KPMG Taseer Hadi & Co.

Chartered Accountants

Amendments through
Finance Act 2014

30 June 2014

Contents

Page No.

Income Tax

Sales Tax

Budget Brief 2014 released on 4 June 2014 summarised the changes

proposed in the Income Tax Ordinance, 2001, Sales Tax Act, 1990,
Federal Excise Act, 2005 and Customs Act, 1969.
The amendments proposed through Finance Bill, 2014 in the Federal
statues have now been enacted through Finance Act, 2014. The
amendments proposed through the Bill, by and large, have been
retained with some changes. Further, few new changes have also
been made.
This document explains significant changes made through Finance
Act, 2014.
The provisions of the Finance Act, 2014 are generally applicable from
01 July 2014, unless otherwise specified.
These comments represent our interpretation of the legislation, and
we recommend that while considering their application to any
particular case, reference be made to the specific wordings of the
relevant statue.

2014 KPMG Taseer Hadi & Co., a Partnership firm registered in Pakistan and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Income Tax Significant Amendments

Corporate tax rate reduced to 33 percent

Bonus shares

The Finance Minister in his budget speech

made a statement and the salient features
issued alongwith budget documents also
contained information that rate of tax for
companies for tax year 2015 would be
reduced to 33 percent. However, the
Finance Bill 2014 did not contain an
amendment to this effect which appeared to
be an omission.

The Finance Bill 2014 proposed that the

bonus shares declared by a company will be
treated as income of the shareholders and
chargeable to tax under the head income
from other sources. Further, the Bill
proposed to introduce withholding tax on
bonus shares at the rate of 5 percent of the
value of bonus shares determined on the
basis of day-end price of the first day of the
closure of books.

The said omission has now been corrected

and the rate of tax for companies for tax year
2015 has now been provided as 33 percent.

The mechanism of withholding tax from the

amount of bonus shares was not clearly
provided.

Alternative Corporate Tax

The Finance Bill 2014 introduced
Alternative Corporate Tax (ACT) providing
for tax payable by a company at higher of
corporate tax or ACT at the rate of 17
percent of accounting income to be
computed in specified manner, excluding
therefrom exempt income and income
subject to final and fixed tax regimes etc.

The Finance Act has now inserted sections

236M and 236N in the Income Tax
Ordinance, 2001 to provide mechanism of
withholding tax in the case of companies
quoted on stock exchanges and other
companies respectively. The salient features
of the aforesaid new withholding tax
provisions are as follows:
i.

It has now been provided to further exclude

the following from the applicability of ACT:

Income of NPOs, trusts and welfare

institutions etc. subject to 100 percent
tax credit under section 100C of the
Ordinance; and

Bonus shares issued by companies

quoted on stock exchange

Every company, quoted on stock

exchange, shall withhold 5 percent of
the bonus shares to be issued.

Bonus shares withheld shall only be

issued to a shareholder, if the
company collects from the
shareholder, tax equal to five percent
of the value of bonus shares issued
to the shareholder including bonus
shares withheld, determined on the
basis of day-end price on the first day
of closure of books.

Tax shall be collected within 15 days

of the first day of closure of books

Income of a company setting up an

Industrial undertaking that is subject to
reduced corporate rate of 20 percent
under clause (18A) of Part II of the
Second Schedule to the Ordinance.

2014 KPMG Taseer Hadi & Co., a Partnership firm registered in Pakistan and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Income Tax Significant Amendments

If the shareholder fails to make

payment of tax within 15 days or the
company fails to collect tax within 15
days, the company shall deposit the
bonus shares in the Central
Depository Company of Pakistan
Limited (CDC) or any other
prescribed entity.

If a shareholder neither makes

payment of tax to the company nor
collects its bonus shares within three
months of the date of issuance of
bonus shares the company may
proceed to dispose of its bonus
shares to the extent it has paid tax on
the shareholders behalf.

Bonus shares deposited in CDC or

any other prescribed entity shall be
disposed of in the mode and manner
as may be prescribed and the
proceeds thereof shall be paid to the
credit of the Federal Government.

A company liable to deposit tax shall

be entitled to collect and recover the
tax from the shareholder.

Tax paid under this section shall be a

final tax on the income of the
shareholder arising from bonus
shares.

FBR may prescribe rules for

determination of value of bonus
shares for determination of tax
liability.

ii.

Bonus shares shall be deemed to be

the income of the shareholder.
Tax paid under this section shall be
final tax on the income of the
shareholder of the company arising
from issuance of bonus shares.

