1.    Exploration and production of petroleum to be treated as a separate business undertaking.-

Where any person carries on, or is deemed to carry on, under an agreement with the Government, any business, which consists of, or includes, the exploration or production of petroleum in Pakistan, or setting up of refineries at Dhodak and Bobi fields, income of exploration and production companies from pipe-line operations, and manufacture and sale of liquified petroleum gas or compressed natural gas, such business or part thereof, as the case may be, shall for the purposes of this Ordinance, be deemed to be a separate business undertaking hereinafter referred to as "such undertaking" and the profits and gains of such undertaking shall be computed separately from his income, profits or gains from any other business, if any, carried on by him.

2.    Computation of profits.-

(1)   Subject to the provisions of this Part, the profits and gains of such undertaking shall be computed in the manner applicable to income, profits and gains chargeable under the head "Income from business or profession".

(2)   Where such person incurs any expenditure on searching for or on discovering and testing a petroleum deposit or winning access thereto, but the search, exploration or enquiry upon which the expenditure is incurred is given up before the commencement of commercial production, the expenditure allocable to a surrendered area or to the drilling of a dry-hole shall be deemed to be lost at the time of the surrender of the area or the completion of the dry-hole, as the case may be.

(3)   Where the agreement provides that any portion of the expenditure deemed to be lost under sub-rule (2) (such portion hereinafter referred to as the said loss) shall be allowed against any income of such undertaking, it shall be allowed in either of the following two ways, as may be provided for in the agreement, namely:-

(a)    the said loss in any year shall be set-off against the income of that year-chargeable under the head "Income from business or profession" or any income (other than income from dividends) chargeable under any other head and where the loss cannot be wholly set off in this manner, the portion not so set off shall be carried forward to the following year and set off in the same manner, and so on, but no loss shall be carried forward for more than six years; or

(b)    the said loss in any year shall be set off against the income of such undertaking of the income year in which commercial production has commenced and where the loss cannot be wholly set off against the income of such undertaking of that year, the portion not so set off shall be carried forward to the following year and set off against the income, if any, of such undertaking of that year, and if it cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following year, and so on, but no loss shall be carried forward for more than ten years.

(4)   After the commencement of commercial production, all expenditure incurred prior thereto and not deemed to be lost under sub-rule, (2) and not represented by physical assets in use at the time the commercial production commenced shall be allowed as a deduction, so, however, that the portion of such deduction to be so allowed in any year shall be such amount (not exceeding ten per cent of the aggregate amount deductible in respect of onshore areas and twenty-five per cent for offshore areas) as may be selected by the assessee.

(5)   Any expenditure, including royalty paid to the Government by an onshore petroleum exploration and production undertaking on, or after, the first day of July, 2001  (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended after the commencement of commercial production wholly and exclusively for the purpose of the business of production and exploration of petroleum carried on by such undertaking shall be allowed as a deduction:

Provided that-

(i)     no deduction shall be allowed in respect of such expenditure incurred on the acquisition of assets in respect of which depreciation allowance is admissible under the Third Schedule;

(ii)    depreciation allowance admissible under the Third Schedule shall be deducted in respect of the assets referred to in paragraph (i);

(iii)   depreciation allowance admissible under the Third Schedule shall also be deducted in respect of such expenditure incurred on the acquisition of the physical assets, which were acquired before the date of the commencement of commercial production and were being used by such undertaking on and after that date, as if such assets had been acquired at the time of the commencement of commercial production at their original cost, as reduced by the amount of depreciation allowance, if any, previously allowed to be deducted under this Ordinance or the repealed Act.

(6)   If in any Year the deductions admissible under section 23 and sub-rules (3) and (4) exceed the gross receipts from the sale of petroleum produced in Pakistan, such excess shall be set off against other income (not being income from dividends) and carried forward in the manner and subject to the limitations laid down in sections 35 and 38 and the Third Schedule, so however, that no portion of such excess shall be carried forward for more than six years:

Provided that the limitation of six years prescribed in this sub-rule shall not apply to depreciation allowance admissible to a person carrying on the business of offshore petroleum exploration and production in respect of any machinery, plant or other equipment used in such exploration or production.

3.    Depletion allowance.-

In determining the income of such undertaking for any year ending after the date on which commercial production has commenced, an allowance for depletion shall be made equal to fifteen per cent of the gross receipts representing the well-head value of the production:

Provided that such allowance shall not exceed fifty per cent of the profits or gains of such undertaking before the deduction of such allowance.

4.    Limitation on payment to Government and taxes.-

(1)   The aggregate of the taxes on income and other payments excluding royalty as specified in the Pakistan Petroleum (Production) Rules, 1949 or the Pakistan Petroleum (Exploration and Production) Rules, 1986 and paid by onshore petroleum exploration and production undertaking on, or after, the first day of July, 2001, to the Government in respect of the profits or gains derived from an undertaking to which this Part applies for any assessment year shall not exceed the limits provided for in the agreement:

Provided that the said aggregate shall not be less than fifty per cent of the profits or gains derived by an onshore petroleum exploration and production undertaking and forty per cent of the profits or gains derived by an offshore petroleum exploration and production undertaking before the deduction of the payment to the Government:

Provided further that in respect of assessment year commencing on, or after, the first day of July, 2002  the said aggregate shall not be less than forty percent of the profit or gains derived by an onshore petroleum exploration and production undertaking before the deduction of payment excluding royalty paid by an onshore company to the Government.

