THREADBARE LEGAL & ECONOMIC

ANALYSIS ON TAX REFORMS

PACKAGE 2018
DATED: 09 April 2018

408, CONTINENTAL TRADE CENTRE, BLOCK-8, CLIFTON, KARACHI

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 TABLE OF CONTENTS

Page
S. No. Description
No.s
Preamble 1
A Declaration Scheme 1
1 Persons Covered 1
2 Assets Covered 1
3 Value of Assets 1
4 Timeline 3
5 Tax Rates 3
6 Confidentiality 4
7 Declaration not admissible in evidence 4
B Foreign Currency Accounts 4
C Amendments in Income Tax Ordinance, 2001 (“ITO”) 4
Tax Year in which concealed income, asset and/or
1 4
expenditure shall be added
2 Immunity on foreign remittances limited 4
3 Foreign income and assets statement – Section 116 A of ITO 4
4 Rate of tax for Individuals 5
5 Rate of tax for AOP 5
D Points to ponder 7
E A brief comparison with our suggestion in the report 8
Annexure 9
 Preamble:

Prime Minister, Mr. Shahid Khaqan Abbasi, announced ‘one time amnesty scheme’ as a part
of Economic Reforms Package during his candid press conference on April 06, 2018.

The scheme was ratified, along with other amendments in relevant laws, by the President of
Pakistan by way of an Ordinance, as the Senate and National Assembly are not in session.

The scheme and amendments were effected through promulgation of following Ordinances.

1. Foreign Assets (Declaration and Repatriation) Ordinance, 2018 (“Foreign Assets

Ordinance”);
2. Protection of Economic Reforms (Amendment) Ordinance, 2018 (“PERA”);
3. Voluntary Declaration of Domestic Assets Ordinance, 2018 (“Domestic Assets
Ordinance”); and
4. Income Tax (Amendment) Ordinance, 2018 (“ITAO”).

A. Declaration Scheme

Salient features and loopholes in the scheme and amendments are briefed as under.

1. Persons Covered

 Foreign Assets - All the citizens of Pakistan are eligible to avail the scheme except
holders of public office (definition in Annexure A), their spouses and dependent
children.
 Local Assets – Every company, Association of person and all the citizens of Pakistan
are eligible to avail the scheme except holders of public office, their spouses and
dependent children.

2. Assets Covered

 All the foreign assets;

 Undisclosed local income; and/or
 Undisclosed local assets

held, on or before April 8th, 2018 by persons covered under the scheme, are eligible to be
benefitted under the scheme except the assets with respect to whom proceedings are
pending in any Court of law.

3. Value of assets

The value of the assets to be benefitted under the scheme shall be the as under:

THREADBARE LEGAL & ECONOMIC ANALYSIS ON TAX REFORMS PACKAGE 2018 1

S.No. Asset Type
A Foreign Assets
B Local Assets
1 Undisclosed income.
2 Open plots and land.
3 Super structure.
4 Apartments and flats.
5 Imported motor vehicles.
Motor vehicles purchased from a
6 manufacturer or assembler or
dealer in Pakistan.
Used motor vehicles purchased
7 equal to 10% for every year following the year in
locally.
Securities and shares traded on
8
stock exchange.
Securities and shares not traded
9 as reduced by the value of preference shares and
on stock exchange.
National saving schemes, postal
10 certificates, bonds, securities and
other similar investments in
THREADBARE LEGAL & ECONOMIC ANALYSIS ON TAX REFORMS PACKAGE 2018
Value
values as declared by the person declaring the asset
or cost of the asset, whichever is higher
As declared.
Cost of acquisition or FBR rates, whichever is higher.
Rs 400 per square feet.
Cost of acquisition or Provincial stamp duty rates,
whichever is higher.
A-B
A= CIF value plus the amount of all charges, customs-
duty, sales tax, levies, octroi, fees and other duties
and taxes leviable thereon and the costs incurred till
their registration.
B= a sum equal to 10% of the said value for each
successive year upto a maximum of five years.
A-B
A = The price paid by the purchaser, including the
amount of all charges, customs duty, sales tax and
other taxes, levies, octroi, fees and all other duties
and taxes leviable thereon and the costs incurred till
their registration.
B = a sum equal to 10% of the said value for each
successive year upto a maximum of five years.
Value determined in the manner specified in S.N. 5
or 6, as the case may be, as reduced by an amount
which it was imported or purchased from a
manufacturer.
Day-end price of the share or security quoted on
registered stock exchange as on the 9th April, 2018
and where no day-end price of such share or security
is quoted on stock exchange on the 9th April, 2018
day-end price of the share or security quoted on a
date nearest to the 9th April, 2018.
Break-up value or face value, whichever is higher.
Breakup value shall be the sum of paid-up capital,
reserves and balance as per profit and loss account
divided by the amount of the paid up ordinary share
capital.
Face value.
2
 S.No. Asset Type Value
capital instruments not traded or
quoted on stock exchange.
11 Gold. Rupees 4000 per gram.
Other precious stones and Market rate as on the 9th April, 2018 or cost of
12
metals. acquisition, whichever is higher.
13 Stock-in-trade. Market rate as on the 9th April, 2018.
14 Plant and machinery. Actual cost of acquisition with no depreciation.
15 Accounts receivable.
Actual cost of acquisition.
16 Other assets.
17 Prize bonds, cash and bank Face value.
accounts including foreign
currency accounts.

