The scheme was ratified, along with other amendments in relevant laws, by the President of Pakistan by way of an Ordinance, as the Senate and National Assembly are not in session.
The scheme and amendments were effected through promulgation of following Ordinances.
1. Foreign Assets (Declaration and Repatriation) Ordinance, 2018 ("Foreign Assets Ordinance");
2. Protection of Economic Reforms (Amendment) Ordinance, 2018 ("PERA");
3. Voluntary Declaration of Domestic Assets Ordinance, 2018 ("Domestic Assets Ordinance"); and
4. Income Tax (Amendment) Ordinance, 2018 ("ITAO").
A. Declaration Scheme
Salient features and loopholes in the scheme and amendments are briefed as under.
1. Persons Covered
> Foreign Assets - All the citizens of Pakistan are eligible to avail the scheme except holders of public office (definition in Annexure A), their spouses and dependent children.
> Local Assets - Every company, Association of person and all the citizens of Pakistan are eligible to avail the scheme except holders of public office, their spouses and dependent children.
2. Assets Covered
> All the foreign assets;
> Undisclosed local income; and/or
> Undisclosed local assets
held, on or before April 8th, 2018 by persons covered under the scheme, are eligible to be benefitted under the scheme except the assets with respect to whom proceedings are pending in any Court of law.
3. Value of assets
The value of the assets to be benefitted under the scheme shall be the as under:
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TAU CORPORATE ADVISORS
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S.No. Asset Type Value
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A Foreign Assets values as declared by the person declaring
the asset or cost of the asset,
whichever is higher
B Local Assets
1 Undisclosed income. As declared
2 Open plots and land. Cost of acquisition or FBR
rates, whichever is higher
3 Super structure. Rs 400 per square feet
4 Apartments and flats. Cost of acquisition or Provincial
stamp duty rates, whichever is higher
5 Imported motor vehicles. A-B
A= CIF value plus the amount of
all charges, customs- duty, sales
tax, levies, octroi, fees and other
duties and taxes leviable thereon
and the costs incurred till their
registration
B= a sum equal to 10% of the said
value for each successive year
upto a maximum of five years.
6 Motor vehicles purchased
from a manufacturer or
assembler or dealer in
Pakistan. A - B
A = The price paid by the
purchaser, including the amount
of all charges, customs duty, sales
tax and other taxes, levies, octroi,
fees and all other duties and taxes
leviable thereon and the costs
incurred till their registration
B = a sum equal to 10% of the
said value for each successive year
upto a maximum of five years
7 Used motor vehicles
purchased locally. Value determined in the manner
specified in S.N. 5 or 6, as the
case may be, as reduced by an
amount equal to 10% for every year
following the year in which it was
imported or purchased from
a manufacturer
8 Securities and shares
traded on stock exchange. Day-end price of the share or
security quoted on registered
stock exchange as on the 9th April,
2018 and where no day-end price of
such share or security is quoted
on stock exchange on the 9th April,
2018 day-end price of the share
or security quoted on a date
nearest to the 9th April, 2018
9 Securities and shares
not traded on stock
exchange. Break-up value or face value,
whichever is higher. Breakup value
shall be the sum of paid-up capital,
reserves and balance as per profit
and loss account as reduced by the
value of preference shares and
divided by the amount of the paid
up ordinary share capital
10 National saving
schemes, postal
certificates,
bonds, securities
and other similar
investments in Face value
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S.No. Asset Type Value
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capital instruments
not traded or quoted
on stock exchange
11 Gold. Rupees 4000 per gram
12 Other precious stones and Market rate as on the
metals. 9th April, 2018 or
cost of acquisition,
whichever is higher
13 Stock-in-trade. Market rate as on
the 9th April, 2018
14 Plant and machinery. Actual cost of
acquisition with no
depreciation
15 Accounts receivable
Actual cost of acquisition
16 Other assets
17 Prize bonds, cash and
bank Face value. Accounts
including foreign
currency accounts
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4. Timeline
The scheme will be applicable from April 10th, 2018 to June 30th, 2018.
5. Tax Rates
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Local/Foreign Assets Tax Rates
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Foreign Assets Liquid assets not repatriated 5%
Immoveable assets 3%
Liquid assets repatriated and 2%
invested in Government securities
upto 5 years in US dollars
denominated bonds with six-monthly
profit payment in equivalent Rupees
(rate of return 3%) and payable on
maturity in equivalent Rupees
Liquid assets repatriated
Local Assets Foreign currency held in a foreign
currency account in Pakistan as on
the 31st March, 2018 and encashed
in equivalent Rupees
Foreign currency held in a foreign
currency account in Pakistan as on
the 31st March, 2018 which is
invested in Government securities
upto 5 years in US dollars denominated
bonds with six-monthly profit payment
in equivalent Rupees (rate of return 3%)
and payable on maturity in
equivalent Rupees
Other Assets 5%
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6. Confidentiality
Particulars of any person making a declaration, or any information received in any declaration, shall be confidential notwithstanding any law for the time being in force.
