Investors need to present profit proof for tax incentive

KARACHI: Financial institutions are demanding certificates of proof from investors that show they receive less than Rs500,000 profit on debt in a year if they want to avail reduced income tax rates, sources said on Friday.

The sources said financial institutions asked recipients of profit on debt to furnish certificate of annual profits of less than Rs500,000 to avail the reduced rate of income tax on return on investment.

The financial institutions, including banks and other payers of profit on debt are acquiring such certificates from their customers to get the tax incentive.

Under a section 151 of Income Tax Ordinance 2001, the rate of withholding tax on profit on debt is 10 percent in case total profit does not exceed Rs500,000. However, if the profit exceeds the benchmark, the rate of withholding tax is 15 percent. If the recipient is not on the active taxpayers list, the tax rate turns out to be 30 percent.

Through the Finance Act 2020, an amendment was made into the section under which the reduced rate of 10 percent would only be available if recipient of profit provides a certificate that his annual income under this head will not be beyond the threshold.

In order to explain the amendment the FBR issued circular no. 07 of 2020 on December 22, 2020. The FBR received many queries regarding the application of the reduced rate under the section 151.

“It is clarified that the required certificate is to be furnished by the recipient of the profit on debt to the payer of such profit to the effect that total profit on debt received/receivable during the tax year from all investments in his case shall not exceed Rs500,000. The requisite certificate can be submitted on plain paper,” the FBR said.

Tax managers and tax experts are unanimous that the amendment to furnish a certificate by the recipient of profit would not spare withholding agents from responsibility of deducting actual amount of withholding tax.

Tax officials at Large Taxpayers Office Karachi said the amendment is requiring the recipients of the profit to estimate annual return, which is not practical.

An official said in case the return increases the threshold income in such a scenario the bank will deduct the tax rate at a higher rate or the recipient of the profit will be responsible for mis-declaration.

Rehan Hassan, former president of Karachi Tax Bar Association said certificates are not important but when the income tax returns are filed for tax year 2021 such issues would emerge.

Hassan said banks or financial institutions would ultimately be responsible for actual and correct deduction of withholding tax under the SECTION 151 of Income Tax Ordinance, 2001. “How it is possible that a person estimates his annual income? What will happen if the interest rate is changed?”