A. F. FERGUSON & CO.

FEDERAL BUDGET 2016

This memorandum gives a brief overview of Pakistan economy and significant amendmentsproposed by the Finance Bill 2016. All changes proposed through the Finance Bill 2016 areeffective July 1, 2016.

This memorandum can also be accessed on our website www.pwc.com/pk

June 4, 2016

Table of Contents

Economic Overview 1

Executive Summary 5

Income Tax 6

Sales Tax 17

Federal Excise Duty 20

Islamabad Capital Territory(Tax on Services) Ordinance, 2001 21

Customs Duty 22

Fiscal Responsibility and DebtLimitation Act, 2005 24

1

Economic Survey 2015-16

Pakistan’s economy continues tomaintain its growth momentum for thethird year in a row, with real GDPgrowing at 4.71 percent in financialyear 2016 which is the highest in eightyears. GDP posted a reasonable growthover last year despite a major setbackin agriculture growth on account ofmassive decline in cotton production.However, the loss to some extent iscompensated by remarkable growth inindustrial and services sector as boththese sectors crossed their targetgrowth, while other keymacroeconomic indicators (likeinflation, fiscal and current accountbalance) recorded improvement.

Particularly, the external section hasbecome more stable on account ofrobust growth in workers’ remittances;continued flows from InternationalFinancial Institutions; and a sharpdecline in global oil prices.The country’s foreign exchangereserves have reached all time high(over US$ 21 billion) in May 2016,which can finance over 5 months of thecountry’s import bill. This improvementin the external sector was critical inmaintaining the exchange rate stabilityduring the year.

Based on the above positivities, theeconomy is now all set to move towardshigh growth trajectory with single digitinflation at 6 percent. The foreigncurrency reserves which has reached tohighest level is projected to rise evenmore. The fiscal deficit has also beenprojected to be brought down. Theexternal sector will continue to remainstable on the back of improvement intrade balance, higher remittances,continuous flows from InternationalFinancial Institutions, and stableexchange rate.

FY 15 – 16 FY 14 – 15

GDP growth rate 4.71% 4.04%

Per capita income - US$ 1,561 1,517

FDI (July – April)US$ million 1,016 964

Inflation 2.79% 4.53%

Public debt(PKR billion)

- Domestic 13,399 12,199

- Foreign 5,769 5,18219,168 17,381

Budget deficit -%age of GDP 3.4% 3.8%

Source: Economic Survey of Pakistan 2015-2016

KEY ECONOMIC INDICATORS

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The following table sets out the Key Budget Financials:

2016-20172015-2016(Revised)

Rs inBillion %

Rs inBillion

Tax revenue 3,956 3,420

Non-tax revenue 959 913

Gross revenue receipts 4,915 4,333

Public account receipt – net 171 156

Total receipts 5,086 100 4,489 100

Less: Provincial share in Federal taxes (2,136) (42) (1,852) (40)

Net revenue receipts 2,950 58 2,637 60

Expenditure

- Current expenditure 4,031 79 3,714 83

- Development expenditure 1,051 21 879 20

5,082 100 4,593 103

Deficit (2,132) (42) (1,956) (43)

- Domestic debts non-bank 470 547

- Domestic debts banks 453 199

- Foreign debt 820 860

- Privatization proceeds 50 13

- Surplus from provinces 339 337

(2,132) (1,956)

Budget Financials

BUDGET AT GLANCE

%

3

29%

20%

36%

15%

Domestic debts non-bank (29%)

Domestic debts banks (20%)

Foreign debts (36%)

Surplus from provinces (15%)

21%

20%9%

6%

31%

13%

Income Tax (21%)

Sales Tax (20%)

Customs Duty (6%) and FED (3%)

Petroleum levy, Gas Infrastructure Cess & Others (6%)

Borrowings (31%)

Non-tax revenue (13%)

33%

21%15%

13%

9%

7%2%

Provincial share in Federal taxes (33%)

Debt servicing (21%)

Development expenditure (15%)

Defence Affairs and Services (13%)

Federal Government expenses including pensions (9%)

Grants and transfers (7%)

Subsidies (2%)

IN

OUT

Receipts Borrowings

WHERE FROM THE RUPEE COMES INAND WHERE IT GOES OUT

4

FY 15 – 16 FY 14 – 15(Revised)

Rs inBillion

Rs inBillion

There is nosubstantial changein the ratio of directand indirect taxes.

A substantial andincremental shift isrequired to decreasedisparity in incomeand reduce theburden of indirecttaxes on commonman.

Direct Taxes:

Income Tax 1,539 1,308

Workers’ Welfare Fund 17 14

1,556 1,322

Indirect Taxes:

Customs Duty 413 349

Sales Tax 1,437 1,230

Federal Excise Duty 213 201

Petroleum Levy 150 135

Gas Infrastructure Cess 145 145

Natural Gas Surcharge 35 32

Others 7 6

2,400 2,098

3,956 3,420

BREAK-UP OF TAX REVENUE

Income Tax39%

Customs Duties10%

Sales Tax36%

FederalExcise Duty

5%

Petroleum Levy4%

Gas Infrastructure Cess4%

Others2%

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INCOME TAX

1. Super tax as applicable for tax year 2015 hasbeen extended to tax year 2016 also.

2. Fixed tax Regime for Builders and Developershas been introduced for business or projects,initiated and approved after July 1, 2016.

3. The time limit for tax on sale of immovableproperty has been extended from 2 to 5 years, withflat rate of tax of 10%, irrespective of holdingperiod.

4. Status of foreign trust has been clarified,without giving manner of disclosure thereof in thewealth statement.

5. Provincial Sales Tax authorities will collect 3%of the turnover from a provincial sales taxregistered person, being a non-filer.

6. The right to surrender losses within a groupshall be restricted to the percentage holding in theentity.

7. Exemption for inter corporate dividends in agroup structure (other than 100% owned group) isproposed to be abolished.

8. Tax credit for investment in BMR Projects, etc.has been extended to June 30, 2019.

9. Tax credits for investments under sections 65Dand 65E shall also be available to entities withequity of 70% and above.

10. Specific documents and information arerequired to be maintained in respect oftransactions with associates.

11. Withholding tax at 3% of value of motor vehicleis required to be collected from non-filer lessees byleasing company and certain financial institutions.

12. Rationalised minimum tax regime for specifiedservice sectors extended to June 30, 2017 whilstalso including IT services and IT enabled services.

13. Entire income of insurance business proposedto be taxed at the applicable corporate tax rate.

14. Scope of Eighth Schedule enhanced to includecollection of tax on gain on redemption of mutualfund units and future commodity contracts ofPMEX.

15. Services rendered / contracts executed outsidePakistan to be taxed at higher rates.

SALES TAX

1. Five export oriented sectors (textile, leather,carpet, surgical and sports goods) will be subject tozero rated regime.

2. The definition of Input tax has been proposedto be amended to exclude the Sales tax paid underrespective Provincial laws.

3. A ‘zero-rated invoice’ shall be issued by thetransferor to the transferee on sale of taxableactivity or transfer of ownership of such activity asan ongoing concern to another registered person.

4. The threshold for turnover for qualifying ascottage industry is proposed to be enhanced at Rs10 million.

FEDERAL EXCISE DUTY

1. FED on certain services which are now subjectto provincial sales tax has been proposed to bewithdrawn.

2. FED on aerated beverages and locally producedcigarettes have been enhanced. FED on certaintypes of cement is proposed to be modified.Exemption from duty is proposed to be withdrawnon White Cement.

