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Taxation
All sales tax refunds due from July 1, 2019 would be paid from the current revenue stream of the Federal Board of Revenue and the Treasury would not be involved. This was revealed by a high-level source in the FBR to Business Recorder and confirmed by the Ministry of Finance.

The Ministry of Finance will not allocate any sum(s) for payment of sales tax refunds, the source added, because refunds are not an expenditure item; net revenue after the payment of sales tax refunds would be reported to the Ministry of Finance. Effective the week beginning 26 August the FBR would begin the process of repayment of refunds through the Fully Automated Sales Tax e-Refund (FASTER).

Under the new system notified by the FBR, the FBR will issue next batch of sales tax refunds to exporters of five export-oriented sectors by electronically communicating Refund Payment Orders (RPOs) to the State Bank of Pakistan within 72 hours of submission of claim for onward advice to banks for credit into the claimants’ bank accounts. According to the FBR, the refund payment order (RPO) of the amount found admissible shall be generated and the same shall be electronically communicated direct to the State Bank of Pakistan, within 72 hours of submission of claim, for onward advice to the respective banks for credit into the notified account of the claimant. In case of refund claim of a commercial exporter, the payment of such refund shall be made after the realisation of export proceeds.Meanwhile, Towel Manufacturers’ Association of Pakistan has overwhelmingly rejected the new refund procedure for five export-oriented sectors under SRO 918(I)/2019.

It has requested the FBR for payment of 17 percent sales tax from separate exporters escrow account.

The association has approached Abdul Hafeez Shaikh, Advisor to Prime Minister on Finance and Revenue, Abdul Razak Dawood, Advisor on Commerce and Textile to Prime Minister, and Chairman FBR Shabbar Zaidi, highlighting pros and cons of the refund mechanism.

The association has requested to consult association before finalising refund mechanism to exporters.

Being an almost 100 percent export-oriented industry, the towel manufacturers foresees severe cash flow crunch for their exporters and predicts decrease in towel exports due to the sales tax refund mechanism outlined in the SRO.

Firstly, the requirement of the complex natured Annexure-H form will create delays for the exporting companies in filling their returns. The association urges the FBR to utilise the Annexure-H for the post audit purpose only and not for the purpose of pre-verification of the refund claim.

Secondly, the association firmly believes if the collected sales tax refunds from the exporters go into the government revenue stream, the government will not be able to return the collected fund to the exporters in a timely manner, thus creating sever liquidity crunch for the exporting industries.Thirdly, for this reason the current collected sales tax funds from the exporters should be kept in separate escrow account with complete visibility to the exporters and the refunds should be routed timely to the exporters from this escrow account only.

The association urged the FBR to consult with the association in order to devise a suitable refund mechanism which the industry can survive and grow its exports from Pakistan.

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Taxation
The Federal Board of Revenue has issued a circular wherein the directions of Chairman FBR have been conveyed to all the field offices of Customs and Inland Revenue to ensure basic facilities at field offices for the taxpayers and visiting people.

According to the circular, the FBR chairman has directed all the field offices to extend necessary courtesy and respect to the visiting taxpayers and people. It has been directed to ensure proper seating areas and availability of drinking water for the visitors.

The cleanliness must be ensured in the office premises. A separate parking area may be marked for the officers, tax practitioners, chartered accountants and lawyers. CCTV cameras may be monitored regularly and security arrangements may strictly be ensured.

All the field officers have been directed to monitor arrangements in their respective premises. Moreover, the circular further says that all the field officers may become a part of government’s clean and green campaign and plant trees in the office vicinity and residential colonies. The spot checking will be conducted by the board officers any time to ensure implementation of all the arrangements.-PR
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Taxation
Federal Board of Revenue (FBR) Tuesday specified conditions to determine how a foreign company operating in Pakistan is considered as a Controlled Foreign Company (CFC) for the purpose of taxation. The FBR has issued circular 13 of 2019 to explain the section 109A of the Income Tax Ordinance 2001.

