March 10, 2021 (MLN): After resisting IMF’s request for more than a year, the Federal government approved “The Income Tax Second Amendment Bill 2021” on Tuesday.

Following the approval of ‘The Income Tax Second Amendment Bill 2021’ income tax exemptions available to Modaraba companies, Real Estate Investment Trusts (REITs), Pakistan Mortgage Refinance Company, Venture Capital Funds, and IT services and IT-enabled services will be withdrawn.

However, the IT services and IT-enabled services would be allowed to avail 100 percent tax credit at the time of filing of income tax returns, Business Recorder (BR) reported.

Sources told that the corporate income tax exemptions to the tune of Rs70-140 billion would be withdrawn. But according to the independent experts, the actual impact of the withdrawal of these exemptions would not be more than Rs30-40 billion, BR said.

One of the key facilitative measures to be introduced through the Income Tax (Second Amendment) Bill, 2021 is that the government will abolish a 1.5 percent turnover tax or minimum tax applicable on the exempt entities. This would enable many sectors to avail the tax credits in their income tax returns.

Another big relief being provided through the Income Tax (Second Amendment) Bill, 2021 is a reduction in the turnover tax rate from 1.5 percent to 0.25 percent to the dealers, sub-dealers, wholesalers, and retailers of the locally manufactured mobile phones.

The Federal Board of Revenue (FBR) will give 100% tax credit to IT Services, including software development, software maintenance, system integration, web design, web development, web hosting, and network design, and IT-enabled services include inbound or outbound call centers, medical transcription, remote monitoring, graphics design, accounting services, human resources services, telemedicine centers, data entry operations, locally produced television programs, and insurance claims processing.

As per BR, the Government has made 78 amendments to the Income Tax Ordinance 2001 relating to exemptions and concessions. Of the 78 changes to the exemption schedule, 24 removals of exemptions would have a significant impact on revenue, while the elimination of the 10-12 income tax exemptions will have a nominal impact on revenue.

Furthermore, a total of 41 exemptions that would have no or very negligible revenue impact, have been removed from the Income Tax (Second) Amendment Bill 2021.

Of the 78 exemptions that will be eliminated, about 37 have been rewritten to simplify the tax laws. In addition, around 5-6 those exemptions have been withdrawn where beneficiaries have stopped taking exemption benefits under the Income Tax Ordinance 2001, BR said.

Through the bill, the FBR has also amended exemptions available to non-profit organizations

Sources told BR that with the bill, income tax exemptions available to Modaraba Companies will be eliminated. This clause would be deleted from the Second Schedule of the Income Tax Ordinance 2001: Any income, not being income from 10 [manufacturing or] trading activity, of a Modaraba, registered under the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980, for any assessment year commencing on or after the first day of July 1999.

 With regards to IPPS, the government approved to withdraw the income tax exemptions available to them. However,  the existing IPPs as well as those that would sign the agreements by June 30, 2021, would continue availing the exemptions due to sovereign guarantees.

Moreover,  it was decided that the income tax exemptions available to oil refinery investments would expire by the end of this calendar year.   

The income tax exemptions available to private equity funds and venture capital funds have been approved to be withdrawn. Moreover, the collective investment schemes will also be subject to normal tax.

As per BR, under the law, the exemption is available to the profits and gains derived between the first day of July 2000 and the thirtieth day of June 3, 2024, both days inclusive, by a venture capital company and venture capital fund registered under Venture Capital Companies and Funds Management Rules, 2000 and a Private Equity and Venture Capital Fund.

In the bill, it was also proposed to lift the exemption available to the Pakistan Mortgage Refinance Company. Under the law, the exemption is available to any gain by a person on transfer of a capital asset, being a bond issued by Pakistan Mortgage Refinance Company to refinance the residential housing mortgage market, during the period from July 1, 2018, till June 30, 2023.

Under section 65D of the Income Tax Ordinance 2001, the Government may revoke the exemption available to the newly established industrial enterprises.

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