EXECUTIVE SUMMARY ON TAX PROPOSALS

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GENERAL

There is no major policy change in the taxationregime. Except for certain incentives forindustrialization, most of the proposals relate totax collection measures instead of documentationand broad based income taxation.

There is a dire need to promote corporatization ofbusinesses. In Pakistan, the gross incidence of taxand compliance burdens on corporate sector stillremains higher and rigorous than non-corporatesector. The strategy to promote corporatization isnot apparent in the Finance Bill introduced in theNational Assembly. On the contrary, there arecertain proposals (such as dilution of grouptaxation and holding company regime) which arenot in line with the internationally acceptable andsuccessful corporate taxation norms. This policyneeds to be reconsidered.

There is also a need to prescribe measures fordocumenting assets held by Pakistanis in andoutside Pakistan.

The distinction between ‘filer’ and ‘non-filer’has been used as revenue generation measureinstead of identifying the new taxpayers.This requires a dedicated policy which bringsnon-filers in the tax system for income basedtaxation.

SUPER TAX

Through Finance Act, 2015, Super tax wasimposed on (i) banking companies; and (ii) othertaxpayers having income of Rs. 500 million orabove, at the rate of 4% and 3% respectively fortax year 2015 only. The said levy is proposed to beextended to tax year 2016 also.

Contrary to the scheme of law, the Federal Boardof Revenue (FBR) stated in a circular that suchlevy shall be calculated on the income withouttaking the effect of brought forward business anddepreciation losses. This matter was, therefore,challenged and is currently subjudice in theHigh Court.

The aforesaid contention of the FBR, which wasnot in line with the legislative scheme, is nowproposed to be introduced in the relevant law.

TAX ON BUILDERS AND DEVELOPERS

The Finance Bill 2016 seeks to introduce a uniquenon-income based Fixed Tax Regime for‘Builders’ and ‘Developers’. Under this regime,tax liability for the builders and developers shallbe determined on the basis of area, instead of thevalue of property or actual transaction value.

Builders and developers eligible for theseprovisions shall be the persons engaged inconstruction and sale of residential, commercialor other buildings and plots under the projectsinitiated and approved by the relevant land andbuilding authorities (as may be prescribed) afterJuly 1, 2016.

Notwithstanding being a Fixed Tax Regime, thisproposal is likely to incentivize recording of theactual value of the developed property, as thedeclaration of the real value will not result in anyincome based tax incidence for the seller which isfixed on area basis.

This regime will be applicable for business orprojects, initiated and approved after July 1,2016.

As a consequence of the introduction of theabove, the minimum tax regime under sections113A and 113B for builders and land developers isproposed to be withdrawn. The said regime forbuilders was not made effective till June 30,2018. Further, the Federal Government did notissue any notification to make minimum taxregime effective for land developers.

RENTAL INCOME

Property income for all cases is currently subjectto tax on net-income basis. It is now proposedthat in the case of individuals and Association ofPersons (AOP), tax shall be payable on the basisof ‘gross rent’ instead of ‘net income’. A schedulerrate has been prescribed for the same.The ‘income from property’ so taxed shall not beclubbed with any other head of income.

INCOME TAX

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Property income in the hands of individuals andAOPs of an amount less than Rs 200,000 in a taxyear shall not be taxable, subject to the conditionthat such person does not derive income from anyother head.

Following tax rates have been prescribed forchargeability and withholding on annual grossrentals derived by individuals and AOPsexceeding Rs. 200,000:

Rent slabs Rate of tax

Above Rs 200,000and up to Rs 600,000

5% of the gross amountof rent exceedingRs 200,000

Above Rs 600,000and up to Rs 1,000,000

Rs 20,000 plus 10 % ofthe gross amountexceeding Rs 600,000

Above Rs 1,000,000and up toRs 2,000,000

Rs 60,000 plus 15 % ofthe gross amountexceeding Rs 1,000,000

Above Rs 2,000,000 Rs 210,000 plus 20% ofthe gross amountexceeding Rs 2,000,000

TAX ON SALE OF IMMOVABLEPROPERTY

The seller or transferor of immovable property issubject to withholding tax. This represents tax onincome from sale or transfer of that property.Nevertheless, this provision is applicable onlyif property is sold within two years of acquisition.

It is now proposed that the time limit is to beextended from two years to five years. Further,flat rate of 10% is proposed to be levied on gainon sale of immovable property if holding periodis up to 5 years.

The validity of this amendment needs to beexamined as the time period of two years wasintroduced to cater for the cases of gains arisingon sale of property being an adventure in thenature of trade as otherwise the gain on sale ofimmovable property is arguably not taxable bythe Federal Government under the Constitution.The extension of period to five years is not in linewith this concept.

The matter of taxability of gain on immovableproperty by Federal or Provincial Government,especially in post 18th amendment to theConstitution is already subjudice in courts.

Rate of tax to be collected by the Registering orAttesting authority is proposed to be increased asunder:

Transaction By Rate of taxSale or transfer ofimmovable property

Filer 1% of declaredconsideration

Non-filer

2% of declaredconsideration

Purchase or transferof immovable propertyhaving value of morethan Rs. 3 million

Filer 2% of declaredconsideration

Non-filer

4% of declaredconsideration

As per the proposed amendment in section 236C,in the case of sale / transfer of immovableproperty, this provision shall only be applicablefor transfer made within five years of acquisition.

STATUS OF FOREIGN TRUST

A trust is deemed to be a company under IncomeTax Ordinance, 2001. The status of foreign trustis similar to a trust formed under the trust lawapplicable in Pakistan. This aspect has beenclarified by way of explanation in the Finance Bill.

This amendment has far reaching effect foroffshore trusts settled / authored by Pakistanicitizens. Accordingly, as per the strictinterpretation of law, in the case of trust, thebeneficiary is not required to disclose hisinterests in the wealth statement prior to receiptof benefit from the trust, which is considered asdividend and taxed on receipt basis.

It is suggested that relevant and necessaryprovisions be introduced to prescribe the mannerof disclosure of the interest (as settlor orbeneficiary or trustee) in a foreign or local trustby a person subject to Pakistan tax. This willpromote documentation of assets held undertrust.

MINIMUM TAX REGIME OF CORPORATESERVICE SECTOR

Service sector companies were subjected to Minimum Tax Regime under section 153 of the Ordinance vide Finance Act, 2015, wherein tax withholding at applicable rate was made Minimum Tax (8%). The said regime was however rationalized for twelve service sectors for the period July 1, 2015 till June 30, 2016, under Clause (94) of Part IV of Second Schedule to the Ordinance.

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The said rationalized scheme for 12 sectors isproposed to be extended from June 30, 2016 toJune 30, 2017, provided taxpayer files anirrevocable undertaking by November, 2016 topresent its accounts to the Commissioner foraudit of its tax affairs.

In addition to twelve sectors, providers of ITservices and IT enabled services, as defined inClause (133) of Part I of Second Schedule, are alsoproposed to avail rationalized Minimum TaxRegime, subject to fulfilment of prescribedconditions.

It is suggested that the aforesaid option beextended to all persons providing services.

DEDUCTION OF TAX ON BUSINESSEXPENDITURE

It is proposed that provisions relating todisallowance of expenditures due to non-deduction of tax at source which are currentlyrestricted to salary, rent, brokerage orcommission, profit on debt, payments to non-residents and for services be extended to ‘allexpenditure’ from which a person is required todeduct or collect withholding tax under theOrdinance.

It appears that disallowance for non-deduction oftax on payments for raw material and finishedgoods purchases shall not be made for a sumexceeding 20% of the value of payments for suchpurchases. Nevertheless, the text of the proposedamendment extends the aforesaid restriction to20% on all expenditure which are subject to thisprovision.

