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Deloitte. M.

Yousuf Adil Saleem & Co


Chartered Accountants
Budget 2008-09

Budget 2006-07
C O N T E N T S
Preamble

Budget at a Glance ………………………………………….2

An Overview of the Economy and Budget 08-09 ………3

Highlights of Important Fiscal Proposals ……………..11

Significant Proposed Amendments In:

Income Tax Ordinance, 2001 ……………………………..16


Sales Tax Act, 1990 ………………………………………...35
Federal Excise Act, 2005 …………………………………..42
Customs Act, 1969 ………………………………………….48
Capital Value Tax (CVT) ……………………………………50
Federal Board of Revenue Act, 2007 ……………………..51
Economic Reforms Act, 1992 ……………………………...51
Labour Laws …………………………………………………52

Minimum Wages for Unskilled Workers Ordinance, 1969 …..52


Provincial Employees' Social Security Ordinance, 1965 ………..52
Industrial and Commercial Employment (Standing Orders)
Ordinance, 1968 ……………………………………………………..52
Workers Welfare Fund Ordinance, 1971 ……………………….…52

PREAMBLE
The Employees’ Old-Age Benefits Act, 1976 …………………...53

Corporate Laws
As a part of our ongoing efforts to meet the needs of our
clients and staff, we prepare this memorandum each year Companies Ordinance, 1984 ……………………………………....55
which contains highlights and our comments on Finance Bill. Insurance Ordinance, 2000 ………………………………………...56
This commentary is for general guidance as such before Securities and Exchange Commission of Pakistan Act, 1997 ….56
considering the precise effect of a particular change reference Securities and Exchange Ordinance, 1969 ……………………….57
should be made to the provisions of the relevant statute. Khushhali Bank Ordinance, 2000 ………………………………….58
Modaraba Companies and Modaraba
This memorandum contains an economic review, highlights of (Floatation and Control) Ordinance, 1980 ……………………..58
fiscal measures and explanatory description of the significant Foreign Exchange Regulations Act, 1947 ………………………...59
changes in the Income Tax, Sales Tax, Federal Excise, Listed Companies (Substantial Acquisition of
Custom, Corporate, Labour and other related laws proposed Voting Shares and Take-Overs) Ordinance, 2002 ……………….59
through Finance Bill, 2008. Certain other relevant information
on corporate laws and IFRS are also included in this
memorandum. Significant Circulars / Notifications issued
by The Securities and Exchange Commission
Amendments proposed in the Finance Bill 2008 will take of Pakistan (SECP) during 2007-2008 ………………….61
effect from July 01, 2008, unless otherwise provided, once it
is approved by the parliament.
Overview of newly adapted IFRSs
The memorandum is prepared with a view to keep the clients
and staff abreast of the changes in fiscal and other laws. The IFRS 7 Financial Instruments: Disclosures ……………….68
users are therefore advised to seek professional advice IFRS 8 Operating Segments ……………………………….69
before exercising and applying any legal provision and acting
thereupon. The firm accepts no responsibility for any action Significant amendments made by IASB in IFRSs ..…..….70
taken (or not taken) as a result of the information contained in
this document.

The memorandum can also be accessed on our web side


www.deloitte.com/pk

Karachi
June 12, 2008

1
Budget 2008-09

Budget at a Glance Budget 2006-07

Sources of Funds - 2008-09


(Estimated)
Rupees
*Net Revenue Receipts
in billion % 1.25%
7.41% Net Capital Receipts
3.93%
*Net Revenue Receipts 1,111 55.3 External Receipts
Net Capital Receipts 221 11.0 6.19%
Self Financing of PSDP by
External Receipts 300 14.9 Provinces

Self Financing of PSDP by Change in Provincial Cash


Balance
Provinces 124 6.2 Privatization Proceeds
Change in Provincial Cash
Balance 14.94% Bank Borrowing
79 3.9
Privatization Proceeds 25 1.3 55.27%

Bank Borrowing 149 7.4


11.01%
Total Sources of Funds 2,010 100

Application of Funds - 2008-09 General Public Services


(Estimated) 46.24% (including Debt Servicing)
Rupees 25.70%
Defence Affairs and
in billion % Services
General Public Services
(including Debt Servicing) 930 46.3 Public Order & Safety Affairs

Development Expenditure 516 25.7


1.99% Economic Affairs
Defence Affairs and Services 296 14.7
Public Order & Safety Affairs 27 1.3
Economic Affairs 201 10.0 Others

Others 40 2.0
10.01% Development Expenditure
Total Application of Funds 2,010 100

1.33% 14.73%

*Net Revenue Receipts


Rupees
in billion %
a) Direct and Indirect Taxes 1,251.5 112.7
b) Non-Tax Revenue 427.8 38.5
Gross Revenue Receipts (a+b) 1,679.3 151.2
Less: Provincial Share in Taxes 568.3 51.2
1,111.0 100

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Budget 2008-09

An Overview of the Economy and Budget 08-09 Budget 2006-07

Faced with multiple crises of Fuel, Food and Energy shortages and price spiral coupled with acute resource crunch,
the Finance Minister and his team must be congratulated for presenting a record budget of over Rs. 2 trillion for
2008-09. The budget also includes an enhanced Public Sector Development Program, notwithstanding questions as
how this program will be funded. The most distinguishing feature of this budget is the proposal for direct intervention
through cash subsidies to the poorest segment of the country through budgetary allocation of Rs. 34 billion. This,
together with subsidy on fertilizer, larger allocations for agriculture sector that has been badly neglected in the past,
increase in salary & pension of government employees and increase in minimum wages to Rs. 6000 per month,
clearly reflects on the government’s commitment to provide support to the weakest and the poorest segments of the
populace.

While these may be steps in the right direction, considering the unprecedented food inflation that may have
pushed a very large section of the population to below poverty line, souring fuel prices that has forced the
government to borrow nearly half a trillion rupees, they do raise some fundamental questions. The biggest
question is how will this budget be financed in the back drop of slowing economic growth, stagnant tax collections
during current year, dwindling proceeds from privatization, and continuing rise in oil prices that inherently erodes
whatever fiscal space is available to the government? The other big question is whether and to what extent the
government will be able to address the unprecedented food inflation that has climbed to over 15% as per the
government’s own estimates?

Before discussing the budget proposals and the fundamental questions on resource availability, it would be pertinent
to analyze the current state of the economy, which has been depicted in the Economic Survey 2007-08 published a
day before the budget.

The most apparent message that has emerged from the analysis presented in the Economic Survey for the current
year is that virtually all the targets for the current year have been missed. Salient features of economic performance
during the year are summarized below:

• The overall economic growth during the year, which had surged to around 7% in the past five years, reduced to
5.8%. While this growth is much lower than the target and the past performance, it nevertheless should be
considered a good performance, especially considering the adverse internal and external environment that has
prevailed during most of this year. At a time when the global economy was plagued with financial, fuel and food
crises and in a year of massive uncertainty owing to elections, judicial crises, imposition of emergency, the
assassination of the leader of the largest party in the country, most adverse law & order situation and lack of any
governance during major part of the year, achieving a growth close to 6% clearly points to the strength and
resilience of Pakistan’s Economy.

• The most conspicuous factor responsible for this slow down compared to growth momentum in the previous five
years, is the dismal performance of the Agriculture Sector. As shown in the table below, in a year when the world
is facing one of the worst food crises, the growth of Agriculture this year decelerated to 1.5% compared to an
average growth rate of 3.7% in the past five years, and 4.4% in the decade of 90s. In fact, as far as four major
crops are concerned, their over all production actually declined by 3% compared to the previous year, and the
above meager growth was also derived from significant growth in livestock of around 11%.

• Large-scale manufacturing registered a growth of 4.8% in 2007-08 against the target of 10.9% and last year’s
achievement of 8.6%., exhibiting signs of moderation on account of saturation in capacity utilization, power
shortages and the questions about competitiveness of our industry.

• Total investment could not sustain its record level of 22.9 percent of GDP of the last fiscal year and declined to
21.6 percent of GDP in 2007-08, but this decline is considered marginal. In fact, even in this year of uncertainty,
Pakistan did receive foreign direct investment of US $ 3.5 billion in the first 10 months, which is only $ 700 million
less than last year, reflecting continued investor confidence on Pakistan’s economy.

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Budget 2008-09

• National savings plummeted to 13.9% of the GDP compared to 17.8% in the previous year, primarily due to
Budget
steep rise in fiscal deficit to 7% of the GDP that caused the government to borrow an all 2006-07
time record amount of
Rs.551 billion (upto May 2008) from the State Bank. As can be seen from the graph below, as the savings rates
declines significantly, the gap between the savings and investment is widening, which will naturally increase the
burden of loans on the government. Due to this, the public sector has, once again, become one of the largest
borrower from the banking sector, as it used to be prior to September 11, 2001.

• The country is facing an all time high trade deficit of over US $ 21 billion, with imports rising to over $ 40 billion
compared to the exports of around $ 19 billion. Consequently, the balance of payments deficit is expected to rise
to 7% percent of the GDP, which resulted in depletion of foreign currency reserves by nearly $ 4 billion during the
year despite significant rise in foreign remittances. As a consequence, rupee which had remained stable in
comparison to US $ in the past five years, lost its value by 6.5% in the past few months. While the major culprit
responsible for deterioration of external account as well as extremely adverse financial condition of the
government was virtually an unthinkable rise in the price of fuel in the international market, the previous political
and care taker governments remained virtually silent spectators to these adverse developments having failed to
take any corrective action.

• As a consequence of global fuel and food crises, combined with total lack of government action and significant
reduction in agricultural productivity, the country is witnessing one of the worst inflation in the past two decades
or so. While the overall inflation climbed to 11% compared to 7.8% in the previous year, the food inflation has
risen to 15%. As poor families spend 80% of their income on food, this has made tremendous impact on the daily
lives of vast majority of poor. Although there are no estimates available, it must have increased significantly, the
portion of population living below the poverty line.

• On the positive side, a part from achieving a reasonable overall GDP growth, the Services sector continued to
maintain solid pace of expansion, growing by 8.2 percent. In the external account, the workers remittances have
risen by 19.5 percent to $ 5.3 billion in 10 months. Also, another positive outcome of the year was that the Per
Capita income continued to reflect healthy growth, as it registered a growth of 17.3 percent this year and crossed
$ 1000 mark to US$ 1,085 as compared to US $925 last year, as the GNP grew by over six percent and the
growth in population was contained to around 2%.

The above dismal performance in the external account, which has resulted in significant depreciation of Rupee,
further reinforces the view that the previous government’s policies of pursuing growth through increase in
consumption and unhindered imports rather than through investment and exports was seriously flawed and not
sustainable. The other most conspicuous policy lapse of the previous government is the culpable neglect of
Agriculture Sector, which has stagnated to 3.4% annual average growth compared to an average growth of 4.4% in
the 90s, and in current year its growth plummeted to a meager 1.5% plunging the economy into worst food crises.
Lack of investments in seed, technology, research and other measures to enhance productivity of Agriculture Sector
in the past eight years, despite huge fiscal space created by unprecedented flows in the economy, is the most
important factor responsible for falling agricultural productivity. Had the government focused on this sector, and even
if the growth of agriculture this year would have been the same as average growth of 90s at 4.4%, the GDP growth
this year would have been higher by 1 percentage point to 6.8%. And more importantly, had the major crops
production not declined compared to the previous year, the country would have been saved from wheat shortages
and unprecedented food inflation in the economy.

A brief summary of sector-wise performance and other key economic indicators are presented in the following tables
and graphs depicting the state of the economy and its trend in recent years.

Sector Growth Performance (Percentage)

1990’s 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08


GDP 4.6 4.7 7.5 8.6 6.6 6.8 5.8
Agriculture 4.4 4.3 2.3 6.7 1.6 3.7 1.5
Manufacturing 4.8 6.9 14.0 12.6 10.0 8.2 5.4
Large-scale manufacturing 3.6 7.2 18.1 15.6 10.7 8.6 4.8
Services 4.6 5.2 5.9 8.0 9.6 7.6 8.2

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Budget 2008-09

GDP and GNP Growth (Percentage)


Budget 2006-07

10.0
8.6 8.3
9.0 7.5 7.3
8.0 6.8 6.7
6.3 6.6
7.0 6.4 5.8 6.1
4.6
6.0
4.0 4.7
5.0
4.0
3.0
2.0
1.0
-
1990's 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

GDP GNP

Population and GDP (Percentage)

10.00
9.00
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
-
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Population growth GDP growth

Structure of Saving & Investment as percentage of GDP

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08*


TOTAL INVESTMENT 16.8 16.9 16.6 19.10 22.10 22.90 21.60
Gross Fixed Investment 15.5 15.3 15.0 17.5 20.5 21.3 20.0
Public Investment 4.2 4.0 4.0 4.3 4.8 5.7 5.7
Private Investment 11.3 11.3 10.9 13.1 15.7 15.6 14.2
NATIONAL SAVINGS 18.6 20.8 17.9 17.5 18.2 17.8 13.9
Domestic Saving 18.1 17.6 15.7 15.40 16.30 16.0 11.7

* Provisional

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Budget 2008-09

National savings to Total investment (percentage) Budget 2006-07

23.00
22.00
21.00
20.00
19.00
18.00
17.00
16.00
15.00
14.00
13.00
12.00
11.00
10.00
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08*

National Savings Total Investment

Foreign remittances by workers

610.00
590.00
570.00
550.00
530.00
510.00
490.00
470.00
450.00
430.00
410.00
390.00
370.00
July August September October November December January February March April

2006-07 2007-08

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Budget 2008-09

Economic Growth and other key budget targets for fiscal year 2008-09
Budget 2006-07
Owing to the current adverse economic conditions, having missed most of the economic targets during the year, and
considering adverse impact of global slow down, food and fuel crises, the following key targets for fiscal year 2008-
09 have been planned.

a) GDP growth is targeted at 5.5%, which will be lower than current year’s growth of 5.8%. This is a modest
target, and it assumes expected increase of 3.5% for Agriculture sector and 6.1% growth for
manufacturing and service sectors.

b) Inflation is targeted at 12%.

c) Gross investment to GDP ratio is estimated at 25%, which appears to be an ambitious target,
considering the current turbulence in financial markets around the world.

d) Overall budget outlay is pitched at Rs. 2,010 billion which is nearly 30% higher than the size of budget
estimates and only 3% higher than the revised estimates for the current year. While the current
expenditure is proposed at 1,493 billion, 1.5% lower than the revised estimates for current year, the
development expenditure is pitched at Rs. 550 billion being 20% higher than then the revised estimates
for current year.

e) Fiscal deficit is targeted at 4.7% compared to 7% in the current year and the borrowing from the State
Bank, which is expected to be Rs. 424 billion during the year, is planned to be reduced to Rs. 149 billion
next year. In order to achieve this, the government is planning to mobilize FBR tax revenue of Rs. 1.25
trillion, which means tax collections are planned to be increased by nearly 25% compared to current
year’s collections. Additionally, to finance such a large budget outlay, the Capital Receipts are expected
to rise to Rs. 220 billion, non-tax revenue to Rs. 428 billion and external loans to Rs. 300 billion
compared to the revised estimates of current year of Rs. 143 billion, Rs 393 billion and Rs. 275 billion
respectively. Additionally, the privatization proceeds are expected to be Rs. 25 billion compared to Rs.
75 billion and Rs. 1.6 billion respectively as per original and revised estimates for current year. Major
increase expected in Non-tax revenue will be profit from State Bank estimated at Rs. 110 billion
compared to Rs. 88 billion as per revised estimates. Within capital receipts, major increase is planned
through additional resource mobilization from saving schemes (expected increase of Rs. 51 billion), short
term credits (expected increase of Rs. 17 billion), Pakistan Investment Board (Rs. 13 billion).

f) Current Account deficit for the next year is pitched at 6% percent of the GDP compared to 7% of GDP
during the current year. The reduction is expected due to targeted deceleration in imports, which si
expected to grow at the rate of 6.5% compared to nearly 30% increase during the current year. The
imports are expected to be curtailed mainly through enhancement in custom’s duty rates by 10 to 15%
on 300 non-essential and luxury items.

g) Foreign Exchange reserves are expected to remain at more or less the same level, which is $ 12 billion.

Key Changes in the policy framework for achieving sustainable economic growth and stability

On the whole, the budget estimates and related policy framework, appear to be the right direction. The Finance
Minister also announced the budget, to be a part of a medium term plan, which is under preparation, and there
are some proposals that reflect strategic shift from the past. These are direct cash subsidies for the poor and
focus on Agriculture Sector to enhance its productivity that can reduce rural poverty as well as stabilize prices of
agricultural commodities, major investment to increase power generation in the shortest possible time to
address the problem of power shortages.

Rising inflation, investment on Agriculture and poverty

The rate of inflation stood at 10.3 percent in the first 10 months (July – April) but it is expected to rise to 11 percent
for the whole year, where as the food inflation is at all time high of 15%. Main cause of this inflation is steep rise in oil

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Budget 2008-09

prices that has not been passed on to the consumer due to subsidies on petroleum and power amounting to Rs. 400
billion. The financing from the State Bank of Rs. 424 billion and fiscal deficit of 7% of the Budget 2006-07
GDP, large trade and
current account deficits, depreciation in the value of rupee have all contributed to price spiral, besides shortages, but
the most important contributor to such price spiral is decline in agricultural productivity coupled with steep increase in
such commodity prices in international market.

As per a recent report of the World Bank on Agriculture, the price of wheat has gone up by 125% and that of Rice by
75% compared to last year in the international market. Accordingly to commodity price index published in the
Economist Magazine, the food commodity price index has gone up by 60% compared to last year. Soaring prices of
agricultural commodities have been blamed on lower agricultural production, weather shocks, shift to bio fuels in the
wake of higher cost of oil and higher cost of inputs like fertilizer.

Continuous increase in world food prices has brought into focus, the need for investing more in Agriculture to
enhance its productivity. Although, contribution of Agriculture in overall GDP has declined over the years, it still
remains the most important source of livelihood for majority of the people of this country. While its direct contribution
to the GDP is around 21%, since most of the industry is agro based (Textiles, Sugar, Fertilizer, paper, dairy industry
are closely connected with agriculture) and the services sector is also linked with agriculture, its contribution to
national economy is pervassive. Nearly 75% of the poor in South Asian countries (including India and Pakistan) live
in the rural areas, who are directly or indirectly dependent on agriculture. Consequently, economic growth and
prosperity of largest number of people of countries like Pakistan depends on the Agricultural productivity. In India, the
government spends nearly 8% of the GDP (including 6% as subsidies) on Agriculture. Compared to this, Pakistan’s
spending on Agricluture is hardly 2 to 3% of the GDP. For instance, if Pakistan was to give subsidy to farmers at the
same rate as India, the aggregate amount of subsidy would be Rs. 600 billion. Compared to this, the allocation on
Fertilizer subsidy for 2008-09 (which is the only subsidy to the farmer) will be Rs. 35 billion.

After years of neglect and low investment, agriculture actually presents an unprecedented opportunity for a Country
like Pakistan whose economy is largely agro based, to enhance prosperity of large section of its population, reduce
massive poverty and confront widening rural and urban income disparities. Due to current price spiral, the support
prices of agricultural commodities need to be raised significantly, which will make investment in Agriculture more
profitable. While the government needs to enhance its public investment on Agriculture Research, Seed
development, Rural Farm to Market Roads, Irrigation, Agricultural inputs like Fertilizer, and access to agricultural
credit, there is significant incentive for the farmers to invest and grow more. In other words, Agriculture has to be at
the center of the government’s development agenda if the country has to face current food shortages and increase
overall prosperity of its people. Consequently, the government’s current focus on agriculture, which entails slight
increase in subsidy on Fertilizers of Rs. 35 billion compared to currently year’s revised estimates of Rs. 29.5 billion
and the provision of Rs. 75 billion in the PSDP to improve water availability and efficient use of water resources is
welcome change. Clearly, more needs to be done by the Federal and Provincial Governments, in coordination with
each other, to increase agricultural productivity.

Inflation Trend (Percentage)

12

10

0
1998-99 1999-00 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008*

* The figures of 2007-08 are from July to April only.

