GOVERNMENT OF PAKISTAN (2024)

GOVERNMENT OF PAKISTAN

REVENUE DIVISION

CENTRAL BOARD OF REVENUE

*****

No.F.1-167(1)ITP/2001-EC/SAL

Islamabad, the July 4, 2001

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(Income Tax)

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Subject: FINANCE ORDINANCE, 2001 – EXPLANATION OF IMPORTANT PROVISIONS RELATING TO INCOME TAX.

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<![if !supportEmptyParas]>The following are the important amendments made in the Income Tax Ordinance, 1979, through the Finance Ordinance, 2001:

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1. BONUS SHARES.

[Sections 2 (20), (24), 12(9), 50(7) and clause (108) of Part-I of Second Schedule]

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Bonus shares issued by a company are deemed to be its income under section 12(9) of the Income Tax Ordinance, but are exempt upto 30^th June 2001 under clause (108) of Part-I of the Second Schedule to the Ordinance. These shares are also not taxable in the hands of shareholders because of specific exclusion from the definition of income given in clause (20) of section 2.

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As a result of omission of sub-section (9) of section 12, through the Finance Ordinance 2001, bonus shares issued by a company, on or after first day of July, 2001, would not be deemed to be its income. Consequently, sub-section (7) of section 50 under which tax was payable at the time of issue of bonus shares, has been omitted. Similarly, clause (108) of Part-I of Second Schedule, which exempted the companies from the provisions of section 12(9), would also stand omitted w.e.f. 1^st July 2001.

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Clauses (2) and (24) of section 20 have also been amended The effect of amendments in these clauses is that from 1^st July 2001, bonus shares would be taxable in the hands of shareholders and tax would be collectable under the amended section 50 (6A) @ 10% by the companies from shareholders other than companies.

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2. FOREIGN REMITTANCES.

[Section 13(2A)]

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A new sub-section (2A) has been introduced in section 13 which envisages that sources of foreign remittances from abroad through normal banking channel, which are encashed from a schedule bank and a certificate of encashment is produced to that effect, would neither be probed nor would addition be made under section 13 on that account.

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3. FIRST YEAR ALLOWANCE IN RESPECT OF LEASED PLANT, MACHINERY AND EQUIPMENT.

[Section 23(1)(a), Rule 5AA of Third Schedule]

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A new rule 5AA has been introduced in the Third Schedule whereby leasing companies, modarabas and investment banks have been allowed First Year Allowance (FYA) @ 30% besides 10% normal depreciation on plant, machinery and equipment leased out by them for the first time on or after 1^st July 2001. FYA would not be admissible on motor cars (not being motor vehicles plying for hire), ships and boats other than fishing trawlers. Used plant, machinery and equipment and that on which initial depreciation or depreciation or FYA or Reinvestment allowance has been allowed in the past, would also not be eligible for FYA, under the new rule 5AA.

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4. SPECIAL PURPOSE VEHICLES (SPVs).

[Section 23(1)(via), (7D), Explanation to sub-section (1) of section 23, Proviso to section 50(4)]

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SPVs are companies formed under the Assets Backed Securitization Rules, 1999, framed under the Companies Ordinance, 1984, for the purposes of securitization of receivable. The following concessions have been allowed to SPVs:-

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<![if !supportLists]>(i) <![endif]>Where payment is made to a SPV on behalf of the creditor (originator), it shall be treated as payment to the creditor and would be allowable as a deduction if it was admissible as an expenditure u/s 23.

<![if !supportLists]>(ii) <![endif]>The financial cost/discount of securitization of receivables would be deductible as an expense by the person selling/getting discounted the receivables i.e. Originator. On the other hand, total amount of receivables securitized would be recognized as an income of the year in which the securitization takes place.

<![if !supportLists]>(iii) <![endif]>Tax would not be deductible under section 50(4) from payments made by SPVs to the Originator.

<![if !supportLists]>(iv) <![endif]>Credit for the tax deducted by a debtor from payments made on behalf of the creditor to SPV would be allowed to the creditor/ originator.

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5. INTEREST ACCRUED ON NON-PERFORMING LOANS CREDITED TO SUSPENSE ACCOUNT BY DEVELOPMENT FINANCE INSTITUTIONS (DFIs).

[Section 23(1)(xxii)].

