SALIENT FEATURES

CUSTOMS BUDGETARY MEASURES 2007-08

Policy Objectives:
• Consistency and transparency in tariff policy.
• Minimizing the cost of doing business.
• Tariff reforms continued.
• Cascading principle in tariff rates maintained as guiding principle (primary raw
materials @ 0%-5%, secondary/components @ 5-10% and finished goods @ 20-
25%).
• Industrial incentives for growth and expansion.
• Tariff classification scheme aligned with HS 2007 version.
• Amendments in SROs to align them with HS 2007 version.
• Amendments in Customs Act, Rules and Procedures for further simplification.

Structural measures:
• Adoption of Harmonized Commodity Description and Coding System - 2007
version. Necessary additions/deletions and amendments made in Pakistan
Customs Tariff.
• Introduction of 0% duty slab in Tariff. The SRO regime squeezed in size.

Sectoral industrial incentives:

• In order to enhance local industrialization, capacity building, production
competitiveness efficiency and product presentability, duty rates on raw
materials, parts and components for manufacturing of the following
items/products have either been reduced or eliminated:
o CNG compressors.
o Paper and paperboard.
o Items/equipments which have dedicated use in non-conventional/
alternate renewable energy resources like solar, wind and bio tech.
o Gum base.
o Transformers, submersible motors, electricity meters, switchgears and
electric bulbs and tube lights.
o Light engineering products.
o Polystyrenes and their raw materials.
o Energy saving lamps and its raw materials/ parts.
o Petroleum bitumen/ asphalt.
o Footwear.
o Football bladder.
o Aviation equipments.

• New sectors/sub-sectors have been added under the incentive regime for
local manufacturing. Existing exemption regime available to different industrial
segments has been deepened.
• Reduction/elimination of duty for introduction of Second Generation Tariff
Policy Reforms for:
(i) Gems & Jewelry
(ii) Furniture
(iii) Marble & Granite
(iv) Horticulture
(v) Surgical equipment/medical devices.

• Poultry feed items, poultry vitamins, evaporation air coolers, insulated

sandwich panels and silos for storage of poultry have been exempted from
duty.

Increase in duty rates:

• In order to safeguard the local industry from an onslaught of foreign goods
duty rates have been increased on import of poultry meat, welded stainless
steel pipes etc. Duty rates on vehicles have been increased around the
effective rate of CVT which has been merged in customs duty. For upto 800cc
cars there was no CVT, therefore rate of duty against these vehicles has not
been changed.

Revenue measures:
• Levy of 1% Special surcharge on imports excluding vegetables/pulses,
edible oil/ghee, crude petroleum, furnace oil, HSD, medicines, fertilizers,
imports under chapter 99, temporary imports etc.
• Merger of Capital Value Tax (CVT) in Customs duty.
• Levy of regulatory duty on export of specified metals and articles thereof.

Relief measures:
• Amnesty scheme for condonation of delays in submission of installation/
consumption certificates etc.
• Amnesty from payment of fine/penalties and surcharges on payment of
principal amount.

Other measures:
• Downward revision of 5 yrs. capping to 3 yrs. for import of old/used cars/jeeps.
• 5 yrs. tariff plan for auto sector.
• Reduction/elimination of duty rates on specified diesel generating sets.
• Inputs used by the newspaper industry are being provided at concessionary
rate.
• Duty rates on equipments for broadcasting sector have been reduced to 5%.
• Extention of incentives for expansion and up-gradation of existing hospitals.
• Inclusion of PSF in DTRE scheme, payment of duty drawback and R&D
support.

Legal changes:
• Legislative changes have been suggested for simplification of law/
procedures.
• Section 25 and 25A of the Customs Act have been amended to address
the phenomenon of under invoicing.
 SALIENT FEATURES

SALES TAX & FEDERAL EXCISE BUDGETARY

MEASURES (FY 2007-08)

‰ The budgetary measures of Sales Tax and Federal Excise are aimed to:

• Provide relief for the taxpayers by giving focussed concessions and

rationalizing of tax rates, thereby creating a conducive and business
friendly environment for the taxpayers.

• Simplify the tax laws to make them easy for the taxpayers and
compatible with international best practices.

• Remove irritants and impediments in laws and procedures.

• Reducing the cost of doing business by furthering the automation of

business processes.

BRIEF POINTS ON INDIVIDUAL BUDGETARY MEASURES:

RELIEF MEASURES

‰ Zero-rating of sales tax on sewing machines and bicycles.

