ISLAMABAD:The development authorities, housing societies, and other authorities, who had wrongly claimed income tax exemption under the cover of “local authority”, have been brought into the tax net from July 1, 2008. Sources told Business Recorder on Tuesday that the Federal Board of Revenue (FBR) had clarified definition of “local authority” through Finance Act, 2008.

Resultantly, a number of development authorities would now liable to pay income tax. Most of the developmental authorities were claiming income tax exemption in the past. The amendment to last budget has successfully brought all such kinds of development authorities into the tax-net.

Sources said the “local authority” covers those municipal bodies, who can levy local tax or local cess. However, this does not cover development authority. Under Section 49 of the Income Tax Ordinance, 2001, income of a local authority is exempt from income tax. The term “local authority” was not defined in the Ordinance, due to which some organisations like the National Highway Authority, etc try to take cover of the exemption available to a local authority. T

he intention of the legislature is to provide exemption to a municipal committee, district and Tehsil government and such other organisations entrusted by the government with the administrative and financial powers to be executed within the territorial jurisdiction of a limited area as earmarked through legislation. In order to clarity and avoid misinterpretation of the provision, the definition of the ‘local authority’ has been specified in the Ordinance, 2001.

The amendment in the relevant provisions of the Ordinance has substituted the term “local authority” by the term “local government” so that exemption is applicable as intended by the legislature.

Under sub-section 4 of section 49 of the Ordinance, 2001, exemption shall not be available in case of corporation, company, a regulatory authority, a development authority, other body or institution established by or under a federal law or a provincial law or an existing law or a corporation, company, a regulatory authority, a development authority or other body or institution set up, owned and controlled, either directly or indirectly, by the federal government or a provincial government, regardless of the ultimate destination of such income as laid down in Article 165A of the Constitution of Pakistan.

It is important to mention that income of regulatory authorities like Pakistan Electronic Media Regulatory Authority (Pemra); Pakistan Telecommunication Authority (PTA); Oil and Gas Regulatory Authority (Ogra) and National Electric Power Regulatory Authority (Nepra) were liable to tax under Ordinance, 2001.

The board had brought Pemra, PTA, Ogra, Nepra, and other development authorities into the tax net in last budget through a ‘clarification amendment’ regarding taxation of regulatory authorities through Finance Bill, 2007-08.

However, due to absence of clear definition of the “local authority”, some of the development authorities claimed as “local authority” and went to courts, raising question on the interpretation of law. They claimed that we are local authorities and not liable to income tax. The issue has been resolved through proper definition of ‘local authority’ under sub-section 4 of section 49 of the Ordinance 2001.

Sorce: FBR