Naveed Zafar Ashfaq Jaffery & Co

Chartered Accountants

Prologue:

-Government of Pakistan made certain amendments vide Tax Laws (Amendment) Ordinance, 2016 (“Ordinance”) issued on 31st August, 2016, with immediate effect except where identified in the forthcoming paragraphs.

-This Ordinance has been issued without the approval of Senate and National Assembly with a statement that the Senate and National Assembly are not in session and the President is satisfied that circumstances exist which render it necessary to take immediate action. There is also a recent Judgment of Honorable Supreme Court that the Cabinet has powers to approve the Ordinance to be issued by the President.

1) Sales Tax Act, 1990

a) Adjustment of Provincial Sales Tax - S. 2, Clause (14)

-Vide SRO 212(I)/2014, provincial sales tax paid on services was made claimable as input adjustment from federal output tax with effect from July 01, 2013. Earlier, vide Finance Act (“FA”) 2015; provincial sales tax paid on reduced rates was rendered non-claimable.

-FA-16 disallowed the provincial sales tax paid on services as input adjustment from federal output tax. This resulted in increase in the cost to end consumer and defied the spirit of value added tax system.

-After protracted deliberations between Federal and Provincial revenue authorities, the amendment is introduced in the Ordinance to reverse the change brought through FA 2016 i.e. provincial sales tax paid on services is made allowable input adjustment from Federal output tax.

-This amendment shall be effective from July 01, 2016.

2) Income Tax Ordinance, 2001

a) Return on Investments in Sukuks from a Special Purpose Vehicle (“SPV”)

i) Charging of Tax - S. 5AA, Div. IIIB, Part I, Sch. I

-Vide Ordinance, a new section 5AA is inserted and return on investment in Sukuks from a SPV is taxed at following rates as a final tax:

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                                       Amount of return


Sukuk Holder            on investment             Rates


=======================================================


Company                 Any amount                  25%


individual or AOP      More than one million      12.5%


individual or AOP      Less than one million        10%


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(There is a confusion with respect to tax rate for the amount of exactly one million)

-The above rates shall be applied on gross amount of the return on investments.

-Moreover, the return on other investments in Sukuk will be exempt from tax which is already exempt under Income Tax Ordinance, 2001, as elucidated in forthcoming item (iii).

-It has further been provided that section 153 shall not apply to a payment by SPV to the originator for issuance of Sukuks.

ii) Deduction of Tax-S. 150A, Div. IB, Part III, Sch. I

-Vide Ordinance, a new section 150A is inserted and the Special Purpose Vehicle is made liable to deduct tax at following rates from the gross amount of return on investment in Sukuks while making payment of the same:

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                                       Amount of return


=======================================================


Sukuk Holder            on investment             Rates


Company                 Any amount                  15%


individual or AOP       More than one million     12.5%


individual or AOP       Less than one million       10%


Non Filer               Any amount                17.5%


=======================================================

(There is a confusion with respect to tax rate for the amount of exactly one million)

iii) Income of Special Purpose Vehicle - Div. 136, Part I, Sch. II

-According to Clause 136 Part-I 2nd Schedule, Income of SPV is exempt. However, if there is any income arises in the accounts of SPV after the completion of securitization process, the same shall be returned to the Originator in the next income year and such income shall be taxable in the hand of Originator.

-The ordinance has also made income after the process of issuance of Sukuks to be returned to the originator.

Example:

-For example, an Originator say, AB Bank, makes a SPV which issues Sukuks at coupon rate of KIBOR + 1% to general public to use the proceeds for the purpose of lending to a borrower, say XY Industries at KIBOR + 3%. The process of issuance of Sukuks is completed in 28th Feb, 2016 (i.e. tax year 2016). Any income of the SPV, like spread between 3% and 1%, will be exempt and will be returned to the Originator of SPV in next income year i.e Tax Year 2017 and will be taxable in the hands of Originator in Tax Year 2017.

b) Advance Tax on Sale or Transfer of Immovable Property - S. 236C

* Advance tax on sale of property has been exempted if the seller is dependent of a Shaheed of Pakistan Armed Forces (“PAF”) or of a person who dies while in the service of PAF or Federal and Provincial Governments. The advance tax has also been exempted on first sale of property acquired or allotted as an original allottee.

Disclaimer:

-This publication gives an overview of the Tax Laws (Amendment) Ordinance, 2016; it is prepared for the general use of our clients/other users, and shall not be a construed as an expert advice relating to a particular matter. No representation and/ or warranty (written or inferred) are extended as to the completeness of contents. You should not act upon or take decision(s) on the basis of the information without soliciting professional advice.