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A new clause (xxii) has been inserted in section 23(1) allowing as an expense the interest on non-performing loan credited to suspense account by development finance institutions in accordance with the Prudential Regulations for banks and such institutions by the SBP. This is applicable for assessment year commencing on or after the 1^st day of July 2002.

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6. ALLOWANCE FOR INVESTMENT IN NEW SHARES.

[Section 41A, Clause (d) of Paragraph A1 of the First Schedule].

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An individual assessee would be entitled to an allowance not exceeding 10% of his income or Rs.100,000 – whichever may be less, invested during income year commencing on or after 1^st July 2001. The allowance would be available in respect of new shares offered to the public by companies listed on stock exchange and the assessee is the original allottee of such shares. This allowance would also be available in respect of listed shares sold by Privatization Commission of Pakistan. The shares must be held for at least 12 months reckoned from the date of purchase. If any shares are disposed of before 12 months, the relief in tax would be added to the tax payable.

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The relief in tax would be allowed in the form of a rebate calculated at the average rate of tax.

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7. RETIREMENT ANNUITY SCHEME.

[Section 44AA, Clause (d) of Paragraph A1 of the First Schedule].

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A new section 44AA has been introduced in the Income Tax Ordinance. The assessees contributing under a contract of annuity scheme introduced by an insurance company registered under the Insurance Ordinance, 2000 and is approved by the Security and Exchange Commission of Pakistan (SECP), and the main object of the scheme is to make provision of an annuity in old age would be allowed a rebate in tax. The contribution, in a year, should not exceed 5% of the income or Rs.50,000 – whichever may be less. The above allowance shall not be allowed in respect of an annuity contract, which provides:

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(a) for the payment during the life of the assessee of any sums besides the sums payable as annuity;

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(b) for the annuity payable to the assessee to commence before he attains the age of sixty years;

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(d) for payment of the annuity outside Pakistan.

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8. ALLOWANCE FOR MARK UP PAID ON HOUSING LOANS.

[Section 44AAA, Clause (d) of Paragraph A1 of the First Schedule].

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A new section has been inserted in the Ordinance to allow a rebate at average rate of tax on any mark up paid by an assessee on a loan sanctioned and advance on or after 1^st July 2001 and which does not exceed Rs.600,000 and is advanced for the purpose of construction of a new house or acquisition of a house. The allowance would be available where such loan is advanced by a scheduled bank under a house finance scheme approved by the State Bank of Pakistan or advanced by Government or a local authority or House Building Finance Corporation. The maximum amount eligible for an allowance under this section is 25% of income or Rs.50,000 – whichever is the less. Besides, the loan must be utilized for construction of a new house or acquisition of a house. An allowance under this section would not be available where an assessee claims a deduction for mark up under clause (e) or (ee) of sub-section (1) of section 20.

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9. TAX WITHHOLDING.

[Sub-section (5AAA), (5B), (6A), (7), (7A) & (7G) of section 50]

Tax withheld from goods transport motor vehicles owners (section 80BB) and industrial undertakings located in EPZs (Section 80CD) was made final discharge of tax liability through Finance Ordinance, 2000. Like other taxpayers covered by presumptive tax, these taxpayers would also file statement under section 143B. An appropriate amendment has been made in the said section.

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19. NEW RATES OF INCOME TAX FOR INDIVIDUALS, AOPs, URFs AND HUF.

[Paragraph A1 of Part-I of First Schedule].

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New income tax rates for individuals, AOPs, URFs and UHF have been provided which are applicable from assessment year commencing on or after 1^st day of July 2002. Salient features are as under:-

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<![if !supportLists]>(a) <![endif]>A uniform basic threshold of Rs.60,000 has been provided both for salaried and non-salaried taxpayers;

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<![if !supportLists]>(b) <![endif]>Basic exemption of Rs.60,000 would not be available to taxpayers who have income from agriculture and are entitled to Rs.80,000 basic exemption under Provincial Agricultural Income Tax. A separate rate structure has been provided for such persons in clause (a) of the proviso to newly introduced paragraph A1 in Part-I of the First Schedule;

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<![if !supportLists]>(c) <![endif]>The reduction in tax liability to salaried taxpayers as contained in paragraphs (1) and (2) of clause (1B) of Part-III of the Second Schedule continues to be available to them;

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<![if !supportLists]>(d) <![endif]>The 50% reduction in tax liability for assessees who are 65 years of age or above and their income does not exceed Rs.200,000, also continues to be available to them;

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<![if !supportLists]>(e) <![endif]>Relief in tax under sections 41A, 44AA and 44AAA introduced through Finance Ordinance 2001, would be available at the average rate of tax;

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<![if !supportLists]>(f) <![endif]>The new rates for purposes of assessment would be applicable from assessment year commencing 2002-03. However, for purposes of tax withholding under sub-section (1) of section 50 in respect of salaried taxpayers, these rates would be applicable from 1^st July 2001.

