This move is seen by many as a tool to ease the economic pressure as a result of rising inflation, political turmoil and resulting public anger. Whatever the reason may be, these amendments can be beneficial for some industrialists.
We can summarise the recent amendments in three broad categories:
- Tax incentive for acquisition of sick industrial units
- Tax incentives for local and overseas Pakistanis
- Tax amnesty for investment in industry
Tax incentive for acquisition of sick industrial units
Overview of Incentive Scheme
A company can acquire majority stake (share capital) in a sick industrial unit to benefit from its tax losses. The benefit of investment under this scheme would be that the investor company can claim tax losses of the sick industrial unit.
The investor shall be entitled to adjust loss for the latest tax year and earlier brought forward assessed business losses (excluding capital loss) for a period of three years (u/s 57). If the investor company is unable to adjust the said losses, the sick industrial unit shall carry forward the losses u/s 57.
The investor company shall adjust the loss under the head “income from business” to the extent of its ownership stake (in %). For example, if the investor acquires 50% stake of the sick industrial unit, it can claim its 50% tax losses.
The investor must be a company.
The sick industrial unit shall be a company.
Investor shall acquire share capital of the sick industrial unit under a scheme of acquisition.
This benefit is not available to any scheme of amalgamation or merger.
Sick industrial unit means an industrial undertaking, which:
- has accumulated losses for a continuous period of three years prior to 1 July 2022, which equal or exceed its entire capital and reserves at the time of acquisition; or
- has defaulted towards repayment of outstanding debts owing to banking companies or non-banking financial institutions for a consecutive period of three years immediately before acquisition; or
- has been declared a sick industrial unit by Federal Government in a notification published in the official gazette.
The above scheme would be available subject to the following conditions:
- The sick industrial unit shall continue the same business till 30.06.2026.
- The sick industrial unit shall not dispose of assets till 30.06.2026.
- The investor shall continue ownership for at-least five years i.e. from 30.06.2023 to 30.06.2028. The investor company shall not change its share capital.
- The sick industrial unit shall attain the previous maximum production capacity by tax year 2026. Otherwise, the profits adjusted against losses shall become taxable in tax year 2027.
- The sick industrial unit shall file a revival certificate issued by Engineering Development Board along with the return of income for the tax year 2026.
Tax incentive for local and overseas Pakistanis
Overview of Incentive Scheme
A resident individual taxpayer having foreign assets declared in terms of section 116 or 116A by 31.12.2021 can avail this incentive.
A Pakistani citizen who is non-resident for continuous period of more than five years can also avail this scheme.
- The eligible individual shall establish an industrial undertaking in a new company on or after 01.03.2022 with equity of at-least Rs.50 million.
- The individual shall remit equivalent funds to Pakistan through proper banking channel up to 31.12.2022.
- The industrial undertaking shall start commercial production by 30.06.2024.
- The company must not be set up by splitting up or reconstitution of a company or an industrial undertaking already in existence.
Tax amnesty for investment in industry
Overview of Amnesty Scheme
FBR shall not ask source of funds u/s 111 against which amnesty is required.
Eligible person can incorporate the funds and the amount of tax paid in his wealth statement, financial statements or books of account.
NAB and the FIA (including access under Rights of Access to Information Ac, 2017) shall not ask the FBR to share information about the beneficiaries of the scheme.
All persons (individuals, AOPs, companies) other than the following are eligible for the tax amnesty scheme:
- holders of public office, their spouses and dependent children;
- a public company as defined in clause (47) of section 2 of the Ordinance;
- a person who has availed amnesty under the Voluntary Declaration of Domestic Assets Ordinance, 2018, the Foreign Assets (Declaration and Repatriation) Ordinance, 2018, or the Assets Declaration Act, 2019;
- a person that has been declared a bank loan defaulter by a bank or a financial institution within the last three years; or
- a director of a company that has been declared a bank loan defaulter by a bank or a financial institution within the last three years.
How to Avail Amnesty?
- The eligible person shall establish a new industrial undertaking being a company.
- The eligible person shall deposit amount of funds against which amnesty is required (in PKR) in a dedicated bank account of the company in Pakistan.
- The eligible person shall file a statement with FBR till 30.09.2022 mentioning the amount of funds, deposited as above, against which the amnesty is required.
- The eligible person shall pay 5% tax to FBR on the amount of funds along with the statement.
Existing Industrial Undertaking:
- The existing company shall open a dedicated bank account for the purpose of amnesty.
- The company shall deposit the amount of funds against which amnesty is required (in PKR) in the dedicated bank account of the company in Pakistan.
- The company shall file a statement with FBR mentioning the amount of funds, deposited as above, against which amnesty is required.
- The company shall pay 5% tax to FBR on the amount of funds along with the statement.
- Amnesty scheme shall not be available for any proceeds of crime, corruption, money laundering and terror financing.
- Investment shall be made in equity and does not include borrowed funds and investment in land
- Amount of funds shall not have been declared in any of tax returns up to tax year 2021.
- Tax returns up to tax year 2021 shall have been filed by 31.12.2021.
- Minimum amount of investment shall be Rs.50 million.
- There shall not be change in ownership of the industrial undertaking company prior to 30.06.2026.
- The new industrial undertaking shall not dispose of any of its assets prior to 30.06.2026.
- The new industrial undertaking shall use funds only for purchase or import of plant and machinery through letter of credit or for construction of building and structure for the industrial undertaking.
- The new industrial undertaking must commence commercial production by 30.06.2024, and it shall submit a certificate to this effect issued by Engineering Development Board along with the tax return for tax year 2024.
- The existing industrial undertaking shall use funds for purchase or import of plant and machinery including IT hardware through letter of credit, or software & IT services or for construction of building and structure for the manufacturing premises.
- The existing industrial undertaking must complete the expansion and modernization by 30.06.2024, and it shall submit a certificate to this effect issued by Engineering Development Board along with the tax return for tax year 2024.
- The investment must not be made in the following sectors:
- arms and ammunitions;
- aerated beverages;
- flour mills;
- vegetable ghee; and
- cooking oil manufacturing excluding extraction units.
If any further clarification is required please feel free to comment below, or call at +92-333-4853599 (WhatsApp also).