BudgetBrief-2015

KPMG Taseer Hadi & Co. Chartered Accountants

Budget Brief 2015 An Economic and Tax Commentary

The Budget Brief 2015 contains a review of economic scenario and highlights of Finance Bill 2015 as they relate to direct and indirect taxes and certain other laws.

The provisions of the Finance Bill 2015 are generally applicable from 01 July 2015, unless otherwise specified.

The Budget Brief contains the comments, which represent our interpretation of the legislation, and we recommend that while considering their application to any particular case, reference be made to the specific wordings of the relevant statutes.

5 June 2015

Contents

Budget at a Glance 1

Economic Analysis 3

Economic Scenario 11

Highlights - Income Tax 17

- Sales Tax 19

- Sales Tax on Services (Islamabad) 20

- Federal Excise 20

- Customs 21

Significant Amendments

- Income Tax 23

- Sales Tax 63

- Sales Tax on Services (Islamabad) 71

- Federal Excise 75

- Customs 77

Contents

2015 KPMG Taseer Hadi & Co., a Partnership firm registered in Pakistan and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

Budget Brief 2015 1

Budget Estimate 2014-15

% Revised Estimate 2014-15

% Budget Estimate 2015-16

%

Revenue Tax Revenue 3,129 74.2 2,910 68.6 3,418 74.8

Non Tax Revenue 816 19.4 1,042 24.6 895 19.6

3,945 93.6 3,952 93.2 4,313 94.4

Public Accounts Receipts - Net 271 6.4 288 6.8 254 5.6

4,216 100.0 4,240 100.0 4,567.0 100.0

Less: Provincial Share 1,720 40.8 1,575 37.1 1,849 40.5

Net Revenue 2,496 59.2 2,665 62.9 2,718 59.5

ExpenditureDevelopment 839 19.9 754 17.8 969 21.2

Current 3,527 83.7 3,558 83.9 3,615 79.2

4,366 103.6 4,312 101.7 4,584 100.4 Deficit 1,870 44.4 1,647 38.8 1,866 40.9

Funded byCapital Receipts 484 25.9 393 23.9 485 26.0

Domestic Debt - Banks 228 12.2 402 24.4 283 15.2

External Debt 671 35.9 692 42.0 751 40.2

Privatization Proceeds 198 10.6 18 1.1 50 2.7

Surplus from Provinces 289 15.4 142 8.6 297 15.9 1,870 100.0 1,647 100.0 1,866 100.0

------------------(Rupees in billion) ----------------

Budget at a Glance

2 Budget Brief 2015


.

Budget Brief 2015 3 2015 KPMG Taseer Hadi & Co., a Partnership firm registered in Pakistan and a member firm of the KPMG network of independent member firms affiliated with KPMG International

Cooperative (KPMG International), a Swiss entity. All rights reserved.

GDP Growth

Economic Analysis

14-15

(P) 13-14 12-13 11-12 10-11 09-10 08-09 07-08 06-07 05-06

Nominal GDP US$ billion 269 253 225 224 214 177.0 168 170 143.0 127.4

Nominal GDP Rs. billion 27,384 25,068 22,379 20,047 18,276 14,867 13,200 10,638 8,673 7,623

Real GDP Growth % 4.24* 4.03* 3.65* 3.84* 3.62* 2.58* 0.36* 4.99* 5.54* 5.8

Sectoral GDP Growth %

Agriculture 2.9* 2.7* 2.7* 3.6* 2.0* 0.2* 3.5* 1.8* 3.4* 6.3

Manufacturing 3.2* 4.5* 4.6* 2.1* 2.5* 1.4* -4.2* 6.1* 9.0* 8.7

Services 5.0* 4.4* 5.1* 4.4* 3.9* 3.2* 1.3* 4.9* 5.6* 6.5

Sectoral Share in GDP %

Agriculture 20.9 21.1 21.4 21.6 21.7 22 22.5 21.9 22.5 23

Manufacturing 13.3 13.4 13.4 13.2 13.4 13.6 13.8 14.4 14.3 13.8

Services 58.9 58.4 58.2 57.4 57.1 56.9 56.6 56 56.1 56

4.24%4.03%

3.65%3.84% 3.62%

2.58%

0.36%

4.99%

5.54%

5.80%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

0

5,000

10,000

15,000

20,000

25,000

30,000

14-15 (P) 13-14 (P) 12-13 (P) 11-12 (P) 10-11 09-10 08-09 07-08 06-07 05-06

GDP Growth (% Points)

GDP GDP Growth

Source: Pakistan Economic Survey 2014-15

*Base year 2005-06 Source: Pakistan Economic Survey 2014-15

4 Budget Brief 2015


GDP Growth

0

10

20

30

40

50

60

70

80

90

100

14-15 13-14 12-13 11-12 10-11 09-10 08-09 07-08 06-07 05-06

Sectoral Share in GDP (% Points)

Agriculture Manufacturing Services Others

2.9 2.7 2.7 3.6

2.0

0.2

3.5

1.8

3.4

6.3

3.2

4.5 4.6

2.1 2.5

1.4

(4.2)

6.1

9.0 8.7

5.0

4.4

5.1

4.4 3.9 3.2

1.3

4.9 5.6

6.3

(6.0)

(4.0)

(2.0)

-

2.0

4.0

6.0

8.0

10.0

14-15 13-14 12-13 11-12 10-11 09-10 08-09 07-08 06-07 05-06

Sectoral GDP Growth (% Points)

Agriculture Manufacturing Services



Budget Brief 2015 5


Public Debt

14-15 (Mar) 13-14 12-13 11-12 10-11 09-10 08-09 07-08 04-05

Public Debt (Rs. billion) 16,936 15,996 14,293 12,695 10,767 9,006 7,731 6,126 4,802

Domestic 11,932 10,920 9,522 7,638 6,017 4,654 3,860 3,275 2,601

Foreign currency 5,004 5,076 4,771 5,057 4,750 4,352 3,871 2,852 2,201

Public Debt (% of GDP) 61.8 63.8 63.9 63.3 58.9 60.6 57.8 56.8 62.9

Domestic 43.6 43.6 42.5 38.1 32.9 31.3 29.2 30.7 33.5

Foreign currency 18.3 20.3 21.3 25.2 26.0 29.3 28.6 26.1 29.4

61.8

63.863.9

63.3

58.960.6

57.8

56.8

62.9

43.6 43.642.5

38.1

32.931.3

29.2 30.7

33.5

18.320.5

21.3

25.226

29.328.6

26.1

29.4

0

10

20

30

40

50

60

70

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

14-15 13-14 12-13 11-12 10-11 09-10 08-09 07-08 04-05

Public Debt (in Rs. billion)

Public Debt Public Debt (% of GDP) Domestic % of GDP Foreign currency - % of GDP



6 Budget Brief 2015


Overall Deficit

14-15P

(Jul-Mar) 13-14

(Jul-Mar) 13-14 12-13 11-12 10-11 09-10 08-09 07-08 06-07 05-06

(US $ million)

Exports 18,122 18,746 25,078 24,802 24,718 25,356 19,673 19,121 20,427 17,278 16,553

Imports 30,875 31,226 41,668 40,157 40,370 35,872 31,209 31,747 35,397 26,989 25,017

Trade Balance -12,753 -12,480 -16,590 -15,355 -15,652 -10,516 -11,536 -12,627 -14,970 -9,711 -8,464

Services net -1,381 -2,129 -2,657 -1,564 -3,305 -1,940 -1,690 -3,381 -6,457 -4,170 -7,304

Current Transfer net

15,974 14,852 20,222 18,183 17,686 15,687 12,562 11,163 11,476 10,585 10,548

(Workers remittances)

13,328 11,586 15,837 13,922 13,186 11,201 8,906 7,811 6,451 5,494 4,600

Income Account Balance net

-3,121 -2,865 -3,948 -3,669 -3,245 -3,017 -3,281 -4,407 -3,923 -3,582 -2,667

Current Account -1,456 -2,692 -3,130 -2,496 -4,658 214 -3,946 -9,252 -13,874 -6,878 -5,015

Overall deficit (% of GDP)

5.0 6.3 5.5 8.2 6.8 6.5 6.2 5.2 7.3 4.1 4.0

5.0%

5.5%

8.2%

6.8% 6.5%

6.2%

5.2%

7.3%

4.1% 4.3%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

0

5,000

10,000

15,000

20,000

25,000

30,000

14-15 13-14(E)

12-13 11-12 10-11 09-10 08-09 07-08 06-07 05-06

Rs.

