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Pakistan Tax Laws (Second Amendment) Ordinance 2021 Removes and Amends Several Tax Incentives and Benefits — Orbitax Tax News & Alerts

Pakistan's Federal Board of Revenue has published the Tax Laws (Second Amendment) Ordinance 2021, which was promulgated by the president on 22 March 2021 and introduces several changes with immediate effect. One of the key aspects of the Ordinance is the removal of several tax benefits/incentives in order to increase revenue as per the conditions of an IMF fund facility. This includes the removal of:

  • The first year allowance for installing plant, machinery, and equipment by industrial undertakings established in specified rural and under-developed areas;
  • The tax credit for the employment of fresh graduates from universities and recognized institutes;
  • The tax credit for companies listing on a registered stock exchange in Pakistan;
  • The income tax exemption for venture capital companies and venture capital funds;
  • The capital gains tax exemption for industrial undertakings in an Export Processing Zone; and
  • Several other specific exemptions provided under the Second Schedule of the Income Tax Ordinance.

In addition to removing benefits/incentives, the Ordinance has also changed benefits for certain persons previously exempted from tax under the Second Schedule, which are now granted a 100% tax credit, including:

  • Qualifying persons engaged in coal mining projects in Sindh;
  • Startups certified by the Pakistan Software Export Board (applies in year of certification and following two years); and
  • Persons deriving income from the export of computer software or IT services or IT enabled services up to the period ending 30 June 2025, subject to the condition that 80% of the export earnings are remitted to Pakistan through normal banking channels.

To enjoy the 100% tax credit, the following conditions must be met:

  • (Tax) returns have been filed;
  • Tax required to be deducted or collected has been deducted or collected and paid;
  • Withholding tax statement for the immediately preceding tax year have been filed; and
  • Sales tax returns for the tax periods corresponding to the relevant tax year have been filed.

Further, a new 25% tax credit is introduced for eligible capital investments in new machinery, buildings, equipment, hardware, and software by the following:

  • Greenfield industrial undertakings engaged in manufacturing/processing of goods or materials, or engaged in shipbuilding; and
  • Industrial undertakings engaged in the manufacture of plant, machinery, equipment, and other items used exclusively in renewable energy generation, with the undertaking to best set up by 30 June 2023 and the credit available for 5 years.

This 25% credit covers minimum and final taxes.