4. Timeline

The scheme will be applicable from April 10th, 2018 to June 30th, 2018.

5. Tax Rates

Local/Foreign Assets Tax Rates

Liquid assets not repatriated 5%
Immoveable assets 3%
Liquid assets repatriated and invested in Government
securities upto 5 years in US dollars denominated bonds
Foreign Assets
with six-monthly profit payment in equivalent Rupees
(rate of return 3%) and payable on maturity in equivalent
Rupees
Liquid assets repatriated
Foreign currency held in a foreign currency account in
Pakistan as on the 31st March, 2018 and encashed in 2%
equivalent Rupees.
Foreign currency held in a foreign currency account in
Pakistan as on the 31st March, 2018 which is invested
Local Assets
in Government securities upto 5 years in US dollars
denominated bonds with six-monthly profit payment in
equivalent Rupees (rate of return 3%) and payable on
maturity in equivalent Rupees.
Other Assets 5%

THREADBARE LEGAL & ECONOMIC ANALYSIS ON TAX REFORMS PACKAGE 2018 3

 6. Confidentiality

Particulars of any person making a declaration, or any information received in any declaration,
shall be confidential notwithstanding any law for the time being in force.

7. Declaration not admissible in evidence

Nothing contained in any declaration made shall be admissible in any proceedings against
the declarant for imposition of penalty or for prosecution under any law.

B. Foreign Currency Accounts

As per amendment introduced in section 5(4) of Protection of Economic Reforms Act, 1992,
a person, who is a non filer, is prohibited from depositing any cash into any foreign currency
account.

C. Amendments in Income Tax Ordinance, 2001 (“ITO”)

1. Tax year in which concealed income, asset and/or expenditure shall be added

Amounts representing Pakistan source Tax year to which such amount relates
income, expenditure or asset (part of existing law)
Amounts representing foreign source Immediately preceding tax year of
income, expenditure or asset discovery (insertion)

2. Immunity on foreign remittances limited

Immunity from inquiry on foreign remittances through normal banking channel

encashed in Pakistan Rupee is restricted to Rs. 10 million for a tax year.

3. Foreign income and assets statement – Section 116A of ITO

 Every resident individual

 Having foreign income equal to or in excess of $ 10,000; or

 Having foreign assets with a value of $ 100,000 or more

Shall furnish a ‘foreign income and assets statement’ giving following particulars:

 Total assets and liabilities as on the last day of the tax year;

THREADBARE LEGAL & ECONOMIC ANALYSIS ON TAX REFORMS PACKAGE 2018 4

  Foreign asset transferred during the year and consideration thereof; and

 Foreign income and expenditure derived wholly and necessarily for the said
income.
 Every person who is required to file a ‘foreign income and assets statement’ is also
required to file return of income under section 114 of ITO

 The time limitation for five years for the Commissioner to issue notice to file return of
income shall not be applicable if the Commissioner is satisfied on the basis of reasons
to be recorded in writing that a person who failed to furnish his return has foreign
income or owns foreign assets.

