BA), (12O) & (12P) of Part IV]
Exemptions earlier notified by the FBR in respect of collection of income tax on import of following items are now enacted through the Act:
(i) Thirty million adult 3xPly Knit face masks received as humanitarian assistance from M/s Hanes Brands Inc. North Carolina, USA, for distribution within the population of Lahore Division, Govt of Punjab - SRO No. 1009(I)/2021 dated August 9, 2021; and
(ii) Drones donated by Ministry of Agriculture and Rural Affairs, Government of China to Pakistan through Sea Route - SRO No. 1407(I)/2021 dated October 29, 2021.
Further, import of cinematographic equipment as notified by the Federal Government is also exempted from collection of advance tax at import stage.
EXEMPTION FROM WITHHOLDING OF TAX ON PAYMENTS TO DISTRIBUTOR, PRODUCER OR IMPORTER OF FEATURE FILMS, [Clause (43H) of Part IV]
Withholding of tax on payments made by an exhibitor or distributor of a feature film to producer, importer or intermediary distributor has been exempted.
EXEMPTION FROM WITHHOLDING PROVISIONS IN CASE OF CERTAIN EXEMPT ENTITIES [Clause (120) of Part IV]
Entities/persons qualifying for exemption under Table I of Clause 66 of Part I of Second Schedule are exempted from applicability of withholding provision in respect of their receipts.
IMMUNITY FROM AUDIT [Clause (105A) of Part IV]
A person, whose income tax affairs have been audited in any of the preceding four tax years, has been granted immunity from selection of audit by the Commissioner as well as Board. Nevertheless, the Commissioner would remain empowered to select such cases for audit with Board’s approval.
INAPPLICABILITY OF ENHANCED RATE OF TAX COLLECTION ON SALE/ PUIRCHASE OF IMMOVABLE PROPERTY BY OVERSEAS PAKISTANIS [Clause (111AC) of Part IV]
A person whose name is not appearing in ‘Active Taxpayers List’ is liable to withholding/ collection of taxes at double the prescribed rates. Since, names of overseas Pakistanis, not being liable to tax filing in Pakistan, do not appear in Active Taxpayers List, such provisions meant that they were liable to enhanced amounts of tax collection while buying/ selling properties in Pakistan.
Such enhanced rates of tax collection on sale/ purchase of properties, applicable under Tenth Schedule, are now made inapplicable for overseas Pakistanis, having POCs and NICOPS.
TAXATION OF BANKING COMPANIES (Seventh Schedule)
For tax year 2023 and onwards, the general rate of tax applicable to the taxable income of banking companies has been enhanced from 35% to 39%. The applicable rate of super tax has been explained in earlier part of this Memorandum under Section 4C.
Through the Finance Act, 2021, for tax year 2022 onwards, higher rates of tax were prescribed for the banking companies in respect of the taxable income attributable to investment in the Federal Government Securities. Such rates have now been enhanced for tax year 2022 and onwards in the following manner:
In this respect, an explanation has also been added to clarify that these tax rates are applicable to total income attributable to total investment in Federal Government securities.
Through the Finance Act, 2019, rules for persons not appearing on the Active Taxpayers List [‘ATL’] were introduced by way of Tenth Schedule whereby the rates of tax required to be deducted or collected were increased by 100% of the rates prescribed under the law, with few exceptions. The said regime was in continuation of the concept of filer and non-filer under the Income Tax laws.
Through the Act, the tax required to be collected in respect of the following sections are enhanced in the manner given below if the person is not appearing on the ATL:
Moreover, tax withholding in respect of export of services (under section 154A) has been included in the ‘exception list’ (Rule 10) and, thus, the provisions relating to enhanced withholding tax would not apply in such cases.
The rate of advance tax on items falling within Part II of the Twelfth Schedule has been increased from 2% to 3.5% for commercial importers.
