Beruflich Dokumente
Kultur Dokumente
Budget 2011-12
Highlights & Comments
Audit.Tax.Consulting.Financial Advisory.
Foreword
We prepare this memorandum each year which contains highlights and our comments on Finance Bill. This commentary is for general guidance as such before considering the precise effect of a particular change, reference should be made to the provisions of the relevant statute. This memorandum contains an economic review, highlights of fiscal measures and explanatory description of the significant changes in the Income Tax, Capital Value Tax, Sales Tax, Federal Excise and Custom Duty laws proposed through Finance Bill, 2011 and introduced through notifications. Certain other relevant information on Corporate Laws and IFRSs are also included in this memorandum. Amendments proposed in the Finance Bill 2011 will take effect from July 01, 2011, unless otherwise stated, once it is approved by the parliament. The memorandum is prepared with a view to keep the clients and staff abreast of the changes in fiscal laws. The users are therefore advised to seek professional advice before exercising and applying any legal provision and acting thereupon. The Firm accepts no responsibility for any action taken (or not taken) as a result of the information contained in this document. The memorandum can also be accessed on our website www.deloitte.com/pk
Contents
Budget at a Glance Economic Review Highlights of Important Fiscal Proposals Significant Amendments Proposed In Income Tax Ordinance, 2001 Capital Value Tex (Finance Act 1989) Sales Tax Act, 1990 Federal Excise Act, 2005 Customs Act, 1969 Summary of Important Circular / Notifications Issued by SECP Significant Amendments Made in IFRSs and IFRIC
3 4 13
17 35 36 41 46
50
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Budget at a Glance
Sources of Funds Rupees in billion 2011-12 Rupees in billion 2010-11 Revised *Net Revenue Receipts Net Capital Receipts External Receipts Estimated Provincial Surplus Bank Borrowing Total Sources of Funds 1,529 395 414 125 304 2,767 55.2 14.3 15.0 4.5 11.0 100 1,238 459 290 120 452 2,559 48.4 17.9 11.3 4.7 17.7 100
Application of Funds
General Public Services (including Debt Servicing) Development Expenditure Defence Affairs and Services Public Order & Safety Affairs Economic Affairs Others Total Application of Funds
*Net Revenue Receipts Direct and Indirect Taxes Non-Tax Revenue Gross Revenue Receipts Less: Provincial Share in Taxes 2,074 658 2,732 1,203 1,529 135.6 43.0 178.6 78.6 100 1,679 557 2,236 998 1,238 135.6 45.0 180.6 80.6 100.0
Economic Review
Fourth budget of the current coalition government lead by PPP for FY 2011-12, with aggregate outlay of Rs. 2.77 trillion is largely continuation of status quo. Except for the attempt to restrict the fiscal deficit to 4 percent through an ambitious tax collection target of Rs. 1.95 trillion, in line with IMF conditionalities, there are obviously no major surprises. Clearly, the budget lacks any serious effort to broaden the tax net through a broad based VAT / RGST regime, on which there has been so much debate with little or no effort. In the absence of RGST, one can only see that Pakistans fiscal imbalances will continue to deepen, with adverse consequences. The budget also proposes a Federal development program of Rs. 300 billion, and an aggregate development program of Rs. 730 billion, including provincial development program of Rs. 430 billion, which looks optimistic in view of serious resource constrains. But even if this program is implemented, it will hardly be 3.4 percent of GDP that is unlikely to revive growth. Economic review of FY11 and Expectations for FY12 FY11 started with an upheaval for the economy of Pakistan as the nation suffered the worst natural disaster (floods) in its entire history which resulted in relentless short and long-term consequences for our economy. The devastating July 2010 floods swept across the length and breadth of the country, killing more than 1,400 people and rendering 20 million people homeless. Around 2 million of agricultural land went under water destroying around 20 percent of the standing Kharif crop. This situation created direct threat to the nations food security as the food inflation escalated to 21.2 percent in September, 2010 and tapering off to 15.9 percent by the end of May, 2011. Other problems for the economy included rising international oil prices (50 percent increase from June, 2010 to April, 2011), rising fiscal imbalances due to less-than-expected increase in electricity tariffs, delays in carrying out revenue-increasing measures, tax exemptions for residents of flood affected areas, and continued heavy fiscal support to state-owned enterprises. As a result, fiscal deficit for the 9M/FY11 stood at a profound 4.5 percent of GDP with expectations of above Rs. 1 trillion for the full year. On the flip side, the external account of the country stayed positive with impressive numbers for exports and foreign remittances during the ten months of FY11. While the current account balance has improved, capital and financial inflows continued to decline. Owing to devastation caused by floods, continuing energy shortages and ongoing security issues, the economy continues to be in stress, with overall GDP growth declining to 2.4 percent, compared to the target of 4.5 percent estimated initially.
GDP & GNP Growth (Percentage)
10.0 9.0 8.7 6.8 5.8 5.0 5.6 4.8 3.7 3.7 1.7 0.0 2004-05 2005-06 2006-07 2007-08 GDP GNP 2008-09 2009-10 2010-11 P 2.2 3.8 2.4 2.9 6.7
The growth in the agriculture is estimated at 1.2 percent on the back of 3.7 percent growth in the livestock sector (highest share in the agricultural sector). Major Crops, which accounts for 31 percent of agricultural sector, went down further during FY11 and registered a negative growth of 4 percent compared to a negative growth of 2.4 percent during the last year and a target of 3.7 percent. On the contrary, minor crops registered an impressive growth of 4.8 percent compared to the target of 3 percent and massive negative growth of 7.8 percent in the preceding year. As discussed above, the performance of the manufacturing sector during FY11 has been a boombust phenomenon. In particular, the Large Scale Manufacturing sector, which comprises of 65 percent of the overall manufacturing sector, clocked a subtle 1 percent growth in FY11 against a considerable 5 percent in FY11 while the construction sector dragged the overall performance of the manufacturing sector by virtue of a 21 percent fall in its activity compared to the last year. Beside range of factors, three regular features persistently affected the performance of the manufacturing sector are energy crisis, ever rising input cost and lack of demand. The services sector was the saving grace for the economy this year as it grew by 4.1 percent in FY11 against the target of 4.7 percent in comparison with actual outcome of 2.9 percent in FY10. Within services sector, wholesale and retail trade sector grew at 3.9 percent as compared to 4.6 percent last year and the target for the year of 5.1 percent. Finance and insurance sector recorded negative growth of 6.3 percent in 2010-11 as against contraction of 11.3 percent last year. Public administration and defence posted a stellar growth of 13.2 percent as compared to 2.5 percent in last year. Social Services Sector grew by 7.1 percent which is slightly higher than the target of 5.0 percent but lower than last years actual growth of 7.8 percent. Below charts and graphs reflect the trend of sectoral growths in the past seven years.