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Budget 2008-09

Benazir Income Support Program


Budget 2006-07
Rs. 34 billion have been earmarked for income support program aimed at helping the poorest of the poor. The
program is planned to be expanded to Rs. 50 billion and every deserving household will be provided Rs. 1000 per
month. This is the first time that any Pakistan government has decided to provide direct cash grant targeted at the
poorest of the poor, who are living below subsistence level. In the current situation of spiraling commodity prices, this
appears to be the only option to provide some relief to the poor. In fact, once this program is in place, the
government should consider reducing large amounts of subsidies of over Rs. 400 billion this year, which are given to
all consumers in fuel and power rates, and transfer such relief to targeted poorer segments of the population. As
generally, subsidy given on petroleum prices treats all segments of the society, rich and the poor, alike, which is
neither fair nor efficient to use of limited resources at the disposal of the government.

Although the Finance Minister looked confident in implementing this program through NADRA data base, given the
quality of administrative machinery of the government, it is not going to be easy. The program appears to be at the
initial design stage and perhaps, it may take some time to fully design and implement it. Nevertheless, this is a right
initiative under the circumstances.

Key risks and challenges for achieving sustained growth and poverty alleviation

Considering the economic potential of Pakistan, with its strategic geographic location being in the midst of fastest
growing countries : China in the North east which has been growing at the rate of over 10% since last 25 years, India
in the East which is growing at the rate of over 9%. On the western side, it has oil and gas rich Iran which can meet
the energy requirements of Pakistan & India, and at a distance of just two hours flying time, oil rich middle eastern
countries that are awash with liquidity (estimated fcy reserves of GCC countries are estimated to be more than $ 2
trillion, even higher than China) and starved of human capital. The fifth neighboring country is Afghanistan, where
substantial investment for its reconstruction and development will continue to flow from the west in the foreseeable
future; being a land locked country, it is entirely dependent on Pakistan for its trade. Pakistan, being in the middle of
this region, needs to develop an appropriate strategy to take full benefit of its location.

With over 160 million people, a large portion of young population in a world that is ageing, a considerable number of
which have English speaking skills, fertile land and tremendous natural resources, Pakistan has a tremendous
potential to move forward on high growth path. The biggest misfortune of this country is not economic but political
instability. The fact is that economic stability and progress is not possible without a sustainable system of
government, and consistent economic policies. Now that we have returned to democratic dispensation after over
eight years of military lead government, the biggest risk to this country is whether the political leaders will
demonstrate enough maturity, tolerance and sagacity to move forward rather than backward, and allow current
nascent democratic dispensation to continue, resolving their differences through compromise and dialogue. .

As far as the GDP growth target is concerned, considering that it is even lower than the current year, it should not be
difficult to achieve. As the major reason for lower GDP growth this year was poor performance of agriculture, and
given the attractive prices of agricultural commodities, it is only natural that this sector should attract substantial
investment. Also, historically, whenever the agricultural productivity goes down in one year, it always rebounds in the
ensuring year. Therefore, with focused of government intervention, it is highly likely that the growth of agriculture will
rebound to around 4 to 5 percent, giving the necessary boost to services and agro based industry as well.

Tax and non-tax receipts and investment

Unless the government is able to mobilize significant external resources from friendly countries and International
Financial Institutions, the overall resource picture looks quite uncertain. As far as tax collections are concerned, it is
extremely unlikely for FBR to increase tax collections by 25%, and most likely, we may see a shortfall of at least Rs.
100 billion. Therefore, the government must look for alternative resources, such as enhancing the proceeds from
privatization through expediting this program.

Target of achieving gross investment of 25% of the GDP also looks extremely optimistic. Amongst other things, both
local and foreign direct investment in Pakistan is largely dependent on the political stability of the country. Therefore,

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Budget 2008-09

the government must take extra efforts to ensure timely resolution of judges issue, tactful handling of Pakistani tribal
areas to ensure better law & order situation in the country in order to attract reasonable levelBudget
of capital 2006-07
investment in
the country.

Policy on boosting manufacturing

Unfortunately, after the end of Multi Fiber Agreement leading to quota free trade in textiles, Pakistan has not been
able to gain any significant market share and despite substantial investment in textiles in the past eight years, our
main export based industry textile seems to be struggling in wake of tough competition from China, India and other
South East Asian countries as is apparent from sluggish exports and liquidity crisis being faced by this industry. Also,
previous governments have not taken any tangible steps that were required to enhance the competitiveness of our
textiles, especially the value added products by lowering the cost of production. Not only most of the irritants such as
high cost of inputs like electricity, business disruptions, and law & order remain unresolved, they have aggravated
due to high cost and non-availability of power and gas. It is high time that the Government did some rethinking to
make our textiles and other manufacturing industries competitive. In India, the government in partnership with
professional organizations and businesses, has been organizing an annual international conference to enhance
competitiveness of manufacturing and reduce cost of doing business. Such a conference can help in identifying new
ways and solutions to making our industry competitive.

Boosting Export of Services through skill development

In the backdrop of stagnant exports, growth in the last few years was largely contributed by investment and
consumption arising from domestic demand. In the long-run, a sustained economic growth of an emerging economy
will not be possible without surge in our export of goods and services. Pakistan’s strategy of enhancing exports has
not worked and therefore, it requires serious rethink. Besides working on enhancing export competitiveness of the
manufacturing sector, significant focus is required to develop and enhance export of services, including the export of
IT software and IT enabled services such as business process outsourcing and off shoring that has brought
handsome dividends to Indian economy. In this area, we need to learn from the example of India, which has similar
systems, culture and heritage, and has done remarkably well in developing services industry that is expected to earn
over US $ 117 billion foreign exchange in 2007-08, where as its expected services exports (which has been growing
at the compound rate of 28%) is likely to reach $ 311 billion in 2012. The key to India’s success is the quality and
quantity of educated and skilled manpower. Why can’t Pakistan emulate India by investing more in its human
resources? Without enhancing the number of qualified and skilled people, it will be extremely difficult to compete with
China, India and other emerging markets to realize the full potential of Pakistan.

For this purpose, the primary investment in future will need to be in our Human Resources in terms of higher
investment on education, skill development and health. Looking at the budget, both the investment as well as focus
on human development is much below the required level.

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Budget 2008-09

Highlights of Important Fiscal Proposals Budget 2006-07

Income Tax

• Basic threshold of exemption in respect of salaried person is to increase to Rs 180,000 and for a woman
salaried taxpayer to Rs 240,000. Moreover marginal tax relief measure is allowed to lessen adverse impact
on change of income slabs.

• Minimum tax on turnover at the rate of 0.5% is withdrawn.

• For specified rural and undeveloped areas, First Year Allowance of accelerated deprecation at 90% is
proposed on plant, machinery and equipment which are put to use after July 01, 2008.

• Companies eligible for group taxation under section 59B are also entitled for relief in respect of inter-
corporate dividends.

• Exemption of taxation on capital gains on the disposal of shares of the listed companies has been extended
to the tax year ending on June 30, 2010.

• In case of amalgamation of the banking companies, NBFCs, modaraba and insurance companies, the
“accumulated business loss” of an amalgamating company or companies shall be set off or carried forward
against the business profits an gains of the amalgamated company and vice versa.

• Concept of progressive slab rates from 20% to 35% has been introduced for small companies. Small
companies are now require to affect tax withholding law on certain payments/

• Unrealized gains or losses on investments of non-life insurance companies are excluded from the taxable
income.

• Progressive slab rates would apply on income from property from 5% to 15% based on different income
slabs.

• Uniform rate of withholding tax at 2%is introduced for both commercial and industrial importers.

• 10% withholding tax on profit from pensioners benefit scheme and behbood fund for pensioners, senior
citizens and widows has been levied.

• Exemption of Pakistan Cricket Board from income tax is withdrawn.

• Tax amnesty has been introduced, by virtue of which no probe is likely on any unexplained assets or
undisclosed income declared by a tax payer subject to payment of investment tax on the value of asset.

• Individuals and AOP having annual turnover of Rs. 25 million or more and Rs 50 million or more respectively
are become liable to withhold tax on payments made by them for the sale of goods, services rendered and
on execution of contracts.

• Remittance of profit by a branch of a foreign company is proposed to be treated as dividend.

• For claiming tax credit or direct deduction from income, the limit for donations made by the individuals, AOP
and companies has been reduced to 10% of their taxable income.

• Remittance of insurance or reinsurance premium to overseas insurance or reinsurance companies is subject


to tax withholding tax at 5% which is to be considered as final tax.

11
Budget 2008-09

• Rate of tax withholding on cash withdrawal from banks has been enhanced from 0.2% to 0.3%.
Budget 2006-07
• Builders and developers are required to pay minimum tax for the constructed property at Rs 50 per sq. ft of
the covered area and for developed plots at Rs.100 per sq. yard.

• Cooperative societies and finance societies to be taxed at corporate tax rate.

• Tax exemptions under any other statutes are no more available unless specified in the Second Schedule to
the Income Tax Ordinance, 2001.

• Payment to media companies outside Pakistan would be subject to a withholding tax at 10%, treated as final
tax.

• Foreign currency payments made through the foreign currency accounts or through exchange companies
would be subject to tax withholding unless specifically notified for exemption.

• Branches of foreign companies operating in Pakistan are subject to thin capitalization rules.

• A uniform rate of withholding tax at 1% has been made applicable on all the exporters.

• Members of Stock Exchanges will now be assessed under normal tax regime. However, tax collected by
them in lieu of commission income and trading on shares will be treated as minimum tax.

• Time frame for the payment of tax due has been reduced from thirty days to fifteen days.

• Filing of wealth statement is mandatory for all salaried tax payers having income of Rs 500,000, irrespective
of the requirement of the filing of tax return

• Cash payment of salary exceeding Rs.15,000 not to be allowed as deductible expense to the employer.

• Provision for deductions of non performing loans, as per prudential regulations for banking companies will
now be subject to the criteria laid down under section 29 and 29A of the Income Tax Ordinance, 2001.

• Requirement of prior approval from the Commissioner of income tax for making payments to non resident
without deduction of tax or reduced tax has been done away with, where the payment is liable to reduced
rate of tax under the tax treaty.
th
• The limit of amount exempted from the employer contribution to recognized provident fund is fixed to 1/10 of
salary or Rs.100, 000 whichever is lower.

• Income tax rate on purchase of locally produced edible oil is increased from 1% to 2%.

Sales tax

• General rate of sales tax has been enhanced from 15% to 16% for goods and services.

• Period of twelve months is proposed to be reduced to six months to claim unadjusted input tax in the return.

• The condition to adjust the input tax on purchase of fixed assets after start of production of a new unit is
proposed to be removed

• Period of filing the revised return extended from 90 days to 120 days.

• Excess input tax against non-zero rated supplies can now be carried forward or refunded

12
Budget 2008-09

• Rate for the default surcharge has been increased from 1% to 1.5% per month.
Budget 2006-07
• Local and imported fertilizer and pesticides have been exempted from sales tax.

• Biscuits, confectionary, snacks, electric bulbs and tube lights have been excluded from retail based tax
regime of the Third Schedule.

• Energy saver lamps have been exempted from sales tax.

• Molasses, as raw material used in the production of acetic acid has been brought in the category of zero
rated supplies. Also, caustic soda flakes/ solid, cotton linter and sequins linter are brought into this category.

• Persons registered in Azad Jamu and Kashmir making zero rated supplies, are now eligible for claiming
sales tax refunds on the purchase of taxable goods from Pakistan.

• Supplies to hospitals run by Federal or Provincial Government or charitable hospitals having at least 50 beds
are proposed to be exempted.

• General amnesty is given to unregistered persons, having taxability falling under the ambit of sales tax, can
now apply for registration and henceforth comply with the return filing requirements. The scheme envisages
amnesty for payment of any past sales tax dues.

Federal Excise

• Rate of federal excise duty has also been enhanced from 15% to 16% on goods and services under VAT
mode.

• Excise duty on telecommunication services has been increased to 21%.

• Federal excise duty on cement has been raised to Rs 900 per Tonne from the existing base of Rs 750 per
tonne.

• Purchase of motor vehicles exceeding engine capacity of 850 cc, imported or local, will now be subject to a
levy of federal excise duty of 5%.

• Federal excise duty on certain banking, insurance and franchise services had been increased from 5% to 10%.

• Increase in retail price and rate of federal excise duty on cigarette notified.

• Amendments have been made to charge duty from local recipients of services coming from abroad and
terminating in Pakistan.

• 5% Federal excise duty on crop insurance has been abolished

• Period of filing the revised return extended from 90 days to 120 days.

• Rate for the default surcharge has been increased from 1% to 1.5% per month.

Customs

• Custom duty has been increased by 10% on old and used automotive vehicles of different capacity specified
in SRO 577(I)/2005 dated 6th June, 2005 meant for transport of persons.

• Further, capital value tax is abolished on import of above mentioned vehicles. Previously CVT was recovered
in addition to custom duty, sales tax, withholding taxes.

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Budget 2008-09

• Vehicles imported in violation of Import Policy Order as well as smuggled vehicles has been allowed release
Budget 2006-07
on payment of redemption fine at 30% of the value of vehicles along with leviable duty/taxes.

• Fully dedicated CNG buses exempted from duty.

• Pharmaceutical industry relates specified active ingredients, chemicals and packing materials are subjected
to 5 % duty.

• Manufacturers have been allowed to import duty free samples as per specified conditions in chapter 99 of
PCT.

• Custom duty at Rs. 500 per set levied on import of mobile phone.

• Custom duty on betel leaves increased from Rs. 150/Kg to Rs. 200/Kg.

• 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.

• Duty rates on non-essential and luxury items such as dairy products, fruits, chewing gum, chocolate, processed
food, fruit juices, aerated waters, ceramic products, air conditioners/ refrigerators, electric fans, toasters, micro
wave ovens, television, furniture and lighting equipment etc increased from 25 % to 35 %.

• Duty rates on cosmetics increased from 20 – 25 % to 35 %.

• Duty rates on electric ovens/ cooking ranges etc. increased from 20 % to 30 %.

• The concessionary duty on import of raw materials such as Palm Stearin, Coconut Crude Oil, Crude Palm
Kernel Oil, Surface Active Agents, PFAD, Palm Kernel Acid Oil and Palm Kernel Fatty Acid Distillate for
manufacture of Toilet and Laundry Soap have been allowed to the industrial units located in the State of
Azad Jammu and Kashmir after meeting general conditions.

• Duty concessions and sales tax exemption on import of capital goods, even if manufactured locally.

• Higher incidence of import duty on cars/jeep above 1800 cc.

• Rationalization of customs duty rates on cascading principle on import of industrial inputs.

• Additional customs duty on import of components and sub-components of auto sector.

Capital Value Tax

• In the case of bank no CVT will be charged on General Power of Attorney unless it is used to enforce the
mortgage of property offered as collateral against a loan.

Companies Ordinance

• Period of holding annual general meeting increased again to four months.

• Ineligibility of certain persons to become directors redefined.

• Certain exemptions on appointment of managing agents, sole purchase, sales agents, etc.

• Power of Commission enhanced to bring under the ambit of Section 208 all types of companies making
investment in associated companies and undertakings.

• Commission empowered to determine the time limit for payment of dividend.

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Budget 2008-09

Insurance Ordinance
Budget 2006-07
• Increase in annual supervision fee payable to the SECP.

• Extension of the power of the SECP to prescribe maximum levels of acquisition costs and management
expenses.

• Application of certain rules and restrictions to reinsurance brokers, which were previously only applicable to
direct insurance intermediaries.

Securities and Exchange Commission of Pakistan Ordinance

• Provisions to curb insider trading re-enacted and reinforced.

• Inside information and insider defined.

• Obligation on listed companies to disclose inside information.

• Enhancement of power of enquiries, penalties and appeals.

• Enlargement of powers to make rules and regulations.

Securities and Exchange Commission of Pakistan Act

• Terms of office of the Commissioner regulated.

• Securities and Exchange policy board regulated.

• Powers and functions of the commission enlarged.

Take-over Ordinance

• Changes in the applicability criteria of the Ordinance.

• SECP to prescribe percentage of shares to be acquired, instead of acquirer.

• Scope of obligation of the acquirer for public announcement enlarged.

• Increase in penalties for non-compliances.

• Commission empowered to make regulations and issue directives, circulars, etc.

Modaraba Ordinance

• Registrar of Modarabas empowered to issue directions.

• Registrar empowered to make regulations.

• SECP empowered to issue directives, circulars, codes, guidelines, etc.

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Budget 2008-09

Significant Proposed Amendments in: Budget 2006-07

Income Tax Ordinance, 2001

1. Definitions Section 2

Asset Management Company (5B)

The amendment seeks to modify the definition to align with the definition as provided in the Non-Banking
Finance Companies and Notified Entities Regulations, 2007.

Dividend (19)

The proposed insertion seeks to expand the definition of dividend. As a result, the remittance of profit after
tax by branch of foreign company operating in Pakistan shall be treated as dividend. The Ordinance provides
the general tax rate of 10% applicable on dividend.

The proposed amendment does not specify the mechanism for the levy, collection / payment of tax on
dividend. Necessary amendment may be required to be made in this regard.

Eligible person (19A)

Under the Voluntary Pension system Rules, 2005, an individual Pakistani holding a valid National Tax
Number or a Computerized National Identity Card is specified as eligible person. The proposed amendment
seeks to extend the eligibility also to overseas Pakistanis having National Identity for Overseas Pakistanis.

Proposed definitions (19B), (19C), 19(D) and 19(E)

A new clause (19B) seeks to define the terms “addressee”, “automated”, “electronic”, “electronic signature”,
“information”, “information system”, “originator” and “transaction” as defined in the Electronic Transactions
Ordinance, 2002 (LI of 2002).

Clause (19C) seeks to define the term ”electronic record” to include the contents of communications,
transactions and procedures under this Ordinance, including attachments, annexes, enclosures, accounts,
returns, statements, certificates, applications, forms, receipts, acknowledgements, notices, orders,
judgments, approvals, notifications, circulars, rulings, documents and any other information associated with
such communications, transactions and procedures, created, sent, forwarded, replied to, transmitted,
distributed, broadcast, stored, held, copied, downloaded, displayed, viewed, read, or printed, by one or
several electronic resources and any other information in electronic form.

Newly inserted clause (19D) seeks to define “electronic resource” to include telecommunication systems,
transmission devices, electronic video or audio equipment, encoding or decoding equipment, input, output or
connecting devices, data processing or storage systems, computer systems, servers, networks and
related computer programs, applications and software including databases, data warehouses and web
portals as may be prescribed by the Board from time to time, for the purpose of creating electronic
record.

Newly inserted clause (19E) proposes to define the term “telecommunication system” to include a system
for the conveyance, through the agency of electric, magnetic, electro-magnetic, electro-chemical or
electro-mechanical energy, of speech, music and other sounds, visual images and signals serving for
the impartation of any matter otherwise than in the form of sounds or visual images and also includes
real time online sharing of any matter in manner and mode as may be prescribed by the Board from
time to time.

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Budget 2008-09

Investment Company (30A)


Budget 2006-07
The amendment proposes to substitute the definition to mean an investment company as defined under the
Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003 as a consequence of
promulgation of Non-Banking Finance Companies and Notified Entities Regulations, 2007.

Leasing company (30B)

The amendment proposes to replace the definition to mean a leasing company as defined under the Non-
Banking Finance Companies and Notified Entities Regulations, 2007.

Local government (31A)

A general amendment has been proposed by virtue of which for the words “local authority” wherever
occurring in the Ordinance, the words “Local Government” is to be substituted.

Consequential to the above proposed amendment, the term “Local Government” is proposed to be defined to
have the same meaning as defined in the Punjab Local Government Ordinance, 2001 (XIII of 2001), the
Sindh Local Government Ordinance, 2001 (XXVII of 2001), the NWFP Local Government Ordinance, 2001
(XIV of 2001) and the Balochistan Local Government Ordinance, 2001 (XVIII of 2001);

Under the Income Tax Ordinance, 2001 the term local authority has been referred in sections 27, 49, 61, 64,
80, 83, 153, 155 and 172.

