KPMG Taseer Hadi & Co. Chartered Accountants Budget ... Taseer Hadi & Co. Chartered Accountants Budget Brief 2017 An Economic and Tax Commentary The Budget Brief 2017 contains a review

KPMG Taseer Hadi & Co. Chartered Accountants

Budget Brief 2017 An Economic and Tax Commentary

The Budget Brief 2017 contains a review of economic scenario and highlights of Finance Bill 2017 as they relate to direct and indirect taxes and certain other laws.

The provisions of the Finance Bill 2017 are generally applicable from 01 July 2017, 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.

This publication will be updated, after enactment of the Bill, to provide comments on enacted provisions, including changes in the proposals contained in the Bill. The update will be posted on our website www.kpmg.com.pk subsequent to the enactment of Finance Act 2017.

26 May 2017

Contents

Budget at a Glance 1 Economic Analysis 3 Economic Scenario 7 Highlights - Income Tax 15 - Sales Tax 17 - Federal Excise 18 - Customs 19 Significant Amendments - Income Tax 21 - Sales Tax 41 - Federal Excise 53 - Customs 57 - The Common Reporting Standard 61

Contents

© 2017 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 2017 1

Budget Estimate 2016-17

% Revised Estimate 2016-17

% Budget Estimate 2017-18

%

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

Revenue

Tax Revenue 3,956 77.8 3,825 78.0 4,330 78.4

Non Tax Revenue 959 18.9 912 18.6 980 17.7 4,915 96.7 4,737 96.6 5,310 96.1

Public Accounts Receipts - Net 171 3.3 165 3.4 213 3.9 5,086 100.0 4,902 100.0 5,523 100.0

Less: Provincial Share 2,136 43.5 2,121 44.8 2,384 44.9

Net Revenue 2,950 56.5 2,781.0 55.2 3,139.0 55.1

Expenditure

Development 1,051 20.7 936 18.8 1,340 25.8

Current 4,031 79.3 4,049 81.2 3,852 74.2 5,082 100.0 4,985 100.0 5,192 100.0

Deficit 2,132 43.5 2,204 44.8 2,053 44.9

Funded by

Capital Receipts 470 22.0 160 7.3 428 20.9

Domestic Debt - Banks 453 21.2 741 33.6 390 19.0

External Debt 820 38.5 996 45.2 838 40.8

Privatization Proceeds 50 2.4 18 0.8 50 2.4

Surplus from Provinces 339 15.9 289 13.1 347 16.9 2,132 100.0 2,204 100.0 2,053 100.0

Source: Budget in Brief 2017-18 - the deficit figure does not match with budget documents.

Budget at a Glance

© 2017 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.

2 Budget Brief 2017


Budget Brief 2017 3

Macroeconomic Indicators

Budget 16-17

Revised 16-17

Budget 17-18

Forecast 18-19

Forecast 19-20

Real GDP Growth (%) 5.7 5.3 6.0 6.5 7.0

Inflation (%) 6.0 4.5 6.0 6.0 6.0

(as percentage of GDP)

Total Revenue 16.0 16.2 17.2 17.3 17.5

Tax Revenue 12.9 13.1 13.7 14.2 14.6

FBR Tax Revenue 10.8 11.1 11.2 11.8 12.2

Non Tax Revenue 3.1 3.1 3.5 3.2 2.9

Total Expenditure 19.8 20.4 21.3 21.3 21.4

Current 14.9 15.9 15.0 14.6 14.6

Development 4.7 4.5 6.3 6.7 6.8

Fiscal Balance -3.8 -4.2 -4.1 -4.0 -3.9

Revenue Balance 0.9 0.2 2.2 2.7 2.9

Total Public Debt 61,4 64.8 61.4 57.8 54.3

GDP at market prices (Rs. In billions) 33,509 31,862 35,919 48,876 46,597

GDP Growth

16-17

(P) 15-16 14-15 13-14 12-13 11-12 10-11 09-10 08-09 07-08

Nominal GDP US$ billion 304 279 271 244 231 224 214 177.0 168 170

Nominal GDP Rs. billion 31,862 29,102 27,443 25,168 22,385 20,047 18,276 14,867 13,200 10,638

Real GDP Growth % 5.28 4,71 4.04 4.05 3.7 3.8 3.6 2.6 0.4 5.0

Sectoral GDP Growth %

Agriculture 3.5 0.3 2.1 2.5 2.7 3.6 2.0 0.2 3.5 1.8

Industry 5.0 5.8 5.2 4.53 0.7 2.6 4.5 3.4 -5.2 8.5

Services 6.0 5.6 4.4 4.46 5.1 4.4 3.9 3.2 1.3 4.9

Sectoral Share in GDP %

Agriculture 19.5 19.9 20.7 21.1 21.4 21.6 21.7 22 22.5 21.9

Industry 20.9 20.9 20.7 20.5 20.3 21.0 21.2 21.0 20.9 22.1

Services 59.6 59.2 58.6 58.4 58.2 57.4 57.1 56.9 56.6 56

Economic Analysis

Source: Budget Brief 2016-17

Source: Pakistan Economic Survey 2016-17



4 Budget Brief 2017

Public Debt

16-17 (Mar)

15-16 14-15 (P) 13-14

(P) 12-13 11-12 10-11 09-10 08-09

Public Debt (Rs. billion) 20,873 19,678 17,381 15,991 14,318 12,695 10,767 9,006 7,731

Domestic 14,748 13,627 12,199 10,920 9,522 7,638 6,017 4,654 3,860

Foreign currency 6,124 6,051 5,182 5,071 4,797 5,057 4,750 4,352 3,871

Public Debt (% of GDP) 65.5 67.6 63.3 63.5 64.0 63.3 58.9 60.6 57.8

Domestic 46.3 46.8 44.5 43.4 42.5 38.1 32.9 31.3 29.2

Foreign currency 19.1 20.8 18.8 20.1 21.4 25.2 26.0 29.3 28.6

Overall Deficit

4.2%4.6%

5.3%5.5%

8.2%

6.8% 6.5% 6.2%5.2%

7.3%

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

35,000

16-17 15-16 14-15 13-14 12-13 11-12 10-11 09-10 08-09 07-08

Rs. B

illio

n

GDP(mp) Overall Deficit


Source: Pakistan Economic Survey 2016-17 2016-17 Deficit as per budget speech by Finance Minister.


Budget Brief 2017 5

Social Indicators

16-17 15-16 14-15 13-14 12-13 11-12 10-11 09-10 08-09 07-08

Population (millions) 199.1 195.4 191.71 188.02 184.35 178.9 175.3 171.7 168.2 164.7

Unemployment rate (%) 5.9 5.9 5.9 6.0 6.2 6.0 6.0 5.5 5.2 5.2

GNP per capita – US$ 1,629 1,531 1,514 1,389 1,334 1,320 1,274 1,072 1,026 1,053

Total investment - % of GDP 15.78 15.55 15.71 14.65 14.96 15.08 14.1 15.8 17.5 19.2

National Savings - % of GDP 13.1 14.3 14.7 13.4 13.9 13 14.2 13.6 12.0 11.0

Exchange Reserves

16-17 15-16 14-15 13-14 12-13 11-12 10-11 09-10 08-09 07-08

Exchange reserves (US$ billion) 20.8 21.4 18.7 14.1 11.0 16.5 17.1 12.2 11.5 16.4

Imports Cover (months) 4 7.9 4.9 3.7 2.9 4.4 5.0 4.2 3.9 4.9

Rupee to USD parity 104.8 104.8 101.8 98.8 99.7 94.5 86.0 83.8 78.5 62.5

Inflation

* 2016-17 and 2015-16 unemployment figures not provided, therefore taken as same as for 2014-15. Source: Pakistan Economic Survey 2016-17



4.12.9 4.5 8.6 7.4 11 13.7 10.1 17 12

3.9

2.1

3.5 9

7.1

11

18

12.9

23.1

17.6

4.33.4 5.3

8.4

8.4

10.5 10.7

8.3

13.4

7.9

0

5

10

15

20

25

16-17 15-16 14-15 13-14 12-13 11-12 10-11 09-10 08-09 07-08

Inflation

CPI Food * Non Food *



6 Budget Brief 2017


Budget Brief 2017 7

The incumbents have been in the driving seat for the last four years and now preparing to go in to the final stretch, and while on the face of it the economy appears to be broadly stable, there are concerns that the earlier exceptional macro level gains may not have been sufficiently robust enough to stimulate the micro economy. Undoubtedly, the economy was, if not a complete mess, in dire straits when the current government came into power, and the finance team’s efforts to safely navigate near to insurmountable hurdles, consequently reversing the economic decline, and simultaneously boosting key macroeconomic indicators, has received international and domestic acclaim over the last couple of years.

Bloomberg, Forbes, Wall Street Journal and The Economist have all, over the years, been praising Pakistan’s successes on the economic front with more than exciting headlines: “Pakistan: The Next Colombia Success Story”, “Pakistan is Potential Global Turnaround Story”, “Pak Economy doing better than US, Canada economies”, “Pakistan most underrated economy”, “Pakistan’s economy is a pleasant surprise”, “Pakistan Economy has improved in recent years”. Perhaps, the crowning achievement was in June last year when MSCI upgraded Pakistan’s status to Emerging Market; of course not forgetting the improvements in country’s rating by Moody’s and S&P. On a lighter note, such positivism flowing from economic write ups on Pakistan in international markets was sufficiently uplifting enough for one professional to remark, “Are we living in the same Pakistan that these guys are reporting on!” On a more serious note, optimism permeated the country as well and the “Feel Good” mood remains ubiquitous across Pakistan; ignoring the political conflicts. In fact, in our last four commentaries we have continuously praised the Government for its discipline and efforts to revive the economy sufficiently for the world to sit up and notice.

Even back then, however, and more off late, these laurels often came with a pinch of salt, generally advising on the need to build upon these macro gains and simply to do more; which suggestions were perhaps prescient considering the numerous micro level steps needed to arrest the decline at the grass root level of the economy. Stagnant, rather falling real wage, growing unemployment, insufficient savings and next to none level of investment have resulted in a deteriorating quality of life for the middle classes, which perhaps has fostered corruption at every level of, actual or perceived power, across the society. While the need to generate political mileage from macroeconomic gains achieved through sheer hard work is quite understandable, it is simultaneously necessary not to procrastinate, or get complacent in the feel good environment; those at the helm of affairs perhaps need to focus more on the criticism then on the compliments

“To be sure, the problems remain staggering. The education system is poor, exports are not making progress and rely too heavily on textiles, investment is insufficient, and much of the country has a series of interlocking problems with weather, water and drought. The political situation is improved but still far from ideal, and Pakistan is not situated in a calm part of the world. There is plenty of talk of the country benefiting from China’s “One Belt, One Road” initiative, but for now I consider that speculative”, extracts from the article “Pakistan's Economy Is a Pleasant Surprise” by Tyler Cowen, Bloomberg February 2017.

“The country is also held back by inefficient and often cartelised industries, which have fallen behind rivals in India and Bangladesh. Exports, 60% of which are textiles, have been shrinking for years. Much more needs to be done to create an educated workforce. Almost half of all those aged five to 16 are out of school—25m children. Health, like education, is woefully underfunded, in part because

Economic Scenario



8 Budget Brief 2017

successive governments shy away from taxing the wealthy. Only 0.6% of the population pays income tax. As the World Bank puts it, Pakistan’s long-term development depends on “better nutrition, health and education””, The Economist 19th January 2017.

“Greater exchange rate flexibility and efforts to improve export sector productivity are needed to address the widening trade deficit as well as strengthen the economy’s ability to absorb medium-term CPEC-related and other capital outflows. Bringing the power distribution sector to full cost recovery will be critical to ensure long-term success of new energy initiatives and minimize fiscal costs. Alongside, monetary policy needs to remain prudent. Discussions also focused on the reforms needed to enhance Pakistan’s social safety nets, restructuring and seeking private sector participation in loss-making public enterprises, promoting financial inclusion and deepening, and improving the business climate. Maintaining the reform momentum will be critical for Pakistan to achieve its broader economic objectives”, IMF Staff press release on end of Article IV Mission to Pakistan April 5, 2017.

“Persistent, steady progress on the structural reform agenda will be necessary if Pakistan is to accelerate its growth recovery and lift millions more out of poverty.... However, significant risks remain and the country should guard against global slowdown by continuing to make key reforms, including expanding the electricity supply, boosting tax revenues, strengthening the business environment and encouraging private sector to invest”, The World Bank Press release, 28 April 2016.

“First, Pakistan has crippling energy and water shortages. ...water shortages pose big problems for agriculture, which consumes more than 90% of Pakistan’s water and employs more workers than any other sector in the country. Water woes have prompted many farmers to seek new livelihoods in cities already struggling to provide jobs for their

swelling populations. Second, Pakistan’s export performance is poor. In the first eight months of the current fiscal year, exports fell by 12% when compared to the same period the year before. Pakistani government assessments attribute the slide to economic slowdowns in China and the EU - both key export markets for Pakistan - and low levels of investment in export sectors. However, the chief explanation for Pakistan’s sluggish exports is the same it has been the same for decades: the country's export mix lacks diversity. While many developing economies in Asia have gradually embraced the services sector and gravitated away from traditional manufacturing, Pakistan has stuck to low-value-add textiles”, Michael Kugelman, The Interpreter, Lowy Institute for International Policy, 11th May 2017.

“The Pakistani state, apart from the military, is weak and its economic performance disastrous...There are drawbacks for Pakistan in becoming too dependent. Its trade deficit with China has doubled in recent years, exacerbating declines in its foreign currency reserves. This has forced the country to seek emergency loans from outside sources — including China — to maintain payments on older loans made in foreign currencies....China’s investments, rather than prioritising Pakistan’s development interests, favours its own strategic ones. But it will be Pakistan that has to pay back the loans that fund the projects. ...Pakistan has also become the biggest importer of Chinese military hardware and has eight submarines on order. ..Nor is there any guarantee that the projects will be commercially viable. You do not have to look far to find Chinese-backed white elephants. The Hambantota port in Sri Lanka, which struggles to pay staff salaries, is one. The most obvious risk for China is that Pakistan ultimately proves unable to honour its debts, and that it becomes as undependable a client as it has for the US”, The Financial Times, 25th April 2017. While the extracts from FT editorial are completely unpalatable and unequivocally incomprehensible, they have been included to provide a complete flavour of how the


Budget Brief 2017 9

World perceives Pakistan’s economy under their own agendas; still even purely negative critique needs to be scanned for legitimate analysis, if any.

Notwithstanding, summarising all of the above comments, they boil down to falling exports, insufficient investment in education and lack of domestic investment. We chose to ignore the comment on water and draught, since it would require related technical input. Irrespective, the government must obviously be aware of the spate of news items and reports terming Pakistan water stressed with the risk of turning into a water scarce country by 2040. Water management is a zero sum game with zero margins for error; if this research is right, and going forward Pakistan is unable to manage its water issues, the economy will not matter in any case. Pakistan needs big dams.

Moving on, while State Bank of Pakistan (SBP) has visibly become less critical in its recent economic write ups, the issues highlighted earlier are the very ones SBP implicitly or explicitly points out in its “The State of Pakistan- Second Quarterly report for the year 2016-17”: “In particular there is a need to further reduce cost of doing business, enhance productivity, and remove structural impediments in the export sector”. Productivity enhancement requires investment in technology and human resource, and high cost of doing business and structural impediments in the export sector, choke and frustrate the much needed investment. With less than needed spending on education for decades coupled with reduced demand for unskilled labour globally, remittance growth, if at all, will remain muted. And while Pakistan struggles with educating its children and transiting into an industrial nation, the world has moved on to the Fourth Industrial Revolution; the advent of Artificial Intelligence will continue to displace humans from the workforce globally, all of which is definitely not good news for Pakistan. The need to invest in education perhaps should be the top priority of the Government. According to the Pakistan Economic Survey 2016-17, education spending as a

percentage of GDP is only 2.3% in FY2016 compared with 2.2% in FY2015. “The present government focuses strongly on primary education and endeavor to resume the compendium on education from 2.0 percent of its GDP to 4.0 percent by 2018 on education sector”, Extract from Pakistan Economic Survey 2013-14.

