Promoting industrialisation, facilitate FDI in country: FBR proposes to reinstate sub-clause of 2nd schedule of IT Ordinance 2001


ISLAMABAD: In order to promoter industrialisation and to facilitate foreign direct investment (FDI) in to the country, a proposal is under consideration at Federal Board of Revenue (FBR) to reinstate sub-clause (iii) of clause 72 of part 1, of 2nd schedule of the Income Tax (IT) Ordinance 2001, official sources informed on Thursday.  
Proposed changes: Due to the withdrawal of this provision, profit on debt payable to non-resident person in respect of foreign loans, registered with the State Bank of Pakistan and utilised for industrial investment in Pakistan has became taxable. It has been proposed to reinstate sub-clause (iii) of clause 72 of part 1, of 2ndschedule.   
Sub-clause (iii) of clause 72 of part 1, of 2nd schedule to the Income Tax Ordinance 2001 was omitted through the amendments proposed in Finance Act 2009.  
It is expected decision on this proposal be made while finalising the upcoming budget proposals for incorporation in Finance Bill 2015, the sources said.
Existing section 59B (2) (a) states “There is continued ownership for five years, of shares capital of the subsidiary company to the extent of fifty five percent in case of a listed company, seventy five percent or more, in case of other companies”.
Proposed: The change proposed in this section suggests Section 59 (2) (a) should read as “ There is from the date of surrender of loss, continued ownership for five years of share capital of subsidiary company to the extent of fifty-five percent in case of listed company, or seventy-five percent or more, in the case of other companies.
Rationale: Due to the ambiguity, “Continued ownership for five years, of share capital of subsidiary company” is being read to mean as five years prior ownership i.e prior to surrender of loss. The underlying concept behind a group relief is to nurture and turn around subsidiaries which have long- term viability. The five-year post surrender holding clause was also put into place top prevent ‘Loss Shopping’.
According to another key tax proposal, Section 59 (B) (b) the existing section states, “A company within the group engaged in business of trading shall not be entitled to avail group relief”.
Proposed Change: According to the changes proposed in this section, a company (not being a company operating trading houses as defined under clause 57 of Part IV of the 2nd Schedule of the Ordinance) engaged in the business of trading shall not be entitled to surrender the loss”.    
Explanation: For the purpose of this paragraph, a company would not be considered to be engaged in the business of trading unless more than 30 percent of declared turn over is from business of trading. Provided that losses on speculation business as defined under section 19 (2) of the Income Tax Ordinance will not be available for surrender.
Rationale: The clause “engaged in the business of trading” is being misconstrued to read as being applicable in every situation where there is some trading activity. It will be appreciated that manufacturing concerns augment their product offerings by importing/selling products that they do not manufacture themselves. 
The manner in which this provision of the law is being interpreted, a company, which primarily engaged in manufacturing and has some trading interest albeit small, is unable to offset the losses of other company within the group. 
The proposed explanation of allowing trading activity up to the extent of 30 percent of the turn over allows batter clarity of the law.
As trading houses entails a significant investment and create a real job in the economy, it has been proposed to make it eligible to surrender losses. 

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