Bill

ion

Overall Deficit

GDP(mp) Overall Deficit



Budget Brief 2015 7


Social Indicators

14-15 13-14 12-13 11-12 10-11 09-10 08-09 07-08 06-07 05-06

Population (millions) 191.71 188.02 184.35 178.9 175.3 171.7 168.2 164.7 158.2 155.4

Unemployment rate (%) *6.0 6.0 6.2 6.0 6.0 5.5 5.2 5.2 6.2 7.6

GNP per capita US$ 1,512.4 1,383.5 1,333.3 1,320.5 1,274.1 1,072.4 1,026.1 1,053.2 979.9 897.4

Total investment - % of GDP 15.1 15 15 15 14.1 15.8 17.5 19.2 18.8 19.3

National Savings - % of GDP 14.5 13.7 13.9 13 14.2 13.6 12.0 11.0 14.0 15.2

6 6.2 6.2 6 6

5.5 5.25.2

6.2 7.6

012345678

0

50

100

150

200

250

14-15 13-14 12-13 11-12 10-11 09-10 08-09 07-08 06-07 05-06

Rs.

Bill

ion

Social Indicators - 1

Population Unemployment Rate (%)

15.1%15.0%

15.0% 15.0%14.1%

15.8%17.5%

19.2% 18.8%

19.3%

14.5% 13.7% 13.9%13.0%

14.2%13.6%

12.0%11.0%

14.0%

15.2%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

0

200

400

600

800

1,000

1,200

1,400

1,600

14-15 13-14 12-13 11-12 10-11 09-10 08-09 07-08 06-07 05-06

Rs.

Bill

ion

Social Indicators - 2

GNP Per Capital - US$ Total investment - % of GDP National Savings - % of GDP

* 2014-15 unemployment figures not provided. Therefore 2013-14 level used. Source: Pakistan Economic Survey 2014-15



8 Budget Brief 2015


Exchange Reserves

14-15 13-14 12-13 11-12 10-11 09-10 08-09 07-08 06-07 05-06

Exchange reserves (US$ billion) 17.5 14.1 11.5 16.5 17.1 12.2 11.5 16.4 12.8 11.2

Imports Cover (months) 4.0 3.8 3.5 5 5.7 4.6 4.3 5.6 5.7 5.4

Rupee to USD parity 101.9 98.77 99.66 89.2 85.5 83.8 78.5 62.5 60.6 59.9

4

3.43.5

55.7

4.64.3

5.6 5.75.4

0

1

2

3

4

5

6

02468

101214161820

14-15 13-14 12-13 11-12 10-11 09-10 08-09 07-08 06-07 05-06

Exchange Reserves (in USD million)

Exchange Reserves Imports Cover (months)



Budget Brief 2015 9


Inflation

14-15 (Jul-Apr)

13-14 (Jul-Apr)

13-14 12-13

11-12 10-11 09-10 08-09 07-08 06-07 05-06

CPI 4.8 8.7 8.6 7.4 11.0 13.7 10.1 17.0 12.0 7.8 7.9

Food * 3.6 9.3 9.0 7.1 11.0 18.0 12.9 23.1 17.6 10.3 6.9

Non Food * 5.7 8.2 8.4 7.5 11.0 10.7 8.3 13.4 7.9 6.0 8.6

Core 6.9 8.3 8.3 9.6 10.5 9.4 7.6 11.4 8.4 5.9 7.5

0

5

10

15

20

25

14-15 13-14 12-13 11-12 10-11 09-10 08-09 07-08 06-07 05-06

Inflation

CPI Food * Non Food *



10 Budget Brief 2015


Budget Brief 2015 11


The crowning accomplishment of the government, since the previous commentary a year ago, on the economic front, is the fortuitous and momentous accord on the China Pakistan Economic Corridor (CPEC). During the Chinese Presidents celebrated recent visit in April 2015, Memorandum of Understandings (MOUs) worth US$ 46 billion were signed. According to the State Bank of Pakistan (SBP), direct investment in Pakistan, since independence, currently stands at USD 30.8 billion; this perhaps is a valid benchmark to gauge the quantum of the expected Chinese investment in Pakistan.

As of very late, the exact details of the MOUs have been kept quite close to the chest by the government, for whatever compulsions, with summarized disclosures only forthcoming at the All Parties Conference (APC) a few days ago. Fortunately for the nation, a consensus was achieved during the APC thereby addressing the blighting opposition from the provinces over perceived biases in the planned investment.

Nonetheless, from the information currently available, a big chunk of this investment is earmarked for power generation, approximately 15000 MW, of which half are Coal fired, with a derisory amount set aside for Hydel generation. Load shedding and circular debt have been the nemesis of at least the last two governments and is also the key irritant for the incumbents; especially considering the ambitious promises made during the election campaign and in the party manifesto; which perhaps was the blueprint behind the disparate allocation towards power generation and specifically from coal.

Undoubtedly, power is the biggest hurdle Pakistan faces in achieving economic stability, albeit the solution is not electricity at any cost, the elusive Fountain of youth in this case is cheap electricity.

According to Power System Statistics issued by National Transmission & Dispatch Company (NTDC), as of 2014 Pakistans electricity generation stood at 24,953MW, of which 16,963MW, was thermal and

only 6902MW was hydel, the rest were alternate forms of energy. Why and how is this capacity insufficient to meet an undiversified demand of 23505MW is left for the technocrats to argue about, however, what is noticeable is that almost 34% of the 95148GWh generated in 2014 was from furnace oil. To get a flavour of how this impacts the economy, the cost of generation from Tarbela is 0.96 kWh and from Mangla is 0.64 kWh, compared to which the cost of fuel alone, for GenCos stands at Rs. 15.60 kWh. On top of this, transmission and dispatch losses alone stood at 19.6% in 2014.

Considering that the government is currently able to recover around Rs. 11 per unit only, it would appear prudent to estimate the cost of generation from coal and solar projects and their future impact upon the quantum of circular debt, prior to taking such initiatives. It is providential that international fuel prices have collapsed, however, something as fickle as oil prices cannot be relied upon to balance the electricity budget indefinitely. Approximately 46% of the generation is utilized by the Domestic consumer, which cannot be deemed productive and who hardly have surplus disposable income to finance inexorable rise in electricity cost. The problem for any sitting government is that this segment of consumers is their electoral polity and cannot be ignored. Already the subsidies, primarily to this segment, have resulted in an increase in circular debt, once again, to around Rs. 250 billion; although certain quarters dispute the governments claim about the size of this debt.

Another, perhaps as formidable, hurdle with generating electricity from imported fuel is the pressure on the foreign exchange reserves and the associated investment required in related logistics to transport the fuel. The cost of environmental protection is also a prohibitive consideration. Notwithstanding the development and installation phase, which can possibly extend beyond 3 years, the key question when all this generation comes on line is: will the cost of generation be sufficiently reasonable to enable the domestic manufacturer to compete in international markets? The economic benefits of this investment will only accrue to

Economic Scenario



Pakistan through expansion of exports; electricity is only an enabler, manufacturing is the revenue earner.

Considering the Governments success with APCs, perhaps it is advisable to hold one on development of Big Dams, which as technocrats keep pointing out are critical, not only for cheap electricity, but for water security in the very near future. Already water riots have started in the largest metropolitan of the country. Perhaps the APC could also discuss cooperation between the Federal and KPK government to develop on fast track hydel projects up north.

The famed corridor, the route to Gwadar from Kashgar, deemed to be absolutely imperative for China, is envisaged to cost, road and rail, around USD 10 billion. There are a multitude of estimates, which is indeed bewildering, on how much distance the Chinese save through this investment, but if all this hype is true, China will surely build this particular infrastructure in the shortest time possible. As mentioned earlier, the conditions precedent for individual investments remain unclear at this point, and accordingly it is impractical to comment on the ability of the Government to cater to that wish list, but to venture a guess the corridor itself, by default, is not expected to have any inherent deal breakers.

