CAF 6 Principles of Taxation (Tax Year 2018)

1
Small Company @ 25%
Tax liability shall be reduced by 50% if;
i
ii
Individual [Non Salaried] & AOP Salaried Individual Company
Holds NADRA's CNIC for disabled persons OR
age is 60 years or above on 1st day of tax year
Taxable income (other than income under FTR) upto Rs 1
million AND
In the case of an association of person which is a professional firm
prohibited from incorporating by any law or the rule of the body regulating
their profession, the 35% rate of tax mentioned against last serial number
above shall be 32% for the tax year 2016 and onwards
Property Income

2
1st Sched, Part-I, Div-VIII
1st Sched, Part-I, Div-VII

3
Value of
Goods
Sales Tax @
17%
Total
Manufacturer 1
Sales 1,000 170 1,170 170
Manufacturer 2
Purchases 1,170
2,000 340 2,340 Output Tax 340
Input Tax (170)
170
Manufacturer 3
Purchases 2,340
3,000 510 3,510 Output Tax 510
Input Tax (340)
170
Consumer paid 3,510
FBR gets 510
Manufacturer paid nothing out of its pocket to FBR
Students' handouts in context of Lecture
Paid to FBR
Added value to it and converted it to goods worth 2000 and sold
them to Manufacturer 2
Description
Added value to it and converted it to goods worth 3000 and sold
them to consumer
Illustrative Example on Indirect Taxation Concept

4
Income Tax Capital Value Tax Workers' Welfare Fund Sales Tax Faderal Excise Custom Duty
Income Tax Ordinance 2001 Section 7 of Finance Act 1989 Workers Welfare Fund Ordinance, 1971 Sales Tax Act 1990 Faderal Excise Act 2005
Income Tax Rules 2002 Capital Value Tax Rules 1990 Sales Tax Rules Faderal Excise Rules 2005
Chapter
Part
Division
Section
Subsection
Clause
History :
Income Tax Act 1860 repealed in 1865
Income Tax Act 1886
Income Tax Act 1918
Super Tax Act 1917
Super Tax Act 1920 consolidated into Income Tax Act 1922
Income Tax Ordinance 1979
Income Tax Ordinance 2001
Direct Taxes Indirect Taxes
FBR Taxes

5
Tools Structures
Tax Structure Proportional
Exemptions Regressive
Tax Consessions Progressive
Deductible Allowances
Tax Credits
Rebates
Objectives

6
Objectives of Taxation Basics of Taxation Principles of Levy
Revenue Equality Benefit Principle Lagislator Tax Practitioner Tax Payer
Non-Revenue Certainity Ability to pay Principle Canons of Taxation Fairness Integrity
by Adam Smith Transparency
Development Convenience of Payment Equal Distribution Principle Equity Objectivity
Canon of Equality Accountability
Economy of Collection Canon of Certainity Confidentiality
Canon of Convenience of Payment Responsibilites of Tax Administrators
Canon of Economy of Collection - Professional Behaviour
-
-
Additional Canons -
Canon of Productivity -
Canon of Elasticity
Canon of Flexibility - Accuracy of records and its confidentiality
Canon of Simplicity - Refrain from soliciting gifts
Canon of Diversity -
- Diligently respond to valid tax refund claims
-
Concepts
Ethics
Administrator
Obey taxation laws, no undue favors to tax payer
Honesty and integrity to maintain respect of Govt
and Taxpayer
Provide prompt, efficient and quality services to
taxpayer
Refrain from actively participating in political
activities
Make reasonable efforts to collect proper amount of
tax at lowest possible cost
Educate Taxpayer on their rights and
responsibilities
Professional Competence
& Due Care
Impartial, fair, neutral and consistent in
administing tax laws, without any prejudic to to
race, social status, economic circumstances

7
Deferred Liabilities Deposits & Reserves
Loans Grants
Non-Tax Receipts Recovery of Loans & Advances Domestic Debt Receipts
Other Taxes
FBR Taxes
Public AccountFaderal Consolidated Fund
Internal Receipts External Receipts
Capital ReceiptsRevenue Receipts
Tax Receipts

