BUDGET REFLECTIONS

JAI Junaidy Alam Iqbal
Chartered Accountants
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This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Junaidy Alam Iqbal accepts no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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PREAMBLE The Pakistan economy has moved to a declining growth phase. Till a few years ago, there was still a debate among informed observers about whether the economy had moved above the 6 to 7 percent average growth seen since 2002. There is now no doubt that the economy has moved to a higher growth trajectory, with growth in Gross Domestic Product (GDP) at market prices exceeding 6 percent every year since 2002. The projected economic growth rate of around 5 percent for 2008-09 is in line with the recent trend of political instability and deteriorating law & order situation. The Pakistan growth story, in recent times, has been an absorbing tale. Inclusive recent past growth however, encompassing the weaker sections of society, remains a challenging task. The economic outlook of the Country is as follows:
Key indicators 2007 2008 4.6 12.1 -4.7 -8.8 9.3 62.5 61.9 2009 5.1 6.5 -3.7 -8.9 9.1 64.0 66.7 2010 5.0 6.1 -3.4 -8.4 8.8 65.0 69.5 2011 2012 5.1 5.8 5.6 5.7 Real GDP growth (%; fiscal years 6.4 ending Jun 30th) Consumer price inflation (av; %) 7.6

Budget balance (% of GDP; fiscal -4.0 years ending Jun 30th) Current-account balance (% GDP) Short-term interest rate (av; %) Exchange rate PRs:US$ (av) Exchange rate PRs:¥100 (av) Source : Various Researches of -7.2 9.3 60.7 51.6

-3.0 -1.2 -8.7 -8.7 7.8 7.5

66.0 67.0 71.9 73.0

The Economic Survey presented before the Parliament on 10 June 2008 by the Finance Minister (Syed Naveed Qamar) has identified the following as important priorities: a) Achieving forecasted growth through additional reforms. b) Controlling of inflation (especially food & essential items inflation), managing liquidity crises from the surge of capital outflows and coping with depreciating rupee through fiscal/policy measures, and c) Achieving better Balance of Payments by keeping the current account deficit in check. Against this backdrop, the Finance Minister presented the Budget 2008-09 before the Parliament on 11 June 2008. As per the Budgeted figures, the fiscal deficit is estimated at 4.7 percent of the GDP (as compared to 4.0 percent for the previous year). The FM is confident that he will meet his target revenue enhancement of 23.1%. The Budget brings some relief to the Agriculture sector by introducing subsidies on its input. Infrastructure sector is also a priority for the Finance Minister and the Budget has made allocations towards improving the infrastructure of the country. Water and power is considered as highly important for the development of the country and the economy as a whole. The budget has allocated 75 billion for building of water reservoirs/dams. Despite some positive changes the budget may turn out to be a shock for low income group. This is due to some proposed measures that may push inflation higher. The proposal to increase Sales Tax and FED rates by 1% would impact on the prices of all the essential commodities.

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Besides across the board applicability of WWF for all the entities registered under the Shops & Establishment Ordinance, would also lead to increase in prices. Levy of FED on cement sector coupled with minimum tax on builders and developers and high price of steel internationally as well as locally would certainly put a halt on planned commercial projects and housing schemes. This in turn would slow down economic activity in large number of industrial sectors depending largely on construction industry. The Finance Bill does not seem to have paid much attention on broadening of tax base for collection of tax rather only 1% increases in Sales Tax and FED. It is also important to mention that in view of unstable political situation, continuous security threats and down grading of Pakistan sovereign rating by S&P and Moody, we do not expect that there are attractive proposition for Foreign Direct Investment (FDI). Further impending privatization of some of the Government entities may not attract the desirable price. The budget reflection that follows, are the salient features of the Finance Bill 2008-09, in terms of direct taxes, indirect taxes and corporate laws. Unless otherwise indicated, the proposed amendments will apply from tax year 2009 and the tariff amendments relating to Central Excise and Customs Duties will apply from 1 July 2008.

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DIRECT TAXES
Minimum Tax Section 113

The concept of minimum tax was first introduced during 1991. The underlying assumption was to collect tax even from those tax payers who do not have taxable profits. This levy created lot of controversy and was also challenged at judicial fora. The Honourable Supreme Court of Pakistan however upheld the levy of minimum tax. The Finance bill now proposes to withdraw minimum tax of 0.5 percent of turnover. This is the good amendment as it will remove difficulty for the loss making companies to pay taxes on turnover.
Withholding Agents Section 153

The amendment with regard to individual and AOP creates confusion as the time period for the determination of turnover has not been mentioned. It will become hard to assess the triggering point when an AOP or an individual becomes a withholding agent. This appears to be an effort to document the economy but in real terms may require an individual and an AOP to follow procedure already considered too cumbersome by corporate entities. This measure would certainly increase the cost of doing business for these small business entities.
Withholding tax on cash withdrawal

Finance bill proposes to enhance the rate of withholding tax on cash withdrawal exceeding Rupees 25,000 from 0.2% to 0.3%.
Limit of cash salary enhanced Section 21(m)

The proposed amendment in the section 153 would make the following persons withholding agents:  A small company  An individual having turnover over Rs. 25 million  An AOP having turnover exceeding Rs. 50 million. After the amendment the above persons would also become liable to withhold tax from payments made on account of supply of goods, services and contracts.

