Advanced taxation (cfap5) by fawad hassan [lecture3]

Income from Salary
Employee Employment Employer
Means any individual engaged in employment Means any person who engages and
remunerates an employee
Includes:
i. Directorship or any other office
involved in management of company
OR
ii. a position entitling the holder to a
fixed or ascertainable remuneration
OR
iii. holding or acting in any public office
3 Important Questions:
1. Geographical Source of Income
2. Basis of Taxation
3. Residential Status recently changed
Heads of Income
61
Deciding a
Salary case

Income from Salary
1. Geographical Source of Income [S-101(1), (11) & (16)]
Heads of Income
Employment Exercised
In Pakistan Outside Pakistan
Payment of Salary made
In Pakistan PSI FSI
Outside Pakistan PSI FSI
By or on behalf of FG/PG/LG in Pakistan
PSI wherever employment is exercised
Salary
62
Pension/Annuity
Resident
FSI
PSI
PENRBorn by
Paid by

Income from Salary
Heads of Income Salary
63
Cash BasisAccrual
[S-110]
Salary received in current tax year in respect of services rendered in
previous Tax Year is taxable on accrual basis.
Conditions:
(i) Salary is received from a private company
(ii) Commissioner of Income Tax is satisfied that the payment of salary
was deferred
[S-12(7)]
Arrears of salary received in tax year caused higher taxation, then tax payer
by notice in writing to commissioner tax salary on accrual basis
All Other Cases
Amount OR Perquisite treated as received [S-12(5)]:
as and when it is paid or provided;
By
(i) Employer
(ii) Associate of employer
(iii) Any 3rd party under agreement with employer or its
associate
By
(i) Past employer
(ii) Perspective employer
To
(i) Employee
(ii) Associate of employee
(iii) Any 3rd party under agreement with employee or its
associate
Receipt of Income [S-69]:
Amount/benefit/perquisite treated as received when:
(i) Actually received
(ii) Applied on behalf/instruction of person OR under any law
(iii) Made available to person

Income from Salary
3. Residential Status Recently Changed
Heads of Income Salary
64
Non Resident
Resident
Geographical Source of Income
PSI FSI
Residential
Status
FSI of Resident
Foreign Source Salary of Resident [S-102]:
Exempt if;
- Foreign tax on salary is paid by individual OR
- withheld by employer and paid to revenue
authority of foreign country
Citizen of Pakistan leaves Pakistan [S-51(2)]:
If a citizen of Pakistan leaves Pakistan in a Tax Year
and remains abroad during that tax year
then Salary earned outside Pakistan shall be
exempt
Returning Expatriate [S-
51(1)]:
If resident in a Tax Year but was
Non-Resident in preceding 4
Tax Years
Then all foreign source income
will be exempt in tax year in
which tax payer becomes
resident and the following tax
year
Short term Resident [S-50]:
FSI will be exempt
Conditions:
(i) Resident solely by reason
of employment
(ii) Present in Pakistan for 3
years or less
Exceptions:
(i) Income from business
established in Pakistan
(ii) Foreign Source Income
brought into or received
in Pakistan

Income from SalaryHeads of Income Salary
65
Deciding a Salary case:
1. Salary Definition
2. Deductions
3. Perquisites/Facilities/Benefits
4. Exemptions

66
Salary [S-12(2)] Means: any amount received by employee from employment whether capital or revenue nature
Includes: Perquisites [Section-13]
means
-items provided by employer in kind
OR
-cash reimbursed for expenses other than office purpose
includes
-Services of house keeper, driver, gardener, domestic assistant
-Utilities
-Any obligation of employee to employer, waived off by employer
-Any obligation of employee to another person paid by employer
-FMV of property transferred to employee reduced by any payment
made by employee
Allowances
-Cost of Living
Allowance
-Subsistance Allowance
-Rent
-Utilities
-Education
-Entertainment
-Travel Allowance;
except for official tours
-Pay
-Wages
-Other remuneration
-Leave pay
-Overtime
-Bonus
-Commission
-Fee
-Gratuity
-Work condition
Supplements
Expenditure
incurred by
employee but
paid by employer,
other than official
purposes
Others
-Pension,
Annuity
- Leave encashment -Vehicle wholly or partly for private use
-Accommodation
-Medical Facility
-Interest free loan
- Medical Allowance -Profits in lieu of salary
-Employee Share Scheme

