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BACKGROUND AND HIGHLIGHTS OF THE FINANCE (SUPPLEMENTARY) BILL, 2021
The Government claims to have presented the Finance (Supplementary) Bill, 2021 as part of prior actions to ensure Pakistan’s sixth review of the $6 billion Extended Fund Facility (EFF) cleared by the IMF’s Executive Board, which is scheduled to meet on January 12, 2022 to decide about the disbursement of a nearly $1bn tranche.
The Government estimates to collect revenues of Rs 375 billion through the amendments proposed in the Bill, out of which Rs 343 billion are expected to be collected from the withdrawal of sales tax concessions. The Finance Minister has emphasized that most of the sales tax exemptions proposed to be withdrawn are intended to fix the distortions in existing sales tax laws w.r.t. exemption and zero-rating. He has further claimed that substantial part of the sales tax so collected would not be passed on to the end consumers / common man especially the sales tax of Rs 160 billion expected to be collected from the pharma sector which will be refundable to pharmaceutical companies when claims for zero rating will be filed. This claim, however, raises question on the basis of additional tax collections of Rs 375 billion envisaged through the Bill if substantial amount of sums so collected are expected to be refunded / adjusted.
While removal of distortions in the sales tax regime was essential to streamline the process of collection of sales tax under the VAT mode across the board, however Government’s over reliance on indirect taxes which has been seen over a period of time, and also witnessed in higher tax collections recently, needs to be rationalised. This over emphasis on indirect taxation is perhaps due to structural imbalance of taxation system of Pakistan which does not allow optimal tax collection and promotes undocumented economy. A substantial and incremental shift is required to decrease disparity in income and reduce the burden of indirect taxes on common man.
Major sales tax concessions / exemptions withdrawn are as under:
• Zero rating of sales tax has been proposed to be withdrawn on various items including
(i) exempt goods if exported by a manufacturer;
(ii) supplies of locally manufactured plant and machinery to manufacturers in the Export
(iii) supplies to duty free shops.
• The reduced rate of 12.5% on locally manufactured or assembled motorcars has been restricted to the motorcars having engine capacity up to 850 cc only.
• Reduced rate of tax on import of specified plant and machinery is proposed to be withdrawn.
• Fixed tax on import of certain cellular mobile phones has been proposed to be replaced by the standard rate of 17% tax.
• Exemptions from sales tax on import and supplies of various goods (including capital goods) is proposed to be withdrawn including plant and machinery for export processing zones, goods imported by or supplied to hospitals, machinery and parts for renewable energy, sample or replacement goods.
Apart from the above, some other major amendments proposed through the Bill are as under:
• A clause introduced by the Tax Laws (Third Amendment) Ordinance, 2021 (through which companies were made liable to make their payments through digital modes) has been suspended until it will be notified by FBR. Since its introduction, the implementation of the clause was otherwise being kept in abeyance by FBR through circulars.
• Banks are required to provide particulars of bank accounts opened or redesignated during preceding month.
• Advance income tax on bills of internet and mobile, and on own money of locally manufactured cars has been increased. FED on import or local supply of certain vehicles has also been increased.
• Concept of SPV introduced in the REIT regulations has also been accounted for in the income tax provisions.
• Condition of providing CNIC on sale to unregistered persons waived in case payments are made through debit or credit card or digital mode.
• Scope of Tier 1 retailers has been expanded to include those subject to income tax withholding under sections 236G or 236H, beyond a threshold.
INCOME TAX PAYMENTS THROUGH DIGITAL MEANS
Through the Tax Laws (Third Amendment) Ordinance, 2021, a new Clause (la) was introduced under section 21 which requires every company to make payment for a transaction under a single account head exceeding Rs 250,000 through ‘digital means’ from their notified business bank account, subject to certain exclusions. Otherwise, the expense would become inadmissible.
Due to challenges and practical difficulties in the implementation of Clause (la), the Board deferred its implementation from time to time till December 31, 2021.
The Bill now proposes to defer its implementation indefinitely till the time it is notified by the Board.
While introducing Clause (la), the term ‘digital means’ was not defined. It was, although, ought to mean all sort of paperless mode of payments; however, due to lack of proper definition confusion persisted. The State Bank of Pakistan (SBP) in its instructions issued to banks vide PSP & OD Circular Letter No. 5 of 2021 dated October 15, 2021 listed down following digital modes of payments, which were also considered to be relevant for the purposes of Clause (la):
(a) Online portals/platforms for digital payments/receipts
(b) Online Interbank Fund Transfer services
(c) Online bill/invoice presentment and payments services
(d) Over the Counter (OTC) digital payments services/facilities
(e) Card payments using Point of Sale (POS) terminals, QR codes, mobile devices, ATMs, Kiosk and/or any other digital payments enabled devices
(f) Any other digital/online payment modes
To address this ambiguity, the Bill has proposed to define the term ‘digital means’ as “electronic or digital payments as defined by the State Bank of Pakistan”. It, therefore, appears that the above instructions of SBP or any other instructions which may be issued by SBP from time to time would be relevant for the purposes of defining ‘digital means’ whenever clause (la) would be implemented.
