Tax Memorandum 2016

Shekha & Mufti
Chartered Accountants
Shekha & Mufti

PREFACE
ThistaxmemorandumsummarizescrucialchangesproposedintheFinanceBill2016inIncomeTax,
SalesTax,FederalExciseDutyandCustomsDutyLaws.
AllchangesthroughtheFinanceBill2016areeffectivefrom01July2016exceptwherespecifically
indicated.
Thetaxmemorandumcontainsthecomments,whichrepresentourinterpretationofthelegislation.
We,therefore,recommendthatwhileconsideringtheirapplicationtoanyparticularcase,reference
bemadetothespecificwordingsoftherelevantstatute(s).
Thememorandumcanalsobeaccessedonourwebsitewww.shekhamufti.com
June04,2016
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S.No.
TABLEOFCONTENTS
PAGE
1.
MAJORCHANGESININCOMETAXLAWS
2.
MAJORCHANGESINSALESTAXLAWS
3.
MAJORCHANGESINFEDERALEXCEISEDUTYLAWS
4.
INCOMETAXORDINANCE,2001
A.
B.
C.
D.
E.
F.
G.
H.
ChangesinProvisionsofPersonalTaxation
ChangesinTaxationofCapitalGainonShares
ChangesinTaxationofCapitalGainonProperties
ChangesinTaxationofCompanies
ChangesinTaxationofPropertyIncome
ChangesinIncomeTaxExemptions
WithholdingTaxChart
OtherKeyChanges
729
7
10
12
14
18
20
2226
2730
5.
SALESTAXACT,1990
3139
6.
FEDERALEXCISEDUTYACT,2005
4043
7.
CUSTOMSACT,1969
4446
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MAJORCHANGESININCOMETAXLAWS
SuperTaxhastobepaidforTaxYear2016aswell.
CompanieswithevenGrossLosswillhavetopayforMinimumIncomeTaxof1%oftheirturnover.
Groupreliefgiventoholdingcompanyonproratebasistoitsshareholding.
Taxcreditof3%oftheTaxpayablewillbeallowedtomanufacturerswhomake90%oftheirsalesto
registeredpersons.
10%taxcreditforCompaniesforinvestmentinPlant&MachinerytocontinuetillJune2019.
Employment Tax Credit @ 2% for every 50 employees to be allowed to company setting up new
manufacturingunitsuptoJune30,2019.
Theslaboftaxablepropertyincomehasbeenincreasedfrom150,000/to200,000/
PharmaceuticalCompaniestobeallowedSalespromotion,advertisementandpublicityexpenseupto
5%ofturnover.
TaxRebateonPurchaseofHealthInsurancePolicyintroduced.
HouseLoaninterestAllowancecanbeclaimeduptheinterestorprofitpaymentof2,000,000/
Lastdatefor2%additionalPensioninVPShasbeenextendedtoJune2019.
TaxRebateonEducationexpensesofchildrenhasbeenintroduced.
TheexemptionlimitofProvidentFundexemptionhasbeenincreasedfrom100,000/to150,000/
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MAJORCHANGESINSALESTAXLAWS
DisallowanceofProvincialTaxes(includingIslamabadCapitalTerritory)
ThresholdforcottageindustryincreasedtoRs10million
NewdatesforfilingofAnnexureofthesalestaxreturnstoalignwithnewsystem
Inputtaxclaimcanonlybeclaimedwhensupplierhasdeclaredandpaidtherelatedsalestax
NewSubSection4AinSection11istobeinsertedtoempowertaxofficerfordeterminingdefault
ofwithholdingsalestax
MineralwateristobelistedinThirdSchedule
IssuanceofzeroratedinvoiceonsaleortransferofbusinessandamendmentsinSection49to
removeconfusion
Abolitionofzeroratingonstationaryitemsandmilk
Exemptionfromsalestaxonpesticides
ExemptionforbusinessesestablishedinGawadarandsuppliesthereoffor23years.
Salestax@8%onwhitecrystallinesugarandwithdrawalofdutyfromFederalExciseAct,2005
Salestaxonspecifiedmobilephonesincreased
Notax,Norefundforfiveexportorientedsectorsandthepurchaseofenergy,gas,furnaceoiland
coalwillbezerorate.Theretailsalesoffinishedgoodswouldbe@5%
Turnovertax@2%forspecifiedretailerfallinginTierI
FixedsalestaxonMarbleIndustry@1.25perKWHonelectricityconsumption
ApplicationofcertainprovisionoftheSalesTaxAct,1990onIslamabadCapitalTerritory(Taxon
Services)Ordinance,2001
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MAJORCHANGESINFEDERALEXCISEDUTYLAWS
WithdrawalofdutyoncertainserviceswhicharesubjecttosalestaxunderProvinciallaws
Dutyoncementchangedfrom5%ofretailpricetoRs.1perkilogramofcement
Dutyoncigarettesenhanced
Rateofdutyonaeratedwatersenhancedfrom10%to11.5%ofretailprice
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INCOMETAXORDINANCE,2001
CHANGESINPROVISIONSOFPERSONALTAXATION
TaxRebateonPurchaseofHealthInsurancePolicy
(Section62A)
A new tax rebate has been proposed on the purchase of health insurance policy. This rebate is in
additiontothetaxrebatealreadyallowedincaseoflifeinsurancepolicies.ThetaxCredit/Rebateshall
beallowedifthepersonhaspaidhealthinsurancepremiumorcontributiontoanyhealthinsurance
company registered by the Securities and Exchange Commission of Pakistan under the insurance
Ordinance,2000.
It has, however, not been mentioned that whether the rebate will be allowed strictly on health
insurancepolicypurchasedforthepersonhimselforwillbepermissibleforhisfamilyanddependents
aswell.
Themechanismforcalculationoftaxrebatehasbeenbasedontheaveragerateoftaxapplicableon
the person with upper limit on the amount of eligible health insurance premium at the lower of
following:
i
ActualPremiumPayment
ii
5%ofAmountTaxableIncome
iii
100,000/
Thehealthinsurancerebateisstrictlyallowedonlyincaseofsalaryincomeandbusinessincomeor
bothbutwillnotbeavailableagainstMinimumTaxationorFinaltaxation.
2%AdditionalVoluntaryPensionScheme(VPS)
(Section63(2)(C)(II))
The Finance bill proposes to insert a proviso whereby the last date of June 2016 for additional
contribution of two percent (2%) per annum for every year after forty (40) year of age has been
extendedtoJune2019.Thisiscertainlyawelcomeproposalasitwasverymuchnecessitatedforall
salariedindividualswhodonotfindmuchavenuetosavetaxesortosecuretheirretirementbenefits
plan.However,themaximumlimitofeligiblecontributiontotheVPShasbeencutdownfrom50%of
thetaxableincomeofthepersonto30%.
Needlesstomentionthattheadditional2%contributionintheVPScanbeavailedtobecontributed
intothefundeveryyearforeveryextrayearoverthe40years.
Theprovisionregardingthemechanismofcalculatingtherebateonthebasisofaveragerateoftax
andwithholdingofincometaxincaseofearlyencashmentremainsthesame.
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MoreAllowanceforInterestonHouseLoan
(Section64A)
AnewSectionwasintroducedinthelastBudgetwherebythetaxcreditonhouseloanagainstthetax
liabilitywasreplacedwiththeallowanceforinterestonhouseloandirectlyagainstthetaxableincome
ofthetaxpayer.Thisfactuallyresultedinbiggertaxsavingstoindividuals.
The allowance was allowed at the lower of 50% of the taxable income or Rupees 1 Million. This
monetarylimitof1Millionhasnowbeenproposedtobeincreasedto2MillionintheBudget.
Theallowanceisavailableontheinterestpaymentoronthepaymentofshareinhousevalue,onthe
loantakeneitherfor,(a)Constructionofnewhome,(b)Purchaseofahousefromthefollowing;
CommercialBank
NBFIRegulatedbySECP
GovernmentAuthority
StatutoryBody;employees
ListedCompany;employees
Acomparativecomputationistabulatedasunder;
Allowable
Allowance
Saving
Description
TY2016
TY2017
TaxableSalary
7,000,000
7,000,000
Less;DeductibleAllowance
1,000,000
2,000,000
NetTaxableIncome
6,000,000
5,000,000
275,000/
Incometaxonabove
1,147,000
872,000
Interestpaid
2,200,000
50%oftaxableincome
3,500,000
Limit u/s 64A whichever is
lower
2,000,000
Lastly, we understand that the above Section 64A should be included in the Part IX of Chapter III
[DeductibleAllowance]andnotintheChapterofTaxcreditsandtherefore,essentiallyismisplaced.
EducationAllowanceforChildren
(Section64AB)
TheFinancebillhasproposedanewallowanceoneducationexpensesofchildrenincurredbythe
taxpayer.Ithasbeenproposedthatthetuitionfeewillbeconsideredastheeducationexpenseand
will alone be eligible for deduction from the taxable income. It has further been provided that
allowancewillbeavailabletoeitheroftheparentbutnottobothofthem.
Thisiscertainlyamuchneededandmuchawaitedallowanceespeciallyforsalariedindividualswho
do not generally get any respite from tax burden. However, there are certain amendments which
shouldbetakenintoaccountbecausethewaytheeducationallowancehasbeenproposedtobegiven
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does not seem to transfer the benefit to the individual as it has been disallowed to income class
earningmorethan1Millionincome.
Secondly,theconstrictionofschoolfeetomerelytuitionfeeislikelytoberesentedasitwouldbe
moreadvisablechangehaditbeenallowedtoallandsundrypaymentsmadetoschoolandcolleges.
Thirdly,themechanismforgivingtheallowanceneedsclarityasithasbeenproposedatthelowerof
asfollows;
a) Fivepercent(5%)ofthetotaltuitionfeespaidbytheperson
b) Twentyfivepercent(25%ofthepersonstaxableincomefortheyear
c) Anamountcomputedbymultiplyingthesixtythousandwithnumberofchildrenoftheindividual
Once can see that 25% of 1 Million may be 250,000/ but 5% of 250,000/ factually becomes
meaningless.
Lastly,ithasbeenproposedthattheemployer(company)cannotgiveadjustmentundersection149
oftheordinance.Therefore,asoverallthewholeexerciselookslikeahalfheartedandafeebleattempt
toactuallyprovideforanytaxsaving.
ExemptionofProvidentFundmarginallyincreased
(6thSchedule)
TheFinanceAct,2008reducedtheexemptionlimitofProvidentFundtoamaximumof100,000/Per
annum
Theamendmentdidnottheaffectthetaxabilityorexemptionofprovidentfundsofemployeeswith
monthlyBasicsalaryoflessthan100,000/butitcertainlyhithardonhighSalariedIndividualswith
monthlyBasicofmorethantheaboveasitliterallytookawayallthewellplannedtaxfreeRetirement
benefits. The rationale behind the above proposed change has never been explained by the
authorities.
Itwouldverymuchbepertinenttomentionherethattherewasnosuchchangesuggestedinthe
GratuityFundorinthePensionFund,however.Asaresultthereemergedagreatdisparitybetween
thethreeRetirementbenefitsintermsoftheireligibilityforthedesiredexemptionfromtax.
Thecurrentmarginalincreaseintheexemptionlimitfrom100,000/from150,000/istoolateand
toolittlefortheclassoftaxpayerswhichhasnoothertangibleavenueoftaxsavingortaxplanning.
Itistherefore,suggestedthatsinceProvidentFundisaretirementbenefitandtherefore,shouldbe
treatedasretirementbenefitandshouldaccordingly,beprovidedthecompleteexemptionasitwas
thereintheOrdinancebefore2008.
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CHANGESINTAXATIONOFCAPITALGAINONSHARES
(FirstSchedule;DivisionVII)
TheBudgetarystepsofFBRtowardstheCapitalMarketsandCapitalinvestorsshowsthatithasfinally
beendecidedtowithdrawthebookishexemption (48months holdingperiod)giventotheCapital
GainonShares,ifthecurrentamendmentsaretobecomethepartoftheFinanceAct201617.Ifwe
recallthatafterintroducingtheCGTintheTaxYear2011,theFBRhasconstantlybeenpushingthe
taxratehighereveryyearononehandandincreasingtheminimumholdingperiodrequirementfor
gettingexemptionontheother.
NoExemptionofCapitalgainonShares
(Section37A)
Thisyear,thetaxrateofcapitalgainthoughproposedtoremainthesame,theexemptionasavailable
incaseof48monthsofholdingofshareshowever,appearstohavebeenwithdrawn.
Thecategoriesofholdingperiodhasbeendesignedinthedifferentmodeascomparedtotheearlier
years.Theperiodasdefinedin1st&2ndtiersforlessthan12&24monthsrespectivelyareproposed
toremainthesame,while,the3rdtierofholdingperiodfrommorethan24monthbutlessthan48
monthsisproposedtobechangedwiththecertainconditiononthedateofpurchaseofshares.Ifthe
sharesaresoldduringtheTY2017whichwerepurchasedafter01,July2012,itwillbetaxed@7.5%.
Meaningthereby,thethresholdof48monthsasgivenforexemptionofcapitalgainhasnowbeen
proposedtobewithdrawn.The same mechanism /proposedamendmentcan bewellunderstood
withthefollowingillustration;
IfShareswerepurchasedon
July01,2012
IfSharedaresoldon
June30,2017
HoldingperiodofSharesis
60Months
Exemption
NIL
Taxation
7.5%ofgain
Similarly,the4th&finaltierofholdingperiodisalsoproposedtobeconditionedthatitwillonlybe
availableiftheshareswerepurchasedbefore01,July2012.Theconceptofnumberofmonthstohold
securitiesforgettingexemptionfromtaxoncapitalgainhasfinallybeenwithdrawn.
Aftertheproposedchanges,thecategorieswouldnowbeasfollows;
Shorttermgain(salewithin12months)
Taxable
Longtermgain(salewithin12to24months)
Taxable
Longtermgain(saleafter24months)
Taxable
Longtermgain(salesecuritybeforeacquiredJuly01,2012)Exempt
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ConceptofNONFILERbroughtinCGT
TheFederalBoardofRevenuehasgraduallybeenintroducingthemechanismofFiler&NonFilerin
the other remaining provision of withholding Sections. The purpose of this exercise in not only to
detectsomenoncompliantandnonfileror increasinginrevenuemeasure butareactuallyaimed
towardsdocumentation.
TheconceptofdiscriminationbetweenFilerandNonFilerofTaxpayerhasnowfinallybeenintroduced
inthetaxationofCapitalGainaswellThehigherrateoftaxationoncapitalgainisintroducedforNON
Filersineachslab/categoryinlinewiththeotherprovisionofIncomeTaxlaws.
ItmustbeappreciatedthattheFBRhasnowproposedtoamendSection169oftheOrdinanceforthe
adjustmentandrefundofexcesstaxdeductionsufferedonaccountofnonfilerswhichtheycanget
backoncetheyfilethereturns.
AcomparisonofCGTratesbetweenTaxYear2016andTaxYear2017inlinewithFiler&NonFileris
beingtabulatedhereunder;
HoldingPeriodofSecurities
Tax
Year
Lessthantwelve
(12)months
2016
2017
Filer
NonFiler
15%
15%
18%
Betweentwelveto
twentyfourmonths
Twentyfourmonthsormore
butacquiring
onorafter1st
July,2012
Filer
NonFiler Filer NonFiler
12.5%
7.5%
12.5%
16%
7.5%
11%
before1st
July,2012
Exempt
Exempt
Lastly,thisyear,theSuperTaxisagainproposedtobeapplicablefortheTaxYear2017aswell.This
SuperTaxwillbepaid@3%OR4%byallthosetaxpayerswhoseincomefromCapitalGainwillbe
equaltoormorethan500MillionRupeesinthesamemannerofTY2015.Itremainsimportantto
highlightherethattheexemptincomeofcapitalgain(Morethan48months)willalsobetakenforthe
calculationofSUPERTAXanddischargetheliabilityasindicatedinprecedingTaxYear.
IncreaseinTaxcollectionratebyStockExchange
(233A)
Through the Finance Bill 201617, the Federal Board of Revenue has proposed to amend the tax
collectionbyastockexchangeregisteredinPakistanatthetimeofpurchaseandsalesofsecurities.A
comparisonbetweenratesforpreviousTaxYear2016andtheTaxYear2017istabulatedhereunder;
Tax
Year
2016
2017
TaxcollectiononSharesbyStockExchange
PurchaseValue
0.01%
0.02%
SaleValue
0.01%
0.02%
Shekha & Mufti