(2)   If in respect of any year, the aggregate of the taxes on income and payments to the Government is greater or less than the amount provided for in the agreement, an additional tax shall be payable by the assessee or an abatement of tax shall be allowed to the assessee, as the case may be, so as to make the aggregate of the taxes on income and payments to the Government equal to the amount provided for in the agreement.

(3)   If in respect of any year the payments to the Government exceed the amount provided for in the agreement, so much of the excess as consist of any tax or levy referred to in sub-clause (b) of clause (5) of rule 6 shall be carried forward and treated, for the purposes of this rule, as payments to the Government for the succeeding year:

Provided that the whole of the payments to the Government exceeding the amount provided for in such agreement may be so carried forward if so provided for in any agreement with an assessee made before the first day of July, 1970.

5.    Provision relating to rules.-

The Central Board of Revenue may make rules for the purposes of any matter connected with, or incidental to, the operation of this Part.

6.    Definition.-

For the purpose of this Part,-

(1)   "agreement" means an agreement entered into between the Government and an assessee for the exploration and production of petroleum in Pakistan;

(2)   "commercial production", means production as determined by the Government;

(3)   "Government" means the Government of Pakistan;

(4)   "Part" means part of this Schedule;

(5)   "payments to the Government" means amounts payable to the Government or to any governmental authority in Pakistan-

(a)    in respect of royalties as specified in the Pakistan Petroleum (Production) Rules, 1949, or the Pakistan Petroleum (Exploration and Production) Rules, 1986; and

(b)    in respect of any tax or levy imposed in Pakistan peculiarly applicable to oil production or to extractive industries or any of them and not generally imposed upon all industrial and commercial activities;

(6)   "Petroleum" means crude oil, natural gas and casing-head petroleum spirit as defined in the Pakistan Petroleum (Production) Rules, 1949, or the Pakistan Petroleum (Exploration and Production) Rules, 1986 but does not include refined petroleum products;

(7)   "surrender" means the termination of rights with respect to an area including the expiration of rights according to the terms of an agreement;

(8)   "surrendered area" means an area with respect to which the rights of a person have terminated by surrender or by assignment or by termination of the business;

(9)   "taxes on income" and "tax" includes income-tax and super-tax but does not include payments to Government; and

(10) "well-head value" has the meaning assigned to it in the agreement between the assessee and the Government and, in the absence of any such definition in the agreement, the meaning assigned to it in the Pakistan Petroleum (Production) Rules, 1949 or the Pakistan Petroleum (Exploration and Production) Rules, 1986.

 

 

RULES FOR THE COMPUTATION OF PROFITS AND GAINS FROM THE EXPLORATION AND EXTRACTION OF MINERAL DEPOSITS (OTHER THAN PETROLEUM)

1.    Exploration and extraction of mineral deposits to be treated a separate undertaking.-

Where any person carries on, or is deemed to carry on, any business which consists of or includes the exploration or extraction of mineral deposits of a wasting nature (other than petroleum) in Pakistan, such business or part thereof, as the case may be, shall, for the purpose of this Ordinance, be deemed to be a separate undertaking (hereinafter referred to as 'such undertaking') and the profits and gains of such undertaking shall be computed separately from his income, profits or gains from other business, if any, carried on by him.

2.    Computation of profits.-

(1)   Subject to the provisions of this Part, the profits and gains of such undertaking shall be computed in the manner applicable to income, profits and gains chargeable under the head "Income from business or profession".

(2)   All expenditure on prospecting and exploration incurred by such undertaking, after the thirty-first day of March, 1958, upto the date of commercial production shall, to the extent it cannot be set off against any other income of the said undertaking, be treated as a loss.

(3)   The loss referred to in sub-rule (2) shall be carried forward and set off against the income of such undertaking after the commencement of commercial production, so however, that if it cannot be wholly set off against the income of the said undertaking of the income year in which the commercial production had commenced, the portion not so set off shall be carried forward to the following year and so on, but no such loss shall be carried forward for more than ten years beginning with the year in which commercial production had commenced.

(4)   After the commencement of commercial production, depreciation allowance in respect of machinery and plant purchased or acquired after the thirty-first day of March, 1958 for extracting the ore shall be allowed as a deduction from profits and gains of the year in which they are used for the first time in an amount equal to the original cost of such asset and all the provisions of the Third Schedule shall, so far as may be, apply accordingly.

3.    Depletion Allowance.-

(1)   In determining the profits and gains of such undertaking for any year an additional allowance (hereinafter referred to as the depletion allowance) shall be made equal to twenty per cent of the total income of such undertaking (before the deduction of such allowance).

(2)   No deduction under sub-rule (1) shall be made unless an amount equal to the depletion allowance is set apart and left as a reserve to be utilised for the development and expansion of such undertaking.