EXEMPTIONS FROM WITHHOLDING OF INCOME TAX

AND EXEMPTION CERTIFICATE UNDER SECTION 159 OF

THE INCOME TAX ORDINANCE (ITO), 2001

This is with reference to the various exemptions contained in various

sections/clauses of ITO, 2001 and SROs like SRO 586 whereby withholding
tax is not required to be deducted on certain payments. As clause 46 of Part-
IV of 2nd Schedule to the ITO, 2001 grants exemption from withholding tax to
oil refinery and permanent establishment (PE) of a non-resident. The clause
46 was read and reproduced hereunder for ease of reference:

Quote: “The provisions of sub-section (1) of section 153 shall not apply to
any payment received by an oil distribution company or an oil refinery
[“and provisions of sub-section (2A) of section152 shall not apply to”]
Permanent Establishment of Non-resident Petroleum Exploration and
Production (E&P) Companies] for supply of its petroleum products.]” Un-
quote

Likewise SRO 586(1)/1991 dated June 30, 1991, which is saved vide Section
239(12) of the ITO, 2001, also provide exemptions to certain payments listed
there including payments on account of supply of electricity, gas, crude oil,
agricultural products etc. The said SRO excluded many sectors from
deduction of withholding tax especially E & P sector and agricultural products
and sets a threshold on payment on account of goods of less than Rs. 25,000
and services of Rs. 10,000.

Now when we see section 159 of the ITO, 2001, it requires a certificate to be
issued to effect any exemption or reduced rate of withholding.

However, when we see this requirement with only parties mentioned in SRO
586(1)/1991, it creates a practical problem. For example, a plain reading of
this section setting requirements of a certificate on payments whether
exempt or subject to reduced rate of withholding. That means every party
mentioned in SRO 586 i-e a Refinery, a supplier of electricity, gas, crude oil,
agricultural produce supplier, fish farmers and persons supplying goods of
less than Rs. 25,000 and services of less than Rs. 10,000 are required to
obtain a certificate of exemption in terms of Section 159. This will lead to
chaos which cannot be legislature intent.

A case law reported as 108 TAX 249 have provided an insight to the wisdom
behind the section 159 as follows:

Quote:“The wisdom behind section 159 is to avoid burdening the taxpayer

and the tax administration with the calculations, refunds and adjustments of
amounts, which in the end are not required to be credited to the State
exchequer.” Un-quote

The above clearly means that the provisions of section 159 are applicable in
the cases where the income is exempt from tax and meant to save time and
effort on both department and taxpayer in calculations of refunds, credits
etc.
However, currently the Department is hardly going by the interpretation
leading to requirement and not much consideration is given to the above
mentioned explanation of the honorable Court. Thus, there is a need of
clarification or a speaking order by higher appellate authorities to identify
the scope of application of section 159 and remove the absurdity arising
from department’s interpretation.

Hussain Mehmood Asif

IFRS 16

IFRS 16

Overview:

IFRS 16 succeeds IAS 17. IFRS 16 specifies how a lease will be recognized,
measured, presented and most importantly disclosed. This standard requires
lessees to recognize assets and liabilities for all leases unless lease term is
12 months or less or the asset has a low value. Leases are classified as
either OPERATING OR FINANCE.

Difference between IFRS 16 and IAS 17:

The basic difference between the two is how an operating lease will be
brought to the balance sheet. Under IAS 17, there was no obligation to report
assets and liabilities from operating lease to the balance sheet and were
instead referred to in the footnotes. IFRS 16 changes this and requires assets
and lease liabilities to be recognized on the balance sheet. IFRS 16 contains
a new lease definition. The actual wording of the definition does not change
too much from the IAS 17 but there is a greater emphasis and weight
surrounding how a lease differs from a service.

IMPACT:

As a result of the change the comparability and transparency of the balance

sheet will be improved. The users of the financial statement will now able to
clearly see the effect of operating lease and have a basis to compare with
other companies. Under IAS 17, it was difficult to compare companies who
lease and who buy. Accounting departments will be impacted by the new
standard in the first year of financial reporting due to the changes. Accounts
of many companies will change dramatically and there will be a big increase
in assets as well as increase in liabilities. This will mean that standard capital
and debt ratios will change. Adoption of the new standard will also result in
additional tax related considerations depending on the jurisdiction.
Omar Rafeh Chughtai

INCOME FROM PROPERTY

The chargeability of income under the head “Income from Property” is

elaborated in

Section 15 of the Ordinance. The said section states that “The rent received
or receivable by a person for a tax year, other than rent exempt from tax
shall be chargeable to tax in that year under the head “Income from
Property”.

