KPMG Taseer Hadi & Co.

Chartered Accountants

Amendments in income tax, sales tax and federal excise duty laws vide Amendment Ordinances 2011 and SROs
TAX 18 March, 2011

Contents

The contacts at KPMG in connection with this report are: Amendments in income tax law Amendments in sales tax and FED laws Saqib Masood Partner / Head of Tax, Karachi, KPMG Taseer Hadi & Co. Tel: +92 21 3568 5847 Fax: +92 21 3568 5095
saqibmasood@kpmg.com

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This document explains significant changes to the Income Tax Ordinance, 2001, the Sales Tax Act, 1990 and the Federal Excise Act, 2005 as brought through Amendment Ordinances 2011 and SROs promulgated on 15 March 2011. The document contains the comments, which represent our interpretation of the legislation, and we recommend that while considering their application to any particular case, reference be made to the specific wordings of the relevant statutes.

Mian Safiullah Partner, Islamabad, KPMG Taseer Hadi & Co. Tel: +92 51 282 3558

Fax: +92 51 282 2671

miansafiullah@kpmg.com

Kamran I. Butt Partner, Lahore, KPMG Taseer Hadi & Co. Tel: +92 42 3585 0471-6

Fax: +92 42 3585 0477

kamranbutt@kpmg.com

2011 KPMG Taseer Hadi & Co., a Partnership firm registered in Pakistan and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Income Tax

Levy of Surcharge at 15 percent

Highlights 15% surcharge has been levied on income tax liability for tax year 2011 and withholding of taxes made between 15 March 2011 to 30 June 2011 Comments The Income Tax (Amendment) Ordinance, 2011 [2011 Ordinance] has inserted a new section 4A in the Income Tax Ordinance, 2001 [the Ordinance] to provide for levy of Surcharge at the rate of 15% on income tax payable by every taxpayer as income tax liability, advance tax and withholding tax (as withholding agent) etc. The Surcharge is payable: on income tax liability pertaining to tax year 2011; and on taxes deducted / collected during the period from 15 March 2011 to 30 June 2011 by any withholding tax agent Further, Surcharge shall be paid, collected, deducted and deposited at the same time and in the same manner as the tax is paid, collected, deducted and deposited on account of income tax liability, advance tax, withholding taxes etc. Based on the provisions of section 4A, the following position emerges: All taxpayers whose tax year 2011 [i.e. income year ended between 01 July 2010 to 31 Dec 2010] has already been closed, they are required to pay surcharge on their whole years tax liability at the time of filing of return. Such taxpayers would not be required to pay surcharge on March and June 2011 Quarters advance tax liability as the two quarters would fall within tax year 2012. Further, such taxpayers would not be subject to surcharge on withholding taxes on their receipts as the same would not fall within tax year 2011 but tax year 2012. Such taxpayers, where tax year 2011 has not yet closed, they would be subject to surcharge on withholding taxes on their receipts from 15 March 2011 until year end or 30 June 2011 whichever is earlier. Such taxpayers would also be required to compute surcharge on advance tax liability for March 2011 and June 2011 Quarters (where any such quarter falls within tax year 2011). Furthermore, such tax payers will be required to compute surcharge liability on full year's income tax liability and pay the differential surcharge i.e. after adjustment of surcharge withheld by the withholding agents between 15 March 2011 and 30 June 2011 and surcharge paid in advance, at the time of filing of their return. Surcharge will also be applicable on receipts / income falling under presumptive regime covered within tax year 2011. Employers would be required to withhold tax computing surcharge on full years tax liability of the employees (i.e. from 01 July 2010 to 30 June 2011) and deduct the same until 30 June 2011. Withholding agents are required to deduct / collect surcharge at 15% of the amount of tax deducted / collected and deposit the same in the same manner as is done in the case of tax deducted / collected. We have explained the interpretations of section 4A as has been enacted vide the 2011 Ordinance. However, the intention appears to levy surcharge on income arising during the period from 15 March 2011 to 30 June 2011. Therefore, it is expected that the FBR would clarify the position. We understand that the retrospective effect of surcharge would be a harsh decision by the Government in the current economic scenario, and especially over-burdening the existing taxpayers with new taxes instead of taking measures to broaden the tax base.

2011 KPMG Taseer Hadi & Co., a Partnership firm registered in Pakistan and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Sales Tax and Federal Excise Duty

Withdrawal of sales tax exemptions / zero rating and enhancement of Special Excise Duty rate
Highlights Exemption from sales tax on import and supply of tractors withdrawn Comments The SaleTax (Amendment) Ordinance, 2011 [2011 Ordinance] has omitted tractors from Sixth Schedule to the Sales Tax Act, 1990. Consequently, with effect from 15 March 2011, import and supply of tractors is subject to sales tax at 17%.

Exemption from sales tax on import and supply of fertilizers and pesticides and import of plant and machinery withdrawn

Vide SRO 229(I)/ 2011 dated 15 March 2011, fertilizers and pesticides have been brought in to the sales tax net. Consequently, import and supply of fertilizers are liable to sales tax at 17% with effect from 15 March 2011. Please note that SRO 545(I)/2004 dated 30 June 2004 is still part of the statute under which the value has been fixed for locally produced Urea fertilizer at Rs. 6,660 per metric ton for sales tax purposes, accordingly the aforesaid value shall continue to apply while calculating the sales tax liability. Similarly, vide SRO 230(I)/2011 dated 15 March 2011, import of plant and equipment (whether manufactured locally or not) has been made subject to sales tax at 17%.

Sales tax zero rated facility to textile, leather, surgical, sports and carpets sectors restricted / withdrawn Levy of sales tax on sugar at actual market price

SRO 231(I)/2011 dated 15 March 2011 has been issued to restrict the sales tax zero rated facility to five industrial sectors (textile, leather, surgical, sports and carpets) by amending SRO 509(I)/2007 dated 09 June 2007. Now sales tax zero rated facility on import or supply of goods is available only if these are sold to or utilized by manufacturers-cum-exporters or exporters for export purposes only. Domestic supplies of these five zero rated sectors are now subject to sales tax at the rate of 17 percent. SRO 232(I)/2011 dated 15 March 2011 has been issued to rescind the SRO 564(I)/2006 dated 05 June 2006 through which assessable value of sugar for charging of sales tax was prescribed at Rs. 28.88 per Kg. Now value is to assessed on actual market price, however, rate of sales tax would remain the same that is 8%. Section 3A of the Federal Excise Act, 2005 has been amended vide the Federal Excise (Amendment) Ordinance, 2011 dated 15 March 2011 to increase the rate of Special Excise Duty [SED] from one percent (1%) to two and one half percent (2.5%). However corresponding change has not been made in the SRO 655(I)/2007 dated 29 June 2007 which has created anomaly on the implication of the enhanced rate and the FBR may have to address the same.

Rate of Special Excise Duty increased from 1% to 2.5%

2011 KPMG Taseer Hadi & Co., a Partnership firm registered in Pakistan and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

 2011 KPMG Taseer Hadi & Co., a Partnership firm registered in Pakistan and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International Cooperative (KPMG International).