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20. HIGHER TAX WITHHOLDING RATES FOR CONTRACTORS AND SUPPLIERS NOT HOLDING NATIONAL TAX NUMBER (NTN).

[Section 50(4), paragraphs CCC and E, of Part-I of the First Schedule].

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Contractors and suppliers who do not hold NTN would be liable to higher tax withholding rates. The following are the rates for such non-NTN holders:-

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(i) where the value of seven per cent

contract does not of such income.

exceed thirty million

rupees.

(ii) where the value of eight per cent

contract exceeds thirty of such income.

million rupees.

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(iii) payments on five per cent of

account of supplies. such income.

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The tax deducted at the above rates would constitute the final discharge of tax liability from assessment year 2002-03 onwards.

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21. NEW TAX WITHHOLDING RATES ON ELECTRICITY BILLS.

[Section 50(7E), Paragraph K, sub-para (a) of Part-I of First Schedule].

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The tax withholding rate on electricity bills in the case of commercial consumers have been revised effective 1^st day of July 2001. Following are the new rates:-

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(i) does not exceed Rs.400 Rs. 60

<![if !supportLists]>(ii) <![endif]>exceeds Rs.400 but does not exceed Rs.600 Rs. 80

<![if !supportLists]>(iii) <![endif]>exceeds Rs.600 but does not exceed Rs.800 Rs. 100

<![if !supportLists]>(iv) <![endif]>exceeds Rs.800 but does not exceed Rs.1000 Rs. 160

<![if !supportLists]>(v) <![endif]>exceeds Rs.1000 but does not exceed Rs.1500 Rs. 300

<![if !supportLists]>(vi) <![endif]>exceeds Rs.1500 but does not exceed Rs.3000 Rs. 450

<![if !supportLists]>(vii) <![endif]>exceeds Rs.3000 but does not exceed Rs.4500 Rs. 600

<![if !supportLists]>(viii) <![endif]>exceeds Rs.4500 but does not exceed Rs.6000 Rs. 750

<![if !supportLists]>(ix) <![endif]>exceeds Rs.6000. Rs.1000;

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22. ABOLITION OF SURCHARGES.

[Paragraphs B and C of Part-III of First Schedule].

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The surcharge of Rs.300 payable by assessees qualifying under the self-assessment scheme and 10% surcharge payable by non-salaried individuals and AOPs, URF, HUF where income exceeds Rs.100,000, would not be applicable from assessment year 2002-03. Similarly, companies would also not be liable to 5% surcharge from assessment year 2002-03.

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23. NEW INCOME TAX RATES FOR COMPANIES.

[Paragraph A, sub-paragraph (4) of Part-V of First Schedule].

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A sub-paragraph (4) has been added to paragraph A of Part-V of First Schedule, to provide new rates for companies, which would be applicable from assessment year 2002-03. The following are tax rates for assessment year 2002-03 and onwards:

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(a) in case of a

banking company 50%

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(b) in case of a

public company other

than a banking company 35%

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other company 45%.

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24. TAXATION OF DIVIDEND INCOME OF PUBLIC COMPANIES CARRYING ON INSURANCE BUSINESS.

[Paragraph D of Part-V of First Schedule].

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At present, dividend income of public companies carrying on insurance business, is taxable @ 33%. Paragraph D of Part-V of First Schedule has been amended to provide for taxation of dividend income of such insurance companies @ 5%, as applicable to other public companies from the assessment year 2002-2003.

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25. AMENDMENTS IN SECOND SCHEDULE OF THE INCOME TAX ORDINANCE, 1979.

[Part-I, Part-III and Part-IV of the Second Schedule].

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(A) The following amendments have been made in Part-I of Second Schedule to the Ordinance.

