Profit on Debt and Taxation
This blog speaks about profit on debt and taxation associated with it.
- Where a person pays yield on an account, deposit or a certificate under the National Savings Scheme or Post Office Savings Account;
- a banking company or financial institution pays any profit on a debt, being an account or deposit maintained with the company or institution,
- the Federal Government, a Provincial Government or a Local Government pays to any person profit on any security other than that referred to in clause (a) issued by such Government or authority; or
- a banking company, a financial institution, a company referred to in sub-clauses (i) and (ii) of clause (b) of sub-section (2) of section 80, or finance societies pays any profit on any bond, certificate, debenture, security or instrument of any kind (other than a loan agreement between a borrower and a banking company or a development finance institution) to any person other than financial institution,
The payer of the profit shall deduct tax at the rate specified in Division IA of Part III of the First Schedule from the gross amount of the yield or profit paid as reduced by the amount of Zakat, if any, paid by the recipient under the Zakat and Ushr Ordinance, 1980 (XVII of 1980), at the time the profit is paid to the recipient.
This section shall not apply to any profit on debt that is subject to sub-section (2) of section 152. (Non-Resident)
(3) Tax deductible under this section shall be a final tax on the profit on debt arising to a tax payer other, except where-
- a) taxpayer is a company, or
- profit on debt is taxable under section 7B.
7B. Tax on profit on debt.—(1) Subject to this Ordinance, a tax shall be imposed, at the rate specified in Division IIIA of Part I of the First Schedule, on every person, other than a company, who receives a profit on debt from any person mentioned in clauses (a) to (d) of sub-section (1)of section 151.
(2) The tax imposed under sub-section (1) on a person, other than a company, who receives a profit on debt shall be computed by applying the relevant rate of tax to the gross amount of the profit on debt.
(3) This section shall not apply to a profit on debt that is exempt from tax under this Ordinance.
In the case of a non-filer other than a company the final tax shall be equal to the tax deductible in the case of filer and the tax deducted in excess of that shall be advance income tax adjustable against tax liability.
FBR explained amendment made by Finance Act, 2014 in Circular 2 of 2014:
Regarding profit on debt, as per sub-section (3) of section 151, the rate of tax deductible on profit on debt was final for a taxpayer other than a company.
Through the Finance Act, 2014, a proviso has been added after sub-section (3) making tax deductible for a filer as final tax @ 10% of yield or profit, and 15% for a non-filer with yield or profit exceeding Rs.500,000.
However, in order to attract the non-filer to file return, the additional 5% tax for a non-filer shall be adjustable against the total income for the year.
In case a joint account is held in a bank by more than one person, joint account holders as an entity shall be treated as filer if at least one person in the joint account is a filer.
Similarly, in case an account is held in a bank in the name of a minor, the minor shall deemed to be filer if the parent, guardian or any person who has made deposits in the minor’s account is filer.
Circular No. 6 of 2003 Dt. 09-JUL-03
- Amendment has been made in section 151(1)(c) to omit the words “other than a financial institution”.
- Prior to amendment, the profit earned on securities issued by the Federal/Provincial Governments or local authority, by any person other than a financial institution, was liable to withholding tax.
- An issue arose whether a bank is a financial institution and as such not liable to withholding tax.
- Now as a result of this amendment, all recipients of profit on said securities are liable to withholding tax and provisions of section 151(1)(c) are applicable to all financial institutions including banks.
Exemptions, Section 151 Profit on Debt
The recipient of profit can make an application to the concerned Commissioner of Income Tax and obtain a certificate authorizing the payer to deduct tax at a lower rate or deduct no tax, as may be appropriate. This certificate will be valid until the Commissioner of Income Tax cancels it.
Rate of deduction.- Rates at which tax is to be deducted are given in Appendix. These rates are:
(a) In the case of any profit on debt referred to in clause (a) or (b) or (d) of subsection (1) of section 151, 10% of the yield or profit paid for filers while same rate is for non-filers if profit is up to Rs. 500,000 but if it exceeds this threshold, then rate would be 17.5%; and
(b) In the case of any profit on debt referred to in clause (c) of sub-section (1) of section 151, 20% up to 30.6.2006 and thereafter 10% of the yield or profit paid.
Part IV (Section 151)
Clause (11C) The provisions of section 151 shall not apply in respect of inter-corporate profit on debt within the group companies entitled to group taxation under section 59AA “subject to the condition that the return of the group has been filed for the latest completed tax year”.