CHANGESINTAXATIONOFCAPITALGAINONPROPERTIES
CapitalGainsTaxExemptiononProperty
Section37(1A)
TheconcepttobringtheincomeofpropertygaininthetaxnetwasintroducedintheFinanceAct,
2012. This has been made possible after the 18th amendment was made in the Constitution of
Pakistan,1973,otherwisetheFederalGovernmentdidnothavethepowertotaxgainonimmovable
property. However, chargeability of capital gain on immoveable property has always been
controversialissueinviewofverdictsoftheApexcourtofthecountry.
Primarily,theholdingperiodforexemptionofcapitalgaintaxonpropertywasintroducedfortwo(02)
years,whichisnowproposedthroughthisFinanceBill201617toenhanceuptofive(5)years.
Moreover,aflatrateof10%ongainofimmoveablepropertyisalsobeingproposedtoamendinstead
oftwodifferenttiersofslab.Thecomparisonbetweenproposedandexistingslabisbeingnarrated
hereunder;
COMPARISIONBETWEENTY2016&2017
S.No.
HoldingPeriodofProperty
FY2016
FY2017
Whereholdingperiodofimmoveablepropertyis
1
10%
10%
uptooneyear
2
5%
10%
morethanoneyearbutlessthantwoyear
3
0%
10%
morethantwoyearbutlessthanfiveyear
4
0%
0%
morethanfiveyear
Theenhancementforholdingperiodofpropertyfortaxexemptionfromtwoyearstofiveyearsis
highlydisturbingforthepropertyholdersandpropertydealersaswell.
Taxonsalesofpropertyincreased
(Section236C)
TheadvancetaxonsalesofimmovablepropertywasintroducedintheFinanceAct,2012,whereby
anyregisteringauthoritywasresponsibletocollectadvancetax@0.5%&1%fromFiler&NonFiler
respectivelyatthetimeofsale/transferofimmoveablepropertyifthesaleisbeingmadewithinthe
periodoftwoyearsofpurchase.Thisadvancetaxiscollectedfromtheselleroftheproperty.
ThroughtheFinanceBill201617,ithasnotonlybeenproposedtodoubletherateofadvancetaxbut
toincreasetheholdingperiodoftwo(02)yearstofive(05)yearsaswell.Thisimpliesthattheadvance
taxshallnotbecollectedfromthesellerofthepropertyinthecaseonlyifitissoldaftertheperiodof
5yearsfrompurchase.
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TheproposedrateofadvancetaxunderthisSectionareasfollows;
Tax
Year
2016
2017
Taxonsale/transferofimmoveableproperty
Filer
0.5%
1%
NonFiler
1%
2%
TaxonPurchaseofpropertyincreased
(Section236k)
ThroughtheFinanceAct,2014,theFederalBoardofRevenueintroducedtheadvancetaxcollection
fromthepurchaseronallkindofImmoveableProperties,ifthevalueofthepropertyismorethan
threemillion.Theincometaxfromthepurchaseriscollected@1%(Filers)and2%(NonFiler)bythe
registeringorattestingauthorityatthetimeoftransferofproperty.Thisincometaxisconsidered
advancetaxandisclaimedintheAnnualTaxReturn.
ThroughthisFinanceBill,theFBRnowseekstodoublethetaxratefromthepurchaserofProperty
worthmorethanthreemillion.Thethresholdofthreemillionremainsthesame.
TheproposedratesforcollectionofadvancetaxunderthisSectionareasfollows;
S.No. Description
TY2016
TY2017
1
WherevalueofPropertyisnotmorethan3
0%
0%
million.
2
WherethevalueofPropertyismorethan
Filer
NonFiler Filer
NonFiler
3million
1%
2%
2%
4%
FAIRMARKETVALUE
StampCollectorsrateisnomoreBenchmark;
(Section68)
Section 68 of the Ordinance contains the provision for the determination of market value of any
property,rent,assets,servicesandperquisite.IthasbeenproposedundertheBudgetthatincaseof
ImmoveableProperty,thevaluefixedornotifiedbyanyprovisionalauthorityorlocalbodywiththe
helpofstampdutycollectorsrateshallnotbeconsidered/accountedforasabenchmarkforthe
determinationoffairmarketvalueunderthisOrdinance.
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CHANGESINTAXATIONOFCOMPANIES
QUARTERLYADVANCETAX;
(Section147)
After the introduction of Alternate Corporate Tax (ACT) under Section 113C of the Ordinance
companiesarerequiredtodischargetaxliabilityatthehigherofcorporatetaxoralternatecorporate
tax. However relevant amendment was not made in the provisions for quarterly advance tax
payments.ResultantlythecompaniesarepayingACT,whereverapplicable,atthetimeoffilingofthe
return.ThebillnowproposestoalsoconsiderACTwhiledischargingquarterlyadvancetaxliabilities.
Companiesarerequiredtopayquarterlyadvancetaxbyapplyingtaxtoturnoverratioasperformula
given in subSection 4 of Section 147 of the Ordinance. An explanation has now been proposed
whereinitisclarifiedthattaxassessedinlatestyearincludesminimumtaxandACTunderSections
113 and 113C of the Ordinance. Corresponding amendments have also been proposed in other
subsectionssoastoincludeACTwhiledischargingadvancetaxliabilities.
MINIMUMTAX;
(Section113)
CompaniesdeclaringGrossLossinayeararecurrentlyexemptfromminimumtax.Thisrelaxationis
proposedtobewithdrawninlinewiththeindividualsandAssociationsofpersons(AOPs).
IndividualsandAOPsarecurrentlyliabletopayminimumtaxonlywheretheannualturnoverreaches
toRupees50million.ThisceilingisproposedtobebroughtdownwardtoRupees10million,only.
Therefore,individualsandAOPsareproposedtobeliableforminimumtaxwhereturnoverreaches
Rs.10millionoraboveforTaxYear2017oranysubsequentyear.
ItisfurtherproposedtoexcludethepaymentofsupertaxunderSection4BoftheOrdinancewhile
calculatingminimumtax.
TAXCREDITS;SALESTOREGISTEREDPERSON;
(Section65A)
TheFinanceBillproposestoenhancethetaxcreditto3%fromexisting2.5%oftaxpayabletothe
manufacturerswhomake90%oftheirsalestothepersonregisteredundertheSalesTaxAct,1990.
ThisisawelcomingandencouragingamendmenttowardsthedocumentationoftheEconomy.
TAXCREDIT;EMPLOYMENTBYMANUFACTURERS;
(Section64B)
CompaniessettingupnewmanufacturingunitsbetweenJuly1st2015andJune30th2018arecurrently
entitledforthetaxcredit@1%foreveryfifty(50)employeesregisteredwithrelevantinstitutionsof
theconcernedprovincialgovernmentssubjecttothemaximumoftaxcreditof10%ofthetaxpayable.
Thebillnowproposestoenhancethetaxcreditupto2%foreveryfifty(50)employeessubjecttothe
maximumoftotal10%taxcredit.Theperiodforsettingupofmanufacturingunitisalsoproposedto
beextendeduptoJune302019.
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Thetaxlegislatorperhapsmissedtosubstituteyear2019fromyear2018inclause(a)ofsubsection
3resultingindifferenceofperiodsfortaxcreditwithinthegivenSection.
TAXCREDIT;INVESTMENTINPLANT&MACHINERY;
(Section65B)
CompaniesmakinginvestmentforpurchaseofPlant&Machinery(P&M)arecurrentlygiventaxcredit
up to 10% of the investment, including on account of minimum and final taxes. One of the major
conditionisthattheP&MispurchasedandinstalledbetweenJuly1st2010andJune30th2016.Thebill
nowproposestoextendtheperiodofinvestmentuptoJune302019.
Itisnotedwithapprehensionthatundertheverysamesectiontaxcredit@20%isavailableincase
ofinvestmentismadethroughfreshissueofshareswhichisexpiringbyJune30th2016.Thesame,
however,isnotextendedanyfurther.
Whatneedtobementionedherethatduetopurchaseofplant&machineryinayear,theprofits
already get reduced due to initial and normal depreciations, therefore, the 10% tax credit of the
amountoftaxpayablewhichalreadygetsonthelowersidedoesnotseemveryattractive.
Lastly,thereappearstobenoparticularreasonastowhythiscreditshouldalsonotbeavailableto
IndividualbusinessesandAssociationofpersonswhicharedulyenrolledandregisteredincometax
andsalestax.
TAXCREDIT;ENLISTMENT;
(Section65C)
Tax credit @ 20% of the tax payable is allowed to any company for getting it listed in any stock
exchange in Pakistan in the year of listing. Now, the Finance Bill2016 has proposed to offer the
aforesaid credit for the subsequent year as well. This aims to promote and encourage listing of
Companies.
However,whatneedsattentionhereandshouldbeaddressedthattheShareholdersofthePrivate
CompanywhichisgettingenlisteddonotgetexemptedfromtheCapitalgainonconversionintoa
listedCompanyintheirindividualcapacities.
Therefore, in order to make the amendment more meaningful, equal exemption should also be
providedforinthehandsoftheShareholdersaswell.
TAXCREDIT;EQUITYINVESTMENTININDUSTRIALUNDERTAKING;
(Section65D)
100%TaxcreditunderthisSection is allowedvideFinanceAct,2011againsttaxpayableincluding
minimumandfinaltaxesfornewlyestablishedIndustryundertakingsbytheCompaniesfortheperiod
of five years subject to condition that the company invests with issuance of 100% shares for cash
consideration.
TheBillnowproposestointroduceaformulaforcomputingtaxcreditunderthisSectioninsteadof
existing 100% tax credit. Similarly the requirement for 100% equity investment is relaxed to 70%
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equityinvestmentforcashconsideration.Thereappearstobeacertainpartmissingintheformulaas
theformulacurrentlybeenproposed,resultsinabnormallyhightaxcredit.
It has, further, been proposed to extend the time period of exemption whereby tax credit can be
claimedbythecompaniesincorporatedtill30thJuneof2019whichiscurrentlyexpiringby30thJune
of2016.
The Finance Bill has, additional proposed condition that if the company claiming the tax credit
discontinuesitsbusinesswithinfive(05)yearsofavailingcredit,thetaxcreditwillbedeemedtohave,
wrongly,beenallowed.
TAX CREDIT; EXPANSION IN PLANT & MACHINERY by ALREADY ESTABLISHED INDUSTRIAL

