[These notes have been prepared on the basis of draft of the law as provided by Super Law Updates]
A draft Income Tax (Amendment) Order 2022 was published on 2 March 2022.
This Ordinance was enacted to give effect, in the Income Tax Ordinance 2001, to the incentives and concessions granted by the Government of Pakistan under the Industry Promotion Scheme which was approved by the Firm.
With respect to income tax laws, three concessions and inducements have been provided in the said ordinance. These are;
• Immunity from verification of the sources of financing of investments in industrial companies;
• Investment tax credit for non-resident Pakistanis and other foreigners outside Pakistan; and
• Acquisition and compensation of losses of “sick industries”.
All these measures should increase the flow of investment in the industrial sector. It is good that these incentives are, among other things, limited to industrial investments in large and medium-sized sectors. There is an immediate need to stimulate activity in this particular segment of the economy.
The tax immunity and amnesty provided by law reflect the harsh reality that our tax system has failed to create an environment in which the accumulation of such wealth is curtailed.
The main features of the law as set out are described in the following paragraphs.
Probe immunity for investment in an industrial company
A new subsection 100F has been introduced in the Income Tax Order 2001 under which immunity from source of income verification is provided for investments in industrial undertakings.
Under this provision, tax immunity under the Income Tax Order 2001 is available to all funds which end up in the form of cash in a dedicated bank account for industrial investment purposes. , in accordance with this Order. This means that if Mr. A has an undeclared account or assets in Pakistan or outside Pakistan; then Mr. A can liquidate this asset / transfer the proceeds to the dedicated account under the law and claim immunity from any income tax in Pakistan upon payment of 5% of the value of this amount.
This concession is available to all ‘persons’ as defined in the Income Tax Order 2001 except a listed company.
This immunity is subject to the following conditions:
The declaration to make such an investment is filed before September 30, 2022;
There is a payment equal to 5% of the amount of this investment to the tax authorities;
The amount invested is greater than Rs 50 million and said amount is deposited in a dedicated bank account;
The investment benefiting from this provision can be made in a new company formed for the creation of an industrial company or for Adjustment, Modernization and Replacement (BMR) in an existing company (from funds not declared in the declarations taxes filed until December 31, 2021).
The industrial company resulting from this investment is required to begin commercial production before June 30, 2024.
The following industries will not be eligible for this provision of the law:
Weapons and ammunition;
Manufacture of edible oils excluding extraction units;
This scheme is for individuals who are eligible persons and does not specifically exclude any other person such as a private company or a partnership as defined by the Ordinance.
The following eligible persons do not receive the benefits of the law:
Public office holders, their spouses and dependent children;
A public company as defined in clause (47) of section 2 of the Income Tax Act
A person who has filed a declaration under the Voluntary Declaration of Domestic Assets Act 2019, the Foreign Assets (Declaration) Act 2018 or the Declaration of Assets Act 2019;
A person declared in default of bank payment; Where
A director of a company that has been declared in default.
As a general rule, tax immunity is supposed to be granted only to individuals, but under this regime corporations are also eligible for immunity (other than listed companies)
All statements made under this provision are confidential.
Statutory immunity is considered invalid if:
If there is no commercial production in this industrial company on June 30, 2024;
There is a change of ownership before June 30, 2026;
The newly incorporated company sells the assets before June 30, 2026.
There is no reason to provide for a condition of continued ownership.
This scheme arises from the Income Tax Order 2001, therefore its benefits are limited to the provisions of that Act only. Unlike the Asset Declaration Acts of 2018 and 2019, immunity from other laws is not available, which must be provided if the scheme is to truly succeed. The other relevant law is the Foreign Exchange Regulation Act 1947.
This law will not apply if the proceeds are related to crime, corruption, money laundering and terrorist financing. This issue needs to be considered as under current money laundering laws tax evasion is also a predicate offense under the Anti Money Laundering Act 2010. There may be an argument in favor of the position contradictory between the two Acts, however, we are of the view that if an amount on which tax has been evaded is exempted under the provisions of the Income Tax Act, as has been done under this law, then, on these sums, the provisions of the anti-money law will not apply.
Foreign investment tax credit
A new type of tax credit equal to 100% of the amount of the investment is introduced for investments in industrial companies of a company incorporated as of March 31, 2022 by the following persons:
Pakistani citizens who have been non-tax residents continuously for more than five years; and
A resident person who has declared foreign assets in their declaration of assets.
This means that any industrial enterprise formed through foreign investment in rupees will be eligible for a tax credit equal to 100% of the equity invested on the profits and gains of such industrial enterprises.
The applicable conditions are:
Funds are transferred from outside Pakistan and deposited in a dedicated account;
The investment is over Rs 50 million;
The industrial company starts commercial production before June 30, 2024;
The unused tax credit can be carried forward over a period of five years.
There is no reason to make this provision inapplicable to any other person if the investment is made in rupees from foreign currency remitted to Pakistan (Pakistani citizen or non-Pakistani citizen)
Relief for carrying forward operating losses of sick industrial units
A provision similar to the group relief already in force under Section 59B of the Income Tax Order 2001 has been provided for the redemption of losses from diseased industrial units acquired by any other company .
There is no time limit for this article and this provision should continue as a permanent provision under the Ordinance. However, the timing of replenishment as listed in this section by June 2026 gives the impression that this provision is only applicable for vesting up to a certain period which ends on June 30, 2026.
This aspect deserves to be clarified.
Under prescribed procedure, any company which “acquires” a diseased industrial company as defined in this provision other than by way of amalgamation or amalgamation, the acquirer will be entitled to deduct business losses carried forward from the income of the acquiring company. There is no reason to exclude acquisition by way of merger.
The right to offset losses will be available in the event of the acquisition of majority shares of diseased industrial units. The right to offset losses will be equal to the acquiring company’s share in the affected industrial unit.
Losses include operating losses excluding capital losses. Business losses include depreciation not absorbed by law.
A sick industrial unit was defined as an enterprise being an industrial enterprise where:
Business losses for three continuous years before July 1, 2022 to the extent that they wiped out the equity and reserves of that company; Where
That the company is in default of payment of unpaid debts to banking companies or non-banking financial institutions for a consecutive period of three years immediately before the acquisition; Where
Any other entity declared by the federal government.
The definition of disease unit should be reconsidered.
The sick industrial unit will be revived with a certification to that effect from the Engineering Development Board of the Government of Pakistan to be filed with the return for the tax year 2026. The other conditions are:
Ownership is maintained for five years from June 30, 2023 and there is no change in the share capital of the acquiring company. [This should have been shareholding of acquiring company in the sick unit not the shareholding of the acquiring company];
The assets of the acquired company are not sold until June 30, 2026;
The acquired company continues the same activity until June 30, 2026.
Dissemination of information relating to income tax law
Section 216 of the Income Tax Order 2001 provides that information relating to tax matters shall not be disclosed by officials. There is no ambiguity about this. However, the following two issues have recently arisen in this regard:
Whether or not these provisions also include the National Accountability Ordinance, 1999, the Federal Investigation Agency Act, 1974 and the Right of Access of Information Act, 2017; and
That the information contained in the Voluntary Declaration of National Assets Act 2018, the Assets (Declaration and Repatriation) Act 2018 and the Declaration of Assets Act 2019 be included within the scope of this section .
Through a specific amendment to subsection (2) of Section 216, both of these questions have been answered. This means that tax information, including information disclosed in the Asset Declaration Act, cannot be released in any way to any authority.
This is a commendable act that should have been done much earlier.
Copyright Business Recorder, 2022