Pakistan: The Tax Laws (Second Amendment) Ordinance 2021

The Federal Government on 22nd March 2021 promulgated Tax Laws (Second Amendment) Ordinance, 2021 to amend Income Tax Ordinance, 2001. Through this ordinance, the government aims to expend tax revenue by Rs. 140 billion for the current fiscal year and has withdrawn various tax exemptions. Some of the amendments are given below: 

1. Tax Credits on enlistment on any stock exchanged 

Previously, the tax credit equals to 20% of the tax payable for 4 years was available on the enlistment of the companies on a registered stock exchange in Pakistan. Through this ordinance, this exemption has been withdrawn. 

2. Tax Credits for hiring fresh graduates 

Tax credit for employing fresh graduates was introduced through the Finance Act, 2019 whereby the tax credit was allowed at an average rate of tax on the amount of salary paid to the fresh graduates at a maximum of 5% of the taxable income. The said tax credit has been withdrawn through this ordinance. 

3. 100% Tax Credit for certain persons under section 65F

Previously, the income of certain persons was exempted under the second schedule is now converted into 100% tax credit. 

65F : (1) Income of following taxpayers shall be allowed a tax credit equal to one hundred percent of the tax payable under any provisions of this Ordinance including minimum and final taxes for the period, to the extent, upon fulfillment of conditions and subject to limitations detailed as under: - 

(a) persons engaged in coal mining projects in Sindh supplying coal exclusively to power generation projects; 

(b) a startup as defined in clause (62A) of section 2 for the tax year in which the startup is certified by the Pakistan Software Export Board and the following two tax years; 

(c) persons deriving income from exports of computer software or IT services or IT enabled services up-to the period ending on the 30th day of June, 2025: 

Provided that eighty per cent of the export proceeds is brought into Pakistan in foreign exchange remitted from outside Pakistan through normal banking channels. 

(2) The tax credit under sub-section (1) shall be available subject to fulfillment of the following conditions, namely:- 

a) return has been filed; 

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

c) withholding tax statement for the immediately preceding tax year have been filed; and 

d) sales tax returns for the tax periods corresponding to relevant tax year have been field.

4. Tax credit for charitable organizations 

Previously, donations paid to charitable organizations fell under two categories. The first one is specified in Clause (61) Part I of the Second Schedule, whereby the donors are allowed as a direct deduction from the total income. In the second case, donations paid to organizations covered under section 61 were allowed as a tax credit by way of reduction in tax liability at an average rate of tax. 

Through this ordinance, Clause (61) Part I of the Second Schedule has now been replaced with the newly inserted Thirteenth Schedule where tax credit on donations made to such organizations would be allowed instead of a straight deduction. 

5. First Year Allowance 

Previously, industrial undertaking set-up in specified rural and underdeveloped areas and owned and managed by a company was allowed a first-year allowance at the rate of 90% of the cost of plant, machinery, and equipment installed instead of initial allowance at the rate of 25%. 

Through this Ordinance, this allowance has been withdrawn. 

6. Tax exemption on Inter-corporate group dividends 

Previously, dividend income was exempt derived by a company/recipient is eligible for group relief under section 59B in case of the following group structure:

a) Holding company and 100% owned subsidiaries entitled to group taxation and filing group return (Clause 103A); and 

(b) Holding company and subsidiary companies eligible for group relief under section 59B (Clause 103C). 

Through the Ordinance, the exemption for intercorporate dividend stated in (b) above has been withdrawn.

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