• Zero-rating of sales tax on sewing machines and bicycles is aimed at

providing relief to the general public.

Enforced through Notification SRO 462(I)/2007 dated 09.06.2007,

effective from the 9th June, 2007.

‰ Exemption of sales tax on cottonseed oil:

• Cottonseed oil is the only locally produced vegetable oil subject to

sales tax. To bring it at par with other local vegetable oils and to
provide relief to the oil mills, sales tax on cottonseed oil has been
exempted.
 Enforced through amendment in the Sixth Schedule to the Sales Tax
Act, 1990, effective from the 9th June, 2007.

‰ Sales tax zero-rating on writing inks and exercise books:

• To promote education and to make available essential educational

items at reduced cost, sales tax on writing ink and exercise books has
been zero-rated.

Enforced through Notification SRO 462(I)/2007 dated 09.06.2007,

effective from the 9th June, 2007.

‰ Amnesty scheme for waiver of default surcharge and penalty.

• To encourage the taxpayers to clear their outstanding tax liabilities and

to reduce the legal disputes, amnesty of default surcharge and
penalties has been announced. Taxpayers who wish to avail the
amnesty may deposit the principal amount of tax by 30.06.2007.

Enforced through Notification SRO 463(I)/2007 dated 09.06.2007,

effective from the 9th June, 2007.

‰ Abolition of excise duty on motor gasoline and jet fuel.

• In order to rationalize the taxation on POL products, excise duty @ Rs.

88/- paisas per litre on motor gasoline and Rs. 6/- paisas per litre on jet
fuel has been abolished. The products remain chargeable to sales tax.

Enforced through amendment in the First Schedule to the Federal

Excise Act, 2005, effective from the 9th June, 2007.

‰ Abolition of excise duty on petroleum bitumen.

• To fulfill the increasing demand of bitumen in the country due to

extensive roads construction, it is important to make the imported
bitumen compatible with locally produced bitumen. Therefore, excise
duty @ Rs. 2000/- PMT on bitumen has been abolished. Customs duty
is also being revised downwards.

Enforced through amendment in the First Schedule to the Federal

Excise Act, 2005, effective from the 9th June, 2007.
‰ Zero-rating of sales tax on trailers and semi-trailers.

• To promote the domestic production of better trailers and semi-trailers

for the improvement of goods transport, it is proposed to zero-rate
sales tax on trailers and semi-trailers.

Enforced through SRO 462(I)/2007, dated 9th June, 2007, effective from
the 9th June, 2006.

‰ Abolition of excise duty on exchange companies and health

insurance.

• To promote the flow of remittances through official channels, excise

duty @ 5% on exchange companies has been abolished. Moreover, to
provide level playing field to non-life insurance companies in the field
of health insurance vis-à-vis life insurance companies, excise duty
leviable @ 5% on health insurance has been abolished.

Enforced through amendment in the First Schedule to the Federal

Excise, 2005, effective from the 9th June, 2007.

‰ Exemption of sales tax arrears of industries located in FATA/PATA.

• The industries located in FATA/PATA are closed because of sales tax

arrears created as a result of the relief provided to the industries by
Peshawar High Court which was later on decided against by the
Supreme Court. To provide relief to the industries in FATA/PATA, it is
proposed to exempt the arrears of sales tax against the units subject to
the condition that disputed excise duty and customs duty is duly
deposited by them.

‰ Zero-rating of utilities of rice exporters.

• Local supply of rice is exempt being agricultural produce. Exports are

also zero-rated but the exporters have to obtain refund of small
incidental e.g. sales tax on utility bills. To boost the industry, it is
proposed to zero-rate the utility of rice exporters.

‰ Exemption of sales tax on glass bangles.

• To provide relief to the traditional bangle industry of Sindh, glass

bangles have been exempted from sales tax.

Enforced through amendment in Sixth Schedule to the Sales Tax Act,

1990, effective from 9th June, 2007.

‰ Abolition of excise duty on cable TV operators.

 • To boost the media industry and to provide cheaper entertainment to
the general public, excise duty @ Rs. 8/- per connection per month
leviable on cable TV operators has been abolished.

Enforced through amendment in the First Schedule to the Federal

Excise, 2005, effective from the 9th June, 2007.

‰ Zero-rating of sales tax on uncooked poultry meat.