The FBR said that a new section 109A has been introduced by Finance Act, 2018, which is effective from 1st July, 2018. Return for tax year 2019 will be the first year when provision of this section will become applicable. This section states that taxable income of resident person shall include income attributable to a “Controlled Foreign Company (CFC)”.

In ordinary sense, income of a foreign company owned by a Pakistani resident is ‘taxable’ in Pakistan only when such income is ‘received’ from that non-resident entity. Section 109A(1) of the Ordinance is a deeming provision which essentially creates legal fiction resulting

in following exceptions: Corporate veil is pierced and income of a ‘company’ is deemed to be the income of controlling entity and income is taxed in the year it is ‘earned’ not when it is actually ‘received’. This is the consequence of the first action because when corporate veil is pierced the income becomes taxable when earned.In order to determine that a foreign company is a Controlled Foreign Company (CFC) either of the two conditions regarding control of the resident over foreign company has to be fulfilled:-

i) more than fifty percent of the capital or voting rights of the non-resident company are held, directly or indirectly, by one or more persons resident in Pakistan; or ii) more than forty percent of the capital of the or voting rights of the non-resident company are held, directly or indirectly, by a single resident person in Pakistan. However, a foreign entity which fulfills either of the above condition, cannot be treated as a CFC if:-

i) the shares of the company are traded on any stock exchange recognized by law of the country or jurisdiction of which the non-resident company is resident for tax purposes.

ii) the non-resident company derives active business income as defined under sub-section (3) of section 109A.

iii) tax paid, after taking into account any foreign tax credits available to the non-resident company, on the income derived or accrued, during a foreign tax year, by the nonresident company to any tax authority outside Pakistan is less than sixty percent of the tax payable on the said income under this Ordinance, FBR said.The concept of Active Business Income revealed that the “Active Income” for the purpose of exclusion from CFC regime requires simultaneous fulfillment of two conditions:-

i) cumulative income from dividend, interest, property, capital gains, royalty, annuity payment, supply of goods or services to an associate, sale or licensing of intangibles and management, holding or investment in securities and financial assets is less than 20% of the total income of the said company and ii) principal source of the company is under the head “income from business” in the country or jurisdiction of which it is a resident.

The FBR said that term ‘direct control’ refers to direct ownership of capital or voting rights in the foreign entity. However the term ‘indirect control’ is very wide in its connotation. It includes indirect control by a company through subsidiary companies in which the resident person holds capital or voting rights but also includes other companies in which the resident person exercises control through ownership of capital or voting rights.

The FBR said that the second question after determining a CFC is to determine the ‘attributable CFC Income’ taxable under Section 109A(1) of the Ordinance in the hand of resident person. The taxable income is income generated by a controlled company that should have been taxed ‘when earned’ instead of ‘when distributed’. The attributable income of the resident person shall be determined by comparing the percentage of control (whether direct or indirect) held by the said person over the CFC. This issue is simple to understand in this illustration where the structure is single layered.

The FBR said that certain other exclusions have also been prescribed by law which are income of a controlled foreign company shall be treated as zero, if it is less than ten million Rupees and if direct/indirect capital or voting right held by the resident person is less than 10% in the Foreign entity.The FBR said that other relevant rules revealed that the income of a CFC shall be determined in the currency of that controlled foreign company and shall be included in the income of any resident person during any tax year by converting into Rupees at the State Bank of Pakistan rate applying between that foreign currency and the Rupee on the last day of the tax year.

Foreign tax year, in relation to a non-resident company, means any year or period of reporting for income tax purposes by that non-resident company in the country of residence or, if that company is not subject to income tax, any annual period of financial reporting by that company, FBR said.

The income attributable to controlled foreign company under section 109A shall not be taxed again when the same income is received in Pakistan by the resident taxpayer. Where tax has been paid by the resident person on the income attributable to controlled foreign company and in a subsequent tax year the resident person receives dividend distributed by the controlled foreign company, after deduction of tax on dividend, the resident person shall be allowed a tax credit equal to the lesser of foreign tax paid, as defined in sub-section (8) of section 103, on dividends and Pakistan tax payable, as defined in section 103, for the tax year in which the dividend is received by the resident taxpayer, FBR added.

