Pakistan: Important amendments made In 2017 in the Income Tax Ordinance, 2001

New Concepts 

Introducing concept of an “Online Marketplce”[Section 2(388)] 

The Finance Act, 2017 has introduced the concept of an online marketplace and the same has been defined as an information technology platform run by an e-commerce entity over an electronic network that acts as a facilitator in transactions that occur between a buyer and a seller. A person running an online marketplace shall be subject to reduced / concessionary rate of minimum tax under section 113 of the Ordinance at 0.5% for the Tax Year 2018. Moreover, in terms of clause (28C) of Part II of the Second Schedule to the Ordinance inserted through the Finance Act, 2017 the rate of collection of advance tax on brokerage and commission for a person running an online marketplace shall be 5% which shall constitute final tax.

gIntroducing conpect of “start-ups”[Section 2 (62A)] 

A start-up has been defined as a business set-up by a resident individual, AOP or a company having turnover up to PKR 100 Million in the last five tax years, registered and certified by the Pakistan Software Export Board (PSEB) as an information technology entity. 

For incentivizing start-ups, exemption has been accorded to profits earned by such entities in the tax year in which the entity is certified by Pakistan Software Export Board (PSEB) and the subsequent two tax years. Existing undertakings engaged in similar businesses incorporated or registered on or after July 1, 2012 are also entitled to this exemption subject to certification by Pakistan Software Export Board (PSEB). Furthermore, the Federal Government has also been empowered, through the Finance Act, 2017 to notify any business as a “startup” subject to specific conditions. Moreover, exemption has also been accorded to such “Start-ups” from levy of minimum tax under section 113 1of the Ordinance in terms of sub-clause (xxix) of clause (11 A) of Part IV of the Second Schedule inserted through the Finance Act, 2017 as well as deduction of withholding tax upon receipt of payments specified in section 153 of the Ordinance in terms of clause (43F) Part IV of the Second Schedule to the Ordinance inserted through the Finance Act, 2017. 

Tax credit for non-profit organizations, trusts or welfare institutions 

Prior to Finance Act 2017, non-profit organizations, trusts and welfare institutions enjoyed 100% tax credit equal to the tax payable subject to fulfillment of the following conditions: 

(a) Return has been filed; 

(b) Tax required to be deducted or collected has been deducted or collected and paid; and 

(c) Withholding tax statements for the immediately preceding tax year have been filed. 

Through Finance Act 2017, a new condition (d) has been added for availing this credit, which reads as under: 

(d) The administrative and management expenditure does not exceed 15% of the total receipts. 

The rationale behind this amendment is to stop misuse of receipts/donations etc. received by NPOs and discourage them from spending such amounts on huge administrative salaries, vehicles etc. 

Moreover, the newly inserted condition will not apply to non-profit organizations, if:

(a) Charitable and welfare activities of the non-profit organization have commenced for the first time within the last three years; and 

(b) Total receipts of the non-profit organization during the tax year are less than one hundred million Rupees. 

It may also be mentioned that this condition applies only to non-profit organization and not to “trusts” and welfare institutions. Example: 

XYZ is an NPO running a project for providing primary education free of cost to the needy. The NPO has appointed an administrative officer and administrative staff for recruiting teachers and staff and hiring of buildings for schools. The salaries payable to the administrative officer and staff and salaries payable to teachers and staff, for schools and other expenses are as under:

In this example 15% of the total receipts amounts to PKR 480,000 (15% of 3,200,000) whereas total administrative and management expenses are 240,000 which are less than 15% of total receipts, therefore the Non-profit Organization, namely XYZ, qualifies for 100% tax credit under, section 100C of the Ordinance.

There have been other changes as well which shall be rolled out in next editions.

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