• To decrease the cost of doing business for the organized sector in

poultry meat processing, sales tax on uncooked poultry meat has been
zero-rated.

Enforced through amendment in the Sixth Schedule to the Sales Tax

Act, 1990 and SRO 462(I)/2007, dated 9th June, 2007, effective from the
9th June, 2007.

‰ Exemption of sales tax on surgical tapes and ultrasound gel.

• Medicines are exempt from sales tax. Therefore, the scope of

exemption has been extended to two more medicinal items which are
surgical tapes and ultrasound gel.

Enforced through amendment in the Sixth Schedule to the Sales Tax

Act, 1990, effective from the 9th June, 2007.

REVENUE MEASURES
‰ Extension of scope of excise duty on financial services

• The existing levy of excise duty @ 5% on non-fund banking services is

being extended to include all non-fund services except cheque book
issuance charges, Umra and Hajj service charges, cheque return
charges and utility collection charges.

Enforced through amendment in the First Schedule to the Federal

Excise Act, 2005, effective from the 9th June, 2007.

‰ Rationalization of excise duty on international air travel.

• For the facilitation of passengers various levies on international air

travel i.e. excise duty, foreign travel tax and Government airport tax are
being clubbed together in the name of Air Travel Tax. (ATT). The rate
 is same but exemption for passenger coming from abroad is being
withdrawn.

Enforced through amendment in the First Schedule to the Federal

Excise Act, 2005. Effective from the 1st July, 2007.

‰ Increase in retail price of cigarettes to increase the incidence of tax.

• Cigarettes are chargeable to excise duty on the basis of retail price. To

complement the growth in cigarette industry and to enhance excise
duty collection without disturbing the present three tier system for the
purposes of levy, retail price of cigarettes is increased by 7%.

Enforced through amendment in the First Schedule to the Federal

Excise Act, 2005. Effective from the 10th June, 2007.

‰ Increase in rate of sales tax from 15% to 20% on specified raw

materials.

• To discourage the informal manufacturing in iron and steel, plastics

and paper, the rate of sales tax on import and supply of their raw
materials as well as some specified chemicals is being increased from
15% to 20% which will induce the informal manufacturing sector to be
compliant to obtain input tax adjustment as the end products remain
chargeable to sales tax @ 15%.

Enforced through SRO 466(I)/2007 dated 9th June, 2007, effective

from the 10th June, 2007.

‰ Withdrawal of input tax adjustment on the supply of utilities

(electricity and gas) to the residential colonies of manufacturers.

• In the light of best VAT practices, input tax adjustment is being

disallowed on supply of utilities (electricity and gas) to the residential
colonies of manufacturers. This measure will also settle many legal
disputes.
Enforced through SRO 464(I)/2007 dated 9th June, 2007, effective
from the 9th June, 2007.

‰ Withdrawal of zero-rating of chemicals of multiple usage.

• Under SRO 525(I)/2006, a large number of chemicals used in the five

major export oriented sectors have been zero-rated. Keeping inv iew
 the multiple usage of some of the chemicals are also used in other
industries, such chemicals are being taken out of zero-rating
notification.

Enforced through SRO 509(I)/2007 dated 9th June, 2007, effective

from the 9th June, 2007.

‰ Collection of sales tax of CNG stations from gas distribution

companies.

• To rationalize the collection of sales tax on supplies made by CNG

stations, the responsibility to charge and deposit sales tax is being
given to the gas distribution companies. CNG stations will not be
required to remain registered with sales tax or keep any records.

Enforced through Sales Tax Special Procedure Rules, 2007

effective from the 1st July, 2007.

STREAMLINING MEASURES
‰ Abolition of sales tax on advance payments

• To simply the sales tax regime, sales tax leviable on advance payments
received by registered persons is being abolished. Now the registered
persons shall be required to charge sales tax at the time of delivery of
goods.

Enforced through amendment in the Sales Tax Act, 1990, effective

from the 1st July, 2007.

‰ Restriction of input tax adjustment

• To check the mal-practices in input tax adjustment, the adjustment of input

tax is being restricted to 90% of output tax. The system of adjustment
notes and adjustment advices causing problems for the taxpayers is being
abolished.

New section 8B added to the Sales Tax Act, 1990, effective from
1st July, 2007.
‰ Provisions for payment of sales tax refund along with duty
drawback.

