Saturday, November 14, 2015

Reduction in Minimum Tax Rates on services of certain companies - Presidential order regarding clause (94) and section 153 - Overview

As a result of Presidential Ordinance dated 31.10.2015 new clause (94) is inserted in Part-IV of Second Schedule to the Income Tax Ordinance. Salient features of this Ordinance are as under:
1.       As per clause (94), provisions of section 153(3)(b) will not applicable for tax year 2016 in respect of companies which are engaged in the following service:
                                                        I.            Freight forwarding services.
                                                      II.            Air cargo services.
                                                    III.            Courier services.
                                                    IV.            Manpower out sourcing services.
                                                      V.            Hotel services.
                                                    VI.            Security guard services.
                                                  VII.            Software development services.
                                                VIII.            Tracking services.
                                                    IX.            Advertising services (other than print or electronic media).
                                                      X.            Share registrar services.
                                                    XI.            Engineering services.
                                                  XII.            Car rental services.
In the proviso it is narrated that such companies should be filer and has to furnish an undertaking to the concerned Commissioner to effect that it will produce audited accounts within 30 days from the date of filing of income tax return for tax year 2016. This undertaking is required to be filed by 15th November 2015.
Provisions of section 153(3)(b) provides that tax deducted on services shall be minimum tax. As per provisions of section 153(1)(b) read with Division III of Part III of the First Schedule to the Income Tax Ordinance 2001 the rate of tax deduction in respect of services are prescribed as under:
            (i)    in the case of transport services, two per cent of the gross        amount payable; or

                        (ii)         in the case of rendering of or providing of services, —
(a) in case of a company, 8% of the gross amount payable,if the company is a filer and 12% if the company is anon-filer; and

(b)   in any other case, 10% of the gross amount payable, If the person is a filer and 15% if the person is a non-filer;

(a)     in respect of persons making payments to electronic and print media for advertising services,—

(i) in case of a filer, 1% of the gross amountpayable; and

(ii) in case of a non-filer, 12% of the gross amount payable, if the non-filer is a company and 15% ifthe non-filer is other than a company;”;
Combined reading of above provision of law indicates that tax deduction rates should be the same in respect of companies engaged in the services mentioned above unless and until they obtain an exemption certificate from the Commissioner concerned.
For availing the benefit that their minimum tax rate for tax year 2016 should not increase from 2% of the gross turnover, the companies engaged in the above services have to be filer and should submit an undertaking by 15th day of November 2015 that they are ready to submit their audited accounts to the concerned Commissioner within 30 days of filing of return.
By promulgation of above Ordinance though no change is made in tax deduction rates, the companies liability is restricted to 2% subject to the conditions mentioned above. This means that in case such a company does not apply for exemption in terms of proviso [sub-section (4A)] the tax deduction shall be 8% as against their actual liability of 2%. In such a case newly sub-clauses of clause (b) of sub-section 3 of section 153 would be applicable, which provide that excess amount of tax deducted/paid shall be adjustable against next five years’ tax liability.
In case a company engaged in the above services intends that tax deduction rates @ 8% shall not apply in its case, the company has to file application for exemption conditions of which are:
1.       The company falls within the categories mentioned in clause (94).
2.       The minimum period of certificate should be three months
3.       The company has to pay 2% advance tax of the total turnover of the corresponding period of preceding tax year.
Example 1
A company filed its income tax return for 2016 declaring turnover of Rs.1000. It had filed undertaking for availing benefit of reduced minimum tax @ 2% and hence its minimum liability comes to Rs. 20 whereas rate of tax deduction at source was 8% as it had not applied for exemption certificate. It tax was deducted at Rs.80 resulting into excess payment/refund which could be adjusted against tax liability of the next five years.
Example 2
B company intends to get exemption certificate for the first quarter. In the first quarter of preceding year the turnover was Rs.2,000,000. In such a case, the company has to pay advance tax of Rs.40,000[2,000,000 x 2%]. Suppose, a company intends to get exemption certificate for the whole year and turnover for the preceding tax year i.e. tax year 2015 was Rs.50,000,000 in such a case the company has to pay advance tax of Rs.1,000,000.
Example 3
C company did not file undertaking regarding presentation of audited accounts before the Commissioner concerned, in such a case the company shall not be eligible for benefits of minimum tax rate of 2%. Its tax deducted @ 8% shall be minimum tax.
1.       Time allowed for filing of undertaking i.e. 15th day of November 2015 is very short.

2.       It will open another gateway of corruption in FBR