67
Leave Encashment [2nd Schedule, Part-I, Clause-19]:
Encashment of
Leave Preparatory to Retirement
Of
(i) Government Employee
(ii) Member of Armed Forces
Exempt from Tax
Definition

68
Valuation of Conveyance [Rule-5]:
Taxable
Vehicle leased by employerVehicle owned by employer
Official Use only
Official & Personal use
Personal Use only
Usage
Not Taxable
5% of FMV at commencement of lease5% of cost of vehicle
10% of FMV at commencement of lease10% of cost of vehicle
Definition

69
Valuation of Accommodation [Rule-4]:
Amount that would have been paid
if accommodation was not provided
45% of MTS/Basic Salary
Higher
TaxableTaxable
Accommodation provided in mufasal areas
shall be taxable at 30% of MTS/Basic Salary
Definition

70
Medical Allowance [2nd Sched, P-I, Clause 139]:
BothMedical Facility/Reimbursement
Not in accordance with
terms of employment
In accordance with terms of
employment
Medical Allowance
Medical Allowance >>>>exempt upto 10% of Basic Salary
Medical Facility>>>>>>totally taxable
Taxable
Medical Allowance >>>>Totally Taxable
Medical Facility>>>>>>totally exempt if following
conditions are met
(i) Provide NTN of medical practitioner
(ii) Attestation of expense by employer
Totally exempt if following conditions
are met:
(i) Provide NTN of medical
practitioner
(ii) Attestation of expense by
employer
Exempt upto 10% of Basic Salary
Definition

71
Interest Free Loan [S-13(7) (8) & (14)]: Loan from employer
@
benchmark
rate or
more
Markup
charged?
Markup @ benchmark rate
Included in Taxable Income
Markup @ benchmark rate
– Markup charged by employer
Included in Taxable Income
Nothing Taxable
NoYes
Yes
Above is not applicable on loan upto Rs 500,000/-
OR
Where such benefit is extended by the employer due to
waiver of interest by such employee on his accounts
maintained with the employer.
No
X
(X)
X
If loan is utilized by employee to acquire any asset
Then employee shall be treated as having been paid
markup @ benchmark rate or actual markup paid,
which ever is higher.
Definition

72
Profits in lieu of salary [S-12(2)(e)]
(i) Payment of Employer's Contribution from provident fund
(ii) Amount on termination of employment, whether voluntary basis or under an agreement
(iii) Compensation for redundancy or loss of employment (e.g., Golden Hand Shake)
(iv) Consideration for employee's agreement to :
• enter into employment agreement
• accept changes to conditions of employment
• a restrictive covenant to any past, present or future employment
Includes:
[S-12(6)]
Tax payer has option to get it taxed @ last 3 years
average rate of tax
Last 3 year’s taxable income
Last 3 year’s tax liability
=Average rate of tax
Definition

73
Employee Share Scheme [S-14] Option/Right Acquired
Shares disposed off
Shares acquired without any restriction on transfer
OR restriction removed afterwards
Shares acquired with restriction on transfer
Exercised Option/Right & Shares received Taxable under salary
Consideration
- Cost Paid
Option/Right Disposed Off
Nothing Taxable
X
(X)
X
FMV
- Consideration paid to acquire shares
X
(X)
X Taxable under salary
Taxable under Capital Gains
Disposal value
- Consideration paid to acquire option & share
- Amount previously included in Taxable income
X
(X)
(X)
X
Nothing Taxable
Definition

74
Deductions:
Section 12(4):
No deduction shall be allowed for any expense incurred by employee in deriving salary income.

75
Perquisites/Facilities/Benefits:
1. Pension
2. Commutation of Pension
3. Gratuity & Commutation of Pension
4. Provident Fund
5. Tax on Salary Born by Employer
6. Services provided by employer to employee
7. Utilities
8. Obligation of employee waived by employer
9. Obligation of employee to 3rd party, paid by employer
10. Property or service provided to employee
11. Any other perquisite
12. Self Hiring of Property
13. Superannuation Fund
14. Benevolent Fund

76
1. Pension [2nd Sched, Pt-I, Cl (8)&(9)]
Member of Armed Force
Employee of FG/PG
Totally Exempt
Others
Age>60 Totally Exempt
Works for
same
employer or
its associate
Taxable
More than
1 pension
Totally Exempt
Higher amount is exemptYes
No
YesNo
YesNo
Perks