Sector Growth Performance (Percentage)
2004-05 GDP Agriculture Manufacturing LSM Services
P R
Provisional Revised
9.0 5.8
2006-07
Manufacturing
2007-08
LSM
2008-09
Services
2009-10 R
GDP
2010-11 P
Investment and Savings The total investment has declined from 15.4 percent of GDP in FY10 to 13.4 percent of GDP in FY11 while gross fixed investments has decreased to 11.8 percent of GDP from 13.8 percent last year. On the other hand, national savings notched up above total investments for the first time in the last five years. Moreover, national savings (as a percent of GDP) continued the healthy pattern and increased to 13.8 percent of GDP in FY11 as against 13.1 percent of GDP in the last year. Structure of Saving & Investment as percentage of GDP
2004-05 Total Investment Gross Fixed Investments Public Investments Private Investments National Savings Domestic Savings
P R
Provisional Revised
Foreign Direct Investment Consistent with the declining trend of overall investment, the Foreign Direct Investment (FDI) also declined by 28.7 percent during July April 2011. The decline in FDI in Pakistan is mainly led by the domestic factors such as deteriorated law and order situation, energy crises, circular debt issues and weak economic activity. FDI stood at $ 1.23 billion during the first ten months (JulyApril) of the current fiscal year as against $ 1.73 billion in the same period last year.
F o r e ig n D ir ec t In ve stm e n t
6 .0 0 5 .0 0 4 .0 0 $ n o i l 3 .0 0 l i B 2 .0 0 1 .0 0 0 .0 0 2 0 0 4 -0 5 2 0 0 5 -0 6 2 0 0 6 -0 7 2 0 0 7 -0 8 2 0 0 8 -0 9 2 0 0 9 -1 0 R 2 0 1 0-1 1 P
F o r e ign D ir e c t In v e stm e n t
Inflation The inflation rate as measured by the changes in Consumer Price Index (CPI) is estimated to stand at 14 percent in FY11, as against 11.7 percent in FY10. The food inflation is estimated at 18.4 percent and non-food 10.4 percent, against 12.0 percent and 11.0 percent in the corresponding period of last year. In contrast, the core inflation which represents non-food and non-energy prices decreased from 11 percent to 9.6 percent. While the growth rate has fallen to less than 3 percent, the overall inflation has remained in the high range of 14 to 15 percent in the past few years, indication that the economy is in vicious circle of stagflation. This is obviously a serious cause for concern, as every year, the number of people below poverty line continues to increase.
Inflation (Percentage)
25 20 15 10 5 0 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 R 2010-11 P
Inflation
Interest Rates Taking into account the post flood challenges and fiscal imbalances i.e. monetization, and high rate of inflation; State Bank of Pakistan (SBP) increased the policy discount rate cumulatively by 150bps to 14 percent since July 2010. With large fiscal deficit nearing Rs. 1 trillion coupled with huge losses of public sector enterprises that creates huge demand for credit in the public sector, the credit off-take for private sector remained low. As a result, the interest rates remain high, which also diminishes the demand for credit in the private sector. External Account While the economic growth remained depressed with high inflation and low investment and savings, the positive factors in the economy are improvements in external accounts, with rising exports and remittances. Overall exports recorded a positive growth of 27.8 percent during the first ten months (July-April) of the current fiscal year against an increase of 8 percent in the same period of last year. In absolute terms, exports have increased from $ 15.8 billion to $ 20.1 billion in the ten months of the current year. Imports during the first ten months (July-April) of the current fiscal year (2010-11) increased by 14.7 percent compared to the same period of last year, reaching to $ 32.3 billion. The overall import bill is higher by $ 4.1 billion, reflecting the impact of higher global crude oil and other commodity prices. Owing to the surge in exports, trade deficit of the country declined slightly from $ 12.3 billion in 10MFY10 to $ 12.1 billion in 10MFY11.
Remittances for the first time in the history of Pakistan crossed the $ 1 billion mark in a single month during March 2011 and remained over $ 1 billion for the second consecutive month in April 2011. Workers Remittances totaled $ 9.1 billion in July-April 2010-11 as against $ 7.3 billion in the comparable period of last year, depicting an increase of 23.8 percent.
Foreign Remittances by Workers (in million $)
1200.0 1000.0
Million $
2008-09
2009-10
2010-11
Current account balance improved significantly during the last two years. Current account recorded a broad-based surplus of $ 748 million in July-April 2010-11 as against a deficit of $ 3.46 billion in the comparable period of last year. The improvement came from all components of current account balance like trade balance of goods and services, and current transfers. The continued buildup in foreign exchange reserves, a surplus in current account balance and a sufficient inflow of remittances through official banking channels have caused Pak rupee to remain stable despite high inflation and depressed economy. Exchange rate averaged Rs. 83.7 in FY10 and Rs. 85.3 to a dollar in June 2010. Foreign exchange reserves amounted to $ 17.1 billion by the end of April, 2011 of which, reserves held by SBP stood at $ 13.7 billion and by banks stood at $ 3.4 billion. During July April 2011, the improvement in the reserve position was due to inflows of $ 451 million from IMF under Emergency Natural Disaster Assistance and $ 743 million received under coalition support fund. SBP reserves position was also helped by lower outflows due to shifting of oil payments to interbank market. Inflows in the scheduled bank also improved on account of healthy remittances and export growth. Revenue scenario and fiscal deficit Tax collection by the FBR was targeted at Rs. 1.67 trillion for fiscal year 2010-11. However, the target was downward revised to Rs. 1.59 trillion, as a result of devastation caused by floods during July and August 2011. Revenue collections of FBR stood at Rs. 1.16 trillion during July-April 201011, thereby reflecting 12.6 percent growth over Rs 1.03 trillion collected during the corresponding period last year. Among the four federal taxes, the highest growth 15.6 percent has been recorded
in sales tax receipts, followed by customs (12.6 percent), direct tax (10.7 percent) and federal excise (7 percent). While there are doubts whether even the revised revenue collection of Rs. 1.588 billion will be collected, the overall fiscal deficit during FY11 is expected to be higher than Rs. 1 trillion, or nearly 5.5 percent of the GDP.
External Debt During the first nine months of the current fiscal year 2010-11, Pakistans total external debt increased from $ 55.9 billion at end-June 2010 to $ 59.5 billion by end-March 2011 an increase of $ 3.6 billion or 6.4 percent which is lowest growth in external debt liability in the last five years. This added fiscal woes created by heavy spending on the war-on-terror, flood-related expenses and financial bleeding in state-owned enterprises. Public Debt increased by Rs 1.16 trillion in the first nine months of 2010-11, reaching a total outstanding amount of Rs. 1 trillion; an increase of 13.1 percent in nominal terms. The primary source of increase in public debt during July-March, 2011 has been a sharp rise in local currency component that accounted for 69.7 percent of the increase in total public debt. Domestic Debt stood at Rs. 5.46 trillion at end-March 2011 which implies net addition of Rs. 803.9 billion in the nine months of the current fiscal year. The rapid growth in population is one of the major concerns for Pakistan. According to the latest estimates population of Pakistan stood at 177 million in 2011 and is sixth most populous country of the world having growth rate of 2.05 percent. If the existing trend remained unchanged, it will reach 191.7 million by the year 2015 and 242.1 million by 2030 (Estimates and projection by Sub-Group II for the 10th five year Peoples Plan 2010-15).
