PAKISTAN
RECENT DEVELOPMENTS
DR. IKRAMUL HAQ
Advocate Supreme Court
HUZAIMA & IKRAM (Taxand Pakistan)
FEDERAL TAXES:
Income
Tax Ordinance, 2001
Sales Tax Act, 1990
Customs Act. 1969
Federal Excise Act, 2005
Capital Value Tax
INCOME TAX ORDINANCE, 2001
Basic income tax exemption limit for salaried
and non-salaried individuals for tax year 2012
raised from PKR 300,000 to PKR 350.000.
 Tax credit equal to 100% of the tax payable by
a newly established company.
 Tax credit equal to 100% of tax payable for
equity investment in balancing,
modernization, replacement, or for expansion
of the plant and machinery already installed,
in an industrial undertaking .

INCOME TAX ORDINANCE, 2001
 For
companies getting enlisted on
stock exchange rate of tax credit
enhanced from 5% to 15%.
 Period for carry forward and
adjustment of minimum tax enhanced
to five years from three years.
 Turnover for the purposes of minimum
tax will be gross sales or gross
receipts.
INCOME TAX ORDINANCE, 2001
Holders of commercial or industrial connection
of electricity where the amount of annual bill
exceeds rupees one million, compulsorily
required to file return of income.
 Individuals having income from business
between PKR 300,000 and PKR 350,000 to
file return of income despite having zero
percent tax.
 Threshold for compulsory filing of wealth
statement and its reconciliation increased
from PKR 500,000 to PKR 1,000,000.

INCOME TAX ORDINANCE, 2001
 Monthly,
instead of quarterly statements of
withholding tax to be filed. Statements to
include Computerized National Identity Card
(CNIC) or National tax Number (NTN) of the
persons from whom tax was
withheld/collected.
 Annual withholding tax statement to be filed
by employers for tax withheld and also for
employees earning non-taxable salaries.
INCOME TAX ORDINANCE, 2001




Adjustment period of minimum tax extended from 3
to 5 years.
Non-resident taxpayers having permanent
establishment in Pakistan shall not be entitled to
Advance Ruling.
Banks have been allowed 5% provision of total
advances to small and medium enterprises (SMEs).
Earlier this limit was only 1%.
Rate of tax on dividend received by a bank from its
asset management company enhanced from 10%
to 20%.
INCOME TAX ORDINANCE, 2001
 10% tax deducted on profit from
instruments, government securities
including treasury bills and Pakistan
Investment Bonds from a non-resident
person having no permanent
establishment in Pakistan shall be a
“final tax” where the investments for
purchase of these instruments are
exclusively made through a Special
Rupee Convertible Account maintained
with a Bank in Pakistan.
INCOME TAX ORDINANCE, 2001
 Appeal
to the Commissioner (Appeals) not
permissible against provisional
assessment order.
 Tax payable as a result of provisional
assessment order shall be payable
immediately after a period of sixty days
from the date of service of notice.
 Single member bench of the Tribunal to
dispose of cases involving tax or penalty
not exceeding PKR 1,000,000 instead of
PKR 5,000,000.
INCOME TAX ORDINANCE, 2001
Advance tax on capital gains on sale of
securities shall be payable within a period of
21 days after the close of each quarter.
 Profit on debt on securities issued by Federal
Government, Provincial Government or Local
Government to be taxed under final tax
regime for resident individuals and
Association of Persons (AOPs).
 Threshold for withdrawal from pension fund
enhanced from 25% to 50% of accumulated
balance in order to attract withholding tax.

