Introduction
Exemption from withholding tax is applied to the Commissioner Inland Revenue (IR) under Section 159 of the Income Tax Ordinance, 2001.
Table of Contents
According to the Section 159 of the Income Tax Ordinance 2001, in response to an application in writing by a person, the Commissioner (IR) shall issue an exemption certificate or lower rate certificate, if an amount receivable by such person is:
- Exempt
- Subject to a lower rate of tax
- Subject to 100% tax credit
The Commissioner shall exemption from withholding tax within fifteen days of the filing of application by a Company.
The exemption from withholding tax will be deemed to have been issued upon the expiry of fifteen days from filing of application by the aforesaid company and the certificate shall be automatically processed and issued by Iris.
- The Commissioner IR shall issue a certificate for exemption from withholding tax under Section 151 (1)(c) on profit on securities issued by the federal government, provincial government or a local government authority.
- In the absence of a valid certificate for exemption from withholding tax or certificate for lower rate of tax issued by the Commissioner IR, the withholding agent is responsible to deduct tax at the applicable rates under Income Tax Ordinance, 2001.
Exemption from Withholding Tax-Section 152
- According to Section 152 (4A), the Commissioner may allow a person to make payment to a person having a permanent establishment in Pakistan, without deduction or deduction at reduced rate of tax, if such tax is not minimum. The recipient of payment shall apply to the Commissioner having jurisdiction, for such an exemption from tax or reduced rate of tax.
- As per Section 152 (4B), the Commissioner may allow a person to make payment after deduction of tax equal to twenty percent of the tax chargeable on such payment under sub-section (1A) in case of payment that constitutes part of an overall arrangement of a cohesive business operation. The person making payment shall apply to the Commissioner for reduced rate of tax on behalf of the recipient of the payment. The present rate of tax under Section152 (1A) is 7%. Therefore the reduced rate will be 1.4%. According to the Section 2 (g)(A) of the Income Tax Ordinance, 2001, “the term ”cohesive business operation” includes an overall arrangement for the supply of goods, installation, construction, assembly, commission, guarantees or supervisory activities and all or principal activities are undertaken or performed either by the person or the associates of the person”.
- Under the Section 152 (5), a person shall issue a notice to the Commissioner showing his intention not to deduct tax on a payment to non-resident. The Commissioner shall pass an order within thirty days of receipt of the notice accepting or rejecting the contention of the payer.
- The Section 152 (5) will not be applicable to: a) where exemption from tax or reduced rate of tax is applicable under the Treaty of Avoidance of Double Taxation. b) “an import of goods where title to the goods passes outside Pakistan and is supported by import documents, other than that the supply is made in connection with the overall arrangement for the supply of goods, installation, construction, assembly, commission, guarantees or supervisory activities and all or principal activities are undertaken or performed either by the associates of the person supplying the goods or its permanent establishment, whether or not the title passes outside Pakistan and whether or not the goods are imported in the name of the associate or any other person.” It means that notice to the Commissioner is not required under Section 152 (5) in the situations given in (a) and (b) above.
Exemption from Withholding Tax-Section 153
According to Section 153(4) of the Income Tax Ordinance 2001, the Commissioner may, on application made by the recipient of a payment, may allow in cases where tax deductible is not minimum, by an order in writing, any person to make the payment without deduction of tax or deduction of tax at lower rate.
- The Commissioner shall issue certificate for payment for supply of goods without deduction of tax within fifteen days of filing of application to a company if advance tax liability has been discharged.
- The Commissioner shall be deemed to have issued the exemption certificate upon the expiry of fifteen days to the aforesaid company and the certificate shall be automatically processed and issued by Iris. According to Section 153 (5) of the Income Tax Ordinance 2001, withholding tax will not be applicable to:-
- supply of imported goods where the income tax was paid under Section 148 at the import stage and goods are supplied in the same condition as were imported.
- a refund of any security deposit
- a payment made by the Federal Government, a Provincial Government or a Local Government to a contractor for construction materials supplied to the contractor by the said Government or the authority
- the purchase of an asset by a modaraba, leasing company, banking company or financial institution under a lease and buyback agreement;
- any payment for securitization of receivables or issuance of sukuks by a Special Purpose Vehicle to the Originator.