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Stress on Public Sector Development Program For the first half of FY2011, only Rs. 66 billion was made available for Public Sector Development Program (PSDP) activities, less than 25 percent of the Rs. 280 billion earmarked in the FY2011 federal budget, with spending limited to key projects and priority development programs. The federal PSDP for FY2011 faced a further cut of Rs. 100 billion in the second half due to lack of resources.
o o
In the backdrop of the above-mentioned factors, the federal government has endeavored to present a budget that has ambitious features of revenue generation and development spending on one hand together with some relief measures like reduction in the rate of sales tax and increase in salaries of government employees by 15 percent. Following are the key targets for FY 2011-12: o o Overall GDP growth target is pitched at 4.2 percent in FY 2011-12. Inflation target for next year is set at 12 percent compared to over 15 percent in the outgoing year.
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The total budgetary outlay (expenditure) is projected at Rs. 2.77 trillion, up 14.2 percent from the original budget estimate of current year. Gross revenues are projected at Rs. 2.73 trillion out of which the share of provinces is RS. 1.20 trillion. This translates into a projected consolidated fiscal deficit of Rs. 850 billion (4 percent of GDP). The budget sets a tax revenue target of Rs 1.95 trillion compared to outgoing years revised estimates of Rs. 1.59 trillion. (an increase of about 23 percent). In line with IMF program conditions, allocation of subsidies have been reduced to Rs. 166 billion as opposed to the revised figure of Rs 395 billion in 2010-11. Allocation for the PSDP has been increased by 10 percent to Rs. 730 billion as compared to the current years original allocation of Rs. 663 billion. The rate of GST has been proposed to be reduced to 16 percent from 17 percent. Special Excise Duty has been proposed to be withdrawn on all items
o o
Key risks and challenges for achieving sustained growth and poverty alleviation
Pakistan has achieved some gains in restoring macroeconomic stability after the balance of payments crisis in 2008. However, the economy remains extremely vulnerable due to deep seated macro-economic imbalances such as large fiscal deficits owing very low tax to GDP ratio. Also, with no end to energy and law and order crisis, apparently there are no signs that the recent trend of low investment and savings, and consequently low economic growth and high inflation, will change significantly for better. While Pakistan has huge economic resources, including but not limited to large deposits of coal and hydal resources to meet our energy shortages, and huge natural resources such as copper and gold deposits in Balochistan, it appears that owing to continuing tendency of short-term thinking based on political expediency coupled with lack of effective governance, our ability to utilize such large resources remains limited. The budget also lacks any serious steps to enhance revenue to address the issue of resource shortages and escalating fiscal deficits, the issues of perennial problem of circular debt and any tangible steps to reduce ongoing losses of public sector enterprises. Consequently, despite some positive measures, on the whole, the proposed steps in the budget do not contain any major initiatives that have the potential to revive economic growth, contain inflation and address most of its deep rooted economic problems.
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Mandatory requirement of filing wealth statement and wealth reconciliation statement by Individuals and members of association of persons deriving taxable income of Rs.1 million or more. Tax withholding statements in respect of payments to be filed on monthly basis on 15th of the month subsequent to the month to which the tax withholding relates. Tax withholding statements to provide particulars of CNIC and NTN. Tax deduction at 10% on income from Government Securities received by non corporate taxpayer is now subject to a final discharge of tax liability under FTR. Tax incentive is given by way of removing upper limit for contribution in an Approved Pension Fund. Rate of tax on dividends to the banks from Asset Management Companies is increased from 10% to 20%. Provisional assessment order issued under section 122C is not appealable before the Commissioner (Appeals). For the purpose of levying penalty, the expression tax payable means tax chargeable on the taxable income on the basis of assessment made or treated to have been made under sections 120, 121, 122 or 122C. Powers of Single Bench of Appellate Tribunal to dispose of appeals are restricted to those appeals having amount of tax and penalties upto Rs.1 million only.
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15
Customs
Reductions and Removals
Removal of regulatory duty on various items. List of around 397 items is reduced to 60 items. 5% concessionary rate allowed on additional pharmaceutical raw materials.
Concessions Concessionary duty is allowed on: Raw materials of butyl acetate industry; Raw materials of glass industry; Components of CNG manufacturing industry; Machinery and equipment of oil exploration companies; Raw materials of audio cassettes; and Import of hi-tech car audio systems for hi-tech car audio manufacturing industry
Tariff Rationalization
Tariff rationalization on bars, rods and profiles of refined copper and copper alloy. Creation of separate PCT codes for brass scrap and armored cash carrying vehicle.
Others
Section 21(c) is amended to treat domestic goods against international tenders as exports. This would entitle supplies against international tenders to customs duty draw back (rebate). Transit fee is levied on goods or class of goods in transit across Pakistan to a foreign territory.
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market. An individual or an AOP, without having any restriction with respect to their residential status, who purchase the shares of public listed company as an original allottee or acquire the shares through privatization commission is allowed a tax credit which is calculated by applying the average rate of tax to the lower of: (a) the total cost of acquiring the shares (b) ten percent of taxable income; or (c) rupees three hundred thousand The substituted section seeks to limit this relief only to resident individuals and AOP. Further, the limit of 10% of the taxable income is proposed to be enhanced to 15% and the limit of Rs.300,000 is proposed to be increased to Rs.500,000.. Currently the law provides that the investor must hold the shares for not less than 12 months of the date of their acquisition in order to claim the tax credit, otherwise the amount of tax payable for the tax year in which the shares were disposed off shall be increased by the amount of credit allowed. Now, the Bill proposes to enhance the holding period of the shares to 36 months of the date of acquisition in order to claim and maintain the eligibility of tax credit in the manner provided under the section. Tax credit is also proposed to be allowed in respect of life insurance premium paid by a resident individual or an AOP, deriving income chargeable to tax under the head salary or income from business, to a life insurance company registered by the SECP. The proposed amendment is likely to stimulate business in life insurance sector which was demanding such incentive for a long time. It may also result in stimulating saving habits. Tax credit in respect of life insurance premium is to be calculated by applying the average rate of tax to the lower of: (a) the total contribution or premium paid; (b) fifteen percent of taxable income; or (c) rupees five hundred thousand. From the plain reading of the proposed law, it appears that the tax credit for a tax year is to be allowed on a mutually exclusive basis and the taxpayer is to make a choice in each tax year to opt for any one of the investments for making claim of the tax credit.