Clause(16) The provisions of sections 113, 148, 151, 153, 155 and 156 shall not apply to the institutions of the Agha Khan Development Network (Pakistan) listed in Schedule 1 of the Accord and Protocol dated November 13, 1994, executed between the Government of the Islamic Republic of Pakistan and Agha Khan Development Network:
Profit on Debt and Taxation
Provided that such institutions shall continue to collect and deduct tax under section 149, 151, 152, 153, 155, 156 or 233 from others persons, wherever required thereunder.
Clause (19) The provisions of sections 113 and 151 shall not apply to non residents, (excluding local branches or subsidiaries or offices of foreign banks, companies, associations of persons or any other person operating in Pakistan), in respect of their receipts from Pak rupees denominated Government and corporate securities and redeemable capital, as defined in the Companies Ordinance, 1984 (XLVII of 1984), listed on a registered stock exchange, where the investments are made exclusively from foreign exchange remitted into Pakistan through a Special Convertible Rupee Account maintained with a bank in Pakistan.
Clause (36A) The provisions of clause (a) of sub-section (1) of section 151 shall not apply in respect of any amount paid as yield or profit on investment in Bahbood Savings Certificate or Pensioner’s Benefit Account.]
Clause (38) The provisions of section 151, 153 “, 233 and 236Q” shall not apply to special purpose vehicle for the purpose of securitization [“or issue of sukuks”.
Clause (38A) The provisions of sections 150, 151 and 233 shall not apply to a Venture Capital Company;
Clause (38C) The provisions of section 150, 151, 152, 153 and 233 shall not apply to the Islamic Development Bank.
Clause (47B) The provisions of sections 150, 151, 233 and Part I, Division VII of the First Schedule shall not apply to any person making payment to National Investment Unit Trust or a collective investment scheme or a modaraba or Approved Pension Fund or an Approved Income Payment Plan or a REIT Scheme or a Private Equity and Venture Capital Fund or a recognized provident fund or an approved superannuation fund or an approved gratuity fund.
Clause (59) The provisions of section 151, regarding withholding tax on profit on debt, shall not apply—
(ii) to any payment made by way profit or interest to any person on Term Finance Certificates being the instruments of redeemable capital under the Companies Ordinance, 1984 (XLVII of 1984), issued by Prime Minister’s Housing Development Company (Pvt) Limited (PHDCL);
Profit on Debt and Taxation
(iv) in the case of any resident individual, no tax shall be deducted from income or profits paid on,-
(b) Investment in monthly income Savings Accounts Scheme of Directorate of National Savings, where monthly installment in an account does not exceed one thousand rupees.
Clause (67) The provisions of sections 150, 151, 152, 153 and 233 shall not apply in respect of payments made to the International Finance Corporation established under the International Finance Corporation Act, 1956 (XXVII of 1956).
Clause (68) The provisions of sections 151, 153 and 155 shall not apply in respect of payments made to the Pakistan Domestic Sukuk Company Ltd.
Clause (69) The provisions of sections 150, 151, 152, 153 and 233 shall not apply in respect of payments made to the Asian Development Bank established under the Asian Development Bank Ordinance, 1971 (IX of 1971).
Clause (72) The provisions of sections 150, 151, 152, 153 and 233 shall not apply in respect of payments made to The ECO Trade and Development Bank.
Clause (95) the provisions of sections 147, 150A, 151, 152, 231A, 231AA, 236A and 236K shall not apply to “The Second Pakistan International Sukuk Company Limited” “and the Third Pakistan International Sukuk Company Limited”, as a payer.”
Clause [“(96) the provisions of sections 147, 150A, 151, 155 and 236K shall not apply to “The Second Pakistan International Sukuk Company Limited” “and the Third Pakistan International Sukuk Company Limited”], as a recipient.”
Deduction certificates, statement etc. rules 50, 51(3), 53 & 55
In cases where deduction under section 151 is made, the person responsible for paying profit will send to the authorities specified in rule 42, a quarterly statement ending on 30th September, 31st December, 31st March and 30th June by the 20th day of the month next following the said dates in the prescribed manner.
After deducting tax along with copies of challan showing that the tax was deposited in the Government Treasury, or an authorised branch of State Bank or National Bank of Pakistan. The deducting authority is also required to issue a certificate of deduction to the payee as prescribed in rule 42.