Bonus shares issued by companies

not quoted on stock exchange

Every company, not quoted on stock

exchange, shall deposit tax within 15
days of the closure of books at the
rate of 5 per cent of the value of the
bonus shares on the first day of the
closure of books, whether or not tax
is collected by the company from
shareholder.

Bonus shares shall be deemed to be

the income of the shareholder.

The company liable to deposit tax

shall be entitled to collect and
recover the tax deposited by it from
the shareholder

Appropriate rules to address legal and

procedural aspects of disposal of withheld
bonus shares in coherence with relevant
corporate laws and regulations are needed.

2014 KPMG Taseer Hadi & Co., a Partnership firm registered in Pakistan and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Income Tax Significant Amendments

Tax rate on capital gain on debt
securities for tax year 2015 for
companies

The Finance Act 2014 has now empowered

the Commissioner to issue withholding tax
exemption certificate to these organisations.

The Finance Bill proposed varying tax rates

on capital gain on specified securities under
section 37A for tax year 2015 depending
upon the holding period of such securities.

Minimum tax for distributors of FMCG

sector

Besides aforesaid amendment, the Finance

Act provides that capital gain on debt
securities subject to tax under section 37A
of the Ordinance will be taxable in the hands
of a company at applicable corporate tax
rate.

The rate of minimum tax under section 113

of the Ordinance for fast moving consumer
goods sector was 0.2 percent under clause
(8) of Part III of the Second Schedule to the
Income Tax Ordinance, 2001.

Initial allowance for buildings

In the Finance Bill 2014, the said rate was

apparently omitted inadvertently in the effort
of alignment of the relevant provisions of the
Income Tax Ordinance, 2001.

The Finance Bill proposed to reduce the rate

of initial allowance on buildings from 25
percent to 10 percent. The said rate has now
been revised to 15%.

The said error has however now been

corrected and the reduced rate of minimum
tax of 0.2 percent for distributors of FMCG
sector has been kept intact.

Withholding tax exemption certificates

for NPOs etc.

Exemption to public sector university

The Finance Bill proposed to withdraw

exemption of income of NPOs, trusts and
welfare institutions etc. and to allow 100
percent tax credit under section 100C of the
Ordinance subject to specified conditions.
Accordingly, the income of such
organisations is no more exempt from
income tax, however, their tax liability will
remain NIL due to 100 percent tax credit.

The Finance Bill 2014 proposed to allow

exemption to income derived by public sector
university.
This exemption shall now apply with
retrospective effect from 01 July 2013.
Further, the exemption has been made
conditional that such university should be
solely for educational purposes and not for
the purposes of profit.

These organisations have been issued Nil

rate withholding tax certificates due to
exemption of their income. As their income
is no more exempt, therefore, there was a
need to make appropriate amendment in
section 159 to empower the Commissioner
to issue exemption certificate to these
organsiations.
2014 KPMG Taseer Hadi & Co., a Partnership firm registered in Pakistan and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Income Tax Significant Amendments

Withholding Tax on private motor
vehicles

Taxability of steel melters, steel re-rollers

and composite steel units

The Finance Bill 2014 proposed to introduce

collection of advance tax on registration of
locally manufactured motor vehicles and
transfer of registration or ownership of
private motor vehicles to be collected by
Excise & taxation department.

The Finance Bill 2014 proposed special tax

regime for steel melters, steel re-rollers and
composite steel units registered for sales tax
purposes.

It has now been provided that withholding

tax will also be collected on registration of
imported motor vehicles.

Under the said scheme these taxpayers are

subject to tax at the rate of one rupee per
unit of electricity consumed for the
production of steel billets, ingots and mid
steel excluding stainless steel.

It has also been provided that no collection

of advance tax shall be made on transfer of
vehicles after five years from the date of first
registration in Pakistan.

Now it has been provided that aforesaid

taxpayers may opt for this scheme for tax
years 2012 and 2013 if tax liability for the
said tax years is paid by 30 June 2014.

The rate of advance tax on transfer of

registration or ownership of private motor
vehicles has been reduced by 10 percent
each year from the date of registration in
Pakistan.