Finance bill proposes to allow payment of salary in cash up to Rs.15,000. Currently salary above Rs.10,000 should be made through crossed cheque or direct bank transfer.
Investment Allowance - First year allowance Section 23

Finance bill proposes to introduce new section through the insertion of section 23A by virtue of which an investment allowance to be called first year allowance at the rate of 90% of cost of assets would be allowable to installation of industrial
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undertaking at specified rural and under developed areas as notified by Federal government from time to time. This allowance is proposed to be allowed to corporate entities only.
Taxation of Insurance Premium Section 101 & 152

allow the business losses (other than speculation losses) of amalgamating company against profit of amalgamated company up to six years immediately succeeding tax year in which the loss was computed. This amendment may encourage companies in these sectors to consolidate their operation through amalgamation and obtain benefit of this provision.
Taxation of Banking Companies

The finance bill proposes to tax payment of insurance premium or re-insurance premium to foreign insurance and re-insurance companies and now the payment by insurance company to overseas insurance and re-insurance company is treated as Pakistan source income and taxable in Pakistan. Finance bill therefore proposes to withhold tax at the rate of 5% on payment of premium to overseas insurance or re-insurance companies which will be considered as final tax.
Taxation of insurance companies Rule 5 of Fourth Schedule

According to existing provisions of Income Tax Ordinance, 2001 any bad debt is allowable to banking company if the provision is made in accordance with the requirement of prudential regulations. The finance bill now proposes that the bad debt is allowable in accordance with section 29 of Income Tax Ordinance, 2001. Now the provision will not be allowed as expense unless the debt is written off. However a general provision at the rate of 3% of consumer loan will be allowed according to section 29A.
Taxability of branch of foreign Section 2(19f) company

Finance bill proposes to exclude unrealized capital gain and losses on investment in case of insurance companies. Previously unrealized gain and losses are included in the income of insurance companies.
Relief for amalgamating companies Section 57A

Under the Income Tax Ordinance, 2001 the brought forward losses of amalgamating company could not be set off or carried forward against business profit of amalgamated company. Now in case of banking company, non-banking finance company, modaraba and insurance companies the finance bill proposes to

Finance bill proposes to introduce provisions whereby taxation of branch of foreign company is proposed to be brought in line with taxability of subsidiary of foreign company. It proposes that the definition of dividend is extended to include remittance of profit by branch of foreign company operating in Pakistan which if approved would be treated as dividend. As a

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result of this proposed amendment the effective tax rate of company and branch of foreign company would be at par. Finance bill further proposes that the rules regarding thin capitalization would be made applicable in case of branch of foreign company.
Limit on Donation: Section 61

The payment made under this section is minimum tax on the income on developers and builders and they are required to file return of income. This propose amendment will further increase the cost of housing and it may affect the government plans to provide low cost housing to the people of Pakistan.
Imports. Section 148

According to income tax Ordinance, 2001, tax credit and direct deduction from income is allowed on donation to approved institution. The existing limit on donation is 30% income of individual and 15% in case of companies. The Finance bill now proposes to limit the donation to maximum of 10% of income in case of both individual & companies.
Taxation on Developers Builders and Section 113C

The bill proposes to omit subsection 4A. Under this section commissioner was empowered to issue reduced rate certificate at 0.5% on imports by a manufacturer provided that the manufacturer is not liable to pay any tax for that tax year. After the proposed omission the commissioner would enjoy powers to issue exemption of up to 100% in case the manufacturer has settled the advance tax liability for that tax year or has paid tax in that tax year to an amount equal to tax paid in the immediate preceding year. The rate of collection of tax under this section is proposed to be reduced from 5% to 2%. Another important change in connection with imports of capital goods and raw material by manufacturers is proposed by omission of clause 13 and subclasses (i) to (iii) of clause 13G of Part-II of the Second Schedule. By the omission of these clauses the rate of tax on imports by industrial importers and commercial importers is intended to be brought at par. It is believed that this insertion is proposed keeping in view the exploitation of reduced rate by the manufacturers.
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Finance bill proposes to introduce a minimum tax on builders and developers. The builders and developers are required to pay tax at the following rates.
1.
2.