And what are the results of all of these factors according to SBP, “This surge in imports was partly a result of rising commodity prices, especially crude oil and palm. This combined with decline in exports and remittances resulted in the almost doubling of the current account deficit to US$ 3.5 billion during first half of the year”. Three months later, the current account deficit for nine months has swelled to US$ 6.13 billion, again as per SBP. According to the Pakistan Economic Survey 2016-17, the current account deficit had increased to US$ 7.25 billion for the period ended July-April 2017.

According to the data available at the SBP Website, workers remittance for the period July-April 2017 stood at US$ 15.6 billion dollars as against US$ 16.04 billion for the same period last year; a decline of 2.8%. The government however, remains optimistic, according to the Pakistan Economic Survey 2016-17, of achieving the target of US$ 20.2 billion for FY 2017. Irrespective, considering the situation in Middle East, going forward workers remittance most likely will remain muted.

The net deficit for the period July-April 2017 on account of trading in goods and services and on primary income was US$ 25.9 billion dollars compared with US$ 21.1 billion for the same period last year. According to estimates, last year’s deficit was after an estimated gain of US$ 3 to US$ 4 billion, on account of collapsing international oil prices; and while the prices have slightly moved up recently, it was because of cheap oil continuing in 2017, that Pakistan imported and consumed more energy; undoubtedly a key factor in Pakistan’s economic turnaround. Falling global oil and commodity prices were also the reason for low



10 Budget Brief 2017

inflation in the country; which after decades has been under 4% for two years now. However, international oil and commodity prices, hence domestic inflation, are uncontrollable variables, and some global analysts have already issued warnings that oil prices may go up by 30% in the next 12 months. Albeit predicting oil prices are a Mug’s game, hence no point dwelling on next year’s exact trade deficit or expected inflation; except that on a ball park basis, an increasing trade deficit and higher inflation appear inevitable.

On the inflation front, according to the Pakistan Economic Survey 2016-17, CPI inflation stood at 4.09% during July-April 2017 compared with 2.79% percent for the same period last year. The increasing trend is visible already.

In essence trade deficit is excessive consumption by a nation in the present which in substance suggest that our future generations will have to curtail their consumption to pay for our largesse. Temporarily, excessive consumption can be financed by foreign debt; however the only way to pay for foreign debt is by earning foreign exchange either through export surpluses or workers’ remittances. Another methodology to pay off excessive consumption is to sell assets, referred to in normal economic parlance as Privatization; the reason why it has been compared with selling the family silver. The Government’s efforts to privatize key institutions have not succeeded in the past four years, and election year is probably not a good time to even discuss privatization. As is, to privatise or not to privatise is becoming a complicated decision in a world once again moving towards protectionism. Hence, the probability of funding the trade deficit through sale of assets remains remote at least in the near future.

Arguably the net foreign debt outstanding today is broadly equivalent to the nations past excessive consumption and it is this amount that will need to be paid off through future net trade and workers remittance surplus. As per the SBP website,

Pakistan’s external debt and liabilities stood at US $ 75.5 billion as at 31st March 2017; the comparable figure at 30th June 2013 was US$ 60.1 billion. Moody’s has predicted that Pakistan’s external debt and liabilities will stand at US$ 79 billion by end of June 2017. Considering that the net trade and remittance deficit is US$ 10 billion for the first 10 months of the fiscal year 2017, the strategy to bring down this mountainous debt through trade (Workers remittance being considered as export of human resources) is perhaps a nonstarter; ignoring CPEC for the moment, and any other miraculous positive development on the economic front, such as early cheap power generation from Thar coal fields, the nation might be looking at austerity and highly reduced consumption in the near to foreseeable future.

FDI, sale of intangible assets, mostly in the form of allowing market access, can also balance the foreign exchange requirements. According to SBP, total foreign investment in Pakistan for the period July to April 2017 stood at US$ 2.3 billion of which direct investment was US$ 1.7 billion; for the comparable period last year direct investment was US$ 1.5 billion. Direct investment from China stood at around US$ 713 billion for the period July-April 2017 as against around US$ 590 billion for a comparable period in 2016; again these are SBP numbers and are assumed to be inclusive of CPEC. What is even more surprising, in fact inexplicable even, is that foreign equity investment shows an out flow in this period of US$ 387 million compared to an outflow of US$ 385 million last year. This suggests that the record breaking index climb, surpassing 50,000, had nothing to do with foreigner’s interest in PSX. This knowledge is perhaps even more incredible considering that Market Capitalization currently stands at Rs 9.7 trillion compared to Rs 6 trillion in December 2013. The Government perhaps needs to design policies to nudge this domestic speculative investment towards the real economy. Notwithstanding, and in light of this FDI position, FT reporting that Pakistan had to arrange emergency borrowing from China to


Budget Brief 2017 11

the tune of US$ 1.2 billion for meeting its debt obligations appears to have some basis.

High level of debt has a bearing on fiscal deficit; debt has to be paid off, and not eventually, every year. According to the Budget Statement for 2016-17, debt servicing is estimated at Rs. 1.8 trillion against estimated net Federal Revenue receipts of Rs. 2.8 trillion; after defence spending (including pension) the revenue account is projected to end up in a net deficit of Rs. 100 billion; which obviously means more borrowing to meet current government expenditure and development expenditure.

According to SBP, the nation’s total debt and liabilities (Including foreign debt discussed above) stood at Rs 23.9 trillion at 31st March 2017; the comparable figure at 30th June 2013 was Rs 16.3 trillion. Critically, the above estimates of debt servicing are in a stable Rupee environment, with almost no movement since last year in the dollar rupee parity which currently stands at around US$1= Rs 104.7; further the discount rate was kept stable at low levels. Unfortunately, with a higher ever increasing trade deficit, defending the Rupee will be rather challenging for the Central Bank, and with a consequent rising inflation, SBP will struggle to maintain the discount rate. The twin crisis can have a crippling effect on the fiscal deficit. However, the Pakistan Economic Survey 2016-17 while avoiding specifics asserts that, “During the current year, the deficit is expected to remain on the downward trajectory observed over the recent years”.

As a consequence of the above discussion, the importance of generating a trade surplus cannot be underscored; continuing trade deficits may well be fatal for Pakistan.

In the Economic Scenario included in our Budget Brief 2013, we had commented as follows, “This brings the analysis to the very crux of what exactly, under accounting norms, qualifies to be the primary determinant of a country’s state of affairs. All

transactions with third parties constitute the true “profit” of a nation. Unfortunately, Pakistan has fared badly in this category. For the period July 2012 to April 2013, the country’s trade deficit, including goods, services and income, stood at USD16.25 billion. The quantum of deficits over the years, raise questions about the rationale of such trading”.

Realizing the importance of the external accounts, we had further suggested in that year’s Brief as follows:

“..... However, given political will to disentangle lobbies & cartels and a commitment of purpose, the situation is retrievable. Uncertain times demand uncertain actions. For decades domestic economic managers and pundits have always adhered to the dictates of conventional economic thought, with less than desirable results, in fact the situation has worsened over time. Perhaps it is time to unlearn the mistakes of the recent past! The following suggestion, while not all inclusive, provide a flavour of the steps needed: • A detailed analysis and proactive monitoring of trade activities and directly or indirectly discouraging luxury imports and services through duties or taxes. • Significant increase in indirect taxation on luxuries. • Elimination of across the board subsidies with a focus on targeted subsidies for the deserving poor only. • Conversion of all aid activities, domestic or international primarily towards employment creation rather than social development. • Determined government intervention in setting up power generation even at the cost of deficit financing and increased debt. • Revision of power tariff to ensure that the rich subsidize the poor. • Defining limits through prudential regulations on the maximum amount banks can lend to the government, other than for power sector, directly or indirectly. • Provisions of debt at discounted rates, and other incentives, to the private sector for projects which create employment, are export oriented or are geared towards import substitution, primarily a focus on manufacturing. • Restructuring and




improved governance of Public Sector Enterprises including management by public sector to avoid continuous drain on the national resources.

GDP is a combination of consumption, investment, government spending and net trade balance. Since nothing much can be done about consumption and government spending, the above suggestions focus upon investment and improvement in net trade balance.”

Serendipitously, net trade balance remains the key, or perhaps the only relevant component of GDP; an indicator which over time has become more a fashion rather than a substantive determinant of growth. Accordingly, in our subsequent Budget Briefs for 2014 to 2016, we continued to recommend monitoring of trade, maintaining a mercantilist approach, and a focus on export oriented and import substitution manufacturing. Perhaps it is time to consider a flat tariff, say around 30%, on all imports to address the trade imbalance.

As regards GDP, in Pakistan’s case, whether or not we achieved or exceeded last year’s GDP growth rate of 4.7% has become largely irrelevant; according to the Pakistan Economic Survey 2016-17 GDP growth was 5.3% for the current year. While the service sector surpassed its targeted growth, worryingly the industrial sector grew by 5.02% against 5.8% last year. It can however be safely concluded that the growth in GDP was on the back of the agricultural sector which grew by 3.46% compared with 0.27% last year, primarily because of growth in important crops of 4.12% compared to -5.47% last year. Noticeably, this year’s growth fails to recover last year’s decline which perhaps can be linked to water scarcity discussed earlier.

As stated in the Pakistan Economic Survey 2016-17, consumption, investment and exports are the main drivers of economic growth under the expenditure approach. The fact that current year’s economic growth is driven by increase in consumption of 7.92% coupled with a decrease in

net exports of 3.52%, perhaps requires immediate government ratiocination. Interestingly according to the Pakistan Economic Survey 2016-17, per capita income increased to US$ 1,629 in FY 2017 from US$ 1,531 in FY 2016, a growth of 6.4%; broadly, this could only have been possible because of low population growth.

Notwithstanding, apparently, the Governments believes that the current GDP is understated by at least 25%, and consequently, according to the print media, has authorized a World Bank study to determine the actual size of the country’s GDP. Considering that the current census might result in an increase in population, there was a real risk that it would have had an extremely adverse impact on the per capita income for Pakistan. Another advantage of a higher GDP is the additional space to borrow more. On the flip side however this calls into question the analysis contained in the previous many Economic Surveys of Pakistan, and all related ratios and indicators such as tax to GDP, unemployment, growth and poverty to say the least. A 25% increase in GDP will have a negative bearing on most all other indicators including literacy and spending on education. Unemployment is another ratio which may now become alarming. But perhaps the biggest concern might be national savings which according to the Economic Survey of Pakistan, “Reached to 13.1% of GDP in FY 2017 against 14.3% last year”. A situation which, irrespective, needs to be addressed by policies which nudge the populace towards reducing consumption and saving more.

A higher GDP might also further expose the country’s low industrial base and deficit in savings and investments, since any increase in GDP of 25% can only come for the services sector. Notwithstanding that the policy makers need to nudge the nation towards reducing consumption, the bigger challenge will be to simultaneously encourage savings on top of that; an incredibly tall order. Unfortunately, the situation is further complicated by the fact that this is an election year



budget. With load shedding still not under control, albeit huge generation capacity expected to come on the grid by end of 2017, the Government is expected to open the treasury coffers in the coming year to maintain the “Feel Good” environment. Already the government has indicated its intent to increase the Federal development budget by Rs 300 billion; the provinces are expected to follow this lead.

Keynesian economics was definitely the solution to stimulate a stagnant economy, especially after an excellent effort to radically improve Macro Economic Indicator and successfully managing the IMF program. However, with debt reaching unmanageable levels, continuously borrowing to build infrastructure may become a liability sooner than later; and the problem with construction is that jobs created are not sustainable once the work is discontinued. In the interim however, public spending has had the desired multiplier effect. According to Pakistan Statistical Bulletin, vehicle production has increased to 1.36 million in 2015-16 starting from 819 in 2012-13. In addition Pakistanis during the same period started drinking an additional 47, 000 tonnes of blended tea and an additional million litres of beverages. On the telecommunication side, mobile subscribers in Pakistan increased by 5.9 million subscribers during the period July-March 2017 and 3G&4G LTE subscribers increased by 10.3 million during the same period.

Worryingly perhaps, the Government’s efforts to incentivise agriculture and manufacturing over the past four years, while kick starting the economy through Keynesian policies, have not generated the desired results. The on ground situation was perhaps complicated by the need to reduce the fiscal deficit , thereby resulting in an aggressive tax collector trying to meet his budget targets through harsh actions, including freezing bank accounts; a them against us environment. Estimates of tax theft aside, the government seems to be getting on the wrong side of the Laffer curve; apparently taxes on

cigarettes have already fallen this year, suggesting customer preference for cheaper options, resulting in a thriving informal market. All this appears to have stifled growth or facilitated the informal economy to grow more. Further, the provincial sales tax regime has the potential of shoving businesses towards provincial nepotism simply to avoid the hassle of inter-provincial long drawn litigations; pretty soon provinces might start competing to attract businesses with reduced taxes which might not be conducive for the country as a whole. Growth is inversely proportional to taxation, and the Government needs to revisit its taxation policies dramatically to achieve the perfect balance.

In this background, CPEC is rightly termed a game changer. We may have put all our eggs in one basket, but that is fine; except that there is a need to carefully watch and protect the basket. Debt or equity, Pakistan will have invested heavily in its infrastructure, thereby perhaps resolving the chicken or egg question; does investment in manufacturing precedes investment in infrastructure or vice versa. However, there is now a need for domestic investment to come forward and invest in Pakistan’s future.

CPEC is definitely a huge opportunity for Pakistan and after the Macro Level achievements of signing MOUs and facilitating Chinese teams, there is an obvious need to proactively monitor and evaluate all activity under this window. The devil is always in details.

Informal feedback from domestic entrepreneurs resulted in the following set of suggestions:

Land availability for Chinese owned projects to be limited to short term lease;

Pakistani businesses should be given preference and protected;

All projects should require domestic minimum holding.




These suggestions are not entirely unrealistic and are practiced in one form or the other by China and most of the Middle East.

On a holistic level, perhaps a bit early in the day, there is a need to carefully monitor the impacts on trade balance in the interim and after the corridor achieves fruition. There are estimates that CPEC may increase foreign national debt to US$ 110 billion over the next 4 years. Even that level of debt may not be problematic, if at the end of the day domestic manufacturing takes off, and Pakistan achieves full employment.

While we remain strong advocates of CPEC, debate remains the hallmark of informed decision making process. The informal suggestions mentioned earlier about short term leasing of land and ensuring participation of Pakistani investors on an equal footing perhaps require reasonable consideration. Modern infrastructure, while a necessity, is only the enabler as is the internet; what matter is the content that flows through the infrastructure. In substance, the nation may consider proper checks and balances to avoid economic, and perhaps eventual political, dependency; borrowed growth should be at a reasonable cost and mutually beneficial.

The devil is in the details.



Income Tax

• Super tax introduced as one time levy for tax year 2015, was extended to tax year 2016, and now proposed to be further extended for tax year 2017.

• “Durable goods’ are proposed to be excluded from the definition of ‘consumer goods’. Consequently, the reduced rate of minimum tax will no more be available on durable goods.

• Start-ups i.e. businesses offering technology driven products or services, as certified by the Pakistan Software Export Board and having turnover of less than Rs. 100 million in each of the last 5 tax years are proposed to be exempt from tax, including minimum tax, for 3 years

• A public company not distributing 40% or more of its after tax profit either through cash dividend or bonus shares shall be subject to tax on undistributed profits at 10%.

• Fixed tax regime for Developers of plots and Builders of residential, commercial and other buildings, other than for projects initiated and approved during tax year 2017, is proposed to be withdrawn.

• Threshold for non taxability of interest free or concessional loan from employer is proposed to be enhanced from Rs. 500,000 to Rs. 1 million.

