Incentives for investment in industrial undertakings

Incentives for investment in industrial undertakings

This blog highlights Incentives for investment in industrial undertakings that includes Incentives for investment in new and existing industrial undertakings, Incentives for revival of sick units; and Incentives for investment in industries by non-resident Pakistani and resident Pakistani individuals having declared foreign assets.

Revival of Sick Industrial Unit – Adjustment of carry forward of Business Losses [Section 59C] 

Who is eligible to avail incentive?

Where a company (acquiring Company) acquires under a scheme of acquisition majority share capital of another company being a sick industrial unit, the acquiring company shall be entitled to adjust loss for the latest tax year and brought forward assessed business losses excluding capital loss of the acquired company for a period of three years. However, this section shall not apply to any scheme of amalgamation or merger.

For the purpose to avail above incentive “Sick Industrial Unit” means a company being an industrial undertaking, which-

(i) has accumulated losses, for a continuous period of three years prior to the 1st July, 2022, equal to or exceeding its entire capital and reserves at the time of acquisition, as the case may be; or

(ii) has defaulted towards repayment of outstanding debts owing to banking companies or non-banking financial institutions for a consecutive period of three years immediately before acquisition, as the case may be, or

(iii) has been declared as such by the Federal Government in a notification published in the official Gazette.”

 What are the Conditions to avail above Incentives for the acquiring company?

  1. i) There is continued ownership for five years starting from the 30th June, 2023 and there is no change in share capital of the acquiring company;
  2. ii) The assets of the acquired company shall not be sold upto the 30th June, 2026; and

iii) The acquired company continues the same business till the 30th June, 2026

In our humble view the acquiring company should be allowed to change the business of their choice. The GoP should only be interested to revive the sick industrial units for generation of employment, payment of due taxes and economic growth.

Carry forward of Unadjusted Loss

Where the losses surrendered by the acquired company are not adjusted against income of the acquiring company in the said three tax years, the acquired company shall carry forward the unadjusted losses in accordance with section 57 of the Ordinance.

Section 57(2) of the Ordinance provides that if a loss cannot wholly set-off then the amount of the loss that not set-off shall be carried forward to the following tax year and so on, but no loss can be carried forward to more than six years immediately succeeding the tax year for which the loss was first computed. However, in view of section 57(2B) of the Ordinance, in case of hotel business (industrial undertaking) the limit is for a period of eight years.

We also feel that regarding restriction in change of capital, GoP should impose restriction only for reduction of paid-up-capital of acquired company and any injunction of fresh capital for expansion of industrial unit should be encouraged and allowed for the revival of the sick unit.

We are also of view that the limit of three years provided under the Amended Ordinance, shall be reduced for the purpose of computation of time limit of six and eight years provided in section 57(2) and 57(2B) of the Ordinance.

Method of adjustment of loss of acquired company against Income of acquiring company

The loss of the acquired company shall be adjusted against income under the head “Income from Business” of the acquiring company as per following formula, namely:

(A/100) X B

Where-

A is the percentage share capital held by the acquiring company of the acquired company; and

B is the loss of the acquired company referred to in sub-section (1).

Imposition of tax in case of failure to revive

If the acquiring company fails to revive the acquired company by tax year 2026, the acquiring company shall, in tax year 2027 offer the amount of profit on which taxes have not been paid due to set off of losses surrendered by the acquired company.

It may be noted a sick industrial unit as referred above shall be deemed to be revived, if the said company attains maximum production capacity that was obtained before the industrial unit went sick:

Provided that the acquired company produces a certificate to the effect that it stands revived, duly issued by the Engineering Development Board, alongwith the return of income filed for tax year 2026.

Tax Credit for Foreign Investment for Industrial Promotion [Section 65H]

Who is Eligible to avail incentive?

  1. i) Where a taxpayer being:
  2. a) a non-resident Pakistani citizen having continued non-residential status for more than five years: or
  3. b) a resident individual having foreign assets declared in terms of section 116 or 116A by the 31 December, 2021, invests in a company incorporated on or after the 1st March, 2022, to set up an industrial undertaking in Pakistan with equity, not less than fifty million rupees remitted into Pakistan through proper banking channel of any time upto the 31st December, 2022 as per the procedure to be prescribed by the State Bank of Pakistan.
  4. ii) It is important to note that (a) commercial production should commence on or before the 30 June, 2024 and (b) the aforesaid tax credit shall not be allowed to a company or an industrial undertaking established by splitting up or reconstitution of a company or an industrial undertaking already in existence or by transfer of machinery or plant from an industrial undertaking established at any time before the 1st March, 2022.

Computation of Tax Credit

Company shall be entitled to a one-time tax credit equal to one hundred percent (100%) of the amount remitted and credited in rupees in the bank account of such company; against tax liability for the tax year in which commercial production commences.