FINANCE (AMENDMENT) ORDINANCE,
2012

Promulgated by the President on 24 April
2012 providing that:
 Source of investment in the shares would
not be probed till June 30, 2014 provided
that amount remains invested for a period
of 120 days.
 Amount of investment shall be calculated
in the prescribed manner, excluding market
value of net open sale position in futures
and derivatives, if such sale is in a security
that constitutes the said investment.
EIGHTH SCHEDULE (CAPITAL GAINS)
Where a person has made any investment in the
listed securities, enquiries as to the nature and
source of the amount invested shall not be made
for any investment made prior to the introduction
of Eighth Schedule, provided that a statement of
investments is filed with the Commissioner along
with the return of income and wealth statement
for tax year 2012 within due date as given in
section 118, in the manner prescribed & the
amount remains invested for a period of 45 days
up to June 30, 2012, in the prescribed manner.
EIGHTH SCHEDULE (CAPITAL GAIN)
Capital gains on disposal of listed securities
shall be computed and determined under Eighth
Schedule and tax thereon shall be collected and
deposited on behalf of taxpayers by National
Clearing Company of Pakistan Limited (NCCPL)
in the manner prescribed.
 The Central Depository Company of Pakistan
Limited shall furnish information as required by
NCCPL for discharging obligations under this
Schedule.
 The Central Depository Company of Pakistan
Limited to furnish information to NCCPL .

SALES TAX ACT, 1990

Rate of sales tax reduced to 16% from 17%

Several exemptions have been withdrawn
notably:
 Bricks, building blocks, and ready mix
concrete;
 Aircraft & ships, machinery for pilotage &
towage, air navigation equipment;
 Bull-dozers, harvesters, CNG Euro-2 buses,
trucks for highways;
 Agricultural machinery;
 CNG kits & cylinders.
SALES TAX ACT, 1990
 Zero
rating facility withdrawn on CNG
buses in CBU (completely built unit) or CKD
(completely knocked down) condition,
trucks & dumpers, trailers & semitrailers,
road tractors, etc.
 Restriction of claiming input tax up to 90%
of output tax on fixed assets and capital
goods stands withdrawn.
 Returns can also be revised after approval
from the Commissioner.
SALES TAX ACT, 1990
No refund of sales tax is admissible, if
incidence of sales tax has already been
directly or indirectly passed on to the
consumer.
 Specific and express provisions introduced for
inadmissible claim of input tax credit against
invoices issued by suspended or blacklisted
parties.
 Withdrawal of sales tax exemption on plant,
machinery, equipment, etc. relating to
specified sectors/industries/capital goods.

FEDERAL EXCISE ACT, 2005
Special excise duty leviable at the rate of
2.5% on imported and manufactured goods
abolished across the board.
 Rate of Federal Excise Duty (FED) introduced
on aerated waters and fruit juices, etc.
reduced to 6% of retail price .
 Rate of duty on various types of cement
slashed from Rs. 700 PMT to Rs. 500 PMT.
 Rate of duty enhanced on locally produced
cigarettes, unmanufactured tobacco and filter
rods of cigarettes.

FEDERAL EXCISE ACT, 2005
 FED
abolished on 15 different types of
goods including solvent oils, other fuel oils,
greases, MBTE, viscose staple fibre, motor
cars, air-conditioners, deep freezers, etc.
 FED in sales tax mode imposed at the rate
of 8% ad valorem on white crystalline
sugar to substitute sales tax.
 FED on services rendered or provided by
property developers and promoters stands
withdrawn.
CUSTOMS ACT, 1969
 Transit
fee: For the first time transit fee is
levied on any goods or class of goods in
transit across Pakistan to a foreign territory
at such rates as the Federal Board of
Revenue (FBR) may, by notification in the
official Gazette.
 Power to prohibit, withdrawn on import or
export of goods on the belief that the
importer has submitted false statements.
 Duty drawback facility allowed for supplies
against international tenders.
CUSTOMS ACT, 1969
 Enhancement
of time limit from 3 years to 5
years for issuance of show cause notice on
account of audit.
 One year time period for refund, to be
reckoned from the date of the decision of
the appropriate authorities.
 Regulatory duty abolished on a number of
items.
 Incentives to local industry by reduction of
duty through a concessionary notification.
CAPITAL VALUE TAX (CVT)
CVT was abolished w.e.f. July 1, 2011
on the purchase of modaraba
certificates,
instruments
of
redeemable capital and shares of
listed companies. But the Presidential
(Amendment) Ordinance, 2012 has
re-imposed 0.01% CVT on purchase of
shares of public listed companies
from 24 April 2012.
CASE LAW: EFU V FEDERATION OF
PAKISTAN
 Section
152(5) of the Income Tax
Ordinance, 2001 requires that where a
person intends to make any payment to a
non-resident without deduction of tax, he
must inform the Commissioner and wait for
his ruling—which Commissioner is bound to
issue within 30 days.
 Section 152(1AA) requires every person to
withhold tax of 5% while making a payment
of reinsurance premium to a non-resident
person.
EFU V FEDERATION OF PAKISTAN: ISSUES
RAISED
EFU Insurance Pakistan [EFU] neither
deducted tax while making payments to nonresident companies [having DTAs with
Pakistan] nor sought prior clearance from the
Commissioner.
 The Commissioner started penal proceedings
which were challenged in High Court by way
of writ petition on the following grounds:

 Treaty
provisions override domestic law; and
 Payments to non-resident companies, having no
PE in Pakistan, were exempt under DTAs.
EFU V FEDERATION OF PAKISTAN:
DEPARTMENT'S PLEA
Tax Department pleaded that section
101(13A) deemed any amount paid on
account of insurance or re-insurance as
‘Pakistan-source’ income.
 Since EFU did not deduct tax while making
payment mentioned in section 101(13A) read
with section 152(1AA) and 152(5), penal
action was correctly initiated.
 It was incumbent upon EFU to intimate the
Commissioner even if payments were exempt
under DTA.

EFU V FEDERATION OF PAKISTAN: CASE
LAW CITED
EFU countered by relying on American
Express Bank Karachi v. Commissioner of
Income Tax (2009 PTD 1791) that "provisions
of the treaty prevail over provisions of the
Income Tax Ordinance—it is a settled law that
special laws prevail over general laws“.
 In Mountains Estate Mineral Enterprises v.
Commissioner of Income Tax (2008 PTD
1087) it was held that "where no PE in
Pakistan exists, business income is exempt
and no tax can be levied under domestic
law“.

EFU V FEDERATION OF PAKISTAN: PETITIONER'S
ARGUMENTS

The argument of EFU (petitioner) was twofold:
 First submission: provisions of the treaty
have an overriding effect over domestic tax
laws. Payment of re-insurance premium
could not be taxed as ‘Pakistan-source’
income even under a deeming provision.
 Second submission: since payments to the
non-resident enterprises were not liable to
tax in Pakistan, there was no legal
obligation to deduct tax at source or seek
approval from Commissioner.
EFU V FEDERATION OF PAKISTAN:
COURT'S VIEW
 Court
held that “the question of
deduction of tax does not arise where
payments made to the non-residents are
exempt from tax under any provision of
applicable DTA”.
 It is also a settled law that in the case of
an enterprise of contracting State with
which Pakistan has a treaty, provisions of
the treaty will determine the rights and
obligations of the said non-resident
company.
EFU V FEDERATION OF PAKISTAN:
COURT'S VIEW
Although the provisions of section 152(5) of
the Ordinance direct a taxpayer to seek
approval from the Commissioner before
remitting any payment to a non-resident
without deduction of tax, however, it does not
entail any penal consequences if the approval
is not obtained.
 While interpreting the statutes, the court has
to find out as to what was the intention of the
legislature. Intention is the essence of the
statute—Legislature has not made section
152(5) mandatory.

EFU V FEDERATION OF PAKISTAN:
COURT'S VIEW
Department’s view that by using the word
"shall“ in section 152(5), the legislature has
made it mandatory is incorrect. The provision
does not specify any consequences of not
following the requirement of informing the
Commissioner if the person chooses to make
the payment without deduction of tax.
 Merely on the basis of the use of the word
"shall" it could not be construed that it is a
mandatory provision of law—we hold that it is
a directory provision.

EFU V FEDERATION OF PAKISTAN:
COMMENT
 EFU
did not press non-discrimination
provision in DTAs providing that nonresident ‘nationals’ [expression includes
legal persons] could not be subjected to
any taxation [section 101(13A) or any
requirement connected therewith [section
152(5)] as no such taxation or condition
was imposed on Pakistani nationals by the
other contracting states .
 The Court also did not take cognizance of
the matter from this perspective.