Non banking finance company (35B)

The proposed amendment seeks to replace the reference of ‘an institution’ with the term ‘NBFC’ for
revamping the definition of such company.

Omitted clauses (45A) & (45B)

The terms Private Equity and Venture Capital Fund and Private Equity and Venture Capital Fund Management
Company as currently defined in clauses (45A) and (45B) respectively are proposed to be omitted.

Real Estate Investment Trust

Consequent to the promulgation of Real Estate Investment Trust Regulations, 2008, definitions of the
following are proposed to be replaced to have the same meaning as defined in the said regulations.

• Real Estate Investment Trust (REIT) Scheme (47A)


• Real Estate Investment Trust Management Company (REITMC) (47B)

2. Income from business Section 21

As per current provisions, salary, exceeding Rs.10,000, paid otherwise than by a crossed cheque or direct
transfer of funds to the employee’s bank account is not allowed as a deductible expense while computing the
taxable income from business of the employer.

The limit of Rs.10,000 is proposed to be increased to Rs.15,000.

3. First Year Allowance (FYA) Section 23A

The newly introduced section seeks to allow FYA at the rate of 90% in respect of plant, machinery and
equipment against the cost of such eligible depreciable assets, in lieu of initial allowance as currently allowed
in section 23 at the rate of 50%, to an industrial undertaking subject to the following conditions:

• It is set up in rural and under developed areas as specified by the Federal Government.

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Budget 2008-09

• It is owned and managed by a company.


• The plant, machinery and equipment are put to use after July 01, 2008.
Budget 2006-07

It is further proposed that the sub-sections (3) to (5) of section 23 shall apply mutatis mutandis with reference
to defining the term eligible depreciable assets as well as determining their costs for the purpose of newly
inserted section. Similarly a leasing company or an investment banks or a modaraba or a scheduled bank
are allowed to claim the FYA as a deduction against their lease rental income in respect of assets owned by
such entities.

4. Exemptions and tax provisions in other laws Section 54

The proposed amendment seeks to modify the section by virtue of which any exemptions from levying
income tax available under the other statutes are proposed to be withdrawn unless specifically provided
nd
under 2 Schedule to the Income Tax Ordinance, 2001.

In line with the proposed amendment, following two exemptions are proposed to be inserted which were
earlier available in other statutes:

• Pension of former President of Pakistan and his widow under the President Pension Act, 1974 (IX of
1975).
• State Bank of Pakistan and State Bank of Pakistan Banking Services Corporation.

5. Set off of business loss consequent to amalgamation. Section 57A

This section was first time introduced through Finance Ordinance, 2002. Over the period of time this law was
developed to extend its scope and by virtue of which the carry forward and set off of accumulated assessed
business losses at the time of amalgamation of a banking company, NBFC, and insurance company and
industrial undertakings and companies engaged in providing services not being a trading company(s) was
allowed for a period of six tax years.

However, consequent to the amendment made via Finance Act, 2007, benefits of brought forward
accumulated business losses of amalgamating company were not available for set off against the profits and
gains of the amalgamated company instead only the business losses assessed for the year of amalgamation
were allowed to be set off against the business profits and gains of the amalgamated company.

Now by virtue of the proposed insertion of new sub-section (2A), the legislature proposes to restore the relief
in case of amalgamation of Non-banking Finance Company, modaraba or insurance company, with respect
to set off and carry forward of the accumulated losses under the head “income from business” (not being
speculations business losses) against the business profits and gains of the amalgamated company and vice
versa, up to a period of six tax years immediately succeeding the tax year in which the loss was first
computed in the case of amalgamated company or amalgamating company or companies.

For banking companies, the subject relief is proposed to be provided in Seventh Schedule to the Ordinance.

The proposed amendment will certainly continue to encourage the acquisition of sick companies in the above
mentioned sectors.

6. Charitable donations Section 61 and Clause (61) of the


Second Schedule
Currently a company is allowed a tax credit in respect of any sum paid, or any property given in the tax year
as a donation upto a limit of 15% of its taxable income for the year. For an individual or an association of
persons the said limit is 30% of its taxable income for the year.

Now through the proposed amendment, the aforesaid limit of 15% in case of a company and 30% in case of
an individual and association of persons is proposed to be reduced to 10% of the taxable income for all the
taxpayers.

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Budget 2008-09

Similarly through proposed amendment in clause (61) of the Second Schedule to the Ordinance, the direct
Budget
deduction of amount donated to specified institutions is also restricted to 10% respectively 2006-07and
to companies
individual and association of persons.

7. Geographical source of income Sections 101, 152 and 4th Schedule

The newly inserted sub-section 13A proposes to treat the amount paid on account of insurance or re-
insurance premium by an insurance company to overseas insurance or re-insurance company as Pakistan
source income.

Consequential amendment is also proposed is section 152 by virtue of which every person making payment on
account of insurance premium or re-insurance premium to an overseas insurance or re-insurance company is
required to withhold tax at 5% of the gross amount paid. It is further proposed that the tax withheld in the above
manner is to be treated as discharge of full and final tax liability of aforementioned overseas entities.
th
Through proposed amendment in the 4 Schedule to the Ordinance, it is also envisaged that a non-
deduction of tax would result in disallowance of premium for such insurance or reinsurance.

8. Thin Capitalization Section 106

As an anti avoidance tax measure, a new concept of thin capitalization was first time introduced in the
Income Tax Ordinance, 2001.

Under this section deduction to foreign controlled resident companies other than financial institutions and
banking companies, for returns on foreign controlled debt are to be restricted by applying the ratio of foreign
debt to foreign equity of three to one based on the actual debt and equity during any time in the tax year.
This disallowance is not restricted only to one year. The debt to equity ratio is to be calculated for each and
every year separately and then financial charges on foreign debt are be allowed accordingly.

This provision was introduced with the objective to discourage a non-resident from minimizing equity
investment and investing through loans, to achieve greater returns from Pakistan by placing of debt in
Pakistani subsidiaries to take advantage of higher tax rates in Pakistan whereby the interest expense on
such debts will be allowed in Pakistan and concurrent taxation of interest income at nil or lower rates.

It is now proposed to extend the thin capitalization rule to a branch of a foreign company operating in
Pakistan. The intent appears to be to discourage the non-resident from achieving greater returns from
Pakistan by funding its branches through debt.

However, it is important to note that since a branch usually does not have equity, so the mechanism through
which the debt to equity ratio is to be applied in the absence of any equity needs to be defined clearly
otherwise it is apprehended that the branch offices of the foreign companies operating in Pakistan will not be
able to claim deduction in respect of interest paid to its foreign entity on interest bearing loans.

9. Minimum tax on income of certain persons Section 113

Currently a resident company is required to pay minimum tax at 0.5% of its turnover from all sources for that
year for any reason including sustaining of a loss, the setting off of a loss of an earlier year, exemption from
tax, the application of credits or rebates, or the claiming of allowances or deductions (including depreciation
and amortization deductions) allowed under the Income Tax Ordinance, 2001.

The proposed amendment seeks to omit application of minimum tax by virtue of which now a resident
company is not required to pay income tax if it does not have taxable profit / income. Consequent
amendments are also proposed to withdraw all related amendments where relief was given or the application
of law restricted to certain extent and also in respect of tax payable on advance tax.

This amendment is likely to reduce the cost of doing business of sick entities and will have a positive impact
on their cash flows.

19
Budget 2008-09

10. Taxation of builders and developers Section 113C Part I,


Budget
Division IAA 2006-07
of the First Schedule

Considering the long standing demand and considering the high level of returns in the real estate business,
the legislature proposes to tax this untapped source of revenue. Although there is no specific exemption
available in the law with respect to real estate business; however, some how due to lack of will and non-
implementation of the laws, the highly profitable sector has been able to successfully evade the tax on the
gains.

Now the legislature proposes to tax a person who is a developer of land for residential, commercial or
industrial purposes or a builder engaged in construction of houses, commercial or industrial property,
shall be liable to pay tax at the following rates:

(a) in the case of a builder Rs.50 per sq. ft. on covered constructed area; and
(b) in the case of a developer Rs.100 per sq. yard on the area of land developed.

It is also proposed that the tax paid in the above manner is to be considered as minimum tax on the income of
the builder and / or developer.

11. Persons not required to furnish a return of income Section 115

The current section provides that where the employer has furnished the annual statement of tax withholding
from salary for the tax year as required under section 165, then the employee is not required to file his / her
return of income for the said tax year.

Similarly the section 116 requires that every individual filing a return of income for any tax year whose last
declared or assessed income or the declared income for the year is Rs.500,000 or more is required to
furnish a wealth statement for that year along with return of income.

Collective reading of section 115 and 116 shows that an ambiguous situation was created whereby an
individual not required to file his / return of income due to filing of annual statement of tax withholding by the
employer was considered to be exempt from filing of wealth statement.

To remove the anomaly, the sub-section (1) is proposed to be substituted by virtue of which now the section
requires the filing of wealth statement where salary income for the tax year or the last tax year is Rs.500,000
or more irrespective of the fact whether the annual tax withholding statement has been filed by the employer
or not.

12. Investment tax on income Section 120A

The proposed insertion empowers the Federal Board of Revenue (herein after referred as “FBR”) to make a
scheme of payment of investment tax in respect of undisclosed income, representing any amount or
investment made in movable or immovable assets.

It is further proposed that where any person declares undisclosed income in accordance with the said
scheme and the rules, the tax on such income called investment tax shall be charged at such rate as may be
prescribed.

It is further proposed that where a person has paid tax on his undisclosed income in accordance with the
scheme and the rules, he shall

(a) be entitled to incorporate in his books of account such undisclosed income in tangible form; and

(b) not be liable to pay any tax, charge, levy, penalty or prosecution in respect of such income
under the Ordinance.

20
Budget 2008-09

The proposed section also seeks to define the following terms:


Budget 2006-07
“undisclosed income” means any income, including any investment to be deemed as income under
section 111 or any other deemed income, for any year or years, which was chargeable to tax but was not so
charged; and

“investment tax” means tax chargeable on the undisclosed income under the scheme under sub-
section (1) and shall have the same meaning as given in clause (63) of section 2 of the Income Tax
Ordinance, 2001.

It appears that the legislature has provided a money whitening scheme to the benefit of all those whose
actual wealth is not reconcilable with their declared taxable income. The proposed amendment simply
makes the provisions of section 111 related to concealment of income as useless. Such schemes were
also introduced in the past and ended without any much success. It is hoped that this time strong
campaign will be launched to encourage the affluent to bring in the tax net their undisclosed income and
wealth.

However, there is a possibility that the legislature has further plans to levy wealth tax or similar type of tax on
the wealth which may be disclosed through the above mentioned scheme.

13. Asse ssment giving effect to an order Section 124

As per the current provisions of sub-section (2), the Commissioner is required to pass an order within one
year from the end of the financial year in which the Commissioner was served with the order passed by the
Commissioner (Appeals), Appellate Tribunal, High Court or Supreme Court setting aside the order wholly or
partly with the directions to make a new assessment order.

Now by virtue of the proposed insertion in the aforesaid sub-section, the Commissioner (Appeals) is also
required to pass the order, on the basis of directions given by the Appellate Tribunal, High Court or Supreme
Court, within one year from the end of the financial year in which he was served with the order.

It may be pointed out that the section still refers to only assessment order and no insertion has been made
to include appellate order as well. Necessary amendment should be made to remove this anomalous
position.

The proposed amendment is likely to expedite the settlement of the pending appeals at Commissioner
(Appeals) level and may also reduce the hardship being faced by the tax payers due to long and
cumbersome appellate processes.

14. Decision in appeal Section 129

The current provisions require the Commissioner (Appeals) to pass an order within three months from the
end of the month in which the appeal was lodged, otherwise the relief sought by the appellant is to be treated
as having been given and all the provisions of the Ordinance are to have effect accordingly.

The proposed amendment seeks to extend the period of three months to four months.

15. Alternative Dispute Resolution Section 134A

The section was initially introduced vide Finance Act, 2004 whereby the concept of alternative dispute
resolution was brought in the law.

The section provides that an aggrieved person, in connection with any matter pending before an Appellate
Authority, may apply to Board for the appointment of a committee for the resolution of any hardship or dispute
mentioned in detail in the application. The Board after examination of the application of an aggrieved person
is to appoint a committee.

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Budget 2008-09

The committee constituted is to examine the issue and may, if it deems necessary, conduct inquiry, seek
Budget
expert opinion, direct any officer of Income Tax or any other pers on to conduct 2006-07
an audit and make
recommendations in respect of the resolution of dispute as it may deem fit.

The Board may, on the recommendation of the committee, pass such order, as it may deem appropriate.

Now a new sub-section (4A) is proposed to be inserted by virtue of which the Chairman FBR is empowered
to pass such order as he deems fit on the application of an aggrieved person, for reasons to be recorded in
writing, on being satisfied that there is an error in order or decision.

16. Due date for payment of tax Section 137

As per current provisions, the tax payer is required to make payment of tax within 30 days from the date of
services of notice creating tax demand.

By virtue of the proposed amendment, the period of 30 days has been reduced to 15 days. This proposed
amendment is likely to create problems for the tax payer and may also cause increase in disputes and
litigation with the tax authorities.

17. Tax arrears settlement incentives scheme Section 146B

The proposed amendment seeks to authorize the FBR to make scheme in respect of recovery of tax arrears
or withholding taxes and waiver of additional tax or penalty levied thereon.

It is further proposed that the Board may make rules under section 237 for implementation of such scheme.

18. Advance tax paid by the tax payer Section 147

Consequential to the proposed deletion of section 113 – minimum tax, sub-section (4AA) is proposed to be
deleted and sub-section (6A) is proposed to be amended to give effect to the proposed deletion of section
113.

19. Imports Section 148

Consequential to the proposed deletion of section 113 – minimum tax, sub-section (4A) is proposed to be
deleted.

20. Payment to non-residents Section 152 (5) & (7)

The current provisions of sub-section (5) requires the person making payment to the non resident person
to notify the Commissioner if such person intends to make payment to a non resident person without
deduction of tax.

The proposed amendment seeks to provide that the person is not required to notify the Commissioner where
the payments are liable to reduced rate under the relevant agreement for avoidance of double taxation.

The proposed amendment is likely to facilitate the prompt payments to non residents.

The sub-section (7) provides that the person intends to make payment to a non resident person without tax
withholding on account of import of goods is not required to notify the Commissioner where title of goods
being imported passes outside Pakistan.

Now the proposed insertion seeks to provide for the import documents as evidence to support the assertion
that the title was transferred outside Pakistan. In view of this amendment, now the payers will be required to
maintain the record of the import documents which may be required by the tax authorities during tax audit or
monitoring of withholding taxes.

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Budget 2008-09

21. Payments for goods and services Section 153


Budget 2006-07
The following is the brief of various changes proposed:

• Through the proposed amendment, the clause (e) of sub section (5) and clause (b) of sub-section (9) are
proposed to be deleted by virtue of which the “small company” is now also become prescribed as a
withholding agent.

• Due to some drafting anomalies in sub-section in (6A) and (6B), there was some ambiguity with respect
to a the taxation of a company as a manufacturer under final tax regime. Now the proposed amendment
seeks to delete sub-section (6B) and also specify a company being a manufacturer of goods to be taxed
under normal tax regime.

• The sub-section (9) is proposed to be amended to include following persons in the definition of
“prescribed” persons” for the purpose of tax withholding under this section.

§ an association of persons, having turnover of fifty million rupees or above; or


§ an Individual, having turnover of twenty-five million rupees or above.

• By virtue of the proposed amendment, now the professional firms having abovementioned turnover are
liable to withhold tax on their payments. Similarly individuals having turnover of Rs.25 million or more are
now required to withhold tax. These measures are in the nature of enhancing the process for bringing
un-documented sector under the tax net.

• For the first time, the term “manufacturer” is proposed to be defined to mean a person who is
engaged in production or manufacturing of goods, which includes-

(a) any process in which an article singly or in combination with other articles, material,
components, is either converted into another distinct article or produce is so
changed, transferred, or reshaped that it becomes capable of being put to use differently or
distinctly; or

(b) a process of assembling, mixing, cutting, packing, repacking or preparation of goods in any
other manner.

It is important to note that the above definition is only for the purpose of section 153.

22. Payments to non-resident media persons Section 153 A Part III, Division IIIA
of the First Schedule

A new section is proposed to be inserted by virtue of which every person making a payment for advertisement
services to a non-resident media person relaying from outside Pakistan is required to deduct tax from
the gross amount paid at the rate of 10% of the gross amount paid. The tax withheld is proposed to be
final discharge of tax liability.

23. Income from property Section 155

Through Finance Act, 2006, the tax withheld at the rate of 5% was treated as discharge of final tax liability of
the person with respect to such rent. Through Finance Act, 2007, full and final tax liability was made subject
to the provisions of section 15.

Now the proposed amendment seeks to omit the words “subject to section 15”.

First Schedule is also proposed to be amended to provide progressive tax rates in the range of 5%, 10% and
15% for the taxation of rent. However, the tax liability will still be discharged on final tax basis based on
applicable withholding tax rate.

23
Budget 2008-09

The proposed insertion of progressive tax rates is based on the concept that the more you earn more you
pay and is likely to generate more revenue for the government. Budget 2006-07

24. Exemption or lower rate certificate Section 159

The proposed amendment seeks to empower the FBR to amend the rates of withholding tax
prescribed under the Ordinance or exempt person, class of person, goods or class of goods from
withholding tax under the Ordinance.

25. Records Section 174(5)

This section provides for the maintenance of accounts, documents and records by the tax payer. A
new sub-section (5) is proposed to be added by virtue of which the Commissioner is empowered to
require any person to install and use an Electronic Tax Register of such type and description as may be
prescribed for the purpose of storing and accessing information regarding any transaction that has a
bearing on the tax liability of such person.

26. Tax Payers Registration Section 181

Section 181 is proposed to be substituted. The substituted section proposes to provide every taxpayer
to apply in the prescribed form and in the prescribed manner for registration. It is further proposed that the
Commissioner having jurisdiction over a case, where necessitated by the facts of the case, may also
register a taxpayer in the prescribed manner. Taxpayers’ registration scheme is proposed to be regulated
through the rules to be notified by the Board.

27. Penalty for concealment of income Section 184

This section provides for the levy of penalty where the Commissioner, Commissioner (Appeals), or
the Appellate Tribunal is satisfied that any person has concealed income or furnished inaccurate
particulars of such income.

A new sub-section (5) is proposed to be inserted which provides that in consequence of any order
under this Ordinance, the amount of tax in respect of which any penalty imposed is reduced, the
amount of penalty is to be reduced accordingly.

28. Prosecution for failure to maintain records Section 193

This section provides for the prosecution of the person who fails to maintain record as required under
the Ordinance. It is provided that where the failure was deliberate, a fine or imprisonment for a term
not exceeding two years, or both; or in any other case a fine.

The proposed amendment seeks to prescribe a maximum limit of Rs.50,000 for the fine in any other
case.

29. Purchase of motor cars and jeeps Section 231B Part IV, Division III
of the First Schedule

As per current provisions, every manufacturer or authorized dealer of motor cars is to collect tax at
the time of sale of motor car at the rate of 5% or at reduced rate of 2.5% as a result of reduction in
rate allowed in Second Schedule to the Ordinance.
Now this section is proposed to be substituted by new section by virtue of which every person is
required to pay, at the time of registration of a new motor car or a jeep, advance tax at the rates
specified in First Schedule to the Ordinance based on the engine capacity of the motor cars and jeeps.

It is proposed that the provisions of this section shall not be applicable in the case of:

(i) the Federal Government;


(ii) the Provincial Government;
(iii) a foreign diplomat; or a diplomatic mission in Pakistan.

24
Budget 2008-09

31. Collection of tax by stock exchange registered in Pakistan


Budget Section
2006-07233 A

This section provides for the stock exchange registered in Pakistan to collect advance tax,-

(a) at the rate of 0.01% of purchase value from its Members on purchase of shares in lieu of tax on the
commission earned by such Members;
(b) at the rate of 0.01% of sale value from its Members on sale of shares in lieu of tax on the commission
earned by such members.

