According to the income tax circular 7 of 2010 issued here on Thursday, the Finance Act 2010 has introduced a new section 231AA in the Income Tax Ordinance 2001. This enactment provides that every banking company, non-banking financial institution, exchange company or any authorised dealer of foreign exchange will deduct tax @ 0.3 percent at the time of sale against cash of any instrument, including Demand Draft, Pay Order, CDR, STDR, SDR, RTC, or any other instrument of bearer nature or on receipt of cash on cancellation of any of these instruments.
This tax will not be chargeable where payment is made through a crossed cheque for purchase of financial instrument and in case of inter or intra-bank transactions. The advance tax under section 231AA shall not be collected in the case of withdrawals made by the federal government or a provincial government; a foreign diplomat or a diplomatic mission in Pakistan or a person who produces a certificate from the Commissioner that his income during the tax year is exempt.
The rate of advance tax deductible @ 0.3 percent under the said section has been provided under Division VIA of Part-IV of the First Schedule to the Ordinance, which will be effective from July 1, 2010 onwards, income tax circular 7 of 2010 added.
When contacted, experts said the FBR on Thursday issued most important income tax budgetary circular on collection of withholding tax on banking transactions and later withdrawn on the same day to issue a new circular on Friday (today) to properly clarify the applicability of the levy on such banking transactions.
It is learnt that an income tax circular 7 of 2010 has been issued and a corrigendum may be issued on Friday (today) to bring it in line with the provisions of the Finance Act 2010. Another option is to incorporate additional information in the income tax circular 7 of 2010 through a corrigendum to further clarify the withholding tax on banking transactions.
The actual interpretation of the section 231AA added in the Income Tax Ordinance 2001 through Finance Act 2010 reads as follows: The section 231AA of the Income Tax Ordinance 2001 would be applicable on the following types of banking transactions. Under section (1) the advance tax is to be collected on the preparation and cancellation of demand draft, pay order, CDR, STDR, SDR, RTC, or any other instrument of bearer nature ''against cash'' and secondly on electronic transfer of any sum against cash.
In this case, a banking company, non-banking financial institution, exchange company or any authorised dealer of foreign exchange shall collect advance tax from the person seeking the preparation of any kind of aforementioned instruments against cash payment. Furthermore, there shall also be a collection at the time of payment of cash on cancellation of any of these instruments.
Tax shall be collected in the name of the preparer of the instrument or the person receiving the cash on cancellation as the case may be. Under sub section (2) shall be a collection of advance tax on transfer of any sum against cash through online transfer, telegraphic transfer, mail transfer, or any other mode of electronic transfer.
Deposit of cash in a bank account, with or without instruction of its transfer to another account does not represent transfer within the intention of this section. Accordingly, advance tax shall be collected only where such transfer is made against cash other than transfer into an ''account'' maintained with a banking company, the interpretation of the section 231AA of the Income Tax Ordinance 2001 added. Experts added that the FBR should re-draft the circular keeping in view the said interpretation of the Finance Act 2010 to properly clarify the applicability of the withholding tax on banking transactions.