In case of builders In case of developers

Rs. 50 per Sq. ft on covered constructed area. Rs. 100 per Sq. yard on the area of land developed.

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Payment to non residents

Section 152

The bill proposes to amend the section to the effect that permission of commissioner is not required where the payment is being made to a non resident at a reduced rate under a double taxation treaty. In the existing provision permission of commissioner is required where payment to non resident is liable to reduced rate under a treaty. This appears to be a good amendment as it would absolve the taxpayer from indulging in an undue and tiresome process of obtaining exemption.
Withholding tax on non-resident Section 153A & 169 media person

on rental income. Every person would be liable to withholding tax at a rate applicable to the slab of rental income in which such person falls. The same are as follows: 1. Where the taxpayer is an individual
Gross amount of rent Rate of tax

1 Where the gross amount of tax does not exceed Rs. Nil 150,000 2 Where the gross amount of rent exceeds Rs. 150,000 5% of but does not exceed Rs. 500,000 amount exceeding 150,000

the

The bill proposes to insert new section 153A which would render every person making payments to non resident media person liable to deduct tax. The rate of such withholding tax is proposed at 10% of the gross amount. Consequently section 169 is also proposed to be amended so as to make this deduction full and final discharge of tax liability of the non resident media persons.
Withholding tax on Income From Section 155 & 15 Property

3 Where the amount of rent exceeds 500,000 but does 17,500 +10% of not exceed 1,300,000 the amount exceeding 500,000 4 Where the gross rent exceeds 1,300,000 97,500 + 15% of the amount exceeding 1,300,000

Bill proposes to amend the rates of withholding tax at source prescribed in first schedule in relation to section 155. This proposed amendment brings in different slabs for withholding tax
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2. Where the taxpayer is a company Gross amount of rent 1 Where the gross amount of tax does not exceed Rs. 400,000 Rate of tax 5% of amount the

2 Where the gross amount of rent exceeds Rs. 400,000 20,000+ 10% of but does not exceed Rs. 1,000,000 the amount exceeding 400,000 4 Where the rent exceeds 1,000,000 80,000 + 15% of the amount exceeding 1,000,000

taxpayer would be required to pay tax at prescribed rates on any investment made by him in moveable or immoveable assets through undisclosed sources of income. Upon payment of such tax the taxpayer would become entitled to incorporate such assets in to its books of accounts and would not be liable to pay any further tax or penalty on the same. The tax so paid shall be termed as investment tax. No such scheme has yet been made available but according to the budget speech the investment tax is proposed to be 2% of the amount disclosed under the scheme. The insertion of this section would empower the FBR to announce amnesty at any time. The proposed insertion of section 146B would give opportunity to the taxpayer to pay outstanding arrears demands or withholding taxes without levy of additional tax penalty. Such payment would be made under a scheme made FBR for this purpose. an of or by

The above rates may create confusion amongst the withholding agents as a complex procedure is being proposed for the determination of value of rent. Where the rental income of a taxpayer is not subject to withholding tax, the person would be required to pay tax as per the above rates
Power given to FBR to announce Section 102A & 146B amnesty schemes

It is apparent from the insertion of above two sections that the amnesty scheme will be a regular feature and FBR may announce amnesty schemes in general or may give relief to any specified tax payer. This is discrimination with the existing tax payers who pay their tax dues diligently and honestly.

The bill proposes to insert this new section. According to the said insertion board would be empowered to make a scheme for the declaration of undisclosed income. Under the scheme the

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New Registration System

Section 181

The proposed insertion of this section would replace the existing National Tax Number system. A new taxpayer’s registration concept is being introduced. It is believed that this system would assign a universal registration number to each taxpayer who would be used for both income tax and sales tax purposes.
Rectification of errors in decision Section 134A of ADRC

This section is proposed to be amended by insertion of section 4A. The insertion would empower the chairman FBR to rectify any error in the order of Board passed consequent to recommendations of the ADRC. The order would be rectified only when the error is brought to the knowledge of the chairman by the aggrieved person. The chairman in consequence would pass such order as he seems just and equitable.
Taxation of salary

