Budget 2018 Pakistan

BUDGET AT A GLANCE

INCOME TAX

1. Reduced tax rates for individuals (salaried and non-salaried)
2. Corporate tax rate to be cut by 1% per annum to 25% in next five years
3. Tax on issuance of bonus shares to be removed
4. Non-filers cannot purchase property of over4 million
5. Increase in withholding tax rate for non-filers on supply of goods and execution of contract
6. Non-profit organizations (NPO) may claim 100% tax credit against income from investment in micro
finance banks
7. Resident individual taxpayers are required to file foreign income and asset statement
8. Reduction in rate ofadvance tax on banking transaction by non-filers from 0.6% to 0.4
9. Tax for commercial importers change to minimum taxation
10. Required amount to be deposited to qualify for an automatic stay of demand reduced from 25% to
10%
11. Increase in minimum threshold oftax deduction on payment for goods and services from Rs. 10,000/-
to Rs. 30,000/- in case ofservices and from Rs. 25,000/- to Rs. 75,000/- in case ofgoods
12. Minimum tax for marriage halls 5% ofthe bill or Rs. 20,000/-
13. Non-recognition of capital gain to be restricted to relatives
14. Abolition ofautomatic selection ofaudit on late filing of return u/s 214D ofthe Ordinance
15. Audit by commissionerto be restricted to once in three years

SALES TAX

1. Zero rated sales tax regime continue for five export sectors during fiscal year 2018-19
2. Exemption of sales tax on import is being granted to plant and machinery on onetime basis for setting
up ofSpeciaI Economic Zone
3. Rate offurthertax being enhanced from 2%to 3%
4. Furthertax rates increased from 2% to 3%
5. Import of specified parts of personal computers and laptops imported by the manufactures are being
exempted from sales tax
6. The rate offinished articles of leather are textile sectors increased from 6% to 9%

 

CUSTOM

1. Exemption ofcustom duty on specified LED parts, LED lights, LED bulbs, tubes and energy saving bulbs
to protect local industry
2. Import ofsolar panels were exempted
3. Increase ofcustom duty on soya bean oil
4. Increase ofadditionalcustomdutyfrom 1%to 2%

FEDERAL EXCISE DUTY (FED)

1. FED on certain categories ofcigarettes to be increased by around 6%
2. FED on cement to be increased from Rs. 1.25/- per kg to Rs. 1.50/- per kg

SALIENT FEATURES

BUDGET FY 2018

INCOME TAX

Relief Measures:
Increase in threshold of taxable income:
In pursuance of the government’s policy of providing relief to the common man that threshold of taxable
income would be enhanced from Rs. 400,000/- to Rs. 1,200,000/-. Subsequently, the Income Tax
(Amendment) Ordinance, 2018 [Ordinance No. V of 2018] was promulgated on April 08, 2018. As per this Ordinance the enhanced threshold oftaxable income shall apply with effect from lstJuIy, 2018.

Reduction in tax rates for individuals:
To provide relief to individuals (including salaried individuals) the maximum tax rate for all individuals has been reduced to 15% and five taxable slabs for all individuals have been introduced including a nominal tax slab of Rs.1,000/- for persons earning income exceeding Rs. 400,000/- upto Rs.800,000/- and another
nominal income tax slab of Rs.2,000/- for persons earning income exceeding Rs.800,000/- upto Rs.
1,200,000/-.

Reduction in Tax Rates for Association of Persons:

The existing threshold of taxable income for AOP’s is Rs. 400,000 and there are seven progressive tax slabs with the highest slab having a tax rate 35%. In order to ensure fair and equitable treatment and to encourage businesses formed as AOP’s the highest tax rate for AOP’s has been reduced to 30% and the existing seven slabs have been reduced to six slabs.

Extension of tax credits upto 3oth June, 2021:
Tax credit under section 658 is available to companies for the purpose of extension, expansion, balancing,
modernization and replacement of plant & machinery at the rate of 10% of the amount invested. Further, tax credit under section 650 is available to companies setting up a new industrial undertaking for a period of five years. Tax credit under section 65E is available to companies for the purchase and installation of plant
machinery through at least 70% new equity. The above tax credits can be availed by companies making
investments upto 30.06.2019. In order to incentivize investment and setting up of industrial undertakings/ manufacturing concerns such tax credits are being extended for two more years upto 3oth June, 2021.

Abolition of automatic selection for audit on late filing of return:
Presently, a person is automatically selected for audit under section 214D ofthe Ordinance if return of income is filed after the due date specified under the law or after the extended time allowed by the Board or the
Commissioner. The concept of automatic selection for audit causes hardship for taxpayers and may
discourage new taxpayers. Section 214D relating to automatic selection for audit is therefore being omitted. Simultaneously, a penalty has been introduced whereby late filers of income tax returns.