It has been further clarified that taxes collectedfrom the withholding agents and recipients(under sections 161 and 162) shall be consideredas taxes paid for the admissibility of suchexpenditure.

This clarification reiterates the position acceptedby the appellate authorities.

ADVERTISEMENT EXPENDITURE FORPHARMA SECTOR

A restriction has been placed on admissibility ofexpenditure incurred by pharmaceuticalmanufacturers on sales promotion, publicity andadvertisement.

Any expenditure over and above 5% of turnovershall not be treated as admissible businessexpenditure.

This provision is the introduction of a schemealready present in the Drugs Act, 1976. Thedisallowances made on the basis of DrugsAct, 1976 were considered as ultra vires by thehigher appellate authorities. Now, this provisionhas been introduced as part of taxation law.

ADVANCE TAX FROM PROVINCIALSALES TAX REGISTERED PERSON

Provincial Sales Tax authorities are now requiredto collect an amount equal to 3% of the turnoverfrom a provincial sales tax registered person,being a non-filer, on behalf of the FederalGovernment in addition to Provincial sales tax, asthe case may be.

The sum so collected shall be adjustable underthe general concept of law for non-filers withregard to refund / adjustment of such taxes onfiling of returns.

FEDERAL GOVERNMENT’S POWER TOPROVIDE EXEMPTIONS UNDER THESECOND SCHEDULE

Federal Government has been empowered togrant exemption from tax in a manner specifiedin the relevant provision of law. It is nowproposed that a general power shall be availablefor exemption or reduction of tax to the followingcases:-

(i) Any International Financial Institution,such as IFC; and

(ii) Foreign government owned financialinstitution operating under anAgreement, Memorandum ofUnderstanding or any other arrangementwith the Government of Pakistan.

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RESTRICTION OF THE RIGHT TOSURRENDER LOSSES IN GROUPS

A restriction has been proposed in respect of theright to surrender losses within a group.

Under the present scheme, the right of surrenderof losses is not related to the percentage holdingof shares by that entity in the group if entity ispart of the group on the basis of holding asprescribed in the law.

It is now proposed that surrender of losses will berelated and restricted to the percentage holdingof the group in the entity surrendering the losses.

This amendment is not in line with the concept ofgroup taxation under the internationallyacceptable norms. The amount of loss to besurrendered cannot be related to the percentageholding of group in the entity surrendering thelosses as there is a clear provision for payment ofequivalent cash by the respective entity.

It is suggested that this proposal be withdrawn.

INTER CORPORATE DIVIDENDS INGROUP

The exemption for inter corporate dividends ina group structure prescribed under section 59B isproposed to be abolished.

This proposal will effectively dilute theadequately introduced concept of group taxation.The purpose of this exemption is to avoid doubletaxation within a holding company structure. Asa result of this proposal, there will be no basis orreason to form the group except where theholdings are 100%. Accordingly, the exemptionas provided in Clause (103A) of Part I of theSecond Schedule has effectively becomemeaningless.

Furthermore, a question of vested right to groupsformed before the proposed withdrawal ofexemption needs to be examined.

TAX CREDIT FOR INVESTMENT IN BMRPROJECTS, ETC

Tax credit for investment in plant and machineryfor BMR Projects, etc. which was due to expire onJune 30, 2016 has been extended to June 30,2019.

TAX CREDIT FOR ENLISTMENT

Tax credit for a company opting for enlistment inany stock exchange in Pakistan is now proposedto be allowed at 20% of the tax payable in the yearof enlistment and the following year as againstthe present restriction to the year of enlistment.

TAX CREDIT FOR EQUITY BASEDINVESTMENTS

Tax credits for investments are presentlyavailable to companies making 100% equitybased investments for industrial undertaking andcorporate dairy farm set up by June 30, 2016(sections 65D and 65E).

It is proposed that such credits shall also beavailable to entities with equity of 70% and above.Where, the equity is less than 100%, the taxcredits shall be available in proportion to theequity investment.

The eligibility date of setting up an industrialundertaking for tax credit is also extended uptoJune 30, 2019.

FAIR MARKET VALUE

The value fixed or notified by any Provincialauthority for the stamp duty or any other purposeshall not be taken into consideration fordetermining the fair market value of an asset forthe purpose of the Ordinance. It appears that thisamendment is proposed to account for the caseswhere the value of a property or asset or rent orservice was being restricted to the valueprescribed by Provincial authorities for stampduty or any other purpose.

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ELECTRONIC AND PRINT MEDIA FORADVERTISEMENT SERVICES

Payments to Electronic and Print media foradvertisement services shall be subject towithholding tax at the rate of 1.5% of the value ofservices. Previously such payments were subjectto withholding at the rate of 1%.

A fundamental change is proposed to be madewith regard to taxability of such income and witheffect from July 1, 2016, tax withheld at sourceshall be treated as final tax in respect of suchreceipts.

AGREEMENTS FOR AVOIDANCE OFDOUBLE TAXATION AND PREVENTIONOF FISCAL EVASIONS

These provisions are proposed to be substitutedto enable the Federal Government to enter into atax treaty or tax information and exchangeagreement or multilateral convention or intergovernment agreement or similar agreement ormechanism for the avoidance of taxation orexchange of information for prevention of fiscalevasion.

This extension of eligibility has been made toenable the Federal Government to enter intoarrangements with organizations, such as OECD,etc. in the matters of exchange of informationrelating to double taxation and prevention offiscal evasion in addition to arrangements andagreements with other Governments.

Under the present apparatus of international taxarrangements, all the Governments should havemechanisms for collating and exchanginginformation with other Governments andsupranational bodies, etc.

Another important change has been proposed inthis section whereby the information obtainedthrough the aforesaid agreements or treaties shallremain confidential. Previously, suchconfidentiality was not applicable in case theinformation was required for certain specifiedpurposes as laid down in section 216(3) whichinter alia include SECP, SBP, Civil Courts, etc.

The rationale of removing the right of using suchinformation as is presently contained in provisionneed to be examined as after the proposedamendment there could be restriction of the useof information by the relevant respectiveauthorities in Pakistan.

TRANSACTIONS WITH ASSOCIATES -TRANSFER PRICING

Specific documents and information are nowproposed to be maintained in respect oftransactions with associates and suchinformation shall be furnished to theCommissioner within thirty days if requiredduring the course of any proceedings under theOrdinance.

This is an important amendment as this section isapplicable both to resident and non-residentassociates of the taxpayers. Furthermore, it isimportant that the information to be prescribedis in line with the internationally acceptablenorms (such as those prescribed by OECD)especially in the case of non-resident associates.

MINIMUM TAX ON TURNOVER

The threshold for turnover for individualsand AOPs is proposed to be reduced fromRs 50 million to 10 million from tax year 2017 andonwards.

Another amendment is proposed to provideimposition of minimum tax in addition to finaltaxes and super tax.

At present, minimum tax is not payable bycompanies having gross loss which represent theexcess of expenditure (other than depreciationand other inadmissible expenditure) overturnover. It is now proposed that minimum taxshall also be payable by entities having gross loss.

ADVANCE TAX ON CASH WITHDRAWAL& CERTAIN BANKING TRANSACTIONS

At present, deduction of tax at source on cashwithdrawal and certain banking transactions bynon-filers is applicable only if the cashwithdrawal or sum of such transactions in a dayexceeds Rs 50,000. An explanation has beenproposed whereby it is clarified that Rs 50,000shall be the aggregate withdrawal from all bankaccounts in a single day.