• The scope of sales tax refund is now being limited to zero-rated

supplies or exports only. A scheme is being envisaged whereby the
exporters of five zero-rated sectors shall be able to obtain sales tax
refund on packing material, chemicals along with customs duty
drawback.

Enforced through amendment in section 10 of the Sales Tax Act,

1990, effective from the 1st July, 2007.

‰ Withdrawal of special procedures for commercial importers, iron &

steel sector, restaurants, biscuits and confectionery.

• With a view to remove distortions in the sales tax system a number of

special treatment procedures are being abolished. Now commercial
importers, iron & steel sector, restaurants and biscuit and
confectionery sector shall operate in standard sales tax procedure of
payment of due tax after adjusting the input tax on purchases from the
output tax charged on supplies.

Enforced through amendment in Sales Tax Special Procedure

Rules, 2007, effective from 1st July, 2007 for iron & steel, biscuits
and restaurants. For commercial importers immediately vide SRO
468(I)/2007 dated 9th June, 2007.

‰ Introduction of concept of withholding agents in sales tax.

• To plug the revenue gap in Government supplies and to collect the due
tax from general orders supplies and wholesalers, the system of
withholding of sales tax by the Government agencies is being
introduced.

‰ Immediate refunds to Large Taxpayers against bank guarantees.

• To expedite the sales tax refunds of large taxpayers registered in

Large Taxpayers Units, a new procedure has been issued whereby
they can claim their sales tax refunds within three days of filing upon
submission bank guarantee equivalent to refund amounts.

Enforced through SRO 465(I)/2007 dated 9th June, 2007, effective

from 9th June, 2007.
‰ Enhancement in period of record retention.

• Based on international best practices, the period of record retention is

being enhanced to five years from existing three years.

Enforced through amendment in Sales Tax Act, 1990 and Federal

Excise Act, 2005, effective from 1st July, 2007.

‰ Single sales tax return.

• Abolishing the various sales tax returns and a separate invoice

summary, a single sales tax return has been introduced and invoice
summary has been made an annexure to the return for facilitation.

‰ Levy and deposit of excise duty in the manner of sales tax.

• Excise duty shall now be leviable on supplies instead of clearance as

done in sales tax and shall be deposited with the return on the 15th day
of the following month.

‰ Linkage of registration threshold of manufacturers with utility bills.

• Apart from the existing registration threshold of supplies of Rs. 5

million per annum, a new parameter based on utility bills is being
introduced by amending the Sales Tax Act, 1990. Whereby the
manufacturers having utility bills of more than Rs. 600,000 per annum
shall also be required to obtain sales tax registration.
 SALIENT FEATURES FOR THE BUDGET 2007

DIRECT TAXES.

A. RELIEF MEASURES:

1. Present corporate tax rate of 35% to continue.

2. Income of Micro Finance Banks (MFBs) exempted from

tax for five years.

3. Withholding tax on passenger transport services reduced

from 6% to 2% on the analogy of goods transport
services.

4. Exemption under clause (132) of Part I of Second

Schedule extended to companies owning and managing
Hydel Power Projects situated in AJ&K.

5. Companies operating Hotels in Pakistan or AJ&K are

allowed set off of losses arising in Pakistan or AJ&K
against income in Pakistan or AJ&K and vice versa as the
case may be.

6. Exemption of tax on capital gains extended for further one

year.

7. Withdrawal of 2% withholding tax over and above the

prescribed rate on supplies for non-disclosure of NTN or
CNIC to withholding agent.

1
8. Mergers and Acquisitions to be treated as non tax event.

9. Withholding tax rate on all exports to be unified @ 1%.

10. Permanent Establishments of non-resident Exploration

and Production Companies exempted from withholding
tax on supply of crude oil and gas.

11. E&P Companies exempted from WHT on imports (other

than vehicles).

12. Review of Law Relating to Holding Companies.

• 75% share holding required if none of the companies is

a public listed limited company.

• 55% share holding required if one of the group

companies is a public listed limited company.
• Group relief restricted to domestic companies.

• Companies engaged in trading will not qualify for relief.

• Current tax year losses can be surrendered by holding

company to a subsidiary or between subsidiaries which
fulfill the requirements of share holding;

• Inter corporate dividend - liable to 10% adjustable

withholding tax.

13. Group Taxation/Relief:

2
 • For group formation, transfer of shares between
companies and the owners in one direction to be
treated as non-tax event.