Audit by Commissionerto be restricted to once in three years:
In order to facilitate taxpayers who may be subjected to audit repetitively, FBR in its audit policy
has announced that a taxpayer shall not be selected for audit by the Board more than once in three years
through computer ballot. However, under section 177 of the Ordinance the Commissioner may also select a case for audit in successive tax years on the basis of reasons to be recorded in writing.

Reduction in corporate tax rates:
The corporate tax rates shall be reduced from 30% to 25% over the period of 5 years.

order to facilitate taxpayers who have been subjected to audit repeatedly the powers of a Commissioner to select a case for audit under section 177 of the Ordinance have been curtailed to once in three years except with the prior approval of the Board in exceptional circumstances.

Reduced rate of advance tax on banking transactions by non-filers:
Under section 236P of the Ordinance banks are obliged to collect advance tax at the rate of 0.6% from non-filers on non-cash banking transactions (such as transfer of funds through demand draft, pay order, cash deposit receipt cheques/clearing, online transfers, direct debit, telegraphic transfers etc) which are in excess of Rs. 50,000/- per day. In order to provide certainty and to allay concerns regarding likelihood of restoration of 0.6% tax, such rate of tax for non-filers has been reduced to 0.4% on a permanent basis.

Withholding tax on issuance of bonus shares to be withdrawn:
Presently, receipt of bonus shares under section 236M and 236N of the Income Tax Ordinance, 2001 is
charged @ 5% on the issuance of bonus shares to shareholders. withholding tax on issuance of bonus shares has been withdrawn and receipt of bonus shares has been ousted from the definition of income under the Income Tax Ordinance, 2001.

Reduction in Minimum threshold of payment oftax to preclude recovery oftax:
Presently under section 140 of the Income Tax Ordinance, 2001 taxpayers have the option of preventing
recovery of tax through attachment of bank accounts etc., if 25% of the tax clue is paid by the taxpayer during the pendency of appeal before the Commissioner (Appeals). In order to provide relief and facilitate taxpayers, the minimum threshold of payment of tax to preclude recovery of tax during pendency of first appeal has been reduced from 25% to 10% of the tax payable.

Increase in minimum threshold of tax deduction on payment for goods and services:
In order to provide relief to withholding agents the minimum threshold of tax deduction on goods and
services has been enhanced, in the case of payments for supply of goods.

Reduction in penalty forfailure to file withholding statements within the due date:
The existing penalty, under section 182 of the Ordinance for failure to file withholding tax statements within the due date is Rs. 2,500 per day subject to a minimum penalty of Rs. 10,000/. In order to provide relief to withholding tax agents who have deposited tax within the due date but have failed to file their withholding tax statements, the minimum penalty for failure to file such withholding tax statements has been reduced from Rs. 10,000/- to Rs. 5,000/- and only the proposed minimum penalty of Rs. 5,000/- may be imposed if
withholding tax statement is filed within three months of the due date. However existing penalty of Rs. 2,500/- per day (from the due date of filing of withholding tax statement) would apply if the statement is filed after a period of three months from the due date.

Collection of advance tax on purchase of property in installments:
Advance tax under section 236K of the Ordinance is collected from the purchaser of property at the time of transfer of such property. In order to provide relief to persons purchasing property in installments, advance tax on purchase of property shall be collected piecemeal with each installment.

lncentivizing film making in Pakistan:
In order to encourage and promote film-making in Pakistan, 50% tax rebate shall be allowed to foreign film makers making films in Pakistan and a 50% tax reduction in income tax liability shall be allowed to companies deriving income from film making for a period of five years.

Rationalization of tax rates on the import of Coal:
Withholding tax on payments remitted abroad through credit/debit/ prepaid cards:
Banks issuing credit /debit cards will now be obliged to collect 1% advance tax from filers and 3% advance tax from non-filers in respect of credit/debit card transactions resulting in outward flow of remittances from Pakistan.

Tax at import stage on commercial importers:
At present the tax collected under section 148 of the Income Tax Ordinance, 2001 from commercial
importers at the import stage is final tax, therefore, commercial importers are not required to file
their return of income and compute their taxable income. Tax collected from commercial importers at
the import stage shall now constitute minimum tax instead of final tax, therefore, commercial
importers shall be required to file their returns of income depicting their taxable income(s). This
measure is also a step towards gradual phasing out of the final tax regime.

Increase of withholding tax rates for non-filers:
Withholding tax rates have been increased for non-filers in the case of supplies/sale of goods and
contracts under section 153 of the Ordinance.