8
Other Taxes
Non-Tax Receipts Recovery of Loans & Advances Domestic Debt Receipts
Loans Grants
Remuneration Offie
Expenses/Admn
Expenses,
remuneration of
officers and
servants
Debts Payable by Federal Govt. Sums required to satisfy
any judgement against
Pakistan, by any Court or
Tribunal
P O
P
A
P A
P
A
P
A
P A
Speaker, Deputy Speaker of
National Assembly
Chairman, Deputy Chariman of
Senate
Any other sume decleared
by Constitution OR Majlis-
e-shora
Faderal Consolidated Fund
SourcesExpenditureChargeduponFederalConsolidatedFund[Article-81]
Auditor General of Pakistan
Tax Receipts
FBR Taxes
President
Judges of Supreme Court and
Islamabad High Court
Chief Eelection Commissioner
Internal Receipts External Receipts
Revenue Receipts Capital Receipts

9
Upper House Lower House
Senate National Assembly
Word of President
"Ordinance"
Political Govt Exists ?
Yes No
Approved by National
Assembly within 120 days
"Ordinance" becomes the
Law
Yes No
Approved by Senate in
120 days
Yes No
"Act"
Majlis-e-shora = Parliament
President
Bill
= Amendment in Law or a new law is first
presented before National Assembly
After approval from National Assembly, it
is presented before Senate
After approval from
Senate, it is presented
before President
After assent from president, it becomes
"ACT"

10
Shifting Transformation Capitalization Exemptions
Automation to reduce cost Future Taxation
Relevant Taxation Laws:
1 Income Tax Ordinance 2001
2 Income Tax Rules 2002 (Procedure/manner to implement Ordinance)
3 SRO (to amend the law o to make new law)
4 Circulars (Explanation of Law)
5 Circular Letters
(Clarification on any provision of Law in context of a particular case forwarded to
FBR)
Escape from Taxation
Tax Management Strategies
Tax Avoidance Tax Evasion
Allowed/Legal
Illegal means of tax evasionLegal means of avoiding taxation
Not Allowed / Illegal

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Period of less than 12 months
Yes No
Normal Tax Year Special Tax Year Transitional Tax Year
(FBR has authority to prescribe STY) TTY occure because of change in taxyear
from NTY to STY or vice versa
It is the period between tax year end date of
last tax year and commencement date of
next tax year
Denoted by Calendar Year in which Normal
Tax Year ends Denoted by Calendar Year relevant to
Normal Tax Year in which Year end falls
Denoted by Calendar Year relevant to
Normal Tax Year in which Year end falls
Change in Tax Year:
From To
NTY STY
STY NTY
another STY
CIT is convinced that compelling need exists
CIT is convinced that compelling need exists Not convinced;
- issue rejection orders
- record reasons of rejection in order
Grant Permission through an order in
writing
Tax Payer may file review application to
FBR
Decsion of FBR shall be final
Priod of 12 months
Year end date is 30th June
Tax Year [Section-74]
Give tax payer an opportunity of being heard in person
Not convinced
Tax Payer will give an application in writing to Commissioner of Income Tax (CIT)

12
Public Company [S-2(47)]
means
- a company in which 50% or more shares are held by Faderal Government OR
Provincial Government OR
Foreign Government OR
Foreign Company owned by Foreign Government OR
whoes shares are traded on a stock exchange registered in Pakistan and remained listed at end of the year
- a unit trust a unit trust whose units are widely available to the public AND
any other trust as defined in the Trusts Act, 1882
Private Company [S-2(45)]
means a company that is not a Public Company
Non Profit Organization [S-2(36)]
means any person other than Individual which is any of the following;
- established for religious, educational, charitable, welfare or development purposes OR
promotion of amature sport
- formed and registered under any law as non-profit organization
- approved by the Commissioner for specified period
AND
Small Company [S-2(59A)]
is a company which fulfills all of following conditions:
i) registered under Companies Ordinance 1984, on or after 01.07.2005
ii) Paid up Capital x
+ Undistributed Reserves x
x is Rs 50 million or less
iii) Number of employees is 250 or less
at any time during tax year
iv) Annual Turnover is Rs 250 million or less
v) not formed by splitting up OR reconstitution of a company already in existance
Filer [S-2(23A)]
Non-Filer [S-2(35C)]
means a person who is not filer
Important Definitions
none of the assets of such person are available for private benefit to any other person.
means a taxpayer whose name appears in the active taxpayers‘ list issued by the Board from time to time or is holder of a taxpayer‘s card.