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(i) A new clause (7F) has been introduced in Part-I of the Second Schedule, by virtue of which the salary of Pakistani seafarers working on foreign ships, which is chargeable to tax, would be exempt from tax in Pakistan, if it is remitted through normal banking channel within two months of the end of the relevant income year;

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<![if !supportLists]>(ii) <![endif]>Flying allowance received by pilots, navigators and engineers employed by Civil Aviation Authority has been exempted from tax through an amendment in clause (39B);

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<![if !supportLists]>(iii) <![endif]>National Savings Schemes: Clauses (77A), (77D) & (77E) have been amended. As a result, income from investments made on or after 1^st July 2001 in Defence Saving Certificates, Special Saving Certificates and Accounts, National/Post Office Savings Banks Account and mahana amadani accounts would be taxable. The income from such investments would be subject to tax withholding u/s 50(2) at the reduced rate of 10% if the investment exceeds Rs.300,000. The tax so withheld would be adjustable against final tax liability of a taxpayer. Such taxpayers whose income exceeds Rs.60,000 from all sources would be liable to file returns of income and entitled to claim adjustment for tax withheld against their final tax liability.

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At present, tax is deductable @ 10% from Regular Income Certificates and Accounts and mahana amadani accounts where monthly contribution exceeds Rs.1000 per month. This rate of deduction would continue irrespective of the quantum of investment. The tax deducted upto 30^th June 2001 would be the final discharge of tax liability whereas tax deducted from 1^st July 2001 onwards would be adjustable against final tax liability.

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The income from investments made upto 30^th June 2001 in Defence Savings Certificates, Special Savings Certificates/ Accounts, mahana amadani account – where monthly contribution does not exceed Rs.1000, and in Post Office Saving Bank or National Saving Centres under National Saving Schemes, would remain exempt and shall not be subject to tax withholding.

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A new clause (5AA) has been inserted in Part-II of the Second Schedule to provide for aforementioned tax withholding under section 50(2) at a reduced rate of 10%.

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<![if !supportLists]>(iv) <![endif]>Income or profit from deposits made from 1^st July 2001 onward in Post Office Saving Accounts or National Savings Account under National Saving Schemes has also been made taxable at normal tax rates. Tax withholding @ 10% would be effective if such deposits exceeds Rs.300,000 [Clause (77D) refers].

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<![if !supportLists]>(v) <![endif]>Under clause (80A) income derived by individuals from Term Finance Certificates is exempt. Such exemption would not be available from assessment year 2002-03. Tax would, therefore, be deductible from 1^st July 2001 onwards under section 50(7D) @ 10% from interest on TFCs, which is paid to individuals. The tax so deducted would be adjustable against the final tax liability from assessment year 2002-03.

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It may be mentioned that income of companies from TFC’s continues to be taxable but not liable to tax withholding (in respect of TFCs issued on or after 1^st July 1999).

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<![if !supportLists]>(vi) <![endif]>Exemption available to donations made to the Prime Minister’s Fund for National Debt Retirement and National Self Reliance Fund has been withdrawn.

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<![if !supportLists]>(vii) <![endif]>As explained in paragraph I, tax exemption under clause (108) in respect of bonus shares issued by a company has been withdrawn as sub-section (9) of section 12 has been omitted.

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<![if !supportLists]>(viii) <![endif]>Exemption on capital gains under clause (116), which was to lapse after assessment year 2001-02, has been extended for another three years i.e. upto assessment year 2004-05.

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<![if !supportLists]>(ix) <![endif]>Clause (171) has been withdrawn.

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<![if !supportLists]>(B) <![endif]>In Part-III of the Second Schedule, clause (1B) has been amended. Consequently, reduction in tax liability equal to 80% if income does not exceed Rs.60,000, would not apply in respect of tax withholding under section 50(1) from 1^st July 2001 and for assessment for assessment year 2002-03 in other cases, because of increase in taxable income threshold.

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<![if !supportLists]>(C) <![endif]>In Part-IV of the Second Schedule, the following amendments have been made:-

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<![if !supportLists]>(i) <![endif]>Clause (10B) has been substituted to provide exemption from tax withholding under section 50(7D) in respect of profit or interest on TFCs held by a company (issued on or after 1^st day of July 1999).

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<![if !supportLists]>(ii) <![endif]>Clause (32D), regarding exemption from minimum tax under section 80D to individuals, AOPs, URFs and HUF qualifying under SAS has been omitted w.e.f. 1^st July 2001 as a corresponding amendment to this effect has been made in section 80D.