(c) at the rate of 0.01 % of traded value from its Members in respect of trading of shares by the members.

(d) at the rate of 10% of the carry over charge from its Members in respect of financing of carryover trades
in share business.

The tax collected under clause (a) and clause (b) are treated as discharge of full and final tax liability of the
members with respect to such income.

Now by virtue of the proposed amendment, the tax collected through clause (a) to (c) in the above manner is
proposed to be treated as minimum tax of the members. Thus by virtue of the proposed amendment, now
the members of stock exchange will be taxed under normal tax regime.

Through the proposed amendment, the approach apparently is to collect more tax from the members of
stock exchange without removing the exemption from capital gains tax on sale of listed securities. This will
be a source of good amount of revenue for the government especially considering the large number of
transactions at the Pakistan stock exchanges which are likely to increase further due to extension in
exemption on listed securities.

32. Electricity consumption Section 235

This section provides for the collection of advance tax at the rate provided in the First Schedule to the
Income Tax Ordinance, 2001 on the amount of electricity bill of a commercial or industrial consumer.

The tax collected under this section is treated as minimum tax on the income of a person (other than a
company).

The proposed amendment seeks to provide that the tax collected on electricity bill amounting to Rs.20,000
per month is to be treated as minimum tax.

Consequent to the proposed amendment, tax collected on bills exceeding Rs.20,000 is to be treated as
adjustable against the final tax liability of an individual or an association of persons.

33. Electronic record Section 237 A

The newly inserted section 237A seeks to empower the FBR to require any person to use its information
system and electronic resource, in order to replace or supplement, its manual business processes by
automated business processes and substitute its paper based records by electronic record.

It is further proposed that electronic record generated, maintained, issued, served, received, filed or
requisitioned through the electronic resource of the Board shall by itself sufficiently and conclusively
prove its validity, authenticity and integrity and shall be treated to have been done so according to
the provisions of this Ordinance.

25
Budget 2008-09

The First Schedule


Budget 2006-07
Part I Division I Clause (1A)
Rate of tax for salaried individuals

Under the existing clause (IA), tax rates for the salaried individuals are proposed to be revised as follows:

S. No Taxable Income Rate of tax

1. Where the taxable income does not exceed


Rs.180,000, 0%
2. Where the taxable income exceeds Rs.180,000 but
does not exceed Rs.250,000, 0.50%
3. Where the taxable income exceeds Rs.250,000 but
does not exceed Rs.350,000, 0.75%
4. Where the taxable income exceeds Rs.350,000
but does not exceed Rs.400,000, 1.50%
5. Where the taxable income exceeds Rs.400,000 but
does not exceed Rs.450,000, 2.50%
6. Where the taxable income exceeds Rs.450,000 but
does not exceed Rs.550,000, 3.50%
7. Where the taxable income exceeds Rs.550,000 but
does not exceed Rs.650,000, 4.50%
8. Where the taxable income exceeds Rs.650,000 but
does not exceed Rs.750,000, 6.00%
9. Where the taxable income exceeds Rs.750,000 but
does not exceed Rs.900,000, 7.50%
10. Where the taxable income exceeds Rs.900,000 but
does not exceed Rs.1,050,000, 9.00%
11. Where the taxable income exceeds Rs.1,050,000
but does not exceed Rs.1,200,000, 10.00%
12. Where the taxable income exceeds Rs.1,200,000
but does not exceed Rs.1,450,000, 11.00%
13. Where the taxable income exceeds Rs.1,450,000
but does not exceed Rs.1,700,000, 12.50%
14. Where the taxable income exceeds Rs.1,700,000
but does not exceed Rs.1,950,000, 14.00%
15. Where the taxable income exceeds Rs.1,950,000
but does not exceed Rs.2,250,000, 15.00%
16. Where the taxable income exceeds Rs.2,250,000
but does not exceed Rs.2,850,000, 16.00%
17. Where the taxable income exceeds Rs.2,850,000
but does not exceed Rs.3,550,000, 17.50%
18. Where the taxable income exceeds Rs.3,550,000
but does not exceed Rs.4,550,000, 18.50%
19. Where the taxable income exceeds Rs.4,550,000
but does not exceed Rs.8,650,000, 19.00%
20. Where the taxable income exceeds Rs.8,650,000. 20.00%

In case of a woman taxpayer, no tax shall be charged if the taxable income does not exceed Rs.240,000.

However, to lessen the adverse impact of the change in income slabs, it is also proposed 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.

26
Budget 2008-09

(ii) 30% of the amount by which the total income exceeds in each slab but total income does not exceed
Rs.1,050,000. Budget 2006-07

(iii) 40% of the amount by which the total income exceeds in each slab but total income does not exceed
Rs.2,000,000.

(i v) 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 ni each slab but the total income exceeds
Rs.4,450,000.

Division IAA
Rate of tax on Builders and Developers

Pursuant to the introduction of section 113C, rate of payment of tax has been respectively imposed as follows:

a) in the case of a builder at Rs.50 per sq. ft. on covered constructed area; and
b) in the case of a developer at Rs.100 per sq. yard on the area of land developed.

Division II Clause (ii)


Rate of tax on Society or a Cooperative Society

Paragraph (ii) of Division II under Part I of the First Schedule is proposed to be omitted whereby a society or a
cooperative society was required to pay tax at the rates applicable to a company or an individual, whichever is
beneficial. Now said option is proposed to be withdrawn.

Consequent to the proposed deletion, society or cooperative society will be chargeable at the same tax rate of 35%
as applicable to the company, as the society or cooperative society falls under the definition of ‘Company’ as
provided in section 80.

Division II Clause (iii)


Rate of tax on small companies

Presently, a small company as defined in Section 2 is required to pay tax at the rate of 20%. It is proposed that tax at
the rate of 20% be imposed up to the extent whereby the turnover of such company does not exceed Rs. 250 million,
however, where the turnover exceeds the prescribed limit of Rs.250 million, tax shall be payable at the following
graduated rates based on the quantum of turnover.
Rate

(i) Income attributable to turnover exceeding Rs.250


million but does not exceedRs.350 million 25% plus

(ii) Income attributable to turnover exceeding Rs.350


million but does not exceed Rs.500 million 30% plus

(iii) On the income attributable to turnover exceeding


Rs.500 million. 35% plus

Division VI & Part II Division V


Rate of tax on income from property

Currently, the rate of tax to be paid under section 15 is 5% of the gross amount of rent chargeable to tax. Finance Bill
2008 has proposed the following rates of tax for discharge as well as for the tax withholding

27
Budget 2008-09

a) in the case of individual and association of persons


Budget 2006-07
S.No. Gross amount of rent Rate of tax imposed on payment
(1) Where the gross amount of rent does not exceed Rs.150,000. Nil.
(2) Where the gross amount of rent exceeds Rs.150,000 but 5 per cent of the gross amount
does not exceed Rs.400,000 exceeding Rs.150,000.
(3) Where the gross amount of rent exceeds Rs.400,000 but Rs.12,500 plus 10 per cent of the gross
does not exceed Rs.1,000,000. amount exceeding Rs.400,000
(4) Where the gross amount of rent exceeds Rs.1,000,000 Rs.72,500 plus 15 per cent of the gross
amount exceeding
Rs.1,000,000.

S.No. Gross amount of rent Rate of tax applicable for tax


withholding
(1) Where the gross amount of rent does not exceed Rs.150,000. Nil.

(2) Where the gross amount of rent exceeds Rs.150,000 but does 5 per cent of the gross amount
not exceed Rs.500,000 exceeding Rs.150,000.
(3) Where the gross amount of rent exceeds Rs.500,000 but does Rs.17,500 plus 10 per cent of the
not exceed Rs.1,300,000 gross amount exceeding
Rs.500,000.
(4) Where the gross amount of rent exceeds Rs.1,300,000. Rs.97,500 plus 15 per cent of the
gross amount exceeding Rs.1,300,000.

* There appears to be calculation error as tax withholding rates are not in line with tax discharge rates.

b) in the case of company

S.No. Gross amount of rent Rate of tax imposed on payment


(1) Where the gross amount of rent does not exceed Rs.400,000. 5 per cent of the gross amount of rent

(2) Where the gross amount of rent exceeds Rs.400,000 but does Rs.20,000 plus 10 percent of the gross
not exceed Rs.1,000,000. amount of rent exceeding Rs.400,000.
(3) Where the gross amount of rent exceeds Rs.1,000,000. Rs.80,000 plus 15 percent of the gross
amount of rent exceeding
Rs.1,000,000.

* Same rates are applicable for tax withholding.

Part II
Rate of advance tax on imports
The general rate of advance tax to be collected by the Collector of Customs under section 148 is proposed to be
reduced from 5% to 2% of the value of the goods. However, special rate of 1% is still available on some items
mentioned in clause 13 G of Part II of the Second Schedule.

Part III Division II


Rate of tax deduction on payments to non – residents on account of
Insurance premium or re -insurance premium
As a consequence of insertion of sub-section (13A) of section 101, the rate of tax deduction from payments to non
residents on account of insurance premium or re-insurance premium in sub-section (1AA) of section 152 is proposed
to be 5% of the gross amount paid.

28
Budget 2008-09

Division IIIA
Rate of tax deduction on payments to non – resident media persons Budget 2006-07

Pursuant to the insertion of section 153A, the rate of tax to be deducted from payments to non resident media
persons on account of advertisement services to a non-resident person relaying from outside Pakistan, is proposed
to be 10% of the gross amount paid.

Part IV Division III


Tax on Motor Vehicles

Rates of tax on other private motor cars falling under clause (3), Division III of Part IV, are proposed to be revised as
follows:

Engine Capacity Rate of tax


(Rs.)
(a) upto 1000cc 500
(b) 1001cc to 1199cc 750
(c) 1200 to 1299cc 1,000
(d) 1300cc to 1599cc 2,000
(e) 1600cc to 1999cc 3,000
(f) 2000cc and above 5,000

Division IV
Tax on Electricity Consumption

Tax on electricity consumption is to be collected as per the existing slab rates mentioned in Division IV of the Part IV.
However, where the amount of electricity bill exceeds Rs. 20,000, the rate of tax to be collected is proposed to be
10% of the bill instead of Rs. 2,000 presently applicable.

Division V
Tax to be collected from Telephone users

The Bill proposes to abolish different slabs given for collection of tax, instead it proposes to collect tax at 10% of the
bill amount exceeding Rs. 1,000. However, in case of subscribers of mobile and prepaid telephone cards, tax will
remain collectible at 10% of the amount of bill or sale price of prepaid telephone cards.

Division VI
Cash withdrawal from bank

The rate of tax to be deducted under section 231A is proposed to be increased from 0.2% to 0.3% of the cash
amount withdrawn. However, daily withdrawal up to Rs. 25,000 would remain exempt for tax withholding.

Division VIII
Tax to be collected on purchase of motor cars and jeeps

The current rate of tax to be collected under section 231 B is 5% of the gross amount payable for the purchase of motor
vehicle. However, the rate was reduced to 2.5% as a result of insertion of clause 9A in Part II of the Second Schedule.
Now the single rate is abolished and following rates are proposed based on cubic capacity of cars and jeeps.

Engine Capacity Amount of Tax


Rupees
upto 850cc 10,000
851cc to 1000cc 14,000
1001cc to 1300cc 22,500
1301cc to 1600cc 22,500
1601cc to 1800cc 35,000
1801cc to 2000cc 30,000
Above 2000cc 50,000

29
Budget 2008-09

Second Schedule
Budget 2006-07
Part I
Exemption from total Income

Clause 57 Paragraph (x) of sub-clause (3) is proposed to be deleted. Consequently exemption available to
the accumulated balance upto 25% received from the voluntary pension system offered by a
pension fund manager under the Voluntary Pension System Rules, 2005 will be no more
available
Clause 61 The amount of donation for the purpose of direct deduction from taxable income proposed to be
Sub paragraph restricted to 10% from 30% in the case of individual and AOP, and from 15% in the case of
(a) (b) company.
Clause 66 Consequent to the amendment proposed in section 54, the following are exemption available in
other statutes to become part of Second Schedule.

• Pension of a former President of Pakistan and his widow under the President Pension Act,
1974 (IX of 1975)
• State Bank of Pakistan and State Bank of Pakistan Banking Services Corporation
Clause 98 The Bill proposes to insert a new proviso by virtue of which the income of Pakistan Cricket Board
is taxable.
Clause 103A At present intercorporate dividend in respect of companies entitled to group relief under section
59AA is exempt from tax. This relief is proposed to be extended to the companies eligible for
group taxation under section 59B.
Clause 110 Exemption on capital gains on sale of listed securities, modaraba certificates or any instrument of
redeemable capital etc. is proposed to be extended upto tax year ending on June 30 2010.

The following clauses have been omitted

Clause 2 Salary of employees of Shaukat Khanum Memorial Hospital & Research Centre.
Clause 6 Salary of foreign employees of British Council.
Clause 21 Annuity from State Life Insurance Corporation of Pakistan.
Clause 62 Direct deduction from taxable income in respect of donation given to Liaquat National Hospital.
Clause 63A Deduction from taxable income in respect of donation to President’s Relief Fund for Earthquake
Victims.
Clause 63B Direct deduction from donation to World Islamic Economic Forum, 2006.
Clause 77 By virtue of deletion of the clause, exemption currently available on profit derived by non-resident
person (whether a citizen of Pakistan or otherwise) on Islamic mode of financing including istisna,
modaraba, musharika is withdrawn
Clause 82 Exemption available to profit on Special US Dollar Bonds issued under the Special US Dollar
Bond Rules, 1998 is withdrawn.
Clause 83 Exemption available to profit from Pak rupee accounts converted from a Foreign Currency
th
Account or deposit held on the 28 May 1998 is withdrawn.
Clause 132A Income of non-resident person on supply of plant, equipment and machinery to Hub Power
Company Limited, clause being redundant hence proposed to be deleted.
Clause 133A Exemption on gain on transfer of membership right, shares and room by a member of an existing
stock exchange is barred by time limitation.
Clause 138 Exemption on Income form Kot Addu Power Station is time barred by time limitation.

30
Budget 2008-09

Part II
Reduction in Tax Rates Budget 2006-07

Clause 13C Increase in income tax rate on purchase of locally produced edible oil from 1% to 2% is proposed
in respect of manufacturers of cooking oil or vegetable ghee or both.
Clause 13G Reduced tax rate of 1% of the import value was available on 24 items. Now through to Finance
Bill, all other items have been deleted with the exception of following 3 items:
i) Gold
ii) Mobile telephone sets
iii) Silver
Clause 13HH The Bill proposes to insert a new clause by virtue of which tax is to be deducted under section 153
at the rate of 1% on the sale value of rice to be sold by Rice Exporters Association of
Pakistan (REAP) to Utility Store Corporation, in accordance with the provisions of the
agreement, signed with Ministry of Food, Agriculture and Livestock (MINFAL) on May 5, 2008.

The following clauses have been omitted

Clause 6 Reduced rate f tax u/s 151 on Profit on Special US Dollar Bonds.
Clause 9A Tax u/s 231B collected @ 2 ½ % at the time of sale of motor car.
Clause 10 Reduced rate of tax of 20% on the Income from business of Fauji Foundation and Army Welfare
Trust.
Clause 13 1% tax on imports of raw materials and capital goods imported for own use by a manufacturer.
Clause 13A Reduced tax rate of 1% on import of Phosphatic fertilizers.
Clause 13B Reduced tax rate of 2% on import of certain goods.
Clause 13H Tax at 2% on import of certain raw material and other goods.
Clause 14 & 15 Reduced tax rate of 0.75% u/s 154 on export of rice, fish and stones.
Clause 16 Reduced tax rate of 7.5% on the dividend income of the non resident company engaged
exclusively in mining operations.

Part III
Reduction in Tax Liability

Clause 5 The finance bill proposes to rearrange clause 5

Existing clause Proposed clause


Whereas the corporatised entities of Pakistan The tax payable under clause (a) of sub-section
Water and Power Development Authority (1) of section 151, in respect of any amount paid
(DISCOs) and National Transmission and as yield or profit on investment in Bahbood
Dispatch Company (NTDC), are required to Savings Certificate or Pensioners Benefit
pay minimum tax under section 113, the Account shall not exceed 10% of such profit.
purchase price of electricity shall be excluded
from the turnover liable to minimum tax upto
the tax year 2013

31
Budget 2008-09

The following clauses have been omitted Budget 2006-07

Clause 3 Minimum tax for cigarette distributors

Part IV
Exemption from specific provisions

Clauses 16, 19 To withdraw the operation of section 113 (Minimum tax)


& 57
Clause 43A & To rearrange the clause as clause (46). The effect of change is that the payment to permanent
46 establishment against supply of petroleum products will remain exempt from tax withholding on
supplies.
Clause 46A To withdraw the exemption from the provisions of sub-section (6B) of section 153 and include
exemption from the provisions of sub-section (6) of section 153
Clause 47B To substitute the clause in order to streamline the provision in accordance with the NBFC Rules,
2007. Apparently there is no change in the status of exemption already available.
Clause 56 Clause 56 is proposed to be substituted. The substituted clause read as under:
The provisions of section 148 shall not be applicable to the import of goods classified under
Pakistan Customs Tariff falling under Chapters 27, 52.01, 86 and 99.
Clause 65 To insert a new clause by virtue of which any income derived by a project, approved by
Designated National Authority (DNA), from the transfer or sale of Clean Development
Mechanism Credits i.e. Certified Emission Reductions, verified Emission Reductions, is proposed
to be exempt.
Clause 66 The Bill proposes to insert a new clause by virtue of which the provisions of section 235
(electricity consumption) shall not be applicable to the exporters-cum-manufacturers of -
(a) carpets;
(b) leather and articles thereof including artificial leather footwear;
(c) surgical goods;
(d) sports goods; and
(e) textile and articles thereof.

The following clauses have been omitted for becoming redundant, etc.

Clause 3A Waiver of profit on debt or the debt itself


Clause 11 Consequent to the deletion of section 113 this clause mandating the non-application of minimum
tax in various circumstances and the parties is proposed to be withdrawn.
Clause 33 Exemption in respect of non-withholding of tax on payment to National Investment (Unit) Trust or
a mutual fund is proposed to be withdrawn.
Clause 36 No tax deduction on profit on Special US Dollar Bonds
Clause 41A Manufacturer, where declaration of option for the presumptive tax regime has been furnished
Clause 42A President Relief Fund for Earthquake Victims, 2005
Clause 58 Exemption available to Telecom companies from the levy of additional tax for default of not
collecting tax withholding tax is no more available.

32
Budget 2008-09

The Third Schedule


Budget 2006-07
Part II
First Year Allowance (FYA)

Pursuant to the insertion of section 23A, FYA at 90% is now proposed to be allowed on plant, machinery and
equipment installed by any industrial undertaking set up in specified rural and under developed areas, and owned
and managed by a company Such allowance is proposed to be allowed in lieu of initial allowance as allowed under
section 23 against the cost of the “eligible depreciable assets” put to use after July 1, 2008.

The Fourth Schedule

General Insurance Rules

Rule 5(b)
Appreciation / Depreciation of investment not taxable / deductible

By virtue of proposed amendment, while computing the taxable income of any business of the insurer (other than life
insurance), any amount taken to reserve to meet depreciation of investments is not allowed as deduction and any
amount taken credit for in the accounts on account of appreciation of investment is not treated as part of the profits
and gains unless these have been crystallized as gains or losses on the realization of investments. Previously
unrealized gains and losses on investments were taxable or allowable, as the case may, while computing the taxable
income of any business of the insurer (other than life insurance)

Rule 5(d)
Payment of insurance or re-insurance premium to non–resident without deduction of tax at source

While computing the taxable income of any business of the insurer (other than life insurance), no deduction is
proposed to be allowed on account of insurance premium paid to an overseas insurance or re-insurance company or
a local agent of an overseas insurance company until tax has been deducted at the rate of 5% on the gross amount
under newly inserted sub-section (1AA) of section 152.

