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This Memorandum is correct to the best of our knowledge and belief at the time of going to press. It is intended as a general guide and therefore is not a substitute for specific professional advice which should be sought before any action is taken. This Memorandum may be accessed on our website http://www.ey.com/pk

This Memorandum has been prepared as a general guide for the benefit of our clients and is available to other interested persons upon request. This should not be published in any manner without the Firm's consent.

This is not an exhaustive treatise as it sets out interpretation of only the significant amendments proposed by the Finance Bill, 2007 (the Bill) in the Income Tax Ordinance, 2001 (the Ordinance), the Finance Act, 1987 (the FA 1987), the Finance Act, 1989 (the FA 1989), the Sales Tax Act, 1990 (the ST Act), the Customs Act, 1969 (the Customs Act), the Federal Excise Act, 2005 (the FE Act), the Companies Ordinance, 1984 (the CO), the Banking Companies Ordinance, 1962 (the BCO), the Insurance Ordinance, 2000 (the IO), the Securities and Exchange Ordinance, 1969 (the SE Ordinance), the Securities and Exchange Commission Act, 1997 (the SEC Act), the West Pakistan Industrial and Commercial Employment (Standing Orders) Ordinance, 1968 (the WPICE Ordinance), the Companies Profits (Workers' Participation) Act, 1968 (the WPPF Act), the Employees' Old Age Benefits Act, 1976 (the EOB Act) and the Payment Systems and Electronic Fund Transfers Act, 2007 (the PSEFT Act), in a concise form sufficient enough to amplify the important aspects of the changes proposed to be made.

Changes of consequential, administrative, procedural or editorial in nature have either been excluded from these comments or otherwise dealt with briefly. The amendments proposed by the Bill after having been enacted as the Finance Act, 2007, shall, with or without modification, become effective from the tax year 2008, unless otherwise indicated. The Repealed Ordinance means the Income Tax Ordinance, 1979 since repealed. The Board means the Central Board of Revenue, Government of Pakistan.

It is suggested that the text of the Bill and the relevant laws and notifications, where applicable, be referred to in considering the interpretation of any provision. Since these are only general comments, no final decision on any issue be taken without further consideration and specific professional advice should be sought before any action is taken.



-- Assessed loss of amalgamating companies for the tax year is allowed to be set-off against business profits in the year of amalgamation, balance to be carried forward for the succeeding six tax years.

-- Scope of the scheme of amalgamation extended to service sector companies.

-- Concept of group taxation introduced for local companies and now group companies have an option to be taxed as once fiscal unit. Option once exercised cannot be revoked. Group relief to address adjustment of assessed losses between Group Companies (with certain conditions) introduced.

-- Non-recognition of gain or loss on disposal of assets also made available to schemes of arrangement and reconstruction approved by the High Court, State Bank of Pakistan or Securities and Exchange Commission of Pakistan on or after July 1, 2007.

-- Taxation of Banking Companies would be governed by special provisions of the newly introduced Seventh Schedule. Provision for bad debts classified under the Prudential Regulations of the State Bank of Pakistan other than "substandard provisions" are allowable as deduction. Withholding provisions no longer applicable to a Banking Company as recipient.

-- The Second Schedule no longer available to banking companies.

-- Taxation of Shariah compliant Islamic banking would be treated at par with conventional banking.

-- Withholding tax adjustment not available to certain retailers who opt for Final Tax Regime.

-- Newly incorporated companies having no assessed income required to pay advance tax on the basis of its estimated profits.

-- Certificate for exemption of collection of tax at import stage not required for manufacturers importing raw materials for their own use.

-- Rate of collection of tax at the import stage reduced from 6% to 5%.

-- Federal Excise Duty to be included in the value of imported goods for the purpose of collection of tax at import stage.

-- Listed companies no longer under Final Tax Regime.

-- Manufacturer being an individual or an AOP, restored to Final Tax Regime effective from the tax year 2007.

-- Enhanced rate of 2% withholding of tax for goods and services on non-availability of NTN/CNIC No withdrawn;

-- Employer is authorised to adjust tax paid by the employee other than salary, and tax credits relating to donation, investment in shares and profit on debt of housing loan for the purpose of deduction of tax;

-- Local manufacturer and authorised dealers of motor cars obliged to collect tax @ 5% at the time of sale of motor car.

-- Natural gas suppliers required to collect advance tax from CNG Stations @ 6% which would be a final tax.

-- Dividend income made taxable @ 10% for all categories of taxpayers.

-- Private Equity and Venture Capital Fund allowed exemption from tax on distribution of 90% of its profits.

-- Profits on gain arising from sale of immovable property to a Real Estate Investment Trust exempted from tax.