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to the lower of; The mount of total contribution or premium paid during the year; 20% of taxable income of the tax year; or Five hundred thousand rupees.
The Bill seeks to delete the limit of five hundred thousand rupees, thus providing more incentive to contribute to an approved pension fund.
19
The Commissioner Inland Revenue is empowered to re-compute the tax payable by the tax payer for the relevant year and disallow the credit originally allowed, where it is subsequently discovered that any required condition was not fulfilled. From the plain reading of newly inserted section, it transpires that the company would be allowed a tax credit equal to hundred percent even where it establishes a new industrial undertaking within the same company or make BMR investments in the existing industrial undertaking . It is very difficult to understand as to how the amount of tax payable for the newly established industrial undertaking within the company will be calculated, separately from the tax liability of the company of which it is the sub-division or of the industrial undertaking itself where it has made BMR investments.
20
The term Turnover has already been defined in the subsection. Now the Bill proposes to amend the definition to also mean gross sales. This amendment appears to provide more clarity as in practice gross sales are being taken as turnover for the purpose of calculating minimum tax.
21
Similarly, consequent to the amendment proposed under section 153, a resident person or permanent establishment in Pakistan of a non resident person is not required to file return of income: For the sale of goods, except on payment received on account of supply of goods in respect of a company being a manufacturer of such good or payments received on account of sale of goods by a public company listed on a registered stock exchange in Pakistan; On the execution of a contract, other than a contract for the sale of goods or rendering of or providing of services except on payments received by a public company listed stock exchange in Pakistan on account of execution of contracts; and Every exporter or an export house making a payment in full or part including a payment by way of advance to a resident person or permanent establishment in Pakistan of a nonresident person for rendering of or providing of services of stitching, dying, printing, embroidery, washing, sizing and weaving, shall at the time of making the payment, deduct tax from the gross amount payable at the rate specified in Division IV of Part III of the First Schedule.
The reference of sub-sections (a) and (c) of section 233A are proposed to be deleted to align the section with the amendment made in the section 233 A through Finance Act, 2010.
By virtue of amendments proposed in this section, in order to harmonize the provisions of law, it is being clarified that a company is not under any obligation to file wealth statement and wealth reconciliation statement.
12.
Section 127
As per the proposed amendment, the provisional assessment order issued under section 122C is no more appealable before the Commissioner of Appeals. The proposed amendment is quite harsh,
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against the principles of justice and contrary to the right given under the Constitution of Pakistan. The proposed amendment implies that until now from the time section 122C was inserted in statute the order passed under section 122C was appealable.
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The proposed amendment is bound to have serious implications on the taxation of permanent establishment of non-resident persons. This immediate and abrupt change in the taxation regime of permanent establishment may create serious problems for the non-residents who must have planned their business ventures keeping in view the present taxation regime and therefore, may compel them to contest this amendment in the court of law or to ultimately wind up their businesses from Pakistan. (ii) Tax deducted on the payment made to all tax payers including a company and permanent establishment of a non-resident person on account of rendering of or providing of services is to be treated as a minimum tax. Normal tax liability shall be calculated and where the normal tax liability exceeds the minimum tax then the tax payer shall be required to pay the normal tax and where the minimum tax is higher than the normal tax then the tax payer is required to pay the minimum tax. (Individual and association of persons providing or rendering services are currently being taxed in the same manner.) (iii) The term turnover has been defined to mean (a) the gross sales or gross receipts, inclusive of sales tax and federal excise duty or any trade discounts shown on invoices, or bills, derived from the sale of goods;
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the gross fees for the rendering of services for giving benefits including commissions; the gross receipts from the execution of contracts; and the companys share of the amounts stated above of any association of persons of which the company is a member.
It is important to note that the amount of sales tax and federal excise duty are included in the definition of turnover, thereby automatically reducing the thresholds of Rs.50 million applicable respectively to an individual and association of persons to be treated as withholding agents for the purpose of section 153.
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sections is given under which tax withheld is not allowed as tax credit in computing the tax due by the person on the taxable income of the person for the tax year. The Bill proposes to substitute the current sub-section (3) to provide that no tax credit is to be allowed for any tax collected or deducted that is final tax under: (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) sub-section (7) of section 148; sub-section (3) of section 151; sub-section (1B) and (1BB) of section 152; clauses (a),(c)and (d) sub-section (3) of section 153; sub-section (4) of section 154; sub-section (3) of section 156; sub-section (2) of section 156A; sub-section (3) of section 233; sub-section (5) of section 234; and sub-section (3) of section 234A.
22.
Advance ruling
Section 206 A
This section allows a non-resident person to seek advance ruling from the tax authorities in respect of the application of the Ordinance to a transaction proposed or entered into by the tax payer.
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Although, the ratio of advance ruling in favour of the tax payer is relatively lower; nevertheless the concept of advance ruling has always been welcomed by the non-residents. Now the Bill proposes to deny this facility to the non-resident tax payer having a permanent establishment in Pakistan. This is against the much publicized policy of the government to encourage foreign investment in Pakistan. There appears to be no valid and logical reason for proposing this amendment, especially when amendment has been proposed in section 153 having drastic implications on the taxation of permanent establishments of non-resident persons.
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S. No. 1. 2. 3. 4. 5. 6.
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II.
The rates of tax for salaried individuals are proposed to be realigned as follows: Income Slabs Where taxable income does not exceed Rs. 350,000 Where taxable income exceeds Rs. 350,000 but does not exceed Rs. 400,000 Where taxable income exceeds Rs. 400,000 but does not exceed Rs. 450,000 Where taxable income exceeds Rs. 450,000 but does not exceed Rs. 550,000 Where taxable income exceeds Rs. 550,000 but does not exceed Rs. 650,000 Where taxable income exceeds Rs. 650,000 but does not exceed Rs. 750,000 Where taxable income exceeds Rs. 750,000 but does not exceed Rs. 900,000 Where taxable income exceeds Rs. 900,000 but does not exceed Rs. 1,050,000 Where taxable income exceeds Rs. 1,050,000 but does not exceed Rs. 1,200,000 Where taxable income exceeds Rs. 1,200,000 but does not exceed Rs. 1,450,000 Where taxable income exceeds Rs. 1,450,000 but does not exceed Rs. 1,700,000 Where taxable income exceeds Rs. 1,700,000 but does not exceed Rs. 1,950,000 Where taxable income exceeds Rs. 1,950,000 but does not exceed Rs. 2,250,000 Where taxable income exceeds Rs. 2,250,000 but does not exceed Rs. 2,850,000 Where taxable income exceeds Rs. 2,850,000 but does not exceed Rs. 3,550,000 Where taxable income exceeds Rs. 3,550,000 but does not exceed Rs. 4,550,000 Where taxable income exceeds Rs. 4,550,000 % 0 1.5 2.5 3.5 4.5 6 7.5 9 10 11 12.5 14 15 16 17.5 18.5 20
Marginal tax relief allowable at variable slabs to salaried income will continue to be available on the same basis as presently applicable.