Rule 6A
Extension of period for exemption of capital gains from sale of shares

Exemption available on the gains from sale of following has been extended up to tax year ending on June 30, 2010:

a) modaraba certificates;

b) any instrument of redeemable capital as defined in the Companies Ordinance, 1984 (XLVII of 1984),
listed on any stock exchange in Pakistan;

c) shares of a public company (as defined in sub-section (47) of section 2); and

d) the Pakistan Telecommunications Corporation vouchers issued by the Government of Pakistan,

The Sixth Schedule

Provident Fund
Rule 3(a) Part I
Employer's annual contributions, when deemed to be income received by employee.
th
Presently, contributions made by the employer in a recognized provident fund in excess of 1/10 of the salary of the
employee are deemed to be the income of the employee. Finance Bill 2008 proposes to amend this limit as lower of
th
1/10 of salary and Rs. 100,000.

33
Budget 2008-09

Superannuation Fund
Rule 5 Part II Budget 2006-07
Deduction of tax on contributions paid to an employee.

Presently, tax on receipt by employees other than the amount exempt under clause (25) of Part I of the Second
Schedule, from superannuation fund is required to be deducted by the trustees at the average rate of tax at which the
employee was liable to tax during the preceding three years or during such period, if less than three years, as he was
a member of the fund. Now the Finance Bill 2008 proposes that the tax shall be deducted by the trustees at the rate
applicable to the year of withdrawal.

The Seventh Schedule

Rule 1(c)
Inadmissibility of Specific Provisions

The newly introduced schedule, effective from the tax year 2009 onward, provided the allowability of provisions for
classified advances and off balance sheet items as claimed in the accounts, provided these are certified duly from
the external auditors to the effect that such provisions were in line with the requirements of the Prudential
Regulations.

Finance Bill 2008 proposes to withdraw such relaxation and specific provision is no more allowed as deduction while
computing the taxable income of a banking company instead provisions under section 29 and 29A of the Ordinance
as related to allowability of bad debts are applicable.

Rule 7
Withdrawal of requirement of minimum tax liability

Pursuant to the proposed omission of section 113 for minimum tax liability, banking company is also not required to
pay minimum tax.

Rule 8 (1A)
Set off of losses pursuant to the Scheme of Amalgamation

The accumulated loss under the head “Income from Business” (not being speculation business losses) of an
amalgamating banking company or banking companies shall be set off or carried forward against the business profits
and gains of the amalgamated company and vice versa, up to a period of six tax years immediately succeeding the
tax year in which the loss was first computed in the case of amalgamated banking company or amalgamating
banking company or companies. It means that by virtue of proposed amendment, brought forward losses and capital
losses of amalgamating banking company or banking companies are available for set off and carry forward against
the business profits and gains of amalgamated company and vice versa.

34
Budget 2008-09

Sales Tax Act, 1990


Budget 2006-07
Proposed Amendments

1. Definitions

Arrears (2A) Section 2

The definition of ‘arrears’ is proposed to be substituted to mean, on any day, the sales tax due and payable
by the person under the Act before that day but which has not yet been paid.

The definition is revamped in view of the specific definition of ‘sales tax’ which has been added in the Act.

Associate (associated persons) (3)

The Finance Bill seeks to substitute the definition of ‘associated persons’. The proposed definition is in line
with the term ‘associate’ defined in the Income Tax Ordinance, 2001.

Board (4)

The name of Central Board of Revenue was changed to Federal Board of Revenue as a result of
promulgation of the Federal Board of Revenue Act, 2007. The definition of ‘Board’ is proposed to be
substituted to make the consequential amendment therein. Now the term ‘Board’ is defined to mean the
Federal Board of Revenue established under section 3 of the Federal Board of Revenue Act, 2007.

Importer (13)

Presently, the term ‘importer’ is defined to mean any person who lawfully imports any goods into Pakistan.
The word ‘lawfully’ appears to be superfluous so it is proposed to be omitted from the definition.

Input and output tax (14 and 20)

The Finance Bill seeks to redefine the terms ‘input tax’ and ‘output tax’ to streamline them. However, from
the definition of ‘input tax’, the sales tax levied in Azad Jammu and Kashmir (AJK) on supply of goods is
proposed to be excluded. It transpires that such input tax paid in AJK can not be claimed by person
registered in Pakistan.

Person (21)

The term ‘person’ is proposed to be redefined to specifically mention the following persons which will fall
under this definition:

(a) an individual;

(b) a company or association of persons incorporated, formed, organized or established in Pakistan or


elsewhere;

(c) the Federal Government;

(d) a Provincial Government;

(e) a local authority in Pakistan; or

(f) a foreign government, a political subdivision of a foreign government, or public international


organization;

35
Budget 2008-09

Provincial sales tax (22A)


Budget 2006-07
The Financial Bill seeks to define the ‘Provincial Sales Tax’ to enumerate all Provincial Sales Tax
Ordinances at one place in this definition.

Sales Tax (29A)

The definition of ‘sales tax’ is proposed to be added in the Act. It is defined to mean:

(a) the tax, additional tax, or default surcharge levied under this Act;

(b) a fine, penalty or fee imposed or charged under this Act; and

(c) any other sum payable under the provisions of this Act or the rules made thereunder.

Supply (33)

The present definition of ‘supply’ is very broad and it includes lease, other disposition of goods, business or
non-business of goods, etc. The proposed definition is very specific and it means a sale or other transfer of
the right to dispose of goods as owner including such sale or transfer under hire purchase agreement.
However, the Federal Government has been given power to declare any transaction as supply through a
notification in the official Gazette.

Tax (34)

The term ‘tax’ is proposed to be redefined to mean sales tax. As the definition of ‘sales tax’ has been added
in the Act, the consequential amendment is proposed to be made in the definition of ‘tax’.

Taxable Activity (35)

‘Taxable activity’ is proposed to be redefined as any economic activity carried on by a person whether or not
for profit, and includes-

(a) an activity carried on in the form of a business, trade or manufacture;

(b) an activity that involves the supply of goods, the rendering or providing of services or both to another
person;

(c) a one-off adventure or concern in the nature of a trade; and

(d) anything done or undertaken during the commencement or termination of the economic activity, but
does not include-

• the activities of an employee providing services in that capacity to an employer;

• an activity carried on by an individual as a private recreational pursuit or hobby; and

• an activity carried on by a person other than an individual which, if carried on by an individual,


would fall within clause (b).

Time of supply (44)

Presently, the ‘time of supply’ is taken to be a time when the goods are delivered by the registered person.
However, in the case of a supply to associated person, the ‘time of supply’ is considered to be a time when
the goods are made available to it although such goods are not delivered. Now by virtue of proposed
definition, the time of supply in the case of both associated and non-associated persons would be taken to
be time when the goods would be delivered or made available to the recipient.

36
Budget 2008-09

The proposed definition of ‘time of supply’ in relation to-


Budget 2006-07
(a) a supply of goods, other than under hire purchase agreement, means the time at which the goods
are delivered or made available to the recipient of the supply;

(b) a supply of goods under a hire purchase agreement, means the time at which the agreement is
entered into; and

(c) services, means the time at which the services are rendered or provided.

The Bills seeks to define the following terms in the Act which are in line with the Income Tax Ordinance,
2001:

• Association of persons (3A)


• Firm (11A)
• Company (5AA)
• Trust (44A)
• Unit Trust (44AA)

2. Scope of tax Section 3

The general rate of sales tax on supply of goods is proposed to be increased from 15% to 16%.Rate of sales
tax on services is also expected to be increased from 15% to 16%. Since increase in such rate has already
been proposed to be made in Islamabad Capital Territory (Tax on Services) Ordinance.

3. Retail Tax Section 3AA, 26AA & 32AA

The sales tax on retailer is now separately covered by the Sales Tax Special Procedure Rule, 2007. These
sections in the main Act dealing taxation for retailer had been become redundant and not proposed to be
deleted.

4. Determination of tax liability Section 7

Presently, where the taxpayer could not claim the input tax in the relevant month, he is entitled to adjust
such input tax in the succeeding twelve months against output tax in the return. Now, this period of twelve
months is proposed to be reduced to six months to claim previous input tax in the return. However based
on the change, the taxpayer would not be required to specify the reasons for such delayed input tax
adjustment.

5. Adjustable input tax Section 8B

The condition given authorizing adjustment of the input tax on purchase of fi xed assets against output
tax after start of a production of a new unit is proposed to be removed, hence such input tax will be
allowable on purchase of fixed assets subject to the compliance of other general conditions given in this
regard in the Act.

6. Refund of input tax Section 10

Presently, the facility of refund of excess input tax is available against the exports or zero rated local
supplies. Now, in case of excess input tax against supplies other than zero rated or exports, such excess
input tax may be carried forward to the next tax period and shall be treated as input tax for that period and
the refund may be allowed in respect of such excess input tax in accordance with the refund procedure
prescribed by notification in the official Gazette.

37
Budget 2008-09

7. Assessment of tax Section 11


Budget 2006-07
This section empowers the sales tax officer to make assessment of tax including levy of penalty and default
surcharge in case the taxpayer has not fully discharged his sales tax liability. By virtue of proposed
amendment in this section, the sales tax officer is bound to issue show cause within five years to make such
assessment of tax.

Moreover, the time limit for passing an order within 90 days of issuance of show cause notice has been
extended to 120 days. The power available to the Collector to extend such time for further 90 days has also
been extended to 120 days.

8. Access to record, documents, etc Section 25

Sub section (2) of section 25 empowers the sales tax officer to conduct audit of the records of the taxpayer
once in a year. By virtue of proposed amendment, it has been clarified that sales tax officer may carry out
such audit despite the records of that year have earlier been audited by the Auditor-General of Pakistan.

9. Return Section 26

The period of filing of revised return is proposed to be extended from 90 days to 120 days.

10. Default Surcharge Section 34

Presently, the rate of default surcharge i.e. additional tax is 1% for first six month of default in payment of
sales tax and where default continues, the rate is 1.5% for the seventh month onwards. The Bill seeks to
introduce uniform rate of 1.5% since first day of default.

11. Recovery of tax not levied or short levied or erroneously refunded Section 36

The time limit for passing an order under section 36 within 90 days of issuance of show cause notice is
proposed to be extended to 120 days. The power available to the Collector to extend such time for further 90
days has also been extended to 120 days.

12. Power of the Board and Collector to call for records Section 45

By virtue of proposed amendment in this section, the Collector can not call for and examine the records of
any proceedings under the Act where an appeal before Collector (Appeals) or the Sales Tax Appellate
Tribunal is pending.

13. Appeals Section 45B

The time limit for passing an order by Collector (Appeals) within 90 days of filing of appeal is proposed to be
extended to 120 days. The time available to the Collector (Appeals) to pass such order within further
extended period of 90 days has also been enhanced to 120 days.

14. Appeals to Appellate Tribunal Section 46

Presently, appeal may be filed before the Tribunal against the order passed by the Collector (Appeals) under
section 45B or against any order passed by the Board or the Collector under section 45A. The Bill now seeks
to allow filing appeal before the Tribunal against any order passed by the Collector of Sales Tax through
adjudication or under any of the provisions of the Act or rules made thereunder.

The maximum time limit for passing an order in appeal by the Tribunal is also proposed to be extended to 8
months from 6 months.

Moreover, the single bench may now adjudicate the cases involving tax or penalty upto Rs.10 million.
Previously, this limit was 1.5 million.

38
Budget 2008-09

15. Alternative Dispute Resolution (ADR) Section 47A


Budget 2006-07
In settlement of disputes through ADR Committee, the Federal Board of Revenue is required to pass an
appropriate order on the recommendation of the Committee. Presently, there is no provision in the Act which
authorizes the Board to modify its order in case of any mistake therein. The proposed new sub section 4(A)
empowers the Chairman to pass a revised order, upon filing of application by the aggrieved person, in case
there is an error in the original order passed by the Board or when Chairman considers it just and equitable
to modify the said order.

16. Power to make rules Section 50

A new sub-section (2) is proposed to be inserted in this section whereby all rules made under any provisions
of the Act shall be collected, arranged and published alongwith general orders and departmental instructions
and rulings, etc. at appropriate intervals and sold to the public at reasonable price.

17. Representatives and their liabilities and obligation Section 58A & 58B

The concept of ‘representative’ is proposed to be introduced now in the Act. The similar provisions regarding
representative and its liabilities already exist in the Income Tax Ordinance, 2001.

The elaborative definition of ‘representative’ has been given in the Finance Bill. A person is usually
considered to be a representative of a taxpayer if he has business or similar connections with the taxpayer.

The law requires the representative of a taxpayer to perform duties and obligations imposed under the Act on
the taxpayer including the payment of tax subject to the conditions and limitations prescribed in this regard.

18. Repayment of tax to persons registered in Azad Jammu and Kashmir Section 61A

This proposed new section seeks to allow the refund of the input tax paid on any goods acquired in or
imported into Pakistan by the persons registered in Azad Jammu and Kashmir as are engaged in making of
zero-rated supplies.

19. Issuance of duplicate of sales tax documents Section 69

This section is proposed to be substituted, whereby the procedure for issuance of duplicate sale tax
documents has been elaborated as well as fee for issuance of attested duplicate of any such document has
been increased from Rs.10/- to Rs.100/-.

39
Budget 2008-09

1. Schedules
Budget 2006-07
1.1 Item subject to Sales Tax on Retail Prices Basis Third Schedule

• The Finance Bill seeks to exclude biscuits, confectionary, snacks, electric bulbs from Third Schedule to
the Sales Tax Act, 1990. Accordingly, sales tax on such goods is proposed to be charged in VAT mode.

1.2 Exemption Sixth Schedule

• Exemption on packaged edible vegetables and edible fruits is proposed to be removed.

• The Finance Bill seeks to extend exemption on ready mix concrete blocks. Previously, building blocks of
cement were only exempted under this Schedule.

• Energy saver lamps are proposed to be exempted as a measure to overcome electricity crises.

• Supplies to hospitals run by Federal or Provincial Government or charitable operating hospitals having at
least 50 beds are proposed to be exempted under this Schedule.

• The Finance Bill seeks to exempt goods and services purchased by non-resident entrepreneurs in trade
fairs and exhibitions subject to reciprocity and conditions and restriction as may be specified by the
Board.

40
Budget 2008-09

Significant Notifications
Budget 2006-07
Reference Summary

S.R.O. General Amnesty Scheme from payment of past liability (i.e. prior to June 11, 2008) to
524(I)/2008 persons opting to get themselves registered under Sales Tax Act, 1990
11-06-2008
Amnesty has been allowed to exempt the whole Sales Tax amount, default surcharge and
penalties on supplies made prior to June 11, 2008 by an unregistered person who was otherwise
liable to be registered under Sales Tax Act, 1990 and would get himself registered during the
period June 01, 2008 to July 31, 2008 and thereafter file Sales Tax Returns and pay tax due
regularly.

S.R.O. Exemption of fertilizers and pesticides from payment of Sales Tax at import and supply
535(I)/2008 & stage
536(I)/2008
11-06-2008 By virtue of these SROs, different types of fertilizers and pesticides as mentioned in the said
SROs have been exempt from Sales Tax at the time of import and on local supply.

S.R.O. Zero-rating of molasses and other raw materials for the manufacturing of acetic acid
540(I)/2008
11-06-2007 For providing relief to textile industry which extensively uses acetic acid the SRO proposes for
& S.R.O. zero-rating of raw materials used in making of acetic acid according to criterion mentioned in
863(I)/2007 SRO 863(I)/2007 .
24-08-2007

S.R.O. Maintenance of exemption of Sales Tax on the import and supply of cellular telephone
541(1)/2008 & sets subject to the payment of Rs.500 per mobile phone/connection
542(1)/2008
11-06-2008 Previously under SRO 541(I)/2006 dated June 05, 2006 custom duty and sales tax were
exempted on import and supply of mobile phones to the extent that combined effect of both the
levies should be Rs.500 per cellular set, which was collectible from user by the cellular company
operator on activation of a mobile phone/ new connection or giving a new number.

Now by SRO 542(1)/2008 the levy of Rs.500 per cellular set/ connection has been confined to
Sales Tax and separate custom duty of Rs.500 per mobile set will be charged at import stage
aggregating to Rs.1,000.

S.R.O. Enhancement of rate of tax on the import or supply of goods mentioned in the SRO
537(1)/2008 644(I)/2007
11-06-2008
Rate of tax has been enhanced from 20% to 21% on the goods mentioned in Table I and from
17.5% to 18.5% on the goods mentioned in Table II of the SRO 644(I)/2007

S.R.O. Zero Rating of Caustic soda flakes in solid form, Cotton linter and Sequins
538(1)/2008
11-06-2008 The said SRO proposes for the zero rating of Sales Tax on supply and import of Caustic soda
flakes in solid form, Cotton linter and Sequins and deletion of Maize (corn) starch from zero rated
thereof.

530(1)/2008 Through this SRO an insertion has been made in rule 18 of the Sales Tax Rules, 2006
11-06-2008 interalia extending the date of filing of return.
th
In cases where due date has been prescribed as 15 of a month, the tax due shall be deposited
th th
by the 15 and the return shall be submitted electronically by 18 of the same month

41
Budget 2008-09

Significant Proposed Amendments in


Budget 2006-07
Federal Excise Act, 2005

1. Definitions Section 2

Duty Due Section 2(9a)

Present definition of ‘duty due’ does not cater for the duty in respect of services. The Finance Bill proposes to
redefine the ‘duty due’ to mean duty in respect of clearances made or services provided or rendered during a
month and shall be paid at the time of filing of return.

Franchise Section 2(12a)

Presently, the definition of ‘Franchise’ has been given in the Federal Excise Rules. The term ‘Franchise’ is
now proposed to be defined in the Act which means an arrangement under which the franchisee is
contractually or otherwise granted any right to produce, manufacture, sell or trade in or do any other
business activity in respect of goods or to provide service or to undertake any process identified with
franchiser against a fee or consideration including royalty or technical fee, whether or not a trade mark,
service mark, trade name, logo, brand name or any such representation or symbol, as the case may be, is
involved.

2. Duties specified in First Schedule Section 3

Finance Bill proposes that duties of excise shall also be levied at the rate of 15% ad valorem on services
originating outside but terminating in Pakistan.

Pursuant to the aforementioned change, where services are rendered by the person out of Pakistan, the
recipient of such service in Pakistan shall be liable to pay duty.

3. Time period for filing of revised return Section 4

Time period for filing a revised return to correct any omission or wrong declaration made therein is proposed
to be extended from 90 days to 120 days from filing of original return.

Finance Bill provides that a composite return as may be prescribed for the purpose of sales tax and duty
chargeable under the Act shall, unless otherwise directed by the Board, be deemed to be a return for the
purpose of this section. It transpires that where any such composite return is filed by the registered person,
no separate return shall be required to be filed under this Act.

4. Application of provisions of Sales Tax Act, 1990 Section 7

The Finance Bill seeks to insert sub section (2) to the section 7 whereby the Federal Government may
declare, by notification in the official Gazette, that any of the provisions of the Sales Tax Act, 1990,relating to
the levy of and exemption from sales tax, registration, book keeping and invoicing requirements, returns,
offences and penalties, appeals and recovery of arrears shall , with such modifications and alterations as it
may consider necessary or desirable to adapt them to the circumstances, be applicable in regard to like
matters in respect of the duty leviable under this Act.

5. Default Surcharge Section 8

Presently, the rate of default surcharge i.e. additional tax is 1% for first six month of default in payment of
duty and where default continues, the rate is 1.5% for the seventh month onwards. The Bill seeks to
introduce uniform rate of 1.5% since first day of default.

42
Budget 2008-09

6. Determination of value for the purpose of duty Section 12


Budget 2006-07
Presently, where any goods are liable to duty under this Act at a rate dependent on their value, duty shall be
assessed and paid on the basis of wholesale cash price of those goods and where such price is not
available, of identical or similar goods, on which goods are capable of being sold to general body of retail
traders and if there is no such body, to the general body of consumers on the day of its sale without any
deduction whatever except the amount of duty and sales then payable. The Finance Bill proposes that now
duty on such goods shall be assessed and paid on the basis of value as determined in accordance with sub-
section (46) of section 2 of the Sales Tax Act, 1990, excluding the amount of duty payable thereon.