UNDERTAKINGS;
(Section65E)
Previously,theFinanceActprovidestaxcredittoacompanyequaltohundredpercent(100%)oftax
payableforaperiodoffiveyearsifsuchinvestmentismadeforpurchaseandinstallationofplantand
machineryforthepurposeofexpansionofexistingundertakingorundertakinganewprojectincluding
corporate dairy farming with 100% equity raised through issuance of new shares for cash
consideration.
Ithas,now,beenproposedbytheFinanceBilltorestrictthelimitof100%equityto70%,resulting,
taxcreditwillbeallowedinproportionoftheequityraisedthroughissuanceofsharesagainstcash.
Further,theBillhasproposedtoextendtheperiodforsuchinvestmentto30June2019insteadof
30thJuneof2016.
TheFinanceBillhas, additionally proposed aconditionthatifthecompanyclaimingthe tax credit

discontinuesitsbusinesswithinfiveyearsofavailingcredit,thetaxcreditwillbedeemedtohave,
wrongly,beenallowed.
MinimumtaxonServiceCompanies;
(Clause94ofPartI)
In the past, the law was amended by Parliament through Finance Act 2009 whereby the service
providingcompaniesweremadechargeableto6%MinimumTaxunderSection153(1)(b).However,
inasurprisingmove,FederalmachineryissuedaCircular6,grantingthatserviceprovidingcompanies
wereexemptforchargeofminimumtax.TheFTOtooknoticeofthisunlawfulactofFBRfunctionaries
(2012PTD554)andrecommendedactionagainsttheFBRofficerswhowereresponsibleforissuing
unlawfulCircular.
TheFBRwithdrewCircularNo.6on26.04.2011.Inanotherintriguingmove,theFBRinsertedClause
79declaringserviceprovidingcompaniesasexemptfromMinimumTaxthroughSRO1003.Although
FBRhadwithdrawntheCircular6,yetReviewPetition2013PTD2159"wasfiledbeforetheFTOwhich
wasrejectedandtheFTOheld,onthestrengthofjudgmentofSupremeCourtinanidenticalcase,
thatinsertionofClause79wasagainsttheprovisionsoflawand,therefore,malafideandunlawful.
Inordertogivelegalsupporttocorporateserviceproviders,Clause94ofPartI,wasintroducedbythe
IncomeTax(SecondAmendment)whichprovidesexemptionfromapplicabilityofMinimumtaxon
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specified corporate servicesectorsfrom 1stJuly2015till 30June 2016. However, specified service
sectorswillbesubjectedto2%MinimumtaxiftheyfileirrevocableundertakingtotheCommissioner
IRforsubmissionofitsaccountsforincometaxaffairsforTaxYear2016or2017,asthecasemaybe.
Upon filing suchundertaking,theCommissionerIR was empoweredto issue exemption certificate
fromwithholdingtaxundersection153bycollecting2%taxonentireturnoverfromallsources.
IthasnowbeenproposedbytheFinanceBilltogetitexemptfromminimumtaxationbyextending
theschemeofreducedrateof2%upto30thJuneof2017.However,acompanyismandatorytosubmit
theundertakingbyNovember2016.
Ithas,further,beenproposedthatITservicesandITenabledservicesasdefinedinclause(133)will
alsoenjoytheexemptionasavailabletoservicesectorforgettingbenefitofClause94ofPartIofthe
SecondSchedule.
TRANSACTIONBETWEENASSOCIATES;
(Section108)
TheCommissionerisempoweredtodistribute,apportionorallocateincome,deductionsortaxcredits
betweenthepersonswhoareassociatestoreflecttheincomethatthepersonswouldhaverealized
inanarmslengthtransaction.
It has, therefore, been proposed by the Bill that every taxpayer entering into transaction with its
associates shall maintain and keep the precise information and records in specified formats. It is
expectedthatFBRwillprescribetheextentofandmannerinwhichthedocumentswillbemaintained
andtheinformationtobefurnishedtotheCommissionerIR,sorequired.
Shekha & Mufti

CHANGESINTAXATIONOFPROPERTYINCOME
IncomefromPropertyunderaseparateblockofIncomeforIndividuals&AOPs
[Sections15&155]
TheFinanceAct2017hasproposedchangesintaxationofPropertyIncomeinthehandsofIndividuals
andAssociationofPersons(AOPs).Thetaxationincaseofcompanieshasbeenproposedtoremain
thesame.IthasbeenproposedthattherentalincomeforIndividualsandAOPswouldbetreatedas
aseparateblockofincomeandwillnotbeclubbedwithanyothersourceofincome.Thisimpliesthat
there wont be allowed any expense or expenditure against the rental income and neither any
adjustmentortaxcreditortaxallowancewouldbeacceptableandthatthewholeoftherentalincome
willbetaxedatthegrossamount.
InadditiontothechangeintheschemeoftaxationforPropertyIncome,anewslabofrateshasalso
beensuggestedintheBudgetwherebythetaxincidencehasbeenproposedtobeincreased.
INDIVIDUALS/AOP
Section
Head
Company
GrossAmount
TaxRates
15%onGross
Rental
Section INCOMEFROM
Payment
15&155 PROPERTY
[Remainsthe
same]
Existing
Proposed
Existing
Proposed
Upto
150,000
Upto
200,000
Nil
Nil
Nil
200,000
to
600,000
Nil
5%on
exceeding
of200,000
150,000to
1,000,000
600,000
to
1,000,000
10%on
exceeding
of150,000
20,000plus
10%on
exceeding
of600,000
Nil
1,000,000
to
2,000,000
Nil
60,000plus
15%on
exceeding
of1,000,000
Above
1,000,000
85,000plus
210,000
15%on
Above
plus20%on
exceeding
2,000,000
exceeding
of
of2,000,000
1,000,000
Shekha & Mufti

Ascanbeseenthattherehavebeengivenfive(5)taxslabsinsteadofthree(3)taxslabsoflastyear,
thecomparativetaxadvantagehasalsobeentakenawayaswouldbedemonstratedinthefollowing
table:
INCOMEFROMPROPERTY(S.15)
ComparisonBetweenExisting&Proposed
Slab
1
2
3
4
5
RentalIncome
200,000
600,000
1,000,000
2,000,000
2,500,000
TaxYear2016
(NTR)
5,600
37,500
164,500
244,500
TaxYear2017
(FTR)
20,000
60,000
210,000
310,000
Increase/
(Decrease)
14,400
22,500
45,500
65,500
Lastly,asmentionedabovethetaxationofPropertyIncomeforcompanieshasbeenproposedtobe
remainthesame,acorrespondingamendmenthasdulybeensuggestedwherebythecompanywill
continuegettingtheexpenseagainstitsrentalincome.
Shekha & Mufti