• Limit for sales promotion, advertisement and publicity expenses by pharmaceutical manufacturers is proposed to be enhanced from 5 % to 10 % of turnover.

• The asset co-owned by taxpayer and Islamic financial institution, under Musharika arrangement, is proposed to be considered as

wholly owned by the taxpayer for depreciation purposes.

• All notifications issued by Federal Govt. in respect of exemptions after 1 July 2015 shall continue to remain in force till 30 June 2018, unless rescinded earlier.

• The limit of taxable income for claiming deductible allowance in respect of education expenses, is proposed to be increased from Rs. 1 million to Rs. 1.5 million.

• The limit for health insurance premium is proposed to be enhanced from Rs. 100,000 to Rs. 150,000 for the purpose of tax credit.

• Tax credit of 3% of tax payable available to manufacturers making 90% of sales to persons registered under the Sales Tax Act, 1990 is proposed to be withdrawn.

• Tax credit period for companies opted to get listed on the stock exchange is proposed to be extended from 2 years to 4 years. In first two years, tax credit will be allowed at 20% of tax payable, and subsequent two tax years at the rate of 10%.

• Profit and gains derived from Sui Gas field and tax payable thereon are proposed to be computed under Fifth Schedule.

• The Finance Bill proposes a new condition that if administration and management expenses of a non-profit organization exceeds 15% of total receipts, the tax credit will not be available.

• Surplus funds of non-profit organizations are proposed to be taxed at 10%. Surplus funds are defined for the purpose of levy of tax.

Highlights

© 2017 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.


• The Finance Bill proposes to enhance the general rate of minimum tax on turnover from present 1% to 1.25% of the turnover.

• Finance bill proposes that widows, orphans and disabled persons will not be required to file income tax return, even if they own immoveable property or flat located in rating area or a motor vehicle.

• The Bill proposes to empower Chief Commissioner to grant extension of time for filing of return where the Commissioner refuses to grant an extension.

• Best judgement assessment is proposed where the taxpayers does not file return of income despite notice for return filing from the Commissioner concerned.

• Provisional assessment due to non-filing of return is proposed to be withdrawn.

• Individuals having latest assessed taxable income of Rs. 1,000,000 (presently Rs. 500,000) or more will be required to discharge quarterly advance tax.

• The nature of tax collected from manufacturer of fertilizer on import of fertilizer is proposed to be changed from “adjustable” to “final tax”.

• The Bill proposes to allow permanent establishment of non-resident engaged in construction or related contract or contract for advertisement services rendered by T.V. satellite channel to seek exemption / reduction in withholding tax by making an application to the Commissioner, where tax is adjustable

• Withhold tax proposed on service income even where the agent remit net payment to the principal after retaining service fee.

• Revision of withholding tax statement is proposed to be allowed within 60 days from filing of statement where any omission or wrong statement is discovered.

• Transfer pricing audit is proposed, independent of audit of income tax affairs of a person. Separate directorate is being established.

• Penalties for non-compliance to maintenance of records requirement in respect of transactions with associates and related other compliances are proposed. Further, penalty is also proposed for non furnishing of information by reporting financial institution or reporting entity.

• Advance income tax to be collected by Financial Institutions whether shariah compliant or under conventional mode from non-filer lessees at 3% of value of vehicle.

• The income of stock brokers is presently taxable under normal tax regime. The Bill proposes that tax collected by stock exchange on purchase and sale of shares shall be final tax.

• In case of acquisition and disposal of immoveable property within the same tax year, tax collected on sale of such property is proposed to be ‘minimum tax’ of the transferor.

• In addition to tax collected from CNG stations on amount of gas bill, tax collection on electricity bill is also proposed to be final tax.

• A new section is proposed to be inserted whereby adjustable advance tax at 5% of purchase value of tobacco is to be collected from tobacco purchaser.

• The Bill proposes to validate all notifications and orders issued and notified by the federal Govt. before the commencement of Finance



Act, 2017 despite any judgement of High Court or Supreme Court.

• Tax on dividend is proposed to be increased from 12.5% to 15% in the case of filers. Tax on dividend from mutual funds is proposed to be increased from 10% to 12.5%. Withholding tax on dividend is also proposed to be increased accordingly.

• Progressive tax rates on profit on debt are proposed to be substituted with flat tax rates.

• Tax rate on capital gain arising on disposal of listed securities acquired on or after 1 July 2013 is proposed to be 15% for filer and 20% for non-filer irrespective of the holding period of such securities.

• Benefit of taxation under normal tax regime granted to specified service sectors for tax years 2016 & 2017 is proposed to be extended to tax year 2018. Further, services of Pakistan Stock Exchange is proposed to be included in the specified services.

• The Finance Bill proposes to enhance withholding tax rates by 0.5% to 5% for non-filers under different categories.

• Threshold of life insurance premium for collection of advance tax from non-filer is proposed to be increased from Rs. 200,000 per annum to Rs. 300,000.

• Exemption from tax collection on cash withdrawal made from Branchless Banking Agent account is proposed.

Sales Tax

• The Bill proposes to extend the applicability of further tax @ 2% to the zero rated supplies. Conceptually, further tax should not apply on export of goods, considering that non-residents

are not liable for sales tax registration, yet this particular aspect is not clarified.

• To harmonize procedural matters with Income Tax laws, the Bill proposes to allow stay against recovery of tax dues, provided that taxpayer deposits 25% of the tax demand, and his appeal is pending for decision before the Commissioner (Appeals).

• Provisions relating to taxation of Tier-1 retailers, previously governed through the Sales Tax Special Procedure Rules, 2007 are now proposed to be regulated through the main statute.

• Sales tax rates on various grades of fertilizers except urea fertilizers rationalized at fixed rates under Eighth Schedule, with simultaneous exclusion of fertilizers from retail price regime under Third Schedule.

• The bill proposes to increase the amount of sales tax on supply of low priced cellular mobile phones from Rs. 300 to Rs. 650. At the same time, sales tax on supply of medium sized mobile phones is proposed to be reduced from Rs. 1,000 to Rs. 650.

• The Bill proposes to introduce strict penalties on manufacturers and transporters of counterfeited cigarettes, including confiscation of stocks as well as vehicles used for such cigarettes.

• The Bill proposes to reduce sales tax on all poultry related machinery and equipments to 7% from 17%.

• The Bill seeks to extend the zero-rating facility on food preparations for young children in addition to infants, as put up for retail sale.

• The Bill proposes exemption from sales tax on import of vehicles by China Overseas Ports




Holding Company Limited and its operating companies for a period of 23 years for construction, development and operation of Gwader Port and Free Zone Area subject to certain conditions.

• Exemption from sales tax is also proposed to be extended for certain specified items used in projects including wind turbines, solar energy, renewable energy, etc.

• The bill proposes to exempt sunflower and canola hybrid seeds, combined harvesters upto five years old and agriculture diesels engines from Sales tax.

• It is proposed to increase sales tax on steel from existing rate of Rs. 9 per unit of electricity to Rs. 10.5 per unit of electricity. However, the notification to this effect is yet to be issued.

• The budgetary measures reflect that extra tax @ 2% will be withdrawn on lubricating oils as applicable under Rule 58S of the Chapter XIII of Sales Tax Special Procedure Rules, 2007. However, the notification to this effect is yet to be issued.

• Sales tax withholding is proposed to be withdrawn on purchases of taxable goods by a registered buyer from any registered supplier with the exception of advertisement services. However, the notification to this effect is yet to be issued.

• Reduced rate of 5% on retail sales of finished goods of five export sectors is proposed to be enhanced to 6%. Further, commercial imports of fabrics is proposed to attract sales tax at 6% instead of 0% as applicable under five sector export regime as per SRO.1125(I)/2011, dated 31 December 2011 (i.e. textiles, leather, carpets, sports and surgical goods). However, the notification to this effect is yet to be issued.

• Exemptions proposed to be withdrawn under Sixth Schedule on certain ingredients for pesticides.

• Machinery for poultry sector is proposed to be subject to reduced rate of sales tax at 7%.

• Sales tax reduced rate at 10% is proposed on multimedia projectors if imported by any educational institution.

• Sales tax rate on locally produced coal is proposed at reduced rate at Rs. 425 per metric tonne or 17% ad valorem, whichever is higher.

Federal Excise

• The Bill proposes to transfer the power of Federal Government to the Federal Board of Revenue with the approval of the Minister Incharge of the Federal Government in relation to issuance of Notification.

• The Bill proposes to appoint District Taxation Officer and Assistant Director Audit as Inland Revenue Authorities.

• The Bill proposes to assign the function to be performed by the Chief Commissioner Inland Revenue and Commissioner Inland Revenue as directed by the Board and Chief Commissioner respectively.

• The Bill proposes the stay of demand, if 25% of the tax liability is paid at the time of filing appeal which shall be continued till the decision of Commissioner (Appeals).

• In order to override the effect of any judgment of superior courts, the Bill proposes to insert the provision to validate the notifications and orders issued by the Federal Government.

• The Bill proposes the way of serving notice via email or e-folder maintained for the purposes of



e-filing Sales Tax-cum-Federal Excise return by the limited companies.

• FED is proposed to be enhanced on locally manufactured cigarettes.

• FED on cement is proposed to be enhanced from Rs.1 per kilogram to Rs. 1.25 per kilogram.

• FED is proposed to be reduced from 18.5% to 17% on Telecommunication services.

Customs

• Import of solar panels and related components have been exempted from the condition of ‘local manufacturing’ till 30th June 2017 which is extended till 30th June, 2018.

• Broadening the scope of exemption on import/donation by allowing imports and donation of Federal, Provincial, AJ&K, Gilgit-Baltistan Governments, NDMA, PDMA and Govt. emergency/ rescue services.

• Reduction of Customs Duty from 16% to 5% on fabrics (non-woven) used by the pharmaceutical industry.

• Customs Duty rate on Bituminous coal and other coals equalized @ 5%. However, for the Power Projects in IPPs Mode, Customs Duty on import of both types of coals reduced to 3%.

• Regulatory Duty levied/increased on 565 number of non-essential items by varied rates ranging from 5% to 15%.

• The Bill empowers the Board to appoint separate Directorate General of CPEC for facilitation.

• The Bill proposes to transfer the power of Federal Government to the Federal Board of

Revenue with the approval of the Minister Incharge of the Federal Government under various provision of Customs Act.

• The Bill proposes that the value of invoice retrieved from the consignment shall be taken for assessment purpose, if the invoice value is higher than the value declared at the time of import or export.

• Order passed under section 195 is proposed to be appealable.

• In order to override the effect of any judgment of superior courts, the Bill proposes to insert the provision to validate the notifications and orders issued by the Federal Government.

• 5% regulatory duty proposed to be levied on import of synthetic filament yarn (of polyesters).

• The Bill additionally empowers Chief Collector of Customs to extend the time period of warehousing for perishable and non-perishable goods.






Fast moving Consumer Goods Redefined

Sections 2(22A), 113, 153(1) (a), Division IX of Part I and Division III of Part III of First Schedule

The distributors of fast moving consumer goods are subject to minimum tax at a reduced rate of 0.2%.

The Finance Bill proposes to exclude durable goods from the scope of fast moving consumer goods and thus making distributor of such durable goods disentitled to minimum tax at the reduced rate of 0.2%.

Further, withholding tax rate on fast moving consumer goods, other than durable goods, is also proposed to be reduced from 3% to 2% for companies and from 3.5% to 2.5% in cases other than companies.

Start-ups

Section 2 (62A), Clause 144 of Part I, Clauses (11A) and (43F) of the Part IV of Second Schedule

The Bill proposes to introduce a new concept of ‘Start-up’ in respect of technology driven businesses for which various exemptions have also been proposed.

The ‘Start-up’ is proposed to be defined as a business of resident individual, AOP or a company incorporated or registered in Pakistan on or after 01 July 2012 and the person:

• is engaged in or intends to offer technology driven products or services;

• is registered with and duly certified by the Pakistan Software Export Board [PESB]; and

• has a turnover of less than Rs. 100 million in each of the last five tax years.

A business falling within the definition of “start-ups” will be entitled to following exemptions and concessions:

• Exemption of income from tax for the tax year in which the start-up is certified by the PESB and the following two tax years [Clause (144) of Part I of Second Schedule]

• Exemption from withholding of taxes under section 153 as recipient [Clause (43F) of Part IV of Second Schedule]

• Exemption from minimum tax under section 113 [Clause (11A)(xxix) of Part IV of Second Schedule]

Super tax for rehabilitation of TDPs extended to tax year 2017

Section 4B

The Finance Act 2015 imposed one time levy of super tax for rehabilitation for temporarily displaced persons [TDPs] on banking companies at the rate of 4% of income and other taxpayers having income equal to or exceeding Rs. 500 million at the rate of 3% of income. The Finance Act, 2016 extended super tax to tax year 2016.

The Finance Bill now proposes to further extend super tax for tax year 2017.

For this purpose, the term income (other than depreciation and business losses) 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;

Income Tax Significant amendments




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.

Tax rate on dividend enhanced

Sections 5 and 150, Division III of Part I and Division I of Part III of First Schedule

The Finance Bill proposes to enhance the general rate of tax on dividends from 12.5% to 15%, and in the case of dividends received from a mutual fund from 10% to 12.5%. A comparison of current rates and proposed rates is given below:

Category Current Rate

Proposed Rate

Dividend distributed by purchaser of power project, or power generation company

7.5% No change

Dividend received from a mutual fund

10% 12.5%

Dividend received from a stock fund (if fund’s dividend receipts are less than capital gains)

12.5% No change

Category Current Rate

Proposed Rate

Dividend received by a company from a collective investment scheme, REIT Scheme, or a mutual fund, other than a stock fund

25% No change

Other cases 12.5% 15%

Dividend from a Developmental REIT Scheme set up by 30 June 2018

50% of the

applicable rate

No change

Corresponding amendment has also been proposed in withholding tax rates on dividends under section 150 of the Ordinance.

Scope of tax on undistributed profits Revised

Section 5A

This section provided for levy of tax at 10% on undistributed reserves of a public company other than scheduled bank and modaraba, on specified conditions. This tax was not applicable if public company distributes 40% of its after tax profit or 50% of its paid up capital, whichever is less.

The Finance Bill proposes to substitute this section to levy tax on undistributed profits at 10% with effect from tax year 2017 on every public company other than a schedule bank and modaraba that does not distribute atleast 40% of its after tax profits within six months after the end of tax year through cash dividend or bonus shares.

• Tax shall not apply to:



- a company qualifying for exemption under clause 132 of Part I of Second Schedule; and

- a company in which not less than 50% shares are held by the Government

Consequent to the substitution, provision with respect to distribution equivalent to or more than 50% of paid up capital will no longer apply.

It is also proposed that bonus shares or cash dividends distributed before filing of tax return shall be taken as distribution of profits for the tax year 2017.

Tax on profit on debts enhanced

Section 7B, Division IIIA of Part I of First Schedule

Presently, a person other than a company is subject to tax on profit on debt as per below table:

S. No.

Profit on debt Rate of tax

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

10%

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

Rs. 2,500,000 + 12.5% of the amount exceeding Rs. 25,000,000

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

Rs 5,625,000 + 15% of the amount exceeding Rs. 50,000,000

The Finance Bill now proposes to provide flat rates as per below table:

S. No.

Profit on debt Rate of tax

1. Where profit on debt does not exceed Rs. 5,000,000

10%

2. Where profit on debt exceeds Rs. 5,000,000 but does not exceed Rs. 25,000,000

12.5%

3. Where profit on debt exceeds Rs. 25,000,000

15%

Tax on Builders and Developers

Section 7C, 7D and 8

The Finance Act 2013 introduced minimum tax on the following: • Income of builders from business of

construction, sale of residential, commercial or other buildings.

• Income of developers from the business of sale of residential, commercial and other plots.

However, the Finance Act 2016 abolished minimum tax regime and introduced fixed tax regime for builders and developers.

