Tax machinery mixed up over status of exemption on imports

KARACHI: Tax officials are confused over the status of tax exemption on imports of capital goods as a new law restoring taxes has been introduced in the current year’s budget without rescinding the previous exemption statutory regulatory order (SRO), sources said on Friday.

The sources said this created problems for tax managers and taxpayers who are seeking exemption from income tax on import of plant and machinery on the basis of SRO 947(I)/2008. Under the SRO, the taxpayers importing capital goods are allowed exemption from income tax.

However, a new regime of concessionary rate of income tax was introduced under section 148 of Income Tax Ordinance 2001, through the Finance Act 2020. Under the regime, the total exemption from income tax has been abolished and instead three different concessionary rates of 1, 2 and 5.5 percent have been applied on import of capital goods, raw material and other goods, respectively. Taxpayers are applying for exemption under SRO 947(I)/2008 because the notification has not not been rescinded by the Federal Board of Revenue (FBR) despite several changes being made to section 148 of the Income Tax Ordinance 2001. The section mainly deals with advance income tax at the import stage. An official at the Large Taxpayers Office Karachi said a clarification has been sought from the FBR on the issue.

The FBR was informed that amendment made into the section 148 of Income Tax Ordinance 2001 through Finance Act 2020 resulted in a major shift from individual-specific tax rates to goods specific tax rates under which capital goods are subject to one percent tax. A SRO 715(I)/2020 was issued on September 12, which amended the Income Tax Rules 2002 to explain the application of the new regime.

The FBR was informed that under present rules a taxpayer could claim exemption only if the taxpayer is exempted from tax or subject to 100 percent tax credit under section 100C of the Ordinance.

Previously, a commissioner of Inland Revenue was empowered to issue exemption certificates against import of plant and machinery by following conditions and procedures laid down in the SRO 947(I)/2008.

“These conditions were different from the present scenario as laid down under the Income Tax Rules,” the official said.

The SRO 947(I)/2008 has neither been rescinded nor withdrawn by the FBR. However, FBR’s powers under which the SRO was issued was omitted through Finance Act 2015. The FBR was asked to clarify whether or not SRO 947(I)/2008 for exemption of income tax on plant and machinery at the import stage is in operation.

The official said taxpayers are filing applications for exemption from tax on import of capital goods under the SRO. “Therefore, early response from the higher authority will help the tax department to avoid future litigation,” the official added.