The following PCT codes have been reclassified from Part II to Part I of the Twelfth Schedule; hence, now subject to 1% advance tax on the import value as increased by customs-duty, sales tax and federal excise duty:
Further, the following PCT codes have been included in Part II of the Twelfth Schedule to the Ordinance, hence, subject to advance tax at 2% on the import value as increased by customs-duty, sales tax and federal excise duty:
SALES TAX PRODUCTION, TRANSMISSION & DISTRIBUTION OF ELECTRICITY [Sections 2(12) & 2(33)]
Production, transmission and distribution of electricity has been included in the definitions of ‘goods’ as well as ‘supply’. The amendment appeared to reaffirm the Federal Government’s stance that such activities fall within the purview of their legislative competence rather than Provincial domain. The amendment attempts to address an issue between federal government and provinces on their rights to tax such activities under their sales tax laws. However, it would have been appropriate if the amendment is made with consensus, and under all the relevant sales tax laws.
FEE & SERVICE CHARGES FOR VALUATION [Section 2(2gA)]
Section 76 was inserted through Finance Act, 2019 to empower Board, with approval of the Federal Minister-in-charge, to impose fee and service charges for valuation in respect of any other service or control mechanism provided by the Board.
Such fee and service charges imposed or levied under section 76 have been excluded from the definition of ‘sales tax’.
A similar amendment has also been made in the Federal Excise Act. JEWELERS [Section 2(43A)]
The scope of definition of the term ‘Tier-1 retailer’ has been enhanced to include a person engaged in supply of articles of jewelry or parts thereof, of precious metal excluding a person whose shop area measures 300 square feet in area or less. Consequently, such persons are now required to integrate their retail outlets with Board’s computerized system for real-time reporting of sales to avoid disallowance of input tax by 60%. Further, supply of locally manufactured articles of jewelry, or parts thereof, of precious metal or of metal clad with precious metal by such person will be chargeable at 3% subject to the condition that no input tax adjustment shall be allowed.
Consequently, failure to integrate with Board’s computerized system for real-time reporting of sales will not result in disallowance of input tax since the input tax adjustment is otherwise barred. However, a penalty up to Rs 1 million will be imposed if business is not integrated and if the non-integration continues after a period of two months, business premises may be sealed till such integration.
SUBSIDY TO ELECTRICITY CONSUMER [Section 2(46)]
It has been clarified that value of supply will not include the amount of subsidy provided by the Federal Government or Provincial Government to the electricity consumer and has never been chargeable to tax under the Sales Tax Act, 1990. The amendment appears to refute the department’s position on the chargeability of sales tax on government subsidy to the electricity consumers.
Presently, further tax is chargeable @ 3% (in addition to applicable rate), if taxable supplies are made to a person who has not obtained registration number.
Finance Act, 2022 provides that further tax would also be chargeable on taxable supplies made to a person who is not an active taxpayer. Under Sales Tax Act, 1990, a registered person may be delisted from Active Taxpayers List under following circumstances.
• Blacklisted or whose registration is suspended;
• Does not file the return by the due date for two consecutive tax periods;
• fails to file an Income Tax return by due date;
• fails to file income tax withholding statement.
In order to apply the amended provisions, FBR may need to amend its online portal to account for situation where a registered person may be active taxpayer, but not at the time of filing of sales tax return, or for a vice versa situation.
It has been clarified that the services liable to sales tax under a provincial enactment will not attract sales tax withholding implications under the Sales Tax Act, 1990.
Further, the companies, as defined under the Income Tax Ordinance, 2001, engaged in exporting surgical instruments are no longer required to withhold sales tax since these have been excluded from withholding agent enlisted in the Eleventh Schedule to the Sales Tax Act, 1990.
With effect from September 15, 2021, an operator of online marketplace is liable to withhold sales tax at 2% of gross value of supplies in the case of sale of third party’s goods through such online marketplace where suppliers are not active taxpayers. Such provision was introduced earlier through the Tax Laws (Third Amendment) Ordinance, 2021 which has now been ratified through Finance Act, 2022. Further, operator of online marketplace is now required to withhold sales tax at 1% (previously 2%).
FIXED TAX ON OTHER THAN TIER-1 RETAILERS [Section 3(9)]
Earlier, retailers other than those falling in Tier-1, were subject to collection of sales tax by the electricity supplier @ 5% where the monthly bill did not exceed Rs 20,000 and @ 7.5% where the monthly bill exceeded Rs 20,000.