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Taxation
The government has said that it has got access to the data of over 600 Pakistanis who have $ 7-8 billion in their accounts through automatic exchange of information under the Organisation for Economic Cooperation and Development (OECD). This was told by Chairman Federal Board of Revenue (FBR) Shabbar Zaidi to media person outside the committee room where a meeting was chaired by MNA Asad Umar and FBR made a presentation on the very matter. The chairman FBR added that the government has got access to the information of Pakistanis holding accounts having $7-8 billion.

He, however, regretted that the UAE is not sharing information about Pakistanis, especially those who hold Iqama (work permit), but stated that “we are trying to break this barrier to get access to information.” Asad Umar who chaired the committee told media persons after the meeting that majority of those having over $1 million in their accounts have $5 billion in their foreign accounts. The meeting was informed that Pakistanis having $1 million or above abroad have 378 accounts, those having $750,000 to $1,000,000 have 123 accounts while those Pakistanis having $500,000 to $ 750,000 in their accounts are 154 in number.The meeting was further informed that 453 cases have been sent to the commissioners while 247 are available for tax proceeding and FBR plans to dispose of them by October 30, 2019. The meeting was further told that 115 foreign account holders benefited from 2018 amnesty scheme and 72 got benefit from 2019 amnesty scheme. The director general (international taxation) FBR briefed the committee with regard to automatic exchange of information, data received from OECD and its follow-up plan. After detailed presentation, the committee decided to take briefing from the FBR after October 30 2019 after it will initiate tax proceeding against defaulters.

The committee discussed the agenda pertaining to the recommendations of the Special Committee on Agricultural Products to uplift agriculture development in the country. The secretary Ministry of National Food Security & Research informed the committee that Ministry of National Food Security has worked out various projects under the vision of agriculture emergency for the development of agriculture sector.

Syed Fakhar Imam, convener of the Special Committee on Agricultural Products, stated that agro-economy has been paralysed due to lack of research work. He was of the opinion that major portion of allocated funds by the government is utilised for salaries and other administrative business instead of research work. The secretary Ministry of National Food Security & Research informed that government has not allocated required funds of Rs 5 million for research during current financial year 2019-20.The committee recommended to Ministry of Finance for providing the required funds on priority basis. The secretary finance assured the committee that Rs 1 billion would be allocated to Ministry for National Food Security & Research for research work in the second quarter of this financial year. The committee also recommended that Special Committee on Agricultural Products constituted by the Prime Minister will monitor the final allocation of funds for research.

Asad Umar drew the attention of the committee and finance secretary towards the decision made by the cabinet in its meeting held in January 2019 with regard to 50% reduction in Gas Infrastructure Development Cess (GIDC), particularly for the fertilizer sector. The committee meeting also directed the Ministry of Finance to expedite the matter and submit report to this committee at the earliest.

While talking about the sugar situation in Pakistan, it was said that sudden skyrocketing of the price of sugar in the current year still appears to be an anomaly given that the supply of sugar still appears to be in excess of its demand. The committee recommended that CCOP will deliver comprehensive briefing on the working and functioning of the Commission. The committee members expressed their concern on the PFMA cartel and sugar sector.
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Taxation
Several government departments including Federal Board of Revenue (FBR) have conveyed to the Korean International Cooperation Agency (KOICA) that the Pakistani authorities are learning from international experience and best practices of Korea in the fields of agriculture, livestock, taxation and other areas.

This has been disclosed by tax officials during the Knowledge Sharing Workshop held by the Korean International Cooperation Agency (KOICA) Pakistan office. Beside other government departments, the FBR officials also participated in the workshop. KOICA Alumni Association of Pakistan vice president Naveed Ahmad, Kwon Eunjin Young Professional of KOICA and programme coordinator Muhammad Ali Raza hosted the workshop.