S. Taxable income No 1 Where taxable income does not exceed Rs.180,000 2 Where the taxable income exceeds Rs.180,000 but does not exceed Rs.250,000 3 Where the taxable income exceeds Rs.250,000 but does not exceed Rs.350,000 4 Where the taxable income exceeds Rs.350,000 but does not exceed Rs.400,000 5 Where the taxable income exceeds Rs.400,000 but does not exceed Rs.450,000 6 Where the taxable income exceeds Rs.450,000 but does not exceed Rs.550,000 7 Where the taxable income exceeds Rs.550,000 but does not exceed Rs.650,000 8 Where the taxable income exceeds Rs.650,000 but does not exceed Rs.750,000, 9 Where the taxable income exceeds Rs.750,000 but does not exceed Rs.900,000, 10 11 12 13 14 15 16 Where the taxable income exceeds Rs.900,000 but does not exceed Rs.1,050,000 Where the taxable income exceeds Rs.1,050,000 but does not exceed Rs.1,200,000, Where the taxable income exceeds Rs.1,200,000 but does not exceed Rs.1,450,000, Where the taxable income exceeds Rs.1,450,000 but does not exceed Rs.1,700,000, Where the taxable income exceeds Rs.1,700,000 but does not exceed Rs.1,950,000, Where the taxable income exceeds Rs.1,950,000 but does not exceed Rs.2,250,000, Where the taxable income exceeds Rs.2,250,000 but

Rate of tax. 0% 0.50% 0.75% 1.50% 2.50% 3.50% 4.50% 6.00% 7.50% 9.00% 10.00% 11.00% 12.50% 14.00% 15.00% 16.00% 9

Finance bill proposes to introduce the concept of marginal tax relief in case of taxation of employees. Further the exemption of basic limit of salary income is suggested at Rs.180,000 and 240,000 in case of working women. The rates of tax are slightly revised as well. The new rates and the comparison of existing and propose tax liability on various classes of salary income is as follows:

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17 18 19 20

does not exceed Rs.2,850,000, Where the taxable income exceeds Rs.2,850,000 but 17.50% does not exceed Rs.3,550,000, Where the taxable income exceeds Rs.3,550,000 but 18.50% does not exceed Rs.4,550,000, Where the taxable income exceeds Rs.4,550,000 but 19.00% does not exceed Rs.8,650,000, Where the taxable income exceeds Rs.8,650,000. 20.00%

However we feel that such exemption would continue to be available of the Ordinance.
Extension of exemption of Capital Gain-Clause 110 Part-I Second Schedule

Provided further that where the total income of a taxpayer marginally exceeds the maximum limit of a slab in the table, the income tax payable shall be the tax payable on the maximum of that slab plus tax on – (i) 20% of the amount by which the total income exceeds the said limit where the total income does not exceed Rs.500,000. (ii) 30% of the amount by which the total income exceeds in each slab but total income does not exceed Rs.1,050,000. (iii) 40% of the amount by which the total income exceeds in each slab but total income does not exceed Rs.2,000,000. (iv) 50% of the amount by which the total income exceeds in each slab but total income does not exceed Rs.4,450,000. (v) 60% of the amount by which the total income exceeds in each slab but the total income exceeds Rs.4,450,000.”;
Significant amendments in second schedule to the Income Tax Ordinance, 2001 Clause 132-A Part-I Second Schedule:

By the amendment proposed in this clause the exemption on capital gains is intended to be extended for another two tax years. After the said amendment capital gains under this clause would be exempt up to 30 June 2010.
Clause 13-C Part-II Second Schedule

Proposed amendment in this clause would increase the rate of withholding tax u/s 153 on purchase of locally produced edible oil by manufacturers of cooking oil or vegetable ghee. After the proposed amendment such rate would increase to 2 % which is currently at 1%.
Clause 47B Part-IV Second Schedule:

Through the proposed amendment the scope of exemption under this clause is intended to be extended to recognized Provident Funds and approved gratuity and superannuation funds. Currently these funds have to seek separate exemption from commissioner in respect of deduction of withholding tax on dividends and profit on debt. After the amendment they will no longer require separate exemption.

The bill proposes to omit this clause. On the omission of this clause the income of non resident on account of supply made by them to Hub Power Company would no longer remain exempt.
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INDIRECT TAXES
SALES TAX ENHANCEMENT OF RATE

Ever since enactment of the Sales Tax Act on 01 November 1990 the sales tax rates have undergone regular changes. At the time of enactment of the Sales Tax Act, rate of sales tax were 12.5 percent. Since then through various Finance Act, the rates of sales tax varied from 12.5 percent to 18 percent. Once again to the total disregard to the request from the business community that the tax rates are high tax rate are now proposed to be revised upward. This appears to be desperate attempt amid financial constraint the country is currently faced with. The Finance bill now proposes to change the rate of tax from 15 to 16 percent.
DEFINITIONS ARREARS SECTION 2(2A)

directly or indirectly holds or controls twenty percent shares in such company or concern. The Finance bill now proposes to substitute the definitions of Associates. It proposes to include a person who is reasonably expected to act in accordance with the intention of the others or controls fifty percent or more voting powers, rights of dividend or right of capital. The proposed amendments may effect the value of supply in case of transactions between associates.
SALES TAX SECTION 2(29A)