Now, collection of sales tax by the electricity supplier from such retailers is provided as under:
o Rs 3,000 per month where the monthly bill amount does not exceed Rs 30,000;
o Rs 5,000 per month where the monthly bill amount exceeds Rs 30,000 but does not exceed Rs 50,000; and
o Rs 10,000 per month where the monthly bill amount exceeds Rs 50,000.
It has been further provided that above rates of tax shall be increased by 100% if the name of the person is not appearing, on the date of issuance of monthly electricity bill, in the Active Taxpayers List issued under the Income Tax Ordinance, 2001.
Sales tax so collected would represent final discharge of income tax of such retailers. For that purpose, corresponding amendment has been made in the Income Tax Ordinance, 2001.
FBR has been empowered to prescribe, through a general order, persons or class of persons to pay Rs 200,000 per month through their monthly electricity bill.
TIME AND MANNER OF PAYMENT (Section 6)
The Federal Government has been empowered to allow payment of sales tax in respect of import or supply of any goods on installment basis by:
(iii) any public sector organization
Such payment of sales tax on installment basis may be allowed by the Federal Government from any previous date.
RESTRICTION ON THE CLAIM OF ADJUSTABLE INPUT TAX [Section 8B]
Claim of admissible input tax in a tax period is restricted to the extent of 90% of the output tax for that period under section 8B of the Act barring certain exceptions.
Through Finance Act, 2021, a positive amendment was made to exclude public limited companies listed on the Pakistan Stock Exchange. There was a demand from corporate sector then such benefit be extended to all the companies, as input tax under the STRIVE System is allowed where supplies has paid the sales tax, and now there are lesser chances of factionary claims at least in corporate sector.
However, Finance Act, 2022, instead of extending the exclusion of section 8B to corporate sector has withdrawn such benefit from listed companies.
WAIVER OF CNIC / NTN [Section 23(1)(b)]
Through Finance Act, 2019 the requirement to include CNIC / NTN on tax invoice issued for supplies to unregistered persons was introduced, primarily for documentation of economy.
Through the Finance Act, 2022 the said requirement has now been restricted to supplies by manufacturer or importer to unregistered distributor. If such requirement is violated, then input tax on goods/ services attributable to such supplies will be disallowed on pro-rata basis.
Defacing the prescribed invoice number or the barcode or QR code has been introduced as an offence subject to levy of penalty of higher of Rs 500,000 or 200% of the amount of tax involved. Upon conviction by a Special Judge, a simple imprisonment for a term which may extend to two years, or with additional fine which may extend to two million rupees, or with both may also be imposed.
Any person who abets commissioning of such offence has also been made liable, upon conviction by a Special Judge, to simple imprisonment for a term which may extend to one year, or with additional fine which may extend to two hundred thousand rupees, or with both.
Certain penalties were introduced through Tax Laws (Third Amendment) Ordinance, 2021 on failure of Tier-1 retailers to register and integrate business which have now been ratified in the Act.
The powers of the FBR to prescribe rules for initiating criminal proceedings against any specified authority for willful or deliberate acts/omissions resulting in personal benefits and undue advantage to authority, person or taxpayer have been withdrawn. Earlier, the FBR was empowered to this effect through Finance Act, 2019.
ALTERNATIVE DISPUTE RESOLUTION (Section 47A)
The ADR mechanism provided in Sales Tax law has been revamped in line with the amended mechanism provided in the Income Tax & Federal Excise laws.
(S. No. 81 & 82 in Table I in Eighth Schedule)
Prior to the amendments made through the Finance (Supplementary) Act, 2022, the entire pharma sector was exempt from levy of sales tax both at input as well as output stage, except for certain packing materials.
The aforesaid exemption regime was converted into a zero-rating regime for import and local supplies for finished items of pharma sector, however, sales tax was imposed at standard rate of 17% on purchase / import of Active Pharmaceutical Ingredients (API). As a result, the pharma sector was allowed to claim sales tax refund on all purchases including APIs and provincial sales tax on services. A faster - pharma system for expeditious processing of refund claims for pharma sector was introduced. These amendments were made with the aim to improve documentation of the pharma sector.