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The proposed amendment is practicallynon-implementable unless the tax department isin possession of a system whereby there can bedetermination of cash withdrawal from differentbanks by same person in a single day. It isconsidered that the provision be re-examined andthe same should be brought in line with practicalpossibilities available within the existing systems.

There has been no further amendment made insection 236P of the Ordinance and thewithholding applicable on banking transactionsof non-filers has been retained with statutorywithholding rate of 0.6%.

PROVISIONAL ASSESSMENT

Under the present scheme of law, a provisionalassessment abates upon filing of return andwealth statement / accounts within 45 days ofsuch assessment.

The Finance Bill seeks to prescribe anothercondition for such abatement of provisionalassessment whereunder a taxpayer shall have topresent accounts and other documents for the‘Audit’ of income tax affairs for that tax year.

ADVANCE TAX

Alternative Corporate Tax shall also beconsidered for the purposes of determiningadvance tax liability under the Ordinance.

PAYMENTS FOR FOREIGN PRODUCEDCOMMERCIALS

A new withholding tax is proposed to beintroduced for payments made directly orthrough an agent or intermediary to anon-resident person for foreign producedcommercials for advertisement on any televisionchannel or any other media at the rate of 20% ofthe gross amount. Such withholding tax shall betreated as final tax on the income of the non-resident person.

The chargeability of such receipts for anon-resident person under the Ordinance needsto be examined as the amount received by thenon-resident may not be Pakistan source incomeunder the present provisions of section 101 ofthe Ordinance. This status is notwithstandingand in addition to the fact that the taxability ofthe source may not be available in the case wherethere is a tax treaty with the country of residenceof the recipient.

FURNISHING OF INFORMATION BYBANKS AND FINANCIAL INSTITUTIONS

Prior to the proposed amendment, theconfidentiality of the information obtained froma financial institution (including a bank) was notapplicable if such information was required bycertain specified institutions, such as SECP, SBP,Civil Courts, etc. A restriction is proposed to beplaced on dissemination of such information soobtained.

ADVANCE TAX ON LEASED MOTORVEHICLES

A new withholding tax provision has beenintroduced for lessees, being non-filers. Underthis provision, there shall be a withholding equalto 3% of the value of motor vehicle at the time ofleasing of motor vehicles to such non-filers byleasing company and certain financialinstitutions.

This appears to be a mechanism to collect taxequal to 3% of the value of motor vehicle acquiredon lease by a non-filer.

Nevertheless, under the general provisions, suchnon-filer may claim the refund / adjustment ofthe same by filing his return of income.

ADVANCE TAX ON INSURANCEPREMIUM

A new provision has been inserted whereby everyinsurance company shall collect advance tax fromnon-filer policy holders in the following manner:

Type of Premium RateGeneral insurance premium 4%Life insurance premium if exceeding Rs0.2 million per annum

1%

Others 0%

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ADVANCE TAX ON EXTRACTION OFMINERALS

Leaseholders of mines or any person, being anon-filer, extracting minerals shall be subject tocollection of advance tax at the rate of 5% of thevalue of minerals. The responsibility to collectsuch tax lies with the Provincial authoritycollecting royalty from the lease-holder or personextracting minerals. This section is not applicableon lease / concession issued by the FederalGovernment.

DEPRECIATION RELATING TO EXEMPTPERIOD

As per the strict application of law, the writtendown value (at the expiration of the exemptperiod) of an asset used in a business whoseincome was exempt from tax was the original costof such asset. Tax depreciation was not treated tohave been allowed during the exempt period. Anexplanation has been inserted in the law to theeffect that it was always intended by thelegislature that such value shall be determinedafter the expiration of the exempt period on thebasis as if tax depreciation (including initialallowance) was deemed to have been allowed.The effect of this retrospective amendment needto be examined.

TAX CREDIT FOR INVESTMENT INHEALTH INSURANCE

Tax credit shall be allowed in respect ofcontribution paid by a non-corporate residenttaxpayer for health insurance to any insurancecompany approved by SECP. The tax credit is,however, only available to persons derivingincome from salary or income from business.

TAX CREDIT FOR EMPLOYMENTGENERATION BY MANUFACTURERS

The tax credit eligibility period for newemployment generation manufacturing projectshas been extended to June 30, 2019.

TAX CREDIT FOR SALE TO REGISTEREDPERSONS

Tax credit for 90% sale to sales tax registeredpersons is proposed to be enhanced from 2.5% to3% of tax payable.

CAPITAL GAINS TAX ON DISPOSAL OFSECURITIES

Gain on sale of securities was subjected to tax byFinance Act, 2010 in case such securities wereheld for less than 12 months. Through theFinance Act, 2015, the gain arising on disposal ofsecurities with holding period up to 48 monthswas taxed and as such, zero rate of tax was madeapplicable only where the holding period ofsecurities exceeded 48 months.

It has now been proposed to provide exemptiononly on disposal of securities acquired on orbefore July 1, 2012. This means that theexemption presently available on holding periodof securities held for more than 4 years is to bewithdrawn from tax year 2017.

Through Finance Bill, 2016, separate rates of taxon capital gains from disposal of securities havealso been proposed to include separate rates forFilers and Non-Filers. A comparison of tax ratespresently applicable for tax year 2016 with therates proposed for tax year 2017 is as under:

PRESENT RATES FOR TAX YEAR 2016

Holding period Tax rate

Where holding period of a security is less thantwelve months

15%

Where holding period of a security is twelvemonths or more but less than twenty-fourmonths

12.5%

Where holding period of a security is twentyfour months or more but less than four years

7.5%

Where holding period of a security is more thanfour years

0%

PROPOSED RATES FOR TAX YEAR 2017

Holding periodTax rate

Filer Non-Filer

Where holding period of a security isless than twelve months 15% 18%

Where holding period of a security istwelve months or more but less thantwenty-four months 12.5% 16%

Where holding period of a security istwenty-four months or more but thesecurity was acquired on or after 1stJuly, 2012 7.5% 11%

Where the security was acquired before1st July, 2012 0% 0%

Future commodity contracts entered into by the members of PakistanMercantile Exchange

5% 5%

The aforesaid rates will also apply on debtsecurities held by a company. Currently, gain ondebt securities in the hands of a company istaxable at the corporate rate.

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ADVANCE TAX ON DIVIDEND [NON-FILERS]

The rate of withholding tax on dividends fromcompanies other than power generationcompanies or companies supplying coalexclusively to power generation project in case ofa non-filer recipient has been proposed to beincreased from 17.5% to 20%.

MUTUAL FUNDS

a) Tax on Dividends from Mutual Funds

Through Finance Bill, 2016, the rate of tax ondividends from Mutual Funds have now beenproposed to include separate rates for Filers andNon-Filers. Tax rates proposed for tax year 2017are as under:

TaxYear2017

StockFund

Money marketFund, IncomeFund or anyother fund

Filer Non-Filer

Individual 10% 10% 15%Company 10% 25% 25%AOP 10% 10% 15%

b) Taxation of Capital Gain on Disposalof Mutual Fund Units under theEighth Schedule

The Eighth Schedule was introduced throughFinance Act, 2012 to cater for special regime fortaxation of capital gains arising on sale of sharesof listed companies. Under that Schedule, NCCPLwas effectively made the taxing agent forcomputing and collecting the tax on such gains.Nevertheless, gain on disposal of units of openended mutual funds was kept outside the ambitof Eighth Schedule.

In the Finance Bill 2016, the gain on redemptionof units of open ended mutual funds shall also besubject to the mechanism as laid down in theEighth Schedule.