The Finance bill proposes to introduce the definition of Sales Tax. Sales Tax means tax, additional tax, default surcharge, fine, penalty or fee or other sum payable under the provision of the Act.
SUPPLY & TAXABLE ACTIVITY SECTION 2(33) (35)

According to definition of arrears as contained in section 2(A) of the Act arrears includes unpaid amount as have been assessed, adjudged or demanded under the Act. The Finance Bill now proposes to substitute the definition of arrears.
ASSOCIATES (ASSOCIATED PERSONS) SECTION 2(3)

According to the definitions any person considered to be associated if they are under common management and control or

Definition of supply includes putting to private, business or non business use of goods acquired, produced or manufactured in the course of business. Consequently taxable activity means use of goods acquired for private purpose and whether for any consideration or otherwise. The Finance Bill now proposes to substitute the definitions. According to the proposed amendments putting to private, business or non business use of goods will not constitute supply. Consequently definitions of taxable activity also proposes to be amended and the word use of goods for private purpose and whether for any consideration or otherwise is proposed to be

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deleted. This seems to be major change in the definitions of these two terms in view of judgment on taxability of baggasse used in sugar industry. The bill also proposes to exclude from the purview of taxable activity, any activity carried by an individual as a private recreational pursuit or hobby.
TIME OF SUPPLY SECTION 2(44)

INPUT TAX ON FIXED ASSETS

SECTION 8B

The bill proposes to amend the time of supply in case goods are made available to the recipient. This is currently applicable to supply to concerns. The bill also proposes to include time of supply in case of rendering of services which is treated as supply at the time services are rendered.
DETERMINATION OF TAX LIABILITY SECTION 7

Section 8 of the Act provides that tax payer shall not be allowed adjustment of input in excess of 90 percent of the output tax for that period. According to the proviso to Sub Section 1 of Section 8 of the Act tax charged on the acquisition of fixed assets shall be adjustable against output tax in twelve equal monthly instalments after the start of production of new unit. This proviso created confusion regarding treatment of input tax paid on fixed assets acquired by existing unit. The bill now proposes to delete the requirement of new unit for the purpose of claiming input tax on fixed assets and therefore input tax on acquisition of plant and machinery by existing unit would also be available.
REFUND OF INPUT TAX SECTION 10

According to the proviso to Sub Section 1 of Section 7 of the Act the tax payer may adjust input tax paid in the immediate twelve preceding tax periods from out put tax subject to the conditions that taxpayer specifies the reasons for such delayed input tax adjustments. The bill now proposes to allow the adjustment of input tax in six succeeding tax periods without obtaining approval and specifying the reasons of delay. This amendment will now help tax payer in case of genuine default without going into the wriggle with tax authorities.

Section 10 of the Act provides time limit for refund of excess input tax from out put tax on account of zero rated or export. However there is no prescribed procedure for refund arising on any account other than zero rated or export. The Finance bill now proposes to allow carry forward of excess input tax to the next period for supplies other than zero rated or export.
ASSESSMENT OF TAX (SALES TAX) (FEDERAL EXCISE) SECTION 11, 36, 45B SECTION 14, 31, 33

Section 11 empowers the sales tax officer to make assessment of tax in case person fails to file sales tax return or pay less than the
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amount of tax actually payable after giving show cause notice to the tax payer. Presently there is no time limit for issuance of show cause notice. The bill now proposes to restrict the time limit for issuance of show cause notice up to five years. Further the bill also proposes to enhance the limit of making order within 180 days from the date of issuance of show cause notice from the existing limit of 90 days. Similarly the time lines for finalizing order by tax officials and Collectors have been increases from 90 days to 120 days.
ACCESS TO RECORD AND DOCUMENTS SECTION 25

PENALTY FOR NON FILING OF SALE & PURCHASE SUMMARY

The Finance bill proposes to delete penalty of Rs 25,000 on non filing of sales and purchase summary. This amendment is necessary in view of change in Sales tax returns which already includes sales and purchase summary.
DEFAULT SURCHARGE (SALES TAX) (FEDERAL EXCISE) SECTION 34 SECTION 8

According to the provisions contained in Sub Section 2 of section 25 the sales tax officer may conduct audit once in a year. In view of this provision of law the tax payers were refusing sales tax authorities from conducting audit of the records once the audit is conducted by the Auditor General of Pakistan (DRRA). The Finance bill now proposes to provide legal cover to audit by sales tax officer in case Auditor General of Pakistan (DRRA) has conducted the audit earlier.
REVISED RETURN (SALES TAX) (FEDERAL EXCISE) SECTION 26 SECTION 4

The Finance bill proposes a flat rate of default surcharge of 1.5 percent per month in lieu of existing rate of 1 percent in case of default of first six month and 1.5 percent in case default from seventh month and onwards.
AMNESTY SCHEME

The Finance bill proposes to enhance the time limit to file revised return from 90 days to 180 days.