-- Exemption from tax allowed to Private Equity and Venture Capital Fund.

-- Exemption from tax to capital gains of listed securities extended to the tax year 2008.

-- Exemption for tax granted to the Stock Exchanges for gain due to corporatization of Stock Exchanges and transfer of membership rights by individual member.

-- Rate of tax withholding on payment of profit on debt to a non-resident not having a permanent establishment in Pakistan to be the rate as provided for in the relevant tax treaty.

-- Withholding provisions made non-applicable to payments made to non-resident news agencies, syndicate services and individual contributors/writers having no permanent establishment in Pakistan.


-- Concept of cottage industry has been introduced.

-- Sales tax on advance receipt has been abolished.

-- Input tax exceeding 90% of output tax during a tax period not adjustable through monthly sales tax return.

-- Schemes of carry forward of unadjusted input tax for manufacturer and distributor abolished.

-- No sales tax refund for registered person other than persons engaged in supply of zero rated goods.

-- Carry forward of input tax allowed.

-- Adjustment of excess input tax permitted after financial year end on certification by Chartered Accountants.

-- Adjustment of input tax on acquisition of fixed assets allowable only in twelve equal instalments after start of production of a new unit.

-- Auditors certification in respect of payment of sales tax due by a registered person required annually in case of companies.

-- Period of retention of sales tax record and documents extended up to five years.

-- Amendments in the Sixth Schedule.

-- Revised rates of sales tax and income tax for retailers.

-- Sewing machine, bicycles, trailers and semi-trailers now zero rated.

-- Amnesty from payment of default surcharge and penalty introduced in cases where principal amount of sales tax has been paid before June 30, 2007.

-- Input tax on electricity and gas consumed in residential colonies not allowable.

-- Various items of plastic paper and iron sector liable to sales tax at a rate of 20%.

-- Special procedures for minimum value addition on various goods including commercial importers, etc, abolished.

-- Sales tax refund of LTU to be issued within three days subject to bank guarantee.

-- List of zero rating of goods of five export oriented sectors revised.


-- Insertion of the words fee and service charges in the preamble clause.

-- Definition of the Board has been changed.

-- Cumulative incidence of custom duty not to exceed the rate agreed upon by the GOP with other countries under multilateral Trade Agreement .

-- Levy of fee and service charges along with the custom duty.

-- Allowability of plant and machinery temporarily exported to be re-imported without payment of duty.

-- Power to determine value of goods.

-- Value determined not to be challenged.

-- Matter relating to appeals before the Appellate Tribunal.

-- No ADR in respect of matters involving criminal litigation.


-- Definitions of "Dutiable Goods" , "Dutiable Supplies" , "Dutiable Services" and "Supply" introduced.

-- Scope of excise duty on non fund banking services has been enhanced.

-- The concept of sales tax mode has been introduced in respect of levy and collection of excise duty.

-- Scope of levy of excise duty in respect of goods and services redefined.

-- Filing of return and payment of excise duty are harmonised with the sales tax law.

-- The time for levy of excise duty is in line with the time prescribed under sales tax law.

-- For the purpose of levy of duty the amount of duty is to be considered in determination of value of goods.

-- Scope of mode of recovery of short paid amount of duty enhanced.

-- Time limit for keeping the records is prescribed.

-- Time limit for passing the appellate order by the Collector (Appeals) is prescribed.

-- Scope of alternative dispute resolution redefined.

-- Rates of duty on certain goods as services are amended.

-- Life Insurance and Health Insurance have been categorised as exempt services.

-- Excise duty is withdrawal on certain goods.


-- Definition of book and paper and books of accounts expanded to also cover electronically maintained documents and records.

-- SECP also empowered to make rules and regulations.

-- Procedure on confirmation of alteration of memorandum of association simplified.

-- Relaxation to subsidiary for purchasing shares of its holding company.

-- Time limit for holding Annual General Meeting and approving accounts reduced to 3 months from closure of the financial year.

-- Acquirer of substantial voting shares in a listed company entitled to request the SECP to require the company to hold fresh election of directors.

-- Listed companies to appoint independent Share Registrar.

-- Investments in associated companies and undertakings made subject to further regulatory intervention.

-- SECP can appoint an auditor to carry out a special audit of a company.

-- Private companies whose share capital is Rs 7.5 million or more required to file accounts with the Registrar of Companies.


-- Foreign branches and subsidiaries of the banking companies incorporated in Pakistan brought within the purview of definition of banking company.

-- Branches of foreign banks operating in Pakistan under a license issued by the State Bank, included within the definition of a company and a banking company (for the purpose of amalgamation).