However, for that purpose, section 100B whichgoverns Eighth Schedule has not beenappropriately amended. This appears to be anomission. Under the proposed mechanism, tax oncapital gains on redemption of units of mutualfunds (open ended) will be computed andcollected by NCCPL.

The Asset Management Company / companiesmanaging the fund shall be responsible forproviding necessary information to NCCPL forcomputing taxable gain and tax thereon onredemption of units.

PAKISTAN MERCANTILE EXCHANGE

Through the Finance Bill 2016, an explanatoryproviso has been proposed to be included inSection 37A (3) for the purpose of taxing capitalgain on future commodity contracts being aderivative product. It is proposed to clarify thatderivative products include future commoditycontracts entered into by the members ofPakistan Mercantile Exchange whether or notsettled by physical delivery. This means thatcapital gain on settlement of future commoditycontracts is proposed to be brought into NCCPL’smechanism as laid down in the Eighth Schedulewith effect from July 1, 2016.

No separate tax rates are proposed for Filers andNon-Filers deriving capital gain from settlementof commodity contracts; and a single rate of 5% isproposed to be applied by NCCPL forcomputation and collection of capital gain. It isalso proposed that Pakistan Mercantile Exchangewill provide information to NCCPL for thepurpose of computation and collection of taxunder the Eighth Schedule.

PAYMENTS FOR GOODS AND SERVICES

The rate of withholding tax on payments forpurchase of goods from the distributors of FMCGis proposed as under:

Status of distributor of FMCGsupplying the goods

Rate oftax

Company 3%other than a company 3.5%

This rate will not apply on distributor ofcigarettes and pharmaceutical products subjectto tax withholding at 1% under clause (24A) ofPart II of Second Schedule.

PRIZES AND WINNINGS [NON-FILERS]

The rate of withholding tax on a prize on prizebond or crossword puzzle, is proposed to beenhanced from 15% to 20% for non-filer.

14

BROKERAGE AND COMMISSION

Description Increased fromAdvertisement agents

[Non-filers] 10 to 15 percent

Other than advertisementagents [Non-filers] 12 to 15 percent

Moreover, rate of tax to be collected frombrokerage and commission paid to life insuranceagents has been proposed to be introduced at therate of 8% (16% for non-filers). This rate would beapplicable only if the annual commission receivedby life insurance agents is less than Rs. 500,000.

COLLECTION OF TAX BY A STOCKEXCHANGE REGISTERED IN PAKISTAN

Rate of advance tax collection by stock exchangeon sale and purchase of shares is proposed to beincreased from 0.01% to 0.02% of transactionvalue.

COLLECTION OF TAX ON COMMERCIALELECTRICITY CONSUMPTION

Rate of tax collection for commercial consumerson electricity bill exceeding Rs. 20,000 isproposed to be increased from 10% to 12%.

MICRO FINANCE BANK

Exemption allowed to Micro-Finance banks tillJune 2012, being redundant, is proposed to bewithdrawn.

SPORTS BOARD / ORGANISATION

Exemption allowed to a Board or otherorganization established in Pakistan for thepurposes of controlling, regulating orencouraging major games and sports recognizedby the Government is proposed to be restrictedonly where such Board or organization isestablished by the Government. As a result, theposition prior to Finance Act, 2003 is proposed tobe restored.

INCENTIVES FOR GWADAR FREE ZONE

Exemption from tax available to China OverseasPorts Holding Company Limited [COPH], fromGawadar Port operations for a period of 23 years(w.e.f. February 6, 2007), is proposed to beextended to its following group companies:

(a) China Overseas Ports Holding CompanyPakistan (Private) Limited – COPHPL,

(b) Gawadar International Terminal Limited,

(c) Gawadar Marine Services Limited; and

(d) Gawadar Free Zone Company Limited

In addition, following further exemptions areproposed:

(i) Exemption from Minimum Tax undersection 113 for a period of 23 years effectiveJuly 1, 2007 for all the above entities.

(ii) Exemption from tax on income ofcontractors and sub-contractors of COPHand its above group entities from GwadarPorts Operations for a period of 20 yearseffective July 1, 2016.

(iii) Exemption from tax on dividend incomereceived by COPH as well as by COPHPLfrom above group entities. Tax withholdingon such dividend income has also beenexempted for a period of 23 years.

(iv) Exemption from tax on Profits and gainsderived by a taxpayer from businessessetup in Gawadar Free Zone Area for aperiod of 23 years w.e.f. July 1, 2016.

(v) Exemption from tax on Profit on debtearned by a foreign lender or a local bank(owned more than 75% by the Governmentof Pakistan or State Bank of Pakistan)under a Financing Agreement with COPH.

Apart from above, exemption from withholdingtax on profit on debt and commission paid byCOPH, although stated in ‘Notes to the Clauses’,have not been notified in the Finance Bill.

15

EXPORT OF COMPUTER SOFTWARE /IT SERVICES

Exemption allowed to income from export ofcomputer software or IT services or IT enabledservices is proposed to be extended from June 30,2016 to June 30, 2019, provided that eighty percent of the export proceeds is brought intoPakistan in foreign exchange through normalbanking channels.

SERVICES RENDERED ANDCONSTRUCTION CONTRACTSEXECUTED OUTSIDE PAKISTAN

Presently, gross receipts from services renderedand construction contracts executed outsidePakistan are taxed at the rate of 1%, provided thereceipt from services, and income fromconstruction contract are brought into Pakistanthrough normal banking channel. The tax rate of1% is now proposed to be increased and linkedwith 50% of the withholding rate applicable onservices and contracts under section 153 of theOrdinance. Based on the existing withholdingrates prescribed for section 153, the tax rateapplicable on services rendered and constructioncontract executed outside Pakistan shall be asunder:

Description

Company Non-Corporatesector

Proposedrate

Existingrate

Proposedrate

Existingrate

ServicesrenderedoutsidePakistan

4%(50% of

8%)

1% 5%(50% of

10%)

1%

ConstructionContractsexecutedoutsidePakistan

3.5%(50% of

7%)

1% 3.75%(50% of7.5%)

1%

NEW TAX REGIME FOR PAKISTANCRICKET BOARD - PCB

PCB’s income derived from sources outsidePakistan including media rights, gate money,sponsorship fee, in-stadium rights, out-stadiumrights, payments made by International CricketCouncil, Asian Cricket Council or any otherCricket Board is proposed to be taxed at 4% of thegross receipts from such sources.

PCB may also opt to pay tax on above basis for taxyears 2010 to 2015, subject to the condition of; (a)withdrawing all the appeals / petitions pendingbefore appellate forums on the issue of applicabletax rate; and (b) payment of tax on above basis byJune 30, 2016.

TERM FINANCE CERTIFICATES

Exemption from withholding tax on profit ondebt paid to a company in respect of a TermFinance Certificate issued on or after July 1, 1999is proposed to be withdrawn.

TRANSMISSION LINE PROJECTS

Profits and gains derived by companies from atransmission line project which are exempt fromtax under clause (126M) of Part I of SecondSchedule to the Ordinance are proposed to beexempted from Minimum Tax provisions ofsection 113 as well.

TRADING HOUSES

Exemption from Minimum Tax under section 113allowed to companies operating Trading Housesfor a period of 10 years is proposed to bewithdrawn and replaced by reduced (minimumtax) rate of 0.5% upto tax year 2019 and 1%thereafter.

HAJJ GROUP OPERATORS

Following exemptions / concessions available toHajj Group Operators operating Hajj Operationsare proposed to continue for tax year 2016,provided they discharge their tax liability @Rs. 5,000 per Haji:

(i) exempt from Minimum Tax undersection 113;

(ii) exempt from application of section 152;and

(iii) compliance of payment through bankingchannel for payments exceedingRs. 10,000.