13
Any person OR representative of person
Who derives an amount chargeable to tax
who is required to collect/deduct tax
who is required to furnish return of income
who is required to pay tax
under Income Tax Ordinance 2001
Following shall be treated as Person
Individual
Company
formed in Pakistan or elsewhere means:
- Provincial Government
- Local Government
Association of Persons
formed in Pakistan or elsewhere includes:
Firm
HUF
Artificial Juridical Person
Any body of persons formed under foreign law
does not include:
Company
Federal Government
Foreign Government
Political sub-division of Foreign Government
Public International Organization
- Small company as defined in
Section -2
Tax Payer [Section-2(66)]
Person [Section-80]
means: relation between persons who have agreed to share profits of business
carried on by all or any one of them acting for all
- Company as defined in Companies Ordinance 1984
- Body Corporate formed by or under any law in force in Pakistan
- Modaraba
- body incorporated by or under any law of country outside
Pakistan relating to incorporation of companies
- cooperative society, finance society or any other society
- non-profit organization
- trust
- foreigh association decleared by FBR to be a company

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Resident Individual [Section-82]
- Not based on nationality
- Based on physical presence in Pakistan
- Government servant posted abroad will be treated as resident, irrespective of his physical stay in Pakistan
Rule-14
Days to be counted
Part of day counts as a whole day for:
Day of arrival in Pakistan
Day of departure from Pakistan
Public Holiday
Leave, including sick leave
Holiday spent in Pakistan before, during or after activity in Pakistan
Day when activity was interrupted due to
strike
lock out
delay in receipt of supplies
Resident Company [Section-83]
- Company incorporated in Pakistan
- Provincial Government Resident - no further condition to be fulfilled
- Local Government
- Company incorporated outside Pakistan
Resident AOP [Section-84]
Resident if, Control and Management of affairs situated wholly or partly in Pakistan at any time in a Tax Year
Residential Status
Days not to be counted
Day or part of day in Pakistan
solely by reason of being in
transit between two differen
places outside Pakistan
Resident if, Control and Management of affairs situated wholly in Pakistan at any time in a Tax
Year
183 days or more
Resident
0-182 days
Non-resident

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Pakistan Source
Income
Foreign Source
Income
Resident Taxable Taxable
Non-Resident Taxable Not Taxable Foreign Source Salary Income
Citizen of Pakistan Leaving Pakistan Exempt if:
Foreign tax on salary is paid OR
Returning Expatriate If a citizen of Pakistan leaves Pakistan in a
Tax Year and remains abroad during that
tax year
withheld by employer and paid to
revenue authority of foreign country
Short Term Resident If resident in a Tax Year but was Non-
Resident in preceeding 4 Tax Years
then Salary earned outside Pakistan shall
be exempt
Conditions:
1- Resident solely by reason of employment
2- Resident for 3 years or less
then foreign source income will be exempt
Exceptions:
1- Income from business established in
Pakistan
2- Foreign Source Income brought into or
received in Pakistan
Impact of Residential Status on Individual [Section-50, 51, 102]
Then all foreign source income will be
exempt in tax year in which tax payer
becomes resident and the following tax
year

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Description Workings
Normal Tax
Regime
Separate
Taxation
Presumptive Tax
Regime
Minimum Tax
Regime
Ref
Head of Income
Salary a x S-12-14
Income from Property b x S-15-17
Income from Business c x S-18-36
Capital Gains d x S-37-38
Income from Other Sources e x S-39-40
Total Income f=a+b+c+d+e x S-10
- Deductible Allowances
Final Tax Regime
Zakat g x S-60
Workers' Welfare Fund h x S-60A
Workers' Participation Fund i x S-60B
Profit on debt on loan of house j x S-64A
Education Expenses k x S-64AB
l=g+h+i+j+k (x)
Taxable Income m=f-l x S-9
1st Schedule
Tax Imposed n x x x x S-4
- Tax Credits NotAllowed
Tax Rate
Foreign Tax Credit o x S-103
Tax Credit under Part-X of Chapter-III p x S-61-65E
Tax Credits u/s 147 & 168 q x (x) (x) (x) S-147 & 168
r=o+p+q (x)
Tax Payable s=n-r x x 0 x
NotAllowed
Tax payable will be
zero as the tax
deducted will be
Final Tax