Depending upon the conditions attached to the Gwadar route, the BOOT period in particular, or for that matter if it is on BOOT at all, the only way Pakistan can in substance gain from this investment is through access to Chinese markets for the domestic industry. Contrarily Pakistans only gain will be windfalls, perhaps similar to those which accrued when NATO supplies crossed over to Afghanistan; assuming Pakistan owns the trucks and railways. And there is an associated risk that Pakistan markets get flooded with Chinese products; consumer preference for cheaper products cannot be curtailed by patriotic slogans alone. It would therefore be advisable for Pakistan to negotiate setting up of downstream industry in and around the route for Chinese manufacture, at the minimum, concomitant with this investment.

Finally a Lilliputian portion, as a percentage of the overall amount but not in isolation, of USD 1.6 billion

from the CPEC has been earmarked for a Mass Transit Project in Lahore. Maintenance and up-gradation of revenue earning regions is an adroit strategy and needs also to be extended to Karachi, the biggest, by far, contributor to the nations economy; Karachi is arguably, amongst other things, on a downward trajectory as far as infrastructure is concerned.

Fundamentally, irrespective of the debate on how much of this USD 46 billion will actually be spent in Pakistan, primary gains from these multitude projects will materialize after their respective commercial operations date. Keynesian economics might increase economic activity during the spending phase, but whether or not it kicks starts the economy thereafter is entirely dependent upon future positive economic benefits flowing from the underlying projects. In the interim, Chinas economy will get a boost from supplying, perhaps, all the factors of production, assuming that the Government can find a solution to bypass Pakistan Procurement Regulatory Authority (PPRA) rules, if at all applicable.

The debate around debt or investment, which did get noisome now and then, was ab initio irrelevant. In essence equity is generally more expensive than debt, and if the former is secured by sovereign guarantees, which is unclear at this point, risk free as well. No one invests to make a loss, debt or equity; the money will need to be paid back over time, with interest or dividends. In the worst scenario Pakistan might be looking at a even more humongous circular debt issue a few years down the road.

There is no denying that the investment under CPEC is a Knight in shining armour for Pakistan, and kudos to the government for pursuing its fruition, however henceforth, and even more assiduous supervision and monitoring is necessary to ensure it does not become a Trojan horse.

Another milestone, definitely a first, deserving unfettered encomiums and unbridled accolades, achieved by the Government during the year, was the successful conclusion of the IMF seventh review.

Regarding the program, all end of March performance criteria have been met, including on



the budget deficit and accumulation of net international reserves. The indicative target on social spending under the Benazir Income Support Program was also met. While the indicative target for federal tax revenue was missed by a small margin, due to legal challenges to some measures and the adverse impact of declining commodity prices, the authorities are taking measures to meet the end-June budget deficit target (4.9 percent of GDP). The mission welcomed the authorities plans to further reduce the fiscal deficit in 2015/16, while accommodating extraordinary expenditures related to flood rehabilitation, security enhancements to fight terrorism, and resettlement of internally displaced persons. IMF Press Release No. 15/206, May 11, 2015. (Highlighted and underlined for emphasis)

This perhaps is an appropriate assessment of the financial managers performance during the year. The worrisome part is what comes next, as set out in the same press release, Key priorities for the second half of the program include improving the energy sector; widening the tax net to create space for infrastructure investment and social assistance; improving the business climate; and further strengthening external reserve buffers. The agenda is not just challenging, achieving it seems improbable if not impossible.

The SBP State of Pakistan Economy, second quarterly report 2014-15, which was issued around the same time, provides an insight on the factors leading to this roaring appreciation by IMF. The convenient fall in international oil prices, Pakistan being one of the big beneficiaries, and the continued magnanimity of overseas Pakistani were the key contributors to the rising foreign exchange reserves. As at 15 May 2015, total liquid foreign exchange reserves stood at USD 17.75 billion of which net reserves with SBP stood at USD 12.51 billion, possibly highest ever since 2011.

The SBP estimates that savings due to falling oil prices could be around USD 3 billion for the year 2014-15; the fall in prices having an inverse impact on consumption, restricting further savings. Whether or not this bonanza will be long term remains unpredictable, forecasting oil prices is a much more malignant task, compared with predicting the

economy. It might perhaps be prescient for the government to set up a cell of experts who have the capacity, in time, to at least follow the movement of oil prices and attempt to hedge adverse movements. Oil is the single most critical factor for Pakistans economy and a wait and see policy might even be suicidal.

Workers remittance for the period July 2014 to April 2015 stood as USD 14.9 billion compared with USD 12.9 billion for the same period last year, a whopping increase of 15.5% compared with an increase of 11.2% last year. The country-wise break up of workers remittance is however extremely worrying for the future, 65% of all receipts originate from Saudi Arabia, UAE and other GCC countries. Whether or not Pakistans principled stand on Yemen has any adverse fallout, falling oil prices in the medium term can in any case impact this treasure trove. While the SBP believes that Middle East countries have sufficient sovereign funds to continue with their prodigious spending on infrastructure, falling oil prices will eventually puncture the euphoria. If that happens not only will there be a significant fall in remittances, there will be a consequent increase in unemployment, which for some inexplicable reason remains firm at around 6% in spite of an increasing and ageing population.

The foreign exchange reserves were further supplemented by issuance of Sukuk amounting to USD 1 billion, privatization proceeds from UBL and HBL, CSF receipts of USD 1.5 billion and tranches from IMF totalling USD 1.1 billion; although there was a net retirement of external debt during the first half of the year. The concern is that even after selling two tranches of valuable assets, gross external debt remains largely unchanged. As of 15 March 2015,according to SBP total debt and liabilities stood at Rs. 19.3 trillion compared with Rs. 18.3 trillion on June 2014; with external debt continuing to hover around USD 63 billion. The total debt and liabilities as a percentage of GDP reached the dangerous level of 66.4%. The strategy of filling coffers with borrowed money will adversely affect future debt servicing; already the SBP notes that there was a 25.6% increase in external interest payments during the six months period ended 31 December 2014.



Between July 2014 to March 2015, total public debt increased by Rs. 1 trillion approximately, however the government managed to meet IMFs condition of reducing borrowings from SBP for budgetary support. This was accomplished by resorting to borrowing from Private Banks thereby squeezing private credit, with the Banks supplementing their liquidity through Open Market Operations of the SBP. All this resulted in the Banks making super profits through arbitrage in PIBs when the interest rates were on a decline. Consequentially, while the Governments debt profile tilted in favour of medium to long term maturities, there will likely be an increase in future interest payments by the Government.

Overall, the increased inflows of dollars due to workers remittance, with lower outflow due to declining oil import bill, resulted in the Rupee Dollar parity lingering within a band of Rs. 102.70 and Rs. 98.60 for USD 1. Irrespective of the mystery around the rupee continuing to maintain its position, this did result in a loss of competitiveness from the Real Effective Exchange Rate (REER); an indicator derived, broadly, from quantum of trade with, and respective currency exchange rates of trading partners. Admittedly REER is imperfect; however empirical data has proven that it does to an extent establish overvalued currencies and a ballpark assessment of by how much. According to SBP, REER stood at Rs. 118.54 as at March 2015.

While a strong rupee is a positive for translating external public debt, it is apocalyptical for exports. According to the SBP National Data Summary Page on 29 May 2015, the trade deficit from goods alone stood at USD 13.9 billion compared with USD 16.5 billion for the full year 2013-14; even after a reduction of USD 2 billion till April 2015 in imports under the petroleum group; benefits, if any, from the GSP Plus status hardly evident. The overall balance on goods, services and primary income had a deficit of USD 19.3 billion for the same period compared with a deficit of USD 23.2 billion for the complete last year. But for workers remittances of USD 14.9 billion, even IMFs program would have come short on all counts.

On a commodity basis, for the period July-April 2015, increase in export of fruits and vegetables outshone the increase in the entire textile group; manufacture

remained at broadly the same level. Unfortunately, and strangely considering Pakistan claims to be self sustaining in food, import of all other food items stood at USD 1,269 billion; we as a nation imported cars and their spare parts worth approximately USD 1 billion, which call into question the deletion programmes of the automobile sector; telecom equipment of USD 1 billion, the nation seems to be obsessed with talking; and finally spent USD 1.1 billion on travel, which was probably paid to the Emirates, Etihad and Qatar Air. Pakistan International Airline could be on its feet with half this amount; perhaps something to think about.