Carry forward of Unadjusted tax credit

Where no tax is payable by the taxpayer in respect of the tax year in which the commercial production has commenced or where the tax payable is less than the amount of credit as aforesaid, the amount of the credit or so much of it as is in excess thereof, shall be carried forward and deducted from the tax payable by the taxpayer in respect of the following tax year and so on, but no such amount shall be carried forward for more than five tax years. It is important to note that the deduction made under this section shall not exceed in aggregate of foreign investment made under this provision of law.

When tax credit originally allowed shall deemed to have been wrongly allowed?

When it is subsequently discovered by the Commissioner Inland Revenue that any one or more of the conditions specified in this section was or were not fulfilled, the credit originally allowed shall be deemed to have been wrongly allowed and the Commissioner, shall re-compute the tax payable by the taxpayer for the relevant tax year.

Special provisions relating to investment for industrial promotion [Section 100F]

Who is eligible to avail incentive?

  1. i) Any person may file a statement by the 30th September, 2022, declaring therein the amount of funds and depositing the same in rupees in the dedicated bank account in Pakistan as equity of the newly formed Company, incorporated under the Companies act, 2017 [XIX of 2027], before the filing of the statement for investment in a new company formed for establishing and operating an industrial undertaking in accordance with this section.
  2. ii) Such funds should be minimum of fifty million rupees and only be used for purchase or import of plant and machinery through Letter of Credit or for construction of building and structure for the industrial undertaking.

Section 80(1) of the Ordinance provides the following definition of “Person”:

(a) An individual;

(b) A company or association of persons incorporated, formed,

organized or established in Pakistan or elsewhere; and

(c) The Federal Government, a foreign government, a political sub-division of a foreign government, or public international organization.”

It may please be noted that the first proviso of Section 100F of the Ordinance provides that fund declared under this section should only be used for purchase or import of plant and machinery or for construction of building and structure of industrial undertaking, which apparently means that the cost of land cannot be utilized out of fund declared under this section. In our humble view this may not be the intention of the legislature, however, this needs to be clarified by the FBR at the earliest.

Benefits under this plan can be availed by the existing industrial undertaking

The provisions of this section shall apply, mutatis mutandis, to an existing company being an industrial undertaking, for investment in expansion and modernization from amount of funds deposited in new dedicated bank account to deposit the said funds before the filing of the statement and such funds shall only be used for expansion and modernization by way of purchase or import of plant and machinery including IT hardware through letter of credit, or software and IT services or for construction of building and structure for the manufacturing premises of the existing industrial undertaking:

Provided further that the expansion and modernization shall be completed by the 30th June, 2024, and a certificate to that effect, duly issued by the Engineering Development Board, is submitted to the Commissioner along with the return filed for tax year 2024.

Computation Tax under this package

Payment of tax an amount equal to 5% of the funds declared in the statement alongwith statement filed under this section. However, it may be noted that any amount of tax so paid under this section shall not be refundable or adjustable against any other tax liability of the declarant.

Can the Fund Declared in statement be incorporated in Books?

The provisions of section 111 of the Ordinance (immunity from probing of unexplained funds/assets) shall not apply to the fund declared, in this section declarant shall be entitled to incorporate the same in his wealth statement, financial statement or books of accounts, as the case may be.

In our humble view unlike other previous Amnesty Schemes, immunity to probe unexplained funds/investment declared under the Amendment Ordinance, will not be available from other laws, which is important element for success of such kind of amnesty scheme.

Who is not eligible?

(i) The following persons are not eligible:

(a) holders of public office, their spouses and dependent children;

(b) a public company as defined in Clause (47) of section 2 of this Ordinance;

(c) a person who has filed a declaration under the Voluntary Declaration of Domestic Assets Act, 2018, the Foreign Assets (Declaration and Repatriation) Act, 2018, or the Assets Declaration Act, 2019;

(d) a person that has been declared a bank loan defaulter by a bank or a financial institution within the last three years; or

(e) a director of a company who has been declared a bank loan defaulter by a bank or a financial institution within the last three years.

(ii) The provisions of this section shall also not apply to the

(a) any proceeds of crime, corruption, money laundering and terror financing;

(b) any amount which is subject of any departmental or court proceedings;

(c) the investments made in following sectors, namely:-

(i) Arms and ammunitions;

(ii) Explosives;

(iii) Sugar;

(iv) Cigarettes;

(v) Aerated beverages;

(vi) Flour mills;

(vii) Vegetable ghee; and

(viii) Cooking oil manufacturing excluding extraction units.