17
Minimum Tax Regime
Revenue x Income x
Allowable Deductions (x)
x x
Tax Rate Tax Rate
"Tax Liablility" "Tax Liablility" "Tax Liablility"
Tax imposed is
"Final Tax"
where tax at
source is treated
as "Final Tax"
1 Tax Imposed is final tax 1 Income is not chargeable to tax under any Head of Income
2 Income is not chargeable to tax under any Head of Income 2
3
3 Following are not allowed:
Deductble Allowances
4 Following are not allowed: Set off of Losses
Deductble Allowances
Set off of Losses 4 No Tax Credits Allowed
5 No Tax Credits Allowed 5 Tax deducted is not refundable
6 Return of Income is not required for such income
Tax Regimes
No deduction is allowed for expenditure incurred in deriving such income
No deduction is allowed for expenditure incurred in deriving such income
Revnue is received
after deduction of Tax
at Source
Normal Tax Regime Separate Taxation Final Tax Regime

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Apportionment of Deductions [S-67]
Any expenditure/deduction/allowance that relates with following shall be apportioned on reasonable basis:
i) derivation of income under more than one head of income
ii) derivation of taxable income and income under Final Tax Regime
iii) derivation of income under any head of income and for any other purpose
Gross receipts of a class of income
Gross receipts of all classes of income
Notes:
i Gross receipts are net of Sales Tax & Faderal Excise Duty
ii Nature and source of each class of income shall be considered for allocation
iii Above allocation shall be certified by CA or CMA
iv
v
vi Classes of income may include following
PSI FSI
Income from Property P P
Income from Business (Speculation and Non Speculation) P P
Capital Gains P P
Other Sources P P
Separate Block of Income P P
Exempt Income P P
Income under Final Tax Regime P P
Recouped Expenditure [S-70] will be treated as Income in the year of receipt.
Currency Conversion [S-71]
Cessation of Source of Income [S-72]
In case accounts are not required to be audited then certificate shall be obtained for basis of allocation. The said certificate is required
to be accepted by CIR who shall accept it only if variation in allocation from these rules is not more than 10%
In certain transactions where net gains, brokerage or commission is taken, than Gross Profits shall be taken as Gross Receipts
all amounts shall be taken in Pak Rupee. In case of foreign currency, it will be converted to Pak Rupee at SBP
conversion rate on date when amount is taken into account for the purpose of Income Tax
income derived before cessation of a source of income shall be chargeable to tax as if the source of income has not
ceased
Common Rules
Common Exp x
Rule-13: Rules for apportionment of Common Expenditure
expenditure which is clearly allocable to a particular income
deductible/chargeable against that particular incomeapportionment on basis of following formula
expenditure which is not clearly allocable to a particular income i.e.,
Common Expenditure

19
Fair Market Value [S-68]
- - Property
- Rent
- Asset
- If value not determined by FBR then following shall determine FMV - Service
i District Officer (Revenue) OR - Benefit
ii - Perquisite i) restriction on transfer
ii) convertablility to cash
Receipt of Income [S-69]
Income shall be treated as received, if:
i) amount actually received by person,
ii) applied on behalf of person on his instructions ar under any law
iii) made available to the person
Rule to prevent double derivation and double deduction [S-73]
Any income taxed on accrual basis shall not be taxed again on receipt basis and vice versa
Any expenditure deducted on accrual basis shall not be taxed on payment basis and vice versa
FMV shall be determined by CIT
Immovable Property
FBR shall, from time to time, determine FMV of immovable property of an area,
through notification in official gazzette
Provincial or Other Authority authorized in this behalf
for stamp duty
Others
If price not Ascertainable as above then
- price it would ordinarily fetch on sale or supply in
the open market
- FMV shall be determined without considering
following:
FMVItem

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Includes:
- Any amount chargeable to tax under Income Tax Ordinance 2001,
- Any amount subject of deduction or collection of tax at source,
- Any amount treated as income under any provision of Income Tax Ordinance 2001
- Any Loss of income
Salary shall be Pakistan Source Income;
i) when employment is exercised in Pakistan
it is irrelevant, where the payment of salary is made
OR
ii) when salary is paid by or on behalf of
faderal government
provincial government
local government of Pakistan
it is irrelevant, where the employment has been exercised
Section-12(1) Salary is taxable on receipt basis
Section-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
Section-69 Income shall be treated as received, if:
i) amount actually received by person,
ii) applied on behalf of person on his instructions ar under any law
iii) made available to the person
Section-73 Any income taxed on accrual basis shall not be taxed again on receipt basis and vice versa
Any expenditure deducted on accrual basis shall not be taxed on payment basis and vice versa
Note: All incomes under the head "Income from Salary" are chargeable to tax under "Normal Tax Regime"
Income [Section-2(29)]
Geographical Source of Income [Section-101]
Basis of Taxation of Salary
A pension or annuity shall be Pakistan-source income if it is paid by a resident or borne by a permanent establishment in Pakistan of a non-resident
person