The Finance Bill now proposes to withdraw the fixed tax regime and charge tax on income of builders and developers under normal tax regime. However, where the projects were undertaken for the development and sale of residential commercial or other plots initiated and approved during tax year 2017, the same shall remain under fixed tax regime, provided:

• payment has been made during tax year 2017; and

• the Chief Commissioner has issued online schedule for advance tax installments to be paid by the developers under the rules 13U and




13ZB of the Income Tax Rules, 2002 respectively.

This exception is provided on project of development of plots and not on buildings which appears a mistake.

Consequent to proposed abolishment of fixed tax regime, corresponding amendments have been proposed in section 8 of the Ordinance.

Loan to Employees- Threshold for tax purposes enhanced

Section 13

Under this section the differential of profit charged by an employer from an employee on a loan less than the benchmark rate is chargeable to tax as salary income of an employee. However, provision of this section does not apply to a loan not exceeding Rs 500,000.

The Finance Bill proposes to enhance this threshold of Rs 500,000 to Rs 1,000,000.

Threshold of sales promotion, advertisement and publicity expenditure for pharmaceutical manufacturer enhanced

Section 21(0)

The Finance Act 2016 restricted deductible expenditure incurred by pharmaceutical manufacturer on account of sales promotion, advertisement and publicity upto 5% of turnover.

The Finance Bill proposes to enhance the limit from 5% to 10% of the turnover.

Depreciation on co-owned assets under musharika financing

Section 22

There has been dispute on entitlement of depreciation on a depreciable asset jointly owned by a taxpayer and Islamic Financial institution licensed by State Bank of Pakistan / SECP under musharika financing or diminishing musharika financing arrangements.

In order to address this anomaly, the Finance Bill now proposes that depreciation on such jointly owned depreciable asset shall be available to the taxpayer i.e. the person who acquired the asset under musharika arrangement.

Tax on capital gains enhanced

Section 37A, Division VII of Part I of First Schedule

Currently, capital gains on share of a public company, voucher of Pakistan Telecommunication Corporation, Modaraba Certificate, instrument of redeemable capital, and debt securities are subject to tax depending on holding period of such securities, at rates ranging from 7.5% to 15% in the case of filer, and 11% to 18% in the case of non-filer. Whereas, gain on securities acquired before 01 July 2012 are subject to tax at 0%.

The Finance Bill now proposes flat rate of 15% in the case of filer and 20% in the case of non-filer, where the security was acquired on or after 01 July 2013. Gain on securities acquired before 01 July 2013 shall be subject to tax at 0%.

Further, derivate products i.e. future commodity contracts are presently subject to tax at 5% in the case of filer and non-filer which will remain intact.

A comparison of existing and proposed rates is as under:



Holding months

Existing for 2017 Proposed for 2018

Filers Non Filers Filers Non Filers

12 15% 18%

**15% **20% 12 to 24 12.5% 16%

24 to 48 *7.5% *11%

More than 48 ***0% ***0% ****0% ****0%

*Securities acquired on or after 1 July 2012 **Securities acquired on or after 1 July 2013 ***Securities acquired before 1 July 2012 ****Securities acquired before 1 July 2013 It is noted that the Bill proposes to substitute “Division VII” in toto, and no proviso are part of proposed Division VII. Earlier, vide the Finance Act, 2016, Division VII was also substituted as a whole. However, from explanatory Circular No. 7 of 2016 dated 27 July 2016, it appeared that FBR considers that only rates table in Division VII is substituted by the Finance Act, whereas, provisos are still part of the statute, as such, instead of NCCPL, the mutual funds are liable to deduct capital gains tax, despite of the fact that the language of the Finance Act, 2016 was very clear in so far as substitution of Division VII is concerned. Therefore, the intendment drawn by the FBR through the aforestated explanatory circular is not in conformity to the provisions of the Finance Act, 2016.

Powers to grant exemptions and tax concession given to Board

Section 53

Currently, the Federal Government with the approval of Economic Coordination Committee [ECC] is empowered to grant exemptions and tax concessions under this Ordinance under specified situations like national security etc.

It is now proposed that FBR, with the approval of Minister Incharge and ECC, can exercise the powers to grant exemptions. Further, it is proposed

that all such notifications issued with effect from 1 July 2016 shall remain in force till 30 June 2018 except where rescinded earlier.

Limit of deductible education allowance enhanced

Sections 64AB and 60D

In case of individual tax payer the limit of deductible allowance for educational expenses is proposed to be enhanced from Rs. 1 million to Rs. 1.5 million.

Lower limit for tax credit on health insurance premium enhanced

Section 62A

It is proposed to enhance the lower limit for claiming tax credit in respect of health insurance premium or contribution paid to an insurance company from Rs 100,000 to Rs 150,000.

Tax credit to person registered under Sales Tax Act, 1990 withdrawn

Section 65A

Currently manufacturers with 90% of sales to persons registered under Sales tax Act 1990 are entitled to tax credit at the rate of 3% of tax payable.

The Finance Bill proposes to withdraw this tax credit.

Tax credit for enlistment extended

Section 65C

In order to promote listing of companies on registered stock exchanges in Pakistan, the Finance Act, 2010 introduced tax credit at 20% of




tax payable in the year of enlistment and the following tax year.

The period for claiming tax credit is now proposed to be extended from two to four tax years. Such companies would now be entitled to tax credit equal to 20% of tax payable during the first two years (including the year of enlistment) and at the rate of 10% of tax payable in the third and fourth year.

Taxation of dividend paid by non-resident company - anomaly removed

Section 94(3)

Section 94(3) provides that dividend paid by a non-resident company to a resident person shall be chargeable to tax under the head “Income from Business” or “Income from Other Sources”, as the case may be, unless the dividend is exempt from tax.

Section 5 of the Ordinance however provides taxation of dividends, irrespective of receipt from resident or non-resident company, under final tax regime.

Provisions of section 94(3) are thus seen as contradictory to provisions of section 5. To remove this anomaly, the Finance Bill proposes to omit sub-section (3) of section 94.

Taxation of profits and gains from Sui Gas Fields

Section 100

Section 100 contains provisions relating to taxation of profits and gains from production of oil and natural gas and exploration.

Currently tax payable on such profits and gains is computed in accordance with rules provided in Part

I of Fifth Schedule except the profits and gains attributable to production of petroleum and natural gas discovered before 20 September 1954.

It is now proposed that tax on profits and gains derived from Sui Gas field for tax year 2017 and onward shall also be computed under Part I of Fifth Schedule.

Taxation of NPO’s etc.

Section 100C

Tax credit to NPO (Non Profit Organizations), Trust and Welfare Institutions

Currently NPO’s, Trust or Welfare institution are entitled to tax credit equal to 100% tax payable including minimum tax and final tax, subject to the following conditions:

• Return has been filed,

• Withholding tax obligations including filing of statements are met.

It is now proposed to add another condition for entitlement of tax credit that administrative and management expenditure of such NPO and trust etc. should not exceed 15% of total receipts.

The proposed amendment though aims to introduce more stringent controls, however, the restriction of expenditure may not necessarily be seen as conducive for NPOs, especially, the fixed administrative and management expenditure such as salaries, depreciation etc. are to be incurred irrespective of quantum of receipts. Proposed restriction on expenditure can help in curbing use of this venture for personal or commercial gains, it may affect the genuine welfare activities.



Taxation of NPO

It is proposed to levy tax at the rate of 10% on surplus funds of a non profit organization. For this surplus funds have been defined to mean;

• Funds or monies not spent on charitable or welfare activities during the tax year.

• Funds or monies received during the tax year as donations, voluntary contributions, subscriptions and other income.

• Funds or monies are more than 25% of the total receipts of non profit organization received during the tax year.

• Funds or monies are not part of restricted funds i.e. the un-spent funds treated as revenue due to obligation placed by the donor.

Rate of Minimum tax enhanced

Section 113

Minimum tax under section 113 of the Ordinance is applicable in the case of a resident company, and an individual or association of persons having turnover of Rs. 10 million or above in tax year 2017 or in any subsequent tax year, where no tax is payable or paid for a tax year or the tax payable or paid is less than 1% of the turnover from all sources. The general rate of minimum tax is 1% of turnover.

The Finance Bill proposes to enhance the general rate of minimum tax from 1% to 1.25%.

Person not required to file the return of total income

Section 115

The Finance Bill proposes to extend the categories of persons not required to file the return of total

income. Now, a person shall not be required to file a return solely for the reason that he: • owns immovable property with a land area of

500 sq yards or more located in rating area; or

• owns a flat having a covered area of 2000 sq feet or more located in a rating area; or

• owns a motor vehicle having engine capacity above 1000 CC.

Extension of time for furnishing returns or other documents

Section 119

Currently an application can be made by the taxpayer for seeking extension in time for furnishing of return or other documents due to the following reasons:

• Absence from Pakistan

• Sickness or other misadventure, or

• Any other reasonable cause.

The Commissioner may, by an order in writing, grant the applicant an extension of time for furnishing the return total income.

The Finance Bill proposes that where Commissioner has not granted extension in time for furnishing return, taxpayer can make a request to the Chief Commissioner for grant of extension or further extension for a period not exceeding fifteen days unless there are exceptional circumstances requiring a longer time period for the same.




Provisional Assessment

Sections 122C, 114(6), 116(2A), 122, 127 and 137

It is proposed to withdraw the powers of the Commissioner to make a provisional assessment by omitting section 122C of the Ordinance and by amending corresponding relevant provisions of the Ordinance.

Best Judgement Assessment

Section 121

The Finance Bill proposes to enhance the scope of best judgement assessment by adding a person who, in the opinion of the Commissioner, is required to file the return of total income for a tax year but has failed to do so, or who fails to file the information required by the Commissioner for the period of less than twelve months in cases where:

• the person has died,

• the person has become bankrupt or gone into liquidation,

• the person is about to leave Pakistan permanently, or

• the Commissioner requires otherwise

Officers of Inland Revenue Services barred from appointment as Judicial Member of the Appellate Tribunal

Section 130

The second appellate forum i.e. Appellate Tribunal comprises of judicial and accountant members. Section 130 provides qualification for appointment of judicial members as under:

• A person who has exercised the powers of a District Judge and is qualified to be a Judge of the High Court

• A person who is or has been an advocate of a High Court and is qualified to be a Judge of the High Court

• A person who is an officer of Inland Revenue Service in BS-20 or above and is a law graduate.

The Finance Bill now proposes to bar appointment of an officer of Inland Revenue Service as judicial member. Earlier, this qualification was introduced in 2013 and was not welcomed by and large apprehending that it may affect independence of judiciary. The proposed amendment is therefore an attempt to enhance confidence of taxpayers over the appellate forums.

Tax assessed in Gilgit-Baltistan can be recovered in Pakistan

Section 146

Section 146 empowers the Commissioner to recover from a person who has been assessed to tax in Azad Jammu and Kashmir upon receipt of a certificate from the Deputy Commissioner of Azad Jammu and Kashmir.

Gilgit-Baltistan has also adopted the Income Tax Ordinance, 2001 and consequently the powers of the Commissioner have been extended to recover from a person tax assessed in Gilgit-Baltistan.

Threshold for advance tax payment by individuals enhanced

Section 147

Presently, an individual who has latest assessed taxable income of Rs. 500,000 or less, other than



income subject to final tax and salary income, is not required to pay advance tax.

The Finance Bill now proposes to enhance the threshold from Rs. 500,000 to Rs. 1,000,000.

Corporate Reporting Standard - Furnishing of information by financial institutions including banks

Section 165B and 182

Section 165B was introduced in 2015 requiring the banks and financial institutions to provide information regarding non-resident persons in prescribed manner for the purpose of automatic exchange of information under bilateral agreement or multilateral conventions. Subsequently, in September 2016, Pakistan signed OECD’s “Convention on Mutual Administrative Assistance in Tax Matters”.

For the purpose of section 165B, and being signatory to the Convention, the FBR introduced Common Reporting Standard [CRS] by inserting Chapter XII in the Income Tax Rules, 2002. A summary of CRS is given separately in this publication.

Since section 165B was applicable to the extent of information relating to non-resident persons only, whereas, the CRS covered reportable persons which include resident person as well, the Finance Bill proposes to align the enabling provisions of section 165B by including “reportable person” besides non-resident persons. The reportable person is defined in CRS as a person other than:

• a corporation the stock of which is regularly traded on one or more established securities markets, including any corporation that is a related entity of such corporation

• a Governmental entity

• an international organization

• a central bank

• a financial institution

Further, section 165B does not provide definition of financial institution, thus definition contained in section 2(24) is applicable. This definition is restricted to such institution defined as “financial institution” under the Companies Ordinance, 1984. On the other hand, CRS’s definition of “financial institution” means “a Custodial Institution, a Depository Institution, an Investment Entity or a Specified Insurance Company”.

To avoid any dispute and align the provisions of section 165B with CRS, the Bill proposes that the term “reportable person” and the “financial institution” shall have the meaning as provided in CRS.

The Bill also proposes penalty of Rs. 2,000 for each day of default subject to minimum penalty of Rs. 25,000 where a financial institution or reporting entity fails to furnish the information within due date as required under section 165B of the Ordinance.

Firm of “Cost & Management Accountants” eligible to conduct tax audit

Section 176

The Bill proposes appointment of firm of Cost & Management Accountants to conduct audit of income tax affairs of a person. Earlier, only firm of Chartered Accountants were entitled for such appointment.




Transfer pricing – audit and penalties

Sections 108, 182, and 230E

Under section 108 of the Ordinance, in respect of any transaction between persons who are associates, the Commissioner is empowered to distribute, apportion or allocate income, deductions or tax credits between the persons as is necessary to reflect the income that the persons would have realised in an arm‘s length transaction. For the purpose, Rules 20 to 27 of the Income Tax Rules, 2002 have been prescribed.

The Finance Act, 2016 introduced reporting requirement in section 108 of the Ordinance providing that every taxpayer entering into a transaction with its associates shall:

• maintain a master file and local file containing documents and information as may be prescribed;

• keep and maintain prescribed country-by-country report, where applicable;

• keep and maintain any other information and document in respect of transaction with its associate as may be prescribed; and

• keep the files, documents, information and reports specified above for the period as may be prescribed.

Upon requisition by the Commissioner, the above documents are required to be furnished within 30 days or such time as may be extended by the Commissioner upto 45 days or beyond in exceptional circumstances. It was expected that FBR will prescribe the extent of and manner in which the documents will be maintained and the information to be furnished, but so far no rules have been made in this regard.

The Bill now proposes establishment of “Directorate-General of Transfer Pricing” to conduct transfer pricing audit by insertion of section 230E. For the purpose, “transfer pricing audit” is meant as audit for determination of transfer price at arm’s length in transactions between associates, independent of audit of income tax affairs under sections 177, 214C or 214D of the Ordinance. The Bill also proposes that the Board may specify the criteria for selection of the taxpayer for transfer pricing audit and also specify the functions, jurisdiction and powers of the Directorate.

The Finance Bill also proposes to introduce penalties in relation to transfer pricing provisions contained in section 108 of the Ordinance in following manner:

Offence Penalty

Failure to maintain records required under the Ordinance or the rules made thereunder

Rs. 10,000 or 5% of the amount of tax on income, whichever is higher

Failure to furnish the information required or to comply with any other term of the notice served under section 176

Rs. 25,000 for the first default and Rs. 50,000 for each subsequent default

Failure to furnish Information or country-by-country report within the due date

Rs. 2,000 for each day of default subject to a minimum penalty of Rs. 25,000

Failure to keep and maintain document and information required under section 108 or the Rules

1% of the value of transactions, the record of which is required to be maintained

While the Bill proposes penalties, in relation to reporting requirements, which are there, but the related rules prescribing forms and manner have



not yet been prescribed. In absence of such rules, the penalties would not be effective.