CHANGESININCOMETAXEXEMPTIONS
WITHHOLDINGEXEMPTIONTOMANUFACTURERSONIMPORTS
(Section148)
Industrial undertakings, majorly manufacturers, have been allowed to obtain exemption from
withholdingtaxatimportofrawmaterialsaftermeetingcertaincriteria.Advancetaxpaymentisto
bemadeforwholeoftheyearbasedonthehigherofthetaxliabilitiesofeitherofthelastpreceding
two(02)years.ThroughSRO717dated07thAugust2014theconcernedCommissionerIRwasrequired
toinspectthemanufacturingfacilitysoastoverifyproductionandstockconsumptionforissuanceof
importexemptioncertificate.
The Commissioner IR is now been proposed to conduct the audit of the taxpayer pursuing import
withholdingexemptionwithrespecttotheconsumption,productionandsalesasshowninthelatest
incometaxreturn.Inthisrespect,thetaxpayerwillbetreatedasselectedforauditbytheFBRforthat
year.
This has apparently been proposed in view of the large number of complain from the side of
CommercialImportersthattheygetintopricedisadvantageoverthemanufacturer,intheeventthe
manufacturerchoosetoselltherawmaterialwithoutprocessing.
Itwillbeinterestingtonotethatastowhetherthetaxpayer,ifonce,treatedasselectedforauditby
theboardunderSection214CoftheOrdinance,willitbeselectedagainforauditwhetherthrough
computerballotingormanualselectionbytheCommissionerthemselvesastherelevantlegislationin
thisrespectappearsmissing.
EXEMPTIONTOLARGETRADINGHOUSES
(Clause57ofPartIV)
Companiesoperatinglargetradinghouseshavebeenenjoyingexemptionfrom1%minimumtaxand
withholdingtaxontheirsaleofgoods.Exemptionfromminimumtaxwasearlierlimitedtofirstten
(10) years of business commencement which is now proposed to be levied gradually. Reduced
minimum tax rate of @ 0.5% is now proposed to be enacted till Tax Year 2019. Thereafter the
minimumtaxratewillbeenhancedtostandardrateof1%asapplicablecurrently.
EXEMPTIONTOEXPORTERSOFCOMPUTERSOFTWARE/ITSERVICES
(Clause133ofPartI)
TheaboveexemptionwhichisexpiringonJune30,2016isproposedtobeenhancedtillJune30,2019.
Thisextensioninexemptionisproposedontheconditionthatupto80%oftheexportproceedsisto
bebroughtinPakistaninforeignexchangeremittedfromoutsidePakistanthroughnormalbanking
channelsandonlyupto20%canberetainedoutsideformeetingexpenditures.
Shekha & Mufti

REDUCEDTAXRATESFORSERVICES/CONSTRUCTIONCONTRACTSOUTSIDEPAKISTAN
(Clause3ofPartII)
Services rendered outside Pakistan is currently subject to tax at reduced rate of 1% of the gross
receipts subject to the condition that the receipts are brought into Pakistan in foreign exchange
throughnormalbankingchannel.SamegoestoconstructioncontractsexecutedoutsidePakistan.
It is now proposed to charge 50% of the tax rate as applicable to domestic service providers /
construction contractors. Accordingly, if enacted the following tax rates will become applicable
instead:
Companies
IND./AOP
NatureofPayment
Filer
NonFiler Filer
NonFiler
A) Services
4%
6%
5%
7.5%
TransportServices
1%
PrintMediaforAdvertising
0.5%
6%
0.5%
7.5%
B) ConstructionContracts
3.5%
5%
3.75%
5%
EXEMPTIONSFORGAWADARPORTOPERATIONS
(Clause126toClause126ADofPartI)
IncomefromGawadarPortOperationsasderivedbyChinaOverseasPortsholdingcompanyLimited
(COPHCL)is exempt fromtax foraperiodoftwentythree(23)yearssince6thFebruary2007.This
exemption is proposed to be extended to the income of other group companies of COPHCL from
GawadarPortOperationsaswell.MinimumtaxisalsoproposedtobeexemptforCOPHCLandits
othergroupcompaniesforsimilar23years.DividendincomeofCOPHCLanditsPakistan(subsidiary)
companyisalsoproposedtobeexempt.
Besidestheabove,theIncomeofanytaxpayerwhichsetsupthebusinessintheGawadarFreeZone
Areaisalsoproposedtobeexemptfor23yearsstartingfromJuly1st2016.IncomeofContractorsand
subcontractors of COPHCL and its other group companies from Gawadar port operations is also
proposedtobetaxexemptedfor23yearsfromJuly1st2016onward.
Shekha & Mufti

WITHHOLDINGTAXCHART
TAXYEAR2017
S#
Sections
NatureofPayments
TaxRates
Industrialundertaking
(Manufacturers)
148
149
Imports
(RemainsSame)
Companies(Manufacturer
ornot)
IndividualsandAOPs
(NonManufacturers)
Filer
NonFiler
Filer
NonFiler
Filer
NonFiler
5.5%
8%
5.5%
8%
6%
9%
SALARY
AsperSlabs
Companies/IND./AOP
Filer
3
150
NonFiler
Existing
DIVIDEND
12.5%
151
Filer
INTEREST
152(2A)
152A
Filer
153(1)(a)
153(1)(ab)
IND./AOP
NonFiler
Filer
NonFiler
4%
6%
4.5%
6.5%
Services
8%
12%
10%
15%
Contract
7%
10%
7.5%
10%
Sportsman
10%
ForeignProducedCommercial
20%[FTR]
SUPPLYOFGOODS,SERVICES&
CONTRACTS
7
17.5%
(If>500,000/)
Companies
SupplyOfGoods
Companies
AllGoods
IncaseofSaleofrice,cotton,seed,
edibleoil
Distributorsoffastmoving
consumergoods
Services
IND./AOP
Filer
NonFile
Filer
NonFiler
4%
6%
4.5%
6.5%
1.5%
1.5%
3%
3.5%
12%
8%
TransportServices
8
153(1)(b)
153(1)(c)
ElectronicandPrintMediafor
Advertising
Contracts
Sportsman
20%
NonFiler
10%
NONRESIDENTWITHPE
17.5%
Proposed
10%
15%
2%
Existing
Proposed
1%
1.5%
7%
12%
10%
Propose
d
1%
1.5%
7.5%
Existing
10%
15%
10%
Shekha & Mufti

10
153(2)
Stitching,Dying,Printing,
Embroideryetc.
1%
IND./AOP
Company
11
15/155
INCOMEFROMPROPERTY
GrossAmount
15%onGrossRentalPayment
[RemainsSame]
Proposed
Upto
200,000
Existing
Nil
Proposed
Nil
Nil
200,000
to
600,000
Nil
5%on
exceeding
of200,000
150,000
to
1,000,000
600,000
to
1,000,000
10%on
exceedin
gof
150,000
20k+10%
on
exceeding
of600,000
Nil
1,000,000
to
2,000,000
Nil
60k+15%
on
exceeding
of
1,000,000
Above
2,000,000
85k+
15%on
exceedin
gof
1,000,00
0
210,000+
20%on
exceeding
of
2,000,000
Above
1,000,000
Companies/IND./AOP
PRIZEANDWINNINGS
Existing
12
156
TaxRates
Existing
Upto
150,000
Proposed
PrizeBonds
Filer
15%
15%
Otherprizes,Winning,lottery,
Raffles
NonFiler
20%
20%
Companies/IND./AOP
13
14
15
156A
231A
231AA
PETROLEUMPRODUCTS
AdvancetaxonCashWithdrawal
Advancetaxontransactionsinbank
Filer
NonFiler
12%
15%
Filer
NonFiler
0.3%
0.6%
Filer
NonFiler
0.3%
0.6%
Companies/IND./AOP
BROKERAGEANDCOMMISSION
16
233
AllCommissions
AdvertisingAgentsCommission
LifeInsuranceAgent
Filer
NonFiler
12%
15%
10%
15%
8%
16%
(If<0.5million)
(If<0.5million)
Shekha & Mufti

17
233A
CollectionofTaxbyaStock
ExchangeRegisteredinPakistan
18
233AA
COLLECTIONOFTAXNCCPL
19
231B(1)&
(3)
AdvanceTaxonPurchase,
RegistrationandTransferofMotor
Vehicle
Description
Rate
PurchaseofSharesasperclause(a)of
subsection(1)ofsection233A
0.02%ofPurchaseValue
SaleofSharesasperclause(b)ofsub
section(1)ofsection233A
0.02%ofSaleValue
10%
EngineCapacity
5,000
5,000
15,000
7,500
25,000
12,500
65,00
18,750
100,000
25,000
135,000
37,500
200,000
2500ccto3000cc
50,000
270,000
Above3000cc
62,500
300,000
Filer
NonFiler
800
1,200
1001ccto1199cc
1,500
4,000
1200to1299cc
1,750
5,000
1300ccto1499cc
2,500
7,500
1500ccto1599cc
3,750
12,000
1600ccto1999cc
4,500
15,000
2000cc&above
10,000
30,000
851ccto1000cc
1001to1300cc
1301ccto1600cc
Vehicle
20
231B(2)
1601ccto1800cc
{Taxrateshallbereducedby10%
eachyear
1801ccto2000cc
fromthedateof1stregistration)
2000ccto2500cc
EngineCapacity
Upto1000cc
21
234
AdvancetaxonPrivateMotor
Vehicle
22
235
TaxonElectricity
Consumption[Commercial
Consumer]
NonFiler
NoChange
Upto850cc
AdvanceTaxonPurchaseofPrivate
Motor
Filer
Existing
Proposed
10%
12%
Shekha & Mufti

Existing
23
235A
AdvanceTaxondomesticElectricity
Consumption
Proposed
Exceeding
amountof
75k/
7.5%
Not<
100,000
0%
NoChange
Not<75,000
24
236
AdvancetaxonTelephone,prepaid
cardsandInternetBills
14%
25
236A
AdvancetaxonAuction
10%
236B
AdvancetaxonPurchaseof
domesticAirTickets
(ExceptBaluchistanCoastalBelt,
AzadJammuKashmir,FATAGilgit,
BaltistanandChitral)
5%
236C
AdvancetaxonTransferof
ImmovableProperty
26
Existing
27
Proposed
Filer
NonFiler
Filer
NonFiler
0.5%
1%
1%
2%
28
236D
AdvancetaxonFunctionsand
Gathering
5%
29
236E
Advancetaxonforeignproduced
filmandTV
Nochange
30
236F
AdvancetaxonCableOperators
Nochange
31
236G
AdvanceTaxonDistributors,Dealers
Wholesalers
Filer
NonFiler
Fertilizers
0.7%
1.4%
OtherthanFertilizers
0.1%
0.2%
32
236H
AdvancetaxonSalestoretailers
(Wholesalersintroducedtothis
section)
0.5%
33
236I
AdvancetaxonEducational
Institution
[ExceptNonresidents]
5%
34
236J
Advancetaxoncommissionagents
andarhatis
Nochange
0%
Shekha & Mufti

Existing
35
236K
36
236L
AdvanceonPurchaseofProperty
Upto3
million
Filer
<3million
1%
Proposed
Non
Filer
0
2%
First/ExecutiveClass
16,000/PerPerson
OthersExcludingEconomy
12,000/PerPerson
Economy
FG,PG
ForeignDiplomats,DiplomaticMission
ExemptionCertificate
Filer
38
236P
AdvancetaxontransactioninBank
[Newsectionadded]
39
236Q
PaymenttoResidentPersonfor
righttouseofMachineryand
Equipment
10%(FTR)
40
236R
AdvanceTaxoneducationrelated
expensesremittedabroad
5%
41
236S
Dividendinspecie
44
236U
AdvanceTaxbyPakistanMercantile
ExchangeLimited
AdvanceTaxonInsurancePremium
236V
AdvanceTaxonExtractionof
Minerals
236W
AdvanceTaxfromProvincialSales
TaxRegisteredPerson
45
4%
Companies/IND./AOP
236O
43
2%
AdvanceTaxonInternationalAir
Ticket
37
236T
NonFiler
NoChange
Advancetaxunderthischaptershall
notbecollected
42
Filer
NoWHT
NonFiler
0.6%
(if>50k)
Filer
NonFiler
12.5%
17.5%
Existing
Proposed
Sale&purchaseoffuture
commodityContracts
SaleandPurchaseoffutureCommodity
Contracts
0.05%
Deleted
TypesofPremium
Rate
GeneralInsurancePremium
4%
LifeInsurancePremiumifexceeding
ofRs.0.2Millionperannum
1%
Others
0%
Filer
NonFiler
0%
5%
Filer
NonFiler
0%
3%oftheTurnover
Shekha & Mufti