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<![if !supportLists]>(iii) <![endif]>A new clause (32G), has been introduced which exempts Corporate and Industrial Restructuring Corporation (CIRC) from the levy of minimum tax under section 80D.

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<![if !supportLists]>(iv) <![endif]>Pak Arab Refinery limited, like other refineries, has been exempted from application of the provision of section 50(4) in respect of supply of its products [clause (33A)].

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<![if !supportLists]>(v) <![endif]>Sub-clause (i) of clause (59) has been amended to provide that the provisions of section 12(9A) shall not be applicable in respect of a company listed on stock exchange which distributes cash dividend equal to 40% of its after-tax-profit or 50% of the paid up capital – whichever is less.

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26. AMENDMENTS IN THIRD SCHEDULE OF THE INCOME TAX ORDINANCE, 1979.

[Third Schedule].

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The following amendments have been made in the Third Schedule:-

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<![if !supportLists]>(a) <![endif]>normal depreciation rate on personal computer hardware has been enhanced from 10% to 30%;

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<![if !supportLists]>(b) <![endif]>tourism, hotel and tourism related projects, housing and construction and agriculture projects have been placed under entry C of the table in rule 5A. Consequently, the rate of First Year Allowance in respect of such projects would be 65% plus 10% normal depreciation.

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<![if !supportLists]>(c) <![endif]>A new rule 5AA has been inserted to allow First Year Allowance (FYA) @ 30% in respect of any plant, machinery and equipment (other than motor vehicles not plying for hire and ships not being fishing trawlers) given on lease on or after 1^st day of July 2000, by an Investment Bank or a Modaraba or a Leasing Company. The new rule also defines an investment bank.

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<![if !supportLists]>(d) <![endif]>The cost of a motor vehicle for the purposes of depreciation, as contained in rule 8, has been enhanced from Rs.600,000 to Rs.750,000.

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27. AMENDMENTS IN PART-I OF FIFTH SCHEDULE OF THE INCOME TAX ORDINANCE, 1979.

[Part-I of the Fifth Schedule].

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Rules 2 and 4 of Part-I of the Fifth Schedule have been amended. As a result, “royalty” would be allowed as an admissible expense to on-shore petroleum exploration and production undertakings in respect of income year commencing on or after 1^st July 2001. In addition, the rate of tax in respect of on-shore companies would be reduced from 50% to 40% in respect of assessment year 2002-03 onwards.

<![if !supportEmptyParas]>(ABDUL HAMID)

SECRETARY (IT POLICY)

Ph:9203993

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Pakistan

Islamic Republic of Pakistan اسلامی جمہوریہ پاكستان (Urdu) Islāmī Jumhūriyah Pākistān
Government	Federal Islamic parliamentary republic
• President	Asif Ali Zardari
• Prime Minister	Shehbaz Sharif
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As envisaged by the nation's founding father, Muhammad Ali Jinnah, Pakistan is a nation-state, constitutionally a democratic parliamentary republic. The national cabinet, led by the Prime Minister of Pakistan has executive power and the president is the head of state elected by the electoral college.

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President Asif Ali Zardari is the 14th President of Pakistan. He took the oath of the office on 10 March 2024.

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Although Pakistan was founded as a democracy after its independence from the British Raj, the military has remained one of the country's most powerful institutions and has on occasion overthrown democratically elected civilian governments on the basis of self-assessed mismanagement and corruption.

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The President is ceremonial head of state, Prime Minister is head of executive, but this provision made President more powerful than Prime Minister and Prime Minister was made subordinate to President.

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The monarchy was abolished on 23 March 1956, when Pakistan became a republic within the Commonwealth with a president as its head of state.

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Muhammad Ali Jinnah (the founder of Pakistan) wanted Pakistan to be a secular, democratic, and a liberal republic. Pakistan was secular from 1947 to 1955 and after that, Pakistan adopted a constitution in 1956, becoming an Islamic republic with Islam as its state religion.

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Type: Parliamentary democracy. Independence: August 14, 1947. Branches: Executive--president (chief of state), prime minister (head of government). Legislative--Bicameral Parliament or Majlis-e-Shoora (100-seat Senate, 342-seat National Assembly).

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A Commonwealth refers to an independent state created for the common good and includes various forms of government such as republics, constitutional monarchies, federations and confederations. A Republic is a particular form of government, one that does not have a monarch as its head of state.

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