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Govt amends Income Tax Ordinance through Finance Act, 2018; cuts tax relief for salaried individuals

Govt amends Income Tax Ordinance through Finance Act, 2018; cuts tax relief for salaried individuals

ISLAMABAD: The Federal Board of Revenue has introduced amendments in the Income Tax Ordinance, 2001 through Finance Act, 2018.

The federal government reduced relief on income tax range for the salaried persons through Finance Act, 2018. Prior to the Finance Act, the minimum threshold for taxable income was Rs400,000 for individuals and tax rates for non-salaried and salaried individuals were separately provided in paragraph(s) (1) and (IA) respectively in Division I, Part-l of the First Schedule.

Through the Finance Act, 2018, tax rates of both salaried as well as non-salaried individuals have been clubbed and revised by providing rates for individuals (salaried as well as non-salaried) in paragraph (1) of Division I as under:

For an annual salary of 0.4 million rupees, no tax will be applied, while for Rs400,000 to Rs800,000 annual salary, tax will be Rs1,000.

For Rs0.8 million to Rs 1.2 million rupees yearly income, Rs2,000 tax will be applied. Meanwhile, for those earning from Rs1.2 million to 2.4 million rupees, five per cent income tax will be applied.

According to the new amendment, for those earning Rs2.4 million to Rs4.8 million, tax will be Rs60,000.

For those earning more than Rs4.8 million yearly, will have to pay a fixed tax of Rs300,000 and additional of 15 per cent tax money.

The rates of tax for Association of Persons have also been reduced. Prior to the Finance Act, 2018 the tax rates applicable to Association of Persons (AOP’s) and non-salaried individuals were clubbed together and comprised seven progressive tax slabs as provided in paragraph (I), Division I, Part I of the First Schedule. Through the Finance Act, 2018, separate tax rates have been provided for AOP’s in paragraph (2), Division I, Part I of the First Schedule.

Further amendments include reduction in tax rate applicable to companies, reduction in tax rate applicable to “small companies”, successive reduction and elimination of Super Tax, reduction in tax rate on undistributed profit and non-recognition of capital gain in the case of a gift to be restricted to relatives.

Prior to the Finance Act, 2018, sub-section (4) of section 57 and sub-section (5) of section 59A provided that where business loss included deductions allowed under sections 22, 23, 23A, 23B and 24 that had not been set off against income, the amount not set off shall be added to the deductions allowed under those sections in the following tax year, and so on until completely set off. Through the Finance Act, 2018, sub-section (4) of section 57 and sub-section (5) of section 59A have been substituted and now the loss attributable to deductions allowed under sections 22, 23, 23A, 23B and 24 that has not been set off against income shall be set off against 50 percent of 4 the person’s balance income from business after setting off the business loss under sub-section (1) of section 57. However, the condition of set off against 50% shall not apply if the taxable income for the year is less than Rs.10 million.

Meanwhile, the FBR issued Income Tax Circular No. 03 saying that prior to the Finance Act, 2018 the dividend received by a company from a collective investment scheme, a (Real Estate Investment Trust) REIT scheme or a mutual fund (except a stock fund) was subjected to tax at 25 percent for the tax year 201 5 onwards under section 5 of the Income Tax Ordinance, 2001.

In order to incentivize investment by companies in collective investment schemes, REIT schemes and mutual funds, an amendment has been made in the second proviso to Division Ill of Part I of the First Schedule to the Income Tax Ordinance, 2001 whereby the rate of tax has been reduced from 25 percent to 15 percent in respect of dividend received by a company from a collective investment scheme, REIT scheme or a mutual fund (other than a stock fund).

Similarly, in consonance with the reduction in the rate of tax on dividend received by a company from a collective investment scheme, a REIT scheme or a mutual fund under section 5 of the Income Tax Ordinance, 2001 the tax required to be deducted under section 150 of the Income Tax Ordinance, 2001 by a collective investment scheme, REIT scheme or mutual fund upon payment of dividend to a company has also been reduced from 25 percent to 15 percent (in case such company is a filer) by making amendment in Division I of Part Ill to the First Schedule to the Income Tax, 2001. However the rate of tax under section 150 of the Ordinance required to be deducted upon payment of dividend by a collective investment scheme, REIT scheme or mutual fund to a company, being a nonfiler, has not witnessed any change and has remained static at 25 percent.

The FBR further said prior to the Finance Act, 2018 any person receiving dividend from a Developmental REIT Scheme set up by 3oth June, 2018 (for the purpose of development and construction of residential buildings) could avail a 50 percent reduction in tax for a period of three years with effect from June 30, 2018 in terms of the third proviso to Division Ill of Part I of First Schedule to the Income Tax Ordinance, 2001.

In order to promote and encourage investment in Developmental REIT Schemes appropriate amendments have been introduced in the third proviso to Division Ill of Part-l of the First Schedule to the Ordinance through the Finance Act, 2018 whereby persons receiving dividend from a Developmental REIT Scheme shall be entitled to a 50 percent tax reduction if such Developmental REIT scheme (with the object of development and construction of residential buildings) is set up by 3oth June, 2020.

In addition, 50 percent tax reduction on dividend received from such Developmental REIT Schemes would be available for three years from the date of setting up of such Developmental REIT Scheme.

Corresponding amendments have also been made in the third proviso to Division I of Part-Ill of the First Schedule to the Ordinance in respect of the tax required to be deducted under section 150 of the Income Tax Ordinance, 2001 on the dividend paid by a Developmental REIT Scheme (with the object of development and construction of residential buildings).

The FBR explained that prior to the Finance Act, 2018 the rate of advance tax to be deducted under section 150 of the Ordinance on payment of dividend by a rental REIT scheme to an individual as well as an AOP was 12.5 percent in the case of a filer and 15 percent in the case of a non-filer. In order to incentivize investment by individuals in rental REIT schemes, a fifth proviso has been added in Division I of Part Ill of the First Schedule to the Income Tax Ordinance, 2001 through the Finance Act, 2018 whereby advance tax to be deducted under section 150 of the Ordinance upon payment of dividend to an individual by a rental REIT Scheme has been reduced to 7.5 percent irrespective whether the individual is a filer or a non-filer.