This high level of trade deficit is the primary reason that the government has to keep borrowing dollars all the time. Perhaps it is time that imports were monitored and kept in check.

A net deficit in trade obviously has an adverse impact on the size of a national GDP, for Pakistan negative net exports result in a reduction of 6% from the domestic components of the GDP; which is a lot considering that with an expected annual growth of less than 4.5 %, GDP for 2014-15 might be above around USD 250 billion. What is worrying is that an estimated 80% of GDP is composed of household consumption with investment in fixed capital around 15% only. The Government had set a target for under the 3 year Medium Term Economic Framework to increase investment to 20% of GDP; this seems extremely challenging after 2 years together with the GDP target of 7.1%. Even more worrying is the sector wise composition of real GDP; manufacturing as a percentage of real GDP is cemented around 13% and is in fact down from 14% from a few years ago. The increase in real GDP has been brought about primarily by the services sector amongst which Wholesale and Retail trade and Transport Storage and Communication were the heroes. Serendipitously, if the entire nation chatted 24 hours for 365 days on their cell phones, then theoretically the GDP could go through the roof; but what good will that be?

On the other hand, more good news for the year; the appreciable fall of around 390 basis points in annual inflation, attributable once again to the fall in international oil prices, and other commodities in



general; where would the economy be without declining oil prices, is a question best ignored. Low inflation allowed the SBP to successively bring the interest rate down by 300 basis points during the year, which now stands at 7%. While shrinking interest rates has already done wonders to curtail government expenditure, it is envisaged that lower spreads will also push Banks out of their comfort zone, of taking deposits and lending it to the government, and spur growth. The monetary policy otherwise remained prudent, with due credit to the SBP.

Considering the state of the economy, the political instability all through their tenure and the time and resources employed, which all have a cost, in Zarb-e-Azb, the governments achievements thus far are laudable. CPEC and a focus on financial reforms, most boxes ticked, have positioned the country at an advantage for the future. However, as pointed out above, there are some extremely critical steps which need to be initiated, without which there is a credible risk that all these initiatives will turn to naught. A lot more needs to be done.

As pointed out last year, the age old formula of export oriented and import substituting manufacture needs to be the prime directive going forward. Even SBP suggests this strategy in their half year report on the economy. On the taxation front the policy of increasing tax collection through existing share holders and/or indirect taxation is likely to have further adverse affects on the formal economy.

The Fraser Institute annually publishes Economic Freedom of The World Index. They claim that the index measures the degree to which the policies and institutions of countries are supportive of economic freedom. Countries are assessed on the following 5 criteria:

Size of Government: Expenditures, Taxes, and Enterprises;

Legal Structure and Security of Property Rights;

Access to Sound Money;

Freedom to Trade Internationally;

Regulation of Credit, Labour, and Business.

Their 2014 report which contained rankings for the year 2012, overall ranked Pakistan 124th out of 152 countries, worse off than 2011 when the ranking was 111 out of the same sample countries. The worst sub rankings for Pakistan are in the area of legal structure and security of property rights, and access to sound money. It is extremely doubtful that things have improved in the former or even the later for that matter. Dewani courts keep essential capital, a critical factor of production and economic growth, strangulated in a strait jacket for decades. If Banks will decline to lend on the basis of projects, and continue to lend only to the government and those who dont need to borrow in the first place, broad based growth and employment will remain a fantasy. If budding entrepreneurs are forced to borrow from the informal sector, their businesses will remain in the informal sector indefinitely, and tax to GDP ratio will keep lagging.

The Global Competitiveness Report is a yearly report published by the World Economic Forum, since 2004. This report ranks countries on 12 pillars of competitiveness. Pakistan in 2014-15 has been ranked 129th out of 144 countries, compared with 133rd out of 148 last year; in substance status quo. India, Bangladesh, SriLanka, Nepal and Bhutan are all ranked above Pakistan. A synopsis of Pakistans ranking is reproduced below:

Risk Score

Basic requirements (40.0%) 112 3.8

Institutions 133 2.9

Infrastructure 117 2.7

Macroeconomic environment 54 5.0

Health and primary education 111 4.8

Efficiency enhancers (50.0%) 112 3.5

Higher education and training 112 3.3



Risk Score

Goods market efficiency 92 4.2

Labour market efficiency 115 3.8

Financial market development

93 3.7

Technological readiness 110 2.9

Market size 92 3.3

Innovation and sophistication factors (10.0%)

132 2.9

Business sophistication 121 3.4

Innovation 134 2.4

A careful analysis of these results identifies education as the core problem. Institutions, efficiency enhancers, labour efficiency, technological readiness, innovation and business sophistication all have to do with education, obviously in addition to primary and higher education and vocational training.

Finally the most regularly quoted but never taken seriously index in Pakistan, the Corruption Perception Index of Transparency International. As perhaps everybody is aware, Pakistan was ranked 126th out of 174 countries in 2014, with Bangladesh being ranked below us, the only saving grace, if at all. Surprisingly, eradication of corruption was, after load shedding, the key slogan during the last election. The absolute apathy towards a fundamental building block of the economy is inexplicable. Attracting investment, foreign or domestic, is well neigh impossible in an environment where contracts are not enforced and property rights remain nebulous.

Admittedly, it is impossible for any government to address all of the above 17 criteria or pillars simultaneously. A bit of ratiocination identifies the following four priorities for policy formulation:

Export oriented/ import substituting industrialization.

Reducing corruption on a war footing, on the lines being done by the current Chinese President.

Spending the development budget on education, with a focus on higher education and vocational training.

Increasing the number of courts and judges, sufficiently, to settle Dewani cases, the entire plethora, within the next 3 years.

Should the current government achieve results on these priorities in its remaining term that will indeed by history in the making.

Preamble

The Pakistan Economy (PE) walks to the tee, its a great day and the environment is conducive for PE; equipped with the latest equipment, curtsey, a Chinese friend; checks the wind, the tee is positioned and the ball is placed on it, gets into the stance very carefully, takes a practise swing and looks at the coach, IMF; the coach gives a thumbs up; except the caddy (independent well wishers) points out that the laces are untied; tie the laces, and all systems go!

There is definitely anxiety, PE has already used the mulligan, and the margin for error is zero. As the back swing starts, the Pakistani audience hopes and desperately prays that the ball goes over 300 yards, whizzing down the fairway.....



Income Tax

Super tax proposed to be imposed for Tax Year 2015 for rehabilitation of displaced persons. This tax is to be paid by banking companies at the rate of 4% of income and by all other taxpayers at 3% of income; the latter being required to pay only if income is equal to or in excess of Rs. 500 million.

Tax at the rate of 10% on undistributed reserves of companies is proposed to be levied where a profit making company doesnt pay cash dividend or its reserves after distribution of dividend exceed 100 percent of its paid-up capital. This provision shall not apply to companies where fifty percent or more shares are held by the Government.

Graduated tax slabs introduced for taxation of profit on debt earned by taxpayers other than banking companies and insurance companies at the rate of 12.5% and 15% in addition to the existing rate of 10%. The enhanced rates will apply where profit exceeds Rs. 25 million and Rs. 50 million respectively. The withholding tax rate is also proposed to be increased to 17.5% for non-filers where their annual profit is in excess of Rs. 500,000.

Tax rate on dividend received from a REIT scheme enhanced to 25%; however where a development REIT is set up by 30 June 2018, dividend received from such REIT will be reduced by 50% for three years from 30 June 2018.

Preparation of estimate of income for the year proposed to be made mandatory before payment of second installment of advance tax. 50% of the estimated liability is to be paid by second installment.

CNIC made NTN with effect from Tax Year 2015.

Federal Government power to notify exemption through an order has been made subject to

approval of Economic Coordination Committee of Cabinet. All notifications issued after 01 July 2015 shall stand rescinded at the end of the financial year in which issued, unless rescinded earlier. FBRs power to change withholding tax rates also withdrawn.

The investment limit for shares / insurance premium proposed to be enhanced to Rs. 1.5 million from earlier Rs. 1 million for purposes of tax credit.