Marriage halls, banquet halls, commercial lawns etc. are mandated to collect 5% of the bill in respect
of functions under section 236D of the Ordinance. In order to improve and streamline the collection
of this tax, marriage halls are now required to collect either 5% of the bill or Rs. 20,000/- per function
in major cities and Rs.10,000/- per function in the remaining cities, whichever is higher.

Non-recognition of capital gain on gift to be restricted to relatives:
No gain or loss is taken to arise on the disposal of an asset by reason of a gift of the asset under
sections 37 and 79 of the Ordinance i.e. it is treated as a no recognition event, therefore, no liability
for capital gains tax arises. Such no recognition shall now be restricted to gifts given to ”relatives” of
an individual as defined in section 85(5) of the Income Tax Ordinance, 2001.

Payments made for services to permanent establishments of non-residents:
Tax deducted on payments to resident persons for rendering or providing of services under section 153(1)(b)
of the Ordinance constitutes minimum tax whereas tax deducted on similar payments being made to
permanent establishments of non-resident persons does not constitute minimum tax. This treatment is
prejudicial to resident persons as they are at a comparative disadvantage viz-a-viz non-resident having
permanent establishments in Pakistan. In order to provide a level playing field, the tax deductible on services rendered/provided by permanent establishments of non-resident persons shall also be treated as minimum tax.

Foreign remittances through normal banking channels:
Prior to the promulgation of the Income Tax (Amendment) Ordinance, 2008 a person was not required to explain the nature as well as the source of any amount of foreign exchange which is remitted from outside Pakistan through normal banking channels, amendment has been made in section 111(4) of the  Ordinance whereby persons would be required to explain the source of investment if the amount of foreign remittances in a year exceeds Rs.10 million.

Furnishing of foreign income and assets statement:
A new section 116A has been inserted whereby it has been made mandatory for resident individuals to furnish a foreign income and assets statement along with return of income if such individual earns foreign income equivalent to or exceeding USD 10,000/- or is the owner of foreign assets having a value equivalent to or exceeding USD 100,000/-. The foreign income and assets statement shall contain particulars/details regarding total foreign assets and liabilities (as on the last day of the Tax Year) as well as details of foreign assets transferred to another person during the tax year and consideration received in lieu ofsuch transfer. Complete particulars of foreign income earned and the expenditures incurred for earning such income shall also be
furnished through this statement. such individual shall mandatorily be required to file return of Income Tax along with foreign income and assets statement in terms of section 114(2)(f) of the Ordinance.

Penalty for failure to furnish foreign income and assets statement:
A person who fails to furnish Foreign Income and Assets statement within the due date shall also, be subject to levy of penalty of 2% of the foreign income or value of the foreign assets for each year of default under section 182 of the Income Tax Ordinance, 2001.
Time limitation for issuance of a notice calling for return of income in case of foreign income /assets:
Through the Income Tax (Amendment) Ordinance, 2018 a provision has been added in sub-section (5) of section 114 whereby the time limit for issuance of a notice calling for return shall not apply if the
Commissioner is satisfied on the basis of reasons to be recorded in writing that a person who failed to furnish his return has foreign income or owns foreign assets.

Purchase of property by non-filers:
Non-filers shall be prohibited from purchasing property having declared value exceeding Rs.4 million.

Purchase of new motor vehicles:
Non-filers shall not be permitted to purchase new motor vehicles manufactured in Pakistan or new imported vehicles.

Legal cover to electronic service of notices:
Necessary amendment has been made in section 218 of the Income Tax Ordinance, 2001 to grant legal
sanctity to service of notices through electronic mode.

Builders and Developers specified as withholding agents:
Individuals and AOP’s having turnover of Rs. 50 Million or above in a Tax Year are obliged to act as withholding agents whilst making payments for goods, services and contracts under section 153 of the Income Tax Ordinance,2001. Builders and Developers have now specifically been included in the ambit of withholding tax agents for the purpose of section 153 of the Ordinance regardless of the quantum of their turnover.

Builders and Developers specified as withholding agents:
Builders and Developers have now specifically been included in the ambit of withholding tax agents for the purpose of section 153 ofthe Ordinance regardless of the quantum of their turnover.
Streamlining procedure for payment of advance tax:
At present, a taxpayer can file a lower estimate of advance tax without furnishing any basis of such lower
estimate. In case the estimate is not supported with adequate basis, the Commissioner shall have the
mandate to reject the lower estimate and the taxpayer shall be required to pay advance tax on the basis of his turnover for the quarter.