21
means
includes
- Pay Expenditure
- Wages means - Profits in lieu of salary
- Other remuneration - items provided by employer in kind - Cost of Living Allowance - Pension, Annuity
- Leave pay OR - Subsistance Allowance - Employee Share Scheme
- Leave encashment - cash reimbursed for expenses other than office purpose - Rent
- Overtime - Utilities
- Bonus - Education
- Commission includes - Entertainment
- Fee - Vehicle wholly or partly for private use -
- Gratuity - Services of house keeper, driver, gardener, domestic assistant
- Work condition Supplements - Utilities
- Any obligation of employee to employer, waived off by employer
- Any obligation of employee to another person paid by employer
- Accomodation
- FMV of property transferred to employee reduced by any payment made by employee
- Interest free loan
Salary [Section-12(2)]
Others
any amount received by employee from employment whether capita or revenue nature
incurred by employee
but paid by employer,
other than official
purposes
Perquisites [Section-13]
Travel Allowance; except for
official tours
Allowances

22
Valuation of Coveyance [Rule-5]
Usage Vehicle owned by employer Vehicle leased by employer
Personal Use only 10% of cost of vehicle 10% of FMV at commencement of lease
Taxable
Official and Personal Use 5% of cost of vehicle 5% of FMV at commencement of lease
Official Use only Not taxable
(FMV=Fair Market Value)
Valuation of Accomodation [Rule-4]
i)
Amount that would have
been paid if accomodation
was not provided
which ever is high Taxable
OR
ii) 45% of MTS/Basic Salary
iii)
Interest Free Loan [Section-13(7),(14)]
If no markup charged by employer on loan
Markup @ benchmark rate x Taxable
If markup charged by emoployer is less than benchmark rate:
Markup @ benchmark rate x
- Markup charged by employer (x)
x Taxable
If markup is charged by employer @ more than benchmark rate Nothing Taxable
(Benchmark rate = 10%)
Above is not applicable on loan upto Rs 1,000,000/- OR
Valuation of Perquisites
Accomodation provided in mufasal areas shall be taxable at 30% of MTS/Basic Salary
Where such benefit is extended by the employer due to waiver of interest by such employee on his accounts maintained with the employer.

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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
Section-12(6)
Tax payer has option to get it taxed @ last 3 years average rate of tax
Nothing Taxable
Consideration x
- Cost paid (x)
x
Exercised Right/Option &
Shares received
Shares acquired with restriction on transfer Nothing Taxable
Shares acquired without any restriction on transfer
OR restriction removed afterwards
FMV x
- Cosideration paid to acquire shares (x)
x Taxable under Salary
Shares disposed off
Disposal value x
- Consideration paid to acquire option & share (x)
- amount previously included in taxable income (x)
x
Taxable under Capital Gains
Taxable under Salary
Option/Right Disposed off
Option/Right acquired
Profits in lieu of Salary
Employee Share Option Scheme [Section-14]
Average Rate of Tax =
Last 3 year's tax liability
Last 3 year's taxable income

24
Part-I Exemption from Total Income Part-III Reduction in Tax Liability
Part-II Reduction in Tax Rates Part-IV Exemption from Specific Provisions
Part - I Exemptions from Taxable Income
Pension [Clause-8&9]
- Member of Armed Forces
- Employee of Federal Government/Provincial Government
- Others
Yes
Totally Exempt
Yes
Taxable
No Yes
Totally Exempt Higher amount is Exempt
Commutation of Pension [Clause-12]
- Received from Government OR
- Received from pension scheme approved by FBR
Gratuity & Commutation of Pension [Clause-13]
Government Employee Gratuity Scheme approve by FBR Un-approved Gratuity
Un-approved Commutation
Exempt upto Rs 300,000/- Rs 75,000
OR
50% of amount
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 any other employer
Totally Exempt
Totally Exempt
which ever is less
is exempt
2nd Schedule - Exemptions and Tax Concessions
More than one pension
No
No
Age over 60 years
Works for same employer or it's associate
Gratuity Fund approved by CIR
Totally Exempt