The introduction of clause (la) apparently disrupted the currently prevailing credit market practices where besides cheques (being a regular mode of payment), post-dated cheques are also used as instrument of security between buyers and sellers. The Government may, therefore, consider bringing innovation in the cheque clearing system as Pakistan’s credit market prefers this mode of payment. SBP has also been working on introducing QR code system in cheques for seamless same day clearing. This could be integrated with the electronic system of banks for electronic clearing of cheques; thereby, providing the same utility to the customer taxpayers and information to the revenue as any other digital means of payment.
SPECIAL PURPOSE VEHICLE UNDER THE REAL ESTATE INVESTMENT TRUST (REIT)
Prior to amendment in REIT Regulations vide SRO 724(I)/2021 dated June 7, 2021, it was mandatory that the property being developed under the REIT structure, whether developmental or rental REIT, is to be owned by the REIT, being a specific trust formed under these regulations. This inter alia required transfer of property from existing owners to the REIT.
Under the amendments in REIT Regulations (through SRO 724), REIT Scheme can own REIT Assets through Special Purpose Vehicle (SPV), which has to be a Limited Liability Company with at least 75% ownership by the REIT Scheme.
REIT Funds are considered as pass through entity since they are regulatorily obliged to pay 90% of their profits to unitholders to avail corporate tax exemption. The same concept is applied to SPVs since they are undertaking similar operations to that of a REIT scheme under direct ownership structure and are regulatorily obliged to pay 90% of their income as dividend to the REIT Scheme and other investor.
Income Tax Ordinance provides for corporate tax exemption to REIT scheme upon 90% distribution of its profits. Through the Finance (Supplementary) Bill, 2021; the said exemption is also being extended to SPV. Under the amended REIT regulations, SPV would actually earn the income from REIT assets and distribute the same to investors. In line with corporate tax exemption, SPV has also been exempted from application of tax withholding / collection under Sections 150 (Dividend), 151 (Profit on Debt), 233 (Brokerage and Commission) and Capital Gains on disposal of securities.
Distribution of income by SPV to REIT would not be taxable, as income of REIT is otherwise exempt from tax whereas distribution of income by SPV to investor other than REIT would be taxed @ 35%. The tax incidence at higher rate of 35% appears to have been kept to rationalise the overall tax incidence on income from REIT assets earned by other than REIT investors through SPV.
The existing provisions of the Income Tax Ordinance provide for exemption to the profits and gains accruing to a person on the sale of immoveable property to any type of REIT scheme up to June 30, 2023. Under the amended REIT regulations (since the REIT assets can be retained under SPV and the REIT assets is owned by REIT by acquiring the shares of SPV), it was necessary that capital gains on transfer of shares of SPV be exempted to bring the same at par with exemption provided for transfer of immovable property to REIT. The Bill, therefore, proposes to provide the exemption on income from disposal of shares of SPV to any type of REIT scheme up to June 30, 2023.
MINIMUM TAX ON CERTAIN TRANSACTIONS
Under the existing provisions of the following sections, the tax deductions on certain specified transactions are considered as ‘minimum tax’ on the income of a resident person:
(i) Section 153 (payment for goods, services, and contracts);
(ii) Section 233 (brokerage and commission); and
(iii) Section 236Q (payments to residents for use of machinery and equipment).
Due to the manner in which the law relating to minimum tax is worded in the respective sections, there was a view that such withholding would be minimum tax on the entire income of such resident person from all sources.
To remove this ambiguity, the Bill has now proposed to include an explanation in each of the respective sections which provides that withholding tax under respective sections would be minimum tax only on related income which is subject to withholding of tax in that particular section. The courts would interpret whether the proposed amendment although being introduced as explanation would actually be applied retrospectively or the amendments would be considered as prospectively applicable.
FURNISHING OF INFORMATION BY BANKS
Under the provisions of section 165A of the Ordinance, every banking company is required to make arrangements to furnish certain information to the Board in the prescribed form and manner. The Bill proposed to introduce a new Clause in the aforesaid section which requires the bank to provide a list of persons containing particulars of their business accounts opened or re-designated during each preceding calendar month.
It appears that the above change is in-line with the requirement for declaration of the business bank account
under the provisions of section 114A introduced through the Finance Act 2021 and is a step towards documentation of the economy.
DISCLOSURE OF INFORMATION BY A PUBLIC SERVANT
Under the provisions of Section 216 of the Ordinance, a public servant shall not disclose the prescribed confidential information to any person except for the specified instances / list of persons where such information can be disclosed.
