The amendments proposed in direct and indirect federal tax laws of Pakistan through the Finance Bill,
2021 has been promulgated through the Finance Act, 2021 with some changes through amended
Finance Bill. These amendments are effective from 1st July 2021 unless a later date is provided for
particular provision. This memorandum explains the changes made through the amended Finance Bill
which are incorporated in the Finance Act, 2021.
INCOME TAX ORDINANCE, 2001
- Gain on disposal of depreciable immovable
property (Section 22(13)(d))
The Finance bill proposed to charge gain on disposal of depreciable immovable property
under the head “Capital Gains” under section 37 of the Ordinance. However, said proposal is
not approved in the Finance Act. Therefore, gain on disposal of depreciable immovable
property shall remain subject to tax under the head “Income from business” to the extent of
accumulated depreciation claimed till the date of disposal.
2. Capital Gains (Section 37)
The Finance bill proposed to charge gain on disposal of immovable property exceeding Rs.5 million under Normal Tax Regime (NTR) at normal business income tax slab rates. This
proposal is withdrawn through the Finance Act. Therefore, gain on disposal of immovable
property shall remain subject to tax at fixed tax rates on the basis of threshold of capital gains.
However, rate of tax has been increased as follows .
|Gain||Old rate||New rates|
|Not exceeding Rs. 5 million||2.5%||3.5%|
|Exceeding Rs. 5 million to Rs. 10 million||5%||7.5%|
|Exceeding Rs 10 million to Rs. 15 million||7.5%||10%|
|Exceeding Rs. 15 million||10%||15%|
Further, it was also proposed through insertion of clarification to charge gain on disposal of immovable properties under the head “Income from business” at normal tax rates where business of the person is to trade in immovable properties. Such proposal is also withdrawn. Gain arise on disposal of immovable property shall remain subject to tax under the head “Capital Gains” irrespective of purpose of its acquisition.
3. Capital gains on sale of units of exchange traded fund (Section 37A(3))
Units of exchange traded funds are included in the definition of securities provided under sub-section (3) of section 37A of the Ordinance for the purpose of taxability of gain on disposal of such units under section 37A of the Ordinance i.e. Capital gain on sale of securities.
4. Tax credit for investment in units of exchange traded fund (Section 62)
Investment in units of exchange traded fund during the tax year is made eligible for claiming tax credit against tax liability for the year through insertion of new clause (ib) in sub-section (1) of section 62 of the Ordinance through the Finance Act.
5. Resident Individual (Section 82)
A person present in Pakistan for 120 day or more in aggregate during the tax year along with 365 days in aggregate in immediately preceding 4 years was considered as resident person for the purpose of taxation under the Ordinance. Said condition is withdrawn through the Finance Act. Therefore, a person who is present in Pakistan for 183 days or more in aggregate during the tax year shall only be considered as resident person.
6. Business bank account (Section 114A)
Requirement of furnishing of taxpayer’s profile is done away with. However, business bank account utilized by the taxpayer for business transactions is required to be declared by 30th September 2021 otherwise non-declaration will be subject to minimum penalty of Rs. 100,000 or Rs. 10,000 per day of default..
7. Due date for payment of tax (Section 137)
The Finance bill proposed for immediate payment of tax payable upon passing of appeal effect order under section 124(1) or (4) of the Ordinance. Said proposal is withdrawn. Now, the period of 30 days for payment of tax after passing of appeal effect order shall remain intact.
8. Power to arrest and prosecute (Section 203B)
The Finance bill proposed to empower the officer not below the rank of Assistant Commissioner or equal rank to arrest the person where the officer on the basis of material evidence has reason to believe that the person has committed offence of concealment of income. However, in order to avoid the harassment and misuse of the powers, this proposal is revisited. Such powers are restricted where concealment of income is established through audit proceedings and amendment of assessment is made under section 121 or 122 of the Ordinance. Further, such powers to arrest of the taxpayer shall be exercised where concealment of income resulted in non-payment of tax of Rs. 100 million or above in case of filer and Rs. 25 million or above in case
of non-filer. Furthermore, approval of the committee shall be required for arrest of the taxpayer. Such committee shall comprise of following:
- Minister for finance and revenue;
- Chairman FBR; and
- Senior most member of the Board
9. Rate of tax on dividend (Division III of Part I and Division I of Part III, First Schedule)
The Finance Act has specified tax chargeable on dividend received from Real Estate Investment Trust at the rate of 15% under section 5 of the Ordinance. Further, tax shall also be deducted at same rate under section 150 of the Ordinance.
10. Minimum tax rate for flour mills (Division IX, Part I, First Schedule)
The Finance Act has provided reduced rate of minimum tax under section 113 of the Ordinance at the rate of 0.25% for flour mills.
11 . Payment to non-residents (Division II, Part III, First Schedule)
The Finance Act has provided withholding of tax at the rate of 3% on payment made to non-residents for Oilfield services.
12. Payment for goods and services (Division III, Part III, First Schedule)
The Finance Act has reduced the withholding tax rate on payment for execution of contracts from 7% to 6.5% in case of company and from 7.5% to 7% in case of non-company.
13 . Exemption on payment received from provident fund (Clause 22 & 23, Part I, Second Schedule)
The Finance bill proposed to charge / withhold tax at the rate of 10% on profit on debt exceeding Rs. 500,000 received from provident fund. Such proposal is withdrawn.
14 . Exemption on payment received from pension fund (Clause 23C, Part I, Second Schedule)
The Finance bill proposed to charge / withhold tax at the rate of 10% on profit on debt received from approved pension fund. Such proposal is withdrawn.
15. Exemption on local traveling allowance to newspaper employees (Clause 40, Part I, Second Schedule)
The Finance bill proposed to withdraw exemption available on local traveling allowance to newspaper employee. Such proposal is withdrawn.
16. Exemption on perquisites received by employees by virtue of his employment (Clause 53A, Part I, Second Schedule)
The Finance bill proposed to withdraw exemption available to following
- Free or subsidized food provided by hotel and restaurant to its employees during duty hours
- Free or subsidized education provided by educational institution to the children of its employees
- Free or subsidized medical treatment provided by a hospital or clinic to its employees
The said proposal is withdrawn. Therefore, the exemption shall remain intact.
17. Exemption on income of certain institutions (Clause 66, Table I, Part I Second Schedule)
The Finance bill proposed to allow exemption on income derived by political parties registered with Election Commission of Pakistan. Said proposal is withdrawn through Finance Act, However, following institutions are included in the list of exempt institutions through the Finance Act.
- Layton Rahmatullah Benevloent Trust (LRBT)
- Baluchistan Education Endowment Fund (BEEF)
- Saylani Welfare International Trust
- Chiniot Anjuman Islamia
- Army Welfare Trust
18. Exemption on profit and gains derived by a refinery (Clause 126B, Part I, Second Schedule)
The Finance bill proposed exemption for on profit and gains derived by any refinery for the purpose of upgradation, modernization or expansion project of deep conversion refinery of atleast 100,000 barrels per day. The said exemption was proposed for 10 years from commencement of commercial production in case of new refinery or completion of upgradation, modernization or expansion project of existing refinery.
Such proposal is revisited in the Finance Act. The exemption is allowed to any existing refinery irrespective of size subject to following condiions:
- Undertaking to the Federal Government in writing before 31st December 2021
- Whose products fulfills Euro 5 standards
Further, period of exemption is also extended to 20 year for new refinery
19. Exemption on reimbursement of medical expense or medical allowance for employees (Clause 139, Part I, Second Schedule)
The Finance bill proposed to withdraw exemption available to employees on account of reimbursement of medical expenses or medical allowance. Such proposal is withdrawn through the Finance Act. Therefore, employees can continue to claim exemption on medical allowance.
20. Exemption for international buying house (Clause 149, Part I, Second Schedule)
The Finance Act has provided exemption to international buying house on account of any sum remitted through banking channel in foreign currency by its non-resident principal for meeting expenses in Pakistan.
Further, salaries of experts employed by international buying house shall also be exempt if such employee is not a resident and not a citizen of Pakistan.