OTHERKEYCHANGES
SuperTaxonCurrentYearProfit
(Section4B)
ItmayberecalledthatthelevyofSuperTaxwasintroducedinthelastyearofTaxYear2015andwas
statedtobemeantstrictlyforthatTaxYearalone.However,owingtothesamecircumstancesfactors
promptedbyhigherrevenuecollection,theFBRhasmanagedtoreintroducethesameforthisyearas
well.CompaniesareproposedtopaysupertaxfortheTaxYear2016aswellwhilefilingthereturnof
incomeforTaxYear2016.Thisimpliesthatdespitetheloweringcorporatetaxrateby1%thisyearto
31%,thislevyof3%hasvirtuallysnatchedawaythesocalledlowertaxation.
Itispertinenttorecapthatsupertaxispayable@ 4%bybankingcompanieswithoutanyincome
ceilingand@3%bynonbankingcompanieswithincomemorethanRupees500million.Theother
detailsofthemechanismofthislevyhavealsoremainedthesame.Incomeshallbethesumofthe
following:
Profitondebts
DividendIncome
CapitalGains
Brokerage&CommissionIncome
Taxableincomeexcludingabove
Imputableincome
Incomeunder4th,5th,7thand8thSchedule
AsifthereintroductionoftheSupertaxwasnotenoughtoripofftheyearendprofit,theBillfurther
seekstodeprivetheCompanyofitslegalentitlementofclaimofitsdepreciationandbusinesslosses
whenitcomestopaytheSuperTax.InthenotesonclausesofFinancebill2016itwasgiventhatthis
amendment is proposed to exclude the brought forward business losses and (unabsorbed)
depreciationlosses(ofearlieryears).Therebyitisunderstandablethatdepreciationallowanceforthe
yearalongwiththebusinesslossfortheyearstillwillbeconsideredanddeductedwhilecalculating
incomefromallheadofincomeforthepurposesofcomputingsupertax.Thelegislationneedstobe
redraftedinlinewiththenotedontheclauses.
ProrationofExpensesandAllowancesaswell
(Section67)
Common expenditures are to be apportioned among various heads of income including income
subjecttotaxunderNormaltaxregime,FinalTaxRegime,Fixedtaxregimesetc.Theapportionment
istobemadeonanyreasonablebasistakingintoaccountofrelativesizeandnatureoftheactivities
towhichtheamountrelates.
Bill now proposes to apportion deductions and allowances as well besides apportionment of
expenditures. Accordingly, the following major deductions and allowances will also have to be
apportionedintovariousregimesof incomeinsteadofbeingdeducteddirectlyagainstthenormal
incomeONLY:
Shekha & Mufti

Deductions
Depreciationdeductionsincludinginitialdepreciation
Amortizationdeductions
Baddebtsdeductions
Deductibleallowances
AllowanceofZakat
AllowanceforWWF
AllowanceforWPPF,etc.
Onceapproved allcommondeductionsand allowancesbesides expenditureswillalsobeallocable

againstvariousstreamsofincome.
ForeignTrustisalsoaTrustundertheOrdinance
(Section80)
Earlier the Finance Act 2013 had extended the Scope of Company covering all types of trusts
establishedorconstituted.ThelegislatornowproposestopullintheForeignTrustunderthedefinition
of trusts falling under the tax status of a company. The amendment seems to be introduced in
consonancewiththeeffortsofthegovernmenttobringinInternationalNGOs(INGOs)inthetaxnet.
Avoidanceofdoubletaxation
(Section107)
FinanceAct2015hasalreadygivenvastpowerstoFederalGovernmenttoenterintoanagreement,
bilateral or multilateral with foreign governments or tax jurisdictions for avoidance of tax, fiscal
evasion and exchange of information with respect to the taxes on income imposed under the
Ordinance and under corresponding laws in other countries. It is pertinent to mention that the
provisionsoftheabovesaidagreementshaveoverridingeffectontaxprovisionsundertheOrdinance.
Nowtheeditorial/technicalcorrectionisproposedwhereintheagreementsmaynotbelimitedto
foreigngovernmentsortaxjurisdictionsofothercountriesonly.
ThissectionperhapsappearstoensurethecomplianceoftheFATCA(ForeignAccountTaxCompliance
Act)legislationofUSAtaxlaws.
Minimumtaxtobepaidanyways
(Section113)
AmajorchangehasbeenproposedinchargingminimumtaxontheturnoveroftheCompaniesthat
haveevenbeenincurringgrosslossattheoperationallevel,willnownotbeabletoavoidpaymentof
1%minimumtax.
TheCompanieshaveagainbeendeprivedfromtheirgenuinetaxexemptionfromminimumtaxand
nowwillrequiredtopayforitdespiteoftheirlossstatus.
TheFinanceBillalsoproposessomemajorchangesintheapplicabilityandchargeabilityofMinimum
TaxincaseofIndividualandofAssociationofPersonbyreducingtheminimumthresholdofAnnual
turnoverfromrupees50Millionto10MillionfromTaxYear2017andonwards.
Shekha & Mufti

TheproposedamendmentifitbecomesapartofFinanceAct2016shallpressurizethelocaltaxpayer
toresistanybusinessexpansionoractivityinPakistaninviewofMinimumTaxationandmaybecome
aconcernforaforeigninvestoraswell.
Automaticrevisionoftaxreturnin60days
(Section114)
The provision to revise a return of Income for a tax year duly accompanied with the approval of
CommissionerInlandRevenuewasinsertedbyFinanceAct,2010.Howevertheproposedamendment
maintainstobindtheCommissionertoapproveorrejecttherevisionapplicationwithin60daysfailing
whichitwouldbedeemedtohavebeenapproved.
Ithasalsobeenproposedthatwheretherevisionapplicationresultsinhigherincomeorloweringof
losses,theapplicationwillautomaticallybeacceptedwithoutCommissionerApproval.
Theaboveamendmentseemstoperhaps,lowerthepracticalburdenandtheadministrativehassleof
theapplicanthowever,theduechangeswillalsohavetobemadeintheIRISSoftwareaswellwithout
whichtheaforesaidproposalwillremainmerelyapartofstatutewithoutanypracticalsignificance.
Deductionsnotallowed
(Section21)
Asthesectiontitleexhibitsthatthelegislatureimposesabinding(condition)toclaimanexpensewhile
computingthetaxableincomeundertheOrdinance(theOrdinance,2001)i.e.ifthetaxpayerfailsto
withholdtaxfromtheprescribedlistasenumeratedunderSection21(c)oftheOrdinancetherelated
expensesorexpenditurewouldnotbetakenasagenuinetaxexpense.
The Bill now proposes to extend the scope of inadmissibility to almost all the major withholding
provisionsundertheOrdinance.Notablythefollowingshallfallpreytotheproposedamendment;
PurchaseofGood;RawmaterialorFinishedGoods
PaymentunderContract
PrizesandIncentives
PhoneBillandetc.
Theproposedamendmentmaybeviewedasastrictmeasuretowardensuringcompliancebythetax
payerfailingtowhichithasbeenthreatenedtopayheavilyforthenondeduction.Atthesametime
theadministrativehassleandthepainsenduredbythetaxpayerforthewithholdingfunctionhasnot
beenconsideredtoberemuneratedorrewardedequitably.Itissimplyunfortunatethatwehavethe
conceptofpenalizingforoffencebutthereisnoconceptforrewardingthecompliant.
Ithasfurtherbeenprovidedthatdisallowanceofthepurchasesexpenseshallbemadeinthecase
ofnonwithholdingbutwillbelimitedto20%ofpurchases.Itisapprehendedthatthefiledofficers
willrathertendtoadoptthe20%asabenchmarkfordisallowanceunlessproperlyguidedthrough
anycircular.
Shekha & Mufti

IthasalsobeenproposedthatincaseoftheorderofMonitoringofWithholdingtaxesispassedand
the recovery of short deduction is made from the taxpayer, the disallowance cannot be made
thereafter.
LastlytheallowabilityofSalesPromotion,AdvertisementandPublicityexpenseofPharmaCompanies
hasbeenproposedtoberestricteduptothemaximumof5%oftheAnnualturnover.
TaxDepreciationinExemptionPeriod
(Section22)
TheBillproposesanexplanatorynotewithrespecttoclaimandadmissibilityofDepreciationwhere
income of a person is exempted from tax. It has been provided that in case of Plant, Machinery,
buildingandfurniture,normaltaxdepreciationandinitialtaxdepreciationbothshallbedeemedto
have been allowed in respect of the tax year and after the expiration of tax exempted period the
WrittenDownValuewillbeworkedoutaftertakingintoeffectofthedepreciationdeemedtohave
beenallowed.
ExcessTaxdeductedasNonFilerunderFTR
(Section169)
The Bill proposes that any excess tax deducted on account of Nonfiler shall be adjustable and
refundabletothetaxpayeroncehefilesthetaxreturnundertheOrdinance.
AdvertisementIncomeofElectronic&PrintMedia
(Section153)
IthasbeenproposedthatincometaxwithholdingfromgrosspaymenttoElectronicandPrintMedia
onaccountofAdvertisementshouldbeincreasedfrom1%to1.5%andthesameisalsoproposedto
becoveredundertheFinalTaxRegime.
TherateofdeductionoftaxincaseofNonFilerhavebeenproposedtoremainattherateof12%and
15%orcompaniesandnoncompanies,respectively.
Shekha & Mufti

SALESTAXACT1990
COTTAGEINDUSTRY
Section2(5AB)
TheFinanceBillproposesenhancementinmonetaryexemptionthresholdforcottageindustrywith
respecttoturnoverfromRs.10millionfromRs.05million.
Thischangeappearstobeapositivereliefbutincompletebecausethresholdforutilitybillshasnot
beenenhanced.Thiswouldhavebeeneffective,ifbothlimitswereenhancedinequalproportion.
DUEDATEFORFILINGOFRETURN&ANNEXURES
Section2(9)
ThisSectiondealswithduedateoffurnishingofreturnunderSection26and26AAofSalesTaxAct
1990(STAct).AmendmentisproposedtoexcludeSection26AAfromthedefinitionofduedateasit
hadbecomeredundantafteromissionofretailtaxreturnrequiredtobefiledunderSection26AAof
theSTAct.
Amodificationisalsoproposedinlinewiththenewmodelofefilingofsalestaxreturn.Accordingto
suchproposition,differentduedateswouldbespecifiedforfurnishingofdifferentpartsorannexure
of the return. This will pose serious challenge to the return filer to make compliance of law in an
appropriateandtimelymanner.Thenewmodelofefilingofsalestaxreturnislikelytobeinfieldon
01July2016.
INPUTTAXONSERVICES
Section2(14)
Section2(14)dealswiththedefinitionofInputTaxwhichincludesprovincialsalestaxonservices
leviedunderallfourprovinciallegislationsandIslamabadCapitalTerritory(ICT).
ThroughtheBill,itisproposedtoomitthetermprovincialsalestaxfromthedefinitionofinputtax
whichwouldrestricttheinputtaxadjustmentofsalestaxleviedunderallfourprovinciallegislations
andICT.Surprisingly,theBillalsoproposestodisallowinputtaxadjustmentofICTsalestaxonservice
whichisbeingcollectedbyFBRitself.Wefeeltheproposedamendmentwouldenhanceriftbetween
theprovincialandfederaltaxauthoritieswhichwillagainopendoorsoflitigationbeforetheSuperior
Courts.
TheinputadjustmentofsalestaxonservicesbyFBRregisteredpersonshaveremainedamatterof
dispute since the establishment of Provincial tax authorities. Through the Finance Act 2013, the
Federal Government, in a move to disallow the input tax adjustment of provincial sales tax on
services,hadchangedthedefinitionofthetermprovincialsalestax.
Beingaggrievedwiththisprovision,seriesofpetitionwerefiledinHighCourts.TheLahoreHighCourt,
in its judgment dated 20 March 2014, overturned the amendment and allowed the input tax
adjustmentonservices.
Shekha & Mufti