77
2. Commutation of Pension [2nd Sched, Pt-I, Cl (12)]
Received from Government
OR
Received from Scheme approved by FBR
Totally Exempt
Perks

78
3. Gratuity and Commutation of Pension [2nd Sched, Pt-I, Cl (13)]
Rs 75,000/-
OR
50% of amount
(Which ever is less is exempt)
Exempt upto Rs 300,000/-Totally Exempt
Un-approved Gratuity
OR
Un-approved Commutation
Gratuity & Commutation Scheme Approved
by FBR
Government Employee
OR
Approved Gratuity Fund by CIT under 6th Schedule
Exemption not available to following:
(i) Payment not received in Pakistan
(ii) Payment received by Director of Company who is not employee of company
(iii) Payment received by Non Resident
(iv) Gratuity received by employee who has already received gratuity from same or another employer
Perks

79
4. Provident Fund [2nd Sched, Pt-I, Cl (23)] & [6th Sched, Pt-I, Cl (3), (4) & (5)]
Already taxed in salary,
therefore no treatment
Employee Contribution
Govt. PF
Already taxed in salary, therefore no
treatment
Already taxed in salary, therefore no treatment
Un-recognized PFRecognized PF
ExemptEmployer Contribution
No treatment when contribution is
made
Rs 150,000
OR
10% of (Basic Salary + Dearness Allowance)
(Lesser is exempt)
Exempt
Returns credited during
year
Return @ 16%
OR
1/3rd of (Basic Salary + Dearness Allowance)
(Higher is exempt)
ExemptAccumulated Balance Paid
No treatment when returns are
credited
Exempt
Only employee’s contribution is exempt
All other sums are taxable
Note: Dearness Allowance is a type of Cost of Living Allowance
Perks

80
5. Tax on Salary Born by Employer [S-12(3)]
Amount of salary income shall be grossed up by amount of tax payable by employer.
Q. Mr. A has received taxable salary and allowances amounting to Rs 1,810,000 during tax year 2017. You are
required to calculate his taxable income and tax payable under each of following situations:
(i) 100% tax is to be borne by employer
(ii) 40% of tax is to be borne by employer and balance to be borne by Mr. A
(iii) Rs 50,000 is to be borne by employer and balance to be borne by Mr. A
(iv) Mr. A shall pay only Rs 50,000 as tax and balance tax to be borne by employer
Perks

81
6. Services provided by employer to employee [S-13(5)]
House keeper
Gardner
Driver
Other domestic assistant
Less: payment by employee to employer for these services
Salary paid to them by employer X
(X)
X Taxable
Perks

82
7. Utilities [S-13(6)]
Electricity
Gas
Water
Telephone
Less: payment by employee to employer for these utilities
Fair Market Value of utilities X
(X)
X Taxable
Perks

83
8. Obligation of employee waived by employer [S-13(9)]
Waived Amount Taxable
9. Obligation of employee payable to 3rd party paid by employer [S-13(10)]
Paid Amount Taxable
10. Property or service provided to employee [S-13(11)]
Less: payment by employee to employer
Fair Market Value X
(X)
X Taxable
Perks

84
11. Any other perquisite [S-13(13)]
Less: payment by employee to employer for perquisite
Fair MV of perquisite X
(X)
X Taxable
Perks

85
12. Self Hiring of Property [S-15(5)]
"Income from Salary" shall include value of accommodation in accordance with Rule-4
"Income from Property" shall include rent income in accordance with Section-15(4)&(5)
Perks

86
13. Superannuation Fund approved by Commissioner in accordance with Part-II of 6th Schedule [Cl-4-6] & 2nd Sched, P-I, Cl-25 :
Employer’s Contribution
During life time other than above
In lieu of annuity
On deathPayment out of fund:
Taxable
Exempt
Interest Credited
Perks

87
14. Benevolent Fund [2nd Sched, P-I, Cl-24]
Any payment in accordance with
"Central Employee Benevolent Fund & Group Insurance Act 1969"
Exempt
Perks

88
Exemptions:
1. Foreign Government Officials
2. Diplomatic & United Nations Exemptions
3. International Agreements
4. Perquisites without Marginal Cost to Employer
5. Special Allowance
6. Workers’ Participation Fund
7. Salary income of seafarer
8. Allowances to persons working outside Pakistan
9. Full Time teacher/researcher