International buying house means person acting as buying offices, buyers’ agents, or representatives of international buyers for facilitating exports from Pakistan and are registered as liaison offices with Board of Investment or companies registered with SECP. Provided that such buying houses act as cost centers with the sole purpose to bring export orders to Pakistan on behalf of their principals and do not enter into any local business transactions in Pakistan and their expenses are remitted to Pakistan.
21. Reduced rate of withholding tax for Oil tanker contractors & Exemption as a withholding agent. (Clause 28F, Part II & Clause 43D, Part IV, Second Schedule
The Finance Act has provided reduced rate of withholding at the rate of 2% under section 153(1)(b) of the Ordinance from payments made to oil tanker contractor services. Further, exemption as withholding agent from deduction of tax on supplies under section 153(1)(a) of the Ordinance was available under clause 43D of Part IV of Second Schedule to the Ordinance. Such exemption is also extended to payment made for services under section 153(1)(b) of the Ordinance. Exemption as withholding agent shall be available if the Oil tanker contractor pays / offer tax at the rate of 2.5% on payments received against its services. The Finance bill proposed to increase rate of tax from 2.5% to 3.5% however, said proposal is withdrawn through the Finance Act.
22. Reduced rate of tax payable on profit on debt from investment in Federal Government Securities (Clause 20, Part III, Second Schedule)
The Finance Act has provided reduced rate of tax payable at the rate of 15% by a person other than banking or insurance companies in respect of profit on debt from investment in Federal Government securities. Such tax shall be final discharge of tax liability on such profit on debt.
23. Exemption from applicability of minimum tax under section 113 (Clause 11A, Part IV, Second Schedule)
The Finance bill proposed the exemption from minimum tax under section 113 to National Power Parks Management Company Private Limited. This exemption is extended to its demerged entities commencing from date of commercial operation and continuing after the date of change of ownership as a result of privatization by the Privatization Commission of Pakistan.
24. Exemption from withholding of tax on payments received by electricity and gas transmission companies (Clause 46AA, Part IV, Second Schedule)
Exemption is available from withholding of tax on payment received by companies against supply of electricity and gas. The Finance Act has extended the exemption to companies receiving payment for transmission of electricity and gas.
25. Exemption from withholding of tax on imports (Clause 56 Part IV, Second Schedule)
The Finance Bill proposed exemption from collection of tax under section 148 on import of motor vehicles upto 850cc in CBU condition. Said exemption is extended to motor vehicle upto 1000cc through the Finance Act.
Further, exemption is also provided on import of blind talking phones imported by blind persons as per prescribed rules.
26. Taxability of income from Federal Government Securities derived by banking companies (Rule 6C, Seventh Schedule)
The taxable income of banks arising from additional income earned from additional investment in Federal Government securities is chargeable to tax at the rate of 37.5% for tax year 2020 and onwards instead of normal tax rate of 29%. The Finance Act has restricted the taxability at such higher rate to tax year 2021.
For tax year 2022 and onwards, taxable income attributable to investment in Federal Government Securities shall be taxed at following rates:
- 40%, if the assets to deposit ratio as on last day of tax year is upto 40%
- 37.5%, if the assets to deposit ratio as on last day of tax year exceeds 40% but does not exceed 50%; and
- 29%, if the asset to deposit ratio as on last day of tax year exceeds 50%
27. Taxability of excess profits of builders and developers registered under the incentive scheme (Rule 6, Eleventh Schedule)
The builder and developer registered under the incentive scheme are allowed to incorporate in books of accounts, such profits and gains from a project which is in excess of 10 times of tax paid under the incentive scheme subject to condition that the tax shall be paid on such excess profits at normal business tax rates i.e. slab rates for business individuals and AOPs and 29% for companies.
However, the Finance Act has provided straight tax rate of 20% on such excess profits irrespective of class of taxpayer and threshold of its income.
28. Taxability of Small and Medium Enterprise (Fourteenth Schedule)
Separate regime was proposed by the Finance bill for taxability of profits and gains of small and medium enterprises being manufacturers having turnover not exceeding Rs. 250 million. Such enterprise either pay tax on net income basis at the rate of 7.5% or 15% on the basis of threshold of income or opt for final tax on turnover basis at the rate of 0.25% or 0.5% on the basis of threshold of turnover.
The Finance Act has also provided exemption from minimum tax under section 113 of the Ordinance. Further, export proceeds of SME shall be chargeable to tax under FTR on the basis of turnover at the rate of 0.25% or 0.5% as the case may be.
Furthermore, tax deductible under section 153(1)(a) of the Ordinance on payments received by SME against supply of goods shall not be minimum tax.
- Tier-1 retailer (Section 2(43A))
The Finance bill proposed to hold the person running an online market place liable to pay sales tax on supply of goods through such online market place whether or not the goods are owned by him. Further, a retailer operating an online market place was proposed to be categorized as Tier-1 retailer supplying goods through e-commerce platform, whether or not the goods owned by him.
Such proposal are withdrawn in the Finance Act therefore, person running an online market place without owning such goods shall not be liable to pay sales tax on supplies.
2. Common Identifier Number (Section 21B)
The concept of common identifier number proposed by the Finance Bill in addition to sales tax registration number (STRN) is withdrawn through the Finance Act.
3. Inadmissible input tax (Section 8B)
Adjustable input tax for the tax period is disallowed by 15% in case of Tier-1 retailer who does not integrate its retails outlet as prescribed. The Finance Act has increased the limit of said disallowance to 60%.
4. Zero Rating (Fifth Schedule)
The Finance Act has provided following items at zero rating
|16||Milk (PCT heading 04.01)|
|17||Fat filled milk excluding sold in retail packing under brand name of trade mark (PCT heading 1901.9090)|
|18.||(i) Supply, repair or maintenance of any ship which is neither; A ship of gross tonnage of less than 15 LDT; norA ship designed or adapted for use for recreation or pleasure (ii) Supply of spare parts and equipment for ships falling under (i) above (iii) Supply of equipment and machinery for salvage or towage services (iv) Supply of equipment and machinery for other services provided for the handling of ships in a port|
5. Exemption from sales tax on imports or supplies (Table I, Sixth Schedule)
The Finance bill proposed to withdraw following exemptions on imports and proposed for exemption on local supplies only. However, such proposal is withdrawn though the Finance Act.
|11||Eggs including eggs for hatching|
|19||Cereals and products of milling industry|
|84||Preparations suitable for infants, put up for retail sale|
The Finance Act has withdrawn exemption on “Milk” and allow zero rating through insertion of entry no. 16 in Fifth Schedule.
Further, following items are added in the list of exempt items for Pesticides and their active ingredients registered by the Department of Plant Protection under the Agricultural Pesticides Ordinance, 1971, stabilizers, emulsifiers and solvents.
6. Exemption from sales tax on supplies only (Table-2, Sixth Schedule)
The Finance Act has withdrawn following exemptions.
|18||Supplies made by manufactures of marble and granite having annual turnover less than Rs. 5 million even if their annual utility bill is more than Rs. 800,000|
|20||Crushed stone (upto 30th June 2018|
Further, following item is added in the list of exemption on supplies which was previously subject to specified rate under Table I of Eighth Schedule
|27||Wheat Bran (2302.3000)|
7. Exemption on import of plant and machinery (Table 3, Sixth Schedule)
The Finance Act has provided exemption on import of POS machines under tariff heading 8470.2900 subject to the condition that the POS machines imported for installation on retail outlets as are integrated with the Board’s computerized system for real time reporting of sales.
8. Sales tax at specified rates (Table I, Eighth Schedule)
The Finance bill proposed to withdraw sales tax chargeable at specified rates in respect of following items. However, said proposal is withdrawn through the Finance Act and these remain subject to sales tax at specified rates
|S. No.||Description||Sales tax rate|
|6||Plant and machinery not manufactured locally and having no compatible substitute||10%|
|14||Milk and cream concentrated or containing added sugar or other sweetening matter||10%|
|15||Ingredients of poultry feed, cattle feed, except soya bean meal of PCT heading 2304.0000 and oil cake of cottonseed falling under PCT heading 2306.1000||10%|
|20||Plant, machinery and equipment used in production of bio-diesel||5%|
|29||Harvesting, threshing and storage equipment, etc||5%|
|45||Specified machinery for poultry sector||7%|
|60||Fat filled milk||10%|
|61||Silver, unworked condition||1%|
|62||Gold, in unworked condition||1%|
|63||Articles of jewellery, or parts thereof, of precious metal or of metal clad with precious metail||1.5%,of value of gold plus 0.5% of value of diamond used therein, plus 3% of making charges|
Sales tax rate under serial 63 in above table at 0.5% of value of diamond is increased to 2%.