-- In respect of amalgamation of banking companies, a foreign banking company shall not be required to hold a meeting of its shareholders if a certificate is issued by its head office in respect of approval of the scheme.

-- Powers of the Federal Government in respect of forms of businesses to be carried out by the banking companies shall be transferred to the State Bank.

-- Banking companies allowed to issue perpetual non-cumulative preference shares.

-- If a banking company meets the minimum capital requirement and capital adequacy ratio irrespective of past accumulated losses, it shall be eligible for payment of dividend out of its profits for the said year subject to certain conditions.

-- State Bank empowered to maintain a panel of auditors being eligible for audit of banking companies.

-- State Bank empowered to revoke the appointment of auditors of a banking company, downgrading the category of the auditor and removal from the panel of auditors for a period upto five years.

-- Auditor shall be liable to report all the matters of material significance to the State Bank.

-- Scope of issuance of directions, guidelines and instructions by the State Bank broadened.

-- Amendments in the statute in respect of powers, responsibilities and functioning of Banking Mohtasib.

-- Shelter against legal proceedings to credit information providers against issues related to disclosure of information.

-- Microfinance banks allowed to receive foreign currency remittances.

-- State Bank empowered to specify minimum capital requirements for Microfinance banks.




The Finance Ordinance, 2002 for the first time introduced provisions for setting off business losses in the event of amalgamation. A very significant change has been sought to be introduced by the Bill whereby in the event of amalgamation of two or more companies, the assessed loss of the amalgamating company or companies only for the tax year shall be allowed to be set off against business profits and gains of the amalgamated company and vice versa. The set off shall be allowed in the year of amalgamation to the extent of profits and gains for the tax year and thereafter, unadjusted loss, if any, shall be carried forward for such adjustment for the succeeding six tax years.

Earlier, under the existing provisions of this section, accumulated losses of business could be brought forward and set off up to a period of six tax years immediately succeeding the tax year in which the loss was first computed in the case of the companies concerned. As a consequence of the proposed amendment, carried forward loss of the amalgamated company in the event of amalgamation shall stand lapsed.

It therefore, needs to be emphasised that while formulating a scheme of amalgamation, the legal inability to avail the benefit of carry forward losses of an amalgamating company or companies may be viewed as a very significant consideration in pursuing corporate organisation or restructuring of companies.

Attention needs to be drawn to Sub-section (2) of this Section which remains unchanged and is to the effect that in the event of amalgamation, unabsorbed deprecation of an amalgamating company or companies shall be given the same treatment as provided for in Sub-section (4) and (5) of Section 57 of the Ordinance.

This would, therefore, mean that despite express intendment of the new Sub-section (1) seeking to limit set off of the assessed loss of the amalgamating company or companies for the past tax years, unabsorbed depreciation of the amalgamating company or companies available from the past shall continue to be available for set off for an indefinite period against the profit of the amalgamated company.

It needs to be remembered that the existing provision requiring the amalgamated company to continue the business of the amalgamating company or companies for a minimum period of five years from the date of amalgamation remains unchanged.

Clause (1A) of Section 2, defining "amalgamation", seeks to expand the scope of the said definition by seeking to include companies engaged in providing services and not being a trading company or companies.



In line with the tax regime of certain developed jurisdictions, one of the persistent demand of the corporate sector is proposed to be met in the context of taxation of a group of companies as one fiscal unit. The proposed provision would tend to promote a culture of corporation consolidation and is consistent with the emerging needs of the country's current status of economic development and demand of globalisation.

The Bill proposes that wholly owned group companies shall be construed as one fiscal unit for the purpose of group taxation. This entails preparation of consolidated group accounts pursuant to the provisions of the Companies Ordinance, 1984 coupled with consolidated computation of income and tax payable for the group as a whole.

The proposed provision prescribes certain conditions which, inter alia require that the option to be taxed on "a group" basis as one fiscal unit shall be irrevocable in perpetuity. It further provides that the companies constituting the group shall for the purpose of this provision be such companies as have been incorporated under the Companies Ordinance, 1984 and the accounts of all the companies constituting the group shall be prepared by the company and audited by a Chartered Accountant as prescribed for listed companies under the aforesaid Ordinance.

An important consideration in opting for group taxation would be that losses of any constituent company of the group ,prior to the composition of the group, shall be disregarded and no relief thereof shall be available for the purposes of group taxation.

It is expected that the Board will eventually form rules for regulating group taxation.



The existing Section 59B has been proposed to be substituted by a new Section which is far more comprehensive in its scope and implication. The objective underlying this Section appears to be furtherance of the concept of group taxation insofar as treatment of losses of the group companies is concerned.

(To be continued)

Copyright Business Recorder, 2007

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