89
Exemptions:
1. Foreign Government Officials [S-43]
Salary of foreign government employee shall be exempt from tax if:
(i) employee is citizen of foreign country and not citizen of Pakistan
(ii) services performed are similar to those performed by employees of Federal Government in foreign countries
(iii) foreign government grants similar exemption to employees of the Federal Government performing similar services in such foreign country

90
Exemptions:
2. Diplomatic & United Nations Exemptions [S-42]
Following shall be exempt from tax:
(i) Individuals entitled to privileges under the Diplomatic and Consular Privileges Act, 1972
(ii) Individuals entitled to privileges under the United Nations (Privileges and Immunities) Act, 1948
(iii) Pension received by citizen of Pakistan due to former employment in the United Nations or its specialized agencies, if the person’s salary from
such employment was exempt under this Ordinance

91
Exemptions:
3. Exemption under International
Agreements [S-44]
If Pakistan is not permitted to tax
an income under TAX TREATY,
it will be exempt from tax
Salary received under an AID AGREEMENT is exempt from
tax subject to following conditions:
(i) Salary received by individual, who is not citizen of
Pakistan
(ii) Exemption will be to the extent provided in AID
AGREEMENT
(iii) AID AGREEMENT is between FG≈Fr.G FG ≈PIO
(iv) Individual is not resident OR Is resident solely for
performance of service under AID AGREEMENT
(v) In case AID AGREEMENT is with Foreign Govt. then
individual should be citizen of that country
(vi) Salary is paid out of funds released to Pakistan under
AID AGREEMENT
Any income under a bilateral or multilateral technical assistance
AGREEMENT is exempt from tax subject to following conditions::
(i) Income is received by person, who is not citizen of Pakistan
(ii) Person is engaged as a contractor, consultant, or expert on a
project in Pakistan
(iii) Exemption will be to the extent provided in AGREEMENT
(iv) AGREEMENT is between FG≈Fr.G FG ≈PIO
(v) Project is financed out of funds released in accordance with
AGREEMENT
(vi) Person is not resident OR Is resident solely for performance of
service under AGREEMENT
(vii) Income is paid out of funds under AGREEMENT

92
Exemptions:
4. Perquisites without Marginal Cost to Employer [2nd Sched, P-I, Cl-53A]
Hospital/ClinicEducational InstitutionHotel/Restaurant
Any other notified by FBR
Free/subsidized Medical
Treatment
Free/subsidized education
Free/subsidized food
during duty hours
Totally Exempt

93
Exemptions:
5. Special Allowance [2nd Sched, P-I, Cl-39]
Any allowance, other than Conveyance and Entertainment
Allowance, specially granted to meet expenses wholly and
necessarily incurred in performance of office duties
Exempt

94
Exemptions:
6. Workers’ Participation Fund [2nd Sched, P-I, Cl-26]
Amount received as worker, out of Workers' Participation Fund Exempt

95
Exemptions:
7. Salary Income of Seafarer [2nd Sched, P-I, Cl-4]
Salary income shall be exempt if
Pakistani seafarer is on
Pakistan flag vessel
for
183 days or more on vessel
Foreign vessel
No limit of number of days
Following conditions required for exemption:
(i) Income remitted to Pakistan
(ii) through normal banking channel
(iii) within 2 months of relevant tax year

96
Exemptions:
8. Allowance to person working outside Pakistan [2nd Sched, P-I, Cl-5]
Allowance from Govt of Pakistan
to a citizen of Pakistan
for rendering services outside Pakistan
Exempt

97
Exemptions:
9. Full Time teacher/researcher [2nd Sched, P-III, Cl-1(2)]
Tax payable in salary shall be reduced by 40% if following conditions are fulfilled:
(i) The individual is Full time teacher/researcher
(ii) in non-profit education/research institution, duly recognized by
a. Higher Education Commission (HEC)
b. Board of Education
c. University recognized by HEC
(iii) including in any Government training/research institute

Income from Property
Owner/Landlord
Property
Land/Building
Tenant
Rent means:
Amount received/receivable
By owner of land/building
As consideration to use/occupy OR right to use/occupy the land/building
Rent includes:
Forfeited deposit on contract for sale of land/building [S-15(1)&(2)]
2 Important Questions:
1. Geographical Source of Income
Heads of Income
98
Deciding a
Property
Income case
Accrual Basis

1. Geographical Source of Income [S-101(9) & (10)]
Heads of Income Property
99
Immovable Property
situated in Pakistan
Right to explore natural resources
in Pakistan
Rental Income shall be Pakistan Source Income
Gain on disposal of above property or right shall also be Pakistan Source Income

Deciding Income from Property Case:
100
Individual Company
Tax shall be imposed on these persons on Gross Rent Income @ 1st Sched, P-I, Div-VIA
Except following:
(i) Individual/AOP
(ii) having no taxable income under any other head &
(iii) Taxable Property Income is upto Rs 200,000/- [S-15(6) & (7)]
Income from Property derived by Company shall be taxable under
"Normal Tax Regime”
Rental income shall be reduced by allowable expenses, detailed in Section-15A, and
remaining amount shall by included in taxable income under Normal Tax Regime
AOP
Rent

101
Rent
i. 1/10th of advance will be treated as Rent in
• TY of receipt &
• 9 subsequent TYs
ii. Nothing will be included in taxable income, in the tax year in which such advance is refunded
iii. If tenancy is terminated before 10 years and previous advance is returned and new advance is received then:
1/10th of advance will be treated as Rent in
• TY of receipt &
• 9 subsequent Tys
NON-ADJUSTABLE Advance (Building)
[S-16]
automatically included in
taxable income because of
accrual basis of taxation
Advance ADJUSTABLE
against Rent
Taxable on
accrual
basis
Rent
Amount of new advance
- Amount charged to tax earlier
X
X
(X)

102
Rent [S-15], [S-39] & [S-66]
Important !!
(i) Rent received/receivable OR Fair Market Rent, which ever is higher, is taxable [S-15(4)]
(ii) Above is not applicable if Fair Market Rent has already been included in salary income due to self hiring of property [S-15(5)]
(iii) Following amounts shall be included in taxable income under the heads of income mentioned thereagainst;
• Ground Rent
• Rental income from sub-lease of land or building
• Rental income from lease of building, together with Plant & Machinery
• Amount of amenities, utilities, other services connected with renting
• Amount received as consideration for vacating possession of building
(iv) When a property is owned by two or more persons &
their share is definite and ascertainable
then
Persons shall not be treated as AOP
Share of each person's income from property shall be taxed separately
Income from Other
sources
[S-39(1)(d)]
[S-39(1)(e)]
[S-39(1)(f)] & [S-15(3)]
[S-39(1)(fa)] & [S-15(3A)]
[S-39(1)(k)]

103
Allowable Deductions [S-15A]
i. Building Repair Allowance
ii. Insurance Premium
iii. Rates, tax, charge, cess not being Income Tax
iv. Ground Rent
v. Markup on loan to acquire, construct, renovate, extend, reconstruct property
vi. HBFC Loan / Scheduled Bank Loan on scheme based on sharing rent
(share in rent+share in appreciation in value)
vii. Markup on mortgages/charges
1/5th of rent chargeable to tax
Paid/Payable
Paid/Payable
Paid/Payable
Paid/Payable
Paid/Payable
Paid/Payable

104
Allowable Deductions [S-15A]
viii. Expenses wholly &
exclusively for deriving rent
including administrative and
collection charges
ix. Legal Charges
x. Irrecoverable Rent
xi. Inadmissible deductions [S-21]
• Paid/Payable
• maximum upto 6% of rent chargeable to tax
• must be paid within 3 subsequent tax years
• otherwise will be included in taxable income in 4th subsequent tax year
• if unpaid amount which is included in taxable income, as above, is subsequently paid, then it will be allowed as deduction in tax
year in which it is paid
Paid/Payable (to defend title of property or defend any suit connected with property in a court)
Conditions:
i. Tenancy was bonafide
ii. defaulting tenant has vacated property OR steps have been taken to compel tenant to vacate property
iii. defaulting tenant is not occupying any other property of same person
iv. person has taken all legal steps for recovery OR reasonable grounds exist that legal proceedings will be useless
v. rent was previously included in taxable income and tax was duly paid
(if irrecoverable rent is subsequently recovered, then it will be included in taxable income in tax year of recovery)
will be studied in "Income from Business"

Advanced taxation (cfap5) by fawad hassan [lecture3]

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