Lateron,MemorandumofUnderstandings(MOUs)weresignedbyFBRwithSindhRevenueBoard
(SRB)andPunjabRevenueAuthority(PRA)oncrossadjustmentofsalestaxongoodsandservices.
SuchMOUslaiddownmechanismforregularreconciliationofinputtaxbythepartiesoneachother
behalf.FBRissuednotificationSRO212dated26March2014andallowedinputtaxadjustmentof
salestaxonservices.Theaboveadjustmentwasallowedwithretrospecteffectfrom1stJuly2013.
The financial press suggest that despite the above MOUs, the reconciliation of interprovincial /
federal input tax adjustment did not taken place effectively. Therefore, the proposed amendment
appearstobeanoutcomeofsuchconflicts.
TIMEANDMANNEROFPAYMENT
Section6(2)
TheBillproposesanamendmentinSection6(2)inlinewithnewmodelofefilingofsalestaxreturn
whichwillbeeffectivefrom01July2016.Thenewmodelmayrequirethefollowingsubmissionson
respectivedates:
Submissions
Due date (following
monthoftaxperiod)
SalesAnnexure(AnnexC)
10th
ProvisionalReturn
15th
FinalReturn
18th
ENTITLEMENTOFINPUTTAXADJUSTMENT
Section7&8
Inlinewiththeproposednewmodelofsalestaxreturnfiling,aprovisohasbeeninsertedinSection
7(2)(i)ofSTAct.Nowtheregisteredpersonwillonlybeentitledtodeductinputtaxonpurchaseof
goodsagainstsalestaxinvoice,ifthesupplierhasalreadydeclaredsuchinvoiceinhisreturnorhas
alreadypaidamountoftax,asindicatedtherein.
Weunderstandthisisanotherattemptforcrossmatchingtaxreturnsofbuyerandsuppliers.Inthe
past,anidenticalmeasurewasadoptedbythelawmakersintheshapeofSection8(1)(ca)ofSTAct,
whichwasquashedbyLahoreHighCourtonthegroundsthatbuyercannotbemadesubjecttopenal
actiononthewrongdoingsofhissupplier.ApparentlytocountersuchverdictofLahoreHighCourt,
thisnewprovisionoflawhasbeeninsertedinthelawwithaslightlynewwordingsbutonidentical
footingsasthatofSection8(1)(ca).
Weunderstandthefollowingpracticalproblemscouldemanateiftheproposedamendmentisputin
operation:
Thebuyermustensuredeclarationofinvoiceissuedbyitssuppliersbeforeduedatei.e.10th.Such
anassuranceisthekeyofthenewmodel.
Ifthesupplierhimselfoptsfordelayedfilingofhistaxreturnsbypayingnominalpenaltiesforlate
payment of sales tax and efiling of return. In this way, the buyer will not be able to claim
associatedinputtaxinrelevanttaxperiod.
Shekha & Mufti

Thelawdoesnotspecifythemechanismhowinputtaxwouldbecomeadmissibleincasewhere
thesuppliereitherinadvertentlyfailtodeclaresalestaxinvoiceinhisreturnornotpayduesales
taxwithinthespecifieddate.
New efiling system will also not help tax authority to identify those fraudulent suppliers who
recoversalestaxfrombuyerbutdonotdepositintoGovernmentTreasury.Insuchcase,thebuyer
willalsonotbeabletoreportsuchtransactionwhichwillgounnoticed/undetected.
Itis,therefore,proposedthatnecessarychangesmaybemadeinthemechanismtohelpthegenuine
buyer.
RECOVERYOFSALESTAXWITHHOLDING
Section11(4A)
TheFinanceBillhasproposedtoinsertnewsubsectionforempoweringOfficerofInlandRevenueto
issuenoticeanddetermineamountindefault,incasewherethewithholdingagentsfailtowithhold
salestaxfrompaymenttosuppliersordepositsuchwithheldamountofsalestaxasrequiredunder
SalesTaxSpecialProcedure(Withholding)Rules,2007.
Weunderstandtheexpressionamountindefaultsuggeststhattheassessingofficermayonlyrecover
amountofsalestaxnotdepositedbytherespectivesupplier.
Presently,thereisnoprovisioninthelawwhichallowstaxauthoritiestorecoversalestaxwithholding
from withholding agents. We understand that this amendment is proposed in consequences of
judgment of Appellant Tribunal Inland Revenue reported as 112 TAX 139 (2015), Peshawar Bench
wherebyitwasheldthatSection11(2)isnotapplicableincaseofnondeductionorshortdeduction
ofsalestax.
Weunderstandthisinsertionissubstantiveinnatureandhasprospectiveeffect.Hence,allorders
issuedandadjudicationproceedinginitiatedunderSection11(2)wouldneedtobevacated.
Onadifferentbutpertinentnote,weunderstandthattheobjectiveofintroducingwithholdingtax
ruleswascrossmatchingofdeclarationofbuyersandsupplierstosafeguardtherevenuecollection.
Suchwithholdingwasintroducedduringthetimewhenmanualtaxreturnswerefiledbybusinesses.
Sincenewautomatedefilingisbeingintroduced,therefore,weareoftheviewthatwithholdingtax
rulesshouldbewithdrawntotheextentoftransactionsmadebetweenregisteredpersons.However,
transaction with unregistered persons, autonomous bodies and government / semi government
departmentsmaycontinuetobesubjecttoSTWHRules.
EXEMPTION
Section13
Section13dealsinexemptionofsalestaxongoodswhichisgrantedbywayofSixthScheduletoST
ActorthroughnotificationissuedbyFederalGovernmentuponapprovalofEconomicCoordination
CommitteeofCabinet[ECC]underspecificcircumstances.ThroughproposedinsertioninSection13,
exemption of sales tax can be granted on the recommendations of International or Foreign
Governmentownedfinancialinstitutions.
Shekha & Mufti

RETURN
Section26
TheFinanceBillhasproposedtodeletesubsection2fromSection26ofSTActforthereasonthat
requirementforfilingseparatesalestaxisnotmoreapplicable,sinceselectionofmultipletaxrate
facilityisnowavailableinereturns.
DIRECTORATEOFGENERALOFINPUTOUTPUTCOEFFICIENTORGANIZATION
Section30DDD
IOCODirectoratedealsindeterminationofinputoutputandwastageratiooflocallymanufactured
goodsunderCustomsAct1969.TheFinanceBillhasproposedinsertionofidenticalprovisioninST
Act.
OFFENCES&PENALTIES
Section33(19)
Currently, Clause 19 of Section 33 deals in imposition of penalty in case of contravention to any

provisionofSTAct.ThroughFinanceBill,amendmenthasbeenmadeinsaidclauseandofficerofFBR
isfurtherempoweredtoimposepenaltyforviolationofanyrules.
SALEOFTAXABLEACTIVITYORTRANSFEROFOWNERSHIP
Section49
Buyandsaleofbusinesseitherwhollyorpartiallybetweenregisteredpartiesiszerorated,provided
thebusinesscontinuesassuchbythenewbuyer.
ThelanguagecouchedinSection49(2)wasambiguous.Toaddresstheanomaly,theFBRhadissueda
rulingdated15January2002andclarifiedapplicationofzeroratingincaseofsaleofbusinessbetween
registeredpersons.
Theaboverulinghasnowmadepartoflawtoremoveconfusions.Anewconditionregardingissuance
ofzeroratedinvoicebythesellerhasalsobeenadded.
DISCLOSUREOFINFORMATIONBYPUBLICSERVANT
Section56(B)
AnewSubSection2hasbeeninsertedwherebyconfidentialinformationbythepublicservantcan
onlybeprovidedundertheparametersofSection216oftheIncomeTaxOrdinance.Thesharingof
confidential information under Section 56B will have an overriding effect to the Freedom of
InformationOrdinance,2001.
TheconfidentialinformationisdefinedtobetheinformationobtainedundertheSTActorthrough
anybilateralormultilateralagreementswithGovernmentofforeigncountries.
Shekha & Mufti

THIRDSCHEDULE
Section3(2)(a)
Mineral and bottledwater isproposedtobeincluded intheThirdSchedule.Presently,watersold

underbrandandtrademarksissubjecttosalestax@17%onvalueofsupply.
Weunderstandenhancementofincidenceoftaxonwaterwillincreaseinflation.
FIFTHSCHEDULE
Section4
TheFifthSchedulecontainsthelistofzeroratedgoods.TheFinanceBillhasproposedtoabolishzero
ratingonfollowinggoods:
Descriptionofgoods
PCTHeadings
Colorsinsets
3213.1000
Writing,drawingandmarkinginks
3215.9010and3215.9090
Erasers
4016.9210and4016.9290
Exercisebooks
4820.2000
Pencilssharpeners
8214.1000
Geometryboxes
9017.2000
Pens,ballpens,markersandporoustippedpend
96.08
Pencilsincludingcolorpencils
96.09
Milk
04.01
Fatfilledmilk
1901.9090
SIXTHSCHEDULE
Section13
TableI(Import&Supply)
a.
In line with recent drive of curtailing SRO culture, the Bill proposes to transform exemption
notificationSRO115(I)/2008dated6thFebruary2008inSerialNo.100AofSixthSchedule.
Through the aforesaid notification, conditional exemption is allowed on import or supply of

materialsandequipmentsforconstructionandoperationofGawadarPortanddevelopmentof
FreeZoneforGawadarPortandShipBunkerOilsboughtandsoldtotheshipscallingon/visiting
GawadarPort.
Thenotificationallowedsuchconditionalexemptiontooperatingcompanieshavingconcession
agreement with the Gawadar Port Authority. The Bill proposes to notify the name of China
Overseas Ports Holding Company Limited (COPHCL) and its operating companies namely (i)
China Overseas Ports Holding Company Pakistan (Private) Limited (ii) Gawadar International
TerminalLimited,(iii)GawadarMarinServicesLimitedand(iv)GawadarFreeZoneCompany
Limitedforthepurposeofthisexemptionandalsoextendedexemptiontotheircontractorsand
subcontractorsaswellwhichholdtheConcessionAgreement.
Shekha & Mufti

b.
TheBillproposessalestaxexemptiononfollowingcategories/items:
Exemption
Details
TableI
Supplies
by
the SuppliesmadebythebusinessestobeestablishedintheGawadar
businesses
to
be FreeZoneisproposedtobeexemptfromsalestaxforaperiodof
established in the twentythreeyearswithintheGawadarFreeZone,subjecttothe
GawadarFreeZone
conditionthatthesuppliesmadeoutsidetheGawadarFreeZone
andintotheterritoryofPakistanshallbechargedtosalestaxat
applicablerates.
Premixes for growth This exemption is subjected to conditions imposed for
stunting
importationundertheCustomsAct,1969.
Exemption on Laptops Laptop computers, notebooks whether or not incorporating
computers
and multimedia kit [PCT Code 8471.3010], Personal computers [PCT
notebooks
Code8471.3020]
Exemption from sales Exemptionofsalestaxon importorsupplyofpesticides&their
tax on import or supply activeingredientshasbeenproposed.
of pesticides & their
activeingredients
Inthelastpastfewyears,pesticides[infinishedform]andtheir
active ingredients have passed through various phases with
respecttolevyorexemptionofsalestax.Exemptionofsalestax
onpesticides[infinishedform]andtheiractiveingredientswas
available in Year 2011. Later on, pesticides and their active
ingredientswerebroughtundertaxatstandardrateofsalestax.
However, rate of sales tax on these items was reduced from
standard rate to 7% through Finance Act 2015 with no right of
adjustment except sales tax paid on pesticides and their active
ingredients.
TableII
DumpTrucks
ExemptiononDumpTruckshasbeenproposed.
EIGHTSCHEDULE
S.No. Description
15
Old Tax New Tax