A new clause in sub-section (3) is proposed to be added whereby particulars in respect of high-level public officials (defined as politically exposed persons as defined by a rule, regulation, executive order or instrument; or under any law for the time being in force) and public servants in BPS-17 and above, their spouses, children or benamidars, or any person in relation to whom the aforementioned persons are beneficial owner can also be disclosed.
It is also proposed that the said amendment is always deemed to have been added.
The proposed clause shall, however, be not applicable to those who are expressly excepted under clause (iv) of sub-section (m) of Section 5 of the National Accountability Bureau Ordinance, 1999.
ADVANCE TAX ON TV PLAYS AND ADVERTISEMENTS
The Bill proposes to introduce a new Section 236CA for the collection of advance tax on foreign TV drama serials, plays dubbed in Urdu or any other language or any commercial for advertisements featuring foreign actor for screening and viewing on any landing rights channel at the following rates:
The licensing authority certifying the foreign TV drama serial, play dubbed in Urdu or other language or certifying the aforesaid advertisement, as the case may be, is prescribed to be a collecting agent.
The tax required to be collected under the aforesaid section shall be a minimum tax on the income arising from such drama serial, play or advertisement.
Tax withholding on foreign produced TV drama or serial was earlier introduced through Finance Act, 2013 and was later withdrawn through Finance Act, 2016.
ADVANCE TAX ON TELEPHONE AND INTERNET USERS
The Bill proposes to increase advance tax collected from mobile telephone and internet users as under:
ADVANCE TAX ON PURCHASE, REGISTRATION AND TRANSFER OF MOTOR VEHICLES
Every motor vehicle registration authority of Excise and Taxation Department is required to collect advance tax at the time of registration if the locally manufactured motor vehicle has been sold prior to registration by the person who originally purchased it from the local manufacturer.
The Bill proposes to enhance rates of tax under this head as under:
PROFITS AND GAINS OF INDEPENDENT POWER PRODUCERS
Profits and gains derived by a taxpayer from an electric power generation project set up in Pakistan were exempt from tax subject to certain conditions. Through the Finance Act, 2021 [earlier inserted through the Tax Laws (Second Amendment) Ordinance, 2021 dated March 22, 2021], the said exemption was restricted to persons who either entered into an agreement with the Federal or Provincial Government or to whom letter of intent was issued by the Federal or Provincial Government for setting electric power generation project in Pakistan upto June 30, 2021.
The Bill now proposes to amend the restriction for persons to whom ‘letter of support’ instead of letter of intent is issued. The amendment is proposed to be applicable retrospectively.
SALES TAX PHARMACEUTICAL SECTOR
At present, pharmaceutical sector is exempt from sales tax at import as well as supply stage. The sales tax is applicable only on their packing materials as well as on certain indirect costs under provincial laws.
The Bills seeks to impose sales tax on its raw material / purchases while its sale side is being zero rated. As a result, sales tax suffered on raw and packing materials would become refundable. For that purpose, sales tax returns and refund claims would be filed. The Government has promised to process their refunds on fast-track basis like exporters. Based on that, the Government claims that this measure would not only reduce the prices of pharmaceutical products but would also document the entire supply chain, from imports till retailers.
Cottage industry is exempt from sales tax. The term “cottage industry” has been defined to mean a manufacturing concern, which fulfils each of the following conditions, namely:
(a) does not have an industrial gas or electricity connection;
(b) is located in a residential area;
(c) does not have a total labour force of more than ten workers; and
(d) annual turnover from all supplies does not exceed Rs 10 million rupees
Though the Bill, the limit of annual turnover, specified in (d) above, has been reduced from Rs 10 million to Rs 8 million.
TIER 1 RETAILER
The Sales Tax law requires Tier 1 retailers to be registered and to discharge their sales liability under conventional VAT mode whereas retailers other than Tier 1 are not required to be registered as they discharge their sales tax liability through electricity bills.
Presently, a retailer falling in any one or more of the following categories, is treated as Tier 1 retailer:
(a) a retailer operating as a unit of a national or international chain of stores;
(b) a retailer operating in an air-conditioned shopping mall, plaza or centre, excluding kiosks;
(c) a retailer whose cumulative electricity bill during the immediately preceding 12 consecutive months exceeds Rs 1,200,000;
(d) a wholesaler-cum-retailer, engaged in bulk import and supply of consumer goods on wholesale basis to the retailers as well as on retail basis to the general body of the consumers;
(e) a retailer, whose shop measures 1,000 square feet in area or more or 2,000 square feet in area or more in the case of retailer of furniture;
(f) a retailer who has acquired point of sale for accepting payment through debit or credit cards from banking companies or any other digital payment service provider authorized by State Bank of Pakistan; and
(g) any other person or class of persons as prescribed by the Board.
