Taxation

Query from Labeeb Subhani

"whether tax deducted on profit of an individual by a bank is adjustable or full and final discharge of tax liability."

Interest income from following shall be taxable under Final Tax Regime (FTR) for a person other than a company

• Bank Profit including profit and loss sharing (PLS) account

• Profit on certificates under national saving scheme including defence saving certificates and post office saving account

• Profit on certificates, debentures including TFCs, COIs issued by a company or a financial institution.

'Plan B', in case the Reformed General Sales Tax (RGST) bill is not approved by parliament, has been prepared by the Federal Board of Revenue (FBR) and submitted to the Ministry of Finance for possible action. The 'Plan B' includes a proposal to increase the rate of federal excise duty (FED) on selected items, including cement, and restoration of 5 percent excise duty on motorcars.

However, any enhancement in the rate of the FED on a few items would require legislative approval of the Parliament. FED on cement was slashed from Rs 900 to Rs 700 per ton in 2009-10 budget, designed to encourage construction business. And the proposal now is to enhance it to Rs 900 per ton. This would generate an additional amount of approximately Rs 5 billion. Another proposal is to restore excise duty on vehicles, which was withdrawn in 2009-10 budget. The federal excise duty on motor cars @ 5 percent was withdrawn vide SRO 474(l)/ 2009 of June 13, 2009.

The reason for withdrawal was to reduce cost of motor cars and thereby provide relief to the local automobile industry. In case the government accepts the proposal, the estimated revenue of nearly Rs 3 billion could be generated. Sources said that these are merely 'tax proposals', which would be finalised by the policy markers. As rationalization of tax rates is involved in these proposals, prior approval of Parliament is required for increasing tax rates.

The government has already proposed amendment in the Federal Excise Act, 2005 for increasing the rate of special excise duty (SED) from one percent to two percent through Finance (Amendment) Act, 2010. The Finance (Amendment) Act, 2010 is still pending before the National Assembly for passage. Through amendment of Federal Excise Act, 2005, in the Federal Excise Act, 2005, in section 3A, in sub -section (1), for the words "one percent", the words "two percent" shall be substituted.

The government needs additional local resources to relieve the pressure on the budget caused by extraordinary demands for expenditures relating to rehabilitation of a large number of internally displaced citizens due to the summer floods. For this purpose, it was proposed to amend certain provisions of the Income Tax Ordinance, 2001, and the Federal Excise Act, 2005 through a bill on the Finance (Amendment) Act, 2010. The proposed Bill provides increase in the rate of special excise duty from 1 percent to 2 percent under the Federal Excise Act, 2005. However, the Opposition as well as some coalition members refused to support these additional tax measures and the amendment bill remains stalled in parliament.

Whether or not Yarn sales made on 15-03-2011 in local market to non-exporter customers will also be subject to 17% sales tax as the same had already been dispatched before the issuance of SRO after business hours.

Zero rating to textile products has been granted through SRO 509(I)/2007. The aforesaid notification has been amended through SRO 231(I)/2011 dated 15.03.2011. The amending notification is effective from the date of its issuance hence the amendment has effect on the supplies made on or after 15.03.2011. There is a hardship for the persons who had made supplies on 15.03.2011 in business hours and at that time no one was aware of the fact that the Federal Government was going to amend the notification, however, since law has its own course, the persons supplying goods on 15.03.2011 shall be liable to pay tax. I would like to draw your attention that in the Finance Bill for the year 2001-2002 presented in the Parliament on 18.06.2001, the rate of further tax [which was applicable on goods supplied to unregistered persons] was enhanced from 1.5% to 3%. These provisions were given immediate effect, however, the persons who had made supplies on 18.06.2001, were facing the same problem as the Bill was presented in the Assembly in the evening hours of 18.06.2001 whereas the supplied had been made at the rate of 1.5% in the business hours on 18.06.2001. While conducting audit of the sales tax record of the registered persons, the auditors made out cases against the taxpayers through which demands of the differential amounts of further tax were raised. Keeping in view the genuine hardship faced by the taxpayers, the Federal Government had to issue SRO 202(I)/2002 dated 04.04.2002 through which it granted exemption of further tax chargeable under section 3(1A) of the Act in excess of 1.5% on all taxable supplies made by the registered persons on 18.06.2001. Unless such an exemption notification is issued in respect of supplies made on 15.03.2011, you would remain liable to pay tax on supplies made on 15.03.2011 irrespective of the fact that the notification was issued after business hours.

We being manufacturer cum exporter, if sell our yarn to other manufacturer cum exporter who manufactures cloth from the yarn and then exports the same, whether our sale would be treated as zero rated or subject to 17% sales tax. If it is zero rated what should be the required evidence to justify our sale that we actually sold yarn to manufacturer cum exporter who ultimately exported cloth?

