Relevant to Paper F6 (PKN)
This article is relevant to candidates taking Paper F6 (PKN) in either the June or December 2014 sittings, and is based on the tax legislation contained in the Finance Act 2013.
In Pakistan, as in many jurisdictions, a tax can be levied only by, or under, the authority of an Act of Parliament. While taxation of income (other than agricultural income) is governed by the Income Tax Ordinance 2001 as amended from time to time, the Sales Tax Act 1990 deals with sales tax at Federal level. Sales tax on services is a provincial subject and not examinable in Paper F6 (PKN). According to the guidelines issued by ACCA, relevant legislation (including Ordinance) which receives President’s assent on or before 30 September 2013 will be assessed for the first time in the June 2014 sitting of Paper F6 (PKN).
The Finance Act 2013 is effective from 1 July 2013 and is therefore examinable in the June and December 2014 sittings of Paper F6 (PKN). It has been observed that many candidates do not give due attention to the changes brought about in the latest examinable Finance Act. Therefore, candidates are advised to go through these amendments carefully so that they can answer exam questions accurately and earn good marks accordingly.
It should be noted that references to the different sections of the Income Tax Ordinance 2001 and the Sales Tax Act 1990 are for additional information only, as candidates are not required to be able to quote these when answering the F6 (PKN) paper.
The examinable amendments are explained below.
With effect from 1 July 2013, a number of new withholding taxes have been introduced. The examiner does not expect candidates to memorise these rates; however, the examiner does expect candidates to have knowledge of the withholding agents, consequences of non-compliance with the withholding tax provisions and to recognise whether the tax withheld is allowed as a tax credit or is the final tax.
The tax withheld on the transactions discussed below are allowed as a tax credit against the tax liability of a tax payer and are not covered under the final tax regime.
The following changes have been made to the tax rates, which are examinable in the June and December 2014 exams:
Apart from new persons designated as withholding agents in respect of the transactions mentioned under the new withholding taxes section of this article, the legislation has introduced new withholding agents in respect of the existing withholding tax provisions as follows:
Two new legislative provisions have been introduced providing a minimum tax on the income of builders and land developers. The mode, manner and time of payment of such amount of tax shall be notified separately by the Federal Board of Revenue (FBR). [s113A &113B]
Dividend income received by a company is now liable to a fixed and final tax of 10% [the same rate which previously applied to non-corporate taxpayers]. [s5 &8]. This rate is given to candidates in the tax rates and allowances at the front of the exam paper.
Some very important changes have been introduced in relation to the taxation of income from property. Candidates are advised to thoroughly review the amendments made to this important area of taxation discussed below.
With effect from the tax year 2014, income from property shall NOT be taxed under the fixed/final tax regime. Instead, income shall be taxed by adding such income to the income from other heads of income, if any, to determine total income and taxable income. [s15]
In arriving at income under the head, ‘Income from property’, a list of allowable deductions has been given in the legislation. Any deduction not mentioned in this list, is NOT allowable. [s15A]. The deductions are:
Under the Finance Act 2013, a person sustaining a loss under any head of income as specified in section 11 cannot set off such loss against income under the head 'Salary' or 'Income from property'. [s56]
The definition of 'company' has been extended to include the following:
Where a taxpayer has unexplained income or assets and explains the nature and source of these assets as being from agricultural income, such an explanation shall be accepted only to the extent of agricultural income worked back on the basis of agricultural income tax paid (subject to the taxpayer furnishing of proof of payment of agriculture tax under the relevant provincial law). [s111(1)]
Return of income
The following persons will be required to file income tax return irrespective of their quantum of taxable income:
With effect from 1 July 2013, prior approval of the Commissioner of Inland Revenue shall be mandatory for the filing of a revised return. [s114]
All salaried persons deriving taxable income will now be required to file their income tax returns. Prior to this change, a statement filed by an employer could be treated as a return of income for certain taxpayers. [s115]
Wealth statement
Every taxpayer being an individual or a member of an association of persons shall file a wealth statement along with their return of income, irrespective of their declared or assessed income. [s116]
Provisional assessment
The previous time limit of sixty days for any provisional assessment order to be treated as the final assessment order has been reduced to 45 days. [s122C]
Additional payment for delayed refunds
An ‘Explanation’ to s171(2) has been issued to clarify that where a refund order is made on an application under s.170(1), the refund becomes due from the date the refund order is made and not from the date the assessment of income is treated as having been made by the Commissioner under s120 of the Income Tax Ordinance, 2001.
Penalties
Penalties for violations of different provisions of the Ordinance have been increased. [s182]
The reduction in the tax payable on the income from salary of a full time teacher or researcher employed in a duly recognised non-profit educational or research institution has been decreased to 40% (previously 75%).
A duly recognised non profit educational or research institution is one recognized by the Higher Education Commission, a Board of Education or a University recognized by the Higher Education Commission, including government training and research institutions.
It has been further clarified that a full time teacher means a person employed purely for teaching and not performing any administrative or managerial jobs e.g. principals, headmasters, directors, vice-chancellors, chairmen, controllers etc. Similarly a full time researcher means a person purely employed in a research role within a research institution which purely performs research activities.
The rate of initial allowance under section 23 for plant and machinery has been reduced from 50% to 25%. This rate is given to candidates in the tax rates and allowances at the front of the exam paper.
Note: FBR has also outlined the above amendments in the Finance Act 2013 in its Circular No. 06 of 2013, dated 19 July 2013, which can be accessed at www.fbr.gov.pk
A number of changes have been made to the Sales Tax Act 1990. The examinable amendments are briefly discussed below:
The general rate of sales tax has been increased from 16% to 17%. [s3] In addition, where supplies are made to an unregistered person, a further tax of 1% shall be charged. [s3(1A)]
The FBR, by notification in the official Gazette, in lieu of levying and collecting tax on taxable supplies, may levy and collect tax:
A person shall not be eligible to claim input tax paid on purchases in respect of which a discrepancy is indicated by CREST (the computerised program for analysing tax returns) or which is not verifiable in the supply chain. [s8]
From 1 July 2013 , rectification of mistakes (of law or facts) can be made by the Commissioner, the Commissioner (Appeals) or the Appellate Tribunal in the same manner as it can be done under s.221 of the Income Tax Ordinance, 2001. [s57]. Previously, the scope of rectification was limited to minor clerical mistakes.
More goods have been added to the Third Schedule which lists goods liable to sales tax at 17% of their retail price. Candidates are advised to familiarise themselves with these goods.
Written by a member of the Paper F6 (PKN) examining team