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S. No.
Period
2.
Where holding period of a security is six months or more but less than twelve months
3.
0%
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The following exemption clauses are proposed to be omitted for being either barred by time or becoming redundant due to the expiry of the time period mentioned therein. Clause 61
Donation to BCCI Foundation for Advancement of Science and Technology and BCCI Foundation.
Clause 74 (A)
Profit on debt payable to National Bank of Pakistan on foreign currency loan of US $ 100 million, given to Pakistan State Oil Company Limited (PSO) under agreement executed at Bahrain on the 29th May, 2001, approved by the Federal Government vide Finance Divisions letter No.F.3(3)EF(BIII)/2001, dated the May 29, 2001.
Clause 93
Profits and gains derived from running of computer training institution or computer training scheme which was set up between the first day of July 1997 and the thirtieth day of June, 2005 recognized by the respective education authorities for a period of five years.
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Clause (38C)
Consequent to the proposed exemption to Islamic Development Bank under Clause (107A) of Part I of the Second Schedule to the Ordinance, the Bill proposes to insert a new Clause (38C), providing for the non-applicability of tax withholding under sections 151, 152, 153 and 233.
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Clause 1
The proposed amendment seeks to carry out some editorial amendments in sub-clause (c) where it was not mentioned as to how accounting provisions relating to total advances for consumers and small and medium enterprises (SMEs) defined under the State Bank Prudential Regulations shall be carried over to succeeding years if such provisions are in excess of allowable benchmark rate of 5% of total advances of SMEs. Further, the law is also silent about the basis of allow ability of the claim if accounting provisions are made at an amount lower than 5% of the total advances of SMEs. The anomalies are proposed to be removed by making reference of carryover of the balance provisions if these are in excess of the allowed rate of 5%. Further, amendment is proposed in a retroactive manner and it is proposed that if provisioning is less than 5% of the total advances of SMEs, then actual provisioning for the year shall be allowed from first day of July 2010.
Clause 6
The proposed amendment in Clause 6 seeks to enhance the rate of tax from 10% to 20% on dividend to banks received their Asset Management Companies (AMCs) This fiscal measure has apparently been proposed in order to discourage the practice of arbitrage by banks for receiving dividends from its AMCs.
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4. Return Section 26
Section 27 requires the filing of special return in specified cases. At present the law does not provide possibility of revising such return in case of any error or omission therein. Bill now proposes to make an amendment in section 26 to facilitate the taxpayer to revise such return with the approval of Commissioner within 120 days of filing of such return.
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Sixth Schedule
Sales tax exemption given in Sixth Schedule is proposed to be withdrawn on the various items as listed below:
Sixth Schedule- Table 1 Description of goods Surgical tapes. Ultrasound gel. Diapers for adults (patients). Bricks. Building blocks of cement (including ready mix concrete blocks). Computer software. Ambulances, firefighting vehicles, waste disposal trucks, brake down lorries, special purposes vehicles for the maintenance of streetlights and overhead cables. Aircrafts. Ships of gross tonnage exceeding 15 LDTs Defence stores, whether manufactured locally or imported by the Federal Government against foreign exchange allocation for Defence, including trucks, trailers and vehicles falling under PCT heading 87.04 of the First Schedule to the Custom Act, 1969 (IV of 1969), specially modified for mounting Defence equipments, their parts and accessories for supply to Armed Forces. Spare parts and equipment for aircraft and ships covered by serial number 43 and 44 above. Equipment and machinery for pilotage, salvage or towage for use in ports or airports. Equipment and machinery for air navigation. Equipment and machinery used for services provided for handling of ships or aircrafts in a customs-port or customs-airport. Such plant and machinery as is notified by the Federal Government in the official Gazette. Bulldozers and combined harvesters, and components (which include sub-components, components, sub-assemblies and assemblies) imported in any kit form and direct materials or assembly or manufacture thereof Import and supply of fully dedicated CNG Euro-2 buses whether in CBU or CKD condition. Relevant S. No. of Table 1 29A 29B 30 34 35 41 42 43 44 62
64 65 66 67 68 69
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Sixth Schedule Table-2 Description of goods (local supplies) Supply of such agricultural implements as may be specified in a notification to be issued by the Federal Government in the official Gazette.
S. No. in Table 2 5
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Moreover, through above SRO sales tax at the rate of 8% on the supply of sugar has been withdrawn and in place of such sales tax, FED at 8% under sales tax mode has been levied.
SRO 481(I)/2011
Under SRO 551(I)/2008 various items are exempted from sales tax. Through, SRO 481(I)/2011, certain amendments have been made in this exempted SRO as under: Following items have been removed from the exemption list:
CNG kits, cylinders and valves for CNG kits Commercial catalogues, falling under PCT Heading 4911.1000. Phosphoric Acid falling under PCT Heading 2809.2010 Rock phosphate PCT Headings 2510.1000 and 2510.2000 Mineral oil 97% (W/V) 110% (W/V) falling under PCT Heading 2710.0000
i) ii)
White crystalline sugar (FED at 8% has been imposed in place of sales tax) Reclaimed lead if supplied to recognized manufacturers of lead batteries.
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2. Manufacture Clause 16
The above-mentioned definition is proposed to be modified to include preparation of unmanufactured tobacco by drying, cutting and thrashing of raw tobacco in the definition of manufacture.
3. Special Excise Duty Section 3A Notification SRO 489(I)/2011 dated June 3, 2011
Presently, special excise duty is leviable at 2.5% on the import and supply of manufactured goods with certain exemptions given in SRO No.655(I)/2007. Such duty was enhanced through the Federal Excise (Amendment) Ordinance, 2011 from 1% to 2.5% effective from March 15, 2011. Now this SED is totally abolished by the deletion of this section and relevant SRO No 655(I)/2007.through the aforementioned notification SRO 489. The change in law will be applicable from July 1, 2011.
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A new proviso is also proposed to be added by virtue of which order shall be made within one hundred and twenty days of issuance of show cause notice or within such extended period as the Commissioner may, for reasons to be recorded in writing, fix, provided that such extended period shall in no case exceed sixty days. However, any period during which the proceedings are adjourned on account of a stay order or Alternative Dispute Resolution proceedings or the time taken through adjournment by the petitioner not exceeding thirty days shall be excluded from the computation of the periods specified in the first proviso. This time period of passing the order is in harmony with the Sales Tax Act, 1990.
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3. 4.
5% Rs.700 per MT
5.