16

EXEMPTION FROM TAX COLLECTIONON IMPORT OF RAW MATERIALS

Presently, taxpayers are allowed to apply forexemption from tax collection on import of rawmaterials, provided tax liability of current taxyear, determined on the basis of tax liability ofhigher of the two preceding tax years, is paid.That facility was however, subject to complianceof FBR SRO No. 717(I)/2014 which inter aliaincluded a restriction that exempted quantity ofraw material should not exceed 110 per cent of thequantity imported / consumed in the last taxyear. The said restriction, through the SRO, waschallenged by taxpayers before the Hon’ableLahore High Court, which declared the sameextra-jurisdictional on part of FBR to provide fora condition which is not part of law.

It is now proposed to include the aboverestriction (of 110% of quantity) as part of astatute under clause (72B) of Part IV of SecondSchedule to the Ordinance. It has now also beenproposed that Commissioner will be entitled toaudit the taxpayer availing the exemption, inrespect of the consumption, production and salesof the latest tax year (for which return is filed),whilst deeming the selection for such audit undersection 214C of the Ordinance. In case thetaxpayer fails to produce requisite documentsduring the audit, recovery of unpaid tax undersection 148 to be made from the taxpayer.

INVESTMENT IN INDUSTRIALUNDERTAKING - IMMUNITY FROMSECTION 111

Presently, immunity is provided to investmentsmade by a company to setup an industrialundertaking, from provisions of section 111(unexplained sources of income / receipts),subject to certain conditions which inter aliainclude commencement of commercialproduction by such undertaking on or beforeJune 30, 2017. It is proposed to extend said dateto June 30, 2019.

FOURTH SCHEDULE – INSURANCECOMPANIES

In the case of insurance companies, there is aconcept of ‘one basket income’ taxation. Thismeans that all sources / heads of income of aninsurance company are taxed at the applicablecorporate tax rate. However, there is a specificprovision whereby capital gains on disposal ofshares and dividends of listed companies,vouchers of PTC and instruments of redeemablecapital, modaraba certificates and derivativeproducts were subject to tax at the reduced ratesapplicable otherwise on such heads of income.

This special dispensation is proposed to beremoved. It is now proposed that entire income ofinsurance business shall be subject to tax at theapplicable corporate tax rate.

In the past, there was litigation on the subject(including the decision of Supreme Court ofPakistan). The application of specific rate wasintroduced on the premise that the provisionsrelating to the Fourth Schedule are governed bythe First Schedule for tax purposes. Accordingly,notwithstanding the specific concept of ‘onebasket income’, validity of the aforesaidamendment needs to be examined with referenceto the question whether or not the head of income(such as section 5 for all dividend income) canoverride the taxability under a specific Scheduleor vice versa.

17

GENERAL

The Finance Minister has announced (as alsomentioned in the ‘Salient features’) that the fiveexport oriented sectors (textile, leather, carpet,surgical and sports goods), will now be subject tozero rated regime with an objective of ‘no tax norefund’ for such sectors.

The exports are zero rated in general, therefore,the proposed regime, which was also earlierintroduced in 2004, effectively provides zerorating for inputs used in the manufacturing ofexport sector goods. Tax incidence on such inputresults in refunds to the exporters.

In the past, a detailed notification was issuedprescribing the manner and the items on whichsuch zero rating was applicable.

Same regime as introduced earlier waswithdrawn inter alia on account of abuse of zerorating regime in respect of goods having multipleuse. It is, therefore, suggested that necessarycaveats be placed to avoid similar abuse.

Local sale of finished products, however, will besubject to sales tax at the rate of 5%.

Other than the above, there is no major change in Sales Tax regime. The general rate has been kept at 17% and the scheme of taxation has also remained unchanged. Furthermore, restriction has been placed on admissibility of certain input tax as discussed below.

INPUT TAX

Fundamental departure has been proposed in thesales tax regime which is governed under the VATprinciples.

The definition of Input tax has been proposed tobe amended to exclude the Sales tax paid underrespective Provincial laws.

In economic sense, this would imply dual indirecttaxation in the country as indirect taxes paid toProvinces shall not reduce the incidence of salestax paid to Federation. It is suggested that theVAT principles should be completely adhered to.

In addition to the above, input tax adjustmentwill not be available, if the supplier has notdeclared such supply in his return or has not paidtax due as per his return.

This amendment effectively means that aneligible input tax shall become inadmissible forthe buyer only for the reason that the supplier ofgoods has not declared such supply in his returnof sales tax or has not paid the tax due. Theeffective date for this amendment will be notifiedby FBR.

The validity of the aforesaid amendment needs tobe examined with reference to the timing andrelationship / control which a buyer could haveon the conduct of supplier.

RECOVERY OF WITHHOLDING SALESTAX

It is proposed to enact provisions in the Federalsales tax law to enable recovery proceedings forsales tax not/short withheld or failure to depositsuch tax by withholding agents.

This amendment aims to counter the effect ofdecisions of the Appellate authorities wherebysuch actions were unapproved in the past.

PAYMENT OF SALES TAX

Due date for payment of tax is to be notified.Previously sales tax was to be paid at the time offiling of return. Such date is expected to be a dateprior to the due date of filing of return.

PENALTY

Scope of penalty provisions is proposed to beenhanced to include contravention of any rulesmade under the sales tax law.

RETURN OF SALES TAX AND FEDERALEXCISE

Concept of specifying different dates forfurnishing of different parts or annexures of thereturn is proposed.

Requirement for separate return in case of changein rate of tax during a tax period is proposed to bewithdrawn.

SALES TAX

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SALE OF TAXABLE ACTIVITY ORTRANSFER OF OWNERSHIP

Under section 49 of the Act, sale of taxableactivity or part thereof or transfer of ownership ofsuch activity as an ongoing concern to anotherregistered person is a non-taxable event.

In order to substantiate and document theaforesaid non-taxable nature of transaction, it isproposed that in the case of such sale or transfer,a ‘zero-rated invoice’ shall be issued by thetransferor to the transferee.

COTTAGE INDUSTRY

The threshold for turnover for qualifying ascottage industry, which is exempt from tax, isproposed to be enhanced at Rs 10 million fromRs 5 million.

SALES TAX EXEMPTION FORINTERNATIONAL FINANCIALINSTITUTIONS, ETC.

In line with the amendments proposed in IncomeTax Ordinance, 2001, Federal Government is alsoproposed to be empowered to allow exemptionson sales tax in relation to the internationalfinancial institutions and foreign governmentowned financial institutions.

DISCLOSURE OF INFORMATION OF

SALES TAX AND FEDERAL EXCISE

In line with the amendments proposed in Income

Tax Ordinance, 2001, disclosure of information

received or supplied in pursuance of bilateral or

multilateral agreements with foreign

governments is proposed to be confidential

notwithstanding the status of the Freedom of

Information Ordinance, 2002.

SUPPLY OF MINERAL / BOTTLEDWATER

Supply of mineral/bottled water by manufactureris proposed to be taxed at retail price, under theThird Schedule.

FIFTH SCHEDULE – ZERO RATING

Conditional zero rating on import and supply offollowing items is proposed to be withdrawn,however, these will continue to fall under SixthSchedule.

Description PCT Heading

Colors in sets 3213.1000

Writing, drawing and marking inks 3215.9010 &3215.9090

Erasers 4016.9210 &4016.9290

Exercise books 4820.2000Pencil sharpeners 8214.1000Geometry boxes 9017.2000Pens and ball pens 96.08

Pencils including color pencils 96.09Milk 04.01Fat filled milk 1901.9090

Zero rating on import and supply of “Markers andporous tipped pens” (PCT Heading 96.08) hasbeen withdrawn.