7. Declaration not admissible in evidence
Nothing contained in any declaration made shall be admissible in any proceedings against the declarant for imposition of penalty or for prosecution under any law.
B. Foreign Currency Accounts
As per amendment introduced in section 5(4) of Protection of Economic Reforms Act, 1992, a person, who is a non filer, is prohibited from depositing any cash into any foreign currency account.
C. Amendments in Income Tax Ordinance, 2001 ("ITO")
1. Tax year in which concealed income, asset and/or expenditure shall be added
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1. Tax year in which concealed income, asset and/or expenditure shall be added
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Amounts representing Pakistan source Tax year to which such amount relates
income, expenditure or asset (part of existing law)
Amounts representing foreign Immediately preceding tax year
source income, expenditure or asset of discovery (insertion)
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2. Immunity on foreign remittances limited
Immunity from inquiry on foreign remittances through normal banking channel encashed in Pakistan Rupee is restricted to Rs 10 million for a tax year.
3. Foreign income and assets statement - Section 116A of ITO
> Every resident individual
• Having foreign income equal to or in excess of $ 10,000; or
• Having foreign assets with a value of $ 100,000 or more
Shall furnish a 'foreign income and assets statement' giving following particulars:
• Total assets and liabilities as on the last day of the tax year;
• Foreign asset transferred during the year and consideration thereof; and
• Foreign income and expenditure derived wholly and necessarily for the said income.
> Every person who is required to file a 'foreign income and assets statement' is also required to file return of income under section 114 of ITO
> The time limitation for five years for the Commissioner to issue notice to file return of income shall not be applicable if the Commissioner is satisfied on the basis of reasons to be recorded in writing that a person who failed to furnish his return has foreign income or owns foreign assets.
> In case of failure to file a foreign asset and income statement within due date, a penalty of 2% of foreign income or value of foreign asset shall be levied for each year of default.
4. Rate of tax for individuals
• Income Tax rates for individuals shall be as Under with effect from July 1st, 2018:
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S. No. Income Bracket (Rs.) Tax Rates
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1. Upto 1,200,000 Exempt
2. 1,200,001 to 2,400,000 5% of the amount exceeding
Rs. 1,200,000
3. 2,400,001 to 4,800,000 Rs. 60,000 + 10% of the
amount exceeding Rs. 2,400,000
4. More than 4,800,000 Rs. 180,000 + 15% of the
amount exceeding Rs. 4,800,000
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5. Rate of tax for AOP
Rate of tax for Association of persons have been kept same as earlier as under:
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S. No Taxable income Rate of tax
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1 Where the taxable income does not exceed Rs.
400,000 0%
2 Where the taxable income exceeds
Rs.400,000 but does not exceed Rs.500,000 7% of the amount
exceeding Rs.400,000
3 Where the taxable income exceeds
Rs.500,000 but does not exceed
Rs.750,000 Rs. 7,000 + 10% of the
amount exceeding Rs.500,000
4 Where the taxable income exceeds
Rs.750,000 but does not exceed
Rs.1,500,000 Rs.32,000 + 15% of the
amount exceeding
Rs.750,000
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5 Where the taxable income exceeds
Rs.1,500,000 but does not exceed
Rs.2,500,000 Rs.144,500 + 20% of the amount
exceeding Rs.1,500,000
6 Where the taxable income exceeds
Rs.2,500,000 but does not exceed
Rs.4,000,000 Rs.344,500 + 25% of the amount
exceeding Rs.2,500,000
7 Where the taxable income exceeds
Rs.4,000,000 but does not exceed
Rs.6,000,000 Rs.719,500 + 30% of the amount
exceeding Rs.4,000,000
8 Where the taxable income exceeds
Rs.6,000,000
[*32% in case of a professional
fi incorporated company by its
pro Rs.1,319,500 + 35% of the
amount exceeding Rs.6,000,000
m which is prohibited to become
an fession i.e. an audit
firm and a law firm]
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[*32% in case of a professional firm which is prohibited to become an incorporated company by its profession ie an audit firm and a law firm]
D. Points to ponder
Government may face following economic and legal challenges to enforce the Tax Reforms Package:
1. Considering the recent devaluation of Pakistan Rupee, the rates of declaration ie 3% and 5% on moveable and immovable assets respectively, are very low. The payment of taxes at these rates by foreign assets holders will easily be offset against revaluation of their offshore assets in Pakistan Rupee.
2. Capital Value Taxes on immoveable property has been excluded from entry 50 of federal legislative list of The Constitution of Pakistan, 1973, which has the effect that levy of tax on capital value of immoveable property is the right of provinces instead of federation.
3. In his press conference, Honorable Prime Minister termed the scheme as 'one time' amnesty scheme, however, there is no provision with respect to penalties or coercive action in case of non declaration by any person, which may be unearthed subsequently.
4. Cap on outward remittances has not been introduced. Flight of precious foreign exchange will continue in form of so called foreign investment, which is against the spirit of the scheme. We recommended a threshold of $ 500,000 per individual for investment purposes.