Naveed Ahmad conveyed the sentiments of love and friendship to Korean people from the people of Pakistan. He introduced all the participants to each other and expressed his regards to KOICA Pakistan Office for arranging this fruitful knowledge sharing workshop.

Following introductory session, FBR Deputy Commissioner Qayyum Rani gave a presentation on the topic “Experience of a life time Korea, KOICA-KU”. She shared her experiences regarding her exposure and learning in Korea and useful of that experience after return to Pakistan. Muhammad Qaseem, director animal health from livestock department Lahore gave a presentation on the topic “Enhancing Efficiency of Livestock Sector in Punjab, Pakistan, lessons learnt from Korea”. He explained that after the training from Korea, he contributed a lot for the development of helpline service (9211) for Pakistani farmer.Najeeb Aslam, Deputy Director Local Government and Rural Development Department Lahore shared his work in development of model village in Punjab after attended the training course on Samuel Movement from Korea.
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Taxation
Chairman Federal Board of Revenue (FBR) Shabbar Zaidi directed Customs Intelligence on Monday to intensify operations against smugglers, warehouses storing smuggled goods, outlets openly selling smuggled items and check revenue leakage through ports. Sources told Business Recorder here on Monday that the FBR chairman visited Directorate General of intelligence and Investigation (Customs) to get briefing on anti-smuggling activities.

Senior officials of the agency briefed the chairman on the anti-smuggling actions and future strategy in this regard. Overall briefing was focused on working of the directorate. Tax authorities reviewed the agency’s performance and directed them to focus their energies on anti-smuggling and check any possible evasion through ports, sources said.

Shabbar Zaidi has also directed the agency to effectively implement the anti-smuggling strategy at ports. On Monday, the FBR took action against several customs officers. Meanwhile, the FBR had completed disciplinary proceedings under Government Servants (Efficiency & Discipline) Rules, 1973 against Nasir Iqbal, Inspector (BS-16) (posted as Examining Officer) in Model Customs Collectorate (Appraisement-West), Karachi.
The FBR has also imposed major penalty of “Compulsory Retirement” upon Rao Muhammad Aslam, Appraising Officer (BS-16), Model Customs Collectorate of Appraisement-East, Karachi under rule 4(1)(b)(ii) of the Government Servants (Efficiency & Discipline) Rules, 1973 with immediate effect.

In another case, the FBR also imposed the major penalty of “Reduction to the lower post of Appraising Officer” upon Amir Ahmad Samoo, Principal Appraiser under rule 4(1)(b)(i) of the Government Servants (Efficiency & Discipline) Rules, 1973 with immediate effect.

His Performance Allowance shall be stopped for one year from the date of award of penalty as provided in Para 7(iii) of the Performance Allowance Guidelines, 2015 and he will have to appear afresh for restoration of the same. The FBR also imposed the major penalty of “Reduction to the lower post of UDC” upon Qamar Jamal, Appraising Officer under rule 4(1)(b)(i) of the Government Servants (Efficiency & Discipline) Rules, 1973 with immediate effect. His Performance Allowance shall be stopped for one year from the date of award of penalty as provided in Para 7(iii) of the Performance Allowance Guidelines, 2015 and he will have to appear afresh for restoration of the same.In exercise of powers conferred under Rule 5(1) of the Government Servants (Efficiency & Discipline) Rules 1973, the Competent Authority has placed Gul Sher Ahmed Zehri, Inspector (BS-16), Model Customs Collectorate of Preventive, Quetta, under suspension with immediate effect for a period of three months.
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Taxation
Sindh Revenue Board (SRB) has extended the date for e-deposit of Sindh Sales Tax and e-filing of tax return for the tax period of July, 2019. According to a notification issued here, the SRB has permitted the registered persons, including withholding agents covered by the provisions of the Sindh Sales Tax Special Procedure (Withholding) Rules, 2011, to e-deposit the amounts of Sindh Sales Tax for the tax period July 2019, on or before 19th August, 2019 and to e-file their tax returns for the tax period July, 2019, on or before 22nd August, 2019, in the prescribed manner.
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Taxation
The Federal Board of Revenue (FBR) has said that every person paying royalty to a resident person would be required to deduct tax at the rate of 15 percent of the gross amount payable. According to an income tax circular issued by the FBR here on Wednesday, the FBR has explained the procedure for payment of royalty to resident persons.