In case you are selling yarn to such a person who is registered as a manufacturer cum exporter, the supplies would be chargeable to zero rating of sales tax. You can retrieve the sales tax registration certificate of the buyer exhibiting that he is registered as manufacturer cum exporter. The buyer would use the yarn in the manufacture of fabric which would be either exported or would be sold in the local market. In case of export, the goods shall be chargeable to zero rating of tax. In case of local sale, if such a sale is again made to a manufacturer cum exporter or exporter, the goods shall be chargeable to zero rating of tax. However if the goods are sold in the local market to a person neither registered as manufacturer cum exporter nor exporter, the goods shall be charged to tax at the rate of 17%.

We being manufacturer cum exporter, if sell our yarn to other manufacturer cum exporter who exports the same without any processing, whether our sale would be treated as zero rated or subject to 17% sales tax. If it is zero rated what should be the required evidence to prove that we actually sold yarn to manufacturer cum exporter?

The reply to the first part of the question has been given in above paragraph. The only evidence that the goods are sold to the manufacture cum exporter or exporter, will be the sales tax registration certificate of the buyer.

What will be the status of Cotton Ginner registered as manufacturer cum exporter & otherwise selling his cotton to manufacturer cum exporter? Whether cotton has also become subject to 17% sales tax.

Under SRO 509(I)/2007, ginned cotton is also subjected to zero rating of sales tax. In case the ginner supplies cotton to manufacturer cum exporter, it shall be chargeable to tax at the rate of zero percent otherwise it shall be chargeable to standard rate of 17% sales tax.

If we sell some old machinery for which at the time of its purchase we had paid sales tax @ 15%, whether its sale today after the issuance of SRO 230 will be again subject to 17% or not?

Reply

Zero rating of sales tax on plant machinery and equipment including parts thereof, has been withdrawn w.e.f. 15.03.2011 so any machinery, whether new or old, sold on or after 15.03.2011 has become liable to sales tax at the rate of 17% irrespective of the fact whether you had paid sales tax at the time of its purchase.

Since zero rating of sales has been withdrawn effective March 15, 2011, therefore, we request you to confirm as if the stock already held and imported at zero rated but sold on or after March 15, 2011 would be subjected to 17% sales tax or not. Till now there is no such circular or clarification from the board on this matter.

Zero rating of sales tax on plant machinery and equipment including parts thereof, has been withdrawn w.e.f. 15.03.2011. Any supply of these goods on or after 15.03.2011 shall be subjected to 17% sales tax and 2.5% SED irrespective of the fact whether these were imported under zero rated regime.

Please clarify this increase of Excise duty of 1 to 2.5% for zero Rating sector because as per SRO 509(1)/2007 , sales tax will be charged at the rate of zero rating percent on the supply and import thereof .

Now through SRO 231 (1)/2011, this zero rating of sales tax is there but in a restricted manner, then what will be the applicability of this increase of 1 to 2.5 % FED because when it was 1%, then it was not being applicable. What will be the status in case of textile and leather especially?

Zero rating of sales tax on textile and leather has been restricted only if these goods after import or domestic production are sold or purchased between persons registered as manufacturer cum exporters or as exporters, for use or utilization in goods meant for export. In case these goods after import or domestic production are sold or purchased between persons not registered as manufacturer cum exporters or as exporters OR for use in goods meant for local consumption, zero rating of sales tax shall not be applicable under SRO 509(I)/2007.  When the supply of those goods is out of the ambit of SRO 509(I)/2007, the exemption of SED in terms of Sr. No. 25 of the Table given below SRO 655(I)/2007 shall also be not available to the goods. Some advocates still hold the view that even the goods supplied to persons other than manufacturer cum exporters or exporters OR for use in goods meant for local consumption, become liable to 17% sales tax but those still remain exempt from SED. However, this point of view has to be tested for judicial scrutiny by competent court of law. Before taking any action, it would be advisable to seek categorical ruling from FBR to avoid any future complication.

Federal Board of Revenue (FBR) has decided to enforce by April 15 the return filing of top 1000 corporate non-filers and top 1000 corporate short-filers of sales tax for the period between July 2010 to December 2010, says a press release issued on Wednesday.

This was decided at a meeting of FBR’s Board-in-Council convened under the directive of Finance Minister Dr. Abdul Hafeez Sheikh. The meeting chaired by FBR Chairman Salman Siddique and attended by all Members deliberated various proposals and options to invigorate revenue generation and meet the collection target for the ongoing year.

The Board has also decided to enforce compliance in corporate income tax returns where out of 44,794 registered corporate taxpayers, only 18,098 have filed their returns so far for the fiscal year 2010. A similar compliance would be also be ensured in the case of Association of Persons (AoPs) where out of registered 135,292 AoPs, only 34,155 have filed their returns. The enforcement drive would be completed by May 30, 2011.

The meeting also decided to start desk audit of corporate returns to be completed by February 28, 2011 as well as risk-based audit of the corporate sector to be completed by April 30, 2011. The demand raised as a result of these audits will be collected by June 30, 2011.