SIXTH SCHEDULE - EXEMPTIONS

a) Conditional exemption from sales tax allowedunder SRO No 115(I)/2008 dated February 6,2008, on import and supply of materials andequipment for construction and operation ofGawadar Port and development of Free Zoneis now proposed to be restricted to certainspecified entities and their contractors/sub-contractors subject to specified conditions.The aforesaid notification has todate not beenrescinded.

Exemption on supplies made within Gawadarfree zone by businesses to be established insaid zone is proposed for a period of 23 years.

b) Import or supply of following items areproposed to be exempted

Description PCT Heading

Premixes for growth stunting Respective headingand subject to

conditions imposedunder Customs Act

Laptop computers, notebookswhether or not incorporatingmultimedia kit

8471.3010

Personal computers 8471.3020

c) Import of dump trucks for Thar Coal field isproposed to be conditionally exempted

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EIGHTH SCHEDULE

a) Increase of sales tax rate on ingredients ofpoultry and cattle feed is proposed from 5%to 10% and following PCT headings are nowproposed to be included in this respect:

PCT Heading

2301.1000 (Meat and Bone Meal)

2833.2940 (Zinc Sulphate)2923.9010 (Betaine)

Following items are proposed to be removedfrom Eighth Schedule:

PCT Heading

2301.2010 (Shrimp meal)2833.2600 (Zinc Sulphate)

2923.9000 (Betafin)

b) Reduction in rate allowable to specific itemsused in production of biodiesel as certified byAlternate Energy Development Board isproposed to be withdrawn. However,reduction in rate to related plant, machineryand equipment shall continue.

c) Import of grain holding silos are proposed tosubjected to sales tax @ 10%.

NINTH SCHEDULE

Sales tax rates under the Ninth Schedule onimport or local supply and/or registration ofIMEI by Cellular Mobile Operators on mediumpriced cellular phones and smart cellular phonesare proposed to be increased as follows:

Medium priced cellular phones from Rs 500 toRs 1,000

Smart cellular phones from Rs 1,000 toRs 1,500.

REVAMPING OF SALES TAX REGIMEFOR CERTAIN ITEMS

a) Certain pesticides and their activeingredients registered by the Department ofPlant Protection under the AgriculturalPesticides Ordinance, 1971 previouslycovered under Eighth Schedule are nowproposed to be exempted under SixthSchedule.

b) Supply of Urea, whether or not in aqueoussolution (PCT heading 3102.1000) is nowproposed to be taxed @ 5%, previously thiswas included in Fertilizers under ThirdSchedule.

20

GENERAL

Excise Duties are essentially levied to discourageconsumption for socially undesirable items. Overthe time, the Excise Duties were graduallyreduced, phased out, and substituted by VATregime.

The review of proposals reveal a departure fromthis economic concept and excise duties are beingused as a revenue generation measure regardlessof the nature of items and their usage, such ascement.

Except for corrective measures of removingunwarranted duplication of FED on certainservices subjected to Provincial Sales Tax, there isno significant policy amendment in FED regime.

SERVICES SUBJECT TO PROVINCIALSALES TAX

The much awaited withdrawal of the FED onservices which are now subject to provincial salestax has been proposed in the Finance Bill 2016. Inthe Finance Bill 2016, following services will notbe subject to FED:

Advertisements;

Shipping agents;

Franchise services;

Stock brokers; and

Services provided or rendered by bankingcompanies, insurance companies, cooperativefinancing societies, modarabas, musharikas,leasing companies, foreign exchange dealers, non-banking financial institutions, asset managementcompanies and other persons dealing in any suchservices

In the absence of this amendment, there was aquestion of duplication of incidence of indirecttax on such services both by Federation andProvinces. There had been litigation on thissubject and the Sindh High Court has recentlyresolved the controversy in favour of taxpayersdeciding that services (other than shippingagents) taxed by Provincial Government cannotbe subject to FED. The aforesaid issue wasaggravated by the amendment made in theFinance Act, 2015 where the exclusion was madeonly for telecommunication services.

The withdrawal has been made for specificservices identified above. It is, however,suggested that there should have been a generalprovision that FED shall not be payable on anyservice which has been validly taxed by theProvincial Government.

RETURN OF SALES TAX AND FEDERALEXCISE

Concept of specifying different dates forfurnishing of different parts or annexures of thereturn is proposed.

Requirement for separate return in case ofchange in rate of tax during a tax period isproposed to be withdrawn.

ADJUSTMENT OF EXCISE DUTY

Adjustment on input duty (goods or services) isproposed to be made conditional to thedeclaration in the supplier’s return and paymentof duty. This condition will be effective uponnotification by the FBR.

EXEMPTION OF DUTY FORINTERNATIONAL FINANCIALINSTITUTIONS, ETC.

Federal Government is proposed to beempowered to allow exemptions on excisablegoods or services in relation to the internationalfinancial institutions and foreign governmentowned financial institutions.

DISCLOSURE OF INFORMATION OFSALES TAX AND FEDERAL EXCISE

In line with the amendments proposed in IncomeTax Ordinance, 2001, disclosure of Informationreceived or supplied in pursuance of bilateral ormultilateral agreements with foreigngovernments is proposed to be confidentialnotwithstanding the status of the Freedom ofinformation Ordinance, 2002.

AERATED WATERS / BEVERAGES

The rate of duty is proposed to be enhancedfrom 10.5% to 11.5% of retail price effective fromJuly 1, 2016.

FEDERAL EXCISE DUTY

21

LOCALLY PRODUCED CIGARETTES

Description of and duty on the locallyproduced cigarettes (PCT heading 24.02) isproposed to be modified/enhanced. Revised ratesare applicable from June 4, 2016, as tabulatedunder:

Description of goods

Revised rateFrom

June 4 toNovember 30,

2016

FromDecember 1,

2016 &onwards

Locally producedcigarettes if their on-pack printed retailprice exceeds Rs4,000* per 1,000cigarettes.

Rs 3,436per 1,000cigarettes

Rs 3,705per 1,000cigarettes

Locally producedcigarettes if their on-pack printed retailprice does not exceedsRs 4,000* per 1,000cigarettes.

Rs 1,534per 1,000cigarettes

Rs 1,649per 1,000cigarettes

* This is Rs 4,400 effective from December 1, 2016.

CEMENT

The basis of levy of excise duty on various typesof cement, classified under PCT heading 25.23, isproposed to be changed from “5% of retail price”to “Re 1 per kg”, with effect from July 1, 2016.

The provisions of Federal Sales Tax Act relatingto the following powers of Federal Governmentare proposed to apply to ICTO:

Specifying a higher or lower rate of tax,subject to such conditions and restrictions.

Levy and collect such amount of tax as it maydeem fit on any services or class of services inlieu of sales tax.

Allow exemptions under section 13 of theFederal Sales Tax Act.

Notify any person or class of person aswithholding agent for the purpose ofdeduction and deposit of sales tax.

This change will effectively double the amount ofduty presently payable on cement bag whichcontains 50 kg of cement.

Exemption from duty is proposed to bewithdrawn on ‘White Cement’ (PCT heading25.23)”.

EXEMPTIONS

Certain exemptions are proposed in relation toGawadar Port and development of Gawadar FreeZone. These exemption are identical to serial100A and 100B proposed to be introduced inTable 1 of the Sixth Schedule of the Sales TaxAct, 1990.