Before going on, first we define the rent

“Rent” means any amount received or receivable by the owner of land or a

building as

Consideration for the use or the right to use, the land or building,

And includes any forfeited deposit paid under a contract for the sale of land
or a building’’

Example: Where rent received or receivable is less than fair market rent for
the property, the owner shall be treated as having received the fair market
rent for the period the property is let on rent in the tax year. However, this
shall not apply in the case of self-hiring where fair

Market rent is already included in the income of the lessee, chargeable to tax
under the

Head “Salary”.

TREATMENT OF NON-ADJUSTABLE AMOUNTS

The treatment of non- adjustable advances received in relation to buildings is

explained in

Section 16 of the Ordinance in the following manner:

1. Where the owner of building receives an advance which is not

adjustable against rent, the whole of advance shall be treated as rent
chargeable to tax under the head income from property in the year of
receipt and following nine tax years in equal proportion i.e.1/10th of
such un-adjustable advance shall be included in the income of the
taxpayer under the head “income from property” in 10 tax years
commencing from the tax year in which the advance is received.
 2. If advance is refunded in any year before the expiry of 10 years such
advance shall not be included in the income from the tax year in which
it is refunded or thereafter
3. After vacancy, if the property is let out again against another non-
adjustable advance, new advance less the portion of previous advance
already charged to tax shall be chargeable equally in 10 tax years,
commencing from the tax year in which the advance is received from
the succeeding tenant.

The above treatment is shown in separate block of taxation.

Treatment for Company: while treatment for Company is to include in

normal tax regime and also following expenses are allowed to be claimed
under this head:

Tax Rate Surcharge

29% for income up to Rs 5 crore 7% for income between Rs 1 crore & Rs 10 crore
30% for income exceeding Rs 5 7% for income between Rs 1 crore & Rs 10 crore and 12%
crore if income exceeds Rs 10 crore
Note: No treatment is required in case of adjustable advance against rent
because the same will be automatically included in the computation of rent.

Bilal Hussain Mali

GOING CONCERN; A RATIONALE

For any set of accounts, and regardless of who completes them,

particular accounting principles must be followed. One of the
accounting principles that need to be followed when producing a set of
accounts is going concern, and both auditors and management need to
be fully aware of what this mean in practice.
What Exactly is Going Concern
A business that is not at a risk of Liquidation, or no such events exist
that will cease entity’s operations. As per International Standard on
Auditing 560 Auditor shall consider whether events or conditions exist
that may cause significant doubt on entity’s ability to continue as
going concern.
Following are the examples of such events or conditions
Financial
  Net liability or net current liability position.
 Inability to repay debentures and long term loans at scheduled
dates without any possibility of rescheduling of debts.
 Indications of withdrawal of financial support by creditors.
 Inability to obtain financing for essential new product
development.
 Change from credit to cash transactions with suppliers.
 Inability to pay creditors on due dates.
 Default in compliance of loan terms.
 Arrears or discontinuance of dividends.
 Negative operating cash flows.
 Adverse key financial ratios.
Operating
 Management intentions to liquidate entity or to cease operations.
 Loss of key management without replacement.
 Loss of major market, key customer, franchise, license, supplier.
 Labor difficulties including strikes.
 Shortage of important supplies.
 Emergence of a highly successful competitor.
Other
 Noncompliance with capital or other statutory requirements.
 Legal proceedings that may jeopardize entity’s ability to continue
business.
 Change in laws and government policies expected to adversely
affect the entity.
 Uninsured or underinsured disasters when they occur.
Responsibility regarding going concern
It is the responsibility of management to decide initially whether or not
the entity should be considered as a going concern, taking in to
account a broad range of factors from cash flow to competition.
Auditors are then responsible for collecting sufficient appropriate
evidence to support management’s decision, and concluding whether
or not it is appropriate.
Matters to be communicated to Those Charged with
Governance
The Auditor shall communicate the following with those charge with
governance;
 Whether events or conditions constitute a material uncertainity.
 Whether use of going concern basis is appropriate.
 The adequacy of related disclosures in financial statements.
 The implications for the auditors report.
Muneeb Sultan Arif

HOW TO REGISTER ONLINE TO FILE YOUR INCOME TAX

RETURNS

Being an income tax filer has its own benefits, and to attract greater
number of people to file their taxes, the government has added even
more incentives, the most notable of which has been the provision that
non-filers can’t buy property valuing more than PKR 5 million.
So how can you become an income tax filer online? Follow these steps:
1. Only an individual can register through e-filing system.
2. The e-filing is applicable only for the filing of income tax returns.
REQUIREMENTS FOR FILING INCOME TAX RETURN:
1. A cell phone with SIM registered your own CNIC.
2. A personal email address belonging to you.
3. Scanned pdf files of.
4. Certificate of maintenance of personal bank account in your own
name.
5. Evidence of ownership of business premises, if you own a
business.
HOW TO REGISTER FOR INCOME TAX E-FILING:
1. Visit the FBR website and open the File Returns tab encircled in
the image.
 2. Click the Income Tax e-Filing through iris in the e-Filing of Income
Tax Returns.
3. You will be brought to the login page for the Iris, if you haven’t
already registered, you will have to do that first.
4. Once you click on the link, a dialog box will open where you have
to provide your basic details as.
5. When you click submit after providing the details, you will asked
to verify your email address and phone number with separate
codes sent to both.
6. Once submitted again and your email and mobile have been
verified, you will receive a text with your registration number,
password, and pin code. You will be able to log into your Iris
account using the registration/CNIC number and password. You
will need the pin code while submitting your income tax returns
or wealth statement, so be sure to save that as well.
FILING RETURNS AND WEALTH STATEMENT:
You will basically have to provide a wealth statement and your tax
returns to become a filer, particularly if you are a salaried individual.
These will include a variety of details about your income in the past
year and the various kinds of properties that you may own. The
complete details for these will be provided in a separate articles soon.
Ehtisham Sohail

IAS 1 PRESENTATION OF FINANCIAL STATEMENTS

It sets out the overall requirements for financial statements, including

how they should be structured, the minimum requirements for their
content and overriding concepts such as going concern, the accrual
basis of accounting and the current/non-current distinction.
The objective of IAS 1 (2007) is to prescribe the basis for presentation
of general purpose financial statements, to ensure comparability both
with the entity’s financial statements of previous periods and with the
financial statements of other entities. IAS 1 sets out the overall
requirements for the presentation of financial statements, guidelines
for their structure and minimum requirements for their content.
Standards for recognizing, measuring, and disclosing specific
transactions are addressed in other Standards and Interpretations
It applies to all general purpose financial statements that are prepared
and presented in accordance with International Financial Reporting
Standards (IFRSs). General purpose financial statements are those
intended to serve users who are not in a position to require financial
reports tailored to their particular information needs.
Objective of general purpose financial statements is to provide
information about the financial position, financial performance, and
cash flows of an entity that is useful to a wide range of users in making
economic decisions. To meet that objective, financial statements
provide information about entities.
 assets
 liabilities
 equity
 income and expenses, including gains and losses
 contributions by and distributions to owners (in their capacity as
owners)
 Cash flows.
Fair presentation and compliance with IFRS
The financial statements must “present fairly” the financial position,
financial performance and cash flows of an entity. Fair presentation
requires the faithful representation of the effects of transactions, other
events, and conditions in accordance with the definitions and
recognition criteria for assets, liabilities, income and expenses set out
in the Framework. The application of IFRSs, with additional disclosure
when necessary, is presumed to result in financial statements that
achieve a fair presentation. IAS 1 requires an entity whose financial
statements comply with IFRSs to make an explicit and unreserved
statement of such compliance in the notes. Financial statements
cannot be described as complying with IFRSs unless they comply with
all the requirements of IFRSs (which includes International Financial
Reporting Standards, International Accounting Standards, and IFRIC
Interpretations and SIC Interpretations).
Reporting period
There is a presumption that financial statements will be prepared at
least annually. If the annual reporting period changes and financial
statements are prepared for a different period, the entity must disclose
the reason for the change and state that amounts are not entirely
comparable
Disclosure
An entity must disclose, in the summary of significant accounting
policies or other notes, the judgments, apart from those involving
estimations, that management has made in the process of applying the
entity’s accounting policies that have the most significant effect on the
amounts recognized in the financial statements.
Examples cited in IAS 1 include management’s judgments in
determining:
 when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to
other entities
 Whether, in substance, particular sales of goods are financing
arrangements and therefore do not give rise to revenue.
 An entity must also disclose, in the notes, information about the
key assumptions concerning the future, and other key sources of
estimation uncertainty at the end of the reporting period, that
have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial
year. These disclosures do not involve disclosing budgets or
forecasts.
Anwar Ahmed Gondal

PROCEDURE FOR REGISTRATION OF NGO/NPO

Definition
Nonprofit organizations are organized for a public or mutual benefit
other than generating profit for owners or investors. Non-profit
organization may be different in size and form, nonprofit organizations
share five common characteristics:
1. they are organized
2. Private (separate from the government)
3. Self-governing
4. Non-profit-distributing and
 5. Voluntary.
The non-profit distributing characteristic means that – contrary to the
common belief – nonprofits can generate profit but they cannot
distribute it to owners or directors. The profit must all be used to
support the operation of the organization.
Types of NGOs/NPOs by Law
Before an NGO can start work, it must be registered with Governement
of Pakistan. There are two types of NGOs and both have different
registration procedures:-
1. Registered under ‘Voluntary Social Welfare Agencies‘
Ordinance 1961
2. Registered under ‘Socities Act of 1860‘.
Uncommon NGO types and their respective registration acts.
1. Non-Profit Company (Under ‘Companies Act 2017’)
2. Cooperative Society (Under ‘Co-operative Societies act 1925)
Registration Procedure for NPO Under Section 42 of The
Companies Act, 2017
Step-by-Step Process:
1. The first step is to seek availability of the proposed name for the
company
2. Prepare an application by the promoters or members of an
association desirous of obtaining a license under section 42 of the
Companies Act, 2017.
3. There must be at least 3 subscribers/ members/promoters of the
company and who must have sufficient skills, expertise and
resources for the attainment of object of the proposed company.
4. Each promoter shall contribute a reasonable amount as startup
donation having regard to the circumstances of the case.
5. All conditions of license shall be mentioned in the Memorandum
of Association of the company.
Documents Required:
The following information/documents are required to be submitted
along with the application
1. Original Bank challan of Rs.25,000/- paid as licensing fee, in the
authorized branches of MCB Bank Limited/United Bank limited in
favor of the Securities and Exchange Commission of Pakistan.
 2. Copy of letter showing that the proposed name is available.
3. Draft Memorandum and Articles of Association duly signed by the
promoters.
4. List of promoters of the association with their occupations and
addresses.
5. Photo copies of CNICs of each promoter and (attested copies of
passports in case of foreigners).
6. A statement showing the names of companies, associations and
other institutions in which the promoters of the proposed
association holds any office stating the office held
(position/designation) in each case.
7. A declaration by a person of the effect that he has scrutinized the
application and the accompanying documents, and that he is
satisfied that the same are drawn up in conformity with the
provisions of the Act and fulfill the conditions for the grant of
license laid therein and these rules;
8. An undertaking from each promoter to the effect that they have
sufficient skills, expertise and resources for the attainment of
object of the proposed association. Moreover, the said
undertaking should indicate that each promoter shall contribute a
reasonable amount (e.g., Rs.200,000/-) as start up donation
having regard to the circumstances of the case. The amount shall
be deposited in the company’s account within a period of six
months of the date of its incorporation which shall be used for the
attainment
9. An affidavit affirming correctness of contents of the application,
affirming that promoters are not defaulters of loans etc. on the
stamp paper of appropriate value duly attested by an Oath
Commissioner;
10. An estimate of the future annual income and expenditure of
the proposed company, specifying the sources of income and
objects of expenditure. The statement should also reflect the
aforesaid startup donation of the each subscriber.
In case of foreign promoter / donor, the following additional
(five sets of each) documents needs to be provided:
 Draft Memorandum of Association
 Copies of Computerized National Identity Cards (CNICs) of all
Pakistani members and in case of foreigners, copy(ies) of
passport(s);
  Resume of all promoters
 Estimated Income and expenditure statement, names of foreign
donors along with letters of intents from foreign donors and year
wise amount of donation, and;
11. A brief statement of the work already done (if any) and the
work proposed to be done after incorporation as a company
specifying salient features of the project(s) e.g., their location,
size, duration, etc., to be undertaken in pursuance of object of
the company.
12. Power of Attorney (Authority Letter)on Stamp Paper of
appropriate value made by all the promoters in favor of a person
to present the application before the Commission on their behalf,
and to make other amendments, additions, corrections etc. ,in
the documents and also to collect license.
13. Resume of all promoters.
14. The application needs to indicate whether the association is
already in existence or not. If the association is already in
existence, the following information/documents relating to the
existing entity also to be furnished:
15. In case, the existing entity is a society, trust, etc,:
 A copy each of the audited balance sheet, income and
expenditure account and the annual report on the working of the
existing entity for the financial year immediately preceding the
date of the application;
 Attested copy of Certificate of registration (if it has any legal
status);
 Copy of resolution regarding dissolution and taking over the
assets and liabilities of the existing entity by the proposed
company within three months of its incorporation;
 Attested copy of latest List of members of Board of
Directors/Governors/Trustees etc of the existing entity;
 Attested copy of Latest Memorandum and Articles of Association,
Charter, or Statute by which it was registered.
In case, the existing entity is already registered as a company
in Pakistan:
 A copy of each of the audited balance sheet, income and
expenditure account. Annual report on the working of the existing
entity for the financial year immediately preceding the date of
the application and
  A copy of special resolution proposing to seek license under
section 42 of the Act and amendments in its memorandum and
articles of association to bring it in conformity with the licensing
requirments.
After obtaining license from the Commission, the Association must be
incorporated under the provisions of the Act, within a period of three
months from the date of the license.
Muhammad Shafaat Ali

PREVENTION OF OFFENCES RELATING TO FRAUD, MONEY

LAUNDERING AND TERRORIST FINANCING

The changing trends and pattern of Money laundering (ML) and

Terrorist Financing (TF) is a major global concern now days. Money
laundering in simple words is method to make funds as earned from
legal resources whereas actually being earned from criminal activities.
Whereas in financing of terrorism, funds may come from legal
resources but will be used for criminal activities. Government of
Pakistan is actively making polices and legislations in light of the
recommendation of the FATF.
Section 453 of the Companies Act 2017, which requires every officer of
a company to endeavor to prevent commission of any fraud, offences
of money laundering including predicated offences as provided in the
Anti-Money Laundering Act, 2010 (VII of 2010) with respect to affairs of
the company and necessary adequate measures need to be taken.
Further FATF Recommendations also require countries to take
measures to counter Money Laundering and Terrorism Financing
Activities. Such policies will be developed considering Risk-Based
Approach, which require High Allocation of Resources / Enhanced
measures will be taken for High Risks and Simplified Procedures will be
taken for Low Risks areas. Risks related to Money Laundering and
Terrorism Financing can be classified in three categories: –
 Geographic Risk
 Client Risk
 Service Risk
Categorization of above risks as “High” or ‘Low” depends on number of
factors like do our business activities relate with the parties /
customers based in countries, that are known to be used by money
launderers and or terrorist financers or they have connections, direct
or indirect, with money launderers or terrorist financers.
Accordingly, Securities and Exchange Commission of Pakistan (SECP)
issued Circular # 16 of 2018 dated August 29, 2018 to take reasonable
measure, for identification of ultimate natural beneficial owners or
controllers, irrespective of the number of levels of the chain of
ownership or control, from companies having legal person (non-natural
person) as members or shareholders and are required to maintain
“Register of Ultimate Beneficial Ownership”. The minimum information
of ultimate beneficial owner, that is required to be maintained in the
register includes:
1) Full name,
2) Father’s name/husband name,
3) NIC/NICOP/Passport number,
4) Nationality,
5) Country of origin (in case of foreign national or dual national),
6) Email address (if available),
7) Usual residential address,
8) Date on which name was entered in the register, and
9) Date on which the person ceased to be a beneficial owner
along-with reasons of cessation.
In exceptional cases where no natural persons are identified, there
shall be entered in the register the names of the natural person(s) who
hold the position of senior managing official(s) of the legal person
(including their date of birth, NIC/NICOP/Passport number, nationality
and residential addresses).
Timeline to obtain and maintain register under this is ninety days from
the date of the circular, and 30days for any subsequent change.
Further The Commission may require said maintained information from
the company or class of companies and shall also provide this
information to the any other authority or agency of the Government
pursuant to the powers to call for information entrusted by law to such
authority or agency. Further each company shall authorize its chief
executive officer or one of its directors to provide the requisite
information to the concerned authorities, and provide further
assistance as may be needed.
Nauman Ul Qadeer