According to the income tax circular 4 of 2017 issued by the FBR here on Wednesday, Finance Act, 2013 introduced minimum tax upon the income of builders from the business of construction and sale of residential or commercial buildings and the income of developers from the business of sale of residential or commercial plots. Thereafter, the minimum tax regime was abolished and a fixed tax regime for builders as well as developers was introduced through the Finance Act, 2016 whereby the tax liability was based on square footage of area developed/constructed under section 7C and 7D of the Income Tax Ordinance.
The fixed tax regime available to builders and developers has now been abolished/withdrawn through the Finance Act, 2017.Tax shall now be charged on the income of builders and developers under the normal tax regime for the Tax Year 2018 onwards. However, for projects initiated and approved during Tax Year 2017 the provisions of section 7C and 7D shall remain applicable, subject to fulfillment of the following conditions:-
Firstly, payment has been made by the developer/builder during the Tax Year 2017 in accordance with Rule 13S of the Income Tax Rules, 2002. Secondly, the Chief Commissioner has issued online schedule of advance tax installments to be paid under Rule 13U of the Income Tax Ordinance, 2002 in the case of builders and under Rule 13ZB of the Income Tax Rules, 2002 in the case of land developers.
Thirdly, determination of perquisite in case of interest free/concessional loans by an employer to an employee [Section 13(7)]. Prior to the Finance Act, 2017 in terms of sub-section (7) of section 13 of the Ordinance if an employer extended an interest free loan to an employee the interest on such loan was computed on the basis of the benchmark rate [as defined in clause (a) of sub-section (14) of section 13] and was treated as salary of such employee. Likewise, if an employer extended loan at a concessional interest rate to an employee vis-à-vis the benchmark rate the differential of the interest rate charged and the benchmark rate [as defined in clause (a) of sub-section (14) of section 13] was treated as salary of the employee. The aforementioned treatment was, however, not applicable in respect of interest free/concessional loans extended by employers up to Rs 500,000.The limit of Rs 500,000 has now been enhanced to Rs 1,000,000 through the Finance Act,2017.
Enhancement in limit for sales promotion, advertisement and publicity expense by pharmaceutical companies: A new provision ie section 21 (0) was introduced through the Finance Act, 2016 whereby expenditure incurred by pharmaceutical companies on sales promotion, advertisement and publicity, in excess of 5% of their turnover was liable to be disallowed as an admissible expense against Business Income of such pharmaceutical company. Through the Finance Act, 2017 the limit for expenditure incurred by such pharmaceutical companies on sales promotion, advertisement and publicity allowable as a deduction against their business income has been increased from 5% to 10% of turnover.
The FBR said that prior to the Finance Act, 2017 depreciation under section 22 of the Income Tax Ordinance, 2001 was allowable as an admissible deduction against business income, only if the dual conditionalities of ownership of asset as well as its usage for business purposes were satisfied. Depreciation on assets financed through Musharika/diminishing Musharika Financing was not admissible because the asset is jointly owned by the borrower and the Islamic Financial Institution ie neither has absolute ownership of the asset which is a necessary pre-condition for allowance of depreciation. This treatment conferred a comparative disadvantage upon customers of Islamic Financial Institutions vis-à-vis customers of conventional banks and made such financing through Islamic mode unviable. Customers borrowing from conventional banks could avail benefit of depreciation on the fixed assets provided as security to financial institutions under long/short term financing arrangement whereas such benefit could not be availed by customers under a Musharika/ diminishing Musharika arrangement.
To bring parity between Islamic banking and conventional banking, a proviso has been added to the definition of "depreciable asset" in section 22(15) of the Ordinance through the Finance Act, 2017 which stipulates that where a depreciable asset is jointly owned by a taxpayer and an Islamic Financial Institution licensed by the State Bank of Pakistan or Securities and Exchange Commission of Pakistan in pursuance of an arrangement of Musharika Financing or diminishing Musharika Financing the taxpayer shall be treated as having absolute ownership of the asset. This amendment would enable customers of Islamic Financial Institutions to claim depreciation on assets jointly owned with an Islamic Financial Institutions in pursuance of an arrangement of Musharika or Diminishing Musharika Financing thereby providing a level playing field to customers of Islamic Financial Institutions vis-à-vis customers of conventional banking.
Tax Credit for investment in Sukuks/Insurance: Prior to the Finance Act, 2017 a resident individual or an AOP could avail tax credit in a Tax Year in respect of the expense incurred on acquiring new shares offered by a public company listed on a Pakistani stock exchange subject to the condition that the resident individual or AOP is either the original allottee of the shares or the shares are acquired from the Privatization Commission of Pakistan. The scope of such tax credit has now been extended through the Finance Act, 2017 and the same shall now be available to a resident individual or AOP for cost of acquiring Sukuks offered by a public company listed and traded on a stock exchange in Pakistan subject to the condition that the resident individual/AOP is the original allottee of the Sukuks. Tax credit is also available to a resident individual/AOP deriving income under the head "salary" or "Income from business" who pays life insurance premium on a policy to a life insurance company registered by the SECP under the Insurance Ordinance, 2000.Appropriate amendment has been made through the Finance Act, 2017 whereby the concerned Commissioner has been empowered to recoup such tax credit and recompute the tax liability of a taxpayer for the tax year/years in which such credit was allowed in case the insurance policy, in respect of which insurance premium was paid, is surrendered within two years of its acquisition, the FBR added.
Copyright Business Recorder, 2017