The income from royalty is chargeable to tax under the head “Income from other sources.” However, in case of non-residents receiving Pakistan source royalty tax is separately imposed at the rate specified in Division IV of Part I of the First Schedule which is 15 percent of the gross amount of royalty. In the case of resident persons, income from royalty is made part of taxable income and taxed at the rates provided in Division I or II of Part I of the First Schedule. Prior to the Finance Act, 2019, there was no withholding tax on payment of royalty to resident persons. A new section 1538 has been introduced through the Finance Act, 2019 which requires every person paying royalty to a resident person to deduct tax at the rate of 15 percent of the gross amount payable. The tax deductible shall be adjustable against the income of the recipient of royalty, the FBR added.

Prior to the Finance Act, 2019, tax deductible under sub-section (1 A) of section 152 on payment to a non-resident on execution of contracts mentioned in clauses (a), (b) & (c) was final tax if the non-resident opted for the final tax regime. Through the Finance Act, 2019, tax deductible under sub-section (1A) has been made minimum tax. Similarly, tax deductible under sub-section (1AA) of section 152 on payment to a non-resident for insurance premium or re-insurance premium was final tax. The same has now been made minimum tax, the FBR circular added.
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Taxation
The Federal Board of Revenue (FBR) has clarified that the Commissioner has the power to conduct audit of banks under Section 177 of the Income Tax Ordinance 2001. According to the income tax circular 9 of 2019 issued by the FBR here on Tuesday, as per rule 9, the provisions of the Income Tax Ordinance not specifically dealt with in the rules in the Seventh Schedule shall apply, mutatis mutandis, to the banking company. As such, the Commissioner has the power to conduct audit of a banking company under Section 177.

However, for the removal of doubt, an explanation has been added after sub-rule (h) of rule 1 clarifying that nothing contained in the Seventh Schedule shall be so construed as to restrict power of Commissioner, while conducting audit of the income tax affairs under section 177, to call for record or such other information and documents as he may deem appropriate in order to examine accounts and records to conduct enquiry into expenditure, income, assets and liabilities of a banking company and all the provisions of the Ordinance shall be applicable accordingly.The FBR further clarified that the income, profits and gains and tax payable thereon of a banking company is computed as per rules in the Seventh Schedule. As per sub-rule (c) of rule 1, provisions for advances and off-balance sheet items shall be allowed up to a maximum of 1 percent of total advances and 5 percent of total advances for consumers and small and medium enterprises.

Through the Finance Act, 2019, the existing sub-rule (c) of rule 1 has been clarified for the removal of any doubt by adding an explanation that provision for advances and off balance sheet items at the rate of 1 percent or 5 percent, as the case may be, shall be exclusive of reversal of such provisions, and that reversal of bad debts classified as ‘doubtful’ or ‘loss’ are taxable as the respective provisions have been allowed.

Prior to the Finance Act, 2019, the amount of ‘bad debts’ classified as ‘doubtful’ or ‘loss’ were allowed as expense and ‘bad debts’ classified as ‘sub­ standard’ were not allowed as expense. Through the Finance Act, 2019, sub-rule (d) of rule 1 has been amended so that amount of ‘bad debt’ classified as ‘loss’ shall be allowed as expense and the amount of ‘bad debt’ classified as ‘sub-standard’ and ‘doubtful’ shall not be allowed as expense.The rate of tax on taxable income of a banking company is 35%. Through the Finance Act, 2019, a new rule 6C has been inserted in the Seventh Schedule which provides tax rate of 37.5 percent on taxable income from Federal Government Securities. As per this rule, the taxable income arising from additional income earned from additional investment in Federal Government securities for the tax year 2020 and onwards shall be taxed at the rate of 37.5%.