The Federal Government vide notification 511(I)/2008 dated 5 June 2008 has introduced amnesty scheme to exempt whole amount of default surcharge and penalties payable by a person against whom any amount of sales tax and federal excise duty is outstanding on account of audit observation, audit report, show cause notice or adjudication orders. In order to avail benefits under the notification principal amount sales tax or federal excise duty is required to be paid by 30 June 2008. The Federal Government vide notification 524(I)/2008 dated 11 June 2008 has now introduces another amnesty scheme for voluntary registration of a person who were otherwise liable to be
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registered under the Act. Amount of sales tax, default surcharge and penalties are proposed to be waived in case such persons apply for registration during 1st June to 31st July 2008.
SALES TAX SPECIAL PROCEDURES RULES 2007 COMMERCIAL IMPORTERS

Commercial importer shall now file monthly tax return in place of existing requirement of quarterly return.
RETAILERS

The commercial importers are currently paying sales tax at the rate of 2 percent of the value of goods imported in addition to 15 percent sales chargeable under section 15 of the Act. The tax paid at import stage constitutes final tax liability for commercial importer in case output tax charged by the importer does not exceeds input tax. The Federal Government now through notification 525(I)/2008 has abolished this system for commercial importers w.e.f. 01 July 2008. The commercial importers are liable to pay tax at the rate 17 percent at the time of import. The tax paid at import stage shall form part of input tax and deductible from out put tax due for the tax period. Tax paid at the rate of 2 percent is adjustable in case out put tax charged exceeds from 17 percent. However no refund will be allowed of excess input tax over output tax which is attributable to value addition. Refund will be allowed for excess carried forward input tax, other than input tax on value addition, as provided in Section 10 of the Act. Commercial importers shall be excluded from the purview of section 8B of the Act provided value of import subjected to 2 percent value addition tax exceeds 50 percent of all taxable purchases in a tax period.

Retailers are currently under rule 3 of the Sales Tax Special Procedures Rules, 2007 are liable to tax in case annual turnover increases by Rs five million. By amendment in the rules the retailers including Jewellers are liable to pay tax in case their quarterly turnover increases beyond Rs 1.25 million.
CNG

By amendments in the rule supplier of natural gas are liable to charge sales tax @ 25 percent of amount billed for supply of natural gas to CNG stations. Currently CNG operators are paying sales tax @ 24 percent
FEDERAL EXCISE DUTY INCREASE IN RATE

In line with amendment in rate of Sales tax, the rates of Federal Excise duty on excisable goods and services are also proposed to be increased from 15 percent to 16 percent. However general rate of Excise duty as per section 3 is still 15 percent. Following goods and services are currently charged at the 15 percent.  Edible oil  Vegetable ghee  Concentrates for aerated beverages
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 Advertisement on close circuit TV and cable TV network  Inland carriage of goods by air.  International Freight forwarders
DEFINITIONS DUTY DUE SECTION 2(9a)

DETERMINATION OF VALUE FOR THE PURPOSE OF DUTY

SECTION 12

The Finance bill proposes to amend sub section 1 of section 12 where any goods are liable to duty at the rate dependent on their value. Presently duty shall be assessed and paid on wholesale cash price of goods and now value of goods would be according to the value of supply as contained in Sales Tax Act.
INCREASE IN EXCISE DUTY

Presently date of accrual of duty is the last date of month. The Finance bill now proposes to change the date from last month to time of filing of return. This seems to be correction in law as FED return is currently being filed with the sales tax Return
FRANCHISE SECTION 2(12a)

Apart from general increase in rate of Federal Excise Duty following significant increase in the FED is proposed to be made.
EXISTING PROPOSED

The finance bill now proposes to introduce definition of franchise. As per definition franchise includes royalty, technical fee trade mark brand name or any such representation or symbol.
EXCISABLE SERVICES SECTION 3

Telecommunication Services 15% Cement Insurance Franchise Services Non Fund based banking Services Import & locally manufactured cars Exceeding 850CC Rs.750/ton 5% 5% 5% Nil

21% Rs.900/ton 10% 10% 10% 5%

The Finance bill now proposes to levy duty on services originating outside Pakistan but terminating in Pakistan. The liability to pay Excise duty in this case would be on person who is recipient of service in Pakistan.