A special tax regime for Pharma Sector has now been introduced whereby manufacture or import of substances registered as drugs under the Drugs Act, 1976 shall be subject to 1% sales tax with the condition that such tax shall be final discharge of tax in the supply chain and no input tax shall be allowed to the importer and manufacturer of such goods.
Furthermore, APIs, excluding excipients, for manufacture of drugs registered under the Drugs Act, 1976 or raw materials for the basic manufacture of Active Pharmaceutical Ingredients shall also be subject to 1% sales tax with no input tax adjustment and subject to certification by DRAP and certain procedural conditions.
FIFTH SCHEDULE - ZERO RATING
Zero rating of fat filled milk sold in retail packing under a brand name has been ratified which was earlier introduced through Tax Laws (Third Amendment) Ordinance, 2021. Consequently, withdrawal of reduced rate @10% has also been ratified.
Zero rating on local supplies of raw materials, components, part and plant and machinery to registered exporters authorized under Export Facilitation Scheme, 2021 notified by the Board with certain conditions has been reintroduced which was earlier withdrawn through Finance (Supplementary) Act, 2022.
Table-1 (Import or local sunnlii)
Sales tax exemption on import or local supply of globe artichoke, a flower bud used mostly for medication, is withdrawn. Consequently, import or supply of such items shall be subject to levy of sales tax at 17%.
Through Finance (Supplementary) Act, 2022, exemption on import or supply of books was restricted to only educational textbooks which was earlier available to all kinds of books. Through Finance Act, 2022 the prior position has been restored and import or supply of all kinds of books have been exempted.
Import of art card by Federal Government, Provincial Government and Nashiran-e-Quran for printing of Holy Quran as per the quota determined by Input/output Co-efficient Organisation (IOCO) has also been exempted by Finance Act, 2022.
In addition to above, following exemptions on import or supply are introduced:
Local supply of prepared food or foodstuff by restaurants and caterers is exempted. Earlier, such supplies were taxable at the reduced rate of 7.5%, which was omitted vide Finance (Supplementary) Act, 2022 and made chargeable to sales tax at the standard rate of 17%.
The supply of food is a good or service has been a matter of dispute between Federal and Provincial Governments. While recently there has been underlining between Federal and Provincial Governments on jurisdiction for collection of sales tax on certain economic activities, amongst which included collection of sales tax on supply of food by Province, the amendment made by Finance Act, 2022 for allowing exemption (instead of excluding the same from the ambit of supply / goods) indicates that Federal Government does not want to concede its legal position.
Exemption from levy of sales tax on vermicillies, sheer mal, bun and rusk sold in restaurants or food chains has been introduced. Local supply of these items by bakeries and sweet shops falling in the category of Tier-1 retailers will remain taxable.
Exemption from levy of sales tax on ‘All types of breads, nans and chapattis’ has been introduced. Earlier, such exemption was not available on supply made by bakeries, restaurants, food chains and sweet shops falling in the category of Tier-1 retailers.
Exemption from levy of sales tax on raw hides and skins has been introduced.
Table-3 (Conditional Exemptions for power sector)
In order to encourage investment in and facilitate expansion of existing projects of power sector, the import of machinery equipment and spares has been exempted from sales tax. The under-construction projects in respect whereof an implementation agreement has been signed with the Federal Government, prior to January 15, 2022, is also entitled to such exemption.
Further, construction machinery, equipment and specialized vehicles, excluding passenger vehicles, imported on temporary basis as required for the construction projects of power sectors has also been exempted from sales tax on submission of a post-dated cheque for the differential amount of sales tax along with an undertaking to pay sales tax at statutory rates in case such goods are not re-exported on conclusion of the project.
The exemption is also made available to primary contractors subject to the fulfilment of following conditions:
• Submission of the underlying contract;
• Submission of certificate by the chief executive officer of the contracting company on the prescribed format; and
• Goods shall not be disposed of without the prior approval of FBR on payment of sales tax leviable at import stage.