Rate
Rate
Ingredientsofpoultryfeed,cattlefeed,exceptsoyabeanmeal
5%
10%
ofPCTheading2304.0000andoilcakeofcottonseedfalling
underPCTheading2306.1000
TaxationofSugar
TranspositionfromFederalExciseAct,2005toSalesTaxAct,1990
TheFinanceBillproposestotransposeWhiteCrystallineSugarfromexcisedutytosalestax.Through
the Finance Bill exemption available in Serial No. 111 of TableI of the Sixth Schedule is to be
withdrawnwithcorrespondinginclusioninSerialNo.32oftheEightSchedule@8%.Furthertaxat
2%wouldalsobeapplicableonsupplytounregisteredperson.
Shekha & Mufti

PriortoFinanceAct2011,whitecrystallinesugarwassubjecttosalestaxat8%.
ThisappearstobeasteptakenbytheGovernmenttoidentifythesubsequentsupplychain(i.e.sales
madebythedistributors,wholesalersandretailer)andtocovertherevenueleakage.Intheexcise
regime,postmanufacturesupplychainremainedoutofthepurviewofFederalExciseAct,2005.
Inouropinion,thebenefitofreducedrateofduty@0.5%onlocalsupplyofsugaragainsttheexport
quotaasgrantedthroughS.R.O77(I)/2013dated07February2013willceasetoexistaftertheabove
amendments.
ReducedrateofsalestaxonUrea
The Finance Bill proposes inclusion of Urea (PCT Code 3102.1000) in the Eight Schedule at 5%.
Previously,UreawasclassifiedintheThirdSchedule.Thisisastepforpromotionoftheagriculture
industryandFederalGovernmentsinitiativetooffermaximumbenefitstothissector.However,this
step is not in harmony with that on pesticides on which the entire sales tax is proposed to be
withdrawn.
NINTHSCHEDULE
TheBillproposedtoincreasethefixedamountofsalestaxonfollowingcategoriesofmobilephones:
OldRate
NewRate
MediumPricedCellularMobilePhonesorSatellitePhones
Rs.500
Rs.1,000
Oneortwocamerasbetween2.1to10megapixels
Screensizebetween2.6inchesand4.2inches
Microprocessor:lessthan2GHZ
SmartCellularMobilePhonesorSatellitePhones
Rs.1,000
Rs.1,500
Oneortwocameras:10megapixelsandabove
TouchScreen:size4.2inchesandabove
4GBorhigherBasicMemory
Operating system of the type IOS, Android V2.3, Android
Gingerbreadorhigher,Windows8orBlackberryRIM
Microprocessor:2GHZorhigher,dualcoreorquadcore
Shekha & Mufti

OptionforRetailers
Notificationtobeissued
SalientFeaturesDocumentsissuedbyFBRsuggeststhatanoptionhasbeengrantedtoTier1retailers
forpaymentof2%turnovertaxwithoutinputtaxadjustment.
Presently, such retailers are required to pay sales tax at standard rate i.e. 17% with input tax
adjustment.Suchanoptionappearsasareliefforthoseretailerswhoseeffectiverateofsalestax
afterinputtaxadjustmentismorethan2%.However,itappearsthatretailersdealingintextilesand
leatherwillcontinuetopaysalestaxasprescribedunderSRO1125.
BeforeFinanceAct2014,registeredretailersincludingjewelers,whosupplygoodstofinalconsumers
from their outlets, were required to sales tax on their quarterly turnover. In Year 2014, a 2 Tier
mechanismwasannouncedwherebyTier1retailerwereaskedtoregisterthemselvesandpay17%
sales tax. However, it looks that such regime did not succeed. Resultantly, turnover tax has been
revived.
ZeroratingofFiveExportOrientedSectors
SRO1125(I)/2011(tobeamended)
ThroughFederalBudget20162017,theFederalGovernmenthasproposedtoreinstatethezerorated
regimeforfiveexportorientedsectorsi.e.textile,leather,sportsgoods,surgicalgoodsandcarpet.
Presently,fiveexportorientedsectorsaresubjecttomultipletaxratesi.e.,19%,17%,5%,4%and3%
underSRO1125(I)/2011dated31December2011.Aftertheproposedamendment,zeroratedfacility
will be available on purchase of raw material, intermediate goods and purchase of energy i.e.
electricity,gas,furnaceoilandcoalbyfivesectors.
5%salestaxwouldcontinuetobeapplicableonretailsaleoflocallymanufacturedfinishedgoodsof
fivesectors.
2ndHand&WornClothing
TheFederalGovernmenthasproposedtoexemptsupplyofsecondhandandwornclothingfromlevy
offurthertax.Sincesupplyoftaxablegoodstounregisteredendconsumerisnotsubjecttofurther
tax in terms of SRO 648(I)/2013 dated 09 July 2013, we understand such an exemption would be
availabletounregisteredtradersengagedinpurchaseofsecondhandandwormclothing.
SteelSector
Salestaxonsteelsectorisproposedtoberevisedupwards.
Salestaxonsteelsector,includingshipbreakingsector,iscollectedonfixedrateandadvolerambasis.
Salestaxfromsteelmeltersandrerollersiscollectedonthebasisofelectricityconsumptionwhereas
shipbreakersarepayingsalestaxonthebasisofLDTofshipsimportedforbreaking.
Shekha & Mufti

MarbleCuttingandPolishing
FederalGovernmentproposestolevyfixedsalestax@Rs.1.25perKWHonelectricityconsumedin
additiontosalestax@17%andextratax@5%onpurchaseofelectricity.
ISLAMABADCAPITALTERRITORY(TAXONSERVICES)ORDINANCE,2001
Subsection2A&2B
Forpastfewyears,questionregardingapplicationofvariousprovisionsofSTActonIslamabadSales
Taxhasbeenamatterofdebate.
NecessaryamendmentshavebeenproposedinsaidOrdinancewhichenvisagethatfollowingpowers
fromSTActwillalsobeexercisedtoservicesrenderedorprovidedunderthisOrdinance:
Salestaxathigherorlowerrate
Salestaxwithholding
Zeroratingofsalestax
TaxExemption
The Bill also proposes to exempt regulatory and licensing services rendered or provided by an
organization,establishedunderaFederalstatutefromtheambitoftheOrdinance.Accordingly,such
servicesofICAP,ICMAP,etc.willnotbesubjecttoservicetaxinIslamabad.
Shekha & Mufti

FEDERALEXCISEACT,2005
DueDate
Section2(8a)
Anamendmenthasbeenproposedinthedefinitionofduedatetoharmonizeduedateofsalestax
andfederalexcisereturn.FBRisplanningtointroduceanewmechanismofefilingofsalestaxcum
federalexcisereturneffectivefrom01July2016.Undersuchmechanism,taxpayershallbeliableto
efileitsmonthlysalestaxreturnorannexurethereofonthefollowingdates:
Submissions
Due date (following
monthoftaxperiod)
SalesAnnexure(AnnexC)
10th
ProvisionalReturn
15th
FinalReturn
18th
FilingofReturn&PaymentofDutyetc.
Section4(2)&(3)
TheBillproposesanamendmentintheSection4(2)oftheFederalExciseAct.2005[FEDAct].Suchan
amendment provides legal backing to the new monthly sales tax cumfederal excise return filing
systembeingimplementedbytheFBRwitheffectfrom1stJuly2016.
Further,subsection3ofSection4oftheFEDActhasalsobeenproposedtobeomittedsincesuch
provisionhasbecomeredundantincurrentmechanismofreturnfiling.
AdjustmentofDuties&Taxes
Section6(2A)
TheFinanceBillhasproposedanewsubsection(2A)inSection6oftheFEDAct.Now,theregistered
personwillonlybeentitledtodeductinputtaxonpurchaseofgoodsagainstsalestaxinvoiceifthe
supplierhasalreadydeclaredsuchaninvoiceinhisreturnby10thoffollowingmonthorhasalready
paidamountoftaxdueby15thofthefollowingmonth,asindicatedinitsreturn.
Thisamendmenthasbeenmadeinlinewithproposednewmodelofsalestaxreturnfilingwhichis
plannedtobeimplementedinJuly2016.
Exemptions
Section16(2)
The Bill seeks an amendment in Section 16(2) of the FED Act whereby criteria for powers of
exemptions or reduction / concession of excise duties has been enhanced. Now amendments,
exemptions/concessionsonexcisablegoodsmaybeallowedinthematterrelatingtointernational
financialinstitutionsorforeigngovernmentownedfinancialinstitutions.
Shekha & Mufti

Offence,Penalties,Fines&AlliedMatters
Section19(13)
Anamendmenthasbeenproposedtoinsertanewsubsection13inSection19oftheFEDAct.This
appearstobeclarificatoryinnaturewherebypenaltiesmaybeimposedbythetaxauthoritiesinsuch
caseswherepenaltyagainstanoffencehasnotbeenprescribed.
DisclosureofInformationbyaPublicServant
Section47B
AnewSubSection2hasbeeninsertedwherebyconfidentialinformationbythepublicservantcan
onlybeprovidedundertheparametersofSection216oftheIncomeTaxOrdinance.Thesharingof
confidential information under Section 56B will have an overriding effect to the Freedom of
InformationOrdinance2001.
TheconfidentialinformationisdefinedtobetheinformationobtainedundertheSTActorthrough
anybilateralormultilateralagreementswithGovernmentofforeigncountries.
FIRSTSCHEDULEEXCISABLEGOODSANDSERVICES
AeratedWaters
SerialNo(s)4,5,and6ofTableI
TherateofFEDhasbeenenhancedfrom10.5%to11.5%ofretailpricewitheffectfromJuly1,2016.
LocallyProducedCigarettes
SerialNo(s)9and10ofTableI
Likewise, Federal Excise Duty on the locally produced cigarettes is proposed to be enhanced with
effectfromJuly1,2016inthefollowingscenario:
Serial
Duration
PCTCode ProposedRate(Rupees)
No
9a
Fortheperiodfrom01072016to30112016,locally
3,436 per thousand
producedcigarettesiftheironpackprintedretailprice
24.02
cigarettes
exceedsfourthousandrupeesperthousandcigarettes
9b
For the period from 01122016 onwards, locally
3,705 per thousand
24.02
exceeds four thousand four hundred rupees per
cigarettes
thousandcigarettes
Fortheperiodfrom01072016to30112016,locally
10a
1,534 per thousand
24.02
does not exceed four thousand rupees per thousand
cigarettes
cigarettes
For the period from 01122016 onwards, locally
1,649 per thousand
24.02
does not exceed four thousand four hundred rupees
cigarettes
perthousandcigarettes
Shekha & Mufti