 

In the Real Estate Sector

i. Property transactions shall be recorded at the value declared bythe buyer and the seller.

ii. Property rates notified by FBR (forthe purpose of collection of taxes on sale purchase of property) and
DC rates are to be abolished.

iii. At the Federal level, a one percent adjustable advance tax from the purchaser on the declared value
shall be collected and this tax shall replace the existing withholding tax on sellers and purchasers of
property.

iv. Non-filers shall not be permitted to purchase property having declared value exceeding four million
rupees

v. Provinces shall be requested to abolish the provincial rates for the collection of stamp duty
(commonly known as DC rates) and to collect a total of one percent tax under stamp duty and capital
value tax on the value declared byt he buyer and the seller of property.

SALES TAX & FEDERAL EXCISE BUDGETARY MEASURES

(FY 2018-19)
Enforced through Finance Bill, 2018, effective from 01.07.2018.
Exemption from sales tax is being granted to Fans for Dairy Farms, Preparations for Making Animal Feed and Bovine Semen which are currently chargeable to sales tax at standard rate of 17% is being granted. Likewise, exemption from sales tax is also being provided to Fish Feed which is presently chargeable to sales tax @ 10%. Moreover, sales tax on agriculture machinery is also reduced from 7% to 5%. Exemption is being granted on import of 21 types of computer parts imported by manufacturers registered with and certified by Engineering Development Board for assembling and manufacturing of personal
computers and laptops in accordance with quota determined by IOCO.
Reduced rate of sales tax @ 5% is being introduced on import of 19 items of cinematographic equipment for revival of film industry for five years subject to limitations and conditions imposed under the Customs Act, 1969. Exemption is being granted on import of 21 types of computer parts imported by manufacturers registered
with and certified by Engineering Development Board for assembling and manufacturing of personal
computers and laptops in accordance with quota determined by IOCO.
Exemption is being granted on import of promotional and advertising materials for display at exhibitions.
Reduced rate of sales tax @ 5% is being introduced on import of 19 items of cinematographic equipment for revival of film industry for five years subject to limitations and conditions imposed under the Customs Act, 1969. Exemption of sales tax on import is being granted to plant and machinery on onetime basis for setting up of
Special Economic Zone and for installation in that zone by zone enterprises to align exemption from sales tax with the provisions of SEZ Act, 2012.

Leather products ready for use are enjoying reduced rate of 6% of sales tax at import stage. Identical rate is also being provided on import of ready to use articles of artificial leather by specifying description and PCT headings of items of leather and artificial leather generally used by public.
Exclusion from value addition tax on import of second hand worn clothing and footwear is being provided to grant relief to the general masses. Restriction is being imposed that sales tax and federal excise audit of a registered person can be conducted only once in three years.

The rate of further tax under section 3(1A) of Sales Tax Act, 1990 is enhanced from 2% to 3%.
The rate of sales tax on import and supply of finished articles of leather and textile sector is being increased to 9%. However, all those branded outlets which will be integrated through electronic fiscal devices with FBR online system shall be charged sales tax @6%.
Rate of sales tax for steel sector is being increased to Rs. 13 per unit of electricity consumed. Moreover, the rate of sales tax for other allied steel industries i.e. ship breakers and re-rollers is also being rationalized.
Provisions for giving appeal effect under the Sales Tax Act, 1990 and the Federal Excise Act, 2005 are being introduced to facilitate the taxpayers by removing unnecessary disputes in quantification of tax liability
pursuant to appeal order passed by Commissioner-IR (Appeals), Appellate Tribunal-IR, High Court or Supreme Court of Pakistan.

SRO 1125(I)/2011, dated 31.12.2011 is being amended to provide rate of further tax @1% on local supply of finished fabric.

The amount of tax to qualify for automatic stay till disposal of appeal by the Commissioner (Appeals) is being reduced from 25% to 10%.
Input tax adjustment is being allowed on packing materials to five export-oriented sectors covered under SRO 1125(l)/2011, dated 31.12.2011.
Enforced through amendment ofthe Sales Tax Special Procedures Rules, 2007 with Effect from 01.07.2018 Scope of services under Islamabad Capital Territory (Tax on Services) Ordinance, 2001 is being increased owing to the fact that services which are chargeable to sales tax in provinces are not chargeable to sales tax in Islamabad Capital Territory (Tax on Services) Ordinance, 2001.
Currently default surcharge is calculated @ KIBOR plus 3% per annum. The rate of default surcharge is being introduced at 12% per annum in the Sales Tax Act, 1990 and Federal Excise Act, 2005.
The rate of duty on locally produced cigarettes is being enhanced.
Non-adjustabIe/non-refundable sales tax @ 5% on import of capital goods, whether or not locally
manufactured, for transmission line projects under Standard Implementation Agreement under Policy
Framework for Private Sector Transmission Line Projects, 2015 and Projects Specific Transmission Services Agreement is being introduced.

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