Changes in Second Schedule to the Ordinance
The Finance Act, 2022 has brought about certain amendments in the Income Tax Ordinance, 2001 (the Ordinance, hereafter). Some significant amendments on Changes in Second Schedule to the Ordinance are explained hereunder: –
Second Schedule to the Ordinance
Major changes incorporated in Second Schedule to the Ordinance are
highlighted as under:
Withdrawal of exemptions
(i) Exemption on allowance or perquisite which is paid or allowed outside Pakistan by the Government to a citizen of Pakistan for rendering services outside Pakistan was earlier available under clause (5) of Part I of Second Schedule to the Ordinance. This exemption has now been withdrawn.
(ii) Exemption was earlier available under clause (23B) of Part I of Second Schedule to the Ordinance on amounts received as monthly installment from an income payment plan invested out of accumulated balance of specified pension/annuity account / plans subject to condition mentioned therein. This exemption has now been withdrawn.
Conditional Exemption to Collective Investment Scheme or REIT Scheme
Any income derived by a Collective Investment Scheme or a REIT Scheme is exempt from tax under clause (99) of Part I of Second Schedule to the Ordinance if not less than ninety percent of its accounting income of that year as reduced by realized or unrealized capital gains is distributed amongst the unit or certificate holders or shareholders. Now, further reduction in accounting income of that year has been allowed through adjustment of accumulated losses for these persons in addition to reduction by realized or unrealized capital gains.
Tax Incentives for Film Industry
In order to promote local film industry, following new measures have been introduced:
(i) Five years tax exemption has been granted by inserting clause (151) in Part I of Second Schedule to the Ordinance to a person who derives any income from cinema operations, starting from the commencement of cinema operations.
(ii) Through insertion of clause (153) in Part I of Second Schedule to the Ordinance, exemption has been granted to profit and gains derived by a resident producer or a resident production house from production of feature films during the period from 1′ day July, 2022 to 30th day of June, 2027.
(iii) Similarly, exclusion from provisions of section 148 of the Ordinance has been provided through insertion of Clause (12P) in Part IV of Second Schedule on import of machinery and equipment as listed in serial no. 32 of Part-I of Fifth Schedule to the Customs Act, 1969 subject to the conditions and limitations specified therein.
(iv) Moreover, through insertion of clause (43H) in Part IV of Second Schedule, exclusion from the provisions of clause (b) of sub-section
(1) of section 153 has been provided to an exhibitor or a distributor of a feature film, as payer, on payment made to a distributor, producer or importer of feature film.
Incentive for Venture Capital Companies and Venture Capital Funds
Through insertion of clause (152) in Part I of the Second Schedule, exemption has been granted to profits and gains derived by venture capital companies and venture capital funds for the period from Pt day of July, 2022 to 30th day of June, 2025, as are registered with the Securities and Exchange Commission of Pakistan under relevant applicable rules.
Reduced rate of withholding and minimum tax on turnover for jewelers
Jewelers are withholding agents if falling under definition of prescribed persons for the purpose of section 153 of the Ordinance. Jewelry is a household item in Pakistan which may require to be sold to jewelers for reshaping by common persons.
In order to mitigate full impact of withholding tax required to be deducted under clause (a) of sub-section (1) of section 153, reduced rate of withholding at the rate of 1% has been provided on payment against transactions of sale of gold, silver and articles thereof by inserting clause (31) in Part II of Second Schedule to the Ordinance.
Reduction in Tax on Bahbood Savings Certificates
Currently profit from investment in bahbood savings certificates, pensioners benefit account and Shuhuda family welfare account enjoys exemption from withholding tax. However, profit is taxable at the maximum rate of 10% under the head income from other sources which has now been reduced to 5%. Necessary change has been incorporated in clause (6) of Part III of Second Schedule to the Ordinance.
Restriction on Frequent Audit Proceedings
A new clause (105A) has been inserted in Part IV to Second Schedule to the Ordinance whereby the provisions of section 177 and 214C shall not apply to a person whose income tax affairs have been audited in any of the preceding four tax years. However, the Commissioner may select a person for audit with prior approval of the Board.
Taxpayer As audit of income tax affairs of tax year 2017 has been fi nalized in tax year 2022. Taxpayer A can only be audited again after four tax years i.e. in tax year 2027.
Streamlining Certain Withholding Sections for Non-Resident Pakistanis in Respect of Immovable Property
Some of non-resident Pakistanis may not be required to file income tax return by virtue of applicable provisions of the Ordinance. Therefore they do not appear on the active taxpayers list and hence likely to suffer the mischief of rule 1 of Tenth Schedule of the Ordinance.
In order to facilitate non-resident Pakistanis holding Pakistan Origin Card (POC) or National ID Card for Overseas Pakistanis (NICOP), provisions of section 100BA and rule 1 of the Tenth Schedule will not apply on them in respect of transactions on which tax is collectible under section 236C and 236K of the Ordinance that apply on purchase or sale of immoveable property.
Withdrawal of Reduced Rate Benefit on Investment in Federal Government Securities for certain persons
Profit on debt up to Rs. five million received by a person other than a company is charged to tax under section 7B at the rate of 15% under Division IIIA of Part I of First Schedule of the Ordinance as fixed and final discharge of tax liability.
Provisions of section 7B do not apply in case of companies and for individuals/A0Ps receiving profit in excess of five million rupees. However, by virtue of clause (20) of Part III of Second Schedule of the Ordinance, reduced rate of final tax at 15% was made applicable on profit on debt as separate block of income for all persons other than banking companies or insurance companies insofar the profit was derived from investment in Federal Government securities.
This clause has now been omitted through Finance Act, 2022.
For more information on FBR’s new regulations / circulars/ SROs/ amendments in taxation laws in Pakistan please visit https://www.fbr.gov.pk/