 In case of failure to file a foreign asset and income statement within due date, a
penalty of 2% of foreign income or value of foreign asset shall be levied for each year
of default.
4. Rate of tax for individuals

 Income Tax rates for individuals shall be as Under with effect from July 1st, 2018:

S. No. Income Bracket (Rs.) Tax Rates

1. Upto 1,200,000 Exempt
2. 1,200,001 to 2,400,000 5% of the amount exceeding Rs. 1,200,000
Rs. 60,000 + 10% of the amount exceeding Rs.
3. 2,400,001 to 4,800,000
2,400,000
Rs. 180,000 + 15% of the amount exceeding Rs.
4. More than 4,800,000
4,800,000
5. Rate of tax for AOP
Rate of tax for Association of persons have been kept same as earlier as under:

S. No Taxable income Rate of tax

Where the taxable income does not
1 0%
exceed Rs. 400,000
Where the taxable income exceeds
2 Rs.400,000 but does not exceed 7% of the amount exceeding Rs.400,000
Rs.500,000
Where the taxable income exceeds
Rs. 7,000 + 10% of the amount
3 Rs.500,000 but does not exceed
exceeding Rs.500,000
Rs.750,000
Where the taxable income exceeds
Rs.32,000 + 15% of the amount
4 Rs.750,000 but does not exceed
exceeding Rs.750,000
Rs.1,500,000

THREADBARE LEGAL & ECONOMIC ANALYSIS ON TAX REFORMS PACKAGE 2018 5

 Where the taxable income exceeds
Rs.144,500 + 20% of the amount
5 Rs.1,500,000 but does not exceed
exceeding Rs.1,500,000
Rs.2,500,000
Where the taxable income exceeds
Rs.344,500 + 25% of the amount
6 Rs.2,500,000 but does not exceed
exceeding Rs.2,500,000
Rs.4,000,000
Where the taxable income exceeds
Rs.719,500 + 30% of the amount
7 Rs.4,000,000 but does not exceed
exceeding Rs.4,000,000
Rs.6,000,000

Where the taxable income exceeds Rs.1,319,500 + 35% of the amount

8
Rs.6,000,000 exceeding Rs.6,000,000

[*32% in case of a professional firm which is prohibited to become an

incorporated company by its profession i.e. an audit firm and a law firm]

THREADBARE LEGAL & ECONOMIC ANALYSIS ON TAX REFORMS PACKAGE 2018 6

D. Points to ponder
Government may face following economic and legal challenges to enforce the Tax Reforms
Package:
1. Considering the recent devaluation of Pakistan Rupee, the rates of declaration i.e. 3% and
5% on moveable and immovable assets respectively, are very low. The payment of taxes
at these rates by foreign assets holders will easily be offset against revaluation of their
offshore assets in Pakistan Rupee.

2. Capital Value Taxes on immoveable property has been excluded from entry 50 of federal
legislative list of The Constitution of Pakistan, 1973, which has the effect that levy of tax
on capital value of immoveable property is the right of provinces instead of federation.

3. In his press conference, Honorable Prime Minister termed the scheme as ‘one time’
amnesty scheme, however, there is no provision with respect to penalties or coercive
action in case of non declaration by any person, which may be unearthed subsequently.

4. Cap on outward remittances has not been introduced. Flight of precious foreign exchange
will continue in form of so called foreign investment, which is against the spirit of the
scheme. We recommended a threshold of $ 500,000 per individual for investment
purposes.

5. In absence of preemptive right of government to buy back assets over and above the
valuations declared by the declarants, there would be no control to ensure values declared
are as per market. The declarants will tend to declare values lower than the market values
to pay minimum taxes gaining two fold benefit of declaration without paying due taxes.
On other hand, any adventure to buy properties may trigger legal consequence. This model
was also a failure in India. Therefore, a suitable way forward would be required to ensure
proper value declarations.

6. Foreign Assets Ordinance and Domestic Assets Ordinance have been given overriding
effect to other laws for the time being in force. This means that immunity from criminal
laws along with Narcotic Substance Act, 1947; and Anti Terrorist Act 1997 has also been
extended which will raise questions from Financial Action Task Force.

7. Article 19A pf the constitution of Pakistan, 1973 provides right to information to every
citizen. Therefore, the constitutionality of confidentiality clause in the Ordinances may be
challenged.

8. Decrease in tax rates for individuals will result in revenue losses of approximately Rs. 90
billion and a decline in of approximately 200,000 returns of income.