Similar exemption was earlier available to projects for power generation through oil, gas, coal, wind and wave energy which was withdrawn through the Finance (Supplementary) Act, 2022.
EIGHTH SCHEDULE - REDUCED RATES
Supply of locally produced coal
Supply of locally produced coal is now chargeable to sales tax at higher of 17% ad valorem or Rs 700 per metric tonne. Earlier, it was chargeable to sales tax at higher of 17% ad valorem or Rs 425 per metric tonne.
Import of electric vehicle in CBU condition
To discourage the import of vehicle in CBU condition, import of electric vehicle in CBU condition is chargeable to sales tax at 17%. Earlier, the import of electric vehicle in CBU condition was subject to levy of sales tax at reduced rate of 12.5% introduced through Finance (Supplementary) Act, 2022. However, import of electric vehicle in CBU condition of 50 kwh battery or below is still subject to sales tax at 12.5%. In addition, EV transport buses of 25 seats or more in CBU condition are now subject to sales tax at 1%.
Import and supply of Potassium Chlorate
Import and supply of Potassium Chlorate is chargeable to sales tax @ Rs 60/kg in addition to the sales tax charged @ 17%. Earlier, the rate of ‘additional’ sales tax was Rs 90/kg.
Value addition tax on imports
Import of following items even if imported as raw material or intermediary goods by a manufacturer for in-house consumption is now chargeable to value addition tax at 3%:
Earlier such items were excluded from the levy of value addition tax.
ISLAMABAD CAPITAL TERRITORY (TAX ON SERVICES) ORDINANCE, 2001 Table-1
• Modification in the scope of taxable service
The scope of following entry in Table-1 of the Schedule to the Ordinance has been modified and expanded as under:
• Reduction in standard tax rate
The rate of tax for the services listed in Table-1 of Schedule to the Ordinance has been reduced as follows:
The rate of tax on all services currently taxable at 16% has been reduced to 15%; and
The rate of tax on services of call centres (Entry No. 42) currently taxable at 17% has been reduced to 15%.
However, following services will remain taxable as under:
Following changes have been made
CRIMINAL PROCEEDINGS AGAINST AUTHORITY AND PERSONS [Section 19A]
Section 19A was inserted in the Act through Finance Act, 2019 whereby the FBR had been empowered to prescribe rules for initiating criminal proceedings against any specified authority for willful or deliberate acts/omissions resulting in personal benefits and undue advantage to authority, person or taxpayer.
Such provisions have now been deleted through the Act.
ALTERNATIVE DISPUTE RESOLUTION (ADR) [Section 38]
The ADR mechanism provided in FEA has been revamped in line with the amended mechanism provided in the Income Tax and Sales Tax laws.
CONDONATION OF TIME LIMIT [Section 43]
The FBR is empowered to extend the time limitation for any application to be made or any act or thing to be done. In this context, the Courts and Appellate Tribunal interpreted that such powers cannot be exercised by the FBR once the limitation period for amendment proceedings has already elapsed. In order to nullify the effect of such interpretation, an amendment has been made in section 43 of the Act (as well as in Income Tax and Sales Tax laws) whereby the FBR is empowered to extend the time period even after the expiry of such period.
EXCISE DUTY ON GOODS TOBACCO INDUSTRY
Excise duty on e-liquids for electric cigarette kits, locally produced cigarettes and filter rods for cigarettes has been increased as follows:
Excise duty on club, business and first-class air tickets for international travels has been increased from Rs 10,000 t0 Rs 50,000.
Rate of duty on telecommunication services in Islamabad Capital Territory has been enhanced from 16% to 19.5% probably to align it with the sales tax levied on such services by provinces.
ESSENTIAL COMMODITIES [Sections 2,156,164 AND 170A]
The concept of essential commodities is introduced through FA 2022. The term “essential commodities” has been defined to mean those items availability of which is considered vital for domestic use of consumption, as notified by the FBR from time to time in consultation with the ministries concerned. Accordingly, following amendments are introduced in relation to the items notified as essential goods.