Prosecution for non-compliance with notice requiring filing of return of income

Sections 114(4) and 191

Section 114(4) empowers the Commissioner to require any person to file return of income, within thirty days of service of notice in writing, or any longer or shorter period. Failure to comply with such notice entails penalty under section 182 equal to 0.1% of tax payable for the tax year for each day of default subject to maximum penalty of 50% of such tax payable, with minimum penalty of Rs. 20,000.

The Bill now proposes non-compliance to such notice as an offence punishable on conviction with a fine or imprisonment for a term not exceeding one year, or both.

Default surcharge rationalized

Section 205(1B)

Where a taxpayer is required to pay advance tax, and such liability is discharged less than 90% of its final tax liability, then default surcharge at 12% per annum is chargeable from the 01 April in that year to the date on which assessment is made or the 30 June of the financial year next following, whichever is earlier. This provision has adverse impact on person following special tax year as compared to person following normal tax year.

To rationalize the period of default in the case of person following special tax year, the Finance Bill proposes the default surcharge shall be calculated on and from the first day of the fourth quarter of the special tax year till the date on which assessment is made or the last day of special tax year, whichever is earlier.

Applicability of advance ruling for permanent establishment of non-resident restored

Section 206A

Advance ruling provisions were introduced vide the Finance Act, 2002, applicable in the case of non-resident persons, irrespective that such person has permanent establishment in Pakistan or not. The Finance Act, 2011 however restricted applicability of advance ruling provisions to such non-resident persons who do not have permanent establishment in Pakistan.

The Bill now proposes to lift the restriction placed on permanent establishment of non-resident person on seeking advance ruling.

Disclosure of information by EOBI

Section 216(3)

Section 216(3) of the Ordinance places restriction on disclosure of information by a public servant, except in specified cases / circumstances.

The Finance Bill proposes that such restriction on disclosure of information shall not be applicable on disclosure of information to Employees Old Age Benefit Insituttion in respect of salaries in statements furnished under section 165.

No reward to whistleblowers without evidence

Section 227B

The Finance Act, 2015 introduced rewards to whistleblowers in cases of concealment or evasion of income tax, fraud, corruption or misconduct providing credible information leading to detection of tax. The reward is not applicable if:




• the information provided is of no value

• the Board already had the information

• the information was available in public records, or

• no collection of taxes is made from the information provided from which the Board can pay the reward.

The Finance Bill now proposes that the claim of reward by the whistleblower shall be rejected, in addition to above reasons, if the information is not supported by any evidence.

Broadening of tax base

Section 230D

With the aim of broadening tax base, the Finance Bill proposes establishment of a “Directorate-General of Broadening of Tax Base”. The FBR shall however be specifying the functions, jurisdiction and powers of the Directorate by notification in the official Gazette.

Validation of notifications and orders

Section 241

The Finance Bill proposes section 241 to be inserted for the purpose of validation of notifications and orders issued and notified by the Federal Government, before 01 July 2017. Such notifications or orders shall now be deemed to have validly issued and notified, notwithstanding anything contained in any judgment of a High Court or the Supreme Court.

It appears to be an attempt to sanctify such notifications or orders issued without legal sanctity.

Withholding tax

Significant changes proposed in withholding tax provisions

(i) Tax collected on fertilizers is final

Tax collected at import stage on fertilizers imported by manufacturer of fertilizer is currently adjustable. The Bill proposes to exclude such imports from adjustable regime. The consequential effect of the proposed change will be that imports of fertilizer by manufacturer of fertilizer shall be treated as final tax. [Section 148(7) (b)]

(ii) Non-resident contractors to file option for FTR

Section 152(1A) read with section 152(1B) treats tax deduction from non-resident person on specified contracts as final tax. However, clause (41) of Part IV to the Second Schedule provides that such final tax shall apply only when such non-resident opts for FTR within three months of commencement of tax year.

Due to incorrect placement of the clause, the Bill proposes to delete it, and insert a proviso in section 152(1B) for filing of option to treat tax deduction as final tax. However, no time has been specified. Therefore, a non-resident person appears to elect for FTR at any time on or before filing of return of income for relevant tax year. [Section 152(1B)]

(iii) Exemption certificate to non-resident persons

Permanent establishment of non-resident company can obtain an exemption certificate from withholding tax from payments received from sale of goods, rendering of services and execution of contract under section 152(2A).



It has been proposed that non-resident person can also obtain exemption certificate from deduction of tax under section 152(1A) in respect of specified contracts, provided the tax deduction is adjustable. [Section 152(1A)]

(iv) “Cotton seed” or “cotton seed oils”

Currently sale of “cotton seed or edible oils” are subject to withholding tax under section 153(1) (a) at 1.5% of the gross amount payable. The language apparently creates an anomaly as to whether cotton seeds oil is meant or only cotton seeds is subject matter.

To remove this anomaly, the Bill proposes to clarify that “cotton seeds and edible oils” means cotton seeds oil and edible oils. However, existing provision contains “or”, whereas, the Bill used “and” in between cotton seeds and edible oils.

(v) Retention of service charges to be treated as paid for the purpose of deduction of tax

Payment made to resident person for rendering or providing of services is liable to deduction of tax under section 153(1) (b).

Recently, the Honorable Supreme Court of Pakistan held that tax is not deductible on retention of service charges, as such, minimum tax under section 153(3)(b) does not apply.

The Bill now proposes to clarify that where the service charges are retained by the agent or any other third person, the said person shall be treated to have been paid service charges and the recipient shall collect tax along with payment from the agent or other third person.

The proposed amendment appears to nullify the effect of Apex court’s judgment, prospectively. However, still the proposed

amendment requires collection of tax, whereas, minimum tax under section 153(3) (b) applies on tax deductible. [Section 153(1) (b)]

(vi) Revision of withholding tax statements

Every withholding tax agent is required to file prescribed withholding tax statement in respect of taxes deducted or collected.

Currently there is no specific provision to allow revision of a statement filed in case any error, omission or wrong statement is discovered subsequent to filing.

The Bill now proposes an option to revise withholding tax statement within sixty days of filing of the statement if any omission or wrong statement is discovered. [Section 165]

(vii) Reduction in tax rate on purchase, registration and transfer of motor vehicles

The Bill proposes to reduce the amount of tax to be collected from filers on purchase, registration and transfer of motor vehicles having engine capacity upto 850cc, from Rs. 10,000 to Rs. 7,500; 851cc to 1000cc, from Rs. 20,000 to Rs. 15,000; and 1001cc to 1300cc, from Rs. 30,000 to Rs. 25,000. [Section 231B]

(viii) Collection of tax on leasing of vehicles to non-filers

Presently, collection of tax is required on lease of vehicles to a non-filer by a leasing company or a scheduled bank or an investment bank or a modaraba or a development financial institution. There has been confusion about applicability of this collection of tax on shariah compliant lease of vehicles.




The Bill now seeks to modify the provisions to clarify that lease of vehicles to non-filers, whether shariah compliant or conventional mode, either through ijara or otherwise, shall be subject to collection of tax.

Further, the Bill seeks to extend the tax collection obligations to Non-Banking Financial Institutions as well. [Section 231B (1A)]

(ix) Collection of tax by stock exchange from members to be final tax

The Bill proposes that the tax to be collected by stock exchange from its members on purchase/ sale of shares in lieu of their commission income shall now be final tax as against adjustability thereof per current provision. [Section 233A]

(x) Final tax regime for CNG stations extended

Currently, tax collected on gas consumption bills of CNG stations under section 234A is treated as final tax in respect of income of CNG stations arising from consumption of gas.

The Bill proposes that taxes collected on electricity bills of CNG stations under section 235 shall also be taken as final tax in respect of income of CNG stations arising from consumption of gas, by making amendment in section 234A. Accordingly, now taxes collected under section 234A and 235 on gas and electricity consumption bills shall be combined final tax in respect of income of CNG stations.

The proposed finality of tax collected on electricity bills creates an anomaly, as the enabling provisions of section 235 treats such tax as advance tax.

The Bill also proposes to clarify that the amount of gas and electricity consumption bills subject to collection of tax under section 234A / 235 shall be inclusive of sales tax and all incidental charges. [Sections 234A and 235]

(xi) Tax on electricity bills to be treated as minimum tax on annual basis

Currently the law provides that tax collected from commercial or industrial consumer on electricity bills upto Rs. 30,000 per month shall be treated as minimum tax [non-refundable]. Consequently, if in any particular month if electricity bill exceeds this limit, then tax becomes adjustable.

The Bill proposes to substitute this threshold to Rs. 360,000 per annum. Now, irrespective of monthly bills, if aggregate amount of electricity bills exceed Rs. 360,000 per annum, then tax collected will be adjustable, otherwise it will be minimum tax.

The Bill has also proposed collection of tax on electricity bill, inclusive of sales tax and all incidental charges. Accordingly, the above threshold of Rs. 360,000 shall also be considered inclusive of sales tax and all incidental charges. [Section 235A]

(xii) Reduction in tax rate for internet, mobile telephone and prepaid internet or telephone cards

Currently, tax is required to be collected at 14% of the amount of bill or sale price of internet, mobile telephone and prepared internet or telephone cards. The Bill proposes to reduce this rate to 12.5%. [Section 236]

(xiii) Collection of tax on transfer of immovable property



Person responsible for registering or attesting transfer of immovable property is required to collect tax at the time of registering or attesting the transfer at the time of sales / purchase of property.

The Bill proposes to include the person recording the transfer of immovable property as also responsible to collect this advance tax.

The Bill further propose that the person responsible for registering, recording or attesting transfer shall include the person responsible or registering, recording or attesting transfer for local authority, housing authority, co-operative society and registrar of properties. This amendment is proposed in section 236C, 236K and 236W.

It is further proposed that where acquisition and disposal of immovable property takes place within the same tax year, the tax collected shall be the minimum tax for the transferor on sale of property.

[Section 236C 236K and 236W]

(xiv) Collection of tax on sale of “batteries” to introduced

Tax is required to be collected from sales to distributor, dealers, wholeseller and retailers of various sectors under section 236G and 236H.

The Bill proposes to introduce collection of tax on sales of ‘batteries’ by a manufacturer or commercial importer to distributor, dealers, wholeseller, at 0.1% in the case of filer and 0.2% in the case of non-filer. Further, the Bill proposes collection of tax on sale of batteries to a retailer or to another wholesaler, by manufacturer, distributor, dealer, wholesaler, or commercial importer, at 0.5% of gross

amount of sales. The tax so collected is adjustable. [Section 236G and 236H]

(xv) Advance tax on insurance premium

Currently, advance tax collection is required by insurance companies on life insurance premium if exceeding Rs. 200,000 per annum at 1%. The Bill proposes to enhance this amount to Rs. 300,000.

(xvi) Advance tax on tobacco

Tax collection has been proposed on purchase value of tobacco from every person purchasing tobacco including manufacturer of cigarettes. The proposed tax shall be collected by Pakistan Tobacco Board at the rate of 5 percent of the purchase value of tobacco, which shall be adjustable [Section 236X].

Rate for non-filers enhanced

The Finance Bill proposes to enhance rates of withholding tax from non-filers as under:

Section Nature of transaction

Rates for non-filer

Existing Proposed

152(1A) Payment for specified contracts to non-residents

12% 13%

152(2A) Payment to a permanent establishment of non-resident person for sale of goods

6% in the case of

company

7% in the case of

company

6.5% in the case of others

7.75% in the case of

others

152(2A) Payment to a permanent establishment

12% in the case of

company

14% in the case of

company





Rates for non-filer

Existing Proposed

of non-resident person for services

15% in the case of others


others

152(2A) Payment to a permanent establishment of non-resident for execution of contract

12% 13%

153(1) Payment to a resident person for sale of goods

6% in the case of

company

7% in the case of

company

6.5% in the case of others


others

153(1) Payment to a resident person for services

12% in the case of

company

14.5% in the case of company



others

153(1) Payment to a resident person for execution of contract

10% in the case of

company

12% in the case of

company



others

155 Payment of rent of immovable property to a company

15% 17.5%

156 Prizes and winnings

20% 25%

156A Commission or discount to

15% 17.5%


Rates for non-filer

Existing Proposed

petrol pump operator

234A Gas bill of a CNG station

4% 6%

236A Advance tax on auction of property

10% 15%

236H Advance tax on sale to retailers

0.5% 1%

Second Schedule

Part I - Exemptions

The Bill proposes to insert and modify certain exemptions in Part I of the Second Schedule, as listed below:

New Exemptions

Exemption of income to specific entities Clause (66)

• Asian Infrastructure Investment Bank [AIIB]

• Directors, Alternate Directors, the President, Vice-Presidents, and other officers or employees of AIIB

• Gulab Devi Chest Hospital

• Pakistan Poverty Alleviation Fund

• National Academy of Performing Arts



Profit on debt of Japan International Cooperation Agency [JICA] Clause (140A)

Any profit on debt received by JICA, from loan agreement for Islamabad-Burhan Transmission Reinforcement Project (Phase-I)

Income of political parties Clause (143) Any income derived by a political party registered under the Political Parties Order, 2002 with the Election Commission of Pakistan.

Part IV- Exemptions from application of specific provisions

Cash withdrawals by branchless banking agents Clause (101)

The Bill proposes to exempt “Branchless Banking (BB) Agent Account” from deduction of tax under section 231A at the time of cash withdrawal utilized to render branchless banking services to customers.

Vehicle leased under Prime Minister’s Youth Business Loan Scheme Clause (102)

The Bill proposes to exempt light commercial vehicles leased under the Prime Minister’s Youth Business Loan Scheme from collection of advance tax by leasing company and others as per section 231B(1A).

Exemption to Hajj operators extended Clause (72A)

The Bill proposes to extend the concession to Hajj operators in relation to section 21(l) and 152 applicable until tax year 2016, for tax year 2017

Limit on raw material exempt from collection of tax enhanced Clause (72B)

This clause provides exemption from collection of tax on imports of raw material by industrial undertakings on fulfillment of specified conditions. One of such conditions is that the quantity of raw material to be imported, being sought to be exempted from collection of advance tax, shall not exceed 110 percent of the quantity imported or consumed during the previous tax year. The Finance Bill proposes to enhance this limit from 110 percent to 125 percent.

Concessionary Minimum Tax Regime for specified services sectors extended Clause (94) and section 153

Through amendment vide the Finance Act 2015, the tax deducted from payment on account of services to companies has been treated as minimum tax. For services sectors, where the margin are narrow, the rate of tax deduction to be treated as minimum tax was quite high, even exceeding their margins.

In order to address the grievances of such service sectors, Clause (94) was introduced by the Income Tax (Second Amendment) Ordinance, 2015 and ratified by Income Tax (Second Amendment) Act, 2016 to provide exemption from applicability of minimum tax on specified sectors from 1 July 2015 to 30 June 2016 and later extended to 30 June 2017 by Finance Act 2016.

Under this concessionary regime, the specified sectors are required to pay minimum tax at 2 percent of gross turnover from all sources. Further, it is required to file undertaking to the Commissioner for audit of income tax affairs for tax years 2016 or 2017, as the case may be.




Upon filing such undertaking, the Commissioner was empowered to issue exemption certificate from withholding tax under section 153 by paying 2 % tax on turnover.

The Bill seeks to extend the benefit of reduced rate of 2% minimum tax upto 30 June 2018. Further, for tax year 2018, a company falling under specified sectors will be required to file undertaking till November 2017.

Further, the benefit of this clause is proposed to be extended to “Services rendered by Pakistan Stock Exchange Limited”.

Exemption from collection of tax on foreign produced films etc. withdrawn Clause (56A)

The Finance Act, 2013 introduced section 236E regarding advance tax on foreign-produced TV plays and serials, and simultaneously, an exemption was introduced from applicability of collection of advance tax on import under section 148(7) for persons covered under section 236E.

The Finance Act 2016 omitted section 236E however, clause 56A was not omitted. The Bill proposes to omit this redundant clause now.

Seventh Schedule

Taxation of banking companies

Adjustments for notional gain or loss Rule (1) (g) of Seventh Schedule

Rule 1(g) requires to exclude adjustment made in the annual accounts, on account of application of International Accounting Standards 39 and 40 for the purpose of computing taxable income.

