ISLAMABAD: The Federal Board of Revenue (FBR) has submitted a bill to the National Assembly secretariat proposing a string of amendments to withdraw around 36 tax exemptions and streamline other corporate tax exemptions, which will come into effect from July 1, 2021.

The corporate income tax reforms are in line with recommendations of the International Monetary Fund (IMF). The Fund estimates it will generate revenue of Rs140 billion. The bill, which will be called the income tax (second amendment) bill 2021, will be introduced in the next session of the lower house, whenever convened.

Local tax expert estimates a revenue impact in the range of Rs30bn to Rs40bn.

Under the bill, the tax regime for the non-profit organisation (NPOs) has been made simpler. A broader distinction was made in incomes of charitable institutions which can seek 100pc tax credit or those which cannot. However, the tax credit is linked with prior conditions including filing of income tax returns and withholding tax statements for the relevant tax year.

FBR proposes reforms in line with IMF recommendations to raise around Rs140bn

It has been proposed that a tax rate of 10pc will apply to surplus funds, which are not spent on charitable and welfare activities during the tax year. However, the surplus fund is clearly defined in the proposed amendments.

A senior tax official told Dawn that the clauses related to NPOs were re-written to make it easy for compliance. “There is no change in the tax liability from the NPOs under the proposed amendments,” the official claimed.

A new section 65 F will be introduced in the income tax ordinance to allow 100pc tax credit to persons, who are engaged in coal mining projects in Sindh and incomes of persons from exports of computer software or IT services or IT enabled services until June 2025.

There will be no turnover tax for the IT sector anymore. The availing of tax credit is linked with mandatory filing of income tax and sales tax returns as well as submission of withholding statement.

A new Section 65G is proposed which will allow taxpayers to take an investment tax credit of 25pc of the eligible investments amount against tax payable. It will be available to green field industrial undertaking and renewable energy projects — solar and wind — for a period of five years.

The eligible investment means purchase and installation of new machine­ry, buildings, equipment, hardware and software except self-created software and used capital goods. The bill pro­po­ses conditions for availing the tax credit.

The bill proposes exemption of turnover tax on supply chain of locally manufactured mobile phones. However, it is linked with mandatory filing of income tax returns aiming documentation of the sector.

The exemptions of income tax will continue for the existing electric power generation project. However, no exemptions will be available to persons who enter into agreement or to whom letter of intent is issued by federal or provincial governments for setting up an IPP project in Pakistan after June 30, 2021.

The existing or new refineries will have to make an undertaking with the government before December 31, 2021 for availing exemptions. The exemption relates to setting up of new refinery or upgrade of the existing ones.

For Modaraba companies, the exemption is proposed to be withdrawn and will be subject to normal rate of 29pc. Similarly, withdrawal of the exemption on real estate investment trust (REIT) has been proposed.

The five-year tax credit on new industrial undertaking will not be extended further, which will expire on June 30, 2021. The reduce rate of tax will be available to those low-cost housing projects, which will commence projects from June 2024.

Penalties

Also through the bill, certain penalties have been revised for those who did not file their income tax returns.

In case of non-filing of return, a minimum penalty will be Rs5,000 in those cases where if taxable income is up to Rs800,000. The amount of penalty can be reduced by 75pc, 50pc and 25pc, if the return is filed within one, two and three months respectively after the due date or extended due date of filing of return as prescribed under the law.

No penalty will be imposed to the extent of the tax shortfall occurring as a result of the taxpayer taking a reasonably arguable position on the application of this legislation to the taxpayer’s position. However, the person will pay a penalty of Rs25,000 or 50pc of the amount of tax shortfall, whichever is higher.

Any person who denies or obstructs the access of the commissioner or any officer authorised by the commissioner to the premises, place, accounts, documents, computers or stocks will pay a penalty of Rs50,000 or 50pc of the amount of tax involved, whichever is higher.

Any person who fails to display his NTN or business licence will pay a penalty of Rs5,000.

Besides, the FBR proposed to withdraw exemptions available to Sheikh Sultan Trust, Karachi; income derived by Sukuk Holder in relation to Sukuk issued by “The Second Pakistan International Sukuk Company Limited” and “The Third Pakistan International Sukuk Company Limited”, including any gain on disposal of such Sukuk.

The board also suggested withdrawal of exemption on profit on debt derived by Hub Power Company Limited on its bank deposits or accounts with financial institutions directly connected with financial transactions related to the project operations.

Similarly, the withdrawal of exemptions on profit on debt payable by an industrial undertaking in Pakistan; on any profit on debt derived by any person on bonds issued by Pakistan Mortgage Refinance Company to refinance the residential housing mortgage market; any income of a textbook board of a province; any income derived by any board or other organisation established by government for the purposes of controlling, regulating, or encouraging major games and sports; profits and gains derived between the July 1, 2000 and the June 23, 2024 by a venture capital company and venture capital was recommended.

It was proposed that exemption be withdrawn on any distribution received by a taxpayer from a collective investment scheme under the Non-Banking Finance Companies and Notified Entities Regulations, 2007; dividend income derived by a company; income derived by the Libyan Arab Foreign Investment Company; income derived by the government of Saudi Arabia being dividend of the Saudi-Pak Industrial and Agricultural Investment Company Limited; income derived by Kuwait Foreign Trading Contracting and Investment Company or Kuwait Investment Authority being dividend of the Pak-Kuwait Investment Company in Pakistan; any gain on transfer of a capital asset, being a membership right held by a member of an existing stock exchange; any gain by a person on transfer of a capital asset, being a bond issued by Pakistan Mortgage Refinance Company; any income chargeable under the head “capital gains” derived by a person from an industrial undertaking set up in an area declared by the federal government to be a “zone” within the meaning of the Export Processing Zones Authority Ordinance, 1980 (IV of 1980).

Withdrawal of exemption was also proposed for profit and gains M/s Astro Plastics (Pvt.) Ltd from their Biaxially-Oriented Polyethylene, Terephthalate (BOPET) project; and M/s. Novatex Ltd from their BOPET project; any income derived by a non-resident from investment in OGDCL exchangeable bonds; any income of a special purpose vehicle as defined in the Asset-Backed Securitisation Rules, 1999 made under the Companies Ordinance, 1984; profit and gains derived by LNG terminal operators and terminal owners; any income which was not chargeable to tax prior to the commencement of the Constitution (Twenty-fifth Amendment) Act, 2018 of any individual domiciled or company and association of persons resident in the tribal areas forming part of the provinces of Khyber Pakhtunkhwa and Balochistan under paragraph (d) of Article 246 of the Constitution with effect from June 1, 2018 to June 30, 2023.

Published in Dawn, March 14th, 2021