20% ad val
The structure of FED on locally produced cigarettes is proposed as follows: S. No. 1. 2. Description of goods Locally produced cigarettes if their retail price exceeds Rs 21 per ten cigarettes. Locally produced cigarettes if their retail price exceeds Rs 11.50 per ten cigarettes but does not exceed Rs 21 per ten cigarettes. Locally produced cigarettes if their retail price does not exceed Rs 11.50 per ten cigarettes. Proposed duty 65 % of retail price. Rs 6.04 per ten cigarettes plus 70% per incremental rupee or part thereof.
3.
Note: As per restriction clause given in First Schedule for levy, collection and payment of duty for locally produced cigarettes, the prices cannot be reduced from the level adopted on the day of the announcement of the Budget 2011-12. Following goods has been added in the ambit of Federal Excise Duty, which would be chargeable on such goods in sales tax mode: S. No. 1. Description of goods White Crystalline Sugar Proposed duty 8 % ad val at import and local supply stage.
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Federal Excise Duty has been withdrawn on the following goods and services: Description of goods Solvent oil (non-composite). Other. Other fuel oils. Mineral greases. Transformer oil. Other mineral oils excluding sewing machine oil. Waste oil. Carbon black oil (carbon black feed stock) including residue carbon oil. Methyl tertiary butyle ether (MBTE). Greases. Organic composite solvents and thinners, not elsewhere specified or included; prepared paint or varnish removers: (i) Solvent oil (composite) (ii) Other (excluding thinners). Viscose staple fibre. Motor cars and other motor vehicles principally designed for the transport of persons, including station wagons and racing cars of cylinder capacity exceeding 850 cc. Air Conditioners. Deep Freezers. Description of services Services provided by property developers or promoters for: (a) Development of purchased or leased land for conversion into residential or commercial plots (b) Construction of residential or commercial units. S. No. in Table 1 of First Schedule 17 18 21 26 28 29 30 39 40 46 47
48 49
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Significant notifications
1. SRO 484(I)/2011
The issuance of above SRO has resulted in a withdrawal of SRO 364(I)/2007 under which excise duty was leviable on the services provided by Cable TV operators. The notification will be effective from June 4, 2011.
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2. Power to deliver certain goods without payment of duty and to repay duty on certain goods Section 21
This section allows the delivery of goods imported temporarily for subsequent export without payment of duty, and repayment of duty on the goods which are used in production of goods meant for export. The scope of this section is now proposed to be extended to imported goods used in the production, manufacture, processing, repair or refitting in Pakistan of goods meant for supplies against international tenders.
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6. Power to give credit for and keep account-current of duties and charges Section 34
The Bill proposes to exclude the words of Deputy Commissioner from this section to remove the existing superfluity.
First Schedule
Certain reclassifications have been made in the First Schedule. Moreover, on the following items, CD has been imposed: PCT Code 74.04 7407.1010 7407.2100 Description Copper waste and scrap ------Bars -------of copper zinc base alloys (brass) Proposed Custom Duty rate 5% 5%
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1. 2. 3. 4. 5. -
Shearing machines; Tapping machines; Riveting machines; Spot welding machines; and Evaporator bending machine
Hot rolled steel sheets has been excluded from the concessionary duty raw material of washing machines For CNG Compressors, the existing raw materials have been replaced with the following Bearings Geared pump Valves Forced feed lubricator Pressure and temperature gauges Water flow switch Electric motor Junction box, Glands Oil filter assembly Flexible pressure hoses Flexible water hoses (SS braided) SS Tubes/ Pipes Aluminum bars 6082, 7075, T-6 Connecting rods forged 8.5 Kg Pistons pins, Rods and Rings
For glass manufacturing, following new concessionary duty raw materials have been added: Mirror backing paint (10% ad val) Cullet and other waste / scrap of glass (5% ad val)
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1. 2. 3. 4. 5. 6. 7. 8.
Agricultural Machinery Items imported by the local assemblers of vehicles and companies having CNG licenses. Off-highway dump trucks of 320 hp and above On Highway Dump Trucks of 320 HP and above Goods imported by municipal authorities/local bodies/cantonment boards Fire fighting vehicles and equipment imported by town and municipal authorities Aircraft spares, parts, tyres, navigational equipment and accessories Items imported by Civil Aviation Authority (CAA) for air traffic services and training
479(I)/2011 of 03-06-2011
In SRO 482(I)/2009, a number of397 items were listed on which regulatory duty was imposed at specified rates. Through SRO 479(I)/2011 several items have been removed and now only 60 items are left on which the regulatory duty is levied at the rates specified in the said SRO. The notification is effective from June 04, 2011.
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Corporate Law
Summary of important Circulars issued by the Securities and Exchange Commission of Pakistan (SECP) From June 05, 2010 To June 03, 2011
Circular No. 07 of 2010 dated March 31, 2010 Applicability of Islamic Financial Accounting Standard I Murabaha (IFAS-I)
The Commission has directed all Modaraba Companies to comply with IFAS-I and other standards as notified by the SECP under section 234 of the Companies Ordinance, 1984 while preparing the financial statements of Modarabas.
Circular No.5 of 2010 dated June 22, 2010 Guidelines for Bancassurance - 2010
The revised guidelines have been issued which are applicable on all new Bancassurance Agency Agreements signed on or after 1st August, 2010 and any such agreement existing on the aforementioned date. The Commission requires all insurance companies and takaful operators to strictly comply with these guidelines.
Circular No. 11 of 2010 dated June 10, 2010 Guidelines provided to implement requirements under Section 39 of the Insurance Ordinance, 2000 (Assets of Life Insurers Statutory Funds)
In order to increase transparency and effectiveness, the SECP has notified the guidelines for the implementation of section 39 of the Insurance Ordinance, 2000, according to which all assets owned by the life insurance company should be clearly designated All life insurers are required to: designate in the books of insurer, all assets owned by the company related to either Shareholders Fund, particular Statutory Fund or a sub-fund.
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record the transaction in any one fund, where there are transactions relating to specific policies that relate to more than one statutory fund with the time limitation of recording in the specific fund not later than 15 days following the end of the calendar month in which the first transaction took place. designate the proportion belonging to each fund relating to the assets and liabilities, in case these belong to more than one fund. acquire and dispose of assets at arms length.
The Commission will require an opinion from the statutory auditors as to compliance of aforementioned requirements.
Circular No. 14 of 2010 dated July 05, 2010 United Nation 1267 Committees Consolidated List of Individuals and Entities regarding Freezing of Fund and other Resources
With the objective to prevent criminal misuse of the insurance industry by the money launderers for the purpose of money laundering and terrorist financing all insurance institutions are hereby required to comply with the requirement of freezing of funds and refuse business to individuals, groups, undertakings and entities appearing on the consolidated list maintained by United Nations to prevent the criminal misuse of insurance industry.
Circular No. 15 of 2010 dated July 06, 2010 Related Party Assets
Certain assets in connection with a related party have been declared as admissible for the purpose of solvency requirement. However, all others assets, other than the one specified in the circular, as provided section 32(2)(g) of the Insurance Ordinance, 2000 shall remain inadmissible.
