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Tax of PAKISTAN
Tax of PAKISTAN
Tax of PAKISTAN
Tax of PAKISTAN
Tax of PAKISTAN
Tax of PAKISTAN
Tax of PAKISTAN
Tax of PAKISTAN
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Tax of PAKISTAN

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  • TEACHER AT CPE ISLAMABAD
  • Transcript

    • 1. In the Name of Allah, the Most Beneficent, the Most Merciful EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 1
    • 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. CHAPTER IPRELIMINARYEDITED BYHASSAM UL HAQHASSAM_RAJPOOT@YAHOO.COM 3
    • 4. DEFINATIONS Section 2EDITED BYHASSAM UL HAQHASSAM_RAJPOOT@YAHOO.COM 4
    • 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. CHAPTER IICHARGE OF TAXEDITED BYHASSAM UL HAQHASSAM_RAJPOOT@YAHOO.COM 71
    • 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. 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. 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. 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. INCOME SUBJECT TO A SEPARATE CHARGE OF TAX EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 76
    • 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. 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. 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. 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. 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. 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. 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. CHAPTER III TAX ON TAXABLE INCOME PART ICOMPUTATION OF TAXABLE INCOME EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 84
    • 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. 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. 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. 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. CHAPTER IIITAX ON TAXABLE INCOME PART II HEADS OF INCOME “SALARY” EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 89
    • 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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
    • 143. INTANGIBLES – Section 24“Intangible assets ” means any patent, invention, design ormodel, secret formula or process, copyright, trade mark,scientific or technical knowledge, computer software, motionpicture film, export quotas, franchise, license, intellectualproperty, or other like property or right, contractual rights andany expenditure that provides an advantage or benefit for aperiod of more than one year:• Owned by the person ;• Has a normal useful life of more than one year; 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 expenditure incurred to acquire a depreciable asset ;• Any expenditure incurred to acquire an unimproved land;• EDITED BY Any intangible in relation to which a deduction is allowed under another HASSAM entire cost provision of the Ordinance for the UL HAQ . HASSAM_RAJPOO T@YAHOO.COM 143 Continued
    • 144. INTANGIBLES – Section 24“Deductible amortization ” is arrived at as under: • Where the intangible asset is used in a tax year wholly and exclusively in deriving income from business chargeable to tax – Full amount of amortization of that intangible asset ; or • Where the intangible asset is used in a tax year partly in deriving income from business chargeable to tax and partly for another use. – Fair proportional amount of amortization of that intangible asset attributable to use in deriving income from business chargeable to tax • Where the intangible asset is not used for the whole of the tax year in deriving income from business chargeable to tax – Fair proportional amount of amortization of that intangible asset calculated on the basis of number of days used in deriving income from business chargeable to tax, i.e., – Amortization * ; multiplied by – Number of days used** in deriving income chargeable to tax; divided by – EDITED BY Total number of days in that tax year .* Full amount of amortization or fair UL HAQ amount of amortization , as HASSAM proportionalthe case may be. HASSAM_RAJPOO** An intangible asset that is available for use on a day (including a non-working T@YAHOO.COM day) is treated as used on that day. 144 Continued
    • 145. INTANGIBLES – Section 24“Amortization ” for each intangible asset is computed asunder: • Cost of intangible asset ; divided • Normal useful life of the intangible asset in whole years, subject to a maximum of 10 years.“Cost of an intangible asset ” means any expenditureincurred in acquiring or creating the intangible asset ,including any expenditure incurred in improving or renewing theintangible asset ; and EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 145 Continued
    • 146. GAIN OR LOSS ON DISPOSAL OF ANINTANGIBLE – Section 24“Gain or loss on disposal of an intangible 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 intangible asset takesplace.“Gain or loss on disposal of an intangible asset ” isarrived at as under: • If the consideration received on disposal of an intangible asset exceeds the written down value of an intangible asset , the excess is the gain on disposal of such intangible asset ; or • If the consideration received on disposal of an intangible asset is lessBY the written down value EDITED than of an intangible asset , UL HAQ HASSAM the difference is the loss on disposal of suchHASSAM_RAJPOO . intangible asset T@YAHOO.COM 146 Continued
    • 147. GAIN OR LOSS ON DISPOSAL OF ANINTANGIBLE – Section 24“Written down value of an intangible asset ” at the timeof disposal means: • Cost of that intangible asset ; minus • Total deductible amortization deductions allowed in respect of that intangible asset ; minus • Total amortization attributable to use other than in deriving income from business chargeable to tax of that intangible asset . EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 147 Continued
    • 148. PRE-COMMENCEMENT EXPENDITURE – Section25“Deduction for pre-commencement expenditure ” at therate of 20% of pre-commencement expenditure (straightline method) is allowed to a person against the incomechargeable to tax under the head ‘income from business’.However, no deduction is allowed for pre-commencementexpenditure where a deduction for the same is allowed underanother provision of the Ordinance for the entire amount of thepre-commencement expenditure in the tax year in whichit is incurred.“Pre-commencement expenditure ” means anyexpenditure incurred before the commencement of a businesswholly and exclusively to derive income chargeable to tax,including the cost EDITED BY of feasibility studies, construction ofprototypes, and trial productionUL HAQ but does not include HASSAM activities,any expenditure which is incurred in acquiring land, or a HASSAM_RAJPOOdepreciable asset T@YAHOO.COM . or an intangible 148
    • 149. SCIENTIFIC RESEARCH EXPENDITURE – Section26“ Scientific research expenditure” means any expenditureincurred by a person on scientific research undertaken inPakistan for the purposes of developing the person’sbusiness, including any contribution to a scientific researchinstitution to undertake scientific research for thepurposes of the person’s business, other than expenditureincurred –• In the acquisition of any depreciable asset or intangible;• In the acquisition of immovable property; or• For the purpose of ascertaining the existence, location, extent or quality of a natural deposit.“ Scientific research ” means any activity undertaken inPakistan in the fields of natural or applied science for thedevelopment of human knowledge. EDITED BY“ Scientific research institution ” means any institution HASSAM UL HAQcertified by the Board as conducting scientific research inPakistan. HASSAM_RAJPOO T@YAHOO.COM 149
    • 150. EMPLOYEE TRAINING AND FACILITIESEXPENDITURE – Section 27“ Employees training and facilities expenditure”means any expenditure (other than capital expenditure)incurred in a tax year in respect of– • Any educational institution or hospital in Pakistan established for the benefit of the person’s employees and their dependents; • Any institute in Pakistan established for the training of industrial workers recognized, aided, or run by the Federal Government or a Provincial Government or a Local Government; or • The training of an individual, being a citizen of Pakistan, in EDITED BY connection with a HASSAMapproved by the Board for this scheme UL HAQ purposes. HASSAM_RAJPOO T@YAHOO.COM 150
    • 151. PROFIT ON DEBT/FINANCIAL COSTS AND LEASEPAYMENTS – Section 28Following expenditures* on account of “ Profit on debt ,financial costs and lease payments” are allowed asdeduction in computing the income chargeable to tax under thehead ‘income from business’: • Profit on debt incurred, to the extent that the proceeds or benefit of the debt are used for the purposes of business ; • Lease rental incurred, which is paid or payable to a scheduled bank, financial institution , an approved modaraba , an approved leasing company or a Special Purpose Vehicle on behalf of the Originator for an asset used for the purposes of business ; which is paid or payable to a modaraba • Amount incurred, EDITED BY or a participationHASSAM UL HAQ holder for any funds term certificate borrowed and used for the purposes of business ; HASSAM_RAJPOO T@YAHOO.COM 151 Continued
    • 152. PROFIT ON DEBT/FINANCIAL COSTS AND LEASEPAYMENTS – Section 28• Distribution of profits by a scheduled bank on a profit or loss sharing account or a deposit maintained by account or deposit holder with such bank;• Share in the profits of House Building Finance Corporation of the State Bank of Pakistan in respect of SBP’s investment, under the HBFC (Issue and Redemption of Certificates) Regulations, 1982, in property under a scheme of partnership in profit and loss;• Share in the profits of National Development Leasing Corporation Limited of the State Bank of Pakistan by the in respect of credit line provided by the SBP on a profit and loss sharing basis, for its leasing operations;• Share in the profits of Small and Medium Enterprises Bank of the State Bank of Pakistan in respect of credit line EDITED BY provided by the SBP on a profit and loss sharing basis, for HASSAM UL HAQ its business of investment in small businesses; HASSAM_RAJPOO T@YAHOO.COM 152 Continued
    • 153. PROFIT ON DEBT/FINANCIAL COSTS AND LEASEPAYMENTS – Section 28• Share in the profits of the musharika of a banking company under a scheme of musharika ;• Share in the profits of the musharika of a certificate holder under a musharika scheme approved by the Securities and Exchange Commission and Religious Board formed under the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980;• Financial cost ( being the difference between the amount received by the Originator and the amount of receivables securitized from a Special Purpose Vehicle ) of the securitization of receivables incurred by an Originator to Special Purpose Vehicle . (Where any assets are transferred by an Originator , as a consequence of securitization, to a Special Purpose Vehicle , it is treated as a financing transaction irrespective of the method of accounting adopted by the Originator ). EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 153 Continued
    • 154. PROFIT ON DEBT/FINANCIAL COSTS AND LEASEPAYMENTS – Section 28“ Approved leasing company ” means aleasing company approved by the Board for thispurposes.“ Approved modaraba ” means a modaraba approved bythe Board for this purposes.*However, this does not include:• Expenditures for which deductions are not allowed ;• Expenditures attributable to: – Exempt incomes ; – Income subject to final taxation ; and – Separate EDITEDincome . block of BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 154
    • 155. BAD DEBTS – Section 29“ Bad debts ” are allowed as deduction in computing theincome chargeable to tax under the head ‘income frombusiness’, if the following conditions are satisfied, namely:- • The amount of the debt was previously included in the income chargeable to tax under the head ‘income from business’ ; or • The amount of the debt is in respect of money lent by a financial institution in deriving income chargeable to tax under the head ‘income from business’; • The debt or part of the debt is written off in the accounts; and • There are reasonable grounds for believing that the debt is irrecoverable. EDITED BYThe amount of the deduction allowed for bad debts is to the HASSAM UL HAQextent the debt is written off in the accounts in the tax year . HASSAM_RAJPOO T@YAHOO.COM 155 Continued
    • 156. SUBSEQUENT RECOVERY OF BAD DEBTS –Section 29Where a deduction for a bad debt is allowed and in asubsequent year the person receives in cash or kind anyamount in respect of that debt , the following rules apply,namely:– • Where the amount received exceeds the difference between the whole of such bad debt and the amount previously allowed as a deduction on account of bad debt , the excess is included in the income chargeable to tax under the head ‘income from business’ for the tax year in which it is received; or • Where the amount received is less than the difference between the whole of such bad debt and the amount EDITED BY allowed as a deduction on account of bad debts , the HASSAM UL HAQ shortfall is allowed as a bad debt deduction in computing HASSAM_RAJPOO the income chargeable to tax under the head ‘income from business’ for the tax year in which it was received. T@YAHOO.COM 156
    • 157. RESERVE TO OFF-SET BAD DEBTS ARISING OUT OF CONSUMER LOANS – Section 29A PROFIT ACCRUING ON NON-PERFORMINGDEBTS OF CERTAIN INSTITUTIONS – Section 30 TRANSFER TO PARTICIPATORY RESERVE – Section 31These topics are not covered in the present course EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 157
    • 158. METHOD OF ACCOUNTING – Sections 32 / 33 / 34“ Methods of accounting” for computing the incomechargeable to tax under the head ‘income from business’ are: [ • “ Cash basis accounting” under which: – Income is derived when it is actually received ; and – Expenditure is incurred when it is actually paid . • “ Accrual basis accounting ” under which: – Income is derived when it is due ; and – Expenditure is incurred when it is payable .“ Due ” means when entitled to receive it even if the time fordischarge of the entitlement is postponed or the amount isreceivable in installments. EDITED BY“ Payable ” means when all the events that determine liability HASSAM UL HAQhave occurred and HASSAM_RAJPOO the liability can be the amount ofdetermined with reasonable accuracy. T@YAHOO.COM 158 Continued
    • 159. METHOD OF ACCOUNTING – Sections 32 / 33 / 34It is mandatory for a company to adopt accrual basis ofaccounting while other persons (individual andassociation of persons ) can adopt either of the above twomethods of accounting.The Board is empowered to prescribe themethod of accounting to be adopted by any class ofpersons . To date the Board has not prescribed the method ofaccounting to be adopted by any class of persons .A person can apply, in writing, for a change in themethod of accounting and the Commissioner may, by EDITED BYorder in writing, approve such an application but only if satisfied HASSAM UL HAQthat the change is necessary to clearly reflect the income HASSAM_RAJPOOchargeable to tax. T@YAHOO.COM 159
    • 160. UN-PAID TRADING LIABILITY – Sub-Section (5) ofSection 34“ Un-paid trading liability ” means the amount of tradingliability which is not paid in full or in part within 3 years fromthe end of the tax year in which the deduction was allowed.“ Un-paid trading liability ” is income chargeable to taxunder the head ‘income from business’ in the first tax yearfollowing the end of the three years in which the deduction wasallowed.“ Trading liability ” means unpaid amount, in full or in part, ofa liability in respect of any expenditure for which a deductionwas allowed in computing the income chargeable to tax underthe head ‘income from business’.Example – Purchase of raw materials of Rs.200,000 on credit in the tax year2003. This was claimed as deduction by adopting accrual basis of accounting.In the tax year 2005 a sum EDITED BY of Rs.175,000 was paid and the balance Rs.25,000remained unpaid as a liability till the end of the tax year 2007. Since the HASSAM the taxexpenditure was allowed as deduction in UL HAQ year 2003, the unpaid liabilityof Rs.25,000 will be chargeable to tax in HASSAM_RAJPOO the tax year 2007. T@YAHOO.COM 160
    • 161. BENEFIT DERIVED AGAINST TRADING LIABILITY– Sub-Section (5A) of Section 34The value of the “benefit derived against a trading liability ” isalso income chargeable to tax under the head ‘income frombusiness’ in the tax year in which such benefit is derived. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 161
    • 162. COST OF STOCK-IN-TRADE DISPOSED OFF –Section 35“ Cost of stock-in-trade disposed off” means: • Opening value of the stock-in-trade for the year; plus • Cost of stock-in-trade acquired in the year; minus • Closing value of stock-in-trade for the year.“ Opening value of stock-in-trade ” means: • Closing value of the stock-in-trade at the end of the previous year; or • Where the business is commenced to carry on business in the year, the fair market value (at the time the stock-in-trade is ventured in the business) of any stock-in-trade acquired prior to the commencement of the business. EDITED BY“ Closing value of stock-in-trade ” means lower of cost or HASSAM UL HAQnet realizable value of stock-in-trade on hand at the end of HASSAM_RAJPOOthe year. T@YAHOO.COM 162 Continued
    • 163. COST OF STOCK-IN-TRADE DISPOSED OFF –Section 35“ Cost of stock-in-trade ” means: • Where the method of accounting is cash basis of accounting – Prime Cost Method or Absorption Cost Method (optional); and • Where the method of accounting is accrual basis of accounting – Absorption Cost Method (Mandatory).Where particular items of stock-in-trade are not readilyidentifiable, these can be accounted for on the first-in-first-out method or the average cost method but, once chosen,a stock valuation method can be changed only with the written EDITED BYpermission of the Commissioner and in accordance with any HASSAM UL HAQconditions that the Commissioner may impose. HASSAM_RAJPOO T@YAHOO.COM 163 Continued
    • 164. COST OF STOCK-IN-TRADE DISPOSED OFF –Section 35“ Absorption-cost method ” means the generally accepted accountingprinciple under which the cost of an item of stock-in-trade is the sumof direct material costs , direct labour costs , and factoryoverhead costs ;“ Average-cost method ” means the generally accepted accountingprinciple under which the valuation of stock-in-trade is based on aweighted average cost of units on hand;“ Direct labour costs ” means labour costs directly related to themanufacture or production of stock-in-trade ;“ Direct material costs ” means the cost of materials (special rules apply for agricultural produce ) that become anintegral part of the stock-in-trade manufactured or produced, or whichare consumed in the manufacturing or production process; EDITED BY“ Factory overhead costs ” means the total costs of manufacturing orproducing stock-in-trade , other UL HAQ HASSAM than direct labour and directmaterial costs ; HASSAM_RAJPOO T@YAHOO.COM 164 Continued
    • 165. COST OF STOCK-IN-TRADE DISPOSED OFF –Section 35“ First-in-first-out method ” means the generally accepted accountingprinciple under which the valuation of stock-in-trade is based on theassumption that stock is sold in the order of its acquisition;“ Prime-cost method ” means the generally accepted accountingprinciple under which the cost of stock-in-trade is the sum of directmaterial costs , direct labour costs , and variable factoryoverhead costs ;“ Stock-in-trade ” means anything produced, manufactured,purchased, or otherwise acquired for manufacture, sale or exchange,and any materials or supplies to be consumed in the production ormanufacturing process, but does not include stocks or shares; and“ Variable factory overhead costs ” means those factory overheadcosts which vary directly with changes in volume of stock-in-trademanufactured or produced. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 165
    • 166. AGRICULTURAL PRODUCE AS RAW MARTEIAL– Rule 11“Cost of agricultural produce ” raised or received and usedas raw material to derive income chargeable to tax under thehead ‘income from business’ by a cultivator or receiver ofagricultural produce as rent-in-kind is the “market value ofthe agricultural produce ”, so used.“Market value of agricultural produce ” means -• Where the agricultural produce is ordinarily sold in the market in its raw state or after application of any process ordinarily employed by a cultivator or receiver of agricultural produce as rent-in-kind to render it fit to be taken to market, the market price for the produce at the time it is used as raw materials in the business; or• In any other case, the sum of the following amounts, namely:- – The expenses of cultivation;BY EDITED and – The land revenue rent paid UL the area in which the produce is HASSAM for HAQ grown. HASSAM_RAJPOO T@YAHOO.COM 166
    • 167. LONG-TERM CONTRACTS – Section 36If accounting for income chargeable to tax under the head “income frombusiness” is done on accrual basis of accounting , it is mandatory tocompute business income arising under a long-term contract on thebasis of the percentage of completion method .The percentage of completion of a long-term contract is determined bycomparing the total costs allocated to the contract and incurred beforethe end of the year with the estimated total contract costs as determinedat the commencement of the contract.“ Long-term contract ” means a contract for manufacture, installation, or construction,or, in relation to each, the performance of related services, which is not completed withinthe tax year in which work under the contract commenced, other than a contractestimated to be completed within six months of the date on which work under the contractcommenced.“ Percentage of completion method ” means the generally accepted accountingprinciple under which revenue and expenses arising under a long-term contract arerecognized by reference to the stage of completion of the contract. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 167
    • 168. ADDITIONAL READING MAETRIALBUSINESS ACCOUNTS, DOCUME (A brochure of Federal Board of Revenue) EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 168
    • 169. CHAPTER IIITAX ON TAXABLE INCOME PART V HEADS OF INCOME “CAPITAL GAINS” EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 169
    • 170. CAPITAL GAINS – Section 37This head of income (‘capital gains’) is further classified asunder: • Capital gains chargeable to income tax ; and • Capital gains chargeable to fixed income tax as a separate block of income .The rules for computation of gains under both the classificationare same and these are discussed in the following slides. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 170
    • 171. CAPITAL GAINS – Sections 37“ Capital gains ” arising on the disposal of a capital asset ,other than capital gains exempt from tax , are chargeableto tax under the head ‘capital gains’ as reduced by capitallosses (to the extent of capital gains) for the year.Capital asset are divided into two categories, one held formore than one year and the other held for one year or less thanone year.Gain arising on the disposal of a capital asset held for oneyear or less than one year is computed as under: • Consideration received on disposal of the capital asset ; minus • Cost of the capital asset . EDITED BYGain arising on disposal of capital asset held for more than HASSAM UL HAQone year is taken to HASSAM_RAJPOO be 75% of the gain as calculated for acapital asset held for one year or less than one year. T@YAHOO.COM 171 Continued
    • 172. CAPITAL ASSETS – Sub-Section (5) of Section 37“ Capital asset” means property of any kind, whether or notconnected with a business, but does not include – • Securities ; • Any stock-in-trade, consumable stores or raw materials held for the purpose of business; • Any property with respect to which the person is entitled to a depreciation deduction (depreciable assets ) or amortization deduction (specified intangibles ); • Any immovable property; or • Any movable property held for personal use by an individual or his family member dependent on him, excluding the following: – A painting, sculpture, drawing or other work of art; – Jewellery; – A rare manuscript, folio or book; EDITED BY – A postage stamp or first day cover; – A coin or medallion;HASSAM UL HAQ or – An antique. HASSAM_RAJPOO T@YAHOO.COM 172
    • 173. CAPITAL GAINS – Sections 37“ Cost ” of the capital asset generally meanscost of an asset .Exception to the above general rule is fair market value ofthe asset, on the date of its transfer or acquisition where suchasset becomes the property of a person : • Under a gift, bequest or will; • By succession, inheritance or devolution; • By distribution of assets on dissolution of an association of persons ; or • By distribution of assets on liquidation of a company .But “ cost ” of the capital asset does not include anyexpenditure incurred: • That is deductible EDITED BY under any other head of income; or • That falls under HASSAM UL HAQ allowed referred to deductions not HASSAM_RAJPOO under the head ‘Income from business’. T@YAHOO.COM 173
    • 174. CAPITAL LOSSES – Sections 38“ Capital losses ” arising on the disposal of a capital asset,other than loss arising from disposal of a capital asset t, is deductible from the capital gains for the year, if any, andto the extent of such capital gains . The unadjusted capitallosses can be carried forward for adjustment againstsubsequent years capital gains, if any.The loss arising on the disposal of a capital asset held iscomputed as under: • Cost of the capital asset ; minus • Consideration received on disposal of the capital asset .The rules for EDITED BY determining the cost andConsideration received on UL HAQ of the capital asset HASSAM disposal HASSAM_RAJPOOare same as discussed earlier under ‘Capital gains’. T@YAHOO.COM 174 Continued
    • 175. CAPITAL LOSSES – Sections 38“Non-recognition of capital loss ” – Capital loss is not re-cognized and as such neither deductible from capital gainsnor could be carried forward for adjustment against futurecapital gains in respect of the following assets : • A painting, sculpture, drawing or other work of art; • Jewellery; • A rare manuscript, folio or book; • A postage stamp or first day cover; • A coin or medallion; or • An antique. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 175
    • 176. CAPITAL GAINS ON SALE OF SECURITIES –Section 37A“ Capital gains ” as reduced by capital losses (to theextent of capital gains) arising on the disposal ofSecurities , other than capital gains exempt fromtax , are chargeable to tax under the head ‘capital gains’as a separate block of income subject to fixedincome tax .Note : In case of a banking company and an insurance company the gain arising on disposal of securities is chargeable to tax as separately provided in the Seventh (7th) and Fourth (4th) Schedule to theIncome Tax Ordinance, 2001 respectively. EDITED BY“Capital losses ” HASSAM UL of securities, which could on disposal HAQ HASSAM_RAJPOOnot be set off against capital gains of securities in a tax T@YAHOO.COMyear , can not be carried forward 176
    • 177. CAPITAL GAINS ON SALE OF SECURITIES –Section 37A“Securities ” for the this purpose means share of apublic company , voucher of PakistanTelecommunication Corporation, ModarabaCertificate , an instrument of redeemable capital andderivative products .“ Redeemable capital” –See Companies Ordinance,1984“ Derivative products” –See SRO 112(1)/2011 EDITED BY11th February, 2011 dated HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 177
    • 178. CAPITAL GAINS ON SALE OF SECURITIES –Section 37AThe rates of fixed income tax on capital gains arising ondisposal of Securities are as under:Tax Year Holding Period < six months >= six months >= one year (<182 days) (>=182 days) (>= 365 days) or < one year (<365 days)2011 10.00% 07.50% 00.00%2012 10.00% 08.00% 00.00%2013 12.50% 08.50% 00.00% EDITED BY2014 15.00% 09.00% 00.00% HASSAM UL HAQ2015 17.50% 09.50% 00.00% HASSAM_RAJPOO T@YAHOO.COM 178
    • 179. CHAPTER III TAX ON TAXABLE INCOME PART VI HEADS OF INCOME“INCOME FROM OTHER SOURCES” EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 179
    • 180. INCOME FROM OTHER SOURCES – Section 39AND 40This head of income (‘income from other sources’) is furtherclassified as under: • Other sources chargeable to income tax ; and • Other sources chargeable to final tax as income subject to final taxation.The rules for computation of income from other sourceschargeable to income tax are discussed in the followingslides.The rules for computation of income from other sourceschargeable to finalEDITED BYincome subject to final tax as HASSAM UL HAQtaxation are discussed under the respective headings. HASSAM_RAJPOO T@YAHOO.COM 180
    • 181. INCOME FROM OTHER SOURCES – Sections 39“ Income from other sources ” received in a tax year ,other than income exempt from tax andincome subject to final taxation , is chargeable to taxunder the head ‘income from other sources’.“ Other sources” means income of every kindExcluding: • Incomes covered under rest of the four heads of income (i.e., salary, property, business and capital gain);But including the following: • Dividend ; • Royalty ; EDITED BY • Profit on debt ; HASSAM UL HAQ • Ground rent; HASSAM_RAJPOO T@YAHOO.COM • Rent from the sub-lease of land or a building; 181 Continued
    • 182. INCOME FROM OTHER SOURCES – Sections 39• Income from the lease of any building together with plant or machinery;• Income from provision of amenities, utilities or any other services connected with renting of building;• Any annuity or pension;• Any other amount received as consideration for the provision, use or exploitation of property, including from the grant of a right to explore for, or exploit, natural resources;• The fair market value of any benefit, whether convertible to money or not, received in connection with the provision, use or exploitation of property;• EDITED BY Consideration for vacating the possession of a building ; HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 182 Continued
    • 183. INCOME FROM OTHER SOURCES – Sections 39• Any amount received from approved Income Payment Plan or approved Annuity Plan under Voluntary Pension System Rules, 2005; and• Any amount received as a loan, advance (not being an advance payment for the sale of goods or supply of services), deposit for issuance of shares or gift ( other than from a banking company or financial institution ) otherwise than by a crossed cheque drawn on a bank or through a banking channel from a holder of a National Tax Number ; and• Recouped expenditure BY EDITED (Section 70) HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 183
    • 184. DEDUCTIONS IN COMPUTING INCOME FROMOTHER SOURCES – Sections 40“ Deductions” allowed in computing income chargeable to taxunder the head ‘income from other sources’ are: • Any expenditure* paid , to the extent to which the expenditure is incurred in deriving income chargeable to tax under the head ‘income from other sources’, other than expenditure of a capital nature (normal useful life of more than one year); • Zakat paid under the Zakat and Ushr Ordinance, 1980 on profit on debt chargeable to tax under the head ‘inco ; and • Depreciation of EDITED BY building, plant and machinery in respect of lease of building together UL HAQ and machinery; and HASSAM with plant HASSAM_RAJPOO • Initial allowance of plant and machinery in respect of T@YAHOO.COM 184 lease of building together with plant and machinery.Continued
    • 185. DEDUCTIONS IN COMPUTING INCOME FROMOTHER SOURCES – Sections 40But does not include any expenditure: • That is deductible under any other head of income ; or • Expenditures for which deductions are not allowed ; • 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 185
    • 186. DIVIDEND - INCOME FROM OTHER SOURCES In case of an individual or an association of persons : “Dividend ” is chargeable to final tax as income subject to a separate charge . In case of a company : “Dividend ” is chargeable to income tax under the head ‘income from other sources’. Accordingly, a company is entitled to deduct any admissible expenditure from the gross amount of the dividend which is incurred to derive dividend e.g.:  Profit on debt paid on a debt utilized in acquiring EDITED BY shares from which dividend HAQ HASSAM UL is received; or  Collection charges (bank charges) incurred in realizing HASSAM_RAJPOO the dividend warrants. T@YAHOO.COM 186
    • 187. PROFIT ON DEBT – INCOME FROM OTHERSOURCES“Profit on debt ” is sub-divided in six categories for the purposes of tax treatment as under: 1. Profit on debt on an account, deposit or a certificate issued under the National Savings Scheme or Post Office Savings Account excluding Behbood and Pensioners account, deposit or certificate; 2. Profit on debt on Behbood and Pensioners account, deposit or certificate issued under the National Savings Scheme; 3. Profit on debt on an account or deposit maintained with a banking company or financial institution ; 4. Profit on debt EDITED BY securities of the Federal on any Government, HASSAM UL HAQGovernment a Provincial or a Local Government , other than those issued under the HASSAM_RAJPOO National Savings Scheme or Post of Savings Account; T@YAHOO.COM 187 Continued
    • 188. PROFIT ON DEBT – INCOME FROM OTHERSOURCES5. Profit on debt on any bond, certificate, debenture, security or instrument of any kind (other than a loan agreement between a borrower and a banking company or a development finance institution) issued by a banking company , a financial institution , a company as defined in the Companies Ordinance, 1984 , a body corporate formed by or under any law in force in Pakistan or a finance society ; and6. Any other profit on debt . EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 188 Continued
    • 189. PROFIT ON DEBT – INCOME FROM OTHERSOURCESIn case of a resident individual or anassociation of persons the profit on debt : • Under the categories 1, 3, 4 and 5 is chargeable to final tax as income subject to final taxation ; and • Under the categories 2 and 6 is chargeable to tax under the head ‘income from other sources’, provided such income is not in the nature of business income, in which case it is chargeable to income tax under the head ‘income from business’.In case of a resident company and non-residentpersons the profit on debt is chargeable to income taxunder the head ‘income from other sources’, provided suchincome is not in the nature of business income, in which EDITED BYcase it is chargeable to tax UL HAQ head ‘income from HASSAM under thebusiness’. HASSAM_RAJPOO T@YAHOO.COM 189
    • 190. CONSIDERATION FOR VACATING THE POSSESIONOF A BUILDING – INCOME FROM OTHER SOURCES “ Consideration for vacating the possession of a building” or any part thereof (normally termed as goodwill or pugree) received by other than an owner of the building (e.g. a tenant) from the owner of the building or any one else is chargeable to income tax under the head ‘income from other sources’ as under: • One-tenth of such consideration in in the year in which it is received and the following nine years. • Where the person who is vacating the possession has earlier paid a consideration at the time of getting the possession of the said building or part thereof, then one- tenth of the net consideration (consideration received for EDITED BY vacating the possession minus consideration paid at the HASSAM UL HAQ time of getting the possession) in the year in which it is HASSAM_RAJPOO received and theT@YAHOO.COM following nine years. 190
    • 191. PRIZES AND WINNINGS – INCOME FROMOTHER SOURCES“Prizes and winnings ” are chargeable to final tax asincome subject to final taxation . EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 191
    • 192. CHAPTER III TAX ON TAXABLE INCOME PART VII“EXEMPTIONS AND TAX CONCESSIONS” EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 192
    • 193. EXEMPTIONS – Section 41 to 55Following incomes, or classes of income, or persons or classesof persons is exempt from tax subject to applicable conditions,restrictions and limits. In addition, in the absence of a specificprovision to the contrary contained, the exemption is limited tothe original recipient of that income and is not extend to anyperson receiving any payment wholly or in part out of suchexempt income:- • Agricultural income ; • Income of individuals entitled to privileges under the Diplomatic and Consular Privileges Act, 1972 to the extent provided for in that Act; • Income of individuals entitled to privileges under the United EDITED BY Nations (Privileges and Immunities) Act, 1948 to the extent HASSAM UL HAQ provided for in that Act; HASSAM_RAJPOO T@YAHOO.COM 193 Continued
    • 194. EXEMPTIONS – Section 41 to 55• Pension received by a citizen of Pakistan, by virtue of his/her former employment in the United Nations or its specialized agencies (including the International Court of Justice) provided that his/her salary from such employment was exempt;• Salary received by an employee from a foreign government as remuneration for services rendered to such government provided - – The employee is a citizen of the foreign country and not a citizen of Pakistan; – The services performed by the employee are of a character similar to those performed by employees of the Federal Government in foreign countries; and EDITED BY – The foreign government grants a similar exemption to employees of HASSAM UL HAQ the Federal Government performing similar services in such foreign country; HASSAM_RAJPOO T@YAHOO.COM 194 Continued
    • 195. EXEMPTIONS – Section 41 to 55• Pakistan source income which Pakistan is not permitted to tax under a tax treaty with other countries;• Salary received by a non-citizen of Pakistan to the extent provided for in an Aid Agreement between the Federal Government and a foreign government or public international organization, where – – The individual is either non-resident or a resident solely by reason of the performance of services under the Aid Agreement; – If the Aid Agreement is with a foreign country, the individual is a citizen of that country; and – The salary is paid by the foreign government or public EDITED BY international organization out of funds or grants released HASSAM UL HAQ as aid to Pakistan in pursuance of such Agreement; HASSAM_RAJPOO T@YAHOO.COM 195 Continued
    • 196. EXEMPTIONS – Section 41 to 55• Any income received by a non-citizen of Pakistan engaged as a contractor, consultant, or expert on a project in Pakistan to the extent provided for in a bilateral or multilateral technical assistance agreement between the Federal Government and a foreign government or public international organization, where – – The project is financed out of grant funds in accordance with the agreement; – The person is either a non-resident or a resident solely by reason of the performance of services under the agreement; and – The income is paid out of the funds of the grant in pursuance of the agreement; EDITED BY• Allowances attached to any Honour, Award, or Medal awarded by the President ofUL HAQ HASSAM Pakistan; HASSAM_RAJPOO• Monetary award granted by the President of Pakistan; T@YAHOO.COM 196 Continued
    • 197. EXEMPTIONS – Section 41 to 55 Profit on debt received by a non-resident person on a security issued by a resident person where–  The persons are not associates ;  The security was widely issued by the resident person outside Pakistan for the purposes of raising a loan outside Pakistan for use in a business carried on in Pakistan;  The profit was paid outside Pakistan; and  The security is approved by the Board for this purposes; Scholarship granted to meet the cost of education, other than where the scholarship is paid directly or indirectly by an associates ; Any income received by a spouse as support payment under an agreement to live apart; BY EDITED Income of the Federal Government (subject to certain HASSAM UL HAQ conditions and restriction) *; HASSAM_RAJPOO T@YAHOO.COM 197 Continued
    • 198. EXEMPTIONS – Section 41 to 55• Income of a Provincial Government or a Local Government in Pakistan, other than income chargeable under the head “Income from Business” derived by a Provincial Government or Local Government from a business carried on outside its jurisdictional area (subject to certain conditions and restriction) *; *Exemption is not available in the case of:  a corporation, company , a regulatory authority, a development authority, other body or institution established by or under a Federal law or a Provincial law or an existing law; or  a corporation, company , a regulatory authority, a development authority or other body or institution set up, owned and controlled, either directly or indirectly, by the Federal Government or a Provincial Government, EDITED BY regardless of the ultimate destination of such income as laid down in HASSAM UL HAQ Article 165A of the Constitution of the Islamic Republic of Pakistan; HASSAM_RAJPOO T@YAHOO.COM 198 Continued
    • 199. EXEMPTIONS – Section 41 to 55• Foreign source income , other than income derived from a business established in Pakistan or any foreign source income brought into or received in Pakistan, of an individual who is –  Resident solely by reason of his/her employment ; and  In Pakistan for a period or periods not exceeding three years;• Foreign source income derived by a citizen of Pakistan in a tax year who was not a resident in any of the four tax years preceding the tax year in which he/she became resident and in the following tax year .• EDITED BY Salary earned outside Pakistan, by a resident citizen of Pakistan, during HASSAM UL, HAQ leaves Pakistan and a tax year who HASSAM_RAJPOO remains abroad during that tax year ; T@YAHOO.COM 199 Continued
    • 200. EXEMPTIONS – Section 41 to 55• Income or classes of income, or persons or classes of persons specified in the Second Schedule to the Ordinance , subject to any conditions and to the extent specified therein. However such income, as may be specified in the said schedule and subject to such conditions as may be specified therein, is included in the total income, but the tax is not payable in respect of such income. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 200
    • 201. TAX CONCESSIONS – Section 41 to 55• Payments received by the Federal Government and payments received by a Provincial Government or a Local Government, other than income chargeable under the head “Income from Business” derived by from a business carried on outside its jurisdictional area is not liable to any collection or deduction of tax at source (subject to certain conditions and restriction) *;• Income or classes of income, or persons or classes of persons specified in the Second Schedule to the Ordinance , subject to any conditions and to the extent specified therein, are subject to tax under the Ordinance at such EDITED BY rates, which are less than the rates specified in the First HASSAM UL HAQ Schedule, as are specified therein; HASSAM_RAJPOO T@YAHOO.COM 201 Continued
    • 202. TAX CONCESSIONS – Section 41 to 55• Income or classes of income, or persons or classes of persons specified in the Second Schedule to the Ordinance , subject to any conditions and to the extent specified therein, are allowed a reduction in tax liability under this Ordinance, subject to any conditions and to the extent specified therein;• Income or classes of income, or persons or classes of persons specified in the Second Schedule to the Ordinance , subject to any conditions and to the extent specified therein, are exempted fromBY operation of any provision of EDITED the this Ordinance, subject to any conditions and to the extent HASSAM UL HAQ specified therein. HASSAM_RAJPOO T@YAHOO.COM 202 Continued
    • 203. EXEMPTIONS AND TAX CONCESSIONS IN ANY OTHER LAW“ Exemptions and tax concessions in any other law”providing for – • An exemption from any tax imposed; • A reduction in the rate of tax imposed; • A reduction in tax liability of any person ; or • An exemption from the operation of any provision;under the Ordinance is of legal effect unless also provided forin the Ordinance. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 203
    • 204. EXEMPTIONS AND TAX CONCESSIONS UNDER OTHER PROVISIONS OF THE INCOME TAX ORDINANCE, 2001In addition following are also exempt incomes under variousprovisions of Income Tax Ordinance, 2001 stated against each: • Foreign source salary of resident individuals (Section 102); EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 204
    • 205. CHAPTER IIITAX ON TAXABLE INCOME PART VIII “LOSSES” EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 205
    • 206. SET OFF OF LOSSES – Section 56Pakistan source loss, relating to income chargeable toincome tax (as taxable income ), sustained under theheads of income , namely: • ‘Salary ’ (technically there can be no loss under this head for the time being); • ‘Income from property ’ (technically there can be no loss under this head for the time being); • ‘Non-speculation income from business ’; and • ‘Income from other sources ’;for a tax year is permitted to be set off against income , if EDITED BYany, chargeable to income tax under any other HASSAM UL HAQhead of income for that tax year (see limitations ). HASSAM_RAJPOO T@YAHOO.COM 206
    • 207. SET OFF OF LOSSES – Section 56“Pakistan source speculation business loss ” of atax year can be set off only against any otherPakistan source speculation income from businesschargeable to income tax for that year.“Pakistan source capital loss ” of a tax year can be set off only against any other Pakistan source capital gainschargeable to income tax for that year.Pakistan source loss, relating to income chargeable toincome tax (as taxable income ), sustained under theheads of income ‘Speculation income from business ’ or ‘Capital gains ’ for a tax year is not permitted to be set offagainst income , if any, chargeable to income tax under any EDITED BYother head of income for that tax year . HASSAM UL HAQFor the above purposes of ‘set off of losses’, the loss under the HASSAM_RAJPOOsub-classification ‘ T@YAHOO.COMNon-speculation income from business ’ is set off last. 207
    • 208. SET OFF OF LOSSES OF COMPANIES OPERATINGHOTELS IN PAKISTAN AND AJK – Section 56AA company registered in Pakistan or Azad Jammu and Kashmir (AJ&K), operating hotels in Pakistanor AJ&K, sustains a loss in Pakistan or AJ&K for any tax yearunder the head “income from business” is entitled to have theamount of the loss set off against the company’s income inPakistan or AJ&K, as the case may be, from the tax year 2007onward. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 208
    • 209. CARRY FORWARD LOSS – Sections 56“ Pakistan source carry forward loss ” (see limitations )means the Pakistan source loss, relating to incomechargeable to income tax (as taxable income ), of atax year under the following heads of income: • Non-speculation income from business to the extent it cannot be set off (Carry forward Pakistan source non-speculation business loss);• Speculation income from business (Carry forward Pakistan source speculation business loss); and• Capital gains (Carry forward Pakistan source capital losses).Note: Pakistan source loss, relating to income chargeable to income tax (as taxable income ), of a tax year sustained EDITED BY following heads is not under the recognized as carried forward loss: • HASSAM UL HAQ Salary to the extent it cannot be set off ; • HASSAM_RAJPOO Income from property to the extent it cannot be set off ; and • T@YAHOO.COM Income from other sources to the extent it cannot be 209 Continued
    • 210. CARRY FORWARD LOSS – Sections 56Pakistan source carry forward loss is permitted to becarried forward for set off against following years income.Special rules apply for carry forward of the losses under eachhead i.e.: • Carry forward of Pakistan source non-speculation bu ; • Carry forward of Pakistan source speculation busines ; and • Carry forward of Pakistan source capital losses . EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 210
    • 211. CARRY FORWARD OF NON-SPECULATIONBUSINESS LOSSES – Section 57“Carry forward Pakistan source non-speculationbusiness loss ” is divided in two parts, namely:• ‘Unabsorbed depreciation etc of Pakistan source non-speculation business ’ - That portion of carry forward Pakistan source non-speculation busin which comprises of depreciation, initial allowance, first year allowance a ; and• ‘Brought forward Pakistan source non-speculation business loss ’ – EDITED BY That portion of carry forward Pakistan source non-speculation busin HASSAM UL HAQ which is other than the above. HASSAM_RAJPOO T@YAHOO.COM 211 Continued
    • 212. CARRY FORWARD OF NON-SPECULATIONBUSINESS LOSSES – Section 57Brought forward Pakistan source non-speculation business loss ,of a tax year , is permitted to be set off against the following year’sincome under the same sub-classification , if any, and so on for six*tax years immediately succeeding the tax year for which the loss wasfirst computed.Example – Brought forward business loss for the tax year 2003 can be carried forward till tax year 2009.Where the brought forward Pakistan source non-speculationbusiness loss is of more than one tax year , the loss of the earliesttax year is set off first.Example – A person has brought forward business loss of Rs.100,000, Rs.135,000 andRs.125,000 for the tax years 2003, 2004 and 2005 respectively and in the tax year 2009there is income of Rs.150,000. The brought forward loss of the tax year 2003 ofRs.100,000 will be adjusted first and the balance of Rs.50,000 will be adjusted out ofthe brought forward loss for the tax year 2004. Resultantly, after the adjustmentagainst income for the tax year 2009, the losses to be carried forward shall be Rs.85,000 andRs.125,000 for the tax years 2004 and 2005 BY respectively. EDITED HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 212 Continued
    • 213. CARRY FORWARD OF NON-SPECULATIONBUSINESS LOSSES – Section 57“Unabsorbed depreciation etc of Pakistan sourcenon-speculation business ” of a tax year , is alsopermitted to be carried forward but by way of addition to thefollowing year’s claim ofdepreciation, initial allowance, first year allowance and.Resultantly, Unabsorbed depreciation etc of Pakistansource non-speculation business of a tax year for allpurposes is treated asdepreciation, initial allowance, first year allowance and of the following year in addition to that year’sdepreciation, initial allowance, first year allowance and EDITED BY. HASSAM UL HAQThus, Unabsorbed depreciation etc of Pakistan source HASSAM_RAJPOOnon-speculation business can be carried 213 T@YAHOO.COM forward withoutany time limit, until completely set off. Continued
    • 214. CARRY FORWARD OF NON-SPECULATIONBUSINESS LOSSES – Section 57“Priority of brought forward Pakistan source non-speculation business loss ” - For the purposes of set off oflosses against the income of subsequent year the broughtforward Pakistan source non-speculation businessloss is adjusted first against the income of the subsequentyear and thereafter thedepreciation, initial allowance, first year allowance and including the Unabsorbed depreciation etc of Pakistansource non-speculation business for that year isadjusted. EDITED BYFollowing examples will illustrate the effects of the above: HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 214 Continued
    • 215. CARRY FORWARD OF NON-SPECULATION ABUSINESS LOSSES – Section 57 Example – Example – Example – I II IIIUnabsorbed depreciation etc. of tax year 2003 (500,000) (500,000) (500,000)Business loss for the tax year 2003 (400,000) (400,000) (400,000)Net profits and gains of tax year 2004 (600,000) 300,000 (350,000)Depreciation etc of tax year 2004 400,000 400,000 400,000Unabsorbed depreciation etc of tax year 2003 500,000 500,000 500,000Profits & gains of tax year 2004 before depreciation 300,000 1,200,000 550,000for the year and unabsorbed depreciationSet off of brought forward business loss of tax year (300,000) (400,000) (400,000)2003Set off of depreciation etc including unabsorbed Nil (800,000) (150,000)depreciation etc.Balance Profits and gains Nil Nil NilCarry forward: EDITED BY Balance business loss of tax year 2003 (100,000) Nil Nil HASSAM UL HAQ Un-absorbed depreciation of: Tax year 2003 HASSAM_RAJPOO (500,000) Nil (350,000) Tax year 2004 T@YAHOO.COM (400,000) 100,000 215 (400,000) Total (900,000) 100,000 Continued (750,000)
    • 216. CARRY FORWARD OF NON-SPECULATIONBUSINESS LOSSES – Section 57* However, the brought forward Pakistan source non-speculation business loss sustained by: • A banking company wholly owned by the Federal Government as on first day of June, 2002 and approved by the State Bank of Pakistan for this purpose, relating to any assessment year commencing on or after 01st July, 1995 and ending on the 30th June 2001 (Tax Years 1996 to 2000), the said loss is permitted to be carried forward for a period of ten years; and • An industrial undertaking set up in an area declared by the Federal Government to be a "Zone" within the meaning of Export Processing Zones Authority Ordinance, 1980 (IV of 1980), the loss isEDITED BYto be carried forward for un- permitted HASSAM UL HAQ limited period till its complete set off [Clause (2) of Part IV of 2nd Schedule]. HASSAM_RAJPOO T@YAHOO.COM 216
    • 217. SET OFF OF BUSINESS LOSS CONSEQUENT TOAMALGAMATIONSET– Section 57AThe Pakistan source assessed loss for the tax year , otherthanbrought forward Pakistan source non-speculation busine,brought forward Pakistan source speculation business lo l and Pakistan source capital loss , of theamalgamating company or companies is set off againstbusiness profits and gains of the amalgamated company ,and vice versa, in the year of amalgamation and where theloss is not adjusted against the profits and gains for thetax year the unadjusted loss BYcarried forward for adjustment EDITED is tax years HAQupto a period of six HASSAM UL immediately succeeding theyear of amalgamation.HASSAM_RAJPOO T@YAHOO.COM 217 Continued
    • 218. SET OFF OF BUSINESS LOSS CONSEQUENT TOAMALGAMATIONSET– Section 57AEffective July 01, 2007, in case of amalgamation ofBanking Companies or Non-banking Finance Companies,modarabas or insurance companies thebrought forward Pakistan source non-speculation busine andunabsorbed depreciation etc of Pakistan source non-spe of the amalgamating company or companies can alsobe set off or carried forward for adjustment upto a period of sixtax years immediately succeeding the tax year in which theloss was first computed in the case ofamalgamated company BY EDITED oramalgamating company or UL HAQ HASSAM companies . HASSAM_RAJPOO T@YAHOO.COM 218 Continued
    • 219. SET OFF OF BUSINESS LOSS CONSEQUENT TOAMALGAMATIONSET– Section 57AThe rules regarding treatment ofunabsorbed depreciation etc of Pakistan source non-spe and thepriority of brought forward Pakistan source non-specula equally apply to amalgamating company or companiesin the assessment of amalgamated company and viceversa.However, the above facility of set off of loss for the year, set offofbrought forward Pakistan source non-speculation busine and treatment ofunabsorbed depreciation etc of Pakistan source non-spe EDITED BY HASSAM the amalgamated company is subject to the condition thatUL HAQcontinues the business HASSAM_RAJPOO of theamalgamating company or companies for a minimum T@YAHOO.COM 219period of five years from the date of amalgamation . Continued
    • 220. SET OFF OF BUSINESS LOSS CONSEQUENT TOAMALGAMATIONSET– Section 57AFurther, where any of the conditions as laid down by the StateBank of Pakistan or the Securities and Exchange Commissionof Pakistan or any court, as the case may be, in the scheme ofamalgamation , are not fulfilled, the set off of loss orallowance for depreciation made in any tax year of theamalgamated company or theamalgamating company or companies is deemed to bethe income of that amalgamated company or theamalgamating company or companies , as the case maybe, for the year in which such default is discovered by theCommissioner or Taxation BY EDITED Officer . HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 220
    • 221. CARRY FORWARD OF SPECULATION BUSINESSLOSSES– Section 58“Carry forward Pakistan source speculation businessloss ” means the Pakistan source loss under the sub-classification speculation income from business for atax year , to the extent it cannot be set off against any otherPakistan source speculation income from business forthat year.“Brought forward Pakistan source speculationbusiness loss ” means the carry forward Pakistansource speculation business loss of a tax year .Brought forward Pakistan source speculationbusiness loss of a tax year , is permitted to be set offagainst the following year’s income under the same sub-classification , if any, and so on for six tax years EDITED BYimmediately succeeding the tax year for which the loss was HASSAM UL HAQfirst computed. HASSAM_RAJPOOExample – Brought forward speculation business loss for the tax year 2003 T@YAHOO.COM can be carried forward till tax year 2009. 221 Continued
    • 222. CARRY FORWARD OF SPECULATION BUSINESSLOSSES– Section 58Where the brought forward Pakistan sourcespeculation business loss is for more than one tax year ,the loss of the earliest tax year is set off first. Example – A person has brought forward speculation business loss of Rs.100,000, Rs.135,000 and Rs.125,000 for the tax years 2003, 2004 and 2005 respectively and in the tax year 2009 there is speculation business income of Rs.150,000. The brought forward speculation business loss of the tax year 2003 of Rs.100,000 will be adjusted first and the balance of Rs.50,000 will be adjusted out of the brought forward loss for the tax year 2004. Resultantly, after the adjustment against income for the tax year 2009, the losses to be carried forward shall be Rs.85,000 and Rs.125,000 for the tax years 2004 and 2005 respectively. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 222
    • 223. CARRY FORWARD OF CAPITAL LOSSES –Section 59 (Excluding capital losses on Securities)“Carry forward Pakistan source capital loss ” means thePakistan source loss under the head of capital gains for atax year , to the extent it cannot be set off against any otherPakistan source capital gains for that year.“Brought forward Pakistan source capital loss ” meansthe carry forward Pakistan source capital loss of atax year .Brought forward Pakistan source capital loss of atax year , is permitted to be set off against the followingyear’s income under the same head , if any, and so on for sixtax years immediately succeeding the tax year for which the EDITED BYloss was first computed. HASSAM UL HAQExample – Brought forward capital loss for the tax year 2003 can be HASSAM_RAJPOOcarried forward till tax year 2009. T@YAHOO.COM 223 Continued
    • 224. CARRY FORWARD OF CAPITAL LOSSES–Section 59 (Excluding capital losses on Securities)Where the brought forward Pakistan source capitalloss is for more than one tax year , the loss of the earliesttax year is set off first.Example – A person has brought forward capital loss of Rs.100,000,Rs.135,000 and Rs.125,000 for the tax years 2003, 2004 and 2005respectively and in the tax year 2009 there is capital gains ofRs.150,000. The brought forward capital loss of the tax year 2003 ofRs.100,000 will be adjusted first and the balance of Rs.50,000 will beadjusted out of the brought forward loss for the tax year 2004.Resultantly, after the adjustment against income for the tax year2009, the losses to be carried forward shall be Rs.85,000 and Rs.125,000for the tax years 2004 and 2005 respectively. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 224
    • 225. SET OFF AND CARRY FORWARD OF FOREIGNSOURCE LOSSES“Set off and carry forward of foreign source losses ” isdealt with separately . EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 225
    • 226. LIMITATIONS ON SET OFF AND CARRYFORWARD OF LOSSES – Section 59A Pakistan source loss sustained by an association of persons can only be set off and carried forward for set off against income of the succeeding years by that association of persons . The members of the association of persons can not set off their respective share of Pakistan source loss against their income under any other head nor they can carry forward the same. Successors, other than by way of inheritance, are not permitted to carry forward and set off Pakistan source losses of the person to whom they succeed against their income. Pakistan source losses is restricted to Carry forward of EDITED BY Pakistan source loss which has HAQ assessed or determined HASSAM UL been in pursuance of an order made under section 59, 59A, 62, 63 or HASSAM_RAJPOO 65 of the repealed Income Tax Ordinance, 1979 or an order made T@YAHOO.COM 226 or treated as made under section 120, 121 or 122 of the
    • 227. GROUP TAXATION – Section 59AA & Rule 231DAt the option of the taxpayer , group companies can betaxed as one fiscal unit, subject to furnishing of: • An irrevocable option for group taxation separately by the holding and subsidiary company or companies to their respective Commissioner’s and the Commissioner having jurisdiction over the holding company within first quarter of the tax year in which group taxation is opted for, in the format prescribed by Rule 231D, signed by the respective chief executives, indicating the National Tax Number and Corporate Registration Number of the respective group companies and identifying the Commissioner having jurisdiction on the respective group companies; and EDITED BY • Certificate from SECP, in the format prescribed under Rule 231D, verifying that each UL HAQ group companies are HASSAM of the compliant with the HASSAM_RAJPOO Governance notified Code of Corporate from time to time by SECP. T@YAHOO.COM 227 Continued
    • 228. GROUP TAXATION – Section 59AA & Rule 231DGroup Companies for this purpose are companies fulfillingthe following conditions: • Holding company holds 100% equity of the subsidiary company or companies directly or through nominees; • The holding and subsidiary company or companies: – Are incorporated in Pakistan under the Companies Ordinance, 1984; – Comply with requirements of the Corporate Governance specified by the SECP; – Are designated by SECP to avail group taxation; – Have similar accounting period for computation of income. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 228 Continued
    • 229. GROUP TAXATION – Section 59AA & Rule 231DOne Fiscal Unit for this purpose means:• The income or loss for the year of the group companies is consolidated;• Tax payable is determined on the basis of such consolidated income/loss; Note: Losses including un-absorbed depreciation prior to the formation of the group (before furnishing of an irrevocable option for taxation as one fiscal unit ) of the subsidiary company or companies can not be brought forward and set off against the consolidated income of the group. However, losses after formation of the group can be carried forward and set off against the income of the following years, subject to the carry forward and set off . limitations for such EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 229 Continued
    • 230. GROUP TAXATION – Section 59AA & Rule 231DOther obligations and procedures for availing grouptaxation: • The return of income (as one fiscal unit): – In the name of the holding company as if the business of the subsidiary companies is the business of the holding company; – To be accompanied with copies of audited accounts of every company in the group; • Holding company responsible to discharge the tax liability or claim refund as if the business of the subsidiary companies is the business of the holding company; • Subsidiary companies to furnish their returns of income in their respective tax jurisdiction along with a copy of application for group taxation for record and future adjustments and EDITED BY intimating non-taxability of the returned income. HASSAM UL HAQ • Subsidiary companies to intimate the Commissioner having jurisdiction over the holding company regarding their option HASSAM_RAJPOO for group taxation.T@YAHOO.COM 230 Continued
    • 231. GROUP TAXATION – Section 59AA & Rule 231DOther obligations and procedures for availing grouptaxation: • The provisions of the Ordinance, including withholding provisions as applicable on a holding company shall mutatis mutandis apply to a subsidiary company during the period when the group is taxed as one fiscal unit. Each company shall file independent withholding statements as required under the provisions of the Ordinance. • In case, there is divestment of a subsidiary company and the provisions of group taxation become inapplicable, no effect shall be taken for group taxation during the year of disposal. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 231
    • 232. GROUP RELIEF – Section 59B“ Group relief” basically refers to set off of losses (other thancapital loss and brought forward losses) for the tax yearbetween the companies in a group (see Group CompaniesRegistration Regulations, 2008 by SECP) by way ofsurrender of assessed losses for a tax year by one ofthe group company in favor of another group company .Surrender of assessed losses (other than capital loss andbrought forward losses) can be made by:• A subsidiary of a holding company, in favor of its holding company;• A subsidiary of a holding company, in favor of its subsidiary; or• A subsidiary of a holding company, in favor of another subsidiary its holding company.The loss surrendered by the subsidiary company can be EDITED BYclaimed by the holding company or a subsidiary company for HASSAM UL HAQset off only against its income under the head “Income from HASSAM_RAJPOOBusiness” in that tax year and can be carried forward for T@YAHOO.COMadjustment in the following two tax years . 232 Continued
    • 233. GROUP RELIEF – Section 59BWhere the losses surrendered by a subsidiary company are notadjusted against income of the holding company or asubsidiary company in the said three tax years , the lossessurrendered to the extent not adjusted, revert back to thesurrendering subsidiary company for carry forward inaccordance with section 57.In order to avail the benefit of group relief followingconditions and restrictions apply: • Where one of the company in the group is a public company listed on a registered stock exchange in Pakistan, the holding company should directly hold 55% or more of the share capital of the subsidiary company; or where none of the companies in the group is a listed company, the holding EDITED BY company should hold directly 75% or more of the share HASSAM UL HAQ capital of the subsidiary company; HASSAM_RAJPOO T@YAHOO.COM 233 Continued
    • 234. GROUP RELIEF – Section 59B• Continued ownership for five years, of share capital of the subsidiary company to the extent of 55% or 75%, as the case may be (see consequences of decrease in ownership );• A company within the group engaged in the business of trading is not be entitled to avail group relief;• Holding company, being a private limited company with 75% of ownership of share capital gets itself listed within three years from the year in which loss is claimed;• The group companies are locally incorporated companies under the Companies Ordinance, 1984;• The loss surrendered and loss claimed under this section shall have approval of the Board of Directors of the EDITED BY respective companies; HASSAM UL HAQ• The subsidiary company continues the same business HASSAM_RAJPOO during the said period of three years; T@YAHOO.COM 234 Continued
    • 235. GROUP RELIEF – Section 59B• All the companies in the group shall comply with such corporate governance requirements as may be specified by the Securities and Exchange Commission of Pakistan from time to time, and are designated as companies entitled to avail group relief;• The subsidiary company shall is not allowed to surrender its assessed losses for set off against income of the holding company for more than three tax years;• Loss claiming company shall, with the approval of the Board of Directors, transfer cash to the loss surrendering company equal to the amount of tax payable on the profits to be set off against the acquired loss at the applicable tax rate. The transfer of cash would not be taken as a taxable event in the case of either of the two companies. EDITED BY• Any other condition as may UL HAQ HASSAM be prescribed (nothing has yet been prescribed). HASSAM_RAJPOO T@YAHOO.COM 235 Continued
    • 236. GROUP RELIEF – Section 59BConsequences of decrease in ownershipThe holding company shall, in the year of decrease inownership (below 55% or 75%, as the case may be), offer theamount of profit on which taxes have not been paid due to setoff of losses surrendered by the subsidiary company.Transfer of shares between the companies to form agroupThe transfer of shares between companies and the shareholders, in one direction , does not constitutes a taxableevent provided the transfer is to acquire share capital forformation of the group and approval of the Security andExchange Commission of Pakistan or State Bank of Pakistan,as the case may be, has beenBY EDITED obtained to this effect. HASSAM UL HAQSale and purchase from third party would be taken as taxableevent. HASSAM_RAJPOO T@YAHOO.COM 236
    • 237. CHAPTER III TAX ON TAXABLE INCOME PART IX“DEDUCTIBLE ALLOWANCES” EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 237
    • 238. DEDUCTIBLE ALLOWANCES – Sections 60 / 60A/ 60B“ Deductible allowances” from total income to arrive at taxable income are: Zakat paid under the Zakat and Ushr Ordinance, 1980 , other than Zakat paid on a debt, the profit of which is chargeable to tax under the head “Income from Other Sources”. ( such Zakat is an admissible deduction against the pro ); Workers Welfare Fund paid/payable (according to the method of accounting followed) under the Workers Welfare Fund Ordinance, 1971; and Worker’s Participation Fund paid/payable (according to the EDITED BY method of accounting followed) under the Companies HASSAM UL HAQ Profit (Worker’s Participation) Act, 1968. HASSAM_RAJPOONote: The terms ‘admissible deductions/expenditures’ and T@YAHOO.COM 238 ‘deductible allowances’ are distinct and not same.
    • 239. CHAPTER IIITAX ON TAXABLE INCOME PART X “TAX CREDITS” EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 239
    • 240. TAX CREDITS – Sections 61 to 65C“ Tax Credit” means a rebate in gross income tax onaccount of: • Charitable donations ; • Investment in shares and life insurance premium ; • Contribution to an approved pension fund ; • Profit on debt ; • On being registered under the Sales Tax Act, 1990 as a manufacturer ; • Investment (Balancing, modernization and replacement of plant and machinery) ; and • Enlistment on Stock Exchange ; • Equity investment in newly established industrial undertaking; EDITED BY • Equity investment in purchase and installation of HASSAM UL HAQ plant and machinery for the purposes of balancing, HASSAM_RAJPOO modernization, replacement or expansion in an industrial T@YAHOO.COM 240 undertaking established before July 01, 2011 Continued
    • 241. TAX CREDITS – Sections 61 to 65C“ Tax Credit” for Charitable donations , Investment inshares , Contribution to an approved pension fundand Profit on debt is calculated at the average rate ofgross income tax as reduced by reductions in taxliability on eligible amounts .“Eligible amounts ” under are discussed separately foreach.“ Tax Credit” for all other items – Different set of rules applywhich are discussed separately for each. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 241 Continued
    • 242. TAX CREDITS – Sections 61 to 65AThis effectively means: • Gross income tax ; minus • Reductions in tax liability ; divided by • Taxable income ; multiplied by • Eligible amounts ; is equal to • Tax credit (rebate in tax). Example Amount (Rupees) 1. Taxable income 300,000 2. Gross income tax 22,500 3. Reductions – 11,250 Senior Taxpayer 4. Balance income tax [2 minus 3] 11,250 5. Total eligible amount for tax credit 50,000 6. EDITED BY Tax credit [4 divided by 1 multiplied by 5] 1,875 HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 242 Continued
    • 243. TAX CREDITS – Sections 61 to 65AWhere the person entitled to a tax credit is a member ofan association of persons , the following applies – • “Taxable income ” includes the share of the member in the income chargeable to tax of the association of persons (since otherwise share of the member of the association of persons is ); and • “Gross income tax ” is calculated on the taxable income as stated above.Tax credit or part of a tax credit allowed for a tax year that EDITED BYcan not be adjusted against the gross income tax as HASSAM UL HAQreduced by reductions in tax liability for that year is HASSAM_RAJPOOneither refunded nor carried forward to a subsequent T@YAHOO.COM 243tax year or carried back to a preceding tax year . Continued
    • 244. TAX CREDITS – Sections 61 to 65AIn addition, tax credits are also allowed on: • Exempt share of profits from association of persons of an individual (though technically not tax a credit); • Exempt share of profits from association of persons of a company ; and • Foreign tax credit . EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 244
    • 245. TAX CREDIT - CHARITABLE DONATIONS –Section 61“Charitable donations ” means the gross amount paidthrough a crossed cheque drawn on a bank or thefair market value of any property given as donation in atax year to the following institutions etc.: • Any board of education or any university in Pakistan established by, or under, a Federal or a Provincial law; • Any educational institution, hospital or relief fund established or run in Pakistan by Federal Government or Provincial Government or a Local Government ; • A non-profit organization ; EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 245 Continued
    • 246. TAX CREDIT - CHARITABLE DONATIONS –Section 61“Eligible amount ” (monetary limits) for charitable donationsis lower of the: • Amount of charitable donations ; or • 30%* of the taxable income chargeable to income tax (for an individual or association of persons ) or 20%* of the taxable income chargeable to income tax (for a company ). Example I Example II 1. Amount of donations 40,000 20,000 2. 30% of taxable income 30,000 30,000 3. Eligible amount lower of 1 or 2 30,000 20,000* This does not apply toBY EDITED donations made to Agha KhanHospital and Medical College,UL HAQ [Clause (3) of Part IV HASSAM Karachiof 2nd Schedule]. HASSAM_RAJPOO T@YAHOO.COM 246
    • 247. TAX CREDIT - INVESTMENT IN SHARES ANDLIFE INSURANCE – Section 62“Investment in Shares ” means the cost of shares ,acquired in a tax year by an individual oran association of persons ,: • As original allottee of the shares , offered to the public by a public company listed on stock exchange in Pakistan; or • From the Privatization Commission of Pakistan.“Investment in Life Insurance ” means life insurancepremium paid on a policy to a Life Insurance Companyregistered by the Securities and Exchange Commission ofPakistan under the Insurance Ordinance, 2000.Tax credit for: • Investment in EDITED BYis available to a resident shares association of persons ; and individual and anHASSAM UL HAQ • Investment in HASSAM_RAJPOO is available only to a Life Insurance resident individual deriving income chargeable to tax T@YAHOO.COM 247 under the head ‘salary’ or ‘income from business’. Continued
    • 248. TAX CREDIT - INVESTMENT IN SHARES ANDLIFE INSURANCE – Section 62“Eligible amount ” (monetary limits) is lower of the: • Amount of investment in shares and life insurance ; or • 15% of the taxable income chargeable to income tax ; or • Rs.500,000. Example I Example II Example III 1. Amount invested 155,000 5,000 600,000 2. 15% of taxable income 15,000 15,000 800,000 3. Maximum admissible amount 500,000 500,000 500,000 4. Admissible amount (lower of 1, 2 or 3) 15,000 5,000 500,000 EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 248 Continued
    • 249. TAX CREDIT - INVESTMENT IN SHARES –Section 62“Surrender of tax credit on investment in shares ” –Where a tax credit on investment in shares is allowedin an earlier tax year and subsequently the shares aredisposed off within thirty six (36) months of the date ofacquisition, the amount oftax credit on investment in shares allowed earlier onthe shares so disposed off is added to theincome tax payable or reduced from the current year’stax credit , if any, as the case may be, in the tax year ofdisposal. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 249
    • 250. TAX CREDIT - CONTRIBUTION TO ANAPPROVED PENSION FUND – Section 63“ Contribution or premium to an approved pensionfund ” means the amount of contribution or premium paid in atax year to an approved pension fund under theVoluntary Pension System Rules, 2005 by an eligibleperson.Eligible person for the purposes of this credit means anindividual who is: • A Pakistani National; • Holder of a valid National Tax Number ; or Computerized National Identity Card (CNIC) or National Identity Card for Overseas Pakistanis (NICOP) issued by the National Database and Registration Authority; EDITED BY • Deriving income from salary or business ; and HASSAM UL HAQ • Not entitled HASSAM_RAJPOO from any other to any benefit approved pension fund or approved annuity plan . T@YAHOO.COM 250 Continued
    • 251. TAX CREDIT - CONTRIBUTION TO ANAPPROVED PENSION FUND – Section 63However, transfer by the members of approved employmentpension or annuity scheme or approved occupational savingscheme of their existing balance to their individual pensionaccounts maintained with one or more pension fundmanagers do not qualify for tax credit.“Eligible amount ” (monetary limits) is lower of the: • Amount of contribution or premium to an approved pension fund ; or • 20% of the taxable income chargeable to income tax (Where the person joins the pension fund at the age of forty-one years or above, during the first ten years starting from July 01, 2006 is allowed additional 2% per annum for each year of age exceeding forty years. However, the total contribution allowed is restricted to 50% of the taxable income chargeable to income tax of the preceding tax year ) EDITED BY Example I Example II1. HASSAM UL HAQ Amount of contribution or premium 205,000 5,0002. 20% of taxable incomeHASSAM_RAJPOO 15,000 15,0003. Eligible amount lower of 1 or 2 15,000 5,000 T@YAHOO.COM 251
    • 252. TAX CREDIT - PROFIT ON DEBT – Section 64“Profit on debt etc ” means profit or share in rent and sharein appreciation of value of house paid in a tax year on a loanor advance for the construction of a new house or theacquisition of house obtained from the following: • Scheduled bank; • Non-banking finance institution regulated by Securities and Exchange Commission of Pakistan; • Statutory body; • Public company listed on a registered stock exchange in Pakistan; or • The Federal Government, Provincial Government or a Local Government . BY EDITED HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 252
    • 253. TAX CREDIT - PROFIT ON DEBT – Section 64“Eligible amount ” (monetary limits) is lower of the: • Amount of profit on debt etc ; • 50% of the taxable income chargeable to income tax ; or • Rs.750,000. Example I Example II1. Amount of profit on debt etc. 20,000 30,0002. 50% of total income 25,000 25,0003. Maximum admissible amount 750,000 750,0004. Eligible amount (lower of 1, 2 or 3) 20,000 25,000 EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 253
    • 254. TAX CREDIT - MANUFACTURER REGSITERDUNDER THE SALES TAX ACT, 1990 – Section 65AA person being manufacturer: • Who is registered under the Sales Tax Act, 1990; and • Whose at least 90% of the sales are to persons registered under the Sales Tax Act, 1990; and • Who provides complete details of persons to whom the sales are made;is entitled to a tax credit of 2.5% of the income tax payablebefore credit for advance income tax paid and credit foradjustable tax collected or deducted at source.This effectively means: • Gross income tax ; minus • Reductions in tax liability ; minus • Foreign tax credit ; minus • EDITED BY Tax credits on donations, investments etc. ; minus • HASSAM UL HAQ Tax credit on exempt share from association of persons ; multiplied by HASSAM_RAJPOO • 2.5%; is equal to • T@YAHOO.COM 254 Tax credit (rebate in tax for manufacturers fulfilling the above conditions). Continued
    • 255. TAX CREDIT - MANUFACTURER REGSITERDUNDER THE SALES TAX ACT, 1990 – Section 65AExample:1. Taxable income Rs. 1,000,0002. Gross income tax Rs. 150,0003. Reductions in tax liability, if any Rs. 20,0004. Foreign tax credit, if any Rs. 10,0005. Tax credit for donation, etc., if any Rs. 15,0006. Tax credit on exempt share from association of persons, if any Rs. 5,0007. Balance income tax payable [2 minus 3, 4, 5 and 6] Rs. 100,0008. Tax credit (for a person registered under Sale Tax Act, 1990 and fulfilling the applicable conditions) [8 multiply by 2.5%] EDITED BY Rs. 2,5009. Income tax payableHASSAM UL HAQ [7 minus 8] Rs. 87,500 HASSAM_RAJPOO T@YAHOO.COM 255
    • 256. TAX CREDIT - BALANCING, MODERNIZATION AND EPLACEMENT OF PLANT AND MACHINERY – Section 65BTax credit equal to 10% of the amount invested in theacquisition of plant and machinery for purposes of balancing,modernization and replacement (BMR) is admissible againstthe Income tax payable (before credit of advance taxand adjustable tax deducted or collected at source )subject to the following conditions: The BMR is carried on:  In an industrial undertaking set up in Pakistan and owned by a company ;  In an already installed plant and machinery;  Between July 01, 2010 to June 30, 2015; The tax credit is admissible in the tax year in which such EDITED BY plant and machinery is installed; and The un-adjusted HASSAM UL HAQ credit can be carried amount of such tax HASSAM_RAJPOO forward and adjusted against the tax payable in thefollowing two tax years . T@YAHOO.COM 256
    • 257. TAX CREDIT – ENLISTMENT ON A STOCKEXCHANGE – Section 65COne time tax credit equal to 15% of the Income taxpayable (before credit of advance tax and adjustabletax deducted or collected at source ) is admissible to acompany in the tax year in which it is listed on anyregistered Stock Exchange in Pakistan.Example – Tax Year 2012Taxable income of the company Rs. 1,000,000Income tax payable @ 35% Rs. 350,000Tax credit for enlistment on a stockExchange @ 15% ofEDITED BY payable Rs. income tax 52,500Net Income tax payableHASSAM UL HAQ Rs. 297,500 HASSAM_RAJPOO T@YAHOO.COM 257
    • 258. TAX CREDIT – EQUITY INVESTMENT INNEWLY ESTABLISHED INDUSTRIALUNDERTAKING – Section 65DTax credit is admissible to a company formed forestablishing and operating a new industrial undertakingfor manufacturing in Pakistan, subject to the conditions that: The company :  Is registered / incorporated under the Companies Ordinance, 1984;  Has its registered office in Pakistan; and  Is incorporated between July 01, 2011 and June 30, 2016; and The industrial undertaking :  Is setup between July 01, 2011 and June 30, 2016;  Is managed by a company formed for operating such industrial undertaking ;  Is not established by splitting up or reconstruction or reconstitution of an undertaking already in existence or by transfer of machinery or plant EDITED BY from an industrial undertaking established in Pakistan at any time before July 01, 2011; and HASSAM UL HAQ  Is set up with 100% equity owned by the company. HASSAM_RAJPOO T@YAHOO.COM 258 Continued
    • 259. TAX CREDIT – EQUITY INVESTMENT IN NEWLY ESTABLISHED INDUSTRIAL UNDERTAKING – Section 65DThis tax credit is admissible in the tax year in which suchindustrial undertaking is setup or commercial productionis commenced, which ever is later, and the following fouryears. The amount of tax credit is equal to 100% of the Income tax payable (before credit of advance tax and adjustable tax deducted or collected at source ) on income arising from such industrial undertaking.1. Equity investment in establishing and operating an Rs. 100,000,000 industrial undertaking2. Tax year of setup or commencement of commercial 2012 production which ever is later3. Taxable income Rs. 10,000,0004. EDITED Income tax payable @ 35% BY Rs. 3,500,0005. HASSAM UL HAQ Tax credit for equity investment in newly established Rs. 3,500,000 HASSAM_RAJPOO industrial undertaking [100% of 4]6. T@YAHOO.COM Balance Income tax payable 259Rs. Nil
    • 260. TAX CREDIT – EQUITY INVESTMENT FOR BMR OF PLANT AND MACHINERY IN AN INDUSTRIAL UNDERTAKING ESTABLISHED BEFORE JULY 01, 2011 – Section 65ETax credit for purchase and installation of plant andmachinery, for the purpose of balancing, modernization andreplacement (BMR), or for expansion of the plant andmachinery, already installed, in an industrial undertakingset up in Pakistan before July 01, 2011 is also available to acompany , subject to the following conditions: Purchase of such plant and machinery is made with 100% equity investment; and Purchase and installation of such plant and machinery ismade any time between July 01, 2011 and June 30, 2016.This tax credit is admissible in the tax year in which theplant or machinery is purchased and installed against theIncome tax payable (before credit of advance tax and EDITED BYadjustable tax deducted or collected at source ) for HASSAM UL HAQthat year. HASSAM_RAJPOO T@YAHOO.COM 260 Continued
    • 261. TAX CREDIT – EQUITY INVESTMENT FOR BMR OFPLANT AND MACHINERY IN AN INDUSTRIALUNDERTAKING ESTABLISHED BEFORE JULY 01,2011 – Section 65EThe amount of tax credit is equal to 100% of theproportionate Income tax payable (before credit ofadvance tax and adjustable tax deducted orcollected at source ) on such equity investment and thetotal investment. 1. Tax Year 2012 2. Equity investment excluding equity investment for BMR Rs. 100,000,000 3. Equity investment for BMR: Rs. 20,000,000 4. Total equity investment Rs. 120,000,000 5. Taxable income Rs. 10,000,000 6. Income tax payable @ 35% Rs. 3,500,000 EDITED BY 7. Tax credit for BMR through equity investment [6 divided Rs. 583,333 by 4 multiplied by 3] HASSAM UL HAQ 8. HASSAM_RAJPOO Balance Income tax payable Rs. 2,916, 667 T@YAHOO.COM 261
    • 262. CHAPTER IVCOMMON RULES PART I “GENERAL”EDITED BYHASSAM UL HAQHASSAM_RAJPOOT@YAHOO.COM 262
    • 263. INCOME OF JOINT OWNERS – Section 66For the purposes of computing income chargeable to tax underany head of income except ‘income from business’, whereany property is owned by two or more persons and theirrespective shares are definite and ascertainable – • The persons are not assessed as an association of persons in respect of that property; and • The share of each persons in the income from the property is taken into account. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 263
    • 264. APPORTIONMENT OF DEDUCTIONS – Section 67Where an expenditure relates to – • The derivation of income from more than one head of income ; • Derivation of income comprising of taxable income chargeable to income tax and/or income subject to separate charge chargeable to final tax and/or income subject to final taxation chargeable to final tax and/or separate block of income chargeable to fixed income tax ; or • The derivation of income chargeable to tax under a head of income and to some other purpose, EDITED BYthe expenditure is apportioned on any reasonable basis taking HASSAM UL HAQaccount of the relative nature and size of the activities to whichthe amount relates. HASSAM_RAJPOO T@YAHOO.COM 264Rule 13 of the Income Tax Rules, 2002 specifies how to
    • 265. APPORTIONMENT OF EXPENDITURES – Rule 13Any expenditure that is incurred for a particular class orclasses of income is allocated to that class or classes ,as the case may be.Any common expenditure including financial expenses,relatable to each class of business (i.e., Pakistan source ,foreign source , exempt incomes ,income subject to final taxation ,income subject to separate taxation andseparate block of income ) is allocated to each such classof income according to the following formula, namely:-• Amount of the common expenditure incurred; multiplied by• Amount of gross receipts (without deduction of expenditures) or Gross profit and other incomes (net gains), as the case may be, of the class EDITED BY of business income to which the common expenditure is to be allocated; divided by HASSAM UL HAQ• HASSAM_RAJPOO Amount of gross receipts (without deduction of expenses) or Gross profit and other incomes (net gains), as the case may be, of all the T@YAHOO.COM 265 classes of business incomes to which such common expenditureContinued
    • 266. APPORTIONMENT OF EXPENDITURES – Rule 13However, for allocation of common expenditure of differentclass or classes of business income as stated above,wherever necessary, consideration is also given to the natureand source of each class of income , on reasonable basis toearn each class of income (particularly, in allocating sellingexpenses).The allocation of common expenditures with in each classof business income made on the above basis is accepted bythe Commissioner :• In case the accounts are required to be audited, on the basis of a certificate by the Chartered Accountants or Cost and Management Accountant stating the basis of allocation, unless significant variations are found; and• In other cases, as made by taxpayer , unless variation is found. EDITED BY“Common expenditure ” means expenditure that is notclearly allocable to HASSAM UL HAQ any particular class or classes of HASSAM_RAJPOOincome , such as general administrative and other suchallocable expenditures. T@YAHOO.COM 266 Continued
    • 267. APPORTIONMENT OF EXPENDITURES – Rule 13“Class of income ” means - • Pakistan-source income chargeable under the head “Salary ”; • Foreign-source income chargeable under the head “Salary ” • Pakistan-source income chargeable under the head “Income from Property ”; • Foreign-source income chargeable under the head “Income from Property ”; • Pakistan-source income chargeable under the head “Income from Business ” (other than speculation business income ); • Foreign-source income chargeable under the head “Income from Business ” (other than speculation business income ); • Pakistan-source income from a speculation business income chargeable under the head “Income from Business ”; • Foreign-source income from a speculation business income chargeable under the head “Income from Business ”; • Pakistan-source income chargeable under the head “Capital Gains ”; • Foreign-source income chargeable under the head “Capital Gains ; • Pakistan-source income chargeable under the head “ Income from Other Sources ” • Foreign-source income chargeable under the head “Income from Other Sources ” • Income exempt from tax ; • Income subject to a separate charge ; • Income subject to final EDITED BY taxation ( except proceed realized from exports for which separate provision is made ); and HASSAM UL HAQ • Separate block of income . HASSAM_RAJPOO T@YAHOO.COM 267
    • 268. FAIR MARKET VALUE (FMV) – Sections 68“ Fair market value” or “Fair market rent ” of any: • Property; • Asset; • Service; • Benefit; or • Perquisiteat a particular time is the price or rent which wouldordinarily fetch on sale, supply or letting out in the openmarket at that time.The fair market value or rent is determined without regardto any restriction on transfer or to the fact that it is nototherwise convertible to cash. EDITED BYWhere the fair market price or rent is not ordinarily HASSAM UL HAQascertainable, such price or rent is taken to be as HASSAM_RAJPOOdetermined by the Commissioner . T@YAHOO.COM 268
    • 269. RECEIPT OF INCOME – Sections 69“Receipt of income ” – For the purposes of the Ordinance, aperson is treated as having received an amount, benefit, orperquisite if it is – • Actually received by the person ; • Applied on behalf of the person , at the instruction of the person or under any law; or • Made available to the person . EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 269
    • 270. RECOUPED EXPENDITURE – Sections 70“Recouped expenditure ” – Where any expenditure or lossincurred in a tax year is allowed as a deduction in thecomputing income chargeable to tax under ahead of income and, subsequently, an amount is received,in cash or in kind, in respect of such expenditure or loss, theamount so received is included in the income chargeableunder that head for the tax year in which it is received. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 270
    • 271. CURRENCY CONVERSION – Sections 71“Currency conversion ” – All amounts for the purposes ofOrdinance are taken into account in Rupees.Where an amount is in a currency other than rupees, theamount is converted into Rupee at the exchange rate notifiedby the State Bank of Pakistan on the date the amount is takeninto account for the purposes of Ordinance. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 271
    • 272. CESSATION OF SOURCE OF INCOME – Sections72“Cessation of source of income ” – Where – • Any income is derived by a person in a tax year from any business , activity, investment or other source that has ceased either before the commencement of the year or during the year; and • If the income had been derived before the business , activity, investment or other source ceased it would have been chargeable to tax under the Ordinance, andthe Ordinance applies to the income on the basis that thebusiness , activity, investment or other source had not ceasedat the time the income was derived. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 272
    • 273. RULES TO PREVENT DOUBLE DERIVATIONAND DOUBLE DEDUCTIONS – Sections 73“Rules to prevent double derivation and doubledeductions ” – • An income chargeable to tax on receivable basis, is not chargeable again when actually received; or • An income chargeable to tax on receipt basis, is not chargeable again when receivable; or • An expenditure deductible on payable basis, is not deductible again when actually paid; or • An expenditure deductible on actually paid basis, is not deductible again when payable. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 273
    • 274. CHAPTER IVCOMMON RULES PART II “TAX YEAR”EDITED BYHASSAM UL HAQHASSAM_RAJPOOT@YAHOO.COM 274
    • 275. TAX YEAR – Section 74“ Tax Year” is sub-divided into three types, namely:- • Normal tax year ; • Special tax year ; and• Transitional tax year .The Board is empowered to notify that a class of personshaving: • Special tax year may use normal tax year ; or • Normal tax year may use special tax year . EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 275 Continued
    • 276. TAX YEAR – Section 74“Change of tax year ” – A person can apply, in writing, tothe Commissioner for the change of tax year. TheCommissioner after providing an opportunity of being heard: • If satisfied that there is a compelling need for such a change, by an order, allow a person to use normal tax year instead of special tax year or special tax year instead of normal tax year subject to such conditions, if any, as the Commissioner may impose; or • Reject the application by an order after recording the reasons for rejection. EDITED BYThe order of Commissioner UL HAQ a change of tax year HASSAM allowingtake’s effect from such date, being the first day of the HASSAM_RAJPOOspecial tax year orT@YAHOO.COM year , as the case may the normal tax 276 Continued
    • 277. TAX YEAR – Section 74The permission granted by the Commissioner for change oftax year, after providing an opportunity of being heard, can alsobe withdrawn.A review application against the aforesaid orders of theCommissioner lies with the Board , and the decision by theBoard on such application is final. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 277 Continued
    • 278. NORMAL TAX YEAR – Section 74“ Normal tax year” is a period of twelve months ending on30th day of June and is denoted by the calendar year in whichthe said date falls. For example, tax year for the period oftwelve months from July 01, 2007 to June 30, 2008 shall bedenoted by calendar year 2008 and the period of twelvemonths from July 01, 2008 to June 30, 2009 shall be denotedby calendar year 2009. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 278 Continued
    • 279. SPECIAL TAX YEAR – Section 74“ Special tax year” is any period of twelve months (subject tocertain conditions and restrictions) and is denoted by thecalendar year relevant to the normal tax year in whichclosing date of the special tax year falls. For example, tax yearfor the period of twelve months from January 01, 2007 toDecember 31, 2007 shall be denoted by calendar year 2008and the period of twelve months from October 01, 2008 toSeptember 30, 2009 shall be denoted by calendar year 2010. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 279
    • 280. TRANSITIONAL TAX YEAR – Section 74“Transitional tax year ” means the period between the endof the last tax year prior to change of tax year and the date onwhich the changed tax year commences.“Transitional tax year ” is treated as a separate tax year. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 280
    • 281. CHAPTER IV COMMON RULES PART III “ ASSETS”DISPOSAL AND ACQUISITION OF ASSETS–Section 75 COST OF AN ASSET – Section 76 and 78CONSIDERATION RECEIVED OF AN ASSET–Section 77 and 78 GAIN/(LOSS) ON DISPOSAL OF AN ASSET– NON- REGOGNITION RULES – Section 79 These topics are not covered in the present course EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 281
    • 282. CHAPTER VPROVISIONS GOVERNING PERSONS PART I “CENTRAL CONCEPTS” Division I “Persons” EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 282
    • 283. PERSON - Sub-Section (1) of Section 80“ Person” for the purposes of the Ordinance means:- An individual; An association of persons incorporated, formed, organized or established in Pakistan or elsewhere; A company incorporated, formed, organized or established in Pakistan or elsewhere The Federal Government; A foreign government; A political subdivision of a foreign government; and Public international organization. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 283
    • 284. COMPANY - Sub-Sections (2)(a) and (2)(c) ofSection 80“ Company” means – A company as defined in the Companies Ordinance, 1984; A body corporate formed by or under any law in force in Pakistan; A modaraba ; A body incorporated by or under the law of a country outside Pakistan relating to incorporation of companies; A trust ; A co-operative society ; A finance society ; EDITED BY Any other society established orHAQ HASSAM UL constituted by or under any law for the time being in force; HASSAM_RAJPOO T@YAHOO.COM 284 Continued
    • 285. COMPANY - Sub-Sections (2)(a) and (2)(c) ofSection 80“ Company” means – A foreign association, whether incorporated or not, which the Board has, by general or special order, declared to be a company; A Provincial Government; A Local Government in Pakistan; or A Small Company . EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 285
    • 286. ASSOCIATION OF PERSON - Sub-Sections (2)(a)and (2)(c) of Section 80“ Association of persons” includes a firm , a Hinduundivided family, any artificial juridical person and any body ofpersons formed under a foreign law, but does not include acompany .“ Firm ” means the relation between persons who have agreedto share the profits of a business carried on by all or any ofthem acting for all. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 286
    • 287. TRUST - Sub-Sections (2)(d) and (2)(e) of Section80“ Trust ” means an obligation annexed to the ownership ofproperty and arising out of the confidence reposed in andaccepted by the owner, or declared and accepted by the ownerfor the benefit of another, or of another and the owner, andincludes a unit trust .“ Unit trust ” means any trust under which beneficial interestsare divided into units such that the entitlements of thebeneficiaries to income or capital are determined by thenumber of units held. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 287
    • 288. CHAPTER V PROVISIONS GOVERNING PERSONS PART I “CENTRAL CONCEPTS” Division II“Resident and Non-Resident Persons” EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 288
    • 289. RESIDENTIAL STATUS - Section 81 to 84“ Residential status” (where a person resides in atax year ) is of great importance for the purposes ofdetermining the income chargeable to tax under variousheads of income . Basically there are two categories ofresidential status, namely:- • Resident; and • Non-residentDifferent set of rules apply to determine the residential status ofthree broad categories of a person (individual, associationof persons and company ). BY EDITED HASSAM UL HAQThe Federal Government is resident. HASSAM_RAJPOO T@YAHOO.COM 289 Continued
    • 290. RESIDENTIAL STATUS - Section 81 to 84 andRule 14An individual is “resident” in a tax year if he/she is: • Present in Pakistan for 183 days or more in that tax year ; or • An employee or official of the Federal or a Provincial Government posted abroad in that tax year .In order to compute the number of days an individual is present in Pakistan in a tax year , Rule14 applies, namely: • A part of a day that an individual is present in Pakistan (including the day of arrival in, and the day of departure from, Pakistan) counts as a whole day of such presence; However, a day or part of a day where an individual is in Pakistan solely by reason of being in transit between two different places outside Pakistan does not count as a day present in Pakistan. • The following days in which an individual is wholly or partly present in Pakistan count as a whole day of such presence:- – a public holiday; – a day of leave, including sick leave; – a day that the individual’s activity in Pakistan is interrupted because of a strike, lock- out or delay in receipt EDITEDor of supplies; BY – a holiday spent by the individual in Pakistan before, during or after any activity in Pakistan. HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 290 Continued
    • 291. RESIDENTIAL STATUS - Section 81 to 84An association of persons is “resident” in a tax year if the control and management of the affairs of the association is situated wholly or partly in Pakistan at any time in the year.A company is “resident” in a tax year if: it is incorporated or formed by or under any law in force in Pakistan; the control and management of the affairs of the company is situated wholly in Pakistan at any time in the year; or it is a Provincial Government or Local Government in Pakistan.An individual, an association of persons and a EDITED BY company is “non-resident” HAQtax year if he/she/it is HASSAM UL in a not a resident for HASSAM_RAJPOO that tax year . T@YAHOO.COM 291
    • 292. CHAPTER VPROVISIONS GOVERNING PERSONS PART I “CENTRAL CONCEPTS” Division III “Associates” EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 292
    • 293. ASSOCIATES - Section 85“ Associates” means the relationship between the two persons , where one may reasonably be expected to act in accordance with the intentions of the other, or both persons may reasonably be expected to act in accordance with the intentions of a third person . In addition the following are also treated as associates: An individual and a relative of the individual * ; Members of an association of persons ; A member of an association of persons and the association , where the member , either alone or together with an associate or associates under another application of this definition, controls fifty per cent or more of the rights to EDITED BY the association ; income or capital ofHASSAM UL HAQ A trust and any person who benefits or may benefit under HASSAM_RAJPOO the trust ; T@YAHOO.COM 293 Continued
    • 294. ASSOCIATES - Section 85 A shareholder in a company and the company , where the shareholder , either alone or together with an associate or associates under another application of this definition, controls either directly or through one or more interposed persons –  fifty per cent or more of the voting power in the company ;  fifty per cent or more of the rights to dividends; or  fifty per cent or more of the rights to capital; and Two companies , where a person , either alone or together with an associate or associates under another application of this definition, controls either directly or through one or more interposed persons –  fifty per cent or more of the voting power in both companies;  fifty per cent or more of the rights to dividends in both companies; or  fifty per cent or more of the rights to capital in both companies. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 294 Continued
    • 295. ASSOCIATES - Section 85“Associates does not include ”: Two persons solely by reason of the fact that one person is an employee of the other or both persons are employees of a third person . Two persons being ‘an individual and a relative of the individual’ or being ‘members of an association of persons ’ where the Commissioner is satisfied that neither person may reasonably be expected to act in accordance with the intentions of the other.*“ Relative ” in relation to an individual, means –  an ancestor, a descendant of any of the grandparents, or an adopted EDITED BY child, of the individual, or of a spouse of the individual; or  a spouse of the individual or of UL HAQ specified above. HASSAM any person HASSAM_RAJPOO T@YAHOO.COM 295
    • 296. CHAPTER VPROVISIONS GOVERNING PERSONS PART II “INDIVIDUALS” Division I “Taxation of Individuals” EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 296
    • 297. PRINCIPLE OF TAXATION OF INDIVIDUALS -Section 86“Principle of taxation of individuals ” – Subject to anyother provision in the Ordinance, the taxable income of eachindividual is determined separately. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 297
    • 298. DECEASED INDIVIDUALS - Section 87“Deceased individual’s ” legal representative is liable for– • Any tax that the individual would have become liable for if the individual had not died; and • Any tax payable in respect of the income of the deceased’s estate.The liability of a legal representative under for this purposesis limited to the extent to which the deceased’s estate iscapable of meeting the liability and such liability has the firstcharge on the deceased’s assets;Any proceeding taken under the Ordinance against the EDITED BYdeceased before his or her death is treated as taken against HASSAM UL HAQthe legal representative and may be continued against the HASSAM_RAJPOOlegal representative from the stage at which the proceeding T@YAHOO.COMstood on the date of the deceased’s death; and 298 Continued
    • 299. DECEASED INDIVIDUALS - Section 87Any proceeding which could have been taken under theOrdinance against the deceased if the deceased had survivedmay be taken against the legal representative of thedeceased.“Legal representative ” means a person who in lawrepresents the estate of a deceased, and includes any personwho intermeddles with the estate of the deceased and where aparty sues or is sued in representative character the personon whom the estate devolves on the death of the party so suingor sued. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 299
    • 300. CHAPTER V PROVISIONS GOVERNING PERSONS PART II “ INDIVIDUALS” Division II “ Provisions Relating to Averaging”TAXATION OF INDIVIDUAL WHO IS MEMBER OF AN ASSOCIATION OF PERSONS - Section 88TAXATION OF COMPANY WHICH IS MEMBEROF AN ASSOCIATION OF PERSONS - Section 88A TAXATION EDITED BY OF AUTHORS – Section 89 HASSAM UL HAQ These topics HASSAM_RAJPOO in the present are not covered course T@YAHOO.COM 300
    • 301. CHAPTER VPROVISIONS GOVERNING PERSONS PART II “INDIVIDUALS” Division III “Income Splitting” TRANSFER OF ASSETS – Section 90 INCOME OF MINOR CHILD – Section 91 EDITED BYThese topics are not covered in the present course HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 301
    • 302. CHAPTER VPROVISIONS GOVERNING PERSONS PART III “ASSOCIATION OF PERSONS” EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 302
    • 303. PRINCIPLES OF TAXATION OF ASSOCIATION OFPERSONS – Section 92“Principles of taxation of association of persons ” areas under: • An association of persons is liable to tax separately from the members of the association of persons ; and • Where the association of persons has paid tax the share of the member in profits of the association of persons is exempt from tax.Exception to the above exemption of share of profits are: • In case of an individual being member of the associa ; and EDITED BY • In case of a company being member of the associatio HASSAM UL HAQ . HASSAM_RAJPOO T@YAHOO.COM 303 Continued
    • 304. PRINCIPLES OF TAXATION OF ASSOCIATION OFPERSONS – Section 92The words “paid tax” has the implication that if the incomechargeable to income tax of the association of personsis below themaximum amount that is not chargeable to tax thanthe exemption to the members is not available and suchshare is included in the taxable income chargeable toincome tax and the provisions regarding ‘taxation of individual who is member of an association o’ (Section 88) andtaxation of company which is member of an association (section 88A) do not apply; BY EDITED HASSAM UL HAQFurther, if the association of persons has sustained a loss HASSAM_RAJPOOthe same is not T@YAHOO.COM allocated to the members and is 304
    • 305. CHAPTER V PROVISIONS GOVERNING PERSONS PART IV “COMPANIES”PRINCIPLES OF TAXATION OF COMPANIES–Section 94DISPOSAL OF BUSINESS BY INDIVIDUAL TO WHOLLY- OWNED COMPANY–Section 95 DISPOSAL OF BUSINESS BY ASSOCIATION OFPERSONS TO WHOLLY-OWNED COMPANY–Section 96 DISPOSAL OF ASSETS BETWEEN WHOLLY-OWNED COMPANIES –Section 97 DISPOSAL OF ASSETS UNDER A SCHEME OFARRANGEMENT AND RE-CONSTRUCTION–Section 97A EDITED BY HASSAM UL HAQ HASSAM_RAJPOO These topics are not covered in the present course T@YAHOO.COM 305
    • 306. CHAPTER V PROVISIONS GOVERNING PERSONS PART V“COMMON PROVISIONS APPLICABLETO ASSOCIATIONS OF PERSONS AND COMPANIES” CHANGE IN CONTROL OF AN ENTITY – Section 98 EDITED BY HASSAM UL HAQThis topic is not covered in the present course HASSAM_RAJPOO T@YAHOO.COM 306
    • 307. CHAPTER V PROVISIONS GOVERNING PERSONS PART VA “TAX LIABILITY IN CERTAIN CASES” CHANGE IN CONSTITUTION OF AN ASSOCIATION OF PERSONS - Section 98A DISCONTINUATION OF BUSINESS OR DISSOLUTION OF AN ASSOCIATION OF PERSONS - Section 98B SUCCESSION OF BUSINESS, OTHERWISE THAN ON DEATH - BY EDITED Section 98C HASSAM UL HAQ HASSAM_RAJPOOThese topic are not covered in the present course. T@YAHOO.COM 307
    • 308. CHAPTER VI SPECIAL INDUSTRIES SPECIAL PROVISIONS RELATING TO INSURANCE BUSINESS - Section 99 SPECIAL PROVISIONS RELATING TO THEPRODUCTION OF OIL AND NATURAL GAS, AND EXPLORATION AND EXTRACTION OF OTHER MINERAL DEPOSITS - Section 100 EDITED BY HASSAM UL HAQ HASSAM_RAJPOOThese topics are not covered in the present course. T@YAHOO.COM 308
    • 309. CHAPTER VII INTERNATIONAL PART I“GEOGRAPHICAL SOURCE OF INCOME” This topic is not covered in the present course. EDITED BYHowever, it is necessary UL under stand this topic HASSAM to HAQ for over all understanding of the course HASSAM_RAJPOO T@YAHOO.COM 309
    • 310. PAKISTAN SOURCE INCOME - Section 101“ Pakistan source income” comprises of the following: Salary to the extent to which the it –  is received from any employment exercised in Pakistan, wherever paid; or  is paid by, or on behalf of, the Federal Government, a Provincial Government, or a Local Government in Pakistan, wherever the employment is exercised. Business income of a resident person to the extent to which the income is derived from any business carried on in Pakistan including gain from the disposal of any asset or EDITED BY property used in deriving such business income. HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 310 Continued
    • 311. PAKISTAN SOURCE INCOME - Section 101“ Pakistan source income” comprises of the following: Business income including gain from the disposal of any asset or property used in deriving business income of a non-resident person to the extent to which it is directly or indirectly attributable to –  a permanent establishment of the non-resident person in Pakistan;  sales in Pakistan of goods merchandise of the same or similar kind as those sold by the person through a permanent establishment in Pakistan;  other business activities carried on in Pakistan of the same or similar kind as those effected by the EDITED BY non-residentHASSAM UL HAQ through a permanent establishment in Pakistan; or HASSAM_RAJPOO  any business connection in Pakistan. T@YAHOO.COM 311 Continued
    • 312. PAKISTAN SOURCE INCOME - Section 101“ Pakistan source income” comprises of the following: Where the business of a non-resident person comprises the rendering of independent services (including professional services and the services of entertainers and sports persons), any remuneration derived by the person where the remuneration is paid by a resident person or borne by a permanent establishment in Pakistan of a non-resident person including gain from the disposal of any asset or property used in deriving such business income. Dividend if it is paid by a resident company . EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 312 Continued
    • 313. PAKISTAN SOURCE INCOME - Section 101“ Pakistan source income” comprises of the following: Profit on debt if it is –  paid by a resident person , except where the profit is payable in respect of any debt used for the purposes of a business carried on by the resident outside Pakistan through a permanent establishment ; or  borne by a permanent establishment in Pakistan of a non-resident person . Gain arising on the disposal of shares in a resident company . EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 313 Continued
    • 314. PAKISTAN SOURCE INCOME - Section 101“ Pakistan source income” comprises of the following: Royalty if it is –  paid by a resident person , except where the royalty is payable in respect of any right, property, or information used, or services utilized for the purposes of a business carried on by the resident outside Pakistan through a permanent establishment ; or  borne by a permanent establishment in Pakistan of a non-resident person . Rental income if it is derived from the lease of immovable EDITED BY property in Pakistan whether improved or not, or from any other interest in or HASSAM UL HAQ over immovable property, including a right HASSAM_RAJPOO to explore for, or exploit, natural resources in Pakistan. T@YAHOO.COM 314 Continued
    • 315. PAKISTAN SOURCE INCOME - Section 101“ Pakistan source income” comprises of the following: Gain from the alienation of any property or right in Pakistan whether improved or not, or from any other interest in or over immovable property, including a right to explore for, or exploit, natural resources in Pakistan. Gain from the alienation of any share in a company the assets of which consist wholly or principally, directly or indirectly, of property or rights in Pakistan whether improved or not, or from any other interest in or over immovable property, including a right to explore for, or exploit, natural resources in Pakistan. EDITED BY Pension or annuity if it is paid by a resident or borne by a HASSAM UL HAQ permanent establishment HASSAM_RAJPOO Pakistan in of a non-resident person . T@YAHOO.COM 315 Continued
    • 316. PAKISTAN SOURCE INCOME - Section 101“ Pakistan source income” comprises of the following: Technical fee if it is –  paid by a resident person , except where the fee is payable in respect of services utilized in a business carried on by the resident outside Pakistan through a permanent establishment ; or  borne by a permanent establishment in Pakistan of a non-resident person . Amount paid on account of insurance or re-insurance premium by an insurance company to an overseas insurance or re-insurance company. Any amount not mentioned BY EDITED above if it is paid by a resident person or borneHASSAMpermanent establishment in by a UL HAQ HASSAM_RAJPOO Pakistan of a non-resident person . T@YAHOO.COM 316
    • 317. FOREIGN SOURCE INCOME - Section 101“ Foreign source income” is any income, which is not aPakistan source income . EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 317
    • 318. CHAPTER VII INTERNATIONAL PART II“TAXATION OF FOREIGN SOURCE INCOME OF RESIDENTS” EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 318
    • 319. TAXATION OF FOREIGN SOURCE INCOME OFRESIDENT – Rule 15“Foreign income tax ” means a levy of tax, if it requires acompulsory payment pursuant to the authority of the foreigncountry to levy taxes, which issubstantially equivalent to the income tax imposed unde (Rule 15) but does not include: • A penalty, fine, interest or similar obligation; • A levy of tax to the extent a person receives or is entitled to receive, directly or indirectly, a specific economic benefit from the foreign country in exchange for the payment pursuant to the levy; EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 319 Continued
    • 320. TAXATION OF FOREIGN SOURCE INCOME OFRESIDENT – Rule 15A foreign income tax is “Substantially equivalent tothe income tax imposed under the Ordinance ” means:• A withholding tax imposed on dividends, gross receipts payable to non- resident persons as final tax;• Tax on wages by withholding imposed as a final tax on salary; or• Any other foreign tax, which full fills the following conditions: – The tax is imposed in respect of events that would result in the derivation of income, gains or profits under the Ordinance; – The taxable amount is computed under the foreign tax by subtracting from gross receipts any significant expenses and the depreciation or amortization of capital costs attributable to such receipts, or, where the tax is imposed under the foreign law or any other basis; and EDITED BY – Dividend or interest income earned from foreign source, on being HASSAM UL HAQ so taken by the Board , may be treated to have same character for HASSAM_RAJPOO the resident person , as it has under the Ordinance. T@YAHOO.COM 320 Continued
    • 321. TAXATION OF FOREIGN SOURCE INCOME OFRESIDENT – Rule 15“Specific economic benefit ” means an economic benefitthat is not available on substantially the same terms – • All persons subject to the income tax generally imposed by the foreign country; or • If there is no generally imposed income tax, the population of the country in general.“Economic benefit ” includes – • Any property; • Any service; • Any fee or other payment; • Any right to use, acquire or extract natural resources, patents, or other property owned or controlled by the foreign EDITED BY country; or HASSAM UL HAQ • Any reduction or discharge or a contractual obligation. HASSAM_RAJPOO T@YAHOO.COM 321
    • 322. FOREIGN SOURCE SALARY OF RESIDENTINDIVIDUALS - Section 102“Foreign source salary of a resident individual ” isexempt from tax if the individual has paidforeign income tax in respect of such salary .“Paid ” means tax withheld from the Foreign source salaryby the employer and paid to the revenue authority of theforeign country in which the employment is exercised. EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 322
    • 323. FOREIGN TAX CREDIT - Section 103“Foreign tax credit ”, in respect of foreign source incomechargeable to tax in a tax year of a resident taxpayer isallowed of an amount lesser of – • The foreign income tax including foreign withholding tax which is paid within two years after the end of the tax year in which the foreign source income to which the tax relates was derived; or • The Pakistan tax payable in respect of such income.“Pakistan tax payable ” means proportionate tax attributableto net foreign source income chargeable to tax in atax year , computed by applying the average rate of EDITED BYPakistan income tax for thatUL HAQ HASSAM year. HASSAM_RAJPOO T@YAHOO.COM 323 Continued
    • 324. FOREIGN TAX CREDIT - Section 103“Average rate of Pakistan income tax ” means thepercentage that the Pakistani income tax (before allowance of thetax credit under this section) is of the taxable income of thetaxpayer for the year;“Net foreign-source income ” means the totalforeign source income chargeable to tax, as reduced by anydeductions allowed against foreign source income underthe Ordinance that – • Relate exclusively to the derivation of the foreign source income ; and • Are reasonably related to the derivation of foreign source income BYin EDITED accordance with ‘ apportionment of deductions ’ and the applicable Rules. HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 324 Continued
    • 325. FOREIGN TAX CREDIT - Section 103Where, a taxpayer has foreign source income under morethan one head of income or sub-classification of incomefrom business, the Foreign source income ,deductible expenditures , net foreign source income ,foreign income tax paid, etc. are determined separately foreach head of income and sub-classifications of income frombusiness (non-speculation business income andspeculation business income ) as well.Foreign tax credit or part of a tax credit allowed for a tax yearthat can not be adjusted against the income tax payable forthat year is neither refunded nor carried forward to a EDITED BYsubsequent tax yearHASSAM UL HAQ a preceding tax year . or carried back to HASSAM_RAJPOO T@YAHOO.COM 325 Continued
    • 326. FOREIGN TAX CREDIT - Rule 16To claim a foreign tax credit , an application, in the formprescribed by Rule 16 accompanied by following documents, isrequired to be submitted along with the return of income : • Where the foreign tax has been deducted at source: – A declaration by the payer of the income that tax has been deducted; and – A certified copy of the receipt that the payer has received from the foreign tax authority for the deducted tax or such secondary evidence of the deduction acceptable to the Commissioner ; and • In any other case: – The original or a certified copy of the receipt that the EDITED BY taxpayer has HASSAM from the foreign tax authority for received UL HAQ the tax paid. HASSAM_RAJPOO T@YAHOO.COM 326 Continued
    • 327. FOREIGN TAX CREDIT - Section 103 Example Particulars Pakistan Foreign source Total source Non- Speculatio Capital Other Pakistan speculatio n business gains sources & foreign n business sourceNet income for the 500,000 100,000 (200,000 150,000 250,00year ) 0Brought forward losses 0 (50,000) 0 (300,00 0 0)Income after B/F 500,000 50,000 (200,000 (150,00 250,00losses ) 0) 0Losses carried forward 0 0 (200,000 (150,00 0 ) 0)Balance income 500,000 50,000 0 0 250,00 800,000 0Pakistan income tax 280,000Foreign tax EDITED BY 25,000 0 15,000 75,000Proportionate Pakistan 17,500 0 0 87,500income tax HASSAM UL HAQForeign tax credit HASSAM_RAJPOO 17,500 0 0 75,000 92,500Net income tax T@YAHOO.COM 327 187,500payable
    • 328. DEDUCTIONS ALLOWED AGAINST FOREIGNSOURCE INCOME – Section 104“Deductible expenditures ” – Expenditures incurred inderiving foreign source income chargeable to tax under ahead of income or sub-classification are deductible onlyagainst income under that head or sub-classification.This means that where, a taxpayer hasforeign source income under more than onehead of income or sub-classifications of income frombusiness, the foreign source income , deductibleexpenditures , net foreign income , foreign income tax EDITED BYpaid, etc. are determined separately for each head of incomeand sub-classifications of UL HAQ HASSAM income from business ( HASSAM_RAJPOOnon-speculation business income and T@YAHOO.COM 328speculation business income ) as well.
    • 329. SET OFF AND CARRY FORWARD OF FOREIGNSOURCE LOSSES – Section 104“Set off of foreign source losses ” for a tax year under ahead of income or sub-classifications of income frombusiness (non-speculation business income andspeculation business income ) is not permitted to be setoff against any other head of income or sub-classification.“Foreign source loss carried forward ” and “Foreignsource loss brought forward ” means thenet foreign source loss under each of head of income orsub-classifications of income from business (non-speculation business BY EDITED income andspeculation business income ) HAQ a tax year , taken HASSAM UL forseparately. HASSAM_RAJPOO T@YAHOO.COM 329 Continued
    • 330. SET OFF AND CARRY FORWARD OF FOREIGNSOURCE LOSSES – Section 104Foreign source loss brought forward of a tax year , ispermitted to be set off against the following year’s incomeunder the same head/sub-classification , if any, and so onfor six tax years immediately succeeding the tax year forwhich the loss was first computed.Where the foreign source loss brought forward is formore than one tax year , the loss of the earliest tax year isset off first.Example EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 330
    • 331. CHAPTER VII INTERNATIONAL PART III “TAXATION OF NON-RESIDENTS” TAXATION OF A PERMANENT ESTABLISHMENT INPAKISTAN OF A NON-RESIDENT PERSON - Section 105 THIN CAPITALIZATION - Section 106 EDITED BY HASSAM UL HAQ HASSAM_RAJPOO These topics are not covered in the present course. T@YAHOO.COM 331
    • 332. CHAPTER VII INTERNATIONAL PART IV “AGREEMENTS FOR THE AVOIDANCE OF DOUBLE TAXATION AND PREVENTION OF FISCAL EVASION” AGREEMENTS FOR THE AVOIDANCE OF DOUBLETAXATION AND PREVENTION OF FISCAL EVASION – EDITED BY 107 Section HASSAM UL HAQ HASSAM_RAJPOO This topic is not covered in the present course. T@YAHOO.COM 332
    • 333. CHAPTER VIII ANTI AVOIDANCE TRANSACTIONS BETWEEN ASSOCIATES - Section 108 RE-CHARACTERIZATION OF INCOME AND DEDUCTIONS - Section 109 SALARY PAID BY PRIVATE COMPANIES - Section 110 UNEXPLAINED INCOME OR ASSETS - Section 111 LIABILITY IN RESPECT OF CERTAIN SECURITY EDITED BY TRANSACTIONS - Section 112 HASSAM UL HAQThese topics are not covered in the present course. HASSAM_RAJPOO T@YAHOO.COM 333
    • 334. CHAPTER IX MINIMUM TAXEDITED BYHASSAM UL HAQHASSAM_RAJPOOT@YAHOO.COM 334
    • 335. MINIMUM TAX ON INCOME OF CERTAINPERSONS – Section 113“Minimum tax ” is attracted/levied on (see exceptions ): a resident company; an individual (having turnover of fifty million rupeesor above in the tax year 2009 or in any subsequent taxyear ); and an association of persons (having turnover of fifty million rupees or above in the tax year 2007 or inany subsequent tax year )Where for a tax year : • No income tax is payable (before advance income tax credit and/or adjustable tax collected or deducted at source credit); or • income tax payable (before advance income tax credit and/or adjustable BY collected or deducted EDITED tax at source credit) is less UL HAQ HASSAM than 1.00% (or applicable reduced rate ) ofHASSAM_RAJPOO year; its turnover for that T@YAHOO.COM 335 Continued
    • 336. MINIMUM TAX ON INCOME OF CERTAINPERSONS – Section 113For any reason whatsoever, including any other law for thetime being in force, due to: • Loss for the year; • The setting off of a loss of an earlier year ; • Exemption from tax ; • The application of reduction in tax liability or tax credits (other than advance income tax credit and/or adjustable tax collected or deducted at source credit); or • The claiming of allowances or deductions (including depreciation and amortization deductions). EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 336 Continued
    • 337. MINIMUM TAX ON INCOME OF CERTAINPERSONS – Section 113“Where minimum tax is attracted/levied”: • The aggregate turnover for the tax year is treated as the income for the year chargeable to income tax ; and • The income tax payable (before advance income tax credit and/or adjustable tax collected or deducted at source credit) for that tax year is an amount equal to 1.00% (or applicable reduced rate ) the aggregate turnover for that year, instead of the income tax payable (before advance income tax credit and/or adjustable tax collected or deducted at source credit) otherwise on the taxable income chargeable to income taxBY that tax year . EDITED of HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 337 Continued
    • 338. MINIMUM TAX ON INCOME OF CERTAINPERSONS – Section 113“Carry forward of minimum tax” paid, in excess of theincome tax payable (before advance income tax creditand/or adjustable tax collected or deducted at sourcecredit) otherwise on the taxable income for a tax year , ispermitted for set off against the income tax payable(before advance income tax credit and/or adjustable taxcollected or deducted at source credit), if any, on thetaxable income chargeable to income tax of the following5 tax years . EDITED BY HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 338 Continued
    • 339. MINIMUM TAX ON INCOME OF CERTAINPERSONS – Section 113Reduced rate of minimum tax (other than the standard rate of 1.00%) isapplicable in following cases:Clause (7) of Part III of 2 nd Schedule – 0.20% Company engaged in the business of distribution of cigarettes manufactured in PakistanClause (8) of Part III of 2 nd Schedule – 0.20% Distributors of pharmaceutical products, fertilizers andconsumers goods including fast moving consumers goodsClause (9) of Part III of 2 nd Schedule – 0.50% Oil marketing companies, oil refineries, Sui Southern GasCompany Limited and Sui Northern Gas Pipelines Limited providedthe turnover exceeds Rs. One billion.Clause (10) of Part III EDITED BY of 2 nd Schedule – 0.20% Flour mills HASSAM UL HAQ HASSAM_RAJPOO T@YAHOO.COM 339 Continued
    • 340. MINIMUM TAX ON INCOME OF CERTAINPERSONS – Section 113“Turnover ” means: • The gross sales or gross receipts, exclusive of Sales Tax and Federal Excise duty or any trade discounts shown on invoices, or bills, derived from sale of goods (excluding any amount relating to income subject to final taxation or separate block of income ); • The gross fees for the rendering of services for giving benefits including commissions (excluding any amount relating to income subject to final taxation or separate block of income ); • The gro