WHITE CRYSTALLINE SUGAR

The ad valorem duty on white crystalline sugar isproposed to be withdrawn and replaced by thesales tax regime at a reduced rate of 8%.

This is aimed at collection of sales tax on valueaddition by post manufacturing distributionchain and the related effect thereto.

Zero rating facility available under Federal SalesTax Act to diplomats shall apply to ICTO.

Exemptions available under Federal Sales TaxAct to grants in aid shall apply to ICTO.

Tax levied under ICTO shall not apply toregulatory and licensing services rendered orprovided by an organization established under aFederal statute.

ISLAMABAD CAPITAL TERRITORY (TAX ON SERVICES)ORDINANCE, 2001 (ICTO)

22

LOCAL SUBSTITUTE OF IMPORTS BYPOWER UNITS

Import of new plant, machinery, equipment andapparatus, including capital goods for new powerunits of 25MV and above are subject toconcessional rates of customs duty, subject to thecondition that such goods are not locallymanufactured. The said condition has been doneaway with for those power projects which are onIPP mode meant for supply of electricity tonational grid.

TARIFF SLAB RATIONALIZATION

Goods presently subject to duty at the rate of 5%and 2% are proposed to be assessed at 3% in orderto reduce number of tariff slabs from 5 to 4.

REDUCTION IN CUSTOMS DUTY

(i) By virtue of amendment in First Scheduleand Fifth Schedule, reduction in customsduty has been proposed for the followingitems:

Items

Rate

Old NewRaw material of PVC Resin 5 3White Spirits 10 3Stamping Foil 20 16Fatty Alcohol Ethoxylate 15 5CFC Free Gases 15 11Aluminum Sheet in Coil 20 11Thermostats of Deepfreezes 20 3Bicycle chain parts 20 15Uncoated paper and paperboard 20 15Blister paper 20 10Plastic film medical grade 20 10Polyester resin 20 15Chrysotile asbestos 20 15

(ii) Reduction in customs duty in respect offollowing sectors has been proposedunder the Fifth Schedule:

Sector ConcessionFish Farming Reduction in customs duty on import

of water aerators from 15% to 2% andfeed pellet (floating type) machineryfrom 5% to 2%.

Reduction in customs duty on importof fish and shrimp feed from 10% /20% to 0%.

Sector ConcessionCool Chain Industry Reduction in customs duty on import

of Cool Chain Machinery from 5% to3% subject to certain conditions.

Reduction in customs duty on importof capital goods to 3% subject tocertain conditions.

Dairy, Livestockand Poultry Sector

Customs duty on various machineryused in dairy, livestock and poultryreduced from 5% to 2%.

LEDManufacturers

Concession of customs duty on importof parts and components used forlocal manufacturing of LED lightsfrom 20% to 5%.

Automotive Sector Various concessions have beenproposed for implementation ofautomotive development policy2016-2021.

Textile sector Part IV to the Fifth Schedule has beenadded to exempt customs duty onimport of machinery and equipmentfor textile sector.

(iii) Import of solar panels are subject toconcessionary duty till June 30, 2016.That date has now been extended toJune 30, 2017.

INCREASE IN CUSTOMS DUTY

As part of review / rationalization of customsduty, following major changes have been made:

(i) General rates of customs duty of 10% and15% is proposed to be increased to 11%and 16% respectively;

(ii) Rate of customs duty on following itemunder the First and Fifth Schedule isproposed to be increased:

ItemsRate

Old NewBetel nuts 10 20Betel Leaves Rs. 300/Kg Rs. 600/KgAlmonds 10 20Frozen fish 10 20Medium Density Fiberboard 15 20Cement Clinker 2 11Semi Printed/PrintedSecurity Paper 5 16Live Chicken stock andEggs of chicken 5 11

Birds eggs(not in shell) 5 16Polyester not exceeding2.22 decitex 6 7

CUSTOMS DUTY

23

EXEMPTION FROM CUSTOMS DUTY

(i) Exemption from customs duty isproposed on following items.

- Water Quality Testing Kits- Linear Akyl Benzene- Import of Premixes to prevent

growth stunting- Old and used Ambulances imported

by Edhi Foundation- Sodium iron

(ii) Scope of the exemption from customsduty allowed to Renewable EnergyTechnologies and Charitable Non-profitmaking institutions Operating hospitalsis proposed to be enhanced to certainadditional items.

LEVY OF REGULATORY DUTY

Regulatory duty is proposed on following items atthe rate of 25%:

- Powdered Milk- Whey Powder

WITHDRAWAL OF REGULATORY DUTY

Regulatory duty on following item is proposed tobe withdrawn:

- Bead wire for tyres Manufacturers- Carbon steel strips used by Razor blade

manufacturers

24

-

BACKGROUND

The approval and implementation of FiscalResponsibility and Debt Limitation Act, 2005was meant to provide for elimination of revenuedeficit and reduction of public debt to a prudentlevel by effective public debt management. Theimplementation of the said Act was an effort bythe Government to create strong institutionalmechanism to restore fiscal discipline and tointroduce greater transparency in fiscaloperations.

The targets for maintaining fiscal responsibilityand debt limitations as prescribed under the lawcould not be met. Accordingly, it appears that theproposed Finance Bill provides for revised andmanageable targets for achieving financialdiscipline. This Act is effectively an oversight onthe functions of the Federal Government withrespect to the management of fiscal deficit andresultant public debt.

PROPOSED AMENDMENTS

Through the Finance Bill 2016, it is proposed thatthe Act shall provide for reduction of Federalfiscal deficit and ratio of public debt to grossdomestic product to a prudent level by effectivepublic debt management. The term ‘Federal fiscaldeficit’ is proposed to mean the differencebetween total net revenue receipts and totalexpenditure of the Federal Government.Whereas, the term ‘total net revenue’ is proposedto mean a sum of tax revenues, non-tax revenuesand surcharges of the Government minustransfer of provincial share. The total public debtis proposed to define as the debt of theGovernment serviced out of the ConsolidatedFund and debts owed to the InternationalMonetary Fund.

Through the Finance Bill 2016, the targetsrelating to reduction in fiscal deficit and debt toGDP ratio are proposed to be revised. A briefsummary of the old targets and the proposed newtargets are tabulated below:

New Targets Old Targets

Reductionof fiscal/revenuedeficit

4% of GDP during the3 years (from financialyear 2017-18) andmaintaining it at amaximum of 3.5% ofthe GDP thereafter

Reduce to Nil byJune 30, 2008and thereaftermaintaininga revenuesurplus

Debt toGDP

Public debt shall bereduced to 60% of theestimated GDP, withina period of 2 financialyears (from financialyear 2016-17); and

Public debt shall bereduced by 0.5% everyyear within a period of5 financial years (from2018-19 to 2022-23)and a reduction of0.75% every year (from2023-24 to 2032-33) toreduce the total publicdeficit to 50% of theestimated GDP andthereafter maintainingit to 50% or less ofestimated GDP.

Public debtshould notexceed 60% ofthe estimatedGDP by June 30,2013 andthereaftermaintainingbelow 60% of theGDP; and

Public debt bereduced by notless than 2.5% ofthe estimatedGDP fromfinancial years2003 to 2013

Publicwelfare

Existing targets forpublic welfare areproposed to be deletedand no targets forpublic welfare havebeen proposed

Social andpovertyalleviationrelatedexpendituresshould not bereduced below4.5% of theestimated GDPand budgetaryallocation foreducation andhealth will bedoubled fromexisting level interms ofpercentage ofGDP.

FISCAL RESPONSIBILITY AND DEBT LIMITATION ACT, 2005