Circular No. 16 of 2010 dated July 07, 2010 Categorization of open end Collective Investment Scheme
In order to enable investors to make a well informed decision, all AMCs have been directed by the Commission to make following disclosures for open-end schemes which hold non-compliant investments :
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Disclosure in the Offering Documents (risk section) Disclosure in Advertisement Disclosure in the Fund Manager Report, quarterly, half yearly and annual financial statements.
AMCs are also required to : i) Make available latest monthly Fund Manager Report (FMR) of the Scheme at its website and its simultaneous submission to the Commission. Disclose credit quality / asset quality of portfolio of the Scheme in monthly FRM.
ii)
iii) Ensure compliance with the requirement of maintaining requisite cash and near cash investment.
Circular No. 18 of 2010 dated July 16, 2010 Additional Condition to the Modaraba Authorization Certificate
To safeguard the interest of certificate holders of modarabas, the Commission has imposed new condition for appointment of a CEO to fill the casual vacancy with the approval of the Registrar (Modarabas) and restricting interim arrangement against a casual vacancy.
Circular No. 19 of 2010 dated July 30, 2010 Sharing of Costs of Insurance Ombudsmans Secretariat by Insurance / Takaful Companies.
The Commission has determined the following formula for sharing the costs of the Insurance Ombudsmans Secretariat for the period from 01st July 2010 to June 30, 2011. greatest of Rs. 250,000 and Rs. 0.09 per mille of 2009s. gross direct premium written or contribution received in Pakistan in case of insurance company or takaful operator, respectively.
Circular No. 21 of 2010 dated August 10, 2010 Clarification on clause 3(ii) of Part II of the 3rd Schedule of the Modaraba Companies and Modaraba Rules, 1981.
Clarification was issued by the Commission that the disclosure requirements under clause 3(ii) of Part II of the 3rd Schedule of the Modaraba Companies and Modraba Rules, 1981 are not applicable on sale or transfer of Ijarah (lease) assets by a Modaraba in normal course of business.
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Circular No. 22 of 2010 dated August 24, 2010 Revised 2nd Schedule of Modaraba Companies and Modaraba Rules, 1981
Scale of Fee of Modaraba Companies related to the registration, renewal and filing has been revised by the Commission.
Circular No. 26 & 28 of 2010 dated November 16, 2010 and December 21, 2010 Refund of Fee received under Sixth Schedule to the Companies Ordinance, 1984
The Commission now permits refund of fee deposited under the Sixth Schedule to the Companies Ordinance, 1984 to the existing Companies and the Companies proposed to be registered whose documents have not been filed with the Company Registration Office by making an application alongwith supporting evidence including original paid challan for refund of fee to the Registrar or Commission.
Circular No. 29 of 2010 dated December 24, 2010 Annual supervision fee for the year 2011
Imposition of conditions on Registered Insurers vide sub-section 11 of the Insurance Ordinance, 2011 by the Commission that every insurer must pay on or before 15th day of January every year, an annual supervision fee of the greatest of Rs. 100,000 or such amount as may be prescribed, and at the expiry of one year, a fee of Rs. 2.00 per thousand of the gross direct premium written in Pakistan during the year 2009, subject to a maximum of Rupees fifty million.
Circular No. 03 of 2011 dated January 20, 2011 Amendment in Circular 36 of 2009 dated December 10, 2009 Investment and Allocation Policies for Pension Funds authorized under the Voluntary Pension System Rules, 2005.
Considering the recomposition of the sectors by the Karachi Stock Exchange and availability of limited investment avenues of Sharia Compliant Pension Funds, certain amendments have been made by the Commission in Voluntary Pension Systems Rules, 2005 relating to the allocation of
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assets amongst the different instruments and sectors in order to facilitate the investors and compliance by the Pension Funds.
Circular No. 04 of 2011 dated March 10, 2011 Categorization of open end Collective Investment Scheme
The Commission, as a result of discontinuation of Continuous Funding System (CFS), has directed to replace the term CFS with Margin Trading (MT). Accordingly, the open-end collective investment schemes which are allowed to take exposure in CFS, may now invest in MT in terms of the Rules.
Circular 06 of 2011 dated March 17, 2011 Withdrawal of clarification regarding the term Paid up Capital for Insurance Brokers Registered in Pakistan
Circular No 20 of 2010 dated July 30, 2010 defining the term Paid up Capital for Insurance Brokers Registered in Pakistan has been withdrawn by the Commission.
Circular No. 07 of 2011 dated March 18, 2011 Maximum Management Expenses Limits for Life Insurers under Section 22(9) & Section 23(9) of Insurance Ordinance, 2000
The following amendments made Circular No. 6 of 2006 dated April 28, 2006 for insurance Companies having more than 10 years of business in Pakistan, in respect of First year premium and renewal years premium for the year 2011 & 2012, other than Single Premium Policies, Group Insurance Policies and Annuities :
Limits as per Circular # 6 of 2006 2011 First Year Premium Renewal Year Premium 98% 17% 2012 90% 15 Amended Maximum Limits 2011 104% 19% 2012 100% 18%
Items
All other terms of Circular No. 6 of 2006 remain the same. However, expenses limits for the years after 2012 will be prescribed by the Commission in due course of time.
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Summary of important Notifications issued by the Securities and Exchange Commission of Pakistan (SECP) from June 05, 2010 to June 03, 2011
S.R.O.271 (I)/2010, April 21, 2010
Various amendments have been made in Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003 such as: omitting restriction on sale and transfer of physical shares lodged with the Commission; extension in the validity period of NBFC licence and its renewal to three years respectively;
Undertaking brokerage business by an NBFC having licence of investment advisory services, without forming a separate company.
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IFRSs/IFRIC
Significant amendments made in International Financial Reporting Standards (IFRSs) and International Financial Reporting Interpretations Committee (IFRIC) issued between July 01, 2010 to May 25, 2011
(The list is indicative, not exhaustive)
IFRS 7 Financial Instruments: Disclosures Amended on October 07, 2010 Effective from July 01, 2011
The amendments introduce increased disclosures on transfers of financial assets. The new disclosures now include: Information that enables users of its financial statements: o o To understand the relationship between transferred financial assets that are not derecognised in their entirety and the associated liabilities; and To evaluate the nature of, and risks associated with, the entitys continuing involvement in derecognised financial assets.
For transferred financial assets that are not derecognised in their entirety: o o Description of the nature of the transferred assets, Nature of risk and rewards as well as description of the nature and quantitative disclosure depicting relationship between transferred financial assets and the associated liabilities.
For transferred financial assets that are derecognised in their entirety o o o The carrying amount of the assets and liabilities recognised, Fair value of the assets and liabilities that represent continuing involvement, Maximum exposure to loss from the continuing involvement as well as maturity analysis of the undiscounted cash flows to repurchase the derecognised financial assets.