A banking company shall furnish a certificate from external auditor along with accounts while e-filing return of income certifying the amount of money invested in Federal Government securities in the preceding tax year, additional investments made for the tax year and mark-up income earned from the additional investments for the tax year. “Additional income earned” has been defined to mean mark-up income earned from additional investment in Federal Government securities by the bank for the tax year. The term,

“Additional Investments” has been defined to mean average investment made in the Federal Government securities by the bank during the tax year, in addition to average investments held during the tax year 2019. As per sub-rule (3) of rule 6C, the Commissioner may require the banking company to furnish details of the investments in the Federal Government securities so as to ascertain the applicability of enhanced rate of tax, the FBR added.
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Taxation
The Federal Board of Revenue (FBR) has said that persons whose names are not appearing in the Active Taxpayer List (ATL) will be subjected to 100 percent increased rate of tax. The FBR has explained the collection of tax, computation of income and tax payable of persons not appearing in the ATL [Section 100 BA, the Tenth Schedule] through an income tax circular issued here on Tuesday.

Prior to the Finance Act, 2019, a concept of non-filer existed in the Income Tax Ordinance whereby higher tax rates of withholding were prescribed for persons who were non­filers. Such non-filers could claim adjustment of the higher tax collected at the time of filing of income tax returns. The aim was to compel the non-filers to file their returns of income. However, it was observed that the non-filers, even though subjected to higher withholding rates, still had a propensity not to file their returns. This proved detrimental to the exercise of expansion or tax base. This was due to the absence of an explicit provision specifying a standard procedure for action against such persons.

Through the Finance Act, 2019, the concept of “non-filers” has been done away with and a new concept regarding persons not appearing in the active taxpayers’ list has been introduced. This concept is a major paradigm shift from the erstwhile non-filer higher tax regime is that it not only penalises those persons not appearing in the ATL but also introduces an effective mechanism for enforcing returns from such persons. In this regard, a new section 100BA has been introduced which provides that collection or deduction of advance income tax, computation of income and tax payable thereon shall be determined in accordance with the rules in the newly introduced “The Tenth Schedule” which envisages the entire path to be adopted by the Inland Revenue Department to enforce returns from persons who make financial transactions yet choose not to file their returns of income.The salient features of this scheme are as under:-

i. Persons whose names are not appearing in the ATL will be subjected to hundred percent increased rate of tax.

ii. Where a withholding agent is of the opinion that hundred percent increased tax is not required to be collected on the basis that the person was not required to file return, the withholding agent shall furnish a notice to the Commissioner having jurisdiction over withholding agent setting out the name, CNIC or NTN and address of the person not appearing in the ATL and the nature and amount of the transaction on which tax is required to be collected or deducted; and reason on the basis of which it is considered that the person was not required to file return or statement, as the case may be.

The Commissioner shall accept or reject the contention on the basis of existing law within thirty days. In case the Commissioner fails to respond within thirty days, permission shall be deemed to be granted not to deduct tax at hundred percent increased rates. Withholding agent shall however be responsible for any inaccurate furnishing of such information and penal action may be undertaken against diligent withholding agents.

Where the person’s tax has been deducted or collected at hundred percent increased rate and the person fails to file return of income for the year for which tax was deducted, the Commissioner shall make a Provisional Assessment within sixty days of the due date for filing of return by imputing income so that tax on imputed income is equal to the hundred percent increased tax deducted or collected from such person and the imputed income shall be treated as concealed income. However, the imputable income so calculated or concealed income so determined shall not absolve the person so assessed, from requirement of filing of wealth statement under sub­ section (1) of section 116, the nature and source of amounts subject to deduction or collection of tax under section 111, selection of audit under section 177 or 214C or subsequent amendment of assessment as provided in rule 8 and all the provisions of the Ordinance shall apply.The provisional assessment shall abate if the person files its return within forty five days of completion of provisional assessment. Where the return is not filed within forty five days of provisional assessment, it shall be treated as final assessment and the Commissioner shall initiate penalty proceedings for concealment of income, the FBR added.
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