KPMG in Pakistan summarizes key provisions in Pakistan’s Finance Act 2015 that aim to enhance government revenue and protect the tax base.
Pakistan’s Finance Act 2015 imposes a one-time ‘super tax’ for the Tax Year 2015 to raise funds for the rehabilitation of persons displaced internally due to ongoing military operations against militants.
Enacted with effect from 1 July 2015, the super tax is payable by banking companies at the rate of 4 percent of income and at 3 percent by other taxpayers earning 500 million or more Pakistani rupees (PKR) (5 million US dollars – USD) in the Tax Year 2015. For this purpose, income includes taxable income on net profits basis, dividends, capital gains, commissions and brokerage, and imputable income where tax paid on gross receipts is final discharge of tax liability.
Previously, Pakistan’s Finance Bill confirmed that tax withheld on services rendered by the corporate sector is adjustable. However, the Finance Act 2015 has made such tax a ‘minimum’ tax as 1 July 2015. As a result, tax withheld at the rate of 8 percent (for filers) and 12 percent (for non-filers) of gross receipts is now considered minimum tax for companies.
The amendment appears anomalous, however, because companies’ service income of companies is already subject to minimum tax at the rate of 1 percent of turnover.
Companies providing services, including those in the telecom sector, are likely to be substantially affected by this change, and KPMG in Pakistan understands that the Board of Revenue may consider a review based on representations by the corporate sector. Any change to the law would need approval from the Economic Coordination Committee of the Cabinet of Ministers.
In order to encourage public companies to pay cash dividends, the Finance Act has imposed a 10 percent tax on excess reserves of a company that derives profit for a tax year and either:
In these cases, the reserves exceeding 100 percent of the paid-up capital are deemed as income of the company subject to tax at 10%.
The tax does not apply to banking companies, modarabas, tax-exempt power generation companies, and companies in which majority shares are held by the Pakistan’s government. The tax also does not apply to public companies that distribute profit equal to either 40 percent of their after-tax profits or 50 percent of paid-up capital, whichever is less, within 6 months of the end of the tax year.
In order to enforce voluntary filing of tax returns, Pakistan’s government increased tax withholding rates as of July 2014 for non-filers of returns. The enhanced rates initially applied to receipts on account of dividends and interest and advance tax collectable on cash withdrawals, vehicle registration and property transfer. The rates were further extended in February 2015 to cover withholding tax on services and imports.
The Finance Act 2015 has taken a further step in this direction by bringing non-resident persons within the ambit of enhanced withholding tax rates for non-filers. As of 01 July 2015, the withholding tax rate applying to a permanent establishment of a non-resident company will be 4 percent and 6 percent on supplies of goods for filers and non-filers respectively. For services, the withholding tax rates will be 8 percent and 12 percent for filers and non-filers respectively. For the execution of contracts, withholding rates of 7 percent (filers) and 10 percent (non-filers) apply. These rates are at par with the rates enacted for local companies.
Contracts for construction, assembly or installation projects and related services by non-residents continue to attract withholding tax at 6 percent, regardless of the recipient’s filing status.
The Finance Act 2015 has further imposed an adjustable withholding tax at the rate of 0.6 per cent on banking transactions by a non-filer where the aggregate of such transactions exceeds PKR 50,000 (USD 500) in a day. These banking transactions include sale of instruments (e.g. demand draft, pay order), various type of deposit receipts, PKR travelers checks, transfers of any sum through check or any other instrument, online transfers, and transfers through ATMs.
Cash withdrawals from banks and the issuance of instruments (e.g. demand draft, pay order) against cash are already subject to withholding tax rates of 0.3 percent for filers and 0.6 percent for non-filers.
The Finance Act has extended the scope of services subject to sales tax in the Islamabad Capital Territory1 to bring it in line with the provinces. Services rendered in ICT that are subject to 16 percent sales tax as of 01 July 2015 include services of management and technical consultants, and services provided by:
1Services listed in the Schedule to the Islamabad Capital Territory [ICT] Sales Tax on Services Ordinance, 2001.