Additional disclosures: o o Any gain or loss recognised at the date of transfer of the assets, Income or expenses recognise from the entitys continuing involvement in the derecognised financial assets as well as details of uneven distribution of proceed from transfer activity throughout the reporting period.
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IFRS 9 Financial Instruments Re-issued on October 28, 2010 Effective from January 01, 2013
Initial measurement of financial instruments o All financial instruments are initially measured at fair value plus or minus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs.
Subsequent measurement of financial assets o Financial assets will be subsequently measured at Amortised cost; and Fair value.
Classification is made at the time of initial recognition, namely when the entity becomes a party to the contractual provisions of the instrument. Subsequent measurement of financial liabilities o If a debt instruments meets certain conditions, it can be measured at either: Amortised cost net of impairment write-downs Fair value through profit or loss if doing so eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an 'accounting mismatch')
All other debt instruments must be measured at fair value through profit or loss (FVTPL).
Subsequent measurement of equity instruments o All equity investments in scope of IFRS 9 are to be measured at fair value in the statement of financial position, with value changes recognised in profit or loss, except for those equity investments for which the entity has elected to report value changes in other comprehensive income (FVTOCI)
De-recognition of financial instruments o The requirements for de-recognition have been carried over from IAS 39.
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IFRS 10 Consolidated Financial Statements Issued on May 12, 2011 Effective from January 01, 2013
Objective o Introduce a single basis for consolidation for all entities, regardless of the nature of the investee, and that basis is control
Definition of control o Includes three elements Power over an investee i.e. existing rights that give it the ability to direct the relevant activities Exposure or rights to variable returns of the investee Ability to use power over the investee to affect the investors return
Application of the control principle o Detailed guidance provided on how to apply the control principle in a number of situations, including agency relationships and holding of potential voting rights
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Accounting Requirements o Line-to-line consolidation of similar items with elimination of: Carrying amount of the parent's investment in each subsidiary and the parent's portion of equity of each subsidiary; and Full intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between entities of the group
Present non-controlling interests in consolidated statement of financial position within equity, separately from the equity of the owners of the parent
Disclosure Requirements o There are no disclosures specified in IFRS 10. Instead, IFRS 12 - Disclosure of Interests in Other Entities outlines the disclosures required
Consequent Changes IAS 27 (Revised) Separate Financial Statements Issued on May 12, 2011 Effective from January 01, 2013
The revised IAS 27 retains the current guidance for separate financial statements only. Those parts of IAS 27 Consolidated and Separate Financial Statements that address when and how an investor should prepare consolidated financial statements have been superseded.
IFRS 11 Joint Arrangements Issued on May 12, 2011 Effective from January 01, 2013
Core principle o A party to a joint arrangement determines the type of joint arrangement in which it is involved by assessing its rights and obligations and accounts for those rights and obligations in accordance with that type of joint arrangement
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Definitions o Joint Arrangement o An arrangement of which two or more parties have joint control
Joint Control The contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control
Kinds of Joint Arrangements o The new Standard establishes two types of joint arrangements: o Joint operations - combining the existing concepts of jointly controlled assets and jointly controlled operations; and Joint ventures - equivalent to the existing concept of a jointly controlled entity
The determination of as to whether a joint arrangement is a joint operation or a joint venture is based on the parties rights and obligations under the arrangement, with the existence of a separate legal vehicle no longer being the key factor.
Accounting Requirements o o A joint operator accounts for the assets, liabilities, revenues and expenses relating to its involvement in a joint operation in accordance with the relevant IFRSs For interests in joint ventures, IFRS 11 requires the use of the equity method of accounting thereby eliminating the proportionate consolidation method.
Disclosure Requirements o There are no disclosures specified in IFRS 11. Instead, IFRS 12 - Disclosure of Interests in Other Entities outlines the disclosures required
Consequent Changes
IAS 28 Investment in Associates and Joint Ventures Issued on May 12, 2011 Effective from January 01, 2013
This version supersedes IAS 28 Investment in Associates. The scope has been widened to include accounting treatment for joint ventures and the disclosure requirements have been moved to IFRS 12
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IFRS 12 - Disclosure of Interests in Other Entities Issued on May 12, 2011 Effective from January 01, 2013
It is a new and comprehensive standard on disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles. IFRS 12 establishes disclosure objectives and specifies minimum disclosures that an entity must provide to meet those objectives. An entity should disclose information that helps users of its financial statements evaluate the nature of and risks associated with its interests in other entities and the effects of those interests on its financial statements The disclosure requirements are extensive and significant effort may be required to accumulate the necessary information. Where the disclosures required by IFRS 12, together with the disclosures required by other IFRSs, do not meet the above objective, an entity is required to disclose whatever additional information is necessary to meet the objective
IFRS 13 Fair Value Measurement Issued on May 12, 2011 Effective from January 01, 2013
Applicable to both financial and non-financial items measured at fair value, this Standard achieves the following three objectives: Definition of fair value Guidance on determination of fair value Introduction of consistent requirements for disclosures on fair value measurements.
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IFRS 13 establishes a single framework for measuring fair value where that is required by other Standards. The Standard does not include requirements on when fair value measurement is required; it prescribes how fair value is to be measured if another Standard requires it Definition of Fair Value o The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e. an exit price)
Determination of Fair Value o An entity must determine the following to arrive at an appropriate measure of fair value: The asset or liability being measured (consistent with its unit of account). The principal (or most advantageous) market in which an orderly transaction would take place for the asset or liability. For a non-financial asset, the highest and best use of the asset and whether the asset is used in combination with other assets or on a stand-alone basis. The appropriate valuation technique(s) for the entity to use when measuring fair value, focusing on inputs a market participant would use when pricing the asset or liability. Those assumptions that market participants would use when pricing the asset or liability
Disclosure Requirements o IFRS 13 requires a number of quantitative and qualitative disclosures about fair value measurements. Many of these are related to the following three-level fair value hierarchy on the basis of the inputs to the valuation technique: Level 1 inputs are fully observable (e.g., unadjusted quoted prices in an active market for identical assets and liabilities that the entity can access at the measurement date); Level 2 inputs are those other than quoted prices within Level 1 that are directly or indirectly observable; and Level 3 inputs are unobservable.
An asset or liability is included in its entirety in one of the three levels on the basis of the lowest-level input that is significant to its valuation.
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Amendments to IAS 12 Income Taxes Issued on December 20, 2010 Effective from January 01, 2012
IAS 12 requires an entity to measure the deferred tax relating to an asset depending on whether the entity expects to recover the carrying amount of the asset through use or sale. It can be difficult and subjective to assess whether recovery will be through use or through sale when the asset is measured using the fair value model in IAS 40 Investment Property. The amendment provides a practical solution to the problem by introducing a presumption that recovery of the carrying amount will, normally be , be through sale
(Effective date mentioned above means effective from accounting period beginning on or after)
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