KARACHI: Financial institutions are demanding certificates of evidence from investors showing they receive a return of less than Rs500,000 on debt in a year if they wish to take advantage of lower income tax rates, sources said on Friday.
The source said the financial institution asked debt beneficiaries to provide an annual certificate of profit of less than Rs500,000 to take advantage of the reduced rate of income tax on return on investment.
Financial institutions, including banks and other debt benefit payers obtain these certificates from their customers for tax incentives.
Under section 151 of the 2001 Income Tax Ordinance, the withholding rate of tax on return on debt is 10 percent if total profit does not exceed Rs500,000. However, if the profit exceeds the benchmark, the withholding tax rate is 15 percent. If the recipient is not on the list of active taxpayers, the tax rate turns out to be 30 percent.
Through the 2020 Finance Law, the amendment was made in part where a 10 percent tariff reduction would only be available if the beneficiary provided a certificate that his annual income under this head would not exceed the threshold.
To explain the amendment, FBR issued circular no. 07 of 2020 on 22 December 2020. FBR receives many inquiries regarding the application of lowered tariffs under article 151.
“It explains that the required certificate must be completed by the beneficiary of the debt to the profit payer so that the total profit on debt received / receivable during the tax year from all investments in the case does not exceed Rs500,000. The required certificates can be submitted on plain paper, ”said FBR.
Tax managers and tax experts agree that amendments to certifying by profit recipients will not exempt the withholder’s responsibility for reducing the actual amount of withholding tax.
Tax officials at the Karachi Large Taxpayers Office said the amendment required beneficiaries to estimate annual returns, which is impractical.
One official said if returns increase the threshold income in such a scenario the bank will cut the tax rate at a higher rate or the beneficiary will be held responsible for the declaration error.
Rehan Hassan, former president of the Karachi Tax Bar Association said certificates are not important but when income tax returns are filed for the 2021 tax year, such problems will arise.
Hassan said that a bank or financial institution will ultimately be responsible for the true and proper withholding of taxes under PART 151 of the 2001 Income Tax Act. “How can a person estimate his annual income? What will happen if the interest rate is changed? “