Exemption from withholding at import

stage to industrial undertaking

Passenger transport vehicles

There is a reduced rate of tax on income
from passenger transport vehicles plying for
hire, with registered seating capacity of 20
persons or more at the reduced rate of Rs.
250 per seat per annum under clause (14A)
of Part II of the Second schedule to the
Ordinance.
The Finance Act has allowed the owners of
such vehicles to pay tax at aforesaid
reduced rate on income from 01 July 2012 to
30 June 2013 provided that the tax is paid
by 30 June 2014. The tax already paid for
such period at normal rate of Rs. 500 per
seat per annum shall not be refunded.

Clause (72B) of Part IV of the Second

Schedule was introduced vide Finance Act
2013 whereby the industrial undertakings
have been given exemption from withholding
tax at import stage under section 148 of the
Income Tax Ordinance, 2001 subject to
discharge of the tax liability for the year on
the basis of higher of the tax liability of any of
the preceding two tax years and that the
exemption certificate is issued to this effect
by the Commissioner Inland Revenue.
It has now been provided that application for
the aforesaid exemption certificate will have
to be filed in the prescribed manner and
subject to such conditions as specified in the
Circular issued by FBR for the purpose of
this clause.

2014 KPMG Taseer Hadi & Co., a Partnership firm registered in Pakistan and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Income Tax Significant Amendments

Advance tax rates on sale to distributors
dealers and wholesalers etc.
The rate of advance tax collection by
manufacturers and importers from
distributors, dealers and wholesalers in
certain specified sectors has been increased
from uniform rate of 0.1 percent to the
varying rates for fertilizer sector (0.2 percent
for filer and 0.4 percent for non-filer) and
other sectors (0.1 percent for filer and 0.2
percent for non-filers).
Advance tax on purchase of air tickets
The Finance Bill proposed that every airline,
operating in Pakistan, to withhold tax on
international tickets.
The Finance Act has however restricted the
application of this withholding tax on ticket
for journey originating from Pakistan. The
Finance Act has also eliminated the
distinction of withholding tax rates for filer
and non-filer and provided the rates of 0
percent for economy class and 4 percent for
other than economy class.

2014 KPMG Taseer Hadi & Co., a Partnership firm registered in Pakistan and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Sales Tax Significant Amendments

Restrictions on claim of input tax
withdrawn
The Finance Bill proposed insertion of clause
iiia) under section 7(2) of Sales Tax Act, to
restrict claim on input tax on goods and
services it the same represent:
a) Goods imported or purchased for the
purpose of sale or re-sale by the
registered person on payment of tax;
b) Used directly as raw material, ingredient,
part, component or packing material by the
registered person in the manufacture or
production of taxable goods;
c) Electricity, natural gas and other fuel
consumed directly by the registered
person in his declared business premises
for the manufacture, production or supply
of taxable goods; or
d) Plant, machinery and equipment used by
the registered person in his declared
business premises for the manufacture,
production or supply of taxable goods.
Clause (a) denies claim of input tax on accrual
basis, whereas Clause (b) denies the input tax
only to the extent of consumption of direct
constituents of production or manufacturing.
These measures not only seem harsh for
trade and industry but also appear complex in
terms of determination of raw materials and
other inputs used in production. Thus, the
proposal has been widely criticized.

Sales tax regime on cell/mobile phones to

cover sales tax on SIM cards under Ninth
Schedule
The Finance Bill proposed enactment of Ninth
Schedule to Sales Tax Act prescribing sales
tax regime for cellular and mobile phones as
presently governed through SRO 460(I)/2013.
While transposing the rates under newly
proposed Ninth Schedule, the sales tax on the
basis of issuance of SIM cards could not be
covered. It has now been provided that sales
tax already applicable on the basis of SIM
cards under afore-said SRO.
Thus, sales tax will apply at Rs.250 on
issuance of each SIM card by the Cellular
Mobile Operator or at the time of registration of
a new IMEI number.
Sixth and Eight Schedules
Transposition of exemption notifications were
proposed under Sixth Schedule through the
Finance Bill. Moreover, reduced sales tax rate
of 5% is provided on specified capital goods
under Eight Schedule to Sales Tax Act.
Additionally, sales tax exemption is restored
for oil & gas exploration companies and their
contractors as to be transposed from SRO
575(I)/2006.

The proposed insertion of clause (iiia) in

section 7(2) has not been approved hence the
existing input tax mechanism shall continue to
apply.

2014 KPMG Taseer Hadi & Co., a Partnership firm registered in Pakistan and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

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Phone
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Fax
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eMail
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2014 KPMG Taseer Hadi & Co., a Partnership firm registered in

Pakistan and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (KPMG
International), a Swiss entity. All rights reserved.
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