Tax credit for profit on house loan proposed to be substituted by straight deduction from income for up to Rs. 1 million or 50% of taxable income; whichever is less.

Shipping income of resident persons proposed to be subjected to final tax to 30 June 2020.

New manufacturing units set up between 01 July 2015 to 30 June 2018 proposed to be given tax credit for 10 years; the credit being 1% of tax payable for every 50 employees registered under labor laws during the year; subject to a maximum of 10% of tax payable. The credit apparently would not apply to expansion plans of existing manufacturers.

Tax credit for enlistment proposed to be enhanced from 15% to 20% in the year of enlistment.

The condition to seek Commissioners approval for revision of return waived off in case the revised return is filed within 60 days of filing of original return.

The Commissioner Inland Revenue (Appeals) empowered to grant further stay of 30 days, subject to deciding the appeal within such extended time.

The period for payment of tax demand under an amended assessment order to be enhanced to 30 days as against 15 days at present, whereas

Highlights



period for payment of tax under provisional assessment to be reduced from 60 days to 45 days.

The anomaly removed for issuance of exemption or reduced rate certificate by the Commissioner to Permanent Establishments of non-resident persons on sale of goods, rendering of services and execution of contract where such tax is adjustable.

Withholding tax on services rendered by companies made adjustable with effect from Tax Year 2009.

Tax withheld on payment under contract with a sportsperson made final with effect from Tax Year 2013.

Tax withheld on exports proposed to be treated minimum tax provided the taxpayer files an irrevocable option for taxation on net income basis.

FBR given powers to seek information from financial institutions about non-resident persons, as required to be provided to another country under a tax treaty.

The rate of compensation payable by FBR on delayed payment of refund changed from 15% to KIBOR plus 0.5%.

FBR empowered to constitute special audit panels comprising of its own officers and Chartered Accountants, Cost and Management Accountant firms or any other person directed by FBR to jointly carry out tax audits.

Penalty for non-furnishing of wealth statement changed from Rs. 100 for each day of default to 0.1% of taxable income per week or Rs. 20,000 whichever is higher.

Rate of additional tax reduced from 18% to 12%.

Special rules for tax audit selection of a person registered as retailer under the Sales Tax Special Procedure Rules, 2007 introduced.

14% withholding income tax levied on bill for internet services and on sale of internet pre-paid cards.

Withholding income tax of 5% on domestic air tickets withdrawn on routes of AJ&K, Gligit-Baltistan, Baluchistan Coastal Belt, and FATA.

Non-residents exempted from collection of advance tax on school fee, chargeable otherwise at 5% of fee where fee exceeds Rs. 200,000 per annum.

Withholding income tax at 0.6% of the value of transaction proposed to be imposed on non-filers on transactions in a bank; where the value of transaction exceeds Rs. 50,000 in a day.

Royalty paid to a resident person against right to use industrial, commercial or scientific equipment or rent of machinery proposed to be subjected to withholding tax at 10% which will also be final discharge of tax liability

Remittance of education expenses abroad proposed to be subjected to adjustable withholding tax of 5%.

Tax rate reduced by 3% for persons earning between Rs. 400,000 to Rs. 500,000 annually.

Corporate tax rate for non-banking companies reduced to 32% from existing rate of 33% for Tax Year 2016.

The rate of tax on dividend proposed to be enhanced to 12.5% from existing 10% with increase in withholding tax rate to 17.5% for non-filers. The tax rate on dividend received from a stock fund also proposed to be enhanced from 12.5% at present to 15% effective Tax Year 2015, in case dividend receipts of such stock fund are less than its capital gains.

Tax rates on capital gain arising on sale of listed securities held for up to 12 months proposed to be enhanced to 15% from 12.5% and for the listed securities held up to 24 months proposed to be enhanced to 12.5%, whereas a separate



rate of 7.5% is proposed on capital gain on listed securities held for more than 24 months but for less than 4 years.

Separate withholding tax rate introduced for filers and non-filers with respect to capital gains tax.

Withholding tax rates on goods and services brought at par for residents and non-residents filers and non-filers.

Tax rate on commission enhanced to 15% from 12% in case of non-filers.

Withholding tax rate of international air tickets changed to Rs. 16,000 for first class travel from existing 4% of ticket price.

Profits and gains of following industrial undertakings proposed to be exempted from tax including minimum tax:

Those set up by 31 Dec 2016 to manufacture plant, machinery and equipment with dedicated use for generation of renewable energy; for 05 years from 01 July 2015.

Set up between 01 July 2015 to 30 June 2016 to operate warehouse or cold chain facilities; for 03 years from the date of setup or commencement commercial operation whichever is later.

Set up between 01 July 2015 to 31 Dec 2016 and engaged in operating halal meat production; for 4 years from the date of setup or commencement of commercial production whichever is later.

Manufacturing unit set up in KPK between July 1 July 2015 and 30 June 2018; for 5 years from the date of setup or commencement of commercial production whichever is later.

Transmission line project set up in Pakistan after 01 July 2015 and before 30 June 2018.

LNG terminal operators and terminal owners; for 05 years from commencement commercial operations.

Minimum tax exemption given for Tax Years 2010 to 2012 to taxpayers located in most and moderately affected areas of KPK.

Dividend and capital gains income of banks made subject to tax at 35% with effect from Tax Year 2015.

Sales Tax

Definition of active taxpayer is proposed to be inserted under section 2(1) of the Act.

The limit of annual utility bills is proposed to be enhanced from Rs.700,000 to Rs.800,000 in order to treat an industry as cottage industry under provisions of the Act.

Condition of annual turnover of a retailer engaged in making taxable supplies is proposed to be withdrawn for determining his eligibility for registration under the Act.

The scope of definition of supply is proposed to be broadened by including transfer or delivery of goods to the owner or person nominated by him by a person manufacturing the goods belonging to the owner.

The concept and definition of whistleblower is proposed to be added under the Act to mean a person who reports concealment or evasion of sales tax and tax fraud leading to detection or collection of taxes, fraud, corruption or misconduct.

It is proposed to sanction rewards to whistleblowers; related procedure to be prescribed by the Board.

The rate of further tax on taxable supplies made by a sales tax registered person to an unregistered person is proposed to be enhanced from 1% to 2%.



Input tax paid against goods used in pre-fabricated buildings is proposed to be allowed as an input tax adjustment.

Restriction on claim of input tax on services in respect of which input tax adjustment is barred under the provincial sales tax laws, import of agricultural machinery and equipment at reduced rate or any others goods which the Board may notify are proposed to be enhanced.

The burden of proof is being proposed to be shifted to the department for not depositing of input tax claimed by registered persons in a supply chain.

The powers of FBR exempting imports or supply of goods have been withdrawn , whereas, Federal Government may continue to issue exemptions in exigencies, , however, Bill proposes that such exemption may only be issued subject to approval of ECC and National Assembly. Furthermore, the foregoing exemption notifications will nonetheless stand rescinded on expiry of the financial year in which it is issued.

The concept of tax audit by Special Audit Panels is being proposed to be introduced with Chartered Accountants and Cost and Management Accounts to be on these panels.

Electronic monitoring system is proposed to be introduced to monitor production of specified sectors such as cigarettes, beverages, cement, fertilizer, and sugar.

Federal Government to enter into bilateral or multilateral agreements with provincial governments and governments of foreign countries for sharing of information on sales tax and FED matters.

To strengthen compliance with provisions of the Act, penalty provisions are to be made more stringent by reducing the time period from 15 days to 10 days in order to impose minimum penalty.

The facility of zero-rating presently available on local supply of plant and machinery to Export Processing Zone is proposed to be made available on meeting of certain conditions and restrictions.

It is proposed to introduce a prize scheme to encourage general public to make purchases from registered persons, in order to promote tax culture.

To encourage construction industry growth it is proposed to exempt sales tax on supply of bricks and crushed stones for three years up to 30 June 2018.

It is proposed to exempt the aviation sector from sales tax.

Reduced rate of sales tax in respect of taxable supplies of soyabean meal, oil seeds meant for sowing and plant and machinery not manufactured locally is proposed to be enhanced from 5% to 10%.

Exemption on certain items is proposed to be withdrawn and brought into the tax net at reduced rates under the Eighth Schedule to the Act.

Rate of sales tax on import of cell phones and activation of sim cards is proposed to be enhanced from Rs. 150, Rs. 250, Rs. 500 to Rs. 300, Rs. 500 and Rs. 1,000 depending upon the value and specification.

Sales tax on services (Islamabad)

Certain services rendered in the Islamabad Capital Territory are proposed to be brought into the sales tax net in order to align it with the services taxation regime followed by other provinces.

Federal Excise

FED is proposed to be increased from 9% to 12% on aerated waters, concentrates for aerated beverages and aerated waters containing sugar or other sweetening matters.



Average rate of FED is increased from 58% to 63%.

FED is proposed to be levied on local supply and import of filter rods of cigarettes at the rate of Rs. 0.75 per filter rod.

Amendments on similar lines with sales tax have been proposed in the FE Act regarding special audit panels, electronic monitoring, powers to enter into bilateral or multilateral agreements and rewards to whistleblowers and empowering Economic Coordination Committee to issue exemptions in special set of circumstances.

Customs

Various provisions are introduced to regularize the trans-shipment of goods.

Maximum general tariff rate of customs duty is proposed to be reduced from 25% to 20% except vehicles and their certain parts.

It is proposed to increase customs duty to 2% from 1% under various tariff headings of the First Schedule.

Zero customs duty on import of aircrafts and their parts proposed.

2% customs duty on certain agricultural machineries proposed.

Reduced rate of 15% on items imported by call centers, etc., is proposed to be withdrawn and now 20% customs duty is applicable.

Reduced rate of 10% on complete plants for relocated industries is proposed to be withdrawn and now various rates upto maximum rate of 20% are applicable.

The Finance Minister in his speech of budget 2014-15, declared the policy of Government to gradually phase out SRO culture. On the contrary, the changes in Fifth Schedule are proposed to be made without notifying any withdrawal of any existing SRO.



Super tax for rehabilitation of temporarily displaced persons Section 4B

A one-time levy for tax year 2015 is proposed at the following rates:

Banking companies 4% of income

Other tax payers having income equal to or exceeding Rs. 500 million 3 percent of income

For this purpose, the term income shall constitute the following:

(i) Profit on debt, dividend, capital gain, brokerage and commission;

(ii) Taxable income of a person for a tax year under all heads of income determined under section 9;

(iii) Imputable income defined in section 2(28A); and

(iv) Income computed under:

a. Fourth Schedule - Insurance business;

b. Fifth Schedule - Production of oil and natural gas and extraction and exploration of other mineral deposits;

c. Seventh Schedule Banking business; and

d. Eighth Schedule - Capital gain on listed securities.

The Bill also defines the term imputable income in relation to an amount subject to final tax means the income which would have resulted in the same tax had this amount not been subjected to final tax.

The super tax shall be paid, collected and deposited alongwith return of income as specified in section 137 of the Ordinance and the provisions pertaining to

filing of return, assessments, appeals, collection and recovery of tax etc. contained in chapter X shall apply.

The Commissioner has been empowered for assessment and recovery of super tax.

Tax on undistributed reserves Section 5A

In order to encourage payment of cash dividend, the Bill proposes tax at 10 percent on the excess reserves of public company that derives profits for a tax year but does not distribute cash dividend within six months of the end of the tax year or distributes dividend to such an extent that its reserves after such distribution are in excess of its paid up capital. In such cases, the reserves exceeding 100 percent of the paid up capital shall be treated as income of the company.

However, this tax shall not apply to a scheduled bank, a modaraba or a company in which not less than fifty percent shares are held by the Government.

It has further been proposed that cash dividend for tax year 2015 may be distributed before the due date of filing of return as per section 118(2) of the Ordinance.

For the purpose of this section the term reserves include any amounts set-aside out of revenue or other surpluses, excluding:

capital reserves;

share premium reserves; and

reserves required to be created under any law, rules or regulations.

In view of the definition of the public company given in section 2(47) and the exclusions provided in the proposed section 5A, in summary, this tax shall apply to:

Income tax Significant Amendments



(i) companies listed on stock exchange including mutual funds and

(ii) a company in which not less than fifty percent shares are held by a foreign Government or a foreign Government owned companies.

Tax on profit on debt Section 7B, 151(3), Division IIIA of Part I of the First Schedule

Profit on debt made liable to tax as a separate block of income. The Bill proposes to change the scheme of taxation in respect of profit on debt for all taxpayers and for this purpose a new section 7B is proposed to be inserted. Further, sub-section (3) of section 151 is proposed to be substituted and division IIIA is proposed to be inserted in Part I of the First Schedule.

An accumulated effect of the existing provisions contained in section 151 and the proposed changes would be that henceforth taxable profit on debt received by any taxpayer, including a company (other than a banking company and insurance company), shall be subjected to withholding tax at the rate of 10 percent if the recipient is a filer and at the rate of 17.5 percent (as against current rate of 15 percent) if the recipient of such profit on debt is a non-filer.

Whereas, profit on debt received by any taxpayer (an individual, AOP or a company) shall be subjected to tax as a separate block of income at the following rates:

Where profit on debt does not exceed Rs. 25,000,000

10 percent

Where profit on debt exceeds Rs. 25,000,000 but does not exceed Rs. 50,000,000

2,500,000 plus 12.5 percent of the amount exceeding Rs. 25,000,000

Where profit on debt exceeds Rs. 50,000,000

Rs. 5,625,000 plus 15 percent of the amount exceeding Rs. 50,000,000

In case of a filer, the tax withheld under section 151 will be adjusted against the final tax payable at the above stated rates and the recipient of the profit on debt will be liable to pay the differential amount of tax.

Whereas, in case of a non-filer, tax withheld at the rate of 17.5 percent will be adjusted against the final tax liability at the above rates and any excess deduction can be claimed refundable by filing a tax return.

It is pertinent to mention that substituted sub-section (3) of section 151 and Division IIIA of Part of First Schedule contain reference to section 5A instead of section 7B which may be a typographical error.

Real Estate Investment Trust Regulations 2015 Sections 2(47A), 2(47B), 2(47C), Division III of Part I First Schedule and clause (99A) of Part I of the Second Schedule

The Bill seeks to define the term Real Estate Investment Trust REIT, Real Estate Investment Trust Management Company RMC to bring these definitions in line with the Real Estate Investment Trust Regulations, 2015.

The Bill also proposes to insert definition of terms Development REIT Scheme and Rental REIT Scheme as defined under Real Estate Investment Trust Regulations, 2015.

Further profits and gains accruing on sale of immovable property to a REIT Scheme are exempt upto 30 June 2015. A proviso is proposed to be inserted for exemption of gains on such sale to Development REIT Scheme for development and construction of residential buildings upto 30 June 2020.

The Bill also proposes revision in rate of tax on capital gain on disposal of specified securities in the hands of REIT in line with capital gain on disposal of securities under section 37A.



The Bill also seeks to provide the reduction of 50 percent on taxation of dividend income for the period of three years from the Development REIT scheme established with the object of development and construction of residential buildings set up by 30 June 2018.

CNIC to be deemed NTN Section 181

The Bill seeks to propose Computerized National Identity Card be used as NTN with effect from tax year 2015.

Basis for payment of advance tax by companies and AOPs revised Section 147

Hitherto companies and AOPs are required to pay advance tax for the first three quarters on the basis of tax to turnover ratio assessed for the latest tax year multiplied by current quarters turnover after adjusting tax deducted at source etc.

The taxpayers, being companies and AOPs, are however, required to estimate the tax payable for the relevant tax year before the last installment is due and pay the tax based on such estimate.

The Bill now seeks to provide that companies and AOPs will estimate the tax payable for the relevant year before the second installment is due and pay fifty percent of the estimated amount of tax by the due date for the second quarter and remaining fifty percent of the estimated tax payable shall be paid in two equal installments payable by due dates for third and fourth quarters.

Option to exporters for taxation under normal tax regime Section 154

Hitherto tax deducted from proceeds realization on account of export of goods is treated as final tax in respect of income from such exports.

The Bill seeks to allow an option to exporter for taxation under normal tax regime by filing an irrevocable option at the time of filing of return subject to the condition that tax deducted under this section shall be treated as minimum tax. However, due to minimum tax liability, the possibility of exporters opting under this provision seems unlikely.

Taxation of resident shipping company Section 7A Clause (21) Part II of Second Schedule

The Bill seeks to transpose the existing clause (21) provided under Part II of Second Schedule pertaining to the reduced rate of final taxation of resident person engaged in the shipping business with the proposed newly inserted section.

Similar provision is placed under the newly inserted section 7A where by the income of the resident shipping company is subject to Final taxation and the said reduction shall not available after 30 June 2020

Powers of FBR to grant exemptions and amendments in withholding tax provisions withdrawn Section 159

Consequent to amendments proposed in section 53 withdrawing the powers of the Federal Government to grant exemptions or issue concessionary notifications, the powers given to FBR under section 159 are proposed to be withdrawn.

Default surcharge reduced Sections 161 and 205

The Bill proposes to reduce the rate of default surcharge from 18 percent to 12 percent.



Furnishing of information by Financial Institutions including Banks in respect of non-resident persons Section 165B

The Bill proposes to insert new section 165B to empower FBR to call for information from Banks and Financial Institutions regarding non-resident persons for the purpose of automatic exchange of information under bilateral agreement or multilateral conventions subject to the condition that information received shall be used only for tax purposes and kept confidential.

Rate of compensation on refunds Section 171

The Bill proposes to revise the rate of compensation on delayed refunds from 15 percent to KIBOR plus 5 percent per annum.

Special audit panel Sections 121, 176, 177 and 210(1B)

The Bill seeks to empower FBR to appoint audit panels to conduct an audit under section 177 including a forensic audit of the income tax affairs of taxpayers. Such panel is proposed to be headed by a Chairman, being an Officer of Inland Revenue, and to comprise two or more members from the following:

(i) An Officer or Officers of Inland Revenue

(ii) A firm of Chartered Accountants

(iii) A firm of Cost and Management Accountants; or

(iv) Any other person as directed by FBR

The scope of such audit shall be as determined by the Board or the Commissioner on case to case basis.

The special audit panel may, with delegation of powers in writing and prior approval of the Commissioner, enter the business premises of a

taxpayer to obtain any information or record etc. and examine such information within business premises. Further, if specifically delegated by the Commissioner, special audit panel may exercise the powers as are vested in a Court under the Code of Civil Procedures, 1908.

Further, the powers to enter into business premises and to obtain information or evidence for the purpose of conducting an audit shall only be exercised by Officers of Inland Revenue, being members of special audit panel.

On failure to produce information or records before the Commissioner or the special audit panel, the Commissioner and special audit panel may proceed to make best judgment assessment and the assessment treated to have been made on the basis of return or revised return shall have no legal effect.

FBR has been empowered to prescribe the mode and manner constitution, procedure and working of the special audit panel.

Penalties revised Section 182

The Bill propose to revise following penalties:

Penalty for Existing Revised

Non-filing of withholding tax statement, statement of final taxation and non-furnishing of information by banks

Rs. 2,500 for each day of default subject to a minimum penalty of Rs. 50,000

Rs. 2,500 for each day of default subject to a minimum penalty of Rs. 10,000

Failure to furnish wealth statement or wealth reconciliation

Rs. 100 for each day of default

0.1 percent of taxable income per week or Rs. 20,000 whichever is higher



Consumer goods and fast moving consumer goods defined Section 2(13AA) and 2(22A)

The Bill seeks to define the two terms as follows:

(i) consumer goods means goods that are consumed by the end consumer rather than used in the production of another goods

(ii) fast moving consumer goods means consumer goods which are supplied in retail marketing as per daily demand of a consumer

Further, the reference of consumer goods for the purpose of minimum tax rate of 0.2 percent is proposed to be deleted consequently making them liable to minimum tax at the standard rate of 1 percent.

Threshold of capital revised for small company Section 2(59A)

The Bill proposes to enhance the threshold of maximum amount of paid up capital and undistributed reserves from Rs. 25 million to Rs. 50 million.

Holding period of specified securities extended Section 37A

Currently, capital gain on specified securities is taxable at zero percent if the holding period of such securities is more than two years.

The Bill proposes to extend this period to four years so that capital gain on such securities shall be taxable at zero percent if held for four years or more.

Holding period

Tax year 2015 Tax year

2016

Existing Proposed Proposed

Less than twelve months

12.5

No change

15

Twelve months or more but lessthan twenty fourmonths

10 12.5

Twenty four months or more but less than four years

0 7.5

Powers of Federal Government for grant of exemptions / tax concession curtailed Section 53

Section 53(2) empowered the Federal Government to amend the provisions of the Second Schedule to the Income Tax Ordinance, 2001 by notification in the official gazette and all such amendments were effective in respect of any tax year beginning at a date before or after the commencement of the financial year in which the notification is issued.

Pursuant to the stated policy of the Government that all amendments in fiscal statutes should be made by the parliament, the President of Pakistan issued an Ordinance No. IX of 2015 dated 30 April 2015 which provided that the Federal Government may make amendment in the Second Schedule to the Ordinance with the approval of the Economic Coordination Committee of Cabinet wherever circumstances exist to take immediate action for the purpose of:

national security,

natural disaster,

national food security in emergency situations,



protection of national economic interest in situations arising out of abnormal fluctuation in the international commodity prices,

removal of anomalies in taxes,

development of backward areas and implementation of bilateral and multilateral agreements

The Bill now seeks to incorporate the provisions of the aforesaid Ordinance in sub-section (2) of section 53.

Further, the Bill seeks to insert sub-section (4) in section 53 to provide that any notification issued after promulgation of Finance Act, 2015 shall stand rescinded on expiry of the financial year in which it is issued except where it has been rescinded earlier.

Threshold on investment in shares and insurance for the purpose of tax credit enhanced Section 62

The Bill proposes to increase the limit of investment in shares and insurance for the purpose of tax credit from Rs. 1,000,000 to Rs. 1,500,000

Tax credit for profit on debt substituted with deductible allowance Section 64

Section 64 entitles a person for a tax credit in respect of profit on debt paid on a loan by a scheduled bank or NBFI for the purpose of construction of a new house or acquisition of a house.

The Bill seeks to substitute tax credit with a deductible allowance to the individual taxpayers.

The deductible allowance shall not exceed fifty percent of taxable income of such individual or Rs. 1,000,000 whichever is lower. The Bill further provides that any allowance or part thereof that is not able to be deducted for the year shall not be carried forward to a subsequent tax year.

Tax credit for employment generation Section 64B

With the objective of employment generation, the Bill seeks to introduce tax credit for companies formed for establishing and operating a new manufacturing unit set up between 01 July 2015 till 30 June 2018. The salient features of the scheme are as follows:

(i) tax credit will be allowed for a period of ten years

(ii) tax credit shall be equal to one percent of the tax payable by every fifty employees registered with EOBI and Employee Social Security Institution of provincial Governments during a tax year subject to maximum of 10 percent of the tax payable by the company.

(iii) manufacturing unit is not established by setting up or reconstruction or reconstitution of an existing undertaking or by the transfer of machinery or plant from an existing undertaking established in Pakistan on or before 01 July 2015.

The Commissioner is empowered to withdraw the tax credit and re-compute the tax payable for the relevant tax year on discovery that conditions specified in this section were not fulfilled.

For the purpose of this section, a manufacturing unit shall be treated to have been set up when it is ready to go into trial or commercial production.

Tax credits for BMR, new and existing undertaking to be available against minimum tax and final tax Section 65B, 65D and 65E

The Ordinance currently provides for following tax credits:

Section 65B 10 percent tax credit for investment in plant and machinery for the purposes of extension, expansion, balancing, modernization and replacement



Section 65D 100 percent tax credit for investment in newly established industrial undertaking

Section 65E - 100 percent tax credit for investment in existing established industrial undertaking

The above tax credits are allowed against minimum tax and final tax as well. Whereas section 169 dealing with principles of final taxation and section 113 dealing with minimum tax provide that no credit shall be allowed against final tax and minimum tax. Thus this created anomalies.

The Bill seeks to remove the anomalies by inserting new sub-section (6) in section 65 to provide that tax credit under sections 65B, 65D and 65E shall be available against final tax as well as minimum tax.