THREADBARE LEGAL & ECONOMIC ANALYSIS ON TAX REFORMS PACKAGE 2018 7

 9. Moreover, there will be an anomaly as under section 153(1)(b) of ITO, tax rates for
withholding on an individual service provider in 10% which is minimum tax, whereas,
normal tax rates may be much lower due to revised slab rates. Similar situation would be
faced in case of income from property which attracts tax rates up to 20% as a separate
block of income. Amendments in the tax rates of these sectors would be required too to
remove disparity.

10. It is estimated that out of $ 200 billion undeclared foreign assets, only $ 2 billion would be
repatriated.

11. The following errors are apparent in the Ordinance for which corrective explanation would
be necessary by the Government:

a. In subsection (2) of section 8 of Domestic Assets Ordinance, the words “foreign

assets” have been used instead of “domestic assets”.

b. At serial no. 8 column (3) of table in section 2(6)(1) of ITAO, the figure “48,000,000”
has been mentioned instead of “4,800,000”.

E. A brief comparison with our suggestions in the report

A report was prepared by Tola Associates wherein certain suggestions were offered. The
report may be found at the link https://goo.gl/gmDjHk The status of our suggestions is as
under:

S. No. Particulars Rates suggested Rates implemented

1 Offshore Immoveable 15% 3%
2 Offshore moveable repatriated 2% 2%
3 Offshore moveable not repatriated 10% 5%
4 Onshore immoveable 5% 5%
5 Onshore Moveable 5% 2%

Disclaimer:
This commentary is the property of Tola Associates and contents of the same may not be used
or reproduced for any purpose without prior permission of Tola Associates in writing.

The contents of this commentary may not be exhaustive and are based on media reports. Final
Comments along with economic revelations will be followed after the issuance of Ordinance.

This commentary is circulated electronically free of cost for general public to create tax
awareness in the country.

THREADBARE LEGAL & ECONOMIC ANALYSIS ON TAX REFORMS PACKAGE 2018 8

 ANNEXURE

"holder of public office" means a person who is or has been at any time since 1st day of
January 2000,–

the President of the Islamic Republic of Pakistan or the Governor of a Province;

(ii) the Prime Minister, Chairman Senate, Speaker of the National Assembly, Deputy
Chairman Senate, Deputy Speaker National Assembly, Federal Minister, Minister of State,
Attorney-General for Pakistan and other Law Officers appointed under the Central Law
Officers Ordinance, 1970 (VII of 1970), Adviser or Consultant or Special Assistant to the Prime
Minister and holds or has held a post or office with the rank or status of a Federal Minister or
Minister of State, Federal Parliamentary Secretary, Member of Parliament, Auditor-General of
Pakistan, Political Secretary;

(iii) the Chief Minister, Speaker Provincial Assembly, Deputy Speaker Provincial
Assembly, Provincial Minister, Adviser or Consultant or Special Assistant to the Chief Minister
and who holds or has held a post or office with the rank or status of a Provincial Minister,
Provincial Parliamentary Secretary, Member of the Provincial Assembly, Advocate-General
for a Province including Additional Advocate-General and Assistant Advocate-General,
Political Secretary;

(iv) the Chief Justice or, as the case may be, a Judge of the Supreme Court, Federal
Shariat Court, a High Court or a Judicial Officer whether exercising judicial or other functions
or Chairman or member of a Law Commission, Chairman or Member of the Council of Islamic
Ideology;

(v) holding an office or post in the service of Pakistan or any service in connection with
the affairs of the Federation or of a Province or of a local council constituted under any Federal
or Provincial law relating to the constitution of local councils, co-operative societies or in the
management of corporations, banks, financial institutions, firms, concerns, undertakings or
any other institution or organization established, controlled or administered by or under the
Federal Government or a Provincial Government or a civilian employee of the Armed Forces
of Pakistan;

(vi) the Chairman or Mayor or Vice Chairman or Deputy Mayor of a zila council, a municipal
committee, a municipal corporation or a metropolitan corporation constituted under any
Federal or Provincial law relating to local councils;

Explanation.– For the purpose of this sub-clause the expressions "Chairman" and "Vice
Chairman" shall include "Mayor" and "Deputy Mayor" as the case may be, and the respective
councilors therein; and

(vii) a District Nazim or District Naib Nazim, Tehsil Nazim or Tehsil Naib Nazim or Union
Nazim or Union Naib Nazim;

THREADBARE LEGAL & ECONOMIC ANALYSIS ON TAX REFORMS PACKAGE 2018 9

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