The Bill proposes to add an explanation clarifying that no notional loss shall be allowed as deduction or notional gain shall be charged to tax on any

investment under any regulation or instruction unless all the events that determine such gain or loss have occurred and gain or loss can be determined with reasonable accuracy.

Clause 1 (g) refers to adjustments relating to IAS 39 and 40. Although IAS 39 and 40 have not been adopted for Banks in Pakistan, treatment of certain transactions e.g. trading securities, forward contracts and derivatives is in accordance with IAS 39. In the past different treatment has been accorded by the department in assessing unrealized losses and gains arising from these transactions. Unrealized losses are being disallowed and unrealized gain is included in taxable profits. Perhaps the addition of these wordings would remove this anomaly and now both unrealized losses and gains would be excluded from taxable income until the transaction is concluded.

Computation of Capital Gains on listed securities

Statement filing date extended for NCCPL

Rule 1(6) of Eighth Schedule

NCCPL is required to furnish to the Board a statement of capital gains and tax computed thereon within 30 days of the end of each quarter in the prescribed manner and format.

The Bill proposes to extend the time for filing of the statement to 45 days. Extended date for payment of tax collected by NCCPL

Rule 4 of Eighth Schedule

The NCCPL is liable to collect capital gain tax on behalf of the Board, which is required to be deposited in the separate bank account with



National Bank of Pakistan alongwith the interest accrued thereon, on yearly basis by 31 July, next following the financial year in which the amount was collected.

The Bill now proposes to extend the time for deposit of such amount to 15 August, next following the financial year in which the amount was collected.






Tier-1 Retailers’ regime to govern through Sales Tax Act

Section 2(43A) & Section 3(9A)

Retailers’ sales tax regime is presently mainly governed through the Sales Tax Special Procedure Rules, 2007 as amended vide notification SRO.608 (I)/2014, dated 02 July 2014, whereby, the tier-1 retailers, as specified under Rule-4 thereof, are required to pay sales tax at standard rate or alternatively at the rate of 2% of their total turnover in view of the provisions of Rule 5(1) of the Special Procedure Rules.

The vires of foregoing retailers’ sales tax regime were challenged before the Hon’ble Lahore High Court in Writ Petition No.26772 of 2016. The Hon’ble High Court vide its Order dated 11 May 2016, struck down the provisions of Special Procedure Rules, as substituted vide amendment notification SRO.608(I)/2014.

Now, the Finance Bill proposes to provide legal backing to the sales tax regime of ‘Tier-1 Retailers’ by inserting sub-section (9A) to Section 3 of the Sales Tax Act, 1990 (the Act), which is pari-materi to the regime as already governed through Special Procedure Rules.

Consequently, the Bill also proposes to insert the definition of term ‘Tier-1 Retailer’ under Section 2(43A), which provides threshold limit and qualification criteria for tier-1 retailers, which is same as already described under Rule 4 of the Special Procedure Rules.

Further tax @ 2% applicable on zero-rated supplies

Section 3(1A) & Section 4

Levy of further tax was reinforced vide Finance Act, 2013 under Section 3(1A) of the Act for taxable

supplies made to a person who has not obtained registration number. The rate of further tax was enhanced from 1% to 2% vide Finance Act, 2015.

The Bill proposes to extend the applicability of further tax on zero-rated supplies through Section 3(1A) and Section 4 of the Act viz-a-viz:

• Good exported or Goods specified under Fifth Schedule to the Act;

• Supply of stores and provisions for consumption aboard a conveyance proceeding to a destination outside Pakistan as specified in Section 24 of the Customs Act, 1969;

• Goods subject to zero-rating under the notifications issued by the Federal Government;

• Such other goods as may be specified by FBR through a general order.

Although, the Bill does not clarify whether levy of further tax on zero-rated supplies will apply on export of goods from Pakistan, yet it may be construed by plain reading of Section 3(1A) that further tax should not apply on supplies exported to non-residents, as they are not liable to sales tax registration.

Imports destined for non-tariff areas of Pakistan

Section 3(1) (b)

The Bill proposes to effect a clarificatory amendment in Clause (b) of Section 3(1) regarding application of sales tax on imports destined for non-tariff areas. After proposed amendment, Clause (b) should read as follows:

(b) goods imported into Pakistan, irrespective of their final destination of Pakistan as specified in

Sales Tax Significant Amendments




clause (2) of Articles 1 of the Constitution of Islamic Republic of Pakistan.

According to the provisions of Clause (2) of Article-1 of the Constitution, the territories of Pakistan inter-alia include all four Provinces, Federal Capital, Federally Administered Tribal Areas, and such States and territories as are or may be included in Pakistan, whether by accession or otherwise.

By means of the proposed additions to Clause (b) of Section 3, it is clarified that the goods imported into Pakistan shall be subject to levy of sales tax irrespective of their consumption within the tariff or non-tariff areas of Pakistan.

Legal backing to the existing sales tax notifications till 30 June 2018

Sections 13(6) & 13(7)

The Bills seeks to insert two provisos to Section 13(7) to provide legal cover till 30 June 2018 to all such sales tax notifications issued earlier, but not yet rescinded viz-a-viz:

• Notifications issued prior to 01 July 2016

• Notifications issued on or after 01 July 2016

Further, the Bill proposes to empower the Board instead of Federal Government to place before the National Assembly all exemption notifications issued under Section 13 during a financial year.

Appointment and jurisdiction of Inland Revenue authorities

Sections 30(1), 30(2), 30(2A), 30(2B), 30(3), & 30(4)

The Bill proposes to appoint the following as Inland Revenue authorities:

• District Taxation Officer

• Assistant Director Audit

Further, the Bill proposes to insert provisions to empower the Chief Commissioners Inland Revenue to assign jurisdiction to their subordinate Commissioners Inland Revenue to perform their functions as directed. Presently, the Federal Board of Revenue assigns the jurisdiction of sales tax and Federal excise cases directly to the Commissioners Inland Revenue.

Penalty on counterfeited cigarettes

Sr.No.23 to the Table under Section 33

The Bill proposes to impose strict penalties in case any person who manufactures, possesses, transports, distributes, stores or sells cigarette packs without or with counterfeited, tax stamps, banderoles, stickers, labels or barcodes, as follows:

• Confiscation and destruction of cigarettes stock;

• Rs.25,000 or 100% of the amount of tax involved, whichever is higher;

• Conviction by a Special Judge for a term upto 5 years and/or additional fine which may extend to an amount equal to the loss of tax involved.

The vehicles used for transportation of non-conforming or counterfeited cigarettes packs may also proposed to be permanently seized. Further, the premises used for sale of counterfeited cigarettes can also be sealed under the proposed insertion.



Stay of recovery until decision of appeal by Commission (Appeals) subject to payment of 25% of tax demand

Section 48(1) (f)

The Bill seeks to insert a proviso to Section 48(1) (f) to provide relief against recovery proceedings to such taxpayers whose appeal is pending for decision before the Commissioner (Appeals) subject to the condition that taxpayer deposits 25% of the amount of tax due.

The proposed insertion harmonizes the provisions of Sales Tax Act with Income Tax laws, however the limit of 25% seems quite high considering the quantum of tax demands in sales tax cases. Further, this contradicts with numerous judgments of the superior courts that tax demands should not be recovered until the matter goes through at least one judicial scrutiny.

Service of order, decisions, etc. through electronic means

Section 56(1) (d) & 56(2) (d)

The Bill seeks to insert new clauses under Section 56 to legalize the service of electronically transmitted notices, orders or any other requisition to be served to a public or private limited companies. This transmission may either be through department’s emails or through e-folder as maintained for the purpose of e-filing of sales tax-cum-Federal excise returns.

Validation of notifications/orders issued before Finance Act, 2017

Section 74A

A new provision is proposed to be inserted to validate the notifications and orders issued by the Federal Government before the commencement of the Finance Act, 2017, so as to override the effect of any judgements of the honorable superior courts of Pakistan.

Board to assume broader role with approval of the Minister Incharge of the Federal Government

Sections 3(2), 3(3A), 3(5), 4(c), 7(3), 7(4), 7A (1), 7A (2), 8, 13(2) (a), 60, 65, and 71(1)

Powers to issue notifications under the relevant sections is proposed to be transferred from Federal Government to the Federal Board of Revenue with the approval of the Minister Incharge of the Federal Government in respect of the following:

• Exclusion of applicability of further tax under section 3(1A).

• Mode and manner of chargeability, collection and payment of any taxable goods at any rate of tax.

• Levy of extra tax in addition to sub-section (1), (2) and (4) of section 3.

• Goods chargeable to tax at the rate of zero percent.

• Special Order/Notification for adjustment of input tax against output tax.

• Chargeability of sales tax on the difference between the value of supply for which the goods are acquired and the value of supply for




which the goods, either in the same state or on further manufacture are supplied.

• For minimum value addition required to be declared for supply of goods and to waive the requirement of audit or scrutiny of records if such minimum value addition is declared.

• Non claimability/deduction of input tax.

• Exemption of any taxable supplies.

• Import of goods/class of goods without payment of the whole or any part of tax payable to the registered persons for temporary import with a view to subsequent exportation and registered manufacturer-cum-exporters who import raw material and intermediary products for further manufacture of goods meant for export.

• Exemption of tax not levied or short levied as a result of general practice.

• Special procedure for scope and payment of tax, registration, bookkeeping and invoicing requirements and returns etc.

The proposed broadening of the role of the Board would probably override the effect of various judgements of superior courts, whereupon, the orders and/or notifications issued by the Federal Government were struck down. One of the landmark judgment of the Hon’ble Supreme Court of Pakistan reported on this matter has been passed in Civil Appeals No.1428 to 1436 of 2016, dated 18 August 2016.

Exclusion of fertilizers from retail price regime

Third Schedule

Fertilizers other than urea fertilizers are subject to sales tax at standard rate on retail price basis under Section 3 read with Third Schedule to the Act.

Whereas, urea fertilizers are subject to reduced rate of sales tax at 5% under Eighth Schedule of the Act.

The Bill now proposes to omit Entry No.32 (fertilizers) from Third Schedule with corresponding change in Eighth Schedule, as a result certain fertilizers proposed to be chargeable to fixed sales tax regime through proposed insertion in Eighth Schedule, whereas, fertilizers which are not proposed to be mentioned in Eighth Schedule will be chargeable to sales tax at standard rate of sales tax and will be excluded from retail sales tax regime.

Scope of zero-rating extended to preparations for young children

Fifth Schedule – Sr.No.12 (xvii)

Sales tax zero-rating is admissible on preparations for infant use put up for retail sale, subject to the limitations and conditions as laid down under Chapter XIV of Sales Tax Special Procedure Rules, 2007.

According to the description provided under Pakistan Customs Tariff, it inter-alia covers food preparations of flour, groats, meal starch or malt extract.

The Bill now seeks to extend the zero-rating facility on food preparations for young children in addition to infants, also put up for retail sale.

Extra tax on lubricating oils proposed to be withdrawn

Amendment in Chapter XIII of Sales Tax Special Procedure Rules, 2007 (notification yet to be issued)

It is proposed under the Salient Features issued by FBR that levy of extra tax @ 2% will be withdrawn



through an amendment notification, as applicable under Rule 58S of the Chapter XIII of Sales Tax Special Procedure Rules, 2007. However, this notification has not yet been issued.

The withdrawal of extra tax would enable the industrial consumers to avail input tax adjustments on purchases of lubricating oils, which is presently restricted for input tax under Clause (c) of Section 8(1) of the Act.

Withdrawal of withholding sales tax against purchases made from the registered persons

Amendment in Sales Tax Special Procedure (Withholding) Rules, 2007 (notification yet to be issued)

The Salient Features of Federal Budget also indicate that sales tax withholding will be withdrawn on purchases of taxable goods by a registered buyer from any registered supplier with the exception of advertisement services.

Under the provisions of Rules 2(2) and 2(2A) of the Sales Tax Special Procedure (Withholding) Rules, 2007, a registered buyer of the taxable goods is required to withhold and pay sales tax at the rate of one-fifth or one-tenth of the sales tax amount appearing on the sales tax invoice as issued by a registered supplier.

Thus, when the notification to above effect will be issued, withholding of sales tax will not be required against the invoices issued by the registered suppliers. This seems to lessen considerably the burden of unnecessary compliance.

Enhancement of sales tax rate applicable for steel sector

Chapter XI of Sales Tax Special Procedure Rules, 2007 (notification yet to be issued)

The existing sales tax rate of Rs.9 per unit of electricity as applicable for steel sector under Rule 58H of Chapter XI of Sales Tax Special Procedure Rules, 2007 is proposed to be enhanced to Rs.10.5 per unit of electricity consumed. However, notification to this effect is not yet issued.

Proposed amendments in five export sector regime

SRO.1125 (I)/2011, dated 31 December 2011 (notification yet to be issued)

Following amendments are also proposed in five export sectors sales tax regime as applicable under SRO.1125 (I)/2011, however notification to this effect is yet awaited:

• Reduced rate of 5% on retail sales of finished goods of five export sectors will be enhanced to 6%.

• Commercial import of fabrics will be subject to sales tax at 6%, as such existing zero-rating on imports of fabrics will be withdrawn.

Exemptions proposed under Sixth Schedule

Table-1 (Misc. goods)

S. No. Description of goods PCT heading

97 Markers and porous tipped pens 96.08

100A Scope of exemption proposed to be enhanced to cover plant, machinery appliances and

Respective headings





accessories in relation with exemption on goods meant for construction and operation of Gwadar Port and development of Gwadar Free Zone. Equipments

100C Vehicles imported by China Overseas Ports Holding Company Limited (COPHCL) and its operating companies, namely:-

i. China Overseas Ports Holding Company Pakistan (Private) Limited;

ii. Gwadar International Terminal Limited

iii. Gwadar Marine Services Limited; and

iv. Gwadar Free Zone Company Limited;

For the period of twenty-three years for construction, development and operations of Gwadar Port and Free Zone Area subject to limitations, conditions prescribed under PCT heading 9917(3)

134 Goods received as gift or donation from a foreign government or organization by the Federal or Provincial Governments or any public sector organization subject to recommendations of the Cabinet Division and concurrence by the Federal Board of Revenue.

9908


135 Sunflower and canola hybrid seeds meant for sowing

Respective heading

136 Combined harvesters upto five years old

8433.5100

137 Single cylinder agriculture diesel engines (compression-ignition internal combustion piston engines) of 3 to 36 HP, and CKD kits thereof

8408.9000

Table-3 (Solar energy)

Followings items used for solar energy systems are proposed to be exempted: S. No Description of goods PCT heading

14. Solar Power Systems. 8501.3110

8501.3210

(1) Off–grid/On-grid solar power system (with or without provision for USB / charging port) comprising of :

(i) PV Module

(ii) Charge controller

(iii) Batteries for specific utilization with the system (not exceeding 50 Ah in case of portable system).

8541.4000

9032.8990

8507.2090

(iv) Essential connecting wires (with or without switches).

(v) Inverters (off-grid/ on-grid/ hybrid with provision for direct connection/ input renewable energy source and with Maximum Power Point Tracking (MPPT).

(vi) Bulb holder

8507.3000

8507.6000

8544.4990

8504.4090



S. No Description of goods PCT heading

(2) Water purification plants operating on solar energy.

8536.6100

8421.2100

Table -3 (Renewable Energy technology)

Exemption proposed to apply for goods useable for promotion of renewable energy technology also extended to items used for conservation of energy:


15. SMD/LED/LVD street lights, with or without ballast, PV module, fitting and fixtures

Tubular day lighting device.

(viii) LED bulb/tube lights.

(ix) Invertors (off grid/on grid/ hybrid) with provision for direct connection/input from renewable energy source and with Maximum Power Point Tracking (MPPT), charge controllers and solar batteries.

(x) Light emitting diodes (light emitting in different colors).