This Board-in-Council also decided to start monitoring of withholding agents with airline ticketing agents and banks being the first sectors to come under monitoring radar. The monitoring exercise would continue up to April 15, 2011.

The meeting also decided to utilize and cross-match data available with FBR in order to broaden the tax base. The decision was taken in the light of recommendations given by DG Broadening of Tax and DG Strategic Planning & Research in separate presentations to the Board-in-Council.

The meeting also decided to strengthen monitoring and enforcement mechanism to plug leakages in the system and realize greater revenue. A meeting of the LTU and RTO commissioners has also been convened in March to deliberate ways for expanding the tax net and broadening the tax base.

The meeting also decided to streamline and rationalize tariff on major items of the Afghan transit trade in view of an increased incidence of transit trade items like tea and tyres finding their way back in the Pakistani market and causing a huge loss in revenue. The meeting was told that this illicit trade has risen significantly during the last three years. In this connection, various studies by economic researchers are already under way in FBR to suggest ways for streamlining and rationalizing the tariff and erase the profitability of smuggling under the Afghan transit trade.

Another key decision taken by the Board-in-Council was to set up six electronic way-bridges and instal scanners on the Afghan transit trade route. The meeting was informed that one such way-bridge had already been set up at Chamman while another being set up at Torkham would be completed within the next two days. One way-bridge would be set up at Ammangarh while the remaining three would be completed at Quaid-e-Azam International Container Terminal, Pakistan International Container Terminal and Karachi International Container Terminal in port city of Karachi. All the six way-bridges would be operated through a centralised recording system while FBR House would eventually house the mechanism for the direct monitoring.

Concept of shifting to mud architecture is creating waves in Pakistan. It is heartening to know that a lot is happening to convert this concept in to a reality in the form of proposed Mud Village, Peerzada Festival Area, Lahore.

Mud is an excellent construction material. It is being used as a building material since prehistoric times. Mud structures can still be found in a variety of climates across the globe; In Pakistan, it is most strongly associated with rural culture. The idea of mud building is now coming to urban areas. Construction of model mud village in Lahore is the case in point.

Society for the Promotion of Art and Culture (SPARC), registered in Lahore since 1994, is starting construction of mud village for handicraft men. Prof. Dr. Norbert Pintsch (Senior Expert Service Bonn, Germany) is planning to coordinating the project and giving it a practical shape.

Prof. Dr. Norbert Pintsch is an experienced architect by profession is very passionate about mud architecture. Since completing first building project as an architect at the age of 18, Prof Dr Norbert Pintsch has been in various activities as an architect and civil engineer all his life.

In addition, Iqbal, a local builder from Harrapa, Ghayyoor Obaid, a famous architect, Peerzada Festival Area, a concern that is providing space for construction of mud village near world famous Puppetry Museum are also involved in the project. Beacon House University, Department of Architecture and Building Research Institute are also likely to participate.

It is not good enough to assume that “everything from the past is good. It is necessary to show,” says Dr. Norbert Pintsch who is very passionate about the project. Like national University in Colombia where students practice construction with local materials like bamboo and wood, the project will give an opportunity to the students of Beacon House University to practice what they have been learning while adapting the construction technique mixed with appropriate technology in Pakistan.

Prof. Dr. Norbert Pintsch never gets tired of talking about his passion and, given my own interest, I don’t get tired of listening about the details of the project. Please stay tuned and I will endeavor to bring every detail as the project unfolds.

After holding technical level discussion, the government of Pakistan and IMF started the two-day policy level dialogue on Monday. The meeting discussed the issue of soaring fiscal deficit, as Pakistan seeks to keep it above five per cent against earlier target of 4.7 per cent of the GDP.

However, sources said that there was not consensus on this point in the meeting, which is likely to be settled in the second day (Tuesday) of meeting.

The sources said that Pakistan had asked the IMF to keep in view the ground realities before fixing economic targets, as the country is facing several challenges like war on terror and post-flood situation.

It might be recalled here that during the technical level discussion, Pakistan gave detailed presentations on power sector, performance and subsidy level, tax collected during the first eight months (July-February) of the current fiscal year and a target to be achieved by June 30, inflation level, subsidy given to power sector during the so far period of the financial year, and the fiscal deficit situation, to the IMF.

The government had assured the IMF’s team of taking revenue measures including imposition of 15 percent flood surcharge and 1.5 percent additional special excise duty (SED) and others. Meanwhile, it would broaden the tax base and recover the arrears, which would generate an additional amount. The proposed measures would give additional revenue of Rs 26 billion.

The government had informed the IMF that additional taxation measures would take the annual tax collection target to Rs 1630 billion from Rs 1604 billion. Similarly, the IMF was informed that fiscal deficit could increase if the government of Pakistan did not get funds for fighting against terrorism from the other countries. (Online)