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December 3, 2020

Naya Pakistan certificates face tax treatment quandary

Business

December 3, 2020

KARACHI: Tax authorities seem to have encountered a legal lacuna related to tax treatment for yields on Naya Pakistan certificates to be bought by resident Pakistanis, likely to obstruct foreign inflows from their assets abroad, it was learnt on Wednesday.

Tax on profit from Naya Pakistan certificates is 10 percent and which is applicable to non-residents only, according to the Federal Board of Revenue (FBR).

However, if resident Pakistanis are allowed to purchase the certificates then taxation and declaration may be treated as per Income Tax Ordinance 2001 under which the tax rate is higher and declaration is mandatory, said sources.

The FBR recently issued two statements related to certificates for investment from Pakistanis with foreign assets. In November, it said resident Pakistanis are not allowed to purchase NPCs.

After immense pressure from various quarters, it issued second statement without clarification on the subject of tax treatment on yield of NPCs.

“Naya Pakistan Certificate, a new instrument launched by the government / State Bank of Pakistan (SBP), qualifies as a debt instrument in terms of Clause (5AA) of Part-II of the Second Schedule of the Income Tax Ordinance, 2001. Therefore, profit on debt on the Naya Pakistan certificate is subject to tax at 10 percent which is final tax,” it said. “Such non-residents are not required to file tax returns solely for the declaration of tax deduction on profit on debt. The aforesaid concessionary tax regime is applicable to non-residents only.”

A SBP’s spokesman told The News that resident Pakistan are eligible to purchase NPC with the condition they have declared foreign assets in their annual return of income.

“There may be change in tax treatment on yield from NPCs purchased by non-resident and resident Pakistanis,” said the spokesman.

The SBP said resident Pakistanis who have declared assets abroad with FBR can open a foreign currency Roshan digital account. Through this account, among other facilities, they will be able to invest in USD-denominated Naya Pakistan certificates, it said on its website.

The SBP spokesman said the stance of the central bank regarding purchase of NPCs by resident Pakistanis is clear. “However, the FBR may be in a better position to explain the treatment of income tax for resident and non-resident Pakistanis.”

The SBP said return/profits on NPCs are subject to 10 percent withholding tax as full and final settlement of tax liability on NPC profits. Non-resident investors are also not required to file any tax return if their only source of income in Pakistan is profits earned on NPCs, it said.