(xi) Water pumps operating on solar energy along with solar pump controllers

(xii) Energy saver lamps of varying voltages

(xiii) Energy Saving Tube Lights.

(xiv) Sun Tracking Control System

(xv) Invertors (off-grid/on grid/hybrid) with provision for direct connection / input from renewable energy source and with Maximum Power Point Tracking (MPPT).

9405.4090

8539.3290

8543.7090

9405.5010

8543.7090

8504.4090

9032.8990

8507.0000

8541.5000

8413.7010

8413.7090

8504.4090

8539.3110

8539.3210

8539.3120

8539.3220

8543.7090


(xvi) Charge controller/ current controller.

8504.4090

9032.8990

Table-3 (Manufacturing of LED lights)


Conditions

15A Parts and components for

manufacturing LED lights:

(i) Aluminum housing/ shell for LED (LED light fixture)

(ii) Metal clad printed circuit boards (MCPCB) for LED

(iii) Constant current power supply for of LED lights (1-300W)

(iv) Lenses for LED lights

9405.1090

8543.0000

8504.4090

9001.9000

8543.0000

8504.4090

9001.9000

If imported by LED light manufacturers Registered under the Sales Tax Act, 1990 Subject to annual quota determination by the Input Output Co-efficient Organization (IOCO)”;

Table-3 (Renewable source of energy e.g. solar, wind, geothermal, etc.)

Serial No. 14 is proposed to be substituted by serial No. 14A whereby the exemptions provided on items for dedicated use with renewable source of energy like solar, wind, geothermal etc. are being rationalized as follows:


14A. Following systems and items for dedicated use with renewable source





of energy like solar, wind, geothermal etc.

1.(a) Solar Parabolic Trough Power Plants.

(b) Parts for Solar Parabolic Power Plants.

(i) Parabolic Trough collector’s modules.

(ii) Absorbers/Receivers tubes.

(iii) Steam turbine of an output exceeding 40MW.

(iv) Steam turbine of an output not exceeding 40MW.

(v) Sun tracking control system.

(vi) Control panel with other accessories.

8502.3900

8503.0010

8503.0090

8406.8100

8406.8200

8543.7090

8537.1090

2. (a) Solar Dish Stirling Engine.

(b) Parts for Solar Dish Stirling Engine.

(i) Solar concentrating dish.

(ii) Sterling engine.

(iii) Sun tracking control system.

(iv) Control panel with accessories.

(v) Stirling Engine Generator

8412.8090

8543.7000

8543.7000

8543.7090

8406.8200

8501.6100

3.(a)Solar Air Conditioning Plant

(b) Parts for Solar Air Conditioning Plant

(i) Absorption chillers.

(ii) Cooling towers.

(iii) Pumps.

(iv) Air handling units.

8415.1090

8418.6990

8419.8910

8413.3090

8415.8200


(v) Fan coils units.

(vi) Charging & testing equipment.

8415.9099

9031.8000

4.(a) Solar Desalination System

(b) Parts for Solar Desalination System

(i) Solar photo voltaic panels.

(ii) Solar water pumps.

(iii) Deep Cycle Solar Storage batteries.

(iv) Charge controllers.

(v) Inverters (off grid/on grid/ hybrid) with provision for direct connection / input from renewable energy source and with Maximum Power Point Tracking (MPPT)

8421.2100

8541.4000

8413.3090

8507.2090

9032.8990

8504.4090

5. Solar Thermal Power Plants with accessories.

8502.3900

6. (a) Solar Water Heaters with accessories.

(b) Parts for Solar Water Heaters

(i) Insulated tank

(ii) Vacuum tubes (Glass)

(iii) Mounting stand

(iv) Copper and Aluminum tubes

(c) Accessories:

(i) Electronic controller

(ii) Assistant/ feeding tank

(iii) Circulation Pump

(iv) Electric heater/ immersion rod (one piece with one solar water heater)

8419.1900

7309.0000

7310.0000

7020.0090

Respective headings

Respective heading




(v) Solenoid valve (one piece with one solar water heater)

(vi) Selective coating for absorber plates

7. (a) PV Modules.

(b) Parts for PV Modules

(i) Solar cells.

(ii) Tempered Glass.

(iii) Aluminum frames.

(iv) O-Ring.

(v) Flux.

(vi) Adhesive labels.

(vii) Junction box & cover.

(viii) Sheet mixture of paper and plastic

(ix) Ribbon for PV Modules (made of silver &Lead).

(x) Bypass diodes.

(xi) EVA (Ethyl Vinyl Acetate) Sheet (Chemical).

8541.4000

8541.4000

7007.2900

7610.9000

4016.9990

3810.1000

3919.9090

8538.9090

3920.9900

Respective headings

8541.1000

3920.9900

8. Solar Cell Manufacturing Equipment.

(i) Crystal (Grower) Puller (if machine).

(ii) Diffusion furnace.

(iii) Oven.

(iv) Wafering machine.

(v) Cutting and shaping machines for silicon ingot.

(vi) Solar grade polysilicon material.

(vii) Phosphene Gas.

8479.8990

8514.3000

8514.3000

8486.1000

8461.9000

3824.9999


(viii) Aluminum and silver paste. 2853.9000

Respective headings

9. Pyranometers and accessories for solar data collection.

9030.8900

10. Solar chargers for charging electronic devices.

8504.4020

11. Remote control for solar charge controller.

8543.7010

12. Wind Turbines.

(a) Wind Turbines for grid connected solution above 200 KW (complete system).

(b) Wind Turbines upto 200 KW for off-grid solutions comprising of:

(i) Turbine with Generator/ Alternator.

(ii) Nacelle with rotor with or without tail.

(iii). Blades.

(iv). Pole/ Tower.

(v). Inverter for use with Wind Turbine.

(vi). Deep Cycle Cell/ Battery (for use with wind turbine).

8412.8090

8412.8090

Respective headings

8507.2090

13. Wind water pump 8413.8100

14. Geothermal energy equipment.

(i) Geothermal heat pumps.

(ii) Geothermal Reversible Chillers.

(iii) Air handlers for indoor quality control equipment.

8418.6100

8418.6990

8415.8300





(iv) Hydronic heat pumps.

(v). Slim Jim heat exchangers.

(vi). HDPE fusion tools.

(vii) Geothermal energy installation tools and equipment.

(viii) Dehumidification equipment.

(ix) Thermostats and intellizone.

8418.6100

8419.5000

8515.8000

8419.8990

8479.6000

9032.1090

Proposed omissions/revisions of certain tariff headings owing to adoption of WCO’s New HS Codes Version 2017


1 Live animals and live poultry 0102.1010 and

0105.1900

19 Cereals and products of milling industry

1102.3000

20 Seeds, fruit and spores of a kind used for sowing

1209.1010

26 Fruits juices, whether fresh, frozen or otherwise preserves but excluding those bottled, canned or packaged

2009.8000

31 Holy Quran 8523.5100 &

8523.5200

83 Meat and similar products 1604.3000

106 Import of halal edible offal of bovine animals

0206.2000

Table-1

S. No. Description of goods

PCT Code

Existing Proposed

1 Live animals & poultry 0101.3100 0101.3000

15 Kino (fresh) 0805.2010 0805.2910

15 Others 0805.2090 0805.2100, 0805.2200, 0805.2990

17 Ginger 0910.1000 09.10

23 Sugarcane 1212.9990 1212.9300

33

Currency notes, bank notes, shares, stocks and bonds

4907.0000 49.07

38 Monetary gold 7108.2000 7108.1390

81 Cotton seeds 1207.2000 1207.1000

91 Energy saver lamps 8539.3910 8539.3110

108 Others 3824.9099 3824.8400

110 Others 8543.7090 8539.5010, 8539.5020

113 Agricultural or horticultural 8424.8100 8424.4100

114 Green houses 9406.0010 9406.1010, 9406.9010

133 Ingredients for pesticides 2939.9910 2939.8010

133 Ingredients for pesticides 2939.9910 2939.8010

133 Others 3824.9099 3824.9999



Table-3


PCT Code

Existing Proposed

2 Others 3824.9099 3824.9999

Exemptions proposed to be withdrawn under Sixth Schedule

Table-1


15 Bananas including plantains, fresh or dried

0803.0000

133 Ingredients for pesticides 2903.3040

133 Cadusafos Technical Material 2903.6900



133 Other ingredients for pesticides 2921.4390

133 Tiethanolamine and its salts 2922.1300


Reduced rates of sales tax

Specified fertilizers and certain raw materials subject to reduced sales tax rates - Table-I of Eighth Schedule

• Consequent to exclusion of fertilizers from retail price regime under Third Schedule, following fixed sales tax rates are proposed, subject to the condition that such fertilizers (except DAP) are manufactured from gas other than imported LNG:


Rate of sales tax Rs

per 50 kg bag

35 DAP 100

36 NP (22-20) 168

37 NP (18-18) 165

38 NPK-I 251

39 NPK-II 222

40 NPK-III 341

41 SSP 31

42 CAN 98

• Fertilizer produced from imported LNG are

however subject to reduced sales tax rate of 5% as per SRO 398(I)/2015 dated 8 May 2015. Consequent to above proposed rate revision on fertilizers, it is expected that consequential amendments in afore-said SRO will also be effected.

• Sales tax at the rate of 10% is proposed on supply of natural gas to fertilizer plants for manufacturing of urea.

• Sales tax at 5% is proposed on import of phosphoric acid under PCT heading 2809.2010 by fertilizer company for manufacturing of DAP

Machinery for poultry sector subject to sales tax at 7% - Table-I of Eighth Schedule

S. No. Description of goods PCT

heading

i) Machinery for preparing feeding stuff 8436.1000




S. No. Description of goods PCT

heading

ii) Poultry incubators and brooders

8436.2100 and 8436.2900

iii) Insulated sandwich panels 9406.0090

iv) Poultry sheds 9406.0020

v) Evaporative air cooling system 8479.6000

vi) Evaporative cooling pad 8479.9010

Other items – Table-I of Eighth Schedule

• Sales tax at the rate of 10% on multimedia projectors under PCT heading 8528.6210 is proposed if imported by any educational institution.

• Sales tax on locally produced coal under PCT heading 27.01 is proposed at Rs.425 per metric tonne or 17% ad valorem, whichever is higher.

Rates on mobile phones proposed to be rationalized

Ninth Schedule

S. No.

Description of goods

Rate in Rs.

Existing Proposed

2.A Low Priced Cellular Mobile Phones or Satellite Phones

300 650

2.B Medium Priced Cellular Mobile Phones or Satellite Phones.

1,000 650

H.S. Codes / Tariff Headings aligned with W.C.O.’s HS Version 2017

Eighth Schedule- Table-I


PCT Code

Existing Proposed

26(iv) Sub-soiler 8432.3090 8432.3900

27(iv)

Fertilizer or manure spreader or broadcaster

8432.4000 8432.4100

27(vi) Canola or sunflower drill 8432.3010 8432.3100

27(vii) Sugarcane Planter 8432.3090 8432.3900

Further, the time limitation for concessionary sales tax rate of 5% on import of set top boxes, TV broadcast transmitters and reception apparatus etc. is proposed to be extended from 30 June 2017 to 30 June 2018.



Board to assume broader role with approval of the Minister Incharge of the Federal Government

Sections 3(1) (c), 3(4) and 16(2)

Powers to issue notifications under the relevant sections are proposed to be transferred from Federal Government to the Federal Board of Revenue with the approval of the Minister Incharge of the Federal Government in respect of the following:

• Notified goods as are produced or manufactured in the non-tariff areas and are brought to the tariff areas for sale or consumption therein.

• Levy and collection of duty on any class or classes of goods or services at such high or lower rates as specified in the notification.

• Approval of the Economic Coordination Committee of Cabinet.

The proposed broadening of the role of the Board would probably override the effect of various judgements of superior courts, whereupon, the orders and/or notifications issued by the Federal Government were struck down. One of the landmark judgment of the Hon’ble Supreme Court of Pakistan reported on this matter has been passed in Civil Appeals No.1428 to 1436 of 2016, dated 18 August 2016.

Legal backing to the existing sales tax notifications till 30 June 2018

Section 16(6)

The Bills seeks to insert two provisos to Section 16(6) to provide legal cover till 30 June 2018 to all

such federal excise notifications issued earlier, but not yet rescinded viz-a-viz:

• Notifications issued prior to 01 July 2016

• Notifications issued on or after 01 July 2016

Further, the Bill proposes to empower the Board instead of Federal Government to place before the National Assembly all exemption notifications issued under Section 16 during a financial year.

Appointment of Federal Excise officers and delegation of powers

Section 29

The Bill proposes appointment of following additional officers in order to carry out the purposes of the Federal Excise Act, 2005

• District Taxation Officer

• Assistant Director Audit

It is further proposed that the Chief Commissioner Inland Revenue shall perform the function of any person as the Board may direct. Similarly, the Commissioner Inland Revenue shall perform the function of any person as the Chief Commissioner may direct.

Stay of recovery until decision of appeal by Commissioner (Appeals) subject to payment of 25% of tax demand

Section 37

Under the first proviso of the section, a person shall not be required to seek separate stay, if at the time of filing the appeal 15% of the tax liability is paid. In

Federal Excise Significant Amendments




this case, the stay shall continue for the period of 6 months or till the date of decision of the appeal, whichever is earlier. The said proviso is apparently be applied on both forums (i.e. Commissioner Appeals and Appellate Tribunal).

The Bill proposes an automatic stay that shall be granted to the taxpayer, if 25% of the tax liability shall be paid by him while filing the appeal under section 33 of the Federal Excise Act, 2005 and such stay shall be continued till the decision of the Commissioner (Appeals).

Now, the first proviso is restricted to the Appellate Tribunal. The proposed amendment create hardship for the taxpayer as currently stay is allowed by payment of 15% of tax liability.


Section 43A


Service of order, decisions, etc. through electronic means

Section 47

The Bill seeks to insert new clauses under section 47 to legalize the service of electronically transmitted notices, orders or any other requisition to be served to a public or private limited companies. This transmission may either be through departmental’s email or through e-folder as maintained for the purpose of e-filing of Sales Tax-cum-Federal Excise returns.

Rates of FED enhanced

Table-I of the First Schedule

Entry No.

Proposed Description of goods

Existing FED Rate

Proposed FED Rate

9 Locally produced cigarettes if their on-pack printed retail price exceeds Rs. 4,500 per thousand cigarettes (existing Rs. 4,000 per 1,000 cigarettes)

Period from 01-07-2016 to 30-11-2016

Rs. 3,436 per 1000 cigarettes

Rs. 3,740 per 1000 cigarettes Period

from 01-12-2016 onwards

Rs. 3,705 per 1000 cigarettes

10 Locally produced cigarettes if their on-pack printed retail price exceeds Rs. 2,925 per 1000 cigarettes but does not exceed Rs. 4,500 per 1,000 cigarettes (existing Rs. 4,000 per 1,000 cigarettes)

Period from 01-07-2016 to 30-11-2016

Rs. 1,534 per 1,000 cigarettes

Rs. 1,670 per 1,000 cigarettes Period

from 01-12-2016 onwards

Rs. 1,649 per 1,000 cigarettes

10a Locally produced cigarettes if their on-pack printed

- Rs. 800 per 1,000 cigarettes



Entry No.

Proposed Description of goods

Existing FED Rate

Proposed FED Rate

retail price does not exceed Rs. 2,925 per 1,000 cigarettes

13 Portland cement, aluminous cement, slag cement, super sulphate cement and similar hydraulic cements, whether or not coloured or in the form of clinkers

1 Rs per KG

1.25 Rs per KG

Restriction

Table-I of the First Schedule

The Bill proposes that no cigarette manufacturer shall reduce price from the level adopted on the day of announcement of the latest Budget in relation to serial number 9 of the Table I of the First Schedule.

The Bill also proposes that the minimum price of the new brand of cigarette shall not be lower than 45% of the retail price (excluding sales tax) of the cigratte mentioned at serial number 9 of Table I of the First Schedule.