(i) The essential commodities are included in the definition of smuggled goods. It implies that bringing into or taking out of the essential commodities in breach of any prohibition or restriction for the time being in force would render it as a smuggling; hence subject to penal actions prescribed under the Act for smuggled goods.
(ii) Bordering and coastal areas are defined to mean areas along international borders as notified by the FBR.
(iii) In the case of essential commodities, powers of appropriate officer to stop and search the conveyance carrying smuggled goods are restricted to the bordering and coastal areas as notified by the FBR.
(iv) In case of seizure of essential commodities, such seized goods shall be deposited in the nearest custom-house or the nearest place appointed by the Collector of Customs.
PAKISTAN SINGLE WINDOW ACT, 2021 [Sections 2 & 156]
Pakistan has ratified the agreement on Trade Facilitation of the World Trade Organization and has established PSW for managing external Trade. In this respect, Pakistan Single Window Act, 2021 (PSWA, 2021) has already been enacted.
Through the Finance Act, following amendments are introduced to align the Customs Act with PSWA, 2021;
(i) Introduction of definition of following in the Customs Act, as provided in PSWA, 2021.
(ii) Introduction of following penalties:
The validity of exemption notifications issued on or after July 1, 2016 is further extended to next fiscal year i.e. up to June 2023.
TIME LIMIT FOR FINALIZATION OF PROVISIONAL DETERMINATION OF DUTIES AND TAXES [Section 81]
Timelines prescribed under the Act for finalization of duties, taxes and other charges payable on goods cleared on the basis of provisional determination are reduced as follows:
(a) From six months to 90 days,
(b) extended period reduced from 90 days to 30 days.
Through the Tax Laws (Third Amendment) Ordinance, 2021, an amendment was introduced in section 81 whereby no provisional determination of value was to be allowed in those cases where valuation ruling is in field, irrespective of pendency of any review or revision against such valuation. Now, such amendment is ratified through this Act.
PERIOD FOR WHICH GOODS MAY REMAIN WAREHOUSED [Section 98]
Presently, the maximum period for which non-perishable goods may be warehoused is 6 months, which may be extended only by the Collector of Customs and the Chief Collector of Customs on payment of surcharge @ 1 % per month. The Act now authorizes Additional Collector of Customs to extend the said period for up to 1 month.
CHANGE OF CONSIGNEE NAME IN CASE OF FRUSTRATED CARGO [Section 138]
In the case of frustrated cargo, presently, an officer of the Customs, not below the rank of Additional Collector of Customs, is authorized to allow export of such goods without payment of any duties if applied for either by the person-in-charge of the conveyance brining the cargo or the consignor of such goods.
Through the Import Policy Order, 2020 however, it is provided that custom authorities may allow change of consignee in respect of frustrated cargo, if the goods are otherwise allowed to be imported into Pakistan. In view of that, enabling provisions in the Act are introduced to authorize the customs officer to allow changing name of the consignee to clear such goods.
Through Finance Act, 2021, option to pay fine in lieu of the confiscation of the conveyance, carrying smuggled / offending goods, was withdrawn where such conveyance was seized for the third time; whereas SRO 499(I)/2009 dated June 13, 2009 already prescribed that no such option to pay fine in lieu of confiscation of the conveyance be allowed in such cases. The provisions introduced vide Finance Act, 2021 has now been omitted to align the provisions of the Act.
The monetary threshold prescribed under the Act for the adjudication powers of the Customs Officers has been increased as follows:
ADOPTION OF WCO HS VERSION2022
Pakistan being a signatory to HS Convention has adopted HS 2022 version and incorporated its nomenclature/new HS Codes in Pakistan Customs Tariff (PCT) with adjustments of local PCT codes. Accordingly, first schedule to the Act has been substituted to effect the required changes.
REDUCTION/ CONCESSIONS IN CUSTOMS DUTY Exemption of Customs Duty and Additional Customs Duty
Customs Duty (CD) leviable on the import of following categories of items / sectors is exempted for incentivizing the respective sectors:
Machinery and capital goods for mechanization of farming including machinery pertaining to irrigation, drainage, harvesting, plant protection etc.