Cement
SerialNo13ofTableI
The Bill proposes to change the criteria for collection of FED on cements, classified under Tariff
Heading 25.23. Currently FED on cement is chargeable @ 5% of the retail price. It is proposed to
changethecurrentregimeofFEDwithfixedratebasisi.e.,Rs.1/Kg.
Weunderstanditisarevenuemeasurewhichwillincreasetheprices.Retailcementbagsaresold
normallyin50Kgpacks.Underproposedregime,FEDwillbecollectedRs.50perbag(1/Kg).However,
aspercurrentregime,retailpackof50Kgofcementissupplied@Rs.560,while5%ofRs.560comes
toRs.28.Inthisway,FED@Rs.22perbag(50kg)wouldbecollectedbyFBR.
ExemptionofExcisableServices
TableIIofFirstSchedule
TheBillseekstoexemptdutiableservicesappearingatserialnumbers1,2,2A,5,8,11and13ofTable
II of 1stScheduleto theFED Act onwhich provincial sales tax is already levied or collectedby the
respectiveprovincialtaxauthoritieslikeSRB,PRA,KPKandBRA.
We understand it is a beneficial amendment and was being awaited since long time. After 18th
amendmentmadeintheConstitutionofPakistan,provincialauthoritieswereempoweredtocollect
salestaxonservices.AMOUwassignedbetweenFederalandProvincialauthoritieswherebyitwas
decidedthatFEDwouldnotbechargedorcollectedonsuchservicesonwhichprovincialsalestaxwas
leviedbytherespectiveProvinces.Unfortunately,thedesiredamendmentcouldnotbebroughtinto
theFEDAct.Consequently,noticeswerebeingissuedtothetaxpayersbythefederaltaxauthorities
inrespectofnonpaymentofFEDwiththetaxpayersfilinglegalsuits/petitionsbeforesuperiorcourts.
TheserviceswhichhavebeenexemptedfromFEDareasunder:
Serial DescriptionofServices
TariffHeading
No
1
AdvertisementonclosedcircuitT.V.
9802.3000
2
AdvertisementsoncableT.V.network
9820.5000
2A
Advertisements in newspapers and periodicals (excluding classified 9802.4000and
advertisements),andonhoardingboards,polesignsandsignboards
9802.9000
5
ShippingAgent
9805.1000
8
Services provided or rendered by banking companies, insurance
98.13
companies, cooperative financing societies, modarabas, musharikas,
leasing companies, foreign exchange dealers, nonbanking financial
institutions,AssetsManagementcompaniesandotherpersonsdealing
inanysuchservices.
11
FranchiseServices
9823.0000
13
Servicesprovidedorrenderingbystockbrokers
9819.1000
Shekha & Mufti

Interestingly,onlyfewdaysback,theSindhHighCourt(SHC)hasheldFEDinapplicableonservices
renderedinSindhinwhichsalestaxiscollectedonsuchservices.IntermsofSHCjudgment,FEDon
suchserviceswillbetreatedexemptfromthedateSindhSalesTaxLawscameintoforce,i.e.,01July
2011.
THIRDSCHEDULE
ConditionalExemptionsonExcisableGoods
NewSerialNo18&19ofTableI
The FinanceBillhasproposedtoexcludeWhiteCementTariffHeading25.23fromFEDexemption
appearingatserialNo18ofTableIofSecondScheduletotheFederalExciseAct,2005[FEDAct].After
omittingserialNo.18anewfollowingserialNo.19proposedtobeamendedinsecondScheduleto
theFEAct:
Serial
Description
TariffHeading
No.
Respective
19
Materials and equipment for construction and operation of
Heading
GawadarPortanddevelopmentofFreeZoneforGawadarPortas
importedbyorsuppliedtoChinaOverseasPortsHolding
CompanyLimited(COPHCL)anditsoperatingcompaniesnamely(i)
ChinaOverseasPortsHoldingCompanyPakistan(Private)Limited,
(ii)GawadarInternationalTerminalsLimited,(iii)GawadarMarine
Services Limited and (iv) Gawadar Free Zone Company Limited,
theircontractorsandsubcontractors;andShipBunkerOilsbought
and sold to the ships calling on/visiting Gawadar Port, having
Concession Agreement with the Gawadar Port Authority, for a
periodof forty years, subject to theconditions and procedureas
specifiedunderS.No.100AofTable1ofSixthScheduletotheSales
TaxAct,1990.
Respective
20
SuppliesmadebythebusinessestobeestablishedintheGawadar
Heading
FreeZoneforaperiodoftwentythreeyearswithintheGawadar
Free Zone, subject to the condition that the sales and supplies
outsidetheGawadarFreeZoneandintotheterritoryofPakistan
shallbesubjectedtoFederalExciseDuty.
Shekha & Mufti

CUSTOMSACT1969
GENERALPOWERSTOEXEMPTTHECUSTOMSDUTIES
Section19(1)
ECCoftheCabinethasbeenempoweredtoexemptthecustomsdutiesasfollows:
Section
Existing
Proposed
19(1)
TheFederalGovernmentpursuanttothe TheFederalGovernmentpursuanttothe
approval of the Economic Coordination approval of the Economic Coordination
Committee of Cabinet, whenever Committee of Cabinet, whenever
circumstances exist to take immediate circumstances exist to take immediate
action for the purposes of national action for the purposes of national
security, natural disaster, national food security, natural disaster, national food
security in the emergency situations, security in the emergency situations,
protectionofnationaleconomicinterests protectionofnationaleconomicinterests
in situations arising out of abnormal in situations arising out of abnormal
fluctuation in international commodity fluctuation in international commodity
prices, removal of anomalies in duties, prices, removal of anomalies in duties,
development of back ward areas and development of back ward areas,
implementation of bilateral and implementation of bilateral and
multilateral agreements, subject to such multilateral agreements, and any
conditions, limitations or restrictions, if International Financial Institute or
any, as it thinks fit to impose, may, by foreign government owned Financial
notificationintheofficialGazette,exempt Institute
operating
under
a
any goods imported into, or exported memorandum of understanding, an
from, Pakistan or into or from any agreement or any other arrangement
specified portorstationorareatherein, with the Government of Pakistan,
from the whole or any part of the subjecttosuchconditions,limitationsor
customsduties chargeable thereon and restrictions, if any, as it thinks fit to
may remit fine, penalty, charge or any impose,may,bynotificationintheofficial
otheramountrecoverableunderthisAct Gazette, exempt any goods imported
into,orexportedfrom,Pakistanorintoor
fromanyspecifiedportorstationorarea
therein,fromthewholeoranypartofthe
customsduties chargeable thereon and
may remit fine, penalty, charge or any
otheramountrecoverableunderthisAct.
Shekha & Mufti

FIRSTSCHEDULETOTHECUSTOMSACT,1969
CUSTOMSDUTY
TheBillproposestheamendmentsinFirstSchedulewherebychangesinratesofcustomsduties
havebeensoughtforthefollowing:
Reduction/ConcessioninCustomsDuty
S.No
DescriptionofGoods/Sectors
Rate
Existing% Proposed
%
1
Tariffslabsreducedfromexisting5to4bymerging2%slab
5
3
and5%slabinnew3%slab
2
ConcessionsofCDforDairy,Livestock&PoultrySectors
5
3
3
ConcessionsofCDforFishFarming,fishfeedpellet(floating
5
2
type)machines
4
fish/shrimpfeed
10&20
0
5
ConcessionsofCDonlocalmanufacturingof
20
5
LEDLights
6
ReductioninCDonrawmaterialofPVCResin
5
3
7
ReductioninCDonWhiteSpirits
10
3
8
ReductioninCDonStampingFoil
20
16
9
ReductionofCDonFattyAlcoholEthoxylate
15
5
10
ReductioninCDonCFCFreeGases
15
11
11
ReductioninCDrateforAluminumSheetinCoil
20
11
12
ReductioninCDonThermostatsofDeepfreezers
20
3
13
RemovalofRDfromBeadWirefortyresManufacturers
RD10
0
14
RemovalofRDfromCarbonSteelStripsusedbyRazorblade
RD17.5
0
manufacturers
ExemptioninCustomsDuty
S.No
Descriptionofgoods/Sectors
Rate
Existing% Proposed%
1
2
3
ExemptionfromCDonimportofPremixestopreventgrowth
stunting
ExemptionfromCDonWaterQualityTestingKits
ExemptionfromCDonLinearAkylBenzene
520
20
2
0
0
Shekha & Mufti

IncreaseinCustomsDuty/RD
S.No
Descriptionofgoods/Sectors
Existing%
1
2
3
4
5
6
7
8
9
10
11
10%and15%slabssubstitutewith11%and16%slabs
respectively
RationalizationofCDonBetelnutsandBetel
Leaves
RationalizationofCDonAlmonds
RationalizationofCDFrozenfish
IncreaseofCDonMediumDensityFiberboard
IncreaseofCDonCementClinker
IncreaseinCDonSemiPrinted/PrintedSecurity
Paper
IncreaseinCDonLiveChickenstockandEggs
ofchicken
IncreaseinCDonBirdseggs(notinshell)
LevyofRDonPowderedMilk
LevyofRDonWheyPowder
Rate
Proposed%
10&15
11&16
10
Rs.300/kg
10
10
15
2
5
20
Rs.600/kg
20
20
20
11
16
11
5
20
20
16
20+25RD
20+25RD
FurtherDevelopments
ExpansioninscopeofexemptiononRenewableEnergyTechnologies.
ExpansioninscopeofexemptionforCharitablenonprofitmakingInstitutionsOperating
Hospitals
ReliefonCoolChainMachinery.
ExtensioninreliefonimportofSolarPanelstillJune,2017.
ExemptionfromCDandtaxesondisposalofold&usedambulancesimportedbyEdhi
Foundation
ImplementationofAutomotiveDevelopmentPolicy(ADP)20162021
Shekha & Mufti

PrincipalOffice
C253,P.E.C.H.S.,Block6
OffShahraheFaisal
Karachi.Pakistan
P+92213437481115
F+922134544766
info@shekhamufti.com
BranchOffice
OfficeNo.4,3rdFloorRehmanPlaza
QueensRoad,OffTheMall
Lahore.Pakistan
P+9242362982313
F+924236298234
info.lhr@shekhamufti.com
www.shekhamufti.com

Tax Memorandum 2016

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Tax Memorandum 2016

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TAX CREDIT; EXPANSION IN PLANT & MACHINERY by ALREADY ESTABLISHED INDUSTRIAL

TheFinanceBillhas, additionally proposed aconditionthatifthecompanyclaimingthe tax credit

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Onceapproved allcommondeductionsand allowancesbesides expenditureswillalsobeallocable

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Currently, Clause 19 of Section 33 deals in imposition of penalty in case of contravention to any

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Mineral and bottledwater isproposedtobeincluded intheThirdSchedule.Presently,watersold

Through the aforesaid notification, conditional exemption is allowed on import or supply of

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Old Tax New Tax

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