The Bill proposes an additional criteria to be added by inserting clause (g) which states:
(g) A retailer whose deductible withholding tax under sections 236G or 236H of the Income Tax Ordinance, 2001 during the immediately preceding 12 consecutive months has exceeded the threshold as may be specified by the Board through notification in the official Gazette.
Under sections 236G and 236H, retailers of specified sectors (including pharmaceuticals, poultry and animal feed, edible oil and ghee, auto-parts, tyres, varnishes, chemicals, cosmetics, IT equipment, electronics, sugar, cement, iron and steel products, fertilizer, motorcycles, pesticides, cigarettes, glass, textile, beverages, paint and foam sector) are subject to income tax withholding on their purchases from importers, manufacturers, wholesalers etc.
Henceforth, retailers subject to tax withholding under sections 236G or 236H, in excess of threshold (to be notified by FBR) would be considered as Tier 1 retailer for the purposes of sales tax.
SALES TAX ON RETAIL PRICE
Goods specified in the Third Schedule are subject to sales tax on their retail price. At present, the Government is empowered to include or exclude any goods from the Third Schedule through a notification. The Bill proposes to vest such power to the Board.
Through the Finance, 2021 Sugar was included in the Third Schedule whereby sugar supplied other than as industrial raw material to pharmaceutical, beverage and confectionary industries was subject to sales tax at retail price.
Through SRO 989(I)/2021 dated August 5, 2021, sugar was taken out of Third Schedule for the period from July 1, 2021 till November 30, 2021. The Bill proposes to exclude sugar from Third Schedule w.e.f. December 1, 2021; thus, making it liable to sales tax at its value of supply across the board.
SALE TO UNREGISTERED PERSONS – CNIC
Sales tax law requires every registered person while making sales to unregistered person to provide CNIC or NTN of unregistered buyer except where supplies are made by a retailer involving transaction value not exceeding Rs 100,000.
The Bill proposes to waive the condition of providing CNIC in such cases where payment is made through debit or credit card or digital mode.
It is presently provided that where CNIC provided by buyer is not correct, liability of tax or penalty would not arise against the seller in case of sale made in good faith. The Bill proposes to withdraw the said provision, which may result in unwarranted action against the seller and litigation (as sellers are generally unable to verify the CNIC provided by buyer).
OFFENCES AND PENALTIES
The Bills seeks to amend the following three provisions relating to certain offences and penalties:
(i) Penalty provided in S. No 23 presently applicable to cigarettes, is proposed to be applicable on specified goods. (S. No. 23 provides for penalty, confiscation, destruction by any person who manufactures, possesses, transports, distributes, stores or sells the goods with counterfeited tax stamps, banderoles, stickers, labels or barcodes or without tax stamps, banderoles, stickers, labels or barcodes.)
(ii) For offence specified in S. No. 24, business premise would also be sealed in addition to imposition of penalty (Serial No. 24 provides the penalty against the offence where any person, who is integrated for monitoring, tracking, reporting or recording of sales, production and similar business transactions with the Board or its computerized system, conducts such transactions in a manner so as to avoid monitoring, tracking, reporting or recording of such transactions, or issues an invoice which does not carry the prescribed invoice number or barcode or bears duplicate invoice number or counterfeit barcode, or any person who abets commissioning of such offence).
(iii) S. No. 25A provides for increasing monetary penalties up to four defaults against the retailers who fail to get themselves registered or fail to integrate their business as required under the Sales Tax Act. At present, business promises is sealed after the fourth default if a person fails to integrate the business premises. The Bill seeks to provide that business premises would be sealed notwithstanding the number of defaults of monetary penalties as provided under S. No. 25A
ZERO RATING – FIFTH SCHEDULE
• Goods specified in the Fifth Schedule are subject to sales tax at the rate of zero percent. The proposed Bill seeks to withdraw zero rating on the supply of following goods:
• The Bill seeks to insert the below new entries in the Fifth Schedule whereby the import and local supply of such goods would be subject to zero rate of sales tax:
EXEMPTION – SIXTH SCHEDULE
Through the supplementary bill, it has been proposed to withdraw sales tax exemptions from the following items through omission of the corresponding entries in ‘Table – I (i.e., import and supply)’, ‘Table – II (i.e., local supply only)’, and ‘Table – III’ (i.e., capital goods and plant and machinery) of Sixth schedule to the Act:
Exemption presently available on import as well as on local supplies of goods mentioned under S. Nos. 1, 2, 3,11,12, 23, 72, 99,131, and 132 above has been proposed to be restricted to local supplies only with certain modifications.
(To be continued tomorrow)
AF-FERGUSON & CO Chartered Accountants
Copyright Business Recorder, 2021
AF-FERGUSON & CO Chartered Accountants
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