5. In absence of preemptive right of government to buy back assets over and above the valuations declared by the declarants, there would be no control to ensure values declared are as per market. The declarants will tend to declare values lower than the market values to pay minimum taxes gaining two fold benefit of declaration without paying due taxes. On other hand, any adventure to buy properties may trigger legal consequence. This model was also a failure in India. Therefore, a suitable way forward would be required to ensure proper value declarations.
6. Foreign Assets Ordinance and Domestic Assets Ordinance have been given overriding effect to other laws for the time being in force. This means that immunity from criminal laws along with Narcotic Substance Act, 1947; and Anti Terrorist Act 1997 has also been extended which will raise questions from Financial Action Task Force.
7. Article 19A pf the constitution of Pakistan, 1973 provides right to information to every citizen. Therefore, the constitutionality of confidentiality clause in the Ordinances may be challenged.
8. Decrease in tax rates for individuals will result in revenue losses of approximately Rs 90 billion and a decline in of approximately 200,000 returns of income.
9. Moreover, there will be an anomaly as under section 153(1)(b) of ITO, tax rates for withholding on an individual service provider in 10% which is minimum tax, whereas, normal tax rates may be much lower due to revised slab rates. Similar situation would be faced in case of income from property which attracts tax rates up to 20% as a separate block of income. Amendments in the tax rates of these sectors would be required too to remove disparity.
10. It is estimated that out of $ 200 billion undeclared foreign assets, only $ 2 billion would be repatriated.
11. The following errors are apparent in the Ordinance for which corrective explanation would be necessary by the Government:
a. In subsection (2) of section 8 of Domestic Assets Ordinance, the words "foreign assets" have been used instead of "domestic assets".
b. At serial no. 8 column (3) of table in section 2(6)(1) of ITAO, the figure "48,000,000" has been mentioned instead of "4,800,000".
E. A brief comparison with our suggestions in the report
A report was prepared by Tola Associates wherein certain suggestions were offered. The report may be found at the link https://goo.gl/gmDjHk The status of our suggestions is as under:
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S. No. Particulars Rates suggested Rates implemented
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1 Offshore Immoveable 15% 3%
2 Offshore moveable repatriated 2% 2%
3 Offshore moveable not repatriated 10% 5%
4 Onshore immoveable 5% 5%
5 Onshore Moveable 5% 2%
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Disclaimer:
This commentary is the property of Tola Associates and contents of the same may not be used or reproduced for any purpose without prior permission of Tola Associates in writing.
The contents of this commentary may not be exhaustive and are based on media reports. Final Comments along with economic revelations will be followed after the issuance of Ordinance.
This commentary is circulated electronically free of cost for general public to create tax awareness in the country.
ANNEXURE
"holder of public office" means a person who is or has been at any time since 1st day of January 2000,-
the President of the Islamic Republic of Pakistan or the Governor of a Province;
(ii) the Prime Minister, Chairman Senate, Speaker of the National Assembly, Deputy Chairman Senate, Deputy Speaker National Assembly, Federal Minister, Minister of State, Attorney-General for Pakistan and other Law Officers appointed under the Central Law Officers Ordinance, 1970 (VII of 1970), Adviser or Consultant or Special Assistant to the Prime Minister and holds or has held a post or office with the rank or status of a Federal Minister or Minister of State, Federal Parliamentary Secretary, Member of Parliament, Auditor-General of Pakistan, Political Secretary;
(iii) the Chief Minister, Speaker Provincial Assembly, Deputy Speaker Provincial Assembly, Provincial Minister, Adviser or Consultant or Special Assistant to the Chief Minister and who holds or has held a post or office with the rank or status of a Provincial Minister, Provincial Parliamentary Secretary, Member of the Provincial Assembly, Advocate-General for a Province including Additional Advocate-General and Assistant Advocate-General, Political Secretary;
(iv) the Chief Justice or, as the case may be, a Judge of the Supreme Court, Federal Shariat Court, a High Court or a Judicial Officer whether exercising judicial or other functions or Chairman or member of a Law Commission, Chairman or Member of the Council of Islamic Ideology;
(v) holding an office or post in the service of Pakistan or any service in connection with the affairs of the Federation or of a Province or of a local council constituted under any Federal or Provincial law relating to the constitution of local councils, co-operative societies or in the management of corporations, banks, financial institutions, firms, concerns, undertakings or any other institution or organization established, controlled or administered by or under the Federal Government or a Provincial Government or a civilian employee of the Armed Forces of Pakistan;
(vi) the Chairman or Mayor or Vice Chairman or Deputy Mayor of a zila council, a municipal committee, a municipal corporation or a metropolitan corporation constituted under any Federal or Provincial law relating to local councils;
Explanation.- For the purpose of this sub-clause the expressions "Chairman" and "Vice Chairman" shall include "Mayor" and "Deputy Mayor" as the case may be, and the respective councilors therein; and
(vii) a District Nazim or District Naib Nazim, Tehsil Nazim or Tehsil Naib Nazim or Union Nazim or Union Naib Nazim;