Specified raw materials used for manufacturing of LED lights, LED bulbs (including parts thereof) and brush ware.
26 Active Pharmaceutical Ingredients for incentivizing Pharmaceutical manufacturers.
Raw materials for manufacture of first aid bandages.
Membranes for filtering / purifying water.
The drug ‘Grafalon’ and gadget ‘Irisvision’.
Raw materials of Ivy leaves extract powders.
Cinematographic equipment imported during the period commencing on the 1st July, 2018 and ending on the 30th June, 2023.
Bullet proof vehicles and jammers imported by Federal Government, Provincial Government or such states and territories as are or may be included in Pakistan.
Smartphones including those in CKD/SKD condition (subject to certain conditions prescribed for import of CKD/SKD units).
In addition to CD, Additional Customs Duty (ACD) is also exempted on import of the following goods:
Raw materials imported by paper sizing industry and chlorinated paraffin wax industry and manufacturers of aluminum conductor composite cores.
Stamping foils for manufacturing of optic fiber cables.
Aluminum paste and powder imported by the Coating industry.
Guts, bladders and stomachs of animals.
Reduction in Customs Dutu and Additional Customs Duty
CD leviable on import of following goods is reduced:
Specified categories of other woven fabrics and artificial flowers / foliage of other materials imported by manufacturers of footwear.
High-density fiber (HDF) boards of wood or other ligneous materials
Through the Finance Bill, CD was proposed to be reduced on 10 categories of direct and reactive dyes. Such reduction in CD has now been restricted to 6 categories through the Act.
In addition to CD, ACD, leviable on import of following goods is also reduced:
Glycerol crude and Glycerol for the coating industry.
Goods pertaining to Aluminum, polymers of ethylene, Biaxially Oriented Polypropylene (BOPP) used by the packing industry.
Adhesive, Epoxide resins, Filter media/ paper, Non-woven fabric media and Steel plates / sheets of prime quality imported by manufacturers of filters, other than automotive.
Organic composite solvents and thinners imported by manufacturers of Dibutyl Orthophthalates.
Plywood, veneered panels & similar laminated wood, poly (methyl methacrylate) and cyanoacrylate.
Flavoring powders for food preparation for snacks manufacturers.
Regulatory duty has been reduced as follows:
Through section 7 of the Finance Act, 1989, CVT was imposed on transfer of immovable properties, modaraba certificates, listed shares and motor vehicles.
The CVT was withdrawn gradually and with effect from April 19, 2020 CVT was abolished on all the assets.
The Act has now enacted CVT in respect of below-referred assets:
• Where a person fails to pay or collect CVT or having collected CVT fails to pay the same to the credit of the Federal Government, the Officer Inland Revenue may pass the order after giving the person an opportunity of being heard and proceed to recover the CVT under the provisions of the Income Tax Ordinance, 2001 and the Income Tax Rules, 2002 as if the CVT were an arrear of income tax. Such person will also be liable to pay Default Surcharge @ 12% per annum on the tax unpaid computed for the period commencing on the date on which the CVT was due and ending on the date on which it was paid.
• The provisions of the Income Tax Ordinance, 2001 and the Income Tax Rules, 2002 in so far as relevant shall apply to the collection and recovery of CVT.
• Any person dissatisfied with any order passed by the Commissioner or an officer of Inland Revenue under this section may prefer an appeal before the Commissioner (Appeals) against the order as provided under section 127 shall apply accordingly. The provisions of the Income Tax Ordinance relating to the further appeal process shall apply in respect of Appellate Order passed by Commissioner (Appeals).
• The FBR may prescribe the manner and procedure relating to the collection and recovery of, or any other matter relating to the CVT.
The Federal Government may also exempt any asset or class of assets from CVT subject to such conditions as may be prescribed.
PETROLEUM PRODUCTS (PETROLEUM LEVY) ORDINANCE, 1961
Through the Finance Act, 2022, the maximum limits for petroleum levy rates as specified in the Fifth Schedule to the Petroleum Products (Petroleum Levy) Ordinance, 1961 have been enhanced as under: