How to obtain exemptions under various provsions of Income Tax Ordinance, 2001 - Sample Letters included

1. INTRODUCTION

1.1 The exemptions provided under the Income Ordinance, 2001 are spread all over the said statute under various provisions and in order to have an in depth understanding of the same it is very important to analyse all the relevant provisions and to arrange them in a single meaningful way.

1.2 In this blog all efforts have been made to arrange the provisions regarding the exemptions under the Income Tax Ordinance in one place for an easy understanding of its valuable readers.


2. OVERVIEW OF EXEMPTIONS PROVIDED UNDER INCOME TAX ORDINANCE, 2001

2.1 The provisions of exemptions provided under the Income Tax Ordinance, 2001 can be divided into following three broad categories which will be discussed in detail later in this blog:

• Exemptions and Tax Concessions provided under Part VII of Chapter III of the Income Tax Ordinance, 2001;

• Exemptions under the ambit of Section 159 of the Income Tax Ordinance, 2001; and 

• Exemptions and Reduction in Taxes under the Second Schedule governed by Section 53 of the Income Tax Ordinance, 2001

2.2 Each of the above three categories have their own significance and are further discussed in detail ahead.


3. EXEMPTIONS AND TAX CONCESSIONS - PART VII OF CHAPTER III 

3.1 Agricultural Income - (Section 41 of Income Tax Ordinance, 2001)

3.1.1. Agricultural income derived by a person shall be exempt from tax under the Income Tax Ordinance, 2001.

3.1.2. Agricultural income includes:

• any rent or revenue from land situated in Pakistan for agricultural purposes;
• any income derived from any building owned and occupied by the receiver of the rent or revenue of any land described above;

3.2 Diplomatic and UN Exemptions - (Section 42 of the Income Tax Ordinance, 2001)

3.2.1. The income of an individual entitled to privileges under the Diplomatic and Consular Privileges Act, 1972 (IX of 1972) and United Nations (Privileges and Immunities) Act, 1948 (XX of 1948), shall be exempt from tax under Income Tax Ordinance, 2001 to the extent provided for in that Act.

3.2.2 Any pension received by a person, being a citizen of Pakistan, by virtue of the person‘s former employment in the United Nations or its specialised agencies (including the International Court of Justice) provided the person‘s salary from such employment was exempt under this Ordinance.

3.3 Foreign Government Officials - (Section 43 of the Income Tax Ordinance, 2001)

3.3.1 Any salary received by an employee of a foreign government for services rendered to such government shall be exempt from tax under this Ordinance provided —

• The employee is a citizen of the foreign country and not a citizen of Pakistan;
• The services performed by the employee are of a character similar to those performed by employees of the Federal Government in foreign countries; and
• The foreign government grants a similar exemption to employees of the Federal Government performing similar services in such foreign country.

3.4 Double Tax Treaties - (Section 44 of the Income Tax Ordinance, 2001)

3.4.1. Any Pakistan-source income which Pakistan is not permitted to tax under a tax treaty shall be exempt from tax under this Ordinance.

3.4.2. Any salary received by an individual (not being a citizen of Pakistan) shall be exempt from tax under this Ordinance to the extent provided for in an Aid Agreement between the Federal Government and a foreign government or public international organization, where –

(a) the individual is either 1[not a resident] individual or a resident individual solely by reason of the performance of services under the Aid Agreement;

(b) if the Aid Agreement is with a foreign country, the individual is a citizen of that country; and

(c) the salary is paid by the foreign government or public international organization out of funds or grants released as aid to Pakistan in pursuance of such Agreement.

3.4.3. Any income received by a person (not being a citizen of Pakistan) engaged as a contractor, consultant, or expert on a project in Pakistan shall be exempt from tax under this Ordinance to the extent provided for in a bilateral or multilateral technical assistance agreement between the Federal Government and a foreign government or public international organization, where —

(a) the project is financed out of grant funds in accordance with the agreement;

(b) the person is either a non-resident person or a resident person solely by reason of the performance of services under the agreement; and

(c) the income is paid out of the funds of the grant in pursuance of the agreement.

3.5 President's Honor - (Section 45 of the Income Tax Ordinance, 2001)

3.5.1. Any Honour, Award, or Medal or monetary grant awarded by the President of Pakistan is exempted from tax under the Income Tax Ordinance, 2001.

3.6 Profit on Debt - (Section 46 of the Income Tax Ordinance, 2001)

3.6.1. Any profit received by a non-resident person issued by a resident person shall be exempt from tax under this Ordinance subject to following conditions —

• the persons are not associates;
• the security was widely issued by the resident person outside Pakistan for the purposes of raising a loan outside Pakistan for use in a business carried on by the person in Pakistan;
• the profit was paid outside Pakistan; and
• specific approval is issued by the Board for the purposes of this section. 

3.7 Scholarships - (Section 47 of the Income Tax Ordinance, 2001)

3.7.1. Any scholarship (other than paid by the associate) granted to a person to meet the cost of the person‘s education is exempted from tax under the Income Tax Ordinance, 2001.

3.8 Support Payments to live apart - (Section 48 of the Income Tax Ordinance, 2001)

3.8.1. Any income received by the spouse under the agreement to live apart is exempted from tax under the Income Tax Ordinance, 2001.

3.9 Federal, Provincial and Local Government Income - (Section 49 )

3.9.1. Income of Federal, Provincial and Local Government other than 'Income from Business' are exempted from tax under the Income Tax Ordinance, 2001 subject to certain conditions laid down in section 49 of the Income Tax Ordinance, 2001.

3.10 Foreign Source income of short term residents - (Section 50 of the Income Tax Ordinance, 2001)

3.10.1. The foreign-source income of a resident individual solely by reason employment and who is present in Pakistan for a period or periods not exceeding three years, shall be exempt from tax under the Income Tax Ordinance, 2001.

3.10.2. Exceptions:

(a) any income derived from a business of the person established in Pakistan; or

(b) any foreign-source income brought into or received in Pakistan by the person.

3.11 Foreign Source income of returning expatriates - (Section 51 of the Income Tax Ordinance, 2001)

3.11.1. Any foreign-source income derived by a citizen of Pakistan in a tax year who was not a resident individual in any of the four tax years preceding is exempt from tax under the Income Tax Ordinance, 2001 in the tax year in which the individual became a resident individual and in the following tax year.

3.11.2. Where a citizen of Pakistan leaves Pakistan during a tax year and remains abroad during that tax year, any income chargeable under the head ―Salary earned outside Pakistan is exempt from tax under the Income Tax Ordinance, 2001.

4. EXEMPTIONS UNDER SECTION 159 OF THE INCOME TAX ORDINANCE, 2001

4.1. The Commissioner after being satisfied is empowered under section 159 of the Income Tax Ordinance, 2001 to issue an exemption certificate or a lower rate certificate against the following:

• Tax deduction at source specified in Chapter X Part V Division III;
• Transitional Advance Tax deduction in Chapter XII Part V Division II;
• Advance Tax under section 148; and 
• a trust or non profit organization whose income is subject to 100% tax credit under section 100C

4.2. Following is the graphical presentation of the provisions eligible for exemption under section 159 of the Income Tax Ordinance, 2001.


CLICK BELOW IMAGE TO EXPAND




4.3. The option for applying for an exemption under section 159 on the web portal of FBR i.e. IRIS is to click on the option Withholding /Advance Tax. Following is the screenshot of IRIS for a clear understanding:






4.4. Partywise Exemptions - The taxpayer has been given an option to apply for exemptions for specific parties. In this option there exist a tab of CC in which all the relevant parties are to be entered for whom the exemption would be valid.








4.5. Generic Exemptions - As compared to above the taxpayer has also been given an option to apply for generic exemptions. In this option there is no tab of CC and therfore the exemption certificate would be valid for public in general.








4.6. The exemptions are currently being given for 6 months and the taxpayer is required to renew the same after lapse of every six months.


SAMPLE LETTERS FOR EXEMPTION CERTIFICATES

4.7. Some sample letters of the important sections under which exemption is often sought are being shared below:


4.8. Mutual Funds Application under sections 150, 151, 233

SUB: EXEMPTION FROM DEDUCTION OF WITHHOLDING TAX UNDER SECTIONS 150, 151 AND 233 READ WITH CLAUSE 47B OF PART IV OF SECOND SCHEDULE OF THE INCOME TAX ORDINANCE, 2001


We write to request you to kindly issue the Exemption Certificate under sections 150, 151 and 233 of the Income Tax Ordinance, 2001.


The mutual fund being collective investment scheme is exempt from withholding tax under section 150, 151 and 233 of the Income Tax Ordinance, 2001 as per provisions of Clause 47B of Part IV of the Second Schedule of the Income Tax Ordinance, 2001. Online exemption certificate request is also enclosed for your ready reference.


Therefore, we request you to kindly issue the Exemption Certificate under the above referred provisions of the Income Tax Ordinance, 2001.


We trust the above will meet with your requirements and oblige.


Thanking you,


4.9. Exemption for trust eligible for 100% tax credit under section 100C 


SUB: RENEWAL OF EXEMPTION CERTIFICATE UNDER SECTION 151 OF THE INCOME TAX ORDINANCE, 2001

We write to request you to kindly issue the exemption certificate under section 151 of the Income Tax Ordinance, 2001, read with section 159 of the Income Tax Ordinance, 2001.

The particulars of the trust are as under:-

1. XYZ Trust was established through Registered Trust Deed dated _________.

2. The approval u/s. 2(36)(C) of the Income Tax Ordinance, 2001 has been granted by _________ under letter No. _____________ dated ___________.

3. The Assessment up to Tax Year 20XX has been completed.

4. All the withholding tax statements have duly been filed by the taxpayer and act as withholding tax agent and deduct tax from all payment liable to tax in this regard.

5. The Trust’s is allowed to claim tax credit upto 100% of tax payable, including minimum tax and final taxes under section 100(c) of the Income Tax Ordinance, 2001 as it fulfills all the prescribed conditions mentioned thereon.

6. The Federal Board of Revenue under section 159(1)(c) of the Income Tax Ordinance, 2001 has empowered Commissioner of Income Tax to grant exemption from deduction of tax at source to persons whose income is subject to 100% tax credit under section 100(c) of Income Tax Ordinance, 2001.

Therefore we request you to kindly issue the exemption certificate under section 151 of the Income tax Ordinance, 2001 in terms of clause (c) of subsection 1 of section 159 to the Income Tax Ordinance, 2001 and oblige.

Your kind consideration in this regard shall be highly appreciated.

Thanking you,


4.10. Certificate for reduced rate under section 148 of the Income Tax Ordinance, 2001

SUB: RENEWAL OF INCOME TAX REDUCED RATE CERTIFICATE UNDER SECTION 148 OF THE INCOME TAX ORDINANCE, 2001 ON IMPORT BY INDUSTRIAL IMPORTER UNDER CLAUSE 9A PART II OF SECOND SCHEDULE OF THE INCOME TAX ORDINANCE, 2001

1. Name and Address of the Tax Payer: XYZ Limited

2. National Tax Number XXXXXX-X

3. Sales Tax Registration Number XXXXXXXXXXX

4. Nature of Business The principal business activity of the Company is to ______________________.

With reference to insertion of new clause brought by Finance Act 2014, Clause 72B of Part IV of the Second Schedule of the Income Tax Ordinance, 2001, persons eligible for exemption of Income Tax at import stage subject to meeting of tax liability in respect of current tax year upto December 31, 20XX i.e. Rs. xxx,xxx,xxx/- which reference to determined tax liability for preceding two tax year Tax Year 20XX Rs. xxx,xxx,xxx (xxx,xxx,xxx / 2) & Tax Year 20XX Rs. xxx,xxx,xxx (xxx,xxx,xxx/2) whichever is higher.

We, therefore, request you to kindly issue the Exemption Certificate under section 148 of the Income Tax Ordinance, 2001 in terms of Clause 72B of Part IV of the Second Schedule of the Income Tax Ordinance, 2001 as the tax paid/deducted during year exceeds advance tax liability under the Income Tax Ordinance, 2001 for six months ending December 31, 20XX.

We trust the above will meet requirement and request you to renew the reduced rate certificate at your earliest.

Thanking You,


4.11. Generic Exemption under section 153 

The XYZ Limited is a regular income tax assessee and assessed in Large Taxpayers Unit, Karachi vide NTN _________. Assessment upto Tax Year 20XX has been completed.

We write to request you to kindly issue the Exemption Certificate under section 153 of the Income Tax Ordinance, 2001 valid upto June 30, 20XX.

Company’s Assessment for the Tax Year 20XX, year ended June 30, 20XX has been completed.

The Company’s position is as under:

Turnover for Tax Year 20XX Rs. XX,XXX,XXX,XXX

Tax Assessed Rs. XXX,XXX,XXX

Tax to Turnover ratio 3.21%

Estimated Turnover for year ending June 30, 20XX Rs. XX,XXX,XXX,XXX

Tax to Turnover Ratio 3.21%

Tax Payable for year ending June 30, 20XX Rs. XXX,XXX,XXX

Less: Advance Tax Paid from July 01, 20XX till to date Rs. XXX,XXX,XXX

Refund for Tax Year 20XX

Excess Tax Paid Rs. (XX,XXX,XXX)

In view of the above, the company is entitled for exemption certificate under section 153 of the Income Tax Ordinance, 2001being the company having discharged its tax liability for Tax Year 20XX. We, therefore, request you to kindly issue the Exemption Certificate under section 153 of the Income Tax Ordinance, 2001 in terms of clause (xvii) of S.R.O. No. 586 (I)/91 dated June 30, 1991 as the tax paid during year exceeds advance tax liability under section 147 of the Income Tax Ordinance, 2001 for the Tax Year 20XX.

We further request you to kindly adjust the Refunds due for Tax Year 20XX amounting to Rs. XXX,XXX,XXX/- and Tax Year 20XX Rs. XXX,XXX,XXX/- against the tax liability for the Tax Year 20XX and oblige.

We trust the above will meet with your requirements.

Thanking you,


4.12. Exemption under section 153 of IT Company - Minimum Tax

SUB: REQUEST FOR ISSUANCE OF EXEMPTION CERTIFICATES UNDER SECTION 153 OF THE INCOME TAX ORDINANCE, 2001.

We write to request you to kindly issue the Exemption Certificate under section 153, read with section 159 of the Income Tax Ordinance, 2001.

XYZ Limited is incorporated on XXXXX as a Private Limited Company and is engaged in the business of call centres, data processing, software development and related IT enabled services.

Therefore, the company is eligible to take benefit for minimum tax @ 2% as provided in clause 94 of part IV of the Second Schedule to the Income Tax Ordinance, 2001.

Company’s Assessment for the Tax Year 20XX, year ended June 30, 20XX has been completed. The company is liable to pay minimum tax due to brought forward losses.

The Company’s position is as under:

Estimated Turnover for half year ended December 31, 20XX - Tax Year 20XX Rs. XXX,XXX,XXX

Tax to Turnover Ratio (Minimum Tax) 2%

Tax Payable for half year ended December 31, 20XX Rs. X,XXX,XXX

Therefore, we request you to kindly issue the Exemption Certificate issued under section 153 of the Income Tax Ordinance, 2001 in terms of clause (xvii) of S.R.O. No. 586 (I)/91 dated June 30, 1991 as the advance tax paid as mentioned above meets the advance tax liability under section 147 read with Clause 94 of the Second Schedule of the Income Tax Ordinance, 2001 for the Tax Year 2017.

Irrevocable undertaking as provided under the law is enclosed for your ready reference.

In this connection, we write to submit that advance tax liability amounting to Rs. X,XXX,XXX/- will be paid by us immediately if the approval for grant of exemption certificate under section 153 upto December 31, 20XX is accorded by you.

We trust the above will meet with your requirements.

Thanking you,


4.13. Exemption under section 152 - Payments to Non Residents

SUB: APPLICATION FOR ISSUANCE OF EXEMPTION CERTIFICATE FROM DEDUCTION OF TAX AT SOURCE UNDER SECTION 152 OF THE INCOME TAX ORDINANCE, 2001

We write to request you to kindly issue the exemption certificate under section 152 of the Income Tax Ordinance, 2001 to Non-Resident Company “XYZ Inc., USA” for payment on account of __________ related Services.

The particulars of Non-resident Company are as under:

Name : XYZ, Inc.

Address : USA.

Nature of Payment : XYZ

Amount in US$ : US $ XX,XXX

In order to run the business, the Company has entered into agreements with organizations of other countries, which are providing _________ services around the world.

We are receiving the services as envisaged in the contracts entered into with XYZ, Inc. of USA. It is pertinent to mention here that the above company is non-resident in Pakistan as per the provisions of the relevant Double Taxation Agreements (DTAs) read with section 107 of the Income Tax Ordinance, 2001, having no Permanent Establishment in Pakistan. Therefore, the profits accruing or arising to the non-resident Company in Pakistan is not liable to be taxed as per the provisions of the relevant DTAs and is accordingly exempt from levy of tax.

The relevant clauses of agreement between the Government of Pakistan and Government of United States of America for the avoidance of Double Taxation are enumerated below for your kind perusal.

ARTICLE II
Clause (l) The term "industrial or commercial profits" does not include rents or royalties in respect of motion picture films or of oil wells, mines and quarries, or income in the form of dividends, interest, rents, or royalties, or fees or other remuneration derived by an enterprise from the management, control or supervision of the trade, business, or other activity of another enterprise or concern, or remuneration for labor or personal services, or income from the operation of ships;

Clause (m) The term "permanent establishment", when used with respect to an enterprise of one of the contracting States, means a branch, management, factory or other fixed place of business, but does not include an agency unless the agent has, and habitually exercises, a general authority to negotiate and conclude contracts on behalf of such enterprise or has a stock of merchandise from which he regularly fills orders on its behalf. In this connection—

(i) An enterprise of one of the contracting States shall not be deemed to have a permanent establishment in the other contracting State merely because it carries on business dealings in that other contracting State through a bona fide broker or general commission agent acting in the ordinary course of his business as such; and

(ii) The fact that a corporation or company which is a resident of one of the contracting States has a subsidiary corporation or company which is a resident of the other contracting State or which is engaged in trade or business in such other contracting State whether through a permanent establishment or otherwise) shall not of itself constitute that subsidiary corporation or company a permanent establishment of its parent corporation or company;

ARTICLE III
Clause (1) A United States enterprise shall not be subject to Pakistan tax in respect of its industrial or commercial profits unless it is engaged in trade or business in Pakistan through a permanent establishment situated therein. If it is so engaged, Pakistan tax may be imposed upon the entire income of such enterprise from sources within Pakistan

The USA Company which does not have Permanent Establishment in Pakistan is not subject to Pakistan Tax on its “Industrial and Commercial Profits”.

Since the services are provided outside Pakistan by Non-Resident Companies, the Income of the non-resident is not chargeable to tax in Pakistan. The facts are that we have entered into agreements with the above The USA based Company to provide Services from USA for ultimate use in Pakistan. The above Company is providing services around the world through Web. The above company is non-resident in Pakistan as per the provisions of the Double Taxation Agreements read with section 107 of the Income Tax Ordinance, 2001 having no permanent establishment in Pakistan. Therefore, the profit accruing or arising to the non-resident company in Pakistan is not liable to be taxed as per the provisions of the relevant DTAs and is accordingly exempted from the levy of tax in Pakistan.

In view of the above, we request you to kindly issue the exemption certificate under section 152 of the Income Tax Ordinance, 2001 to the above USA Company and allow us to make payment without deduction of tax at source.

We trust that the above will meet with your requirements.

5. EXEMPTIONS UNDER THE SECOND SCHEDULE OF THE INCOME TAX ORDINANCE, 2001

5.1. Certain SRO's as prescribed below makes it necessary for tax payers to apply for online exemption certificates for exemptions provided by law under second schedule of the Income Tax Ordinance, 2001. The same are reproduced below for the valuable readers: