In the Name of Allah, the Most Beneficent, the Most Merciful                   EDITED BY                   HASSAM UL HAQ  ...
Income Tax Law – LecturesBased On Income Tax Ordinance, 2001 AsAmended upto 30th June, 2011 And AsApplicable For The Tax Y...
CHAPTER IPRELIMINARYEDITED BYHASSAM UL HAQHASSAM_RAJPOOT@YAHOO.COM     3
DEFINATIONS   Section 2EDITED BYHASSAM UL HAQHASSAM_RAJPOOT@YAHOO.COM     4
ACCUMULATED PROFITS – Clause (1) of Section2“ Accumulated profits" in relation to distribution or payment   of a dividend ...
AMALGAMATION - Clause (1A) of Section 2“ Amalgamation” means the merger of one or more:  • Banking companies ;  • Non-bank...
AMALGAMATION - clause (1A) of Section 2•   The liabilities of the amalgamating company or    companies immediately before ...
APPROVED GARTUITY FUND - Clause (3) ofSection 2“Approved gratuity fund ” means a gratuity fund approvedby the Commissioner...
APPROVED ANNUITY PLAN - Clause (3A) ofSection 2“Approved Annuity Plan ” means an Annuity Plan approvedby Securities and Ex...
APPROVED INCOME PAYMENT PLAN– Clause (3B) Of Section 2“Approved income payment plan ” means an incomepayment plan approved...
APPROVED PENSION FUND - Clause(3C) Of Section 2“Approved Pension Fund ” means Pension Fund approvedby Securities and Excha...
APPROVED EMPLOYMENT PENSIONOR ANNUITY SCHEME - Clause (3D)Of Section 2.“Approved employment pension or annuity scheme ”mea...
APPROVED OCCUPATIONALSAVINGS SCHEME - Clause (3E) ofSection 2“Approved Occupational Savings Scheme ” means anyapproved gra...
APPROVED SUPERANNUATION FUND - Clause(4) of Section 2“Approved       superannuation          fund ”     means      asupera...
ASSESSMENT - Clause (5) of Section 2“Assessment ” includes provisional assessment, re-assessment and amended assessment an...
ASSET MANAGEMENT COMPANY- Clause (5B)of Section 2“Asset management company ” means an assetmanagement company as defined i...
BANKING COMPANY - Clause (7) of Section 2“ Banking company” means a banking company as definedin the Banking Companies Ord...
BUSINESS - Clause (9) of Section 2“ Business” includes any: • Trade; • Commerce; • Manufacture; • Profession; • Vocation; ...
BOARD - Clause (11) of Section 2“Board ” means the Central Board of Revenue establishedunder the Central Board of Revenue ...
CHIEF COMMISSIONER - Clause (11B) of Section2“Chief Commissioner ” means a person appointed as ChiefCommissioner Inland Re...
CONTRIBUTION TO AN APPROVED PENSIONFUND - Clause (13B) of Section 2“Contribution to an Approved Pension Fund ” meanscontri...
CO-OPERATIVE SOCIETY - Clause (14) of Section2“ Co-operative society” means a co-operative societyregistered under the Co-...
DEBT - Clause (15) of Section 2“ Debt” means any amount owing, including accounts payableand the amounts owing under promi...
DIVIDEND - Clause (19) of Section 2“ Dividend” includes –a.  Any distribution by a company of accumulated profits to its  ...
DIVIDEND - Clause (19) of Section 2“ Dividend” includes –d. Any distribution by a company to its shareholders on the    re...
DIVIDEND - Clause (19) of Section 2but dividend does not include -i.    A distribution made in accordance with sub-clause ...
ADDRESSEE ETC - Clause (19B) of Section 2The expressions “addressee ”, “automated ”, “electronic ”,electronic    signature...
ELECTRONIC RECORD - Clause (19C) of Section2“Electronic       record ”     includes     the    contents    ofcommunication...
ELECTRONIC RESOURCE - Clause (19D) ofSection 2“Electronic resource ” includes telecommunication systems,transmission devic...
TELECOMMUNICATION SYSTEM – Clause (19E)of Section 2“Telecommunication system ” includes a system for theconveyance, throug...
EMPLOYEE - Clause (20) of Section 2“ Employee ” means any individual engaged in employment .                   EDITED BY  ...
EMPLOYER - Clause (21) of Section 2“ Employer ” means any      person   who    engages   andremunerates an employee .     ...
EMPLOYMENT - Clause (22) of Section 2“ Employment ” includes – A   directorship or any other office involved in the   man...
FEE FOR TECHNICAL SERVICES - Clause (23) ofSection 2“ Fee for technical services” means any consideration,   whether perio...
FINANCIAL INSTITUTION - Clause (24) of Section2“Financial institution ” means an institution as defined underthe Companies...
FINANCE SOCIETY - Clause (25) of Section 2“ Finance society” includes a co-operative society whichaccepts money on deposit...
INCOME - Clause (29) of section 2“ Income” includes • Any amount chargeable to tax under the Ordinance; • Any    amount su...
INDIVIDUAL PENSION ACCOUNT - Clause (29B)of section 2“Individual Pension Account ” means an accountmaintained by an eligib...
INDUSTRIAL UNDERTAKING – Clause (29C) ofsection 2“Industrial undertaking ” means – •  an undertaking which is set up in Pa...
INVESTMENT COMPANY - Clause (30A) ofsection 2“Investment company ” means an investment company asdefined in the Non-Bankin...
KIBOR - Clause (30AA) Of Section 2“KIBOR” means Karachi Inter Bank Offered Rate prevalent onthe first day of each quarter ...
LEASING COMPANY - Clause (30B) of section 2“ Leasing company” means a leasing company as defined inthe Non-Banking Finance...
LOCAL GOVERNMENT - Clause (31A) ofSection 2 “ Local Government” has the same meaning as defined in the Punjab Local Govern...
MEMBER - Clause (32) of section 2“ Member” in relation to an association of persons ,includes a partner in a firm .       ...
MODARABA - Clause (34) Of Section 2“ Modaraba” means a modaraba as defined in the ModarabaCompanies and Modarabas (Floatat...
MODARABA CERTIFICATE - Clause (35) ofSection 2“Modaraba certificate ” means a modaraba certificate asdefined in the Modara...
MUTUAL FUND - Clause (35A) of Section 2“ Mutual Fund” means a mutual fund registered or approvedby the Securities and Exch...
NON-BANKING FINANCE COMPANY - Clause(35B) of Section 2“ Non-banking finance company” means an NBFC asdefined in the Non-Ba...
NON-PROFIT ORGANIZATION - Clause (36) ofSection 2“Non-profit organization ” means any person other than anindividual, whic...
OFFICER OF INLAND REVENUE - Clause (38A) ofSection 2“Officer of Inland Revenue ” means any AdditionalCommissioner Inland R...
ORIGINATOR - Clause (39) of Section 2“Originator ” means Originator as defined in the Asset BackedSecuritization Rules, 19...
PENSION FUND MANAGER - Clause (40A) ofSection 2“Pension Fund Manager ” means an asset managementcompany registered under t...
PERMANENT ESTABLISHMENT - Clause (41) ofSection 2“ Permanent establishment” in relation to a person , means a fixed   plac...
PERMANENT ESTABLISHMENT - Clause (42) ofSection 2   The furnishing of services, including consultancy services, by    any...
PRINCIPAL OFFICER - Clause (44A) of Section 2“Principal officer ” used with reference to a company orassociation of person...
PRIVATE COMPANY - Clause (45) of Section 2“ Private company” means a company that is not apublic company .Note: The defini...
PROFIT ON DEBT - Clause (46) of Section 2“ Profit on a debt” whether payable or receivable, means– Any profit, yield, int...
PUBLIC COMPANY - Clause (47) of Section 2“ Public company ” means – • a company in which not less than fifty per cent of t...
RECOGNIZED PROVIDENT FUND - Clause (48) ofSection 2“Recognized provident fund ” means a provident fundrecognized by the Co...
ROYALTY - Clause (54) of Section 2“ Royalty” means any amount paid or payable,   however described or computed, whether pe...
ROYALTY - Clause (54) of Section 2   The receipt of, or right to receive, any visual images or    sounds, or both, transm...
SECURITIZATION - Clause (57) of Section 2“Securitization ” means securitization as defined in the AssetBacked Securitizati...
SHARE - Clause (58) of Section 2“ Share” in relation to a company , includes a modarabacertificate and the interest of a b...
SHAREHOLDER - Clause (59) of Section 2“ Shareholder” in relation to a company , includes amodaraba certificate holder, a u...
SMALL COMPANY - Clause (59A) of Section 2“ Small company ” means a company registered on or after   the first day of July,...
SPECIAL PURPOSE VEHICLE – Clause (60) ofSection 2“Special Purpose Vehicle ” means a Special PurposeVehicle as defined in t...
TAX - Clause (63) of Section 2“ Tax” means any tax imposed on: • Taxable income (Income Tax); • Income subject to a separa...
TAXPAYER - Clause (66) of Section 2“Taxpayer ” means any person who derives an amountchargeable to tax under the Ordinance...
VENTURE CAPITAL COMPANY AND VENTURECAPITAL FUND - Clause (74) of Section 2“ Venture Capital Company” and “Venture Capital ...
ORDINANCE TO OVERRIDE OTHER LAWS                 Section 3The provisions of the Income Tax Ordinance, 2001 applynotwithsta...
CHAPTER IICHARGE OF TAXEDITED BYHASSAM UL HAQHASSAM_RAJPOOT@YAHOO.COM     71
CHARGE OF TAX - Section 4The Federal levy (Tax ) on income , with effect from July 01,2002, in Pakistan is governed by the...
CHARGE OF TAX - Section 4“Tax ” is the amount computed by applying the applicable rateor rates of tax specified in the Fir...
CHARGE OF TAX - Section 4“Income tax ” payable on taxable income excludingseparate block of income is: • Gross income tax ...
CHARGE OF TAX - Section 4“Fixed income tax ” payable on taxable income taxed asa separate block of income is: • Tax worked...
INCOME SUBJECT TO A SEPARATE CHARGE               OF TAX           EDITED BY           HASSAM UL HAQ           HASSAM_RAJP...
INCOME SUBJECT TO A SEPARATE CHARGE -Sections 5 to 8Income subject to a separate charge are:- • Dividend ; • Royalty of no...
INCOME SUBJECT TO A SEPARATE CHARGE -Sections 5 to 8Following rules apply to income subject to a separate charge: • Tax im...
INCOME SUBJECT TO A SEPARATE CHARGE -Sections 5 to 8•   The liability of the recipient of such income is discharged to    ...
INCOME SUBJECT TO A SEPARATE CHARGE -Sections 5 to 8•   “Dividend ” received from a company by a person other    than a co...
INCOME SUBJECT TO A SEPARATE CHARGE -Section 5 to 8“Royalty ” received by a non-resident person is subject tofinal tax at ...
INCOME SUBJECT TO A SEPARATE CHARGE -Section 5 to 8“Fee for technical services ” received by a non-residentperson is subje...
INCOMES SUBJECT TO A SEPARATE CHARGE -Section 5 to 8Shipping and air transport income received by anon-resident is subject...
CHAPTER III    TAX ON TAXABLE INCOME            PART ICOMPUTATION OF TAXABLE INCOME        EDITED BY        HASSAM UL HAQ ...
TAXABLE INCOME - Section 9“ Taxable Income” means: • Total income ; minus • Deductible allowances ; minus • Donations qual...
TOTAL INCOME - Section 10“ Total   Income”      is     the     aggregate      ofincome chargeable to tax under each head o...
HEADS OF INCOME – Section 11For the purposes of imposition of income tax andcomputation of total income , all incomes are ...
HEADS OF INCOME – Section 11The extent of income under each head of income isdependent upon the residential status of a pe...
CHAPTER IIITAX ON TAXABLE INCOME        PART II   HEADS OF INCOME      “SALARY”   EDITED BY   HASSAM UL HAQ   HASSAM_RAJPO...
SALARY – Sections 12 TO 14This head of income (‘salary’) is further classified as under: • Salary chargeable to income tax...
SALARY – Sections 12 to 14“Salary ” received by an employee in a tax year , otherthan salary exempt from tax is chargeable...
SALARY – Sub-Section (2) of Section 12“ Salary” means any amount received by an employee from   any employment , whether o...
SALARY – Sub-Section (2) of Section 12   Profits in lieu of, or in addition to, salary or wages, including:    Considera...
PERQUISITE – Sub-Section (5) of Section 12A perquisite is treated as received by an employee from any  employment regardle...
EMPLOYEE SHARE SCHEME – Sub-Section (6) ofSection 14“ Employee share scheme” means any agreement orarrangement under which...
SALARY – Exempt from taxSalary of certain persons or class of persons       areexempt from tax under the Ordinance , subje...
SALARY – Valuation of perquisites – Section 13As a general rule the value of perquisites included in salary isthe fair mar...
SALARY – Taxation of retirement or terminationbenefits – Sub-Section (6) of Section 12Salary is chargeable to tax on the b...
SALARY – Taxation of retirement or terminationbenefits – Sub-Section (6) of Section 12  Following example will illustrate ...
SALARY – Taxation of arrears of salary – Sub-Section (7) of Section 12Salary is chargeable to tax on the basis of actually...
SALARY – Taxation of arrears of salary – Sub-Section (7) of Section 12 Following example will illustrate the effects and c...
FLYING AND SUBMARINE ALLOWANCE – Clause(1) of Part III of 2nd Schedule•   “Flying allowance ” of pilots, flight engineers,...
CHAPTER III TAX ON TAXABLE INCOME         PART III    HEADS OF INCOME“INCOME FROM PROPERTY”    EDITED BY    HASSAM UL HAQ ...
INCOME FROM PROPERTY – Section 15 and 16“ Rent ” received or receivable for a tax year , other thanrent exempt from tax , ...
RATES OF FIXED INCOME TAX ON INCOMEFROM PROPERTY In case of an individual or AOP                 In case of a company Gros...
RENT – Section 15 and 16“ Rent ” means any amount (not less than the fair marketrent ) received or receivable by the owner...
NON-ADJUSTABLE AMOUNTS RECEIVED INRELATION TO A BUILDING – Section 16The extent to which such ‘non-adjustable amounts’ are...
NON-ADJUSTABLE AMOUNTS RECEIVED INRELATION TO A BUILDING – Section 16The following examples will illustrate the extent to ...
CHAPTER III TAX ON TAXABLE INCOME         PART IV    HEADS OF INCOME“INCOME FROM BUSINESS”    EDITED BY    HASSAM UL HAQ  ...
INCOME FROM BUSINESS – Section 18 and 19This head of income (‘income from business’) is furtherclassified as under: • Non-...
INCOME FROM BUSINESS – Section 18 and 19The rules for computation of: • Non-speculation      business income chargeable to...
INCOME FROM BUSINESS – Section 18 and 19Following incomes of a person for a tax year , other thanincome exempt from tax , ...
INCOME FROM BUSINESS – Section 18 and 19•   Any management fee derived by a management    company (including a modaraba ma...
OTHER INCLUSIONS IN INCOME FROMBUSINESS UNDER VARIOUS PROVISIONSIn addition following are also included in income chargeab...
SPECULATION BUSINESS – Sub-Section (2) ofSection 19“ Speculation business” means any business in which acontract for the p...
DEDUCTIONS IN COMPUTING INCOME FROMBUSINESS – Section 20In computing the income chargeable to tax under the head‘income fr...
DEDUCTIONS IN COMPUTING INCOME FROMBUSINESS – Section 20“ Any expenditure ” does not include: • Expenditures for which ded...
DEDUCTIONS NOT ALLOWED IN COMPUTINGINCOME FROM BUSINESS – Section 20Deduction for the following expenditures incurred is n...
DEDUCTIONS NOT ALLOWED IN COMPUTINGINCOME FROM BUSINESS – Section 20 and Rule 10•   “Entertainment expenditure ”, which do...
DEDUCTIONS NOT ALLOWED IN COMPUTINGINCOME FROM BUSINESS – Section 20•   Contribution made to a fund that is not a    recog...
DEDUCTIONS NOT ALLOWED IN COMPUTINGINCOME FROM BUSINESS – Section 20•   Profit on debt , brokerage, commission, salary or ...
DEDUCTIONS NOT ALLOWED IN COMPUTINGINCOME FROM BUSINESS – Section 20•   Expenditure exceeding Rs. 10,000 incurred and paid...
SPECIAL PROVISIONS – Sections 22 to 31(DEDUCTIONS IN COMPUTING INCOME FROM BUSINESS)Following are the expenditures* for wh...
SPECIAL PROVISIONS – Sections 22 to 31(DEDUCTIONS IN COMPUTING INCOME FROM BUSINESS)•   Bad debts ;•   Reserve to off-set ...
DEDUCTIONS – UNDER OTHER PROVISIONS(DEDUCTIONS IN COMPUTING INCOME FROM BUSINESS)In addition following are also allowed as...
DEPRECIATION – Section 22“Deduction for deductible depreciation ” of depreciableassets used in a business by a person in t...
DEPRECIATION – Section 22“Deductible depreciation ” is arrived at as under: • Where the depreciable assets is used in a ta...
DEPRECIATION – Section 22Example - Motor vehicle used partly for business chargeable to           tax and partly for priva...
DEPRECIATION – Section 22“Depreciable asset ” means any tangible movable property,immovable property (other than unimprove...
DEPRECIATION – Section 22“Structural improvement ” in relation to immovable property,includes any building, road, driveway...
DEPRECIATION – Section 22“Depreciation ” for each depreciable asset is computed asunder: • Written down value of the depre...
DEPRECIATION – Section 22“Written down value ” means: • Cost of depreciable asset acquired ; minus • Depreciation* , initi...
DEPRECIATION – Section 22“Cost of depreciable asset acquired ”: • In case of a passenger transport vehicle not plying for ...
DEPRECIATION – Section 22“Rates of depreciation ” – The annual rates of depreciation are: • Buildings – All types         ...
GAIN OR LOSS ON DISPOSAL OF DEPRECIABLEASSET – Section 22“Gain or loss on disposal of depreciable asset ” is,included in o...
GAIN OR LOSS ON DISPOSAL OF DEPRECIABLEASSET – Section 22“Written down value ” for the purposes of calculating the gainor ...
GAIN OR LOSS ON DISPOSAL OF DEPRECIABLEASSET – Section 22“Consideration received on disposal of depreciableasset ”: • In c...
INITIAL ALLOWANCE – Section 23“Deduction for initial allowance ” at the rate of50% of the cost of an eligible depreciable ...
INITIAL ALLOWANCE – Section 23“Eligible depreciable asset for initial allowance ” meansa depreciable asset excluding the f...
FIRST YEAR ALLOWANCE – Section 23A and 23B“Deduction for first year allowance ”, in lieu ofinitial allowance , at the rate...
FIRST YEAR ALLOWANCE – Section 23A and 23B“Eligible depreciable asset for first year allowance ”means plant, machinery and...
INTANGIBLES – Section 24“Deduction for deductible amortization ” of intangibleassets used in a business in the tax year is...
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  • TEACHER AT CPE ISLAMABAD
  • Tax of PAKISTAN

    1. 1. In the Name of Allah, the Most Beneficent, the Most Merciful EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 1
    2. 2. Income Tax Law – LecturesBased On Income Tax Ordinance, 2001 AsAmended upto 30th June, 2011 And AsApplicable For The Tax Year 2012Habib Fakhruddin, FCAAmir Alam Khan & Co.,Chartered Accountants55/1, Bank Road, Rawalpindi 2
    3. 3. CHAPTER IPRELIMINARYEDITED BYHASSAM UL HAQHASSAM_RAJPOOT@YAHOO.COM 3
    4. 4. DEFINATIONS Section 2EDITED BYHASSAM UL HAQHASSAM_RAJPOOT@YAHOO.COM 4
    5. 5. ACCUMULATED PROFITS – Clause (1) of Section2“ Accumulated profits" in relation to distribution or payment of a dividend , include – Any reserve made up wholly or partly of any allowance, deduction, or exemption admissible under this Ordinance; For the purposes of sub-clauses (a), (b) and (e) of clause (19) all profits of the company including income and gains of a trust up to the date of such distribution or such payment, as the case may be; and For the purposes of sub-clause (c) of clause (19) , includes all profitsEDITED company including income and of the BY gains of a trust up to the date of its liquidation. HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 5
    6. 6. AMALGAMATION - Clause (1A) of Section 2“ Amalgamation” means the merger of one or more: • Banking companies ; • Non-banking financial institutions ; • Insurance companies; • companies owning and managing industrial undertakings ; or • companies engaged in providing services and not being a trading company or companies ;in either case at least one of them being a public company , or acompany incorporated under any law, other than CompaniesOrdinance, 1984, for the time being in force, in such manner that– • The assets of the amalgamating company or companies immediately before the amalgamation become the assets of EDITED BY the amalgamated company by virtue of the amalgamation, HASSAM UL HAQ otherwise than by purchase of such assets by the HASSAM_RAJPOO amalgamated company or as a result of distribution of T@YAHOO.COM such assets to the amalgamated company after the 6 Continued
    7. 7. AMALGAMATION - clause (1A) of Section 2• The liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation.“ Amalgamating company or companies ” means thecompany or companies which so merge.“ Amalgamated company ” means the company with whichthey merge or which is formed as a result of merger. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 7
    8. 8. APPROVED GARTUITY FUND - Clause (3) ofSection 2“Approved gratuity fund ” means a gratuity fund approvedby the Commissioner in accordance with Part III of the SixthSchedule (This is not covered in the present course). EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 8
    9. 9. APPROVED ANNUITY PLAN - Clause (3A) ofSection 2“Approved Annuity Plan ” means an Annuity Plan approvedby Securities and Exchange Commission of Pakistan (SECP)under Voluntary Pension System Rules, 2005 and offered by aLife Insurance Company registered with the SECP underInsurance Ordinance, 2000. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 9
    10. 10. APPROVED INCOME PAYMENT PLAN– Clause (3B) Of Section 2“Approved income payment plan ” means an incomepayment plan approved by securities and exchangecommission of Pakistan (SECP) under voluntary pensionsystem rules, 2005 and offered by a pension fund managerregistered with the SECP under voluntary pension systemrules, 2005. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 10
    11. 11. APPROVED PENSION FUND - Clause(3C) Of Section 2“Approved Pension Fund ” means Pension Fund approvedby Securities and Exchange Commission of Pakistan (SECP)under Voluntary Pension System Rules, 2005, and managedby a Pension Fund Manager registered with the SECP underVoluntary Pension System Rules, 2005. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 11
    12. 12. APPROVED EMPLOYMENT PENSIONOR ANNUITY SCHEME - Clause (3D)Of Section 2.“Approved employment pension or annuity scheme ”means any employment related retirement scheme approvedunder this ordinance, which makes periodical payment to abeneficiary i.e. Pension or annuity such as approvedsuperannuation fund, public sector pension scheme andemployees old-age benefit scheme. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 12
    13. 13. APPROVED OCCUPATIONALSAVINGS SCHEME - Clause (3E) ofSection 2“Approved Occupational Savings Scheme ” means anyapproved gratuity fund or recognized provident fund. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 13
    14. 14. APPROVED SUPERANNUATION FUND - Clause(4) of Section 2“Approved superannuation fund ” means asuperannuation fund, or any part of a superannuation fund,approved by the Commissioner in accordance with Part II ofthe Sixth Schedule (This is not covered in the present course). EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 14
    15. 15. ASSESSMENT - Clause (5) of Section 2“Assessment ” includes provisional assessment, re-assessment and amended assessment and the cognateexpressions shall be construed accordingly. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 15
    16. 16. ASSET MANAGEMENT COMPANY- Clause (5B)of Section 2“Asset management company ” means an assetmanagement company as defined in the Non-Banking FinanceCompanies and Notified Entities Regulations, 2007. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 16
    17. 17. BANKING COMPANY - Clause (7) of Section 2“ Banking company” means a banking company as definedin the Banking Companies Ordinance, 1962 and includes anybody corporate which transacts the business of banking inPakistan. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 17
    18. 18. BUSINESS - Clause (9) of Section 2“ Business” includes any: • Trade; • Commerce; • Manufacture; • Profession; • Vocation; or • Adventure or concern in the nature of trade, commerce, manufacture, profession or vocation;but does not include employment . EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 18
    19. 19. BOARD - Clause (11) of Section 2“Board ” means the Central Board of Revenue establishedunder the Central Board of Revenue Act, 1924 (IV of 1924),and on the commencement of Federal Board of Revenue Act,2007, the Federal Board of Revenue established under section3 thereof. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 19
    20. 20. CHIEF COMMISSIONER - Clause (11B) of Section2“Chief Commissioner ” means a person appointed as ChiefCommissioner Inland Revenue under section 208 and includesa Regional Commissioner of Income Tax and a Director-General of Income Tax and Sales Tax. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 20
    21. 21. CONTRIBUTION TO AN APPROVED PENSIONFUND - Clause (13B) of Section 2“Contribution to an Approved Pension Fund ” meanscontribution as defined in rule 2(j) of the Voluntary PensionSystem Rules, 2005. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 21
    22. 22. CO-OPERATIVE SOCIETY - Clause (14) of Section2“ Co-operative society” means a co-operative societyregistered under the Co-operative Societies Act, 1925 or underany other law for the time being in force in Pakistan for theregistration of cooperative societies. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 22
    23. 23. DEBT - Clause (15) of Section 2“ Debt” means any amount owing, including accounts payableand the amounts owing under promissory notes, bills ofexchange, debentures, securities, bonds or other financialinstruments. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 23
    24. 24. DIVIDEND - Clause (19) of Section 2“ Dividend” includes –a. Any distribution by a company of accumulated profits to its shareholders , whether capitalized or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets including money of the company ;b. Any distribution by a company , to its shareholders of debentures, debenture-stock or deposit certificate in any form, whether with or without profit, to the extent to which the company possesses accumulated profits whether capitalized or not;c. Any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalized or not; EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 24 Continued
    25. 25. DIVIDEND - Clause (19) of Section 2“ Dividend” includes –d. Any distribution by a company to its shareholders on the reduction of its capital, to the extent to which the company possesses accumulated profits , whether such accumulated profits have been capitalized or not;e. Any payment by a private company as defined in the Companies Ordinance, 1984 or trust of any sum (whether as representing a part of the assets of the company or trust , or otherwise) by way of advance or loan to a shareholder or any payment by any such company or trust on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company or trust, in EDITED BY either case, possesses accumulated profits ; or HASSAM UL HAQf. Remittance of after tax profit of a branch of a foreign HASSAM_RAJPOO company operating in Pakistan; T@YAHOO.COM 25 Continued
    26. 26. DIVIDEND - Clause (19) of Section 2but dividend does not include -i. A distribution made in accordance with sub-clause (c) or (d) in respect of any share for full cash consideration, or redemption of debentures or debenture stock, where the holder of the share or debenture is not entitled in the event of liquidation to participate in the surplus assets;ii. Any advance or loan made to a shareholder by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company ;iii. Any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub- clause (e) to the extent to which it is so set off; andiv. Remittance of after tax profit by a branch of Petroleum Exploration and Production (E&P) foreign company, operating in Pakistan. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 26
    27. 27. ADDRESSEE ETC - Clause (19B) of Section 2The expressions “addressee ”, “automated ”, “electronic ”,electronic signature ”, “information ”, “informationsystem ”, “originator ” and “transaction ”, have the samemeanings as are assigned to them in the ElectronicTransactions Ordinance, 2002 EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 27
    28. 28. ELECTRONIC RECORD - Clause (19C) of Section2“Electronic record ” includes the contents ofcommunications, transactions and procedures under thisOrdinance, including attachments, annexes, enclosures,accounts, returns, statements, certificates, applications, forms,receipts, acknowledgements, notices, orders, judgments,approvals, notifications, circulars, rulings, documents and anyother information associated with such communications,transactions and procedures, created, sent, forwarded, repliedto, transmitted, distributed, broadcast, stored, held, copied,downloaded, displayed, viewed, read, or printed, by one orseveral electronic resources and any other information inelectronic form. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 28
    29. 29. ELECTRONIC RESOURCE - Clause (19D) ofSection 2“Electronic resource ” includes telecommunication systems,transmission devices, electronic video or audio equipment,encoding or decoding equipment, input, output or connectingdevices, data processing or storage systems, computersystems, servers, networks and related computer programs,applications and software including databases, datawarehouses and web portals as may be prescribed by theBoard from time to time, for the purpose of creating electronicrecord. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 29
    30. 30. TELECOMMUNICATION SYSTEM – Clause (19E)of Section 2“Telecommunication system ” includes a system for theconveyance, through the agency of electric, magnetic, electro-magnetic, electrochemical or electro-mechanical energy, ofspeech, music and other sounds, visual images and signalsserving for the impartation of any matter otherwise than in theform of sounds or visual images and also includes real timeonline sharing of any matter in manner and mode as may beprescribed by the Board from time to time. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 30
    31. 31. EMPLOYEE - Clause (20) of Section 2“ Employee ” means any individual engaged in employment . EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 31
    32. 32. EMPLOYER - Clause (21) of Section 2“ Employer ” means any person who engages andremunerates an employee . EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 32
    33. 33. EMPLOYMENT - Clause (22) of Section 2“ Employment ” includes – A directorship or any other office involved in the management of a company ; A position entitling the holder to a fixed or ascertainable remuneration; or The holding or acting in any public office. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 33
    34. 34. FEE FOR TECHNICAL SERVICES - Clause (23) ofSection 2“ Fee for technical services” means any consideration, whether periodical or lump sum, for the rendering of any managerial, technical or consultancy services including the services of technical or other personnel, but does not include – Consideration for services rendered in relation to a construction, assembly or like project undertaken by the recipient; or Consideration which would be income of the recipient chargeable under the head “Salary ”. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 34
    35. 35. FINANCIAL INSTITUTION - Clause (24) of Section2“Financial institution ” means an institution as defined underthe Companies Ordinance, 1984. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 35
    36. 36. FINANCE SOCIETY - Clause (25) of Section 2“ Finance society” includes a co-operative society whichaccepts money on deposit or otherwise for the purposes ofadvancing loans or making investments in the ordinary courseof business. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 36
    37. 37. INCOME - Clause (29) of section 2“ Income” includes • Any amount chargeable to tax under the Ordinance; • Any amount subject to final taxation by way of collection or deduction of tax at source under section 148, 150, 152(1), 153, 154, 156, 156A, 233, 233A and, sub-section (5) of section 234; • Any amount treated as income under any provision of the Ordinance; and • Any loss of income;But does not include,In case of a shareholder of a company , the amountrepresenting the face value of any bonus share [including EDITED BYbonus units in a unit trust – Section 2(8)] or the amount of anybonus declared, issued or paid HAQ the company to the HASSAM UL byshareholders with HASSAM_RAJPOO a view to increasing it’s paid up sharecapital. T@YAHOO.COM 37
    38. 38. INDIVIDUAL PENSION ACCOUNT - Clause (29B)of section 2“Individual Pension Account ” means an accountmaintained by an eligible person with a Pension Fund Managerapproved under the Voluntary Pension System Rules, 2005. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 38
    39. 39. INDUSTRIAL UNDERTAKING – Clause (29C) ofsection 2“Industrial undertaking ” means – • an undertaking which is set up in Pakistan and which employs, – Ten or more persons in Pakistan and involves the use of electrical energy or any other form of energy which is mechanically transmitted and is not generated by human or animal energy; or – Twenty or more persons in Pakistan and does not involve the use of electrical energy or any other form of energy which is mechanically transmitted and is not generated by human or animal energy; and which is engaged in: – the manufacture of goods or materials or the subjection of goods or materials to any process which substantially changes their original condition; – Ship-building; – Generation, conversion, transmission or distribution of electrical energy, or the supply of hydraulic power; or – The working of any mine, oil-well or any other source of mineral EDITED BY deposits; and HASSAM UL HAQ • any other industrial undertaking which the Board may by notification in HASSAM_RAJPOO the official Gazette, specify. T@YAHOO.COM 39
    40. 40. INVESTMENT COMPANY - Clause (30A) ofsection 2“Investment company ” means an investment company asdefined in the Non-Banking Finance Companies (Establishmentand Regulation) Rules, 2003. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 40
    41. 41. KIBOR - Clause (30AA) Of Section 2“KIBOR” means Karachi Inter Bank Offered Rate prevalent onthe first day of each quarter of the financial year. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 41
    42. 42. LEASING COMPANY - Clause (30B) of section 2“ Leasing company” means a leasing company as defined inthe Non-Banking Finance Companies and Notified EntitiesRegulation, 2007. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 42
    43. 43. LOCAL GOVERNMENT - Clause (31A) ofSection 2 “ Local Government” has the same meaning as defined in the Punjab Local Government Ordinance, 2001, the Sindh Local Government Ordinance, 2001, the NWFP Local Government Ordinance, 2001 and the Balochistan Local Government Ordinance, 2001. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 43
    44. 44. MEMBER - Clause (32) of section 2“ Member” in relation to an association of persons ,includes a partner in a firm . EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 44
    45. 45. MODARABA - Clause (34) Of Section 2“ Modaraba” means a modaraba as defined in the ModarabaCompanies and Modarabas (Floatation and Control)Ordinance, 1980. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 45
    46. 46. MODARABA CERTIFICATE - Clause (35) ofSection 2“Modaraba certificate ” means a modaraba certificate asdefined in the Modaraba Companies and Modarabas(Floatation and Control) Ordinance, 1980. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 46
    47. 47. MUTUAL FUND - Clause (35A) of Section 2“ Mutual Fund” means a mutual fund registered or approvedby the Securities and Exchange Commission of Pakistan. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 47
    48. 48. NON-BANKING FINANCE COMPANY - Clause(35B) of Section 2“ Non-banking finance company” means an NBFC asdefined in the Non-Banking Finance Companies (Establishmentand Regulation) Rules, 2003. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 48
    49. 49. NON-PROFIT ORGANIZATION - Clause (36) ofSection 2“Non-profit organization ” means any person other than anindividual, which is – • established for religious, educational, charitable, welfare or development purposes, or for the promotion of an amateur sport; • formed and registered under any law as a non-profit organization; • approved by the Commissioner for specified period, on an application made by such person in the prescribed form and manner, accompanied by the prescribed documents and, on requisition, such other documents as may be required by the Commissioner ;and none of the assets of such person confers, or may confer, EDITED BYa private benefit to any other person . HASSAM UL HAQ Commissioner ”“Approved by the HASSAM_RAJPOOin accordance with theRules 211 to 220 (This is not covered in the present course). T@YAHOO.COM 49
    50. 50. OFFICER OF INLAND REVENUE - Clause (38A) ofSection 2“Officer of Inland Revenue ” means any AdditionalCommissioner Inland Revenue, Deputy Commissioner InlandRevenue, Assistant Commissioner Inland Revenue, InlandRevenue Officer, Inland Revenue Audit Officer or any otherofficer however designated or appointed by the Board for thepurposes of this Ordinance EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 50
    51. 51. ORIGINATOR - Clause (39) of Section 2“Originator ” means Originator as defined in the Asset BackedSecuritization Rules, 1999. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 51
    52. 52. PENSION FUND MANAGER - Clause (40A) ofSection 2“Pension Fund Manager ” means an asset managementcompany registered under the Non-Banking FinanceCompanies (Establishment and Regulations) Rules, 2003, or alife insurance company registered under Insurance Ordinance,2000, duly authorized by the Securities and ExchangeCommission of Pakistan and approved under the VoluntaryPension System Rules, 2005, to manage the ApprovedPension Fund. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 52
    53. 53. PERMANENT ESTABLISHMENT - Clause (41) ofSection 2“ Permanent establishment” in relation to a person , means a fixed place of business through which the business of the person is wholly or partly carried on, and includes – A place of management, branch, office, factory or workshop, premises for soliciting orders, warehouse, permanent sales exhibition or sales outlet, other than a liaison office except where the office engages in the negotiation of contracts (other than contracts of purchase); A mine, oil or gas well, quarry or any other place of extraction of natural resources; An agricultural, pastoral (rural) or forestry property; A building site, a construction, assembly or installation project or supervisory activities connected with such site or project but only EDITED BY where such site, project and its connect supervisory activities continue for a period HASSAM UL HAQ or periods aggregating more than ninety days within any twelve-months period; HASSAM_RAJPOO T@YAHOO.COM 53 Continued
    54. 54. PERMANENT ESTABLISHMENT - Clause (42) ofSection 2 The furnishing of services, including consultancy services, by any person through employees or other personnel engaged by the person for such purpose; A person acting in Pakistan on behalf of the person (hereinafter referred to as the “agent”, other than an agent of independent status acting in the ordinary course of business as such, if the agent –  Has and habitually exercises an authority to conclude contracts on behalf of the other person ;  Has no such authority, but habitually maintains a stock- in-trade or other merchandise from which the agent regularly delivers goods or merchandise on behalf of the other person ; EDITED BY or Any substantial equipment UL HAQ HASSAM installed, or other asset or property capable of activity giving rise to income. HASSAM_RAJPOO T@YAHOO.COM 54
    55. 55. PRINCIPAL OFFICER - Clause (44A) of Section 2“Principal officer ” used with reference to a company orassociation of persons includes – • A director, a manager, secretary, agent, accountant or any • similar officer; and • Any person connected with the management or administration of the company or association of persons upon whom the Commissioner has served a notice of treating him as the principal officer thereof. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 55
    56. 56. PRIVATE COMPANY - Clause (45) of Section 2“ Private company” means a company that is not apublic company .Note: The definition of ‘Private Company’ under the Ordinance is different from one generally under stood or as defined under the Companies Ordinance, 1984. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 56
    57. 57. PROFIT ON DEBT - Clause (46) of Section 2“ Profit on a debt” whether payable or receivable, means– Any profit, yield, interest, discount, premium or other amount, owing under a debt , other than a return of capital; or Any service fee or other charge in respect of a debt , including any fee or charge incurred in respect of a credit facility which has not been utilized. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 57
    58. 58. PUBLIC COMPANY - Clause (47) of Section 2“ Public company ” means – • a company in which not less than fifty per cent of the shares are held by the Federal Government or Provincial Government; • a company in which not less than fifty per cent of the shares are held by a foreign Government, or a foreign company owned by a foreign Government; • a company whose shares were traded on a registered stock exchange in Pakistan at any time in the tax year and which remained listed on that exchange at the end of that year; or • a unit trust whose units are widely available to the public EDITED BY and any other trust as defined in the Trusts Act, 1882.Note: The definition of HASSAM UL HAQ ‘Public Company’ under the Income Tax HASSAM_RAJPOOOrdinance, 2001 is different from one generally under stood or asdefined under the Companies Ordinance, 1984. T@YAHOO.COM 58
    59. 59. RECOGNIZED PROVIDENT FUND - Clause (48) ofSection 2“Recognized provident fund ” means a provident fundrecognized by the Commissioner in accordance with Part I ofthe Sixth Schedule (This is not covered in the present course). EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 59
    60. 60. ROYALTY - Clause (54) of Section 2“ Royalty” means any amount paid or payable, however described or computed, whether periodical or a lump sum, as consideration for - The use of, or right to use any patent, invention, design or model, secret formula or process, trademark or other like property or right; The use of, or right to use any copyright of a literary, artistic or scientific work, including films or video tapes for use in connection with television or tapes in connection with radio broadcasting, but shall not include consideration for the sale, distribution or exhibition of cinematograph films; EDITED BY The supply of any technical, industrial, commercial HASSAM UL HAQ or scientific knowledge, experience or skill; HASSAM_RAJPOO T@YAHOO.COM 60 Continued
    61. 61. ROYALTY - Clause (54) of Section 2 The receipt of, or right to receive, any visual images or sounds, or both, transmitted by satellite, cable, optic fiber or similar technology in connection with television, radio or internet broadcasting; The use of or right to use any industrial, commercial or scientific equipment; The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as mentioned above; and The disposal of any property or right referred to above. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 61
    62. 62. SECURITIZATION - Clause (57) of Section 2“Securitization ” means securitization as defined in the AssetBacked Securitization Rules, 1999. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 62
    63. 63. SHARE - Clause (58) of Section 2“ Share” in relation to a company , includes a modarabacertificate and the interest of a beneficiary in a trust (includingunits in a trust) EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 63
    64. 64. SHAREHOLDER - Clause (59) of Section 2“ Shareholder” in relation to a company , includes amodaraba certificate holder, a unit holder of a unit trustand a beneficiary of a trust . EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 64
    65. 65. SMALL COMPANY - Clause (59A) of Section 2“ Small company ” means a company registered on or after the first day of July, 2005, under the Companies Ordinance, 1984 (XLVII) of 1984, which,- Has paid up capital plus undistributed reserves not exceeding Rs. 25,000,000; Has employees not exceeding 250 any time during the year; Has annual turnover not exceeding Rs. 250,000,000; and Is not formed by the splitting up or the reconstitution of business already in existence. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 65
    66. 66. SPECIAL PURPOSE VEHICLE – Clause (60) ofSection 2“Special Purpose Vehicle ” means a Special PurposeVehicle as defined in the Asset Backed Securitization Rules,1999. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 66
    67. 67. TAX - Clause (63) of Section 2“ Tax” means any tax imposed on: • Taxable income (Income Tax); • Income subject to a separate charge (Fixed Tax); • Income subject to final taxation (Final Tax); • Separate block of income (Fixed Tax); and includes: • Income tax to be collected or deducted at source ; • Income tax to be paid in advance ; • Penalty ; • Fee; or EDITED BY • Any other charge or any sum or amount; HASSAM UL HAQ leviable or payable under the Ordinance. HASSAM_RAJPOO T@YAHOO.COM 67
    68. 68. TAXPAYER - Clause (66) of Section 2“Taxpayer ” means any person who derives an amountchargeable to tax under the Ordinance, and includes – • Any representative of a person who derives an amount chargeable to tax under the Ordinance; • Any person who is required to collect or deduct tax at source under Part V of Chapter X and Chapter XII; or • Any person required to furnish a return of income or pay tax under the Ordinance; EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 68
    69. 69. VENTURE CAPITAL COMPANY AND VENTURECAPITAL FUND - Clause (74) of Section 2“ Venture Capital Company” and “Venture Capital Fund”shall have the same meanings as are assigned to them underthe Non-Banking Finance Companies (Establishment andRegulation) Rules, 2003. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 69
    70. 70. ORDINANCE TO OVERRIDE OTHER LAWS Section 3The provisions of the Income Tax Ordinance, 2001 applynotwithstanding anything to the contrary contained in any otherlaw for the time being in force. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 70
    71. 71. CHAPTER IICHARGE OF TAXEDITED BYHASSAM UL HAQHASSAM_RAJPOOT@YAHOO.COM 71
    72. 72. CHARGE OF TAX - Section 4The Federal levy (Tax ) on income , with effect from July 01,2002, in Pakistan is governed by the Income Tax Ordinance,2001 (hereinafter referred to as ‘Ordinance’) and Income TaxRules, 2002 (hereinafter referred to as ‘Rules’) . It is an annualcharge for a tax year on a person .For the purposes of levy of tax , income is classified infollowing three broad categories: • Taxable income ; • Income subject to a separate charge ; and • Income subject to final taxation .Taxable income isEDITEDdivided into two sub-categories: further BY• Taxable HASSAM UL HAQ income excluding separate block of income; and HASSAM_RAJPOO T@YAHOO.COM• Taxable income taxed as a separate 72 block of income Continued
    73. 73. CHARGE OF TAX - Section 4“Tax ” is the amount computed by applying the applicable rateor rates of tax specified in the First Schedule to theOrdinance , on each category/sub-category of income i.e., • Income Tax on taxable income excluding separate block of income; • Fixed Income Tax on taxable income taxed as a separate block of income ; • Final Tax on income subject to a separate charge ; and • Final Tax on EDITED BY income subject to final taxation . HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 73 Continued
    74. 74. CHARGE OF TAX - Section 4“Income tax ” payable on taxable income excludingseparate block of income is: • Gross income tax ; minus • Reductions in tax liability ; minus • Foreign tax credit ; minus • Tax credits on* ; minus • Tax credit on exempt share from association of perso ; minus • Advance tax paid credit ; minus • Adjustable tax collected or deducted credit .* Charitable donations, Investment in shares, Contribution to an approved pension fund, Profit on debt, On being registered under the Sales Tax Act, 1990 as a manufacturer, Investment (Balancing, EDITED BY modernization and replacement of plant and machinery), Enlistment on Stock Exchange, Equity investment in newly established industrial undertaking and EquityHAQ HASSAM UL investment in purchase and installation of plant HASSAM_RAJPOO purposes of balancing, and machinery for the modernization, replacement or expansion in an industrial T@YAHOO.COM undertaking established before July 01, 2011 74
    75. 75. CHARGE OF TAX - Section 4“Fixed income tax ” payable on taxable income taxed asa separate block of income is: • Tax worked as per applicable rates on each type of such income; minus • Adjustable tax collected or deducted at source out of such income, if any.“Final tax ” payable on income subject to a separatecharge and income subject to final taxation is: • Tax worked as per applicable rates on each type of such income; minus • Non-adjustable EDITED collected or deducted at tax BY source out of such income,UL HAQ HASSAM if any. HASSAM_RAJPOO T@YAHOO.COM 75
    76. 76. INCOME SUBJECT TO A SEPARATE CHARGE OF TAX EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 76
    77. 77. INCOME SUBJECT TO A SEPARATE CHARGE -Sections 5 to 8Income subject to a separate charge are:- • Dividend ; • Royalty of non-residents ; • Fee for technical services of non-residents ; and • Shipping and air transport income of non-residents . EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 77 Continued
    78. 78. INCOME SUBJECT TO A SEPARATE CHARGE -Sections 5 to 8Following rules apply to income subject to a separate charge: • Tax imposed is a final tax; • Such income is not chargeable to tax under any head of income in computing the taxable income of the person ; • No deduction is allowed for any expenditure incurred in deriving such income; • The amount of the such income is not reduced by – – Any deductible allowance ; or – The set off of any loss ; • The final tax payable is BY reduced by any tax credit EDITED not allowed HASSAM UL HAQ credit (foreign tax or tax credits on donations, investments etc. ); HASSAM_RAJPOO T@YAHOO.COM 78 Continued
    79. 79. INCOME SUBJECT TO A SEPARATE CHARGE -Sections 5 to 8• The liability of the recipient of such income is discharged to the extent that – – In the case of shipping and air transport income, the tax is paid in accordance with section 143 or section 144 ; or – In any other case, the final tax payable has been deducted at source ; and• An assessment is treated to have been made under section 120 and the person is not required to furnish a return of income under section 114 for the year in respect such income [section 169(3)]. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 79
    80. 80. INCOME SUBJECT TO A SEPARATE CHARGE -Sections 5 to 8• “Dividend ” received from a company by a person other than a company * is subject to final tax at a flat rate of 10% (except as stated below) of the gross amount of the dividend .• “Dividend ” received from: – A company which has purchased a power project privatized by WAPDA; or – A company set up for power generation is subject to a reduced rate of tax of 7.5% instead of10% (Clause (17) and (20) of Part-II of 2nd Schedule). EDITED BY * By virtue of proviso to section 8, dividend received by a company is HASSAM UL HAQ excluded from the ambit of the income subject to a separate charge and HASSAM_RAJPOO is therefore chargeable to tax as one of the component of ‘income from T@YAHOO.COM other sources’ and forms part of the taxable income.80
    81. 81. INCOME SUBJECT TO A SEPARATE CHARGE -Section 5 to 8“Royalty ” received by a non-resident person is subject tofinal tax at the rate of 15% of gross amount of royalty orapplicable reduced rate of tax as per tax treaty with the countryof such non-resident .If the property or right giving rise to the royalty is effectivelyconnected with a permanent establishment in Pakistan ofthe non-resident , then such royalty is excluded from theambit of the income subject to a separate charge and ischargeable to tax under the head ‘income from business ’. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 81
    82. 82. INCOME SUBJECT TO A SEPARATE CHARGE -Section 5 to 8“Fee for technical services ” received by a non-residentperson is subject to final tax at the rate of 15% of the grossamount of fee for technical services or applicable reducedrate of tax as per tax treaty with the country of suchnon-resident .If the services giving rise to fee for technical services isrendered through a permanent establishment in Pakistanof the non-resident , then such fee for technical servicesis excluded from the ambit of the income subject to a EDITED BYseparate charge and is chargeable to tax under the head ‘ HASSAM UL HAQincome from business ’. HASSAM_RAJPOO T@YAHOO.COM 82
    83. 83. INCOMES SUBJECT TO A SEPARATE CHARGE -Section 5 to 8Shipping and air transport income received by anon-resident is subject to final tax the rate of 8% and 3% ofthe gross amount of the shipping and air transportincome respectively.“Shipping and air transport income ” means carrying onthe business of operating ships or aircraft as the owner orcharterer thereof in respect of –  The gross amount received or receivable (whether in or out of Pakistan) for the carriage of passengers, livestock, mail or goods embarked in Pakistan; and  The gross amount received or receivable in Pakistan EDITED BY for the carriage of passengers, livestock, mail or HASSAM UL HAQ goods embarked outside Pakistan. HASSAM_RAJPOO T@YAHOO.COM 83
    84. 84. CHAPTER III TAX ON TAXABLE INCOME PART ICOMPUTATION OF TAXABLE INCOME EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 84
    85. 85. TAXABLE INCOME - Section 9“ Taxable Income” means: • Total income ; minus • Deductible allowances ; minus • Donations qualifying for straight deduction . EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 85
    86. 86. TOTAL INCOME - Section 10“ Total Income” is the aggregate ofincome chargeable to tax under each head of income . EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 86
    87. 87. HEADS OF INCOME – Section 11For the purposes of imposition of income tax andcomputation of total income , all incomes are classifiedunder the following five heads, namely:- • Salary ; • Income from property ;• Income from business ;• Capital gains ; and• Income from other sources [like dividend, royalty, profit on debt, ground rent, rent from sub-lease of land or building, income from lease of any building together with plant or EDITED BY machinery, prize on bonds, UL HAQ from a raffle, lottery or HASSAM winnings crossword puzzle, or a loan, advance, deposit or gift HASSAM_RAJPOO (subject to certain T@YAHOO.COM conditions). 87 Continued
    88. 88. HEADS OF INCOME – Section 11The extent of income under each head of income isdependent upon the residential status of a person .In case of a resident person , it is both Pakistan source income and foreign source income ; andIn case of a non-resident person , it is only Pakistan source income . EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 88
    89. 89. CHAPTER IIITAX ON TAXABLE INCOME PART II HEADS OF INCOME “SALARY” EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 89
    90. 90. SALARY – Sections 12 TO 14This head of income (‘salary’) is further classified as under: • Salary chargeable to income tax ; and • Salary chargeable to fixed income tax as a separate block of income .The rules for computation of salary chargeable to income taxare discussed in the following slides.The rules for computation of salary chargeable to fixedincome tax as a separate block of income are discussedunder the respective headings. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 90
    91. 91. SALARY – Sections 12 to 14“Salary ” received by an employee in a tax year , otherthan salary exempt from tax is chargeable to tax under thehead ‘salary’.Note: Chargeable income from salary does not permit anydeduction of ‘admissible deductions/expenditure ’.This is an exception to the general rule of admissibledeductions / expenditures. In fact sub- section (4) of section12 specifically states that no deduction is allowed for anyexpenditure incurred by an employee in deriving amountschargeable to tax under the head “Salary”. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 91
    92. 92. SALARY – Sub-Section (2) of Section 12“ Salary” means any amount received by an employee from any employment , whether of a revenue or capital nature, including - Pay, wages or other remuneration, including leave pay, payment in lieu of leave, overtime payment, bonus, commission, fees, gratuity or work condition supplements (such as for unpleasant or dangerous working conditions); Perquisites , whether convertible to money or not; Allowances including cost of living, subsistence, rent, utilities, education, entertainment or travel allowance, but excluding any allowance solely expended in the performance of the duties of employment; Expenditure incurred by an employee that is paid or reimbursed by the employer, other than expenditure incurred on behalf of the performance of the duties of employment; EDITED BY Benefit under ‘Employee Share Scheme ’ (Section 14). HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 92 Continued
    93. 93. SALARY – Sub-Section (2) of Section 12 Profits in lieu of, or in addition to, salary or wages, including: Consideration for an agreement to enter into an employment Consideration for an agreement to any conditions or changes to the Retirement or termination benefits , whether paid voluntarily or Any amount from a provident or other fund, to the extent to which it is Consideration for an employee’s agreement to a restrictive covenant in Pension or annuity, or any supplement to a pension or annuity; and Income tax payable on salary where the employer agrees EDITED BY to pay the IncomeHASSAM UL HAQ tax payable . HASSAM_RAJPOO T@YAHOO.COM 93
    94. 94. PERQUISITE – Sub-Section (5) of Section 12A perquisite is treated as received by an employee from any employment regardless of whether the amount or perquisite is paid or provided – by the employee’s employer , an associate of the employer , or by a third party under an arrangement with the employer or an associate of the employer ; by a past employer or a prospective employer ; or to the employee or to an associate of the employee or to a third party under and agreement with the employee or an associate of the employee . EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 94
    95. 95. EMPLOYEE SHARE SCHEME – Sub-Section (6) ofSection 14“ Employee share scheme” means any agreement orarrangement under which a company issues shares in thecompany to – • An employee of the company or an employee of an associated company ; or • The trustee of a trust and under the trust deed the trustee transferring the shares to an employee of the company or an employee of an associated company . EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 95
    96. 96. SALARY – Exempt from taxSalary of certain persons or class of persons areexempt from tax under the Ordinance , subject to thecertain conditions, restrictions and limitations.Details of such exemptions arranged in alphabetical ord.Details of such exemptions arranged in alphabetical ord. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 96
    97. 97. SALARY – Valuation of perquisites – Section 13As a general rule the value of perquisites included in salary isthe fair market value determined at the time the perquisite isprovided as reduced by any payment made to the employerfor such perquisite or benefit by the employee .However, the valuation of certain perquisites for which specificprovisions are made in the Ordinance and Rules is determinedotherwise.List of such perquisites and their respective methods of. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 97
    98. 98. SALARY – Taxation of retirement or terminationbenefits – Sub-Section (6) of Section 12Salary is chargeable to tax on the basis of actually receivedin a tax year . Accordingly the retirement or terminationbenefits received in lump sum are current year’s income. As aresult the income tax payable substantially increases, sincethe taxable income falls in a higher tax slab .Retirement or termination benefits are compensation for thepast services received in lump sum at the time of retirement ortermination and it is unfair to include such amount in the currentyear’s salary chargeable to tax.To overcome this problem, the taxpayer has anoption to notify the concerned Commissioner ofIncome Tax by the due date for furnishing the return,that he/she hasEDITED BY for the retirement or electedtermination benefits HASSAMto HAQ UL be taxed as aseparate block of income at the average rate of HASSAM_RAJPOOincome tax of the three preceding 98 T@YAHOO.COM years (fixed Continued
    99. 99. SALARY – Taxation of retirement or terminationbenefits – Sub-Section (6) of Section 12 Following example will illustrate the effects and calculations: Salary for the year: Excluding retirement or termination benefits (RTB) Rs. 1,000,000 Retirement or termination benefits (RTB) Rs. 5,000,000 Calculation of Excludin Including Calculation separate Taxable Income income tax, if not g RTB RTB tax at the average income tax electing rate of income tax of payable Chargeable / total 1,000,00 6,000,00 preceding three /taxable income 0 0 years Income tax rate 9% 19% Preceding Year 1 950,000 85,500 Income tax on above 90,000 1,140,00 Preceding Year 2 900,000 67,500Calculation of income tax, if 0 Preceding Year 3 850,000 63,750electing Total 2,700,000 216,750Income tax on chargeable / total / 90,000 Average rate of income tax (Totaltaxable income excluding RTB income tax payable divided by TotalFixed income tax on RTB calculated EDITED BY taxable income) .080277at the average rate of income tax of HASSAM UL HAQ RTB 5,000,000preceding three years HASSAM_RAJPOO on RTB (RTB 401,389 Fixed income tax 401,389Total income tax liability 491,389 multiply by average rate) T@YAHOO.COM 99
    100. 100. SALARY – Taxation of arrears of salary – Sub-Section (7) of Section 12Salary is chargeable to tax on the basis of actually received in atax year . Accordingly the arrears of salary received in lump sum arecurrent year’s income. As a result the income tax payable substantiallyincreases, since the taxable income falls in a higher tax slab .Arrears of salary are compensation for the past employment received inlump sum in the current year and it is unfair to include the such amount inthe current year’s salary chargeable to tax.To overcome this problem, the taxpayer has an option tonotify the concerned Commissioner of Income Tax by thedue date of furnishing the return, that he/she has elected forthe arrears of salary to be taxed as aseparate block of income at the rates of income tax thatwould have been applicable if such arrears were received inthe tax year in which the BY EDITED services were rendered (fixedincome tax ). HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 100 Continued
    101. 101. SALARY – Taxation of arrears of salary – Sub-Section (7) of Section 12 Following example will illustrate the effects and calculations: Salary for the year: Excluding arrears Rs. 1,000,000 Arrears (of last 2 years) Rs. 200,000 for each year Rs. 400,000 Calculation of Excludin Including Calculation of tax liability, if electing income tax, if not g Arrears Arrears Income tax on chargeable /total / taxable 90,000 electing income excluding RTB Chargeable / total / 1,000,00 1,400,00 Fixed income tax on arrears calculated at the taxable income 0 0 rates of income tax that would have been applicable if such arrears were received in the Income tax rate 9% 11% 58,500 tax year in which the services were rendered Income tax on above 90,000 154,000 Total income tax liability 148,500Calculation of separate tax at the Taxable income Income tax payablerates of income tax that would have Excluding Including Excluding Including Differencebeen applicable if such arrears were arrears arrears arrears arrearsreceived in the tax year in which theservices were rendered EDITED BY HASSAM UL HAQPreceding year 1 700,000 900,000 42,000 67,500 25,500Preceding year 2 HASSAM_RAJPOO 600,000 800,000 27,000 60,000 33,000Total T@YAHOO.COM 101 58,500
    102. 102. FLYING AND SUBMARINE ALLOWANCE – Clause(1) of Part III of 2nd Schedule• “Flying allowance ” of pilots, flight engineers, navigators of Pakistan Armed Forces, Pakistani Airlines or Civil Aviation Authority, Junior Commissioned Officers or other ranks of Pakistan Armed Forces; and • “Submarine allowance ” of the officers of the Pakistan Navy,is subject to fixed income tax as a separate block ofincome at the rate of 2.5% of such allowance. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 102
    103. 103. CHAPTER III TAX ON TAXABLE INCOME PART III HEADS OF INCOME“INCOME FROM PROPERTY” EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 103
    104. 104. INCOME FROM PROPERTY – Section 15 and 16“ Rent ” received or receivable for a tax year , other thanrent exempt from tax , is subject to a fixed income tax asa separate block of income .The rates of fixed income tax on rent are as under:- EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 104 Continued
    105. 105. RATES OF FIXED INCOME TAX ON INCOMEFROM PROPERTY In case of an individual or AOP In case of a company Gross amount of Rate of fixed Gross amount of Rate of fixed rent income tax rent income taxWhere the amount Nil. Where the amount 5 per cent of thedoes not exceed does not exceed gross amount ofRs.150,000 Rs.400,000 rentWhere the amount 5 per cent of the Where the amount Rs.20,000 plusexceeds Rs.150,000 gross amount of exceeds Rs.400,000 7.5 per cent of thebut does not exceed rent exceeding but does not exceed gross amount ofRs.400,000 Rs.150,000 Rs.1,000,000 rent exceedingWhere the amount Rs.12,500 plus Rs.400,000exceeds Rs.400,000 7.5 per cent of the Where the amount Rs.65,000 plus 10but does not exceed gross amount of exceeds Rs.1,000,000 per cent of theRs.1,000,000 rent exceeding gross amount of Rs.400,000 rent exceedingWhere the amount Rs.57,500 plus 10 BY EDITED Rs.1,000,000exceeds Rs.1,000,000 per cent of the HASSAM UL HAQ gross amount of HASSAM_RAJPOO rent exceeding Rs.1,000,000 T@YAHOO.COM 105
    106. 106. RENT – Section 15 and 16“ Rent ” means any amount (not less than the fair marketrent ) received or receivable by the owner/co-owner of land ora building as consideration for the use or occupation of, or theright to use or occupy, the land or building, and includes: • Any forfeited deposit paid under a contract for the sale of land or a building; and • Non-adjustable amounts received in relation to a building (amount received by the owner of a building from a tenant or a succeeding tenant which is not adjustable against the rent payable by the tenant) to the extent specified.But does not include rent in respect of: • Lease of a building together with plant and machinery; and • Provision of amenities, utilities or any other service EDITED BY connected with the renting of the building. HASSAM UL HAQ (such rent is chargeable to tax under the head “Income from Other Sources”) HASSAM_RAJPOO T@YAHOO.COM 106
    107. 107. NON-ADJUSTABLE AMOUNTS RECEIVED INRELATION TO A BUILDING – Section 16The extent to which such ‘non-adjustable amounts’ are treatedas rent is as under:Where the amount is received from a tenant – One-tenth of the amount in the tax year in which received and thefollowing nine tax years .Where the amount is received from a succeedingtenant – One-tenth of the, amount received from thesucceeding tenant as reduced by the amount earlier included inthe rent, in the tax year in which received and the followingnine tax years .“ Tenant ” means a person taking on rent a building or thefollowing person taking on rent a building on termination oftenancy by the previous person after the expiry of ten years.“ Succeeding tenant ” means a person taking on rent a EDITED BY HASSAM UL by the first person beforebuilding on termination of tenancyHAQthe expiry of ten years. HASSAM_RAJPOO T@YAHOO.COM 107 Continued
    108. 108. NON-ADJUSTABLE AMOUNTS RECEIVED INRELATION TO A BUILDING – Section 16The following examples will illustrate the extent to which such‘non-adjustable amounts’ are treated as rent:Example-I (First Tenant) – Building ‘1’ for the first time let-out to Tenant ‘A’ andthe Owner ‘X’ receives ‘non-adjustable amount’ of Rs.500,000 in tax year 2005 –Rs.50,000 (1/10th of Rs.500,000) will be treated as rent in the tax year 2005 to 2014.Example-II (First Tenant) – Building ‘1’ for the first time let-out to Tenant ‘A’ andthe Owner ‘X’ receives ‘non-adjustable amount’ of Rs.500,000 in tax year 2005. Thetenancy is terminated in tax year 2009 and the ‘non-adjustable amount’ ofRs.500,000 is refunded by the Owner to the Tenant – Rs.50,000 (1/10th ofRs.500,000) will be treated as rent in the tax year 2005 to 2008.Example-III (Succeeding Tenant) – Building ‘1’ on termination of tenancy,before expiry of ten years, by Tenant ‘A’ is let-out to the Tenant ‘B’ and the Owner ‘X’receives ‘non-adjustable amount’ of Rs.800,000 in tax year 2009 – Rs.60,000 (1/10thof (Rs.800,000 minus Rs.200,000) will be treated as rent in the tax year 2009 to2018.Example-IV (Following Tenant) – Building ‘1’ on termination of tenancy, afterexpiry of ten years, by Tenant ‘A’ is let-out to the Tenant ‘B’ and the Owner ‘X’receives ‘non-adjustable amount’ of Rs.800,000 in tax year 2016 – Rs.80,000 (1/10th EDITED BYof Rs.800,000) will be treated as rent in the tax year 2016 to 2025. HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 108
    109. 109. CHAPTER III TAX ON TAXABLE INCOME PART IV HEADS OF INCOME“INCOME FROM BUSINESS” EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 109
    110. 110. INCOME FROM BUSINESS – Section 18 and 19This head of income (‘income from business’) is furtherclassified as under: • Non- speculation business : – Income chargeable to income tax ; – Income chargeable to fixed income tax as a separate block of income ; and – Income chargeable to final tax as income subject to final taxation ; and• Speculation business income chargeable to income tax .Each of the above classification is treated as distinct andseparate from each other, forBY purposes of computation of EDITED theincome , admissibleUL HAQ HASSAM deductions / expenditures ,apportionment of deductions , set off of losses and HASSAM_RAJPOOcarry forward of business losses . T@YAHOO.COM 110
    111. 111. INCOME FROM BUSINESS – Section 18 and 19The rules for computation of: • Non-speculation business income chargeable to income tax ; and • Speculation business income chargeable to income tax ;are same and these are discussed in the following slides.The rules for computation of: • Non-speculation business income chargeable to fixed income tax as a separate block of income ; and • Non-speculation business income chargeable to final tax as income subject to final taxation ; EDITED BYare discussed separately under UL HAQ HASSAM the respective headings. HASSAM_RAJPOO T@YAHOO.COM 111
    112. 112. INCOME FROM BUSINESS – Section 18 and 19Following incomes of a person for a tax year , other thanincome exempt from tax , computed according to themethod of accounting regularly employed, is chargeable totax under the head ‘income from business’: • The profits and gains of any business carried on at any time in the year; • Any income derived by any trade, professional or similar association from the sale of goods or provision of services to its members ; • The fair market value of any benefit or perquisite, whether convertible into money or not, derived in the course of, or by virtue of,EDITED BY a past, present, or prospective business relationship; HASSAM UL HAQ • Any income from the hire or lease of tangible movable HASSAM_RAJPOO property; T@YAHOO.COM 112 Continued
    113. 113. INCOME FROM BUSINESS – Section 18 and 19• Any management fee derived by a management company (including a modaraba management company).• Any profit on debt derived by a person where the person’s business is to derive such income;• Any amount received or receivable by a scheduled bank or an investment bank or a development finance institution or a modaraba or a leasing company in connection with lease of any asset, whether owned by it or not; and• Any amount received by a banking company or a non-banking finance company , where such amount EDITED BY represents distribution by a mutual fund or a Private HASSAM UL HAQ Equity and Venture Capital Fund out of its income HASSAM_RAJPOO from profit on debt . T@YAHOO.COM 113
    114. 114. OTHER INCLUSIONS IN INCOME FROMBUSINESS UNDER VARIOUS PROVISIONSIn addition following are also included in income chargeable to tax underthe head ‘income from business’ under other provisions of the Ordinancestated against each: • Gain on disposal of depreciable assets or specified intangibles (sub-section (8) of section 22 and (sub-section (8) of section 24); • Subsequent recovery of bad debts (Sub-Section (3) of section 29); • Subsequent recovery of profit accruing on non-performing de (Sub-Section (2) of section 30); • Non-permitted application out of participatory reserve (Sub- Section (5) of section 34); • Un-paid trading liabilities (Sub-Section (5) of section 34); • Benefit derived against trading liability (Sub-Section (5A) of section 34); EDITED BY • Recouped expenditure (Section 70); and HASSAM UL HAQ • Business income HASSAM_RAJPOO 91) of minor child (Section T@YAHOO.COM 114
    115. 115. SPECULATION BUSINESS – Sub-Section (2) ofSection 19“ Speculation business” means any business in which acontract for the purchase and sale of any commodity (includingstocks and shares) is periodically or ultimately settled otherwisethan by the actual delivery or transfer of the commodity, butdoes not include a business in which –• A contract in respect of raw materials or merchandise is entered into by a person in the course of a manufacturing or mercantile business to guard against loss through future price fluctuations for the purpose of fulfilling the person’s other contracts for the actual delivery of the goods to be manufactured or merchandise to be sold;• A contract in respect of stocks and shares is entered into by a dealer or investor therein to guard against loss in the person’s holding of stocks and shares through price fluctuations; or• A contract is enteredEDITED BY into by a member of a forward market or stock exchange in the course of any UL HAQ in the nature of jobbing HASSAM transaction arbitrage to guard against any loss which may arise in the ordinary HASSAM_RAJPOO course of the person’s business as such member. T@YAHOO.COM 115
    116. 116. DEDUCTIONS IN COMPUTING INCOME FROMBUSINESS – Section 20In computing the income chargeable to tax under the head‘income from business’ deduction is allowed for anyexpenditure incurred wholly and exclusively for thepurposes of business , computed according to themethod of accounting regularly employed, including thefollowing : • Cost of animals used for the purposes of business (other than stock-in-trade) which die or become permanently useless for business purposes as reduced by the amount, if any, realized in respect of the carcasses or animals; • Legal and financial advisory services and other administrative cost relating to planning and implementation of amalgamation BY incurred EDITED by an amalgamated company on amalgamation ; and HASSAM UL HAQ • Expenditures HASSAM_RAJPOO for which T@YAHOO.COM special provisions apply for the purposes of deductio 116
    117. 117. DEDUCTIONS IN COMPUTING INCOME FROMBUSINESS – Section 20“ Any expenditure ” does not include: • Expenditures for which deductions are not allowed ; • Expenditures for which special provisions apply for the purposes of deductio ; • Expenditures attributable to: – Exempt income ; – Income subject to final taxation ; and – Separate block of income . EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 117
    118. 118. DEDUCTIONS NOT ALLOWED IN COMPUTINGINCOME FROM BUSINESS – Section 20Deduction for the following expenditures incurred is notallowed in computing the income chargeable to tax under thehead ‘income from business’: • Cess, rate or tax that is levied on the profits or gains of the business or assessed as a percentage or otherwise on the basis of such profits or gains; • Amount of tax collected or deducted at source from an amount derived; • Salary, rent, brokerage or commission, profit on debt , unless such tax is paid or deducted and paid; EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 118 Continued
    119. 119. DEDUCTIONS NOT ALLOWED IN COMPUTINGINCOME FROM BUSINESS – Section 20 and Rule 10• “Entertainment expenditure ”, which does not full fill the following conditions: – Incurred on persons directly related with the business; – Incurred outside Pakistan: o In connection with business transactions; or o Allocated as head office expenditure; – Incurred in Pakistan on entertainment of foreign customers and suppliers; – Incurred on entertainment of customers and clients at the person’s business premises; – Incurred on entertainment at a meeting of shareholders, agents, directors or employees; – Incurred on entertainment at the opening of branches; or – Incurred on employees for free of cost tea, coffee and other similar refreshments provided at the business premises during the course of work. “Entertainment EDITED BY ” means the provisions of expenditure meals, refreshments, and reasonable leisure facilities inaccordance with the HASSAMof business and subject to tradition UL HAQ HASSAM_RAJPOOoverall norms and customs of business in Pakistan. T@YAHOO.COM 119 Continued
    120. 120. DEDUCTIONS NOT ALLOWED IN COMPUTINGINCOME FROM BUSINESS – Section 20• Contribution made to a fund that is not a recognized provident fund , approved pension fund , approved superannuation fund , or approved gratuity fund ;• Contribution made to any provident or other fund established for the benefit of employees , unless effective arrangements are made to secure that tax is deducted as required from any payments made by the fund in respect of which the recipient is chargeable to tax under the head "Salary" ; EDITED BY• Fine or penalty for the violation of any law, rule or HASSAM UL HAQ regulation; HASSAM_RAJPOO• Personal expenditures; T@YAHOO.COM• 120 Amount carried to a reserve fund or capitalizedContinued in any
    121. 121. DEDUCTIONS NOT ALLOWED IN COMPUTINGINCOME FROM BUSINESS – Section 20• Profit on debt , brokerage, commission, salary or other remuneration paid by an association of persons to a member of the association ;• Salary exceeding Rs. 15,000 per month other than by a crossed cheque or direct transfer of funds to the employee’s bank account;• Expenditure of a capital nature (normal useful life of more than one year) except as otherwise allowed; EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 121 Continued
    122. 122. DEDUCTIONS NOT ALLOWED IN COMPUTINGINCOME FROM BUSINESS – Section 20• Expenditure exceeding Rs. 10,000 incurred and paid otherwise than by a crossed cheque drawn on a bank or by crossed bank draft or crossed pay order or any other crossed banking instrument showing transfer of amount from the business bank account of the taxpayer , excluding the following: – Where expenditures under a single account head in aggregate does not exceed Rs.50,000; – Expenditures on account of –  Utility bills;  Freight charges;  Travel fare;  Postage; and  Payment of taxes, duties, fee, fines or any other statutory obligation. EDITED BY Crossed banking instrument includesHAQ transfer of payment from the HASSAM UL online account of payee as well as business account of the payer to the business HASSAM_RAJPOO payments through credit card, subject to the condition that such transactions are verifiable from the bank statements of the respective payer and the payee. T@YAHOO.COM 122 Continued
    123. 123. SPECIAL PROVISIONS – Sections 22 to 31(DEDUCTIONS IN COMPUTING INCOME FROM BUSINESS)Following are the expenditures* for which special provisionsapply for the purposes of deduction in computing incomechargeable to tax under the head ‘income from business’: • Depreciation, initial allowance and first year allowanc ; • Amortization of specified intangibles ; • First year allowance ;• Amortization of pre-commencement expenditure ;• Scientific research expenditure incurred in Pakistan wholly and exclusively for the purpose of deriving income EDITED BY from chargeable to tax; HASSAM UL HAQ• Employee training and facilities expenditure ; HASSAM_RAJPOO• Profit on debt, financial costs and lease payments ; T@YAHOO.COM 123 Continued
    124. 124. SPECIAL PROVISIONS – Sections 22 to 31(DEDUCTIONS IN COMPUTING INCOME FROM BUSINESS)• Bad debts ;• Reserve to off-set bad debts arising out of consumer ;• Profit accruing on non-performing debts of certain ins in ;• Transfer to participatory reserve ; and• Agricultural produce used as raw material .*However, this does not include:• Expenditures for which deductions are not allowed ;• Expenditures attributable to: EDITED BY – Exempt income ; – Income subject to final taxation ;HAQ HASSAM UL and – HASSAM_RAJPOO Separate block of income . T@YAHOO.COM 124
    125. 125. DEDUCTIONS – UNDER OTHER PROVISIONS(DEDUCTIONS IN COMPUTING INCOME FROM BUSINESS)In addition following are also allowed as deduction forcomputing income chargeable to tax under the head‘income from business’ under other provisions of theOrdinance, stated against each: • Subsequent payment of an un-paid trading liability (in full or in part), which was earlier included in the income chargeable to tax under the head ‘income from business’, in the tax year in which the payment is made (Sub-Section (6) of Section 34); • Loss on disposal of depreciable assets or spe (sub-section (8) of EDITED BY (sub-section (8) of section 24) ; section 22 and and HASSAM UL HAQ • Un-absorbed HASSAM_RAJPOO initial allowance, f depreciation, (sub-section (4) of section 57). T@YAHOO.COM 125
    126. 126. DEPRECIATION – Section 22“Deduction for deductible depreciation ” of depreciableassets used in a business by a person in the tax year isallowed against the income chargeable to tax under the head‘income from business’.However, in case a leasing company or an investmentbank or a modaraba or a scheduled bank or a developmentfinance institution in respect of assets leased to anotherperson it is deductible only against the lease rental incomederived in respect of such assets. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 126 Continued
    127. 127. DEPRECIATION – Section 22“Deductible depreciation ” is arrived at as under: • Where the depreciable assets is used in a tax year wholly and exclusively in deriving income from business chargeable to tax – Full amount of depreciation of that depreciable assets ; or • Where the depreciable assets is used in a tax year partly in deriving income from business chargeable to tax and partly for another use. – Fair proportional amount of depreciation of that depreciable assets attributable to use in deriving income from business chargeable to tax. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 127 Continued
    128. 128. DEPRECIATION – Section 22Example - Motor vehicle used partly for business chargeable to tax and partly for private use AmountWritten down value brought forward 800,000Used for business purposes 70%Used for private purposes 30%Annual depreciation @ 15% 120,000Fair proportional depreciation deduction forbusiness purposes (70% of Rs.120,000) 84,000Written down value carried forward(Written down value brought forward minus full amountof depreciation) i.e. Rs.800,000 minus Rs.120,000) EDITED BY 680,000 HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 128 Continued
    129. 129. DEPRECIATION – Section 22“Depreciable asset ” means any tangible movable property,immovable property (other than unimproved land), orstructural improvement to immovable property:• Owned by the person ;• Has a normal useful life of more than one year;• Is likely to lose value as a result of normal wear and tear, or obsolescence; and• Is used* wholly or partly by the person in deriving income chargeable to tax under the head ‘income from business’,but does not include any tangible movable property, immovableproperty, or structural improvement to immovable propertyin relation to which a deduction is allowed under anotherprovision of the Ordinance for the entire cost .* Any asset owned by a leasing company or an investment bank or a EDITED BYmodaraba or a scheduled bank or a development finance institution andleased to another person is treated asUL HAQ business of the lessor. HASSAM used in the HASSAM_RAJPOO T@YAHOO.COM 129 Continued
    130. 130. DEPRECIATION – Section 22“Structural improvement ” in relation to immovable property,includes any building, road, driveway, car park, railway line,pipeline, bridge, tunnel, airport runway, canal, dock, wharf,retaining wall, fence, power lines, water or sewerage pipes,drainage, landscaping or dam. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 130 Continued
    131. 131. DEPRECIATION – Section 22“Depreciation ” for each depreciable asset is computed asunder: • Written down value of the depreciable asset brought forward from the preceding tax year , if any; plus • Cost of depreciable asset acquired during the tax year ; minus • Written down value of the depreciable asset disposed of during the tax year ; minus • Initial allowance or first year allowance , if any, on the depreciable asset acquired during the tax year ; multiplied by • Applicable rate of depreciation . EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 131 Continued
    132. 132. DEPRECIATION – Section 22“Written down value ” means: • Cost of depreciable asset acquired ; minus • Depreciation* , initial allowance , if any, and first year allowance , if any, of that depreciable asset relating to previous tax years.* Full amount of the depreciation and not deductibledepreciation . EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 132 Continued
    133. 133. DEPRECIATION – Section 22“Cost of depreciable asset acquired ”: • In case of a passenger transport vehicle not plying for hire acquired: – On or before 30th June, 2005 is the cost or Rs.1,000,000, whichever is less; – Between 01st July, 2005 and 30th June 2009 is the cost ; or – On or after 01st July 2009 is the cost or Rs.1,500,000, whichever is less; • In case of immovable property or a structural improvement thereon is the cost excluding the cost of land; and • In case of other depreciable assets is the cost . EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 133 Continued
    134. 134. DEPRECIATION – Section 22“Rates of depreciation ” – The annual rates of depreciation are: • Buildings – All types 10% • Furniture (including fittings) 15% • Machinery and Plant (not otherwise specified) 15% • Technical or professional books 15% • Ships 15% • Motor vehicles (all types) 15% • Computer hardware, including printer, monitor & allied items 30% • Machinery and equipment used in manufacture of I.T. products 30% • Aircraft, aero-engines 30% • Below ground installations in mineral oil concerns* 100% • Offshore platforms and production installation in mineral EDITED BY oil concerns* HASSAM UL HAQ 20% * the income of which HASSAM_RAJPOO in accordance with the rules is liable to be computed in Part I of the Fifth Schedule T@YAHOO.COM 134
    135. 135. GAIN OR LOSS ON DISPOSAL OF DEPRECIABLEASSET – Section 22“Gain or loss on disposal of depreciable asset ” is,included in or allowed as a deduction from, the incomechargeable to tax under the head ‘income from business’ in thetax year in which the disposal of depreciable assettakes place.“Gain or loss on disposal of depreciable asset ” isarrived at as under:• If the consideration received on disposal of depreciable asset exceeds the written down value , the excess is the gain on disposal of such depreciable asset ; or• If the consideration received on disposal of depreciable asset is less than the written down value , the difference is the loss on EDITED BY disposal of such depreciable asset . HASSAM UL HAQ“Disposal of depreciable asset ” means disposal of an HASSAM_RAJPOOdepreciable asset T@YAHOO.COM export or transfer out of and includes the 135 Continued
    136. 136. GAIN OR LOSS ON DISPOSAL OF DEPRECIABLEASSET – Section 22“Written down value ” for the purposes of calculating the gainor loss on disposal of depreciable asset is different fromthe written down value for the purposes of calculatingdeductible depreciation and means: • Cost of depreciable asset ; minus • Deductible depreciation , initial allowance , if any, and first year allowance , if any, of that depreciable asset relating to previous tax years. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 136
    137. 137. GAIN OR LOSS ON DISPOSAL OF DEPRECIABLEASSET – Section 22“Consideration received on disposal of depreciableasset ”: • In case of a passenger transport vehicle, the cost of which had been restricted , is: – Consideration received on disposal ; multiplied by – Restricted cost adopted at the time of acquisition ; divided by – Cost of acquiring. • In case of an immovable property is the consideration received or cost , whichever is less; and • In any other case, the consideration received . EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 137
    138. 138. INITIAL ALLOWANCE – Section 23“Deduction for initial allowance ” at the rate of50% of the cost of an eligible depreciable assetfor initial allowance is allowed to a personagainst the income chargeable to tax under the head‘income from business’ in the tax year in which aneligible depreciable asset for initial allowanceis used for the purposes of business for the first timein Pakistan or commercial production is commenced,whichever is latter.However, in case a leasing company or aninvestment bank or a modaraba or a scheduledbank or a development finance institution in respect of EDITED person it is deductible onlyassets leased to another BYagainst the lease HASSAM UL HAQ rental income derived in respect ofsuch assets. HASSAM_RAJPOO T@YAHOO.COM 138 Continued
    139. 139. INITIAL ALLOWANCE – Section 23“Eligible depreciable asset for initial allowance ” meansa depreciable asset excluding the following: • Road transport vehicle other than a vehicle plying for hire; • Furniture and fittings; • Plant or machinery previously used in Pakistan; or • Plant or machinery in relation to which a deduction has is allowed under another provision of the Ordinance for the entire cost of the asset in the tax year in which the asset is acquired. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 139 Continued
    140. 140. FIRST YEAR ALLOWANCE – Section 23A and 23B“Deduction for first year allowance ”, in lieu ofinitial allowance , at the rate of 90% of the cost ofan eligible depreciable asset for first yearallowance is allowed to an industrial undertakingset up: • In specified rural and under developed areas notified by the Federal Government and owned and managed by a company ; or • Anywhere in Pakistan for generation of alternate energy, owned and managed by a company ,against the income chargeable to tax under the head‘income from business’ in the tax year in which aneligible depreciable asset for first year EDITED BYallowance is used for the purposes of business for HASSAM UL HAQthe first time in Pakistan or commercial production iscommenced, whichever is latter. HASSAM_RAJPOO T@YAHOO.COM 140
    141. 141. FIRST YEAR ALLOWANCE – Section 23A and 23B“Eligible depreciable asset for first year allowance ”means plant, machinery and equipment which is not previouslyused in Pakistan.Specified rural and under developed areas have not yetbeen notified by the Federal Government. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 141
    142. 142. INTANGIBLES – Section 24“Deduction for deductible amortization ” of intangibleassets used in a business in the tax year is allowed againstthe income chargeable to tax under the head ‘income frombusiness’. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 142 Continued
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