Confidentiality of Information provided in the Statement

Notwithstanding the provisions of any other law for the time being in force including sub-section (3) of section 216 of Ordinance excluding clauses (a) and (g) of sub-section (3) thereof, the National Accountability Ordinance, 1999 (XVIII of 1999), the Federal Investigation Agency Act, 1974 (VIII of 1975) and the Right of Access to Information Act, 2017 (XXXIV of 2017), particulars of any person making a statement under this section or any information received in any statement made under this section shall be confidential.

When the statement filed under this section would be declared invalid or void?

(i) The statement filed under this section shall not be valid, if—

(a) the newly formed industrial undertaking company fails to prove commercial production in terms of sub-section (3) of this section;

(b) there is a change in ownership of industrial undertaking company prior to the 30th June, 2026; or

(c) the newly formed industrial undertaking company disposes of any of its assets prior to the 30th June, 2026.

(ii) Where the statement filed under this section has been made by misrepresentation or suppression of facts, such statement shall be void as if it had never been made and all the provisions of Ordinance shall apply accordingly.

Disclosure of Information by a Public Servant [Section 216] 

Sub-Section (1) of section 216 of the Ordinance provides that all particulars contained in (a) any statement made, return furnished, or accounts or documents produced under the provisions of the Ordinance; (b) Any evidence given, or affidavit or deposition made, in the course of any proceedings under the Ordinance, other than proceedings under Part XI of Chapter X. [Offences and prosecutions] and (c) any record of any assessment proceedings or any proceeding relating to the recovery of a demand, shall be confidential and no public servant save as provided under the Ordinance may disclose any such particulars.

Sub-Section (2) of Section 216 of the Ordinance further provides that notwithstanding anything contained in the Qanun-Shahadat, 1984 [P.O Order No.10 of 10 of 1984], or any other law for the time being in force, no court or other authority shall be, save a provided in this Ordinance, entitled to require any public servant to produce before it any return, accounts or documents contained in, or forming a part of the records relating to any proceedings under this Ordinance, or any records of the Income Tax Department generally, or any part thereof, or to give evidence before it in respect thereof.

The Amendment Ordinance modified Section 216(2) of the Ordinance; whereby, no court or authority in accordance with the provisions contained in the Qanun-e-Shahadat, 1984, the National Accountability Ordinance 1999, the Federal Investigation Agency Act, 1974 and the Right of Access to Information Act, 2017 or any other law for the time being in force require any public servant to produce before it any return, accounts, or documents contained in, or forming a part of the records relating to any proceedings under the Ordinance, or declarations made under section 100F of the Ordinance or made under the Voluntary Declaration of Domestic Assets Act, 2018, the Foreign Assets (Declaration and Repatriation) Act, 2018 or the Assets Declaration Act, 2019.

Comparative Chart is as under:

Section 216(2) prior to Section 216(2) after amendment amendment

Notwithstanding anything contained in the Qanun-Shahadat, 1984 [P.O Order No.10 of 10 of 1984], or any other law for the time being in force, no court or other authority shall be, save a provided in this Ordinance, entitled to require any public servant to produce before it any return, accounts or documents contained in, or forming a part of the records relating to any proceedings under this Ordinance, or any records of the Income Tax Department generally, or any part thereof, or to give evidence before it in respect thereof.

“(2) Notwithstanding anything contained in the Qanun-e-Shahadat, 1984 (P.O. Order No. 10 of 1984), the National Accountability Ordinance, 1999 (XVIII of 1999), the Federal Investigation Agency Act, 1974 (VIII of 1975) and the Right of Access to
Information Act, 2017 (XXXIV of 2017), or any other law for the time being in force, no court or other authority shall, save as provided in this Ordinance, require any public servant to produce before it any return, accounts, or documents contained in, or forming a
part of the records relating to any proceedings under this Ordinance, or declarations made under section 100F of this Ordinance or made under the Voluntary Declaration of Domestic Assets Act, 2018, the Foreign Assets (Declaration and Repatriation) Act, 2018 or the Assets Declaration Act, 2019 or any records of the Income Tax Department generally, or any part thereof, or to give
evidence before it in respect thereof.”

Our present publication is based on the facts and assumptions stated above on the amendments made in the laws through the Income Tax (Amendment) Ordinance, 2022. Tax laws are subject to change from time to time and as such any change or clarification may affect the comments contained in this publication. We have no responsibility for the events and circumstances occurring after the date of this publication, unless specifically requested.

Further, this publication is interpretation of law and is based on our expertise, experiences and knowledge of the aforesaid law.

Accordingly, it cannot be said with certainty that the comments, views and interpretation expressed above would be accepted by all the stakeholders.

We do not, after publication of above comment, views and interpretation, accept or assume responsibility for any purpose or to any other person to whom various interpretation of the law is shown or in whose hands it may come unless expressly agreed by us in writing.

For more information on FBR’s new regulations / circulars/ SROs/ amendments in taxation laws in Pakistan please visit https://www.fbr.gov.pk/

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