7. Recovery of unpaid duty or of erroneously refunded duty


or arrears of duty, etc. Section 14

Presently, in the case of non-payment or short payment of duty, erroneous refund of duty, etc., the Federal
Excise Officer may issue a show cause notice for payment of such duty within three years from the relevant
date. The Finance Bill seeks to extend the period of issuance of show cause notice upto five years where
such non or short payment of duty or erroneous refund is attributable to collusion or deliberate act.

8. Offences, penalties, fines and allied matters Section 19

Following are the proposed amendments in the rates of penalties:

Penalty for non filing of return

Present Rate Proposed Rate

Rs. 10,000 Rs. 5,000, however, where a person files the


return within 15 days after the due date he shall
pay a penalty of Rs.100 for each day of default.

Penalty for non or short payment of duty

Present Rate Proposed Rate

Rs. 10,000 Rs. 10,000 or 5% of duty involved whichever is


higher

9. Power of adjudication Section 31 (3)

Federal Excise Officer invested with the power to adjudicate is presently required to decide the case within
90 days of the issuance of show cause notice or within such extended period as he may fix but not
exceeding 90 days. Finance Bill 2008 proposes this limit to be extended up to 120 days.

10. Appeal to Collector (Appeals) Section 33

The time limit for passing an order by Collector (Appeals) within 90 days of filing of appeal is proposed to be
extended to 120 days. The time available to the Collector (Appeals) to pass such order within further
extended period of 90 days has also been enhanced to 120 days.

11. Power of Board or Collector to pass certain orders Section 35

The time period to call for and examine the records by the Board or Collector in respect of any proceedings
relating to any decision or order passed by any Federal Excise Officer has been extended to 5 years from 2
years.

43
Budget 2008-09

12. Power to rectify mistakes in orders Section 36


Budget 2006-07
The time period to rectify any apparent mistake in the order passed by the Federal Government, the Board or
any Federal Excise Officer has been extended to 5 years from 3 years.

13. Alternate dispute resolution Section 38 (4)

In settlement of disputes through ADR Committee, the Federal Board of Revenue is required to pass an
appropriate order on the recommendation of the Committee. Presently, there is no provision in the Act which
authorizes the Board to modify its order in case of any mistake therein. The proposed new sub section 4
empowers the Chairman to pass a revised order, upon filing of application by the aggrieved person, in case
there is an error in the original order passed by the Board or when Chairman considers it just and equitable
to modify the said order.

14. Issuance of duplicate federal excise documents Section 43A

Finance Bill seeks to empower an officer of federal excise not below the rank of Assistant Collector to issue,
on payment of one hundred rupees, an attested duplicate of any federal excise document as is available with
the department or has been filed under this Act or rules made there under to a relevant registered person
applying for the same.

15. Franchise services Rule 43A

Banks have been required to deduct FED on the remittance by franchisee on account of franchise fee,
technical fee or royalty if it is satisfied that franchisee has not paid duty as required.

44
Budget 2008-09

1. Schedules Budget 2006-07


1.1 Table - I (Excisable Goods): First Schedule

• In consequence of enhancement of sales tax rate by one per cent, the Federal Excise Duty is also
proposed to be increased from 15 % to 16 % on edible oils, vegetable ghee and cooking oil.

• The Bill seeks to substitutes serial no. 9, 10, 11 pertaining to duties on cigarettes as under:

Existing Proposed

S. Description of Rate of duty Description of Rate of


No. Goods Goods Duty

9. Locally produced Sixty-three per Locally produced Sixty-three per cent of


cigarettes if their cent of the retail cigarettes if their retail the retail price.
retail price price. price exceeds sixteen
exceeds fifteen rupees per ten
rupees per ten cigarettes.
cigarettes.

10. Locally produced Two rupees and Locally produced Three rupees and
cigarettes if their eighty paisas per cigarettes if their retail seventeen paisa per
retail price ten cigarettes plus price exceeds seven ten cigarettes plus
exceeds six sixty-nine per cent rupees and forty three sixty-nine per cent per
rupees and fifty per incremental paisas per ten incremental rupee or
seven paisas per rupee or part cigarettes but does not part thereof.
ten cigarettes but thereof. exceed sixteen rupees
does not exceed per ten cigarettes.
fifteen rupees per
ten cigarettes.

11. Locally produced Two rupees and Locally produced Three rupees and
cigarettes if their eighty paisas per cigarettes if their price seventeen paisas per
retail price does ten cigarettes. does not exceed seven ten cigarettes.
not exceed six rupees and forty three
rupees and fifty paisas per ten
seve n paisas per cigarettes.
ten cigarettes.

Further, Bill also restricts that no cigarette manufacturer shall reduce adopted price level on the day of
the announcement of this Bills for the purpose of FED.

• The Federal Excise Duty on cement is proposed to be enhanced from Rs. 750 to Rs. 900 per metric
ton.

• The Finance Bill seeks to levy 5 % Federal Excise Duty on the import and local supply of motorcars
and other motor vehicles principally designed for the transport of persons, including station wagons
and racing cars of cylinder capacity exceeding 850cc.

45
Budget 2008-09

1.2 Table - II (Excisable Services): First Schedule


Budget 2006-07
• FED rate is proposed to be enhanced by one per cent and new FED rate will be 16 % on services
charges of the following:

o Advertisement on closed circuit T.V and cable T.V network


o Inland carriage of goods by air
o Other shipping agents as specified in serial 5 (ii)

• The Finance Bill seeks to increase FED rate on all type of telecommunication services from 15 % to
21 % except those which are already exempt.

• The Federal Excise Duty in respect of the following services rendered are proposed to be enhanced by
five per cent and increased FED rate will be 10 %:

o All type of insurance including re-insurer and direct insurance service


o Non – fund services provided by banking and non-banking financial companies
o Franchise services

• It is proposed to substitute serial no. 3 relating to services rendered for domestic and international
traveling by air.

Facilities for travel Existing Proposed

(a) Services provided or rendered in Fifteen per cent of the Sixteen per cent of the
respect of travel by air of the charges. charges plus rupees
passenger within the territorial twenty per ticket.
jurisdiction of Pakistan.

(b) Services provided or rendered in


respect of travel by air of the
passengers embarking on
international journey to or from
Pakistan.

(i) Passengers embarking to or from Three thousand two Three thousand two
SAARC region, UAE (Middle East), hundred rupees for hundred and forty rupees
Saudi Arabia, Africa, Afghanistan. economy and economy for economy and economy
plus classes and four plus classes and four
thousand two hundred and thousand two hundred and
for club, business and first forty rupees for club,
classes. business and first classes.

(ii) Passengers embarking to or from Four thousand and two Four thousand two
Europe, Far East, China, USA, hundred rupees for hundred and forty rupees
Canada, Australia, South America, economy and economy for economy and economy
others. plus classes and five plus classes and five
thousand and seven thousand seven hundred
hundred rupees for club, and forty rupees for club,
business and first classes. business and first classes.

46
Budget 2008-09

1.3 (Conditional Exemption) - Table - I (Goods): Third Schedule


Budget 2006-07
• The Finance Bill seeks to extend exemptions to registered manufacture of carbon black oil (carbon black
feed stock). Previously it was available for only National Petrocarbon (Pvt) Limited, Pipri, Karachi.

• It is proposed to enter the exemption in Third Schedule on goods imported or purchased locally for use in
further manufacture of goods in Export Processing Zone as previously this exemption was being
enforced through SRO 333(I)/2002.

1.4 (Conditional Exemption) - Table - II (Services): Third Schedule

• The exemptions on life and health insurance are proposed to transfer from Table – I to Table – II of the
Third Schedule as earlier it was mentioned under wrong Table – I (Goods)

• It is proposed to exempt FED @ 5 % on insurance premium on crops insured by farmer.

47
Budget 2008-09

Significant Proposed Amendments in:


Budget 2006-07
Customs Act, 1969

1. Directorate General of Post Clearance Audit (PCA) Section 3DD

This new section is introduced to constitute a Directorate General of Post Clearance Audit (PCA) in order to
conduct post clearance audit.

2. Use of unique user identifier Section 155F

By virtue of new proviso, the Collector of Customs may suspend the use of unique user identifier of any
person on receipt of any complaint or information about violation of the Customs Act, 1969.

3. Punishment for offences Section 156(1) - S.No. 43

It is proposed that the person having custody of the goods will also be penalized if that person is involved in
any offence by the time good already landed and awaiting process of clearance.

4. Power of adjudication Section 179(3)

It is proposed to extend time limit from 90 days to 120 days for deciding cases relating to confiscation of
goods or imposition of penalty by Customs Officers.

5. Procedure of Appellate Tribunal Section 194 – C (4) (c)

The proposal is with regard to extension in limit of tax involved in the case from Rs. 5 million to 10 million to
adjudicate the case by single member bench.

6. Alternative Dispute Resolution Section 195 – C (4A)

In settlement of disputes through ADR Committee, the Federal Board of Revenue is required to pass an
appropriate order on the recommendation of the Committee. Presently, there is no provision in the Act which
authorizes the Board to modify its order in case of any mistake therein. The proposed new sub section (4A)
empowers the Chairman to pass a revised order, upon filing of application by the aggrieved person, in case
there is an error in the original order passed by the Board or when Chairman considers it just and equitable
to modify the said order.

7. Other signification amendments

• The concessionary duty on import of raw materials such as Palm Stearin, Coconut Crude Oil, Crude
Palm Kernel Oil, Surface Active Agents, PFAD, Palm Kernel Acid Oil and Palm Kernel Fatty Acid
Distillate for manufacture of Toilet and Laundry Soap have been allowed to the industrial units located in
the State of Azad Jammu and Kashmir after meeting general conditions.

• Custom duty has been increased by 10 % on old and used automotive vehicles of different capacity
specified in SRO 577(I)/2005 dated 6th June, 2005 meant for transport of persons.

Further, capital value tax is abolished on import of above mentioned vehicles. Previously CVT was
recovered in addition to custom duty, sales tax, withholding taxes.

• Vehicles imported in violation of Import Policy Order as well as smuggled vehicles has been allowed
release on payment of redemption fine at 30% of the value of vehicles along with leviable duty/taxes
except those vehicle which have already been auctioned.

48
Budget 2008-09

• Fully dedicated CNG buses exempted from duty.


Budget 2006-07
• Pharmaceutical industry related specified active ingredients, chemicals and packing materials at 5 %
duty.

• Manufacturers have been allowed to import samples duty free as per specified conditions in chapter 99
of PCT.

• Custom duty at Rs. 500 per set levied on import of mobile phone.

• Custom duty on betel leaves increased from Rs. 150/Kg to Rs. 200/Kg.

• 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.

• Duty rates on non-essential and luxury items such as dairy products, fruits, chewing gum, chocolate,
processed food, fruit juices, aerated waters, ceramic products, air conditioners/ refrigerators, electric fans,
toasters, micro wave ovens, television, furniture and lighting equipment etc increased from 25 % to 35 %.

• Duty rates on cosmetics increased from 20 – 25 % to 35 %.

• Duty rates on electric ovens/ cooking ranges etc. increased from 20 % to 30 %.

The amendments set out in the First Schedule regarding rate of custom duties are being enforced from the
th
12 day of June, 2008.

49
Budget 2008-09

Capital Value Tax (CVT)


Budget 2006-07
Levy of tax on Capital Value on certain assets Section 7

• The Bill proposes to extend its scope whereby in the case of a bank, the capital value tax shall be paid
when general power of attorney is used to enforce the mortgage of property offered as collateral for
obtaining loan.

• In the “explanation” appended with section 7 (levy of tax on capital value on certain assets), the term
“Urban areas” has been redefined as follows:

“(e) urban area” means area falling within the limits of

(i) the Islamabad Capital Territory;

(ii) a Cantonment Board;

(iii) the rating areas as defined under the Urban Immovable Property Act,
1958 (W.P V of 1958) as inforce in Punjab, NWFP, Sindh and Balochistan
except where the rate under section 117 of the respective Provincial Local
Government Ordinance, 2001 is zero;

(IV) in addition to (iii) up to forty kilometres from the outer limits of the Cantonment Boards in Karachi and up
to forty kilometres from the notified rated areas of Karachi City District;

(V) in addition to (iii) up to thirty kilometres from the outer limits of the Cantonment Boards in Lahore
and Faisalabad and up to thirty kilometres from the notified rated areas of Lahore and
Faisalabad City District;

(vi) in addition to (iii) in all cases other than Karachi, Lahore and Faisalabad up to ten kilometres from
the outer limits of the Cantonment Boards and up to ten kilometres from the notified rated areas; and

(vii) such areas the Federal Board of Revenue may, from time to time, by notification in the official
Gazette, specify.”.

50
Budget 2008-09

Federal Board of Revenue Act, 2007


Budget 2006-07
The following amendments are proposed in the Act:

Section 4
In section 4, for clause (m) the following shall be substituted, namely:-

“(m) to establish a Foundation and a Fund relating thereto so as to provide support and incentives such
as subsidy in the housing, transport, medical, education, uniform or liveries and such other matters to the
employees and for the welfare of the present and retired employees and their families and to create,
establish, organize, assist in the social and cultural activities;”

Section 5

Following new clauses are proposed to be added in section 5:

"(k) power to grant incentives and rewards to the employees;

(l) power to establish performance standards for employees on the basis of merit and specified
performance standards;

(m) power to prescribe mode and method of continuous appraisal for employees; and

(n) power to process matters incidental to or conducive to the attainment of all or any of the foregoing

Section 7

In section 7 a proviso is to be added which provides that the Chairman, may by notification in the official
Gazette and by recording reasons thereof in writing, exclude certain classes of representations from the purview of
this section.

Economic Reforms Act XII of 1992

Section 3 of the Act is proposed to be substituted by a new section which provides that the provisions of this Act
would have effect notwithstanding any thing contained in the Customs Act, 1969 (IV of 1969) and the Income Tax
Ordinance, 1979, or any other law for the time being in force.

It is further proposed that the Foreign Exchange Regulations Act, 1947 (VII of 1947) and the rules and regulations
made thereunder, shall prevail over the provisions of this Act.

Thus, by virtue of the proposed amendment, the provisions of the Act shall over ride the provisions of other laws with
the exception of Foreign Exchange Regulations Act, 1947.

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Budget 2008-09

Amendments Proposed in Labour Laws


Budget 2006-07
Amendments have been proposed in the following labour laws:

a) Minimum Wages for Unskilled Workers Ordinance, 1969;


b) Workers' Provincial Employees' Social Security Ordinance, 1965;
c) West Pakistan Industrial and Commercial (Standing Orders) Ordinance, 1968;
d) Workers Welfare Fund Ordinance, 1971,
e) Employees' Old-age Benefits Act, 1976.

a) Minimum Wages for Unskilled Workers Ordinance, 1969

Similar to the pervious years, the Government in this year’s budget has also proposed an increase in the
Minimum Wages for unskilled workers. This year the increase is from Rs. 4,600 to Rs. 6,000 per month.

b) Provincial Employees' Social Security Ordinance, 1965

The Provincial Employees' Social Security Ordinance, 1965, is applicable to industrial and commercial
establishments. The purpose of this ordinance is to provide for a scheme of social security of the insured
employees and their dependents in case of sickness, maternity, employment injury or death.

Under this ordinance at present only those employees are covered, whose wages are less than or equal to
Rs. 5,000 per month. Keeping in view of the proposed increase in the minimum wages of unskilled worker to
Rs 6,000 per month in the Finance Bill 2008, an enhancement of the wage limit from Rs 5,000 to Rs 10,000
per month for the continued applicability of this Ordinance has been proposed.

At present, the employers covered under the Social Security Scheme contribute at the rate of seven percent
(7%) of the wages paid to insurable employees. In the Finance Bill 2008, it has been proposed that the rate
of contribution to be decreased from seven percent (7%) to six percent (6%) of the wages.

Currently, the maximum monthly payment of employer contribution at the rate of 7% of Rs. 5,000 amounts to
Rs. 350 per month. The proposed enhancement of the wage limit to Rs. 10,000 per month and the proposed
reduction of contribution rate to 6% will result in the maximum contribution per secured employee up-to Rs.
600 per month.

The employers, who have opted to secure their employees through the Self Assessment Scheme contributes
a fixed rate of Rs. 210 (Rupees Two Hundred and Ten only) per month. In the Finance Bill 2008, it has
proposed that the fixed rate of contribution under the self assessment scheme be raised to Rs. 360 (Rupees
Three Hundred and Sixty only).

c) Industrial and Commercial Employment (Standing Orders) Ordinance, 1968

At present under the section 15 (5) of the Industrial and Commercial Employment (Standing Orders)
Ordinance, 1968, where the employer is conducting an inquiry of an alleged misconduct of a worker, he can
suspend the worker for a total period of four weeks. During this suspension period, the worker is entitled for a
subsistence allowance equal to fifty percent of the monthly wages. In the Finance Bill 2008, the allowance
during the suspension period has now been proposed to be increased to an amount equal to full wages of
the worker.

d) Workers Welfare Fund Ordinance, 1971

The purpose of this law is to provide for the establishment of a Workers’ Welfare Fund (WWF), for providing
residential accommodation and other facilities to workers.

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Budget 2008-09

At present under the provision of this Ordinance, every industrial establishment is required to pay two
percent (2%) of the total income every year towards the workers welfare fund andBudgetit is only 2006-07
applicable on
those industrial establishments, whose total income in a financial year is Rs. 500,000 or more. In the Finance
Bill 2008, it has been proposed to amend the definition of Industrial Establishment in order to bring in the
workers of all commercial and services sector in the ambit of this Ordinance by extending its coverage to all
the establishments to which the West Pakistan’s Shops and Establishments Ordinance, 1969, is applicable.

Through Finance Act, 2006, the definition of total income for the purpose of Workers’ Welfare Fund was
amended to mean higher of the profit (before taxation or provision for taxation) as per accounts or the
declared income in the return of income, where return of income is required to be filed.

It was further provided that In case where return of income is not required to be filed, the total income for the
purpose of fund will be the profit (before taxation or provision for taxation) as per accounts or four percent of
the receipt as per the final tax statement under section 115 of the Ordinance, whichever is higher.

Although, the definition of total income was defined in the above manner by virtue of which WWF was
payable on the basis of accounting profit; however, as per provision of section 4 of the Ordinance, WWF was
payable equal to 2 percent of so much of the total income as is assessable under the Ordinance, thus
creating an erroneous interpretation that WWF is still payable on the basis of taxable profit as declared in the
return of income despite change in the definition of total income.

The proposed amendment seeks to remove this anomaly by deleting the reference of “as is assessable
under the Ordinance”.

Similarly sub-section (4) is also proposed to be amended to streamline the same in accordance with the
intent of the legislature i.e. WWF is to be paid on the basis of higher of accounting profit or income declared
or four percent of the receipt relating to final taxation, as the case may be, applicable.

The proposed amendments also provide for corresponding change in the levy based on increase or
reduction of total income.

e) The Employees’ Old-Age Benefits Act, 1976

The purpose of Employees’ Old Age Benefit Act in 1976, is to provide some subsistence level of support
through pension to employees after retirement during their old age.

At present, this law is applicable to every industry or establishment, wherein twenty or more persons are
employed, if the organization has been set up on or after July 1, 2006. While for the organizations
established before July 1, 2006 the limit of number of persons employed was ten. In the Finance Bill, it is
proposed to bring down the applicability of this Act to all the establishments, where five or more persons are
employed.

At present, the employers are required to contribute six percent (6%) of the wages of the insured
persons, however in the Finance Bill 2008, the rate of contribution is recommended to be reduced to five
percent (5%). At present, with a maximum wage limit for coverage of Rs. 4,600 per month (current
minimum wage of unskilled worker), the maximum monthly contribution by employer (6% of Rs. 4,600)
comes to Rs.276/ -. Now, with the proposed changes in the contribution rate to 5% and minimum wage
to Rs. 6,000, the maximum contribution by employer per worker will increase to Rs. 300 per month (5%
of Rs. 6,000).

