Finance Bill 2017 has introduced a new department in the Federal Board of Revenue (FBR) i.e. Directorate-General of Broadening of Tax Base for increasing the number of return filers in the country.

Explaining the legal and procedural changes of the Finance Bill 2017, Syed Naved Andrabi Advocate Supreme Court explained that section 230D of the Income Tax Ordinance 2001 is proposed to be inserted whereby the Directorate-General of Broadening of Tax Base is being introduced.

This separate directorate seemingly is to work on broadening of tax base on the basis of data base. At the moment there are special zones in Regions who are signed this job. It is expected that the job of broadening of tax base will be more effective under this independent directorate.

He said tax on undistributed profits of certain companies were taxed, if the profits were not distributed in shape of cash dividends within six months of the end of the said tax year to such an extent that its reserves, after such distribution, are in excess of hundred percent of its paid up capital.

The reserves as exceeding hundred per cent of its paid up capital were liable to tax by way of insertion of Section 5A into the Ordinance by Finance Act, 2015. It is proposed that Section 5A of the Ordinance be replaced and a company for a tax year if does not distribute at least forty percent of its after tax profits within six months of the end of the tax year through cash or bonus shares shall be liable to pay tax @ 10% on so much of the amount exceeding. The provision has been made simpler and related to after tax profits only and not the reserves.

As per Section 13 of the Income Tax Ordinance the perquisites paid to an employee are to be evaluated for the purposes of taxation. The provisions of Section 13(7) estimates the interest free loans exceeding Rs 500,000/- and more as a perquisite. The limit is now proposed to be increased to Rs 1.0(M). The salaried person may consider this as a relief though minor in nature; however, it may cover a large number of employees, Syed Naved Andrabi explained.

Any expenditure in respect of sales promotion, advertisement and publicity in excess of five per cent of turnover incurred by pharmaceutical manufacturers was to be disallowed in terms of Section 21(O) of the Ordinance. The limit of 5% is to be enhanced to 10% of the turnover, he explained.

An insertion of proviso is proposed into the definition clause of Section 22 (15) of the Ordinance which would mean that where a depreciable asset is jointly owned by a taxpayer and an Islamic financial institution licensed by the State Bank of Pakistan or Securities and Exchange Commission of Pakistan, as the case may be, pursuant to an arrangement of Musharika financing or diminishing Musharika financing, the depreciable asset shall be treated to be wholly owned by the taxpayer. The depreciation on such asset will now be available to the taxpayer.

He explained that as per Section 53 of the Ordinance the Federal Government pursuant to approval of Economic Co-ordination Committee of the Cabinet was divested with the power to allow exemptions and concessions by way of insertions in the Second Schedule to the Ordinance.

This power was strictly interpreted by the Supreme Court of Pakistan in a recent judgement; thus, it is proposed now that the exemptions hence forth be granted by Board (FBR) with the approval of Minister Incharge of the Economic Co-ordination Committee of the Cabinet. A proviso has also being added to nullify the effect of the judgement on all exemptions and concessions that would not stand the test, he said.

A deductible allowance was allowed by inserting Section 64A (profit on debt) and 64AB (Education Expenses) into the Ordinance by way of Finance Act 2015 & 2016 respectively. These Sections are being re numbered to be placed under the portion that deals with deductible allowances and not credits.

These Sections will now be numbered as Section 60C & 60D of the Ordinance. The deductible allowance on education will also be restricted to table income of half a million and not one million as was allowed earlier, Naved Andrabi said.

The special provisions of Section 100 of the Ordinance shall from Tax Year 2017 and onwards will be applicable on profit and gains derived from Sui gas field.

The income of Non-profit organisations, trusts or welfare institutions; as per Section 100C of the Ordinance are allowed a tax credit equal to one hundred per cent of the tax payable, including minimum tax and final taxes payable under any of the provisions of this Ordinance; however, it is proposed that the administrative and management expenditure of such non profit organisation should not exceed15% of the total receipts.

The surplus funds, if any, shall be taxed @ 10%. A new sub-section 1B is being inserted to define surplus funds, which would mean as under;

(i) Not spent on charitable and welfare activities during the tax year;

(ii) received during the tax year as donations, voluntary contributions, subscriptions and other incomes;

(iii) or more than twenty five percent of the total receipts of the non-profit organisation received during the tax year;

(iv) are not part of restricted funds:

Explanation: For the purpose of this sub- section, "restricted funds" mean any fund received by the organisation but could not be spent and treated as revenue during the year due to any obligation placed by the donor.