25
Workers' Participation Fund [Clause-26]
Amount received as worker, out of Workers' Participation Fund Totally Exempt
Special Allowance [Clause-39]
Totally Exempt
Perquisites without Marginal Cost to Employer [Clause-53A]
Medical [Clause-139]
10% of Basic Salary is Exempt
Totally Exempt, if following conditions met: Medical Allowance Totally Taxable
- provide NTN of Medical Practitioner
- Attestation of expenses by Employer Medical Facility
Totally Exempt, if following conditions met:
- provide NTN of Medical Practitioner
- Attestation of expenses by Employer
Medical Allowance exempt upto 10% of Basic Salary
Medical Facility Totally Taxable
Not in accordance with terms of
employment
Taxable
In accordance with terms of
employment
Both
Any allowance, other than Conveyance and Entertainment Allowance, specially granted to meet expenses
wholly and necessarily incurred in performance of office duties
Free/subsidized food during
duty hours
Free/subsidized education Free/subsidized Medical
Treatment
Any other notified by FBRHospital/ClinicEducational InstitutionHotel/Restaurant
Totally Exempt
Medical Facility/Reimbursement
Medical Allowance

26
Provident Fund
[Second Schedule, Clause-23]
[Sixth Schedule, Rule-3]
Government PF Un-recognized PF
Employee Contribution
Already taxed in salary,
therefore no treatment
Employer Contribution Exempt
Rs 150,000
OR
10% of (Basic salary + Dearness Allowance)
Lesser is exempt
No treatment when contribution is made
Returns credited during year Exempt
Returns @ 16%
OR
1/3 of (Basic salary+Dearness Allowance)
Higher is exempt
No treatment when returns are credited
Accumulated balance paid Exempt
Only employee's contribution is exempt
All other sums are taxable
Note: Dearness Allowance is a type of Cost of Living Allowance
Recognized PF
Exempt

27
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
Tax on Salary born by Employer [Section-12(3)]
Amount of salary income shall be grossed up by amount of tax payable by employer.
No deductions allowed [Section-12(4)]
No deduction shall be allowed for any expense incurred by employee in deriving salary income.
Amount OR Perquisite treated as received [Section-12(5)]
as and when it is paid or provided;
by (i) Employer OR
(ii) Associate of employer
(iii) any 3rd party under agreement with employer or its associate
by (i) past employer OR
(ii) perspective employer
to (i) Employee
(ii) Assocciate of employee
(iii) any 3rd party under agreement with employee or its associate
Services provided by employer to employee [Section-13(5)]
House keeper Salary paid to them by employer X
Driver - payment by employee to employer for these services (X)
Gardner X Taxable
Other Domestic Assistant
Utilities [Section-13(6)]
Electricity Fair Market Value of utilities X
Gas - payment by employee to employer for these utilities (X)
Water X Taxable
Telephone
Employer's loan at less than Benchmark rate, used to acquire asset producing taxable income [Section-13(8)]
Deduction from that taxable income shall be allowed at "Bechmark Rate"
Obligation waived by employer [Section-13(9)]
Waived amount Taxable
Employee [Section-2(20)]
Employer [Section-2(21)]
Employment [Section-2(22)]

28
Obligation of Employee payable to 3rd party, paid by employer [Section-13(10)]
Amount paid Taxable
Property or Service provided to employee [Section-13(11)]
Fair Market Value X
- Payment by employee to employer for property or service (X)
X Taxable
Any other perquisite [Section-13(13)]
Fair Market Value of perquisite X
- Payment by employee to employer for these perquisites (X)
X Taxable
Self hiring of property [Section-15(5)]
(i) "Income from Salary" shall include value of accomodation in accordance with Rule-4
(ii) "Income from Property" shall include rent income in accordance with Section-15(4)&(5)
Fair Market Value [Section-68]
of property
rent
asset price it will fetch on sale/supply in "Open Market"
service
benefit
perquisite
following points shall be irrelevant:
(i) Restriction on transfer - if any
(ii) Non-covertibility to cash
If price is not ascertainable, then value determined by Commissioner of Income Tax
Annuity Taxable
Superannuation Fund approved by Commissioner in accordance with Part-II of 6th Schedule
Employer's Contribution Exempt
Interest Credited Exempt
Payment out of Fund
on death
in lieu of annuity
during life time, othen than above Taxable
Benovelent Fund
Any payment in accordancce with "Central Employee Benevolent Fund & Group Insurance Act 1969" Exempt
Exempt

29
Special Allowance [2nd Schedule, Part-I, Clause-39]
Allowance/perquisite, other than Conveyance Allowance & Entertainment Allowance,
specially granted to meet expenses incurred wholly and necessarily in performance of official duties
Leave Encashment [2nd Schedule, Part-I, Clause-19]
Encashment of
Leave preparatory to retirement of
(i) Government Employee
(ii) member of armed forces
W.P.F [2nd Schedule, Part-I, Clause-26]
Any amount received from W.P.F. Exempt
Salary income of seafarer [2nd Schedule, Part-I, Clause-4]
Salary income shall be exempt if
Pakistani seafarer is on
Foreign vessel
No limit of number of days
Pakistan flag vessel Following conditions required for exemption:
(i) Income remitted to Pakistan
183 days or more on vessel (ii) through normal banking channel
(iii) within 2 months of relevant tax year
Allowances to person working outside Pakistan [2nd Schedule, Part-I, Clause-5]
. Allowance from Govt of Pakistan
. to a citizen of Pakistan Exempt
. for rendering services outside Pakistan
Full time teacher/researcher [2nd Schedule, Part-III, Clause-1(2)]
Tax payable in salary shall be reduced by 40% if following conditions are fulfilled:
. The individual is Full time teacher/researcher
. in non-profit education/research institution, duly recognized by
Higher Education Commission (HEC)
Board of Education
University recognized by HEC
. including in any Government training/research institute
Exempt
Exempt

30
1 Zakat [Section-60]
Allowed as deduction from Allowed as deductible allowance
"Income from Other Sources" if total income is less than the amount of Zakat then
. Refund
. Carry forward not allowed
. Carry back
2 Workers' Welfare Fund [Section-60A]
Amount paid under "Workers' Welfare Fund Ordinance 1971" will be allowed as deductible allowance
If accrual basis of accounting is followed for "Income from Business" then deduction will be allowed for this payable expense
3 Workers' Participation Fund [Section-60B]
Amount paid under "Companies' Profit (Workers' Participation) Act 1968" will be allowed as deductible allowance
4 Profit on Debt [Section-60C]
Allowed to : Individual
Purpose :
Details : i Straight deduction as deductible allowance shall be allowed for
profit on debt
share in rent and share in appreciation for value of house
paid by individual on a loan by
scheduled bank or NBFI regulated by SECP OR
Government, Local Government, Provicial Government, statutory body or listed company
ii Deductible allowance shall not exceed lower of following:
50% of taxable income
Rs 2,000,000/-
iii
5 Education Expenses [Section-60D]
Allowed to : Individual having taxable income less than Rs 1,500,000/-
Allowed only to one of the parents in respect of fees of their children
Parent have to provide NTN or Name of educational institution
Purpose : Deductible Allowance for Tution Fees paid in a Tax Year
Details i Deductible allowance shall not exceed lower of following:
5% of tution fee paid
25% of taxable income
60,000 x Number of children
ii
iii
Employer is not allowed to deduct these expenses while withholding tax from salary under section
149
Profit on Debt Any other paid
Zakat under Zakat and Ushr Ordinance 1980
Deductible Allowances
Deductible Allowance for Profit on Debt on loan utilized for construction of new house or acquisition of house
Deductible allowance, if not utilized fully against taxable income shall not be carried forward to
subsequent tax year
Deductible allowance, if not utilized fully against taxable income shall not be carried forward to
subsequent tax year

31
Important:
1 Income from Property derived by following shall be treated as "Separate Block of Income"
Individual
AOP
Tax shall be imposed on these persons on Gross Rent Income, at these rates
No deduction shall be allowed from Gross Rent Income
2 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
Income from Property

32
Geographical Source of Income [S-101(9)]
Rental income shall be Pakistan Source Income if it is derived from lease of immovable property in Pakistan, whether improved or not
Rent means amount received/receivable which means its taxable on accrual basis
by owner of land/building
as consideration to use/occupy OR right to use/occupy the land/building
incluldes forfieted deposit paid under contract for sale of land/building
[Section-16]
(i) 1/10 th of advance is treated as Rent in
. tax year of receipt &
. 9 succeeding tax years
(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:
Amount of new advance X
- Amount earlier charged to tax (X)
X
1/10 th of this amount is treated as Rent in
. tax year of receipt &
. 9 succeeding tax years
Rent
Taxable on accrual basis
Advance adjustable against Rent
automatically included in taxable income
because of accrual basis of taxation
Types of amounts involved
Non-adjustable Advance in relation to Building