Further, sales tax at the rate of 12% applicable in case of retail outlets integrated with Board as per serial no. 66 of Table I is reduced to 10% through the Finance Act.
Sales tax rate of 12.5% proposed for locally manufactured or assembled motor cars of upto 850cc is extended to motor cars of upto 1000cc Sales tax at the rate of 16% is charged on goods supplied from tax-exempt areas of erstwhile FATA/PATA to the taxable areas.
9. Sales tax withholding (Eleventh Schedule)
The whole of applicable sales tax was proposed to be withheld from registered persons manufacturing lead batteries. However, withholding is reduced to 75% of applicable sales tax through the Finance Act. Further, sales tax at the rate of 2% of gross value of supplies through Online Market Place shall require to be withheld from inactive persons. However, withholding shall be effective from the date notified by the Board.
10. Minimum Production of Steel Products (Thirteenth Schedule)
The Finance Act has inserted the Thirteenth Schedule specifying criteria for determination of minimum production of steel products.
|S. No.||Product||Production criteria|
|1.||Steel billets and ingots||One metric ton per 700 kwh or electricity consumed|
|2||Steel bars and other re-rolled long profiles of steel||One metric ton per 110 kwh of electricity consumed|
|3||Ship plates and other re-rollable scrap||85% of the weight of the vessel imported for breaking|
Rules provides that the taxpayer is required to declared both actual and minimum production and supplies in the sales tax return and sales tax liability shall be paid on higher of actual or minimum production. The sales tax paid on excess of actual supplies shall be adjustable in subsequent month against tax payable on actual supplies exceeding minimum production.
In full year, tax actually paid shall not be less than the liability determined on the basis of minimum production and any excess amount shall not be refundable.
In case of ship breaking, the tax liability determined as above shall be deposited on monthly basis on proportionate basis depending upon the time required to break the vessel. Further, ship breakers shall remain liable to pay sales tax separately on items other than ship plates obtained by ship-breaking.
The steel melters and re-rollers employing self-generated power shall install a tamperproof meter for measuring their consumption. Such meter shall be duly locked in room with keys in the custody of a nominee of the Commissioner Inland Revenue having jurisdiction. The officer inland revenue having jurisdiction shall have full access to such meter
The minimum production of industrial units employing both distributed power and self-generated power shall be determined on the basis of total electricity consumption.
FEDERAL EXCISE DUTY
- Excise duty on vehicles (Serial no. 55B, Table I, First Schedule)
The Finance Act has reduced excise duty on locally manufactured or assembled motor cars, SUVs, and other motor vehicles, excluding auto rickshaws principally designed for the transport of persons, (other than those of heading 87.02), including station wagons and racing cars at following rates
|Cylinder capacity||Prior 30th June 2021||New rates|
|1001cc to 2000cc||5%||2.5%|
|2001cc and above||7.5%||5%|
The Finance bill proposes to withdraw excise duty on such motor vehicles upto cylinder capacity 850cc. However, said proposal is withdrawn and excise duty shall remain chargeable on vehicles at the mentioned rates.
2. Excise duty on mobile phone call (Serial no. 6A, Table II, First Schedule)
The Finance bill proposed to charged additional excise duty at the rate of one rupee per call if call duration exceeds three minutes.
The Finance Act has reduced such additional excise duty to seventy five paisa per call and also extended the call duration to five minutes.
Further, additional excise duty on internet services and SMS services proposed through the Finance Bill has been withdrawn.
3. Minimum production criteria for steel products (Fourth Schedule)
The Finance Act has withdrawn the Fourth Schedule which provided the criteria for determination of minimum production for steel products for the purpose of discharged of excise duty. The minimum production criteria is include in Sales Tax Act, 1990 through insertion of the Thirteenth Schedule to the Sales Tax Act, 1990.