This new definition would mean most of the non-profit organisations would be paying tax @ 10%.

Tax expert explained that the revision of return u/s 114(6) of the Ordinance has now been allowed at a lower income than assessed u/s 122C of the Ordinance; which is a provisional assessment and may not be realistic. This is a positive act towards broadening of tax base.

The allowance of extension in time for filing a return can now be made to Chief Commissioner; provided the Commissioner has refused the same. The power of a commissioner to pass a provisional assessment order if the tax payer did not file his tax return in compliance to the notice for filing of the tax return has been withdrawn; thus all related provisions under different sections are also deleted.

The payment of advance tax u/s 147 of the Ordinance is now required to be paid if the last assessed income of an individual is less than Rs 1(M). Earlier the list was Rs 500,000/- .

Syed Naved Andrabi said that a proviso is proposed to be added into Section 153 (1) of the Ordinance. The proviso states that where the recipient of the payment under clause (b) receives the payment through an agent or any other third person and the agent or, as the case may be, the third person retains service charges or fee, by whatever name called, from the payment remitted to the recipient, the agent or the third person shall be treated to have been paid the service charges or fee by the recipient and the recipient shall collect tax along with the payment received.

The statement to be filed u/s 165 of the Ordinance can now be revised wishing 60 days of filing if any commission or wrong is found by the filer. A default surcharge is now allowed to be calculated on the basis of special tax year if applicable to the tax payer and not on the basis of tax year. This is to bring the working in harmony to the persons tax year, he said.

Two new tax authorities have been created and would be designated as under; District Taxation Officer and Assistant Director Audit. The role of the same is to be seen and identified.

A new Directorate-General of Transfer Pricing is being proposed to work on this assignment by insertion of Section 230E into the Ordinance. The basic job would be to determine arms length transactions. The basic job would be to do transfer pricing audit which will be independent of audit in terms of Section 177, 214C & 214D of the Ordinance.

In Section 231B of the Ordinance sub-section 1A is being proposed whereby every leasing company or a scheduled bank or a non- banking financial institution or an investment bank or a modaraba or a development finance institution, whether shariah compliant or under conventional mode, at the time of leasing of a motor vehicle to a non-filer, either through ijara or otherwise, shall collect advance tax at the rate of three per cent of the value of the motor vehicle. The non-filer now taking cars on lease shall have to pay extra tax, he said.

All notifications and orders issued and notified, in exercise of the powers conferred upon the Federal Government, before the first day of July, 2017 shall be deemed to have been validly issued and notified in exercise of those powers, notwithstanding anything contained in any judgement of a High Court or the Supreme Court. Section 241 is being inserted to override the effect of the latest judgement of the Supreme Court, he explained.

The profit on debt paid u/s 151 of the Ordinance will now be taxed as under; where profit on debt does not exceed Rs 5, 000,000 10% Where profit on debt exceeds Rs 5, 000,000 but does not exceed Rs 25, 000,000 12.5%; where profit on debt exceeds Rs 25, 000,000/-15% The rate of tax on capital gains for non filers has been increased to 20% irrespective of the holding period.

The withholding tax rate on dividends has also been increased from 10% to 12.5% and 12.5% to 15% where ever applicable in Division I of Part III of the First Schedule to the Ordinance.

The various rates for non-filers have also been increased for the purposes of broadening of the tax base. It is expected that the heavy cost will force the non -filer to file tax return, tax expert added.

A widow; an orphan below the age of twenty-five years; a disabled person; or in the case of ownership of immovable property, a non- resident person were not required to file a tax return if they owned immovable property with a land area of two hundred and fifty square yards or more or owns any flat located in areas falling within the municipal limits existing immediately before the commencement of Local Government laws in the provinces; or areas in a Cantonment; or the Islamabad Capital Territory; however, it is now proposed that such persons may also not file returns on the basis of owning immoveable property with a land area of five hundred square yards or more located in a rating area; a flat having covered area of two thousand square feet or more located in a rating area or for reason of owning a motor vehicle having engine capacity above 1000 CC, he added.-Business Recorder