• Group taxation to be restricted to locally registered

companies under Companies Ordinance, 1984
domestic companies.

14. CNIC to be used for identification purpose, as an

alternate, where NTN is not obtained.

15. Replacing Venture Capital Funds with Private Equity and

Venture Capital Funds - exemption extended to the Fund
upto June 2014.

16. Capital Gains of private limited companies on sale of their

assets to private equity and Venture Capital Funds to be
taxed @ 10% (reduced tax rate).

17. Income arising on sale of immoveable property to Real

Estate Investment Trust (REIT), exempted from tax for
three years.

18. Separate tax regime for retailers:

Turnover Rate of Tax

- Upto Rs. 05 million 0.5%

- From 05 to 10 million Rs. 25,000 plus 0.5% of the

amount of turnover
exceeding Rs. 5 million

- Above Rs. 10 million Rs.50,000 plus 0.75%

of the amounting of
turnover exceeding Rs.
10 million

3
19. Separate Schedule for Banking Companies introduced.

20. Maximum limit of investment in IPOs to avail tax credit

enhanced from Rs. 200,000 to 300,000.

21. Presumptive Tax Regime introduced for service providers

to exporters/export house under the Trade Policy
withdrawn.

22. Set off of brought forwarded losses in the event of

amalgamation/merger of companies withdrawn.

23. Withholding tax on sale of goods made adjustable for

listed public companies.

24. Tax in respect of income from construction contracts out

side Pakistan to be charged at the rate of one per cent of
the gross receipts provided that such income is brought
into Pakistan in foreign exchange through normal banking
channel.”

25. Withdrawal of withholding tax on payments to travel

agents on sale of air tickets where withholding tax on
commission is already deducted.

26. Payments received by non-resident news agencies,

syndicate services and individual contributors/writers not
having permanent establishment in Pakistan will not be
subjected to withholding tax on services provided.

27. Advertising services provided by owners of

newspapers/magazines in the non-corporate sector taken
out of Presumptive Tax Regime.

28. Withdrawal of CVT on import of cars and power of

attorney executed between first relations.

29. Withholding tax @ 5% on purchase of locally

manufactured cars.

4
 30. Federal Excise duty also to be included in the value of
goods for withholding tax purposes at the import stage.

B. RATIONALIZATION OF WITHHOLDING TAXES REGIME:

31. Withholding Tax on Imports.

• For commercial importers covered under PTR, WHT

rate reduced from 6% to 5%.

• For manufacturers a uniform adjustable withholding

tax on imports @ 1%.

• Exemption in respect of imports covered by

statutory provisions will continue.

• Taxpayers having losses or those having paid

advance tax eligible for reduced rate exemption
certificates on imports.

• Manufacturer exporters registered with Sales Tax

Department not liable to withholding tax on imports.

• Withholding tax on import of edible oil reduced from

3% to 2%.

• Import of polyester filament fiber yarn to be

subjected to 5% withholding tax.

• Import of Bitumen, pesticides/wedicides and FWT to

be subjected at reduced withholding tax rate of 2%.

32. Employers authorized to give credit of tax withheld from

employees under different withholding provisions during
the tax year. Also authorized to adjust tax credit allowable
to salaried taxpayers having salary income only.

5
 33. Ginners provided option to pay WHT at the prescribed
rate.

34. Exclusion of companies (Large Import Houses) importing

bulk industrial raw material from presumptive tax regime.

35. Professional Firms to be taxed at par with other AOPs.

C. REVENUE GENERATION:

36. Withholding tax on non-corporate commercial and

industrial consumers of electricity made minimum tax
liability.

37. Withdrawal of exemption to Mutual Fund on CFS interest

income.

38. Companies to pay advance tax in the first year of

operations.

D. SIMPLIFICATION:

39. Small company redefined with following characteristics;

- Paid up capital = 25 (M)

- Annual Sales = 250 (M)
- Employment Limit = 250 persons

40. Presumptive tax regime for Compressed Natural Gas

(CNG) stations and withholding tax @ 6% of gas bill.

E. DOCUMENTATION:

41. Electronic filing of returns and withholding statements for

corporate taxpayer made mandatory.

6
 42. Filing of Wealth Statement – mandatory for taxpayers
having income of Rs. 500,000/- or more – Commissioner
authorized to call for the Wealth Statement.

F. REVIEW OF EXEMPTION.

43. Clarification amendment made regarding taxation of

Regulatory Authorities.

******