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CUSTOMS ACT , 1969 (IV OF 1969)

The Finance Bill 2008 proposes certain changes aiming to provide incentives to Industries for growth and expansion, by discouraging import of non-essential and luxury items and cascading the principle in tariff rates maintained as guiding principle i.e. primary raw materials taxed at 0%-5%, secondary/components taxed at 5-10% and finished goods taxed at 20-35%. The Bill proposes to provide relief in import duty to the following:  Local producer of water dispensers, hooks & eyes, aluminium alloy, electric irons, mini choppers, vacuum cleaners, central heating gas boilers, mini ovens, gas heaters, gas stoves/cooking ranges with ovens, air handling equipments, central heating equipments, UPS, Chlorinated paraffin, chrysotile cement pipes, sheets & fittings and perforated steel products would be provided inputs at 0%, 5% and 10%.  Fully dedicated CNG buses exempted of from duty.  Pharmaceutical industry given specified active ingredients, chemicals and packing materials at 5% duty.  Eighteen medicines used for cancer/heart treatment etc. exempted from customs duty.  Bitumen, JP4&JP8 exempted from duty. Duty rate on base oil for lubricating oils reduced from 20% to 10%.  Rice seeds, energy saving lamps, dredgers, specified solar energy equipments exempted from customs duty.

 Power plants imported by WAPDA on temporary basis exempted from customs duty.  Reduction of duty on calcium carbide from 15% to 5%, PTA from 15% TO 7.5%, PSF 6.5% to 4.5%, Caustic soda from Rs.5000/MT to Rs.4000/MT, Printing screens from 15% to 10%, nickel not alloyed from 5% to 0%, Textile buckram from 25% to 10%.  Manufacturers have been allowed to import samples duty free as per specified conditions in chapter 99 of PCT.  Seized/confiscated vehicles as on 31 May 2008 may be released against payment of leviable duty/taxes and 30% redemption fine. The Bill also proposes to impose increased import duty on the following:  Duty rates on dairy products, fruits, chewing gum, chocolate, processed food, fruit juices, aerated waters, ceramic products, air-conditioners/refrigerators, electric fans, toasters, micro wave ovens, televisions, furniture and lighting equipment etc increased from 25% to 35%.  Duty rates on cosmetics increased from 20 -25% to 35%.  Duty rate on electric ovens/ cooking ranges etc. increased from 20% to 30%.  Customs duty @ Rs. 500/ per set levied on import of mobile phone.

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JAI Junaidy Alam Iqbal - Chartered Accountants

 Customs duty on betel leaves increased from Rs.150/kg to Rs. 200/kg.  Duty rate increased on sulphonic acid from 10% to 15%.  Duty rate increased on CKD/SKD of sewing machines from 5% to 20%  A uniform rate of 30% specified for import of special purpose motor vehicles.  Increase in duty rates on import of cars/jeeps above 1800cc from 90% to 100%.  Fixed duty/tax rates on old and used cars/jeeps increased by 10%. It is proposed in the Bill to provide certain incentives to manufacturers, particularly soap manufacturers based in AJ&K have been extended concessionary duty regime in line with SRO 565(I)/2006, as available to Pakistan based manufacturers. Also specified industries/projects have been de-linked from the local manufacturing condition for import of required machinery, equipments and raw materials etc. Tariff based system (TBS) for auto sector has further been improved and release of held up indemnity bonds is eased out. Following amendments have been proposed in the Customs Act, 1969:

 A new section 3DD is proposed to be introduced in the Customs Act, 1969 for constituting a Directorate General of Post Clearance Audit (PCA).  A proviso is proposed to be added to section 155F of the Customs Act for suspension of unique user identifier of any person.  Section 156 is proposed to be amended to provide for penalizing the custodian of any goods for involvement in an offence under the Customs Act.  Section 179 of the Customs Act is proposed to be amended for allowing adjudicating officers to decide cases within 120 days.  Section 194C is proposed to be amended for enhancing the
limit of single bench of the Appellate Tribunal from five to ten million rupees.

 A new sub-section 4A is proposed to be added in section
195C for redressel of grievances of an aggrieved person.

