Comments on Finance (Supplementary) Bill, 2023 included changes made in Income tax, Sales tax and Federal Exercise.
Income Tax Ordinance, 2001
The Bill proposes to amend Section 37 of the Ordinance by inserting new sub-sections, which would require the purchaser of shares in a company to withhold advance adjustable tax at the rate of 10% of the Fair Market Value (FMV) and deposit the same into the Government treasury in the name of the seller within fifteen days of payment.
The Bill also states that the fair market value of the shares will be determined in accordance with Section 101A of the Ordinance, with no reduction in liabilities. Rule 19H of the Income Tax Rules, 2001 already contains the formula for calculating the FMV under section 101A.
According to a combined reading of proposed amendments in sections 37 and 37A, the 10% advance tax is applicable on the disposal of shares of a private company, an unlisted public company, and a listed company whose shares are neither sold nor settled through NCCPL.
It is also worth noting that Section 152 of the Ordinance currently requires the payer to withhold 20% tax when making a payment to a non-resident person, which includes payments made on account of the sale of shares in a Pakistani company. The amendment introduced in section 37, on the other hand, makes no distinction between a resident and a non-resident seller.
As a result, the question arises as to whether the non-resident seller can benefit from the reduced tax withholding rate of 10% proposed under section 37, or whether the rate of 20% applicable under section 152(2) will still apply in such cases. It is therefore recommended that the changes made clarify that the 10% tax withholding under this section is only applicable to resident sellers, if that is the legislature’s intent.
The seller must provide the prescribed information or documents, in the form of a statement, to the Commissioner within thirty days of the disposal.
It is also proposed that the provisions of the Ordinance relating to the recovery of taxes not deducted and the imposition of a penalty and default surcharge for failing to deduct or pay taxes deducted, as well as prosecution for noncompliance, apply to the tax deductible and payable under this section.
Where an application is filed by the seller, the Commissioner is empowered to allow payment without deduction of tax or deduction of tax at a reduced rate after making such enquiry as the Commissioner deems appropriate.
Capital Gain on Disposal of Securities [Section 37A]
The Bill proposes to insert a new proviso into Section 37A of the Ordinance, which states that capital gains derived from the disposal of securities covered by Section 37A that are not made through a registered stock exchange and are not settled through NCCPL will now be taxed under Section 37 of the Ordinance rather than Section 37A of the Ordinance.
As a result of this amendment, capital gains arising on the sale of shares of publicly traded companies that are not settled through NCCPL will be unable to benefit from the lower tax rates applicable to securities chargeable to tax under section 37A.
[Section 236CB] Advance tax on functions and gatherings Advance tax on functions and gatherings was first introduced in the Finance Act of 2013 with the insertion of a new section 236D, which required the prescribed persons to collect advance tax at the rate of 10% of the amount of bill from persons arranging functions in a marriage hall, marquee, hotel, restaurant, commercial lawn, club, a community place, or any other place used for such purposes. The advance tax rate was later reduced to 5% by the Finance Act of 2014. Later, an amendment was introduced in Division XI of Part IV of the First Schedule by the Finance Act of 2018, whereby the rate of advance tax was prescribed as the greater of 5% of the total amount of the bill or Rs. 20,000 (for cities that are provincial or divisional headquarters) or 10,000 (for the remaining cities) per marriage function. The aforementioned section was removed by Finance Act 2020. The Bill now proposes to reintroduce the same provisions by inserting a new section 236CB, which requires prescribed persons to collect an advance tax of 10% of the bill amount from persons arranging or holding a function in a marriage hall, marquee, hotel, restaurant, commercial lawn, club, a community place.
Furthermore, such advance tax will be levied where the food, service, or other facility is provided by someone else. The advance tax levied under this section is adjustable. In contrast to the omitted section 236D, the proposed amendment has introduced a blanket rate of 10% regardless of the cities in which functions are held. The proposed amendment also defines the terms “function” and “prescribed person” as under: (a) “function” includes any wedding related event, a seminar, a workshop, a session, an exhibition, a concert, a show, a party or any other gathering held for such purpose; and (b) “prescribed person” includes the owner, a lease holder, an operator or a manager of a marriage hall, marquee, hotel, restaurant, commercial lawn, club, a community place or any other place used for such purpose
In the next paragraph our Comments on Finance (Supplementary) Bill, 2023 incudes sales tax.
Sales Tax Act, 1990
- Scope of Tax [Section 3]
- Standard Rate of Sales Tax Enhanced from 17% to 18%
The Bill proposes raising the standard rate of sales tax on taxable goods imported and supplied from 17% to 18%. The enhancement has been proposed to section 3 as a whole, as a result of which the revised rate of 18% shall also apply on import and supplies of items specified in the Third Schedule to the Sales Tax Act, 1990 (ST Act) (viz. items chargeable to sales tax on MRP) as well as CNG supply by petrol distribution companies, which are covered under various provisions of section 3 other than subsection (1).
Furthermore, as a result of this proposed change, the ceiling provided under sub-section (5) of Section 3 of the ST Act on the Federal Government’s powers to levy maximum extra sales tax will be raised from 17% to 18%.
It is worth noting that, just a day before the Bill was introduced, the Federal Government used its authority under Section 3(2)(b) of the ST Act to raise the standard rate specified in subsection (1) of Section 3 of the ST Act from 17% to 18% (except for Third Schedule items and the CNG sector) via notification No. SRO 179(1)/ 2023 dated February 14, 2023, which took effect immediately.
It is worth noting that such a change in sale tax rate brought about by notification is also covered by the amendments proposed in the Bill; thus, the SRO would become obsolete upon the implementation of the amendments proposed in the Bill. However, because the proposed amendments will become effective from the date of the Bill’s approval by the legislature in the prescribed manner, there is an ambiguity regarding the application of the rates enhanced through the said SRO during the interim period, which tends to apply from the date of the SRO’s issuance unless it is withdrawn or suppressed from the date of its issuance. The legality of said SRO increasing the general rate of sales tax, which is also a prerogative of the parliament under section 3(1) of the ST Act, is also called into question.
Comments on Finance (Supplementary) Bill 2023: The federal government has the authority to change the sales tax rates on Third Schedule items. Currently, the specification or revision of applicable sales tax rates on Third Schedule items can only be accomplished through amendments to the ST Act. The Bill proposes to amend the ST Act by inserting a provision in clause (a) of sub-section (2) of section 3 that gives the Federal Government the authority to impose such higher rate of sales tax on the items listed in the Third Schedule of the ST Act, subject to certain restrictions and conditions.