Under the Section 22 subsection (2) of this Act, certain relaxations in terms of the period of insurable
employment of the insured persons are provided for the applicability of this Act. In the Finance Bill 2008,
these relaxations in the insurable employment period are proposed to be withdrawn for the persons of the
registered on or after July 1, 2008.

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Budget 2008-09

Currently, the Banks and Banking Companies are exempt from the applicability of this Act. In the Finance Bill
2008 by amendment in section 47, (which describes the persons on which theBudget Act do not 2006-07
apply), the
exemption given to the banks and banking companies are being proposed to be withdrawn.

In the Schedule to the Employees’ Old Age Benefits Act, to calculate the old age pension, invalidity pension
for living pensioners and pension for surviving spouse the following formula is provided:

Monthly Wages X Number of Years of Insurable Employment

The computation of the Monthly Wages in the above formula has also proposed for revision. Presently, last
month’s wages were used, while calculating the monthly wages. In the Finance Bill 2008, it has been
proposed that the monthly wages should now be calculated on the basis of last twelve calendar months
wages on which contributions were paid.

In the Finance Bill 2008, the minimum old-age and invalidity pension to insured persons or to the survivors is
being recommended to be increased to Rs. 2,000 per month from Rs. 1,500 per month. This enhanced
pension will be effective for the new pensioners from July 1, 2008. In case of the current pensioners, an
increase of 15% has been recommended. Furthermore, the minimum pension survivor’s pension amount (i.e.
Rs. 2,000 per month) has now been offered to all survivors of the insured persons, previously it was
restricted to the surviving spouse only.

54
Budget 2008-09

Corporate Laws Budget 2006-07


Significant changes proposed are as under:

Companies Ordinance, 1984

1. Annual general meeting Section 158(1) & (4)(a) & (b)

The period for holding an Annual General Meeting is proposed to be extended from “three” months to “four”
months following the close of its financial year. The proposed amendment, which was desperately sought by
the corporate sector, will ease out the pressure on the management for preparation of the accounts in a short
time of two months.

Minimum fine for default by listed companies in holding the AGM has been enhanced to Rs.50,000 but not
exceeding Rs.500,000. For other companies it is minimum Rs.10,000 but not exceeding Rs.100,000.

2. Ineligibility of certain persons to become director Section 187(j)

A person is not eligible to be appointed as a director of a listed company if he is engaged in the business of
brokerage or he is spouse of such person or is sponsor, director or officer of a corporate brokerage house.

A new proviso has been added by relaxing the above restriction if the company itself is a stock exchange.

3. Bar on appointment of managing agents, sole purchase, sales agents, etc Section 206

The Federal Government may also exempt appointment of managing agent or a person, firm or company
entitled to the management of the affairs of a company, who has entered into an agreement or
contract with an NBFC licensed to undertake asset management services in relation to an
investment company, and venture capital company in relation to a fund, registered with the Commission.

4. Investments in Associated companies and undertakings Section 208 (2A)

By excluding the words “such class of” the Commission is proposed to be empowered to make regulations with
respect to nature, period, amount of investment and terms and conditions of investments by all types of
companies in their associated undertakings.

5. Annual accounts and balance-sheet Section 233 (1) & (4)

As the period for holding the annual general meeting has been once again extended and accordingly the period
for laying the audited accounts at the annual general meeting is also extended from “three” months to “four”
months.

In order to facilitate transmission of annual accounts electronically, the Commission is proposed to be


empowered to specify the form and manner in which the company shall send its annual accounts to the
members.

6. Period for payment of dividend Section 251

The Commission is now proposed to be empowered to specify the time period of payment of dividend by the
company, instead of previous requirement of 45 and 30 days for listed and other companies, respectively.

7. Power to make Rules Section 282G, J , K & M

The word “regulations” has been inserted after the word “rules” wherever mentioned in Section 282G, J, K, and
M to enable the Commission to formulate appropriate regulations for NBFCs.

55
Budget 2008-09

Insurance Ordinance, 2000


Budget 2006-07
1. Conditions imposed on registered insurers Section 11

The annual supervision fee payable by an insurer to the Commission is proposed to be increased from the
existing limit of Rs.100,000 or Re.1 per thousand of gross direct premium written in Pakistan whichever is
higher to Rs.500,000 or Re.1 per thousand of gross direct premium written in Pakistan.

2. Power to prescribe maximum levels of acquisition costs and


maximum levels of management expenses Section 66

By deletion of sub section (4), the power granted under section 66 to the Commission has been extended for
an indefinite period.

3. Intermediaries Part XIII – Section 94

Certain provisions of the law which were previously applicable only to direct insurance intermediaries, such
as brokers, is now proposed to be made applicable to the reinsurance brokers also.

Securities and Exchange Commission of Pakistan Act, 1997

1. Term of Office of the Commissioners Section 7

The bill seeks to amend the term of the Commissioner while filling casual vacancy. Further, it is proposed
that a person appointed as a Commissioner shall not be older than sixty two of age on the date of his
appointment. A Commissioner shall stand retired upon reaching the age of sixty five year.

2. Securities and Exchange Policy Board Section 12

The proposed amendments are of administrative nature, the main one being the designation of one of the
members to be the Chairman of the Policy Board by the Federal Government.

As a result of the reduction in the number of members from 10 to 9 as proposed in Section 12(1), sub clause
2(i) has been deleted, whereby the Finance Minister or the Adviser to Prime Minister on Finance, are
proposed not to be a member of the Securities & Exchange Board anymore.

Sub-Rule (7) of this Ordinance is replaced with a new one, whereby it is proposed that the Federal
Government shall designate / empower one of the Members to act as the Chairman of the Board who shall in
the event of a tie, have a casting vote.

3. Power and Functions of the Board Section 20

A new clause (ha) is proposed to be added in section 20(4), whereby a Commission is empowered to hear
and decide investor complaints against persons involved in brokerage business for violations of
securities laws, rules, regulations, directives, codes, etc.

A new clause (jb) is proposed to be added in section 20(4), whereby a Commission is empowered to
maintain and issue panels of auditors from which companies may appoint auditors, and approving audit
firms for financial institutions, listed companies and NBFIs.

A new clause (w) is proposed to be added in section 20(4), whereby a Commission is empowered to
promote and regulate any scheme, fund, arrangement or undertaking (including but not limited to pension,
superannuation gratuity and provident funds and schemes) established by or on behalf of companies and
state owned corporations as employers, for entitlement of post employment benefits of their employees.

56
Budget 2008-09

4. Power to call for examination Section 32


Budget 2006-07
Under section 32(5)(d), the Commission is empowered to call for examination a person willfully refuses to
obey or disregard any lawful order of the Commission, passed under this Act or any other law administered
by the Commission.

5. Imple mentation of orders of the Commission Section 32A

After Section 32, it is proposed to add new Section 32A whereby the Commission may issue such
directions as may be necessary or expedient to give effect to its orders or to prevent abuse of it s
process, including seeking the assistance of the local administration or Police who shall be bound to
provide such assistance.

6. Appeal to the Appellate Bench of the Commission Section 33

Section 33(1)(c) states that no appeal shall lie against a sanction provided or decision made by a
Commissioner or an officer of the Commission to commence legal proceedings in a court of law. It is proposed to
delete the words “court of law” from this sub section. As such, there will be no restriction to go for an appeal in
the court of law.

Securities and Exchange Ordinance, 1969

1. Prohibition of insider trading Section 15A, B, C, D & E

Insider trading is prohibited under this Ordinance. It is proposed to substitute Section 15A whereby
specifying in detail the persons, activities and transactions included and not included in the insider trading.

It is proposed to substitute Section 15B, specifying in detail what “inside information” would include.

Section 15C is proposed to be added wherein the word “Insiders” has been defined in detail.

Section 15D, is proposed to be added wherein listed companies will be responsible to inform / disclose inside
information to the public which directly concerns the listed securities.

Section 15E, is proposed to be added wherein imposing, on any person who is found involved in insider
trading, a penalty of Rs.10 million or three times the amount of gain made or loss avoided by such person,
or loss suffered by another person, whichever amount is higher or surrender to the Commission, an amount
equivalent to the gain made or loss avoided by him; or pay any other person who has suffered a loss, an
amount equivalent to the loss so suffered by such person.

Where such person is an executive officer, director, auditor, advisor, consultant of a listed company, he be
removed from such office by an order of the Commission and debarred from auditing any listed company
for a period of upto three years. Where such person is registered as a broker or agent, he will be liable to
cancellation of registration.

Further, an insider person found disclosing inside information to any person, will be liable to a fine upto Rs.30
million.

2. Corporatisation, demutualisation and integration of the stock exchanges Section 32E

After Section 32E (1), a new sub section 1A is proposed to be added related to the provision to be made in
the rules made in pursuance of Section 32E. These provisions shall specify the matters to be included in any
scheme of demutualization and corporatization and the manner of its approval by the members of the stock
exchange, Commission’s power to approve the scheme and impose any conditions, the process and
procedure to be followed for purposes of demutualization and corporatization and the matters regarding
appointment of directors and chairman of the board of a stock exchange after demutualization including

57
Budget 2008-09

Budget
restrictions on such appointments, restriction of rights attached to the shares issued, various 2006-07
restrictions on
disinvestment, further issue and sale and purchase of shares of a stock exchange after demutualization,
on holding of shares by different categories of shareholders of a stock exchange and trading rights on a
stock exchange and its restrictions.

Khushhali Bank Ordinance, 2000

It is proposed by the Federal Government to repeal Khushhali Bank Ordinance, 2000.

It is further elaborated that in case of any difficulty arising in giving effect to the provisions of this section, the
Federal Government may make such order as may appear to it to be necessary for the purpose of removing the
difficulty.

Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980

1. Power to issue directions Section 18A

It has been proposed by the insertion of new section to vest powers in the Registrar to issue such
directions, as he deems fit, to a modaraba company in the interest of public and Modaraba Certificate holders,
and the modaraba company and its management shall be bound to comply with such directions. Further, the
Registrar may, on a representation made or on his own motion, modify or withdraw such direction, with or
without conditions.

2. Power to make regulations Section 41A

New section 41 A has been proposed to be inserted wherein the power of t he Commission to make such
regulations as are necessary to carry out the purposes of the Modaraba Ordinance. Such powers shall be
subject to the condition of previous publication and before making any regulations the draft thereof shall be
published by the Commission for eliciting public opinion thereon within a period of not less than fourteen
days from the date of publication and the regulation may provide a fine upto Rs.100,000 and in case of default,
a further fine of Rs.1,000 per day.

3. Power to issue directives, circulars, codes, guidelines, etc. Section 41B

New section 41B has been inserted wherein it is proposed to empower the Commission to issue directives,
circulars, codes, guidelines or notifications necessary and the rules and regulations made under this
Ordinance.

Foreign Exchange Regulations Act, 1947

Powers to impose penalty Section 23K

New section is proposed to be inserted empowering the SBP to impose penalty on any person who contravenes any
provision of this Act, or any order, rule, regulation or direction issued by the State Bank, upto Rs.1,000,000 for each
contravention and where the contravention is a continuous one with a further penalty upto Rs.20,000 for each day
during which such contravention continues.

Same powers shall be utilised in case contravention is committed by a company or other body corporate, every
director, manager, secretary or other officer or agent thereof shall also be deemed guilty of such contravention, if
committed with his knowledge or consent.

The SBP shall be liable to take any action in case of default made in payment of penalty by any person and recover
the amount of penalty from any account, or assets, monetary or otherwise, of the defaulter held with State Bank or
any bank or a financial institution.

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Budget 2008-09

Further, the SBP shall be liable to take any action in case any bank or financial institution, to which notice has been
Budget
sent pertaining to the above defaulter, fails to debit the amount of penalty, it shall itself be liable to pay2006-07
such amount
to the State Bank, as if it had itself committed the contravention.

Listed Companies (Substantial Acquisition of Voting Shares and Take-Overs) Ordinance, 2002

1. Definitions Section 2(1)(k)

It is proposed to add the words “or regulations” after the words “rules” empowering the Commission to make
regulations for this Ordinance.

Section 2(1)(l)

The definition of “Promoters” is proposed to be deleted, being irrelevant.

2. Ordinance not to apply to certain transactions Section 3(b)

The provisions of this Ordinance are not applicable on allotment of shares pursuant to a right issue.
However, by re-arrangement Section 3(1)(b), it is proposed that allotment and issuance of shares by the
directors, against the right shares offered but declined or not subscribed u/s. 86(7) of the Companies
Ordinance, 1984, shall not be exempted from the non applicability of this Ordinance.
Section 3(f)

In order to make the Takeover Ordinance applicable, it is proposed to delete Section 3(f) pertaining to non
applicability of the provisions of this Ordinance on transfer of voting shares from financial institutions to co-
promoters of the company pursuant to an agreement between them.
Section 3(m) to (q)

Insertion of the new clauses (m), (n), (o), (p) and (q) to Section 3 are proposed to be added in order to
facilitate of exemption of the Ordinance in case of transfer of voting shares to a person’s relative without
monetary consideration, acquisition of voting shares by CFS financier, rehabilitation scheme of a company,
transfer of sponsors shares of holding or subsidiary company and acquisition of voting shares by strategic
investor in case of disinvestment by existing shareholders of a stock exchange pursuant to the
demutualization process respectively.
Section 3(2)
Insertion of new sub section 3(2) proposes that the acquirers of shares, even if exempt under clauses (a),
(b), (c), (d), (e), (g), (i), (j), (m) and (o) of sub-section (1), will be required to make disclosures of their
respective acquisition. This will enable declaration of the entire shareholding of the acquirer.

3. Number of voting shares to be acquired Section 12(1)

It is proposed to add the words “Commission may prescribe” in place of the words “acquirer may decide” in
order to empower the Commission to control the percentage of voting shares to be acquired by the acquirer.

4. General obligations of the acquirer Section 13(1) & (5)

It is proposed to add the words “whether incorporated in Pakistan or outside Pakistan” after the word
“company,” making the directors responsible for the documents / information issued to the shareholders,
without considering the place of registration of the company i.e. origin of the acquirer.
The words “in the public announcement of offer” is proposed to be inserted at the end of the proviso. This
proposed change is to safeguard the interest of general public, in case any director desires to exempt
himself from the responsibility for the information disclosed in the offering documents such director will have
to issue a statement to this effect.

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Budget 2008-09

5. General obligations of the manager to the offer Section 15


Budget 2006-07
Section 15 is proposed to be re-numbered as sub-section (1). It also proposes to delete clauses (f), (h), (i)
and (j) related to responsibility for the submission of public announcement and offer letter to the Commission,
target company and Stock Exchange(s), compliance of other laws, release the balance amount from the
Bank to the acquirer and submission of compliance report to the Commission.

It is proposed to add new sub section (2)(a), (b) and (c), which shall cover the requirement of the above
deleted sub sections related to the filing of public announcement of offer with the Commission, target
company and the stock exchanges, fulfillment of the necessary obligations by the acquirer and reporting to
the Commission.

5. Penalties for non-compliance Section 26

The penalty by the Commission against willful refusal, failure or contravention is proposed to be enhanced
from Rs.1 million to Rs.50 million and in the case of a continuing default, Rupees two hundred thousand for
every day after the issue of such order during which the refusal, failure or contravention continues, instead of
Rupees ten thousand per day.

6. Power of the Commission to make Regulations Section 29A

New section 29A empowering the Commission to make such regulations not inconsistent with provisions of
this Ordinance and the rules necessary to carry out the purposes of the Ordinance, has been proposed.
Such regulation shall be related to the form, manner, timing and submission of offers letters, public
announcements,public offers, independent advice to shareholders, obligations of directors, obligations and
restrictions of the acquirer and manager to the offer, standard of care and responsibility, timing and content
of documents, offer timetable, asset valuations and offer pricing and mode of payment, restrictions on
dealings before and during the offer, disclosure of dealings, security to ensure completion of a takeover offer,
acceptable securities, mandatory offers, offer size and acquisition, conditional offers, competitive bids and
conduct of enquiry.

Such powers shall be subject to the condition of previous publication and before making any regulations the
draft thereof shall be published by the Commission for obtaining public opinion thereon within a period of not
less than seven days from the date of publication.

7. Power of the Commission to issue directives, circulars, guidelines, etc. Section 29B

New section 29B is proposed to be inserted empowering the Commission to frame the regulations and to
issue such directives, codes, guidelines, circulars or notifications for the prompt compliance of the
Ordinance.

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Budget 2008-09

Budget
Significant Circulars / Notifications issued by The Securities and 2006-07
Exchange
Commission of Pakistan (SECP) during 2007-2008
Reference Subject Matter

Circular 04, 2007 Small Disputes Resolution Committee


dated May 03, 2007
To resolve the disputes between an insurer and a policyholder, in respect of claims the
amount of which does not exceed five hundred thousand rupees, the Small Disputes
Resolution Committee has been constituted by the Federal Government having
jurisdiction in respect of life insurance policies not being group life policies, domestic
insurance policies and private motor insurance policies.

Circular No. 05 of Undertaking Insurance Business in Pakistan by Foreign Companies.


2007 dated May 28,
2007. 100% foreign equity in the insurance business in Pakistan has been allowed subject to
the following conditions: -

i) Minimum equity amount of US$ 4 million by the foreign companies but not less
than US$ 2 million shall be brought from abroad. No restriction on the number of
branches.

ii) No restriction on the employment policy for the foreign insurance companies. All
the facilities as enjoyed by local companies shall be given.

Minimum paid up capital requirement enhanced from Rs.150 million to Rs.500 million for
life/family takaful operators and from Rs.80 million to Rs.300 million for non-life/general
takaful operators.

Foreign investors shall be required to bring in minimum paid up capital of Rs.500 million
in case of life/family takaful and Rs.300 million in case of non-life/general takaful.

Circular No. 06 of Opening of New Accounts with Brokers


2007 dated June
13, 2007. In order to ensure proper documentation, the Commission in exercise of powers
conferred under Section 282D of the Companies Ordinance, 1984, has directed NBFCs
to strictly comply with all the documentary requirements at the time of opening of trading
accounts with their panel of brokers i.e. execution of account opening forms and
submission of prescribed documents, including Memorandum & Articles of Association,
Board Resolution and the list of authorized signatories.

Circular No. 07 of Deferment of Application of IFRIC Interpretation for 'Determining whether an


2007 dated June Arrangement Contains A Lease' For Independent Power Producers (IPPS)
27, 2007
The Commission has extended the period for deferment of the implementation of
th
IFRIC-4 for a further period of two years i.e. till 30 June 2009.

Circular No. 11 of Deposit of Margins and Mark to Market Losses by Collective Investment Schemes
2007 dated with National Clearing Company of Pakistan Limited (NCCPL)
October 23, 2007
In terms of Regulation 12A.5.3 of National Clearing and Settlement Systems Regulations,
2003 (NCSS), all Non Broker Clearing Member are required to deposit margins and mark
to market losses with NCCPL, when they affirm trades entered on their behalf by their
brokers.

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Budget 2008-09

Reference Subject Matter Budget 2006-07


The deposit of securities by a Collective Investment Scheme with the clearing system for
settlement of its own trades is not prohibited under the NBFC Rules. As the Settlement
System has made it obligatory for the clearing members to deposit margins, it is clarified
that a Collective Investment Scheme (CIS), on acquiring membership (full or associate) of
clearing company / settlement system may deposit margins and mark to market losses in
the form of securities or any other prescribed collateral for facilitation or guaranteeing
settlement of its own trade and transaction in favour relevant Exchange or NCCPL, in
compliance with regulations of the Exchange and/or NCCPL. A CIS shall, however, not
pledge its securities for any other purposes including borrowing except as allowed under
the NBFC Rules, 2003.

Circular No. 13 of Eligibility Criteria under Rule 12(1) of the Voluntary Pension System Rules, 2005
2008 dated
November 12, 2007 The SECP in exercise of its powers conferred under sub-rule (2) of rule 12 of the
Voluntary Pension System Rules, 2005 (the "VPS Rules"). (the "('Commission") has
reviewed and revised

The eligibility criteria under the Voluntary Pension System Rules, 2005 (the "VPS Rules")
has been revised by the Commission as under to bring it in line with the provisions of the
Income Tax Ordinance, 2001 :

1. All Pakistani nationals who have valid National Tax Number or Computerized
National Identity Card issued by National Database and Registration Authority
(NADRA) shall be eligible to contribute to the Pension fund authorized under the
Voluntary Pension System Rules.2005.