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JAI Junaidy Alam Iqbal - Chartered Accountants

CORPORATE L AWS
PETROLEUM PRODUCTS (D EVELOPMENT S URCHARGE) ORDINANCE, 1961

MINIMUM WAGES FOR UNSKILLED WORKERS ORDINANCE 1969 (W.P.ORDINANCE NO.XX OF 1969)

The budget proposes to bring the persons engaged in the licensed activities concerning Compressed Natural Gas (CNG) and Liquefied Petroleum Gas (LPG) within the ambit of this Ordinance. Section 2(5) of the Ordinance has been amended to include CNG and LPG in the definition of petroleum products. Section 3(1A) is inserted by Finance Bill which seeks to levy development surcharge on the licenses of CNG and LPG businesses.
PROVINCIAL EMPLOYEES’ SOCIAL SECURITY ORDINANCE, 1965 (W.P. ORDINANCE NO.X OF 1965)

The budget inline with the earlier announcement by the Federal Government officials has proposed to enhance the minimum wages of the downtrodden workers from Rs.4600/- per month of Rs.6000/- per month.
WORKERS WELFARE FUND ORDINANCE 1971 (ORDINANCE NO.XXXVI OF 1971)

The budget proposes to include all workers drawing wages upto Rs.10,000/- per month under the Social Security Ordinance. Clause 6(2) seeks to reduce rate of contribution from 7% to 6% under the Social Security Ordinance, 1965.
SECURITIES AND EXCHANGE ORDINANCE, 1969

One of the most crucial changes proposed in the budget is the imposition of WWF on all types of commercial and service establishments. This is being proposed by inserting section 2(f) (iva) whereby any establishment, to which the West Pakistan Shops and Establishment Ordinance, 1969 (W.P. Ordinance No.VIII of 1969), for the time being applies, is liable to pay to the Fund an amount as per the provisions of the Ordinance.
SECURITIES AND EXCHANGE COMMISSION OF PAKISTAN ACT, 1997

The budget proposes to enhance the power of the Commission relating to insider trading. The Commission has been empowered to make rules for the investigation in cases of insider trading. Major definition (insider trading and insider information) have been elaborated in Section 15 of the Ordinance.

Most of the proposed changes in the budget appear to provide enabling provision to the Commission to make rules and regulations. Important powers being proposed to be vested in Commission is in respect of Section 24 of the Act which would empower the Commission:  to conduct hearing and decide on investor’s complaint.

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JAI Junaidy Alam Iqbal - Chartered Accountants

 to constitute panel of auditor for the Companies and also to approve auditors for financial institutions, listed companies and NBFIs.
INSURANCE ORDINANCE, 2000

Section 158

The budget proposed to increase the annual supervision fee payable to the Commission under Section 11(3) (a) from Rs.100,000 to Rs.500,000.
LISTED COMPANIES (SUBSTANTIAL ACQUISITION VOTING SHARES AND TAKE-OVERS) ORDINANCE, 2002 OF

Sub-section (1) Annual general meeting is proposed to be amended to extend the period for holding the AGM from existing “three” months to “four” months. Sub-section (4) is proposed to be amended as follows:  Clause (a) is proposed to be amended to increase the fine for non compliance on listed company from “twenty” thousand rupees to “fifty” thousand rupees and further fine from “fifty” thousand rupees to “five hundred” thousand rupees.  Clause (b) is proposed to be amended to increase the fine on any other company from “ten” thousand rupees to “one hundred” thousand rupees.
Section 187

Budget has proposed that the exemption from disclosure to be made under the Takeovers Ordinance does not extend to allotment of voting shares under section 86(7) of the Companies Ordinance, to transfer of voting shares between relatives without consideration, acquisition of voting shares by CFS Financiers acting as financiers, transfer of voting shares from sponsors of a holding company to the holding company and acquisition of voting shares by a strategic investor in a demutualised stock exchange. Finance Bill has proposed that acquirer be it a local or foreign company, the directors will be responsible to make the disclosures as required under the Ordinance.
THE COMPANIES ORDINANCE 1984

Section 187 relates to “ineligibility of certain persons to become director”. Clause (j) of the section proposes to restrict the appointment of a person who is a sponsor, director or officer of corporate brokerage house on the board of the Company.

The Finance Bill has proposed the following amendments to the Companies Ordinance, 1984.

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JAI Junaidy Alam Iqbal - Chartered Accountants

Section 206(2)

In Sub-section (2) of section 206 clause (d) and (e) are proposed to be inserted to provide exemption to the following from appointment as managing agent or sole purchase and sales agent.  NBFC’s licensed to undertake asset management services in relation to an investment company registered with the Commission.  Venture capital Company in relation to a fund registered with the Commission.
Section 233

Subject to the proposed amendments in sub-section (1) of section 158, consequential amendment is also proposed in Section 233 relating to “Annual Accounts and balance sheet”.
Section 251

Sub-section (1) relates to “period for payment of dividend” is proposed to be amended to provide powers to the Commission to specify time for the payment of dividend.

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