Anti-avoidance tax measures introduced through Pakistan Finance Bill 2021

By Muzammal Rasheed (Co-founder, CEO & Head of Practice, WTS Global, Pakistan)

The Federal Government has announced several anti-avoidance tax measures in the Finance Bill 2021, presented as part of its third Budget before the National Assembly. The Government tags this budget as “No New Tax Budget” and emphasizes on the expansion of tax bases. This article outlines some of the anti- avoidance measures of the new tax policy introduced through Finance Bill 2021.

Concealment of Income and Investment. The Bill introduced a new section 203A in the Income Tax Ordinance (Ordinance) to empower the Assistant Commissioner Inland Revenue to arrest a person if he believes on the basis of material evidence that the person has committed offence of concealment of income (as per section 111) or any offence warranting prosecution under the Ordinance.  Meanwhile the proposal has received severe criticism from various quarters as the taxpayers believe that the change will create opportunities for harassment and blackmailing. The Senate of Pakistan in its recommendations on Finance Bill has also proposed to withdraw this amendment. The Government defends the proposal, however, it hints that the powers will only be exercised in few cases subject to approval of the higher officials of Ministry of Finance and Revenue.

It has also been proposed that the condition for issuing separate notice in the case of concealment of income and investment (section 111) will not apply if notice issued under section 122(9) of the Ordinance contains the nature and sources of concealed transaction. The Bill proposes to insert an explanation to sub-section (5) of t section 111, clarifying that a separate notice under this section is not required to be issued if the explanation regarding nature and sources of amount credited or the investment of money, valuable article, or the funds from which expenditure was made, has duly been confronted to the taxpayer through a notice under sub-section (9) of section 122 of the Ordinance. It was a consistent view of the courts that issuance of separate show cause notice under section 111 is mandatory in case of charges of concealment of income or investment.

Doctrine of Mutuality. To put an end to the tax exemptions argued on the basis of the ‘doctrine of mutuality’, the Bill clarifies that income of a Cooperative Society from sale of goods, immoveable property or provision of services to its members is a taxable event.

Cross-Border Tax Recovery. The Bill has proposed to empower the Federal Government to enter into agreements with other states for exchange of information to provide assistance in the recovery of taxes. The Bill also introduced amendment for application of existing tax recovery provisions of the Income Tax Ordinance for collection and recovery of taxes in pursuance of a request from a foreign jurisdiction under a tax treaty, a multilateral convention, an inter-governmental agreement or similar arrangement or mechanism.

Withdrawal of Time Limit for Residents having Foreign Income or Assets. In case of resident persons who have foreign income or assets, the Bill seeks to empower the Commissioner to issue notice requiring filing of tax return regardless of the time limitation. The existing time limit for issuance of such notice is five completed tax years.

Gain on Disposal of Immovable Property. In case of immovable property held as depreciable asset, gain arising from disposal of asset is currently not subject to tax. Instead, as per existing rules, only the aggregate of tax depreciation charged on the asset is recouped at the time of disposal. The Bill now proposes that the gain arising from disposal of depreciable assets shall be taxed as per section 37 dealing with the Capital Gains.

Moreover, Capital Gain from disposal of immovable property exceeding PKR 5 million is proposed to be taxed under the normal tax regime instead of fixed CGT rates applicable for immovable property sale transactions. The holding period-based reduction scale for computation of capital gain shall continue to apply.  It has also been clarified that if a person is habitually engaged in transactions of sale and purchase of immoveable property or such sale and purchase is an adventure in the nature of trade and business, the income from these transactions shall be chargeable under the head of “Income from Business”. More so, minimum tax on turnover under section 113 to be paid on receipts from sale of immoveable property where such receipts are taxable under the head ‘Income from Business’.

Employment Allowances and Perquisites: Allowances paid to employees on fixed basis or on percentage of salary; and other allowances which are not actually spent wholly for the performance of employment are proposed to be included in taxable salary. Similarly, exemption on medical allowance or reimbursement and provision of free hospitalisation is proposed to be withdrawn. Federal Board of Revenue has clarified that the need for withdrawal of such exemptions was felt due to reports of fake claims of exemption. The tax credit allowable on the health insurance however remains intact. The Senate of Pakistan has not subscribed to the proposal and recommended the government to restore this exemption.

Exemptions on some other perquisites by virtue of employment are to be withdrawn. These include Free or subsidized food provided by hotels and restaurants during duty hours, Free or subsidized education provided by an educational institution to the children of its employees and Free or subsidized medical treatment provided by a hospital or a clinic to its employees.

Integration of Tier-1 Retailers’ POS:  On Federal Sales Tax, the Bill proposed inclusion of additional businesses in the Tier-1 category of Retailers. Tier-1 retailers are required to integrate their Point of Sales terminal with the system of FBR in real time. As per proposal, certain furniture outlets, operator of online market and persons acquiring point of sale for accepting payment through debit or credit card are to be included in Tier-1 retailer category. Further proposal is made to empower FBR to formulate procedure for “mystery shopping” on invoices issued by Tier-1 Retailer integrated with FBR. The term “mystery shopping” is a control performed by walk through procedures to check the compliance of the transaction or quality of the product.

Goods sold without Brand License: Specified goods sold without brand license are proposed to be considered as counterfeited goods liable to outright confiscation and destruction.

Transfer Pricing Rules for Sales Tax: FBR would be empowered to prescribe rules for determining transfer pricing of taxable supplies between associates to reflect fair market values in arm’s length transactions.

Exchange of Information: Bill contains a proposal to empower FBR to share data or information including real time data, videos and images received under the provisions of this Act with any other Ministry or Division of the Federal Government or Provincial Government. This measure will specifically facilitate the provincial authorities to obtain sales tax data to identify any discrepancy in reporting made by any taxpayer.

The amendments introduced through Finance Bill are, subject to approval by the National Assembly and Presidential assent, effective from 1st July 2021 subject to some exceptions.

Anti-avoidance measure introduced through Pakistan Finance Bill 2021

The author is Co-founder, CEO & Head of Practice at WTS Global, Pakistan.

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