Tax credit for listing on stock exchange Section 65C

The Bill seeks to enhance the limit of tax credit from 15% to 20% of tax payable for a tax year in which the company is enlisted on a stock exchange in Pakistan

Time limit for tax credit for industrial undertaking to start with commencement of commercial production Section 65E

The existing provisions allow tax credit in respect of the tax year in which plant and machinery is installed and for subsequent four years. The Bill seeks to provide that time limit of five years will begin from the date of setting up or commencement of commercial production from the new plant or expansion project, whichever is later.

Powers of Federal Government for exchange of information enhanced Sections 107 and 176

The Bill seeks to empower the Federal Government to enter into bilateral or multilateral agreements with Governments of foreign countries or tax jurisdictions for avoidance of double taxation and prevention of fiscal evasion and exchange of information including automatic exchange of information with respect to taxes imposed under this Ordinance or under corresponding law enforced in other country.

The Bill also seeks to empower the Federal Board of Revenue to obtain and collect information when solicited by another country under a tax treaty, information exchange agreement, multilateral convention, inter-governmental agreement or similar arrangement or mechanism.

Similarly corresponding amendments have also been proposed in section 176(1)(a) empowering the Commissioner to require any person whether or not liable under the Ordinance to furnish to the Commissioner or an authorized officer any information relevant to tax leviable under this Ordinance or to fulfill any obligation under an agreement with a foreign government or tax jurisdiction.

The amendments appear to have been proposed in the wake of recent legislations like FATCA.

Minimum tax on builders deferred until 2018 Section 113A

The Finance Act, 2013 imposed minimum tax on income from business of construction, sale of residential, commercial or other buildings at the rates to be notified by the Federal Government. However, the Federal Government had not notified any rates for the purpose of this section.

The Bill now proposes to defer application of this section till 30 June 2018.



Minimum tax on land developers specified Section 113B

The Finance Act, 2013 inserted section 113B to provide for minimum tax on income from business of development and sale of residential, commercial or other plots at the rates to be notified by the Federal Government. However, no such rates not been prescribed to date.

The Bill now proposes a rate of 2 percent of the value of land notified by the Authority for the purpose of stamp duty as minimum tax rate.

Revision of return of income Section 114

A taxpayer is entitled to revise the return of income on discovery of any omission or wrong statement subject to certain specified conditions. The Finance Act, 2013 prescribed another condition that a return can only be revised if it is accompanied by approval of the Commissioner in writing for revision of such return. One of the conditions for revision of return is that taxable income should not be less than or loss should not be more than income or loss, as the case may be, declared in the return. There was a demand that this condition and the condition of the Commissioners approval are not fair and just, therefore, both need to be removed.

The Bill now proposes partial acceptance of the demand by proposing that Commissioners approval shall not be required if the revised return is filed within sixty days of the filing of the return sought to be revised.

Powers of the Commissioner (Appeals) to grant stay against recovery extended Section 128

Section 128(1A) empowers the Commissioner (Appeals) to stay recovery of tax demand for aggregate period of thirty days.

The Bill seeks to insert sub-section (1AA) empowering the Commissioner (Appeals) for stay of recovery for a further period of thirty days subject to the condition that appeal is decided within the extended period of thirty days.

Due dates for payment of tax revised Section 137

Under the existing provisions, tax payable under an assessment order or amended assessment order is payable within fifteen days from the date of service of notice of demand. The Bill seeks to extend the aforesaid time limit to thirty days.

Further, the Bill proposes to reduce the time limit of payment of tax demand under provisional assessment from sixty days to forty five days from the date of service of the notice of demand.

Powers of FBR to grant exemptions on imports withdrawn Section 148(2)

Consequent to amendments proposed in section 53 withdrawing the powers of the Federal Government to grant exemptions or issue concessionary notifications, the powers given to FBR under sub-section (2) of section 148 are proposed to be withdrawn. Resultantly, FBR cannot specify goods or classes of goods or persons or classes of persons importing goods to whom withholding tax provisions shall not apply.

Manufacturers of cooking oil or vegetable ghee made liable to final tax Section 148A Clause 13(c ) of Part II of Second Schedule

The Bill proposes to transpose the reduced rate of taxation for manufacturers of cooking oil or vegetable ghee or both from clause (13C) of Part II of the Second Schedule to a newly inserted section 148A whereby such manufacturers are chargeable to tax at the rate of 2 percent on purchase of locally produced



edible oil. Such tax is final tax in respect of income accruing from locally produced edible oil.

Permanent establishments of non-residents entitled to seek exemption/reduction in withholding tax rates Section 152(4A)

Until 2012, a PE of a non-resident person was liable to withholding tax at par with a resident person under section 153 and was accordingly entitled to make an application for exemption from withholding tax. However, the Finance Act, 2012 moved the provisions relating to withholding tax from PE of a non-resident to section 152(2A). Yet such PE of a non-resident was not entitled to seek exemption or reduction from withholding tax on its own.

The Bill now proposes to allow PE of a non-resident to seek exemption / reduction in withholding tax rate by making an application to the Commissioner.

Withholding tax on payment on account of services made adjustable for companies Section 153(3)

Consequent to the amendments made vide Finance Act, 2009 a dispute arose as to whether tax deducted from payment on account of services was to be treated as minimum tax or adjustable in case of companies. The FTO in its order held the provisions as discriminatory and invalid.

The Bill now proposes to clarify that tax deducted at source from payment on account of services to companies shall be minimum tax with effect from tax year 2009.

Withholding tax on payment to sportsperson made final tax Section 153(3)(d)

The Bill proposes to make tax deduction from payment to sportsperson as final tax liability in respect of income of such sportsperson with effect from tax year 2013.

Automatic selection of audit Section 214D

The Bill proposes to introduce automatic selection of audit of retailers falling under Sales Tax Special Rules, 2007 other than persons meeting following conditions:

(i) Name of such registered person appears in the sales tax active payers list;

(ii) Complete return of total income has been filed within the due date including the date extended by FBR;

(iii) The tax payable based on the return of total income has been paid;

(iv) 2 percent tax on turnover under section 113 has been paid by such registered person who files the return below taxable limit and in the preceding tax year has either not filed the return or had declared income below taxable limit; and

(v) 25 percent higher tax than the previous tax year has been paid by such registered person and had declared taxable income in the return for immediately preceding tax year.

Such registered persons shall also not be subject to selection of their cases for audit by the Commissioner under section 177 or FBR under section 214C.

Audit of the income tax affairs of such persons shall be conducted as per the procedures given in section 177 and all the provisions of the Ordinance shall apply except the powers of the Commissioner to call for record or documents.



This section shall have effect from the date appointed by the Board through notification in official gazette.

Whistleblower Sections 2(75) and 227B

The Bill proposes to define the term whistleblower as person who reports concealment or evasion of income tax leading to detection or collection of taxes fraud, corruption or misconduct to the competent authority having power to take action against the person or an income tax authority committing fraud, corruption, misconduct or involved in concealment or evasion of taxes.

The Bill proposes to introduce the concept of whistleblower whereby FBR may sanction reward to whistleblowers in providing credible information leading detection of taxes.

The entitlement of whistleblower for reward shall be rejected if:

(i) the information provided is of no value

(ii) the Board already had the information

(iii) the information was available in public records

(iv) no collection of taxes is made from the information provided from which the Board can pay the reward

FBR may prescribe the procedures and also specify the apportionment of reward for whistleblower.

Advance tax on private motor vehicles Sections 231B and 234

The Bill proposes to define the term motor vehicle for the purpose of withholding tax on private motor vehicles under sections 231B and withholding tax on subsequent payment of tax on motor vehicles under 234 as including car, jeep, van, sports utility vehicle, pick-up trucks for private use, caravan automobile, limousine, wagon and any other automobile used for private purpose.

The Bill also proposes to explain date of first registration for the purpose of withholding tax under section 231B as:

(i) the date of issuance of broad arrow number in case a vehicle is acquired from the Armed Forces of Pakistan;

(ii) the date of registration by the Ministry of Foreign Affairs in case the vehicle is acquired from a foreign diplomat or a diplomatic mission in Paki

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