Rates of FED reduced

Table-II of the First Schedule

Entry No.

Description of goods Existing FED Rate

Proposed FED Rate

6 Telecommunication services excluding

18.5% of the charge

17% of the charge

Entry No.

Description of goods Existing FED Rate

Proposed FED Rate

such services in the area of a Province where such Province has imposed Provincial sales tax and has started collecting the same through its own Board or Authority, as the case may be

FED Exemption Introduced

Table-I of the Third Schedule

Entry No.

Description of goods

20A Vehicles imported by China Overseas Ports Holding Company Limited (COPHCL) and its operating companies, namely:-

i. China Overseas Ports Holding Company Pakistan (Private) Limited;

ii. Gwadar International Terminal Limited;

iii. Gwadar Marine Services Limited; and

iv. Gwadar Free Zone Company Limited;

For a period of twenty-three years for construction, development and operations of Gwadar Port and Free Zone Area subject to limitations, conditions prescribed under PCT heading 9917(3).






Proposed concessions, exemptions or reduction in Customs Duty / Regulatory Duty

• Exemption of 3% Customs Duty on raw skins & hides.

• Exemption of 16% Customs Duty on stamping foils.

• Exemption of 3% Customs Duty on import of ostriches.

• Exemption from Customs Duty extended on import of combined harvesters-threshers up to 5 years old while 10% and 20% regulatory duty levied on harvesters-threshers that are old by 5-10 years and those that are older by more than ten years old respectively.

• Customs Duty @ 11% and 16% exempted and instead Regulatory Duty at uniform rate of 9% levied on the telecom equipment.

• Reduction of duty from 11% to 3% and removal of 5% Regulatory Duty on grandparent and parent stock of chicken.

• Reduction of duty on import of hatching eggs from 11% to 3%.

• Reduction of Regulatory Duty on aluminum waste or scrap from 10% to 5%.

• Reduction of Customs Duty on sheets for veneering from 16% to 11%.

• Reduction of Customs Duty on pre-fabricated modular clean rooms panels from 20% to 3%.

• Reduction of Customs Duty on fabric (non-woven) for pharmaceutical industry from 16% to 5%.

• Customs Duty reduced on uncoated polyester film and aluminum wire from 20% to 11% for manufacturers of metalized yarn.

• Customs Duty reduced from 20% to 16% and from 16% to 11%, on raw materials for manufacturers of Baby Diapers.

• Concessionary rate of 11% available on Set top boxes, TV broadcast transmitter and Reception apparatus etc. extended till 30 June 2018.

• Import of solar panels and related components were exempted from the condition of ‘local manufacturing’ till 30 June 2017 which is extended till 30 June, 2018.

• Surcharge in excess of 0.25% for cargo in-bonded at Karachi for upcountry Bonds exempted.

• Expansion of scope of exemption on import/donation by allowing imports and donation of Federal, Provincial, AJ&K, Gilgit-Baltistan Governments, NDMA, PDMA and Govt. emergency/ rescue services.

• Extension of concession on 11 more components of trailers.

• Customs Duty @ 11% and 16% exempted and instead Regulatory Duty at uniform rate of 9% levied on the telecom equipment.

Proposed imposition or enhancement in rate of Customs Duty & Regulatory Duties

• 5% Regulatory Duty levied on import of synthetic filament yarn (of polyesters).

• Increase of Customs Duty on aluminum beverage cans from 11% to 20%.

Customs Significant Amendments




• Customs Duty rate on Bituminous coal and other coal equalized @ 5%. However, for the Power Projects in IPPs Mode, Customs Duty on import of both types of coal reduced to 3%.

• Separate PCT code for compressors of vehicle @ 35% Customs Duty created.

• Separate PCT code for classification of electric cigarettes created at 20% Customs Duty.

• Regulatory Duty @ 10% levied on animal protein meals.

• Regulatory Duty levied/increased on 565 non-essential items by various rates ranging from 5% to 15%.

• Customs Duty @ Rs. 250 per set converted into Regulatory Duty @ Rs. 250 per set on mobile phones.

• Regulatory Duty on betel nuts increased from 10% to 25% while Regulatory Duty @ Rs.200/kg levied on betel leaves.

• Concession in duty/taxes on Hybrid Electric Vehicles above 2500 cc withdrawn.

• Additional duty on cylinder head for motorcycles levied.

Controlled Delivery

Section 2(z)

The Bill proposes to insert the definition of term ‘controlled delivery’ for supervising the activities that allow suspected consignments of prohibited and smuggled goods from or into the territory of Pakistan.

Directorate General of China Pakistan Economic Corridor (CPEC)

Section 3AAA

The Bill empowers the Board to appoint separate Directorate General of CPEC consisting of the following officers for facilitation.

• Director General

• Additional Directors

• Deputy Directors

• Assistant Director

General Power to exempt from customs duties

Section 19(1) & 19(5)

Powers to issue notifications under the relevant sections are proposed to be transferred from Federal Government to the Federal Board of Revenue with the approval of the Minister Incharge of the Federal Government in respect of exemption from custom duties in order to provide legal coverage to certain notifications.

The provision refers the sub section (1) where any circumstances exist to take immediate action for the purposes of national security, national disaster and etc, the Board may issue notification to exempt any taxable goods or taxable services. However, the notification shall stand rescinded after expiry of financial year starting from 1 July 2015.

The Bill proposes to enhance the expiry period from 1 July 2016 to 30 June 2018, if the notification was not rescinded earlier.



Value of Customs

Section 25A

The Bill proposes new proviso where the invoice retrieved from the consignment is higher than the value declared for assessment or warehousing under section 79 or clearance for exportation under section 131, the value of invoice retrieved from the consignment shall be taken for assessment purpose.

Obligation to produce documents and provide information

Section 26(1A)

The Bill proposes the insertion of the sub clause wherein the Board shall empower any officer to require any person to provide such information for the purposes of End Use Verification.

Period for which goods may remain warehoused

Section 98

The Bill empowers Chief Collector of Customs to extend the time for the goods to be placed in ware house for a period not exceeding one month in case of notified perishable goods and a period not exceeding three months in case of non-perishable goods. Presently, Collector of Customs, Federal Government or the Board are empowered to extend the time for warehousing.

Cancellation of registration of registered user

Section 155F

The Bill proposes to amend section 155F by giving right to a person for filing of appeal before the Chief

Collector against the Order issued by the Collector within thirty days on account of cancellation or confirming the suspension of his unique user identifier.

Appeal to Collector (Appeals)

Section 193

The Bill seeks to propose the Order passed under section 195 by the Board, Collector of Customs, Collector of Customs (Adjudication) shall be appealable. Presently, the right of appeal against the Order passed under section 195 is not allowed which creates hardship for the taxpayer.

Power to pass certain Orders

Section 195(A)

The Bill empowers the Board, Collector or Collector of Customs (Adjudication) to pass a fresh Order on its own or assign the case to an officer of equal or higher rank, who may have passed the earlier order to pass such Order.

Power to enter into mutual legal assistance agreement on customs matters

Section 219A

The Bill empowers the Board to enter into memorandum of understanding pertaining to mutual legal assistance in custom matters or in pursuance of any bilateral or multilateral agreement with international organization, foreign customs etc.

Accordingly, the Board may, at its own motion or upon request from an international organization, foreign customs etc. shall exercise its powers being conferred under the proposed Bill.




Conversely, the Board is also empowered on behalf of the Federal Government request an international organization, foreign customs etc. for legal assistance on any customs matters.


Section 221A


New HS Code Version-2017

Through Budget Speech 2017, the Finance Minister has briefed that WCO has adopted new HS Version with effect from 1st January 2017. Therefore, Pakistan, being signatory of WCO, is obliged to adopt the new version from the next financial year i.e. 1st July 2017. The Amendments in HS 2017 will affect the classification of around 15% of goods traded in the world. The majority of changes in HS 2017 have been introduced to address environmental and social issues. Besides, the new version has also introduced for new product classifications to reflect changes in manufacturing processes and technological advancements.

Note

Under clause (18) and clause (19) of section 2 of the Finance Bill 2017, FBR has neither proposed the respective changes in tariff through Schedules of the Customs Act, 1969, nor any concessionary customs / regulatory duty notification has yet been issued. Therefore, the proposed changes in rates of customs / regulatory / additional duty are entirely based on the salient features document issued by FBR.



Background

CRS is a global transparency initiative to combat offshore tax evasion. Cross border business and transactions have become a norm in a global financial and economic world and it is common for tax payers to keep money outside their resident country. Owing to this reason, large amount of wealth held in offshore jurisdictions remain undisclosed to the tax authorities and remain untaxed.

In 2010, U.S. congress enacted the provisions of Foreign Account Tax Compliance Act that required Financial Institutions (FIs) across the globe to report the financial information of U.S persons account holders to U.S. Internal Revenue Services (IRS) in an attempt to curb offshore tax evasion.

In a similar manner, G20 countries requested Organization of Economic Cooperation and Development (OECD) to develop a common framework known as CRS for Automatic Exchange of Information (AEoI). Purpose of the CRS is to allow partner jurisdictions to obtain information about non-resident account holders from financial institutions and automatically exchange that information with other jurisdictions on an annual basis under Multilateral Competent Authority Agreement (MCAA) or Bilateral Agreement (BA) to encourage tax transparency and avoid offshore tax evasion.

Key Requirements for Financial Institutions

CRS regulations are multi layered and divided into various sub sections. Following are key requirements of CRS for any financial institutions:

Entity Classification

Foremost requirement for any FI under CRS is to ascertain its reporting and non-reporting status as per prescribed criteria. This is a key stage for any entity as accurate entity classification shall determine the subsequent responsibilities of entity under CRS.

Due Diligence of Pre-existing Accounts

As per CRS rules, due diligence requirements are mainly bifurcated into two categories:

• Due Diligence for Pre-existing Individual Accounts

• Due Diligence for Pre-existing Entity Accounts

For the purpose of CRS implementation in Pakistan, Pre-existing Account means a financial account maintained on or before 30 June 2017.

Due Diligence for Pre-existing Individual Accounts

For the purpose of due diligence, pre-existing accounts having value below USD 1 million are classified as Low Value Accounts and accounts having value above USD 1 million are classified as High Value Accounts. Due diligence rules are trivial for Low Value Accounts and extensive for High Value Accounts.

Due Diligence for Pre-existing Entity Accounts

Due diligence requirements for entity account holders are complex and require sub-categorization amongst accounts to determine whether such

The Common Reporting Standard (CRS)




accounts are in scope for the purpose of CRS or not.

CRS regulations entail that pre-existing entity accounts with balance less than USD 250,000 as at 31 December 2017 are not required to be reviewed and reported for CRS purposes. FIs are allowed to rely on existing information maintained in lieu of local AML / KYC requirements in order to document entity tax resident status as per CRS requirements. Further, due diligence is also required to determine whether the entity account holder classifies as a Passive Non-Financial Foreign Entity (NFFE) or Active NFFE based on its business activities. Lastly, FIs are required to determine and document the tax resident status of Passive NFFE’s and their controlling persons.

On-Boarding of New Individual & Entity Accounts

FIs are required to establish / modify / update their policies, procedures, forms and processes to cater on-boarding of new accounts from 1st July 2017 onwards. This entails FIs to revisit their new account opening documents which capture tax residency status of customers and ensure that it encapsulates CRS requirements effectively.

Reporting Information to Local Authority

All the requirements of CRS for FIs culminate at this stage. FIs are required to report financial information about non-resident accounts holders to their local authority (FBR) on prescribed frequency. Data set required for reporting comprises of basic information such as Account Number, Name, Address, Residence Jurisdiction, TINs for each Reportable Jurisdiction (if any), date of birth and place of birth (for individual accounts); and account balance and income.

Mode and method of reporting information for FIs shall be elaborated by local authority (FBR) as per the government guidelines and regulations.

CRS Implementation in Pakistan

In September 2016, Pakistan signed Multilateral Convention (the convention) on Mutual Administrative Assistance in Tax Matters of Organization of Economic and Cooperation Department (OECD) to implement CRS.

Legal Framework

Implementing a regulation of this stature which compels sharing of confidential customer information with other countries requires legal basis and thus demands change / modification of existing legal framework of the country. Keeping in view such requirements, Government of Pakistan has included necessary legal provisions in Income Tax Ordinance 2001 (Section 107 (I) and 165 (B), Sales Tax Act 1990 (56) (A) and Federal Excise Act 2005 (47) (A) to provide legal framework for implementation of CRS.

In relation to CRS, FBR has formulated CRS rules in the Income Tax Rules 2002 vide SRO 166(I)/ 2017 dated March 15 2017 to embed CRS regulations in local laws.

Following rules are proposed to be added in the Chapter XIIA of Income Tax Rules 2002 on account of the aforementioned SROs:

Sections Particular

78A Application

78B Definitions

78C General Reporting Requirements

78D General Due Diligence Requirements



Sections Particular

78E Due Diligence Requirements for Pre-existing individual accounts

78F Due Diligence for New Individual Accounts

78G Due Diligence for Pre-existing Entity Accounts

78H Due Diligence for New Entity Accounts

78I Special Due diligence Rules

Key Timelines

Timeline for Implementation in Pakistan

Date

Regime effective from 01 July 2017

New account On-boarding procedures in place

01 July 2017

Complete remediation of individual high value account holders

31 December 2017

Complete remediation of pre-existing entity and individual lower value account holders

31 December 2018

Year of first reporting 2018

CRS Implementation Challenges for FIs

CRS has wider impact and will be much more challenging than FATCA. FIs will be required to identify tax resident status of account holders of more than 100 jurisdictions and reportable volumes are expected to increase by many multiples jurisdictions participating in CRS regime.

FIs need to proactively plan and ensure readiness to meet compliance and reporting deadlines. Common Reporting Standard survey of 2016 by

KPMG LLP, elaborates following protocol for effective implementation of CRS:

Perform Impact Assessment - An “impact assessment” can help identify gaps in compliance capabilities and competence. By isolating any potential shortfalls, FIs can focus on individual business units or geographies to determine if additional resources—money, time, or personnel—may be needed

Outline a basic strategy - FIs should begin the process of developing a plan to update their systems and procedures to perform due diligence of pre-existing accounts, onboard new customers, manage data, and report account information.

Keeping track of local CRS requirements – FIs should monitor requirements and regulations imposed by local tax authority and regulator and ensure their timely implementation

Create Calendar – FIs should publish a planning calendar that maps out key dates and milestones to help ensure a more seamless management of CRS compliance.

Establish communications protocol - Establish a timely communications mechanism to alert all parts of your organization as to the latest CRS disclosures and procedure updates.

Establish automation options - To cater CRS requirements, FIs must plan in advance, allocate sufficient time to review the key components of CRS requirements and create a due diligence checklist of in-house disciplines directly impacted by CRS-related changes including:

Conclusion

CRS will have a profound impact on financial institutions and its requirements will result in significant increase in compliance and monitoring activities of FIs. In Pakistan, FIs have started their




CRS implementation efforts, but there is still a lot of work to be done by both regulators and FIs. FIs shall need to proactively plan and ensure that they have right processes and solutions in place to meet the compliance and reporting deadlines of CRS.

a Offices in Pakistan

Karachi Office Sheikh Sultan Trust Building No. 2 Beaumont Road Karachi 75300 Phone +92 (21) 3568 5847 Fax +92 (21) 3568 5095 eMail [email protected]

Lahore Office 2nd Floor, Servis House 2-Main Gulberg, Jail Road Lahore 54000 Phone +92 (42) 3579 0901-6 Fax +92 (42) 3579 0907 eMail [email protected]

Islamabad Office Sixth Floor, State Life Building Blue Area Islamabad Phone +92 (51) 282 3558 Fax +92 (51) 282 2671 eMail [email protected]

www.kpmg.com.pk

© 2017 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. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. The KPMG name and logo are registered trademarks or trademarks of KPMG International.

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