2. Commission’s Circular No. I of 2007 has been withdrawn.

Circular No. 17 of Applicability of Regulation 23 of Non-Banking Finance Companies and Notified


2007 dated Entities Regulation, 2007 relating to classification and provisioning of Non-
December 18, 2007 Performing Assets.

In order to avoid practical difficulty in implementation of Regulation 23 of the Non Banking


Finance Companies and Notified Entities Regulations, 2007, it has been clarified that the
st
said regulation is not applicable for the period ended 31 December, 2007. The effective
date of applicability of the said regulation shall be intimated later.

Circular No. 01 of Publication of Notices in Urdu Newspaper


2008 dated January
07, 2008 Various provisions of the Companies Ordinance, 1984 and the Rules made there under
require companies to publish the notices, prospectuses, etc at least in one English
language and one Urdu language daily newspaper having circulation in the province in
which, in case of a listed company the stock exchange on which the company is listed
and in case of other company where the registered office of the company, is situated.

In most cases the material is published in Urdu newspapers in English language, which
does not serve the purpose of publication. The publication of the material in Urdu
newspaper is required to be published in Urdu language which is meant for encouraging
dissemination of information in local language, for the better comprehensibility of various
stakeholders, investors and general public.

All companies are, therefore, directed to publish the material in the national English and
Urdu newspapers in English and Urdu languages respectively

62
Budget 2008-09

Reference Subject Matter


Budget 2006-07
Circular No. 02 of Amendments in the Guidelines for Issue of Term Finance Certificate to the General
2008 dated January Public
22, 2008
In order to develop primary Debts Capital Market and encourage new corporate bond
issue, amendment have been made in the Guidelines for Issue of Term Finance
Certificate to the General Public which provided that TFCs to be offered to general public
should be listed at least on any one Stock Exchange of the country.

Now, the corporate bonds issued by the companies to general public may or may not be
listed on the Stock Exchange(s).

Circular No. 04 of Amendments in the Guidelines Approved by the Religious Board for Issuance of
2008 dated April 04, Certificates of Musharika by Modarabas
2008
The Religious Board approved the following amendments in Clause Nos. 9 and 11 of
the Guidelines for issuance of Certificates of Musharika :

1. Insertion of the following sub-clause 9.5 in “Musharika Certificates Redemption


Reserve Fund” :

9.5 The Modaraba may make investment from the Redemption Reserve Fund in
liquid, investment grade Shariah compliant instruments only to maximize on
the returns without exposing the Redemption Reserve Fund to any risk. The
investment from the Redemption Reserve Fund will be disclosed in the
quarterly and annual accounts of Modaraba under a separate head
“Redemption Reserve Fund”. The Modaraba shall replenish any shortfall in the
Redemption Reserve Fund at the time of “mark to market” on the balance
sheet dates.

2. Amendment made in clause 11(iii) of the “Conditions of eligibility” as under :

(iii) The Modaraba is actively engaged in business for a period of two years and
has obtained credit rating of minimum investment grade from a credit rating
agency registered with the Commission and such credit rating shall be
updated at least once every year during the currency of the issue.

Circular No. 05 of Sharing of Expenses of Insurance Ombudsman's Secretariat by Insurance/Takaful


2008 dated April 14, Companies
2008
1. The costs of maintaining the Insurance Ombudsman's secretariat would be shared
by insurance companies in such proportions, as may be determined by the
Commission as provided in sub-Section 4 of Section 126 of Insurance Ordinance,
2000.

2. Total expenses incurred in respect of Insurance Ombudsman's Secretariat by the


st
Commission during the period from 2 May 2006 to 31 December, 2007 amounts to
Rs.9,250,705/ -.

3. For the purpose of sharing of the costs of the Insurance Ombudsman's Secretariat,
the Commission has decided to recover the same from insurance and takaful
companies on the following basis:

"greatest of Rs.150,000 or Rs.0.09 per mille of 2006'.


“gross direct premium written in Pakistan in case of insurance companies, CJ-gross
direct contributions collected in Pakistan in case of takaful companies".

63
Budget 2008-09

Reference Subject Matter


Budget 2006-07
4. All insurance and takaful companies (registered on or before 31 December 2007)
are advised to ensure that a cross cheque or bank draft drawn in favour of
"Securities and Exchange Commission of Pakistan" for their share of the Insurance
Ombudsman's Secretariat costs (for the period form 2 May 2006 to 31 December
2007) should reach the Finance & Administration Department of the Commission in
Islamabad, under advice to the Insurance Division, Karachi, by 30 April 2008.

Circular No. 06 of Model Financing Agreements For Modarabas


2008 dated May 08,
2008 The Religious Board has approved various Model Financing Agreements for Modarabas
which includes Diminishing Musharaka, Ijarah, Istisna, Mudarabah, Musawamah,
Musharaka, Murabahah, Salam, Syndicate Mudarabah, Syndicate Musharakah, Islamic
CFS Murabahah.

The Religious Board approved the conceptual framework for issuance of Sukuk by
Modarabas. The Modaraba Companies are required to adopt the following procedure :

i) Modaraba intending to issue Sukuk, will ensure that the transaction conforms
to the admissible modes provided to its Prospectus approved by the Religious
Board and that the basic concepts of Shariah compliance are fully adhered to in
the proposed instruments in accordance with the general structure for
issuance of Sukuk.

ii) The respective Modaraba will submit its draft instrument to the Religi ous Advisor
of the Modaraba Association of Pakistan (MAP) who would examine and certify
that the instrument is fully compliant with the Shariah requirements and also
conforms to various aspects of the proposed module

iii) The instrument will be submitted to the Registrar (Modarabas) along with the
Compliance Certificate of the Religious Advisor of MAP, who after examining
and satisfying himself on all of conceptual and operational aspects, would approve
the instruments for issuance.

The Religious Board approved issuance of “Modaraba Sukuks” to corporate as well as


individual investors by Modarabas. These Modaraba Sukuks will be different from other
Sukuks due to their tenure and modes i.e. these will be issued for a period from 90 days
to 365 days.

Circular No. 08 of Extension in the Period of Companies Easy Exit Scheme (CEES) 2007.
2008 dated May 08,
2008 The time period of the applicability of the Company Easy Exit Scheme, 2007 is extended
till June 30, 2008.

Circular No.09 of Permission for Insertion of the Word “ An Islamic Financial Institution” after the
2008 dated May 16, name of a Modaraba
2008
Insertion of the words “An Islamic Financial Institution” in brackets, after the name of
a Modaraba managed by the Modaraba Companies, has been permitted by the
Religious Board to represent the functions and businesses of a Modaraba under the
shadow of Islamic financial services.

64
Budget 2008-09

Reference Subject Matter


Budget 2006-07
S.R.O. 819(1)/2007 The following class of companies have been exempted from the requirement of obtaining
dated August 10, the authority of a special resolution for making investment in associated companies or
2007. undertakings as required under subsection (1) of section 208 through Section 208 (2A)
(a) of the Companies Ordinance, 1984 :

(a) Banking company duly licensed by the State Bank of Pakistan (SBP), to the extent
of investments made in the ordinary course of its business, excluding equity
investments;

(b) Development Finance Institution duly licenced by the SBP, to the extent of
investments made in the ordinary course of its business, excluding equity
investments;

(c) NBFC duly licenced by the Commission, to the extent of investments made in the
ordinary course of its business, excluding equity investments;

(d) NBFC duly licenced by the Commission to carry out Investment Advisory Services
or Asset Management Services, to the extent of investments made in a Collective
Investment Scheme being managed by such NBFC.

(e) Modaraba Management Company, to the extent of investments made in a


Modaraba being managed by such company;

(f) Holding company, to the extent of investments made in its wholly owned
subsidiary:

Provided that any disinvestment by a holding company which would reduce its
holding in the subsidiary, in which an investment was made pursuant to this
exemption, to less than 75% shall be made under the authority of a special
resolution.

(g) Company whose principal business is the acquisition of shares, stock, debentures
or other securities, to the extent of acquisition of such securities on behalf of its
clients in the ordinary course of its business.

S. R. O. 859(I)/2007 The Accounting and Financial Reporting Standards for Medium-Sized Companies
–dated August 21, and Small-Sized Companies, in regard to accounts and preparation of balance sheet
2007 and profit and loss account specified in the Fifth Schedule to the Companies
Ordinance, 1984 has been substituted by the SECP.

S.R.O. 860(1)/2007 The SECP has directed that the Accounting and Financial Reporting Standards for
dated August 21, Medium and Small Sized Entities approved by the Council of the Institute of Chartered
2007 Accountants of Pakistan shall, without any modification or alteration unless such
modification or alteration is approved by the Commission, be followed in regard to the
accounts and preparation of balance sheet and profit and loss accounts of non-listed
companies.

Further, in this regard, Medium-Sized Company and Small Sized Company shall mean
as follows:

(A) Medium-Sized company shall be a company that:

(a) is not a listed company or a subsidiary of a listed company;

65
Budget 2008-09

Reference Subject Matter


Budget 2006-07
(b) has not filed, or is not in the process of filing, its financial statements with
the SECP or other regulatory organisation for the purpose of issuing
any class of instruments in a public market;

(c) does not hold assets in a fiduciary capacity for a broad group of outsiders,
such as a bank, insurance company, securities broker/dealer, pension
fund, mutual fund or investment banking entity;

(d) is not a public utility or similar company that provides an essential public
service;

(e) is not economically significant on the basis of criteria as defined below:

Provided that an entity is considered to be economically significant if it has:

i) turnover in excess of Rs.1 billion, excluding other income;

ii) number of employees in excess of 750;

iii) total borrowings (excluding trade creditors and accrued liabilities) in excess
of Rs.500 million.

Provided further that in order to be treated as economically significant


any two of the criterion mentioned in (i), (ii) and (iii) above have to be met and that
the criteria followed shall be based on the previous year’s audited financial
statements. Companies can be excluded from this category where they do
not fall under aforementioned criteria for two consecutive years.

(f) is not a Small-Sized company.

(B) A Small-Sized company shall be a company that:

i) has paid up capital plus undistributed reserves (total equity after taking
into account any dividend proposed for the year) not exceeding Rs.25 million;

ii) has employees not exceeding two hundred and fifty at any time during the
year, and

iii) has annual turnover not exceeding Rs.200 million, excluding other income.

Non-listed companies that are not Medium-Sized companies or Small-Sized companies


shall follow the International Accounting Standards and International Financial Reporting
Standards notified by the Commission for the listed companies.

S.R.O. 1131 The SECP, with the approval of the Federal Government, has made certain amendments
(10/2007 dated in the Non Banking Finance Companies (Establishment and Regulation) Rules, 2003
November 21, pertaining to the NBFCs carrying out leasing, investment finance services, housing
2007 finance services, asset management services, discounting services, investment advisory
services and venture capital investments. These extensive amendments have been made
through insertion / deletion / substitution in the definitions and clauses under NBFC
Rules, 2003.

66
Budget 2008-09

Reference Subject Matter


Budget 2006-07
S.R.O. 1132 Non Banking Finance Companies Notified Entities Regulation, 2007 have been
(10/2007 dated promulgated by the SECP. These regulations shall be applicable to NBFCs carrying out
November 21, leasing, investment finance services, housing finance services, asset management
2007 services, discounting services, investment advisory services and venture capital
investment, including their business activities and to the notified entities being managed
by such NBFCs unless specified regulation for such notified entities have been issued.

S.R.O. 36(1)/2008 Exemption to the listed companies and their subsidiaries from the application of Clause 6
th
dated January 08, of Part 1 of the 4 Schedule regarding disclosure in the financial statements to use a price
2008. other than the arm’s length price, has been further extended till June 30, 2008.

S.R.O. 411(1)/2008 The SECP has directed that the International Financial Reporting Standards 7 and 8
dated April 28, 2008 (IFRS 7 - Disclosure of information about the significance of financial instruments for an
entity's financial position and performance.) (IFRS 8 - Consolidated financial statements
of a group with a parent company and to the separate or individual financial statements of
an entity) issued by the International Accounting Standards Board shall be followed in
regard to the accounts and preparation of balance sheet and profit and loss accounts of
the listed companies.

The requirements of IFRS 7 shall not, till further orders, apply to banks and such non
banking finance companies as are reengaged in investment finance services, discounting
services and housing finance services.

The Commission may, of its own motion or upon an application made to it, grant
exemption to any company or any of the requirements of the aforesaid standards.

67
Budget 2008-09

Overview of newly adapted IFRSs Budget 2006-07

IFRS 7 Financial Instruments: Disclosures

Effective date To be notified by the ICAP

Objective To prescribe disclosures that enable financial statement users to evaluate the significance of
financial instruments to an entity, the nature and extent of their risks, and how the entity
manages those risks

Summary • IFRS 7 requires disclosure of information about the significance of financial instruments
for an entity's financial position and performance. These include:
- disclosures relating to the entity's financial position - including information about
financial assets and financial liabilities by category, special disclosures when the fair
value option is used, reclassifications, derecognitions, pledges of assets, embedded
derivatives and breaches of terms of agreements;
- disclosures relating to the entity's performance in the period - including information
about recognised income, expenses, gains and losses; interest income and expense;
fee income; and impairment losses; and
- other disclosures - including information about accounting policies, hedge accounting
and the fair values of each class of financial asset and financial liability .
• IFRS 7 requires disclosure of information about the nature and extent of risks arising from
financial instruments:
- qualitative disclosures about exposures to each class of risk and how those risks are
managed; and
- quantitative disclosures about exposures to each class of risk, separately for credit
risk, liquidity risk and market risk (including sensitivity analyses).

68
Budget 2008-09

IFRS 8 Operating Segments Budget 2006-07

Effective date To be notified by the ICAP

Core principle An entity shall disclose information to enable users of its financial statements to evaluate the
nature and financial effects of the business activities in which it engages and the economic
environments in which it operates.

Summary • IFRS 8 applies to the consolidated financial statements of a group with a parent (and to the
separate or individual financial statements of an entity):
- whose debt or equity instruments are traded in a public market; or
- that files, or is in the process of filing, its (consolidated) financial statements with a
securities commission or other regulatory organisation for the purpose of issuing any
class of instruments in a public market.
• An operating segment is a component of an entity:
- that engages in business activities from which it may earn revenues and incur expenses
(including revenues and expenses relating to transactions with other components of the
same entity);
- whose operating results are regularly reviewed by the entity's chief operating decision
maker to make decisions about resources to be allocated to the segment and assess its
performance; and
- for which discrete financial information is available.
• Guidance is provided on which operating segments are reportable (generally 10%
thresholds).
• At least 75% of the entity's revenue must be included in reportable segments.
• IFRS 8 does not define segment revenue, segment expense, segment result, segment
assets or segment liabilities, nor does it require segment information to be prepared in
conformity with the accounting policies adopted for the entity's financial statements.
• Some entity-wide disclosures are required even when an entity has only one reportable
segment. These include information about each product and service or groups of products
and services.
• Analyses of revenues and certain non-current assets by geographical area are required
from all entities - with an expanded requirement to disclose revenues/assets by individual
foreign country (if material), irrespective of the entity's organisation.
• There is also a requirement to disclose information about transactions with major external
customers (10% or more of the entity's revenue).

69
Budget 2008-09

Significant amendments made by IASB in International Financial Reporting


Budget 2006-07
Standards
July 1, 2007 to June 11, 2008
(The list is indicative, not exhaustive)

Date of Significant Consequent Effective date


Name of IFRS
amendment amendments changes in of amendment

IFRS 2 – Share January 17, Amendments made to clarify the January 01,
Based Payments 2008 terms ‘vesting conditions’ and 2009
‘cancellations’
IFRS 3 – Business January 10, § Acquisition costs to be July 01, 2009
Combinations 2008 recognized as expenses
§ Criteria for recognition and
measurement of ‘contingent
considerations’ under various
conditions has been added
§ An option is added to
recognize goodwill on ‘full
goodwill method’ i.e. including
non-controlling interest
§ Measurement of gain or loss in
pre-existing relationships and
re-acquired rights has been
introduced
§ Exception of ‘reliable
measurement’ of intangible
assets removed
§ Initial investment, in entity in
that subsequently control is
obtained, is re-measured and
resulting adjustment is
recognized in profit or loss Also affects
IAS 27
§ Treatment given for gain or
loss when partial disposal of an
investment in a subsidiary is
made when:
w Control is retained Also affects
IASs 27, 28
w Control is lost and 31
§ Goodwill is not re-measured on
acquiring additional shares in
subsidiary after control was
obtained
§ The scope of IFRS 3 has been
expanded to include
combinations of mutual entities
and combinations without Also affects
consideration (dual listed IASs 27, 28
shares) and 31

70
Budget 2008-09

Name of IFRS
Date of Significant Budget
Consequent 2006-07
Effective date
amendment amendments changes in of amendment

IFRS 5 – Non- May 22, Treatment when an entity plans to July 01, 2009
current assets held 2008 sell the controlling interest in a
for sale and subsidiary regardless of whether
discontinued the entity will retain a non-
operations controlling interest in the
subsidiary after the sale has been
introduced
IAS 1 – Presentation September 06, § Titles of components of IAS 7: Re-titled January 01,
of Financial 2007 financial statements have been ‘Statement Of 2009
Statements changed Cash Flows’ as
a consequential
§ Concept of ‘comprehensive amendment to
income’ has been added IAS 1
IAS 10 – Events September 06, Title of IAS 10 has been changed
After Reporting Date 2007 form ‘Events after the balance
sheet date’ to ‘Events after the
reporting date’
IAS 16 – Property May 22, 2008 § ‘Net Selling price’ is replaced January 01,
Plant and with ‘Fair Value less costs to 2009
Equipment sell’ in the definition of
‘Recoverable amount’

§ Treatment of sale of assets


held for rental given
IAS 20 – Accounting May 22, 2008 Requirements added to January 01,
for Government government loans with a below- 2009
Grants and market rate of interest to bring it in
Disclosure of line with IAS 39
Government
Assistance
IAS 23 – Borrowing May 22, 2008 Borrowing costs amended to refer January 01,
Cost to interest expense calculated in 2009
accordance with ‘effective interest
rate method’ in IAS 39
IAS 27 – January 10, Refer IFRS 3 for amendments in January 01,
Consolidated and 2008 IAS 27 2009
Separate Financial
Statements
May 22, 2008 Determination of cost of a January 01,
subsidiary in the separate 2009
financial statements of a parent
on first time adoption of IFRSs
has been included
IAS 28 – Investment January 10, Refer IFRS 3 for amendments in January 01,
in Associates 2008 IAS 28 2009
IAS 31 – Interests in January 10, Refer IFRS 3 for amendments in January 01,
Joint Ventures 2008 IAS 31 2009

71
Budget 2008-09

Name of IFRS
Date of Significant Budget
Consequent 2006-07
Effective date
amendment amendments changes in of amendment

IAS 32 – Financial February 14, ‘Puttable instruments’ and IAS 1 : New January 01,
Instruments: 2008 ‘Obligations arising on liquidation’ disclosure 2009
Disclosure on meeting certain criteria are to requirements
be classified as equity instruments for puttable
instruments
and obligations
arising on
liquidation
IAS 38 – Intangible May 22, 2008 Recognition of advertising and January 01,
Assets promotional activities as expenses 2009
or pre-payments added

IAS 39 – Financial May 22, 2008 § Amendments set out a number January 01,
Instruments: of changes in circumstances 2009
Recognition and that are not considered to be
Measurement reclassifications for this
purpose

§ Requirements of ‘Designating
and Documenting Hedges at
the segment level’ amended to
bring these in line with the
requirements of IFRS 8 –
Operating Segments
IAS 40 – Investment May 22, 2008 ‘Property under Construction or January 01,
Property Development for future use as 2009
Investment Property’ previously
fell within the scope of IAS 16.
Now, amended to bring such
property under IAS 40

72
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