Recent Tax Measures to Boost Investment
Level of investment is an important determinant of a country’s economic growth, and it is deemed essential to creating jobs, thus reducing unemployment. The Government of Pakistan is aware of the overwhelming significance of investment in the national economy. This could be the reason why the government has recently amended the tax laws through Presidential Ordinance to grant numerous concessions to local and overseas individuals, who have a Roshan Digital Account in Pakistan, with the primary objective of attracting investment into Pakistan.
For this purpose, the government promulgated the Tax Laws (Amendment) Ordinance, 2021, on 11th of February to amend the tax laws: the Customs Act, 1969; the Sales Tax Act, 1990; the Income Tax Ordinance, 2001; and the Federal Excise Act, 2005.
The salient changes introduced to each of the above-mentioned tax laws are set out below.
The Customs Act, 1969 (CA)
The Presidential Ordinance has abolished customs duty on imports of the following items:
Ø The capital goods, including materials, plant, machinery, hardware, equipment and software imported into Pakistan by the Special Technology Zones (STZ) Authority, zone developers and zone enterprises for consumption within the STZ for a period of 10 years, commencing from the date of signing of the development agreement or from the date of issuance of licence by the STZ Authority; and
Ø The professional and technical apparatus or equipment or instruments imported by foreign nationals, experts and athletes, etc. participating in an international event, including sports events, or under any international arrangement for use solely during such event or arrangement subject to endorsement on their passports are exempted from customs duty;
The Ordinance has established concessional customs duty until 30 June 2026 on the import of the followings:
Ø 25% on electric vehicles (4-wheelers);
Ø 1% on electric vehicle specific components for assembly/manufacture in any kit form (CKD); and
Ø 10% on components for assembly/manufacture in any kit form (CKD) non-localized parts.
The Sales Tax Act, 1990 (STA)
The Ordinance has:
Ø empowered the Federal Board of Revenue (FBR) to share data or information, including real-time data, videos and images received under the provisions of the
Ø exempted sales tax on import of CKD kits for 4-wheeler electric small cars, SUVs and light commercial vehicles (LCVs) with 50 kwh battery or below by local manufacturers until 30 June 2026;
Ø established reduced 1% sales tax (currently, standard rate is 17%) on local supply of locally manufactured or assembled electric small cars (4 wheeler), SUVs and LCVs with 50 kwh battery or below until 30 June 2026;
Ø exempted from the value addition a tax of 3% on import of:
ü electric vehicles (4 wheelers) CKD kits for small cars, SUVs and LCVs with battery 50kwh or below until 30 June 2026;
ü electric vehicles (4 wheelers) small cars, SUVs and LCVs with battery 50kwh or below in CBU condition until 30 June 2026; and
ü electric vehicles (2 and 3 wheelers and heavy commercial vehicles) in CBU condition until 30 June 2025.
The Income Tax Ordinance, 2001 (ITO)
Under the Ordinance:
Ø every banking company maintaining foreign currency value account (FCVA), non-resident Pakistani rupee value account (NRVA) of a non-resident individual holding Pakistan Origin Card (POC) or National Identity Card for Overseas Pakistanis (NICOP) or Computerized National Identity Card (CNIC) requires to withhold tax at the prescribed rates from capital gains arising on the disposal of debt instruments and government securities and certificates (including shariah-compliant variant) invested through aforementioned accounts;
Ø every motor vehicle registering authority of Excise and Taxation department requires to collect advance tax at the prescribed rates until 30 June 2021 from the buyers of locally-manufactured motor vehicle who subsequently sell it within 90 days of delivery of such vehicle;
Ø advance tax collected under section 236C of the ITO on sale or transfer of immoveable property by non-resident individual holding POC or NICOP or CNIC acquired through FCVA or NRVA will be final discharge of tax liability in lieu of capital gains taxable under section 37 of the ITO;
Ø advance tax collected under 236K of the ITO on purchase of immoveable property by non-resident individual holding POC or NICOP or CNIC acquired through FCVA or NRVA will be final discharge of tax liability;
The Ordinance has introduced the following changes into the First and Second Schedules of the ITO:
Ø the rate of super tax at 4% will continue to be chargeable on banking companies after tax year 2021;
Ø the rate of advance tax under section 148 of the ITO will be 1% for importers of CKD kits of electronic vehicles for small cars, SUVs and CLVs with battery 50 kwh or below;
Ø the rate of advance tax on sales to dealers, distributors, or wholesalers of fertilizer and retailers of fast moving consumer goods will be 0.25%, provided they get themselves registered under STA within 60 days from promulgation of the Ordinance 2021;
Ø the rate of tax to be deducted as final tax under Section 151 of the ITO will be 10% of the profit on debt from a debt instrument purchased by resident Pakistani citizens who have already declared foreign assets to the FBR through FCVA;
Ø the tax payable by cotton ginners on their income and profits shall not be more than 1% of their turnover, which will be final discharge of their tax liability;
Ø withholding tax under section 148 of the ITO 2001 is not applicable on temporary imports by international athletes;
Ø the Islamic Naya Pakistan Certificates Company Limited is exempted from corporate income tax, minimum tax on turnover and withholding taxes;
Under the Ordinance, non-resident individuals holding POC or NICOP or CNIC and maintaining FCVA or NRVA will enjoy the following concessions/exemptions:
Ø exempted from provisions of section 100BA and Rule 1 of 10th Schedule of the ITO 2001;
Ø exempted from operation of sections 231A, 231 AA and 236 of the ITO 2001; and
Ø exempted from application of section 114(1)(ae) and section 181 of the ITO provided they have no Pakistan-source taxable income other than profit on debt on FCVA or NRVA, capital gain on disposal of immoveable property acquired through proceeds of FCVA or NRVA, capital gain on disposal of prescribed securities and dividend income on prescribed securities.
The Federal Excise Act, 2005 (FEA)
The Ordinance has excluded electric vehicles (4 wheelers) from the list of excise goods and therefore, electric vehicles (4 wheelers) will not be subject to federal excise duty under the FEA until 30 June 2026.
The Ordinance has come into force on the date of promulgation and thus has enabled non-resident Pakistanis to make investments in both US dollars and Pak rupees in government-issued Naya Pakistan Certificates at attractive rates and in both conventional and Shariah-compliant forms, as well as to make investments in Pakistan’s stock market and real estate sector.
The author is serving as Additional Commissioner Inland Revenue at Federal Board of Revenue, Pakistan. He can be contacted at firstname.lastname@example.org