33
Section-15(4)&(5)
Rent received/receivable
OR which ever is higher is taxable
Fair Market Rent
Exception: above provision shall not apply
if Fair market rent has already been included in salary income due to self hiring of property
Note for students:
-
-
Following amounts shall be included in taxable income under the heads of income mentioned thereagainst;
(i) Ground Rent Income from other sources [Section-39(1d)]
(ii) Rental income from sub-lease of land or building Income from other sources [Section-39(1e)]
(iii) Rental income from lease of building, together with Plant & Machinery Income from other sources [Section-39(1f)]
(iv) Amount of amenities, utilities, other services connected with renting Income from other sources [Section-39(1fa)]
(v) Amount received as consideration for vacating possession of building Income from other sources [Section-39(1k)]
Income of Joint Owner [Section-66]
When a property is owned by two or more persons AND
their share is definite and ascertainable
then Persons shall not be treated as AOP AND
Share of each person's income from property shall be taxed seperately
It has been observed that students used to apply above section to a situation where employer has provided accomodation to
employee and consequently they consider Fair Market Rent of such accomodation in taxable income of employer. Please note that
such application is erroneous , as employer is not renting the property to employee for any rental income.
In case, employee's house has been self hired, then salary income shall include value of accomodation in accordance with Rule-4
and if such valuation was based on Fair Market Rent, then provisions of section 15(4) as explained above shall not apply.

34
Business [Section-2(10)]
Includes any
trade
commerce
manufacture OR adventure or concern in nature of
profession
vocation
but does not include EMPLOYMENT
Income from Business [Section-18]
1) Following incomes shall be chargeable to tax under head "Income from Business"
a) Profits & gains of any business, carried on by person
b) Income derived by
trade
profession from sale of goods OR provision of services to members
similar association
c) Income from hire/lease of tangible movable property
d) FMV of any benefit* OR perquisite from any past, present or perspective business relationship
e) Management Fee
2) Profit on debt : If person's business is to derive such income
then it's "Income from business"
otherwise it's "Income from Other Sources"
3) Lease rentals from lease of any asset shall be "Income from business" if:
Lessor is
Scheduled Bank OR
Investment Bank OR
Development Financial Institution OR
Modaraba OR
Leasing Company
4) "Profit on debt" earned by
Mutual Fund OR
Private Equity & Venture Capital Fund
& distributed to
Banking company OR
Non Banking Finance Company
this distributed share shall be "Income from Business" and not "Income from Other Sources" for
* benefit includes debt or profit on debt waived off under
SBP(Banking Policy Deptt.) circular 29 of 2002
derived by a management company including Modaraba
Management Company
Income from Business

35
Speculation Business [Section-19]
Means
business in which, contract for purchase or sale of commodity is setelled, otherwise than by actual delivery of commodity
does not include
following contracts to guard against future price fluctuations
i) contract in respect of materials to fulfill another contract of actual delivery of goods
ii) contract in respect of shares & stocks entered into by dealer or investor
iii)
Taxation of Speculation business:
i) It shall be treated as a separate business from any other business under head "Income from Business"
ii) Principles of apportionment of deductions under section 67 shall apply as if it is a separate head of income
iii) Loss from Speculation Business shall be treated under section 58
contract entered into by member of stock exchange or forward market to guard against jobbing or arbitrage
transaction in ordinary course of business

36
Deductions Allowed [Section-20]
1) Any expenditure incurred wholly and exclusively for purpose of business
2) Depreciation of tangible assets, amortization of intangible assets & pre-commencement expenditures
3) Legal & financcial advisory services & administrative cost incurred by amalgamated company for it's amalgamation
4) Animal used for business & profession becomes permanantly disable of is dead then following deduction shall be allowed:
Actula Cost X
Less: Amount realized from animal carcass (X)
X
(Above is not applicable in case of animals which are stock-in-trade)

37
Deductions not allowed [Section-21]
Following deductions are not allowed under head "Income from Business"
i) Cess, rate, tax on profits of business whether payable in Pakistan or outside Pakistan
ii) Tax deducted at source from amounts received
iii) All such payments shall not be allowed as deduction, if applicable tax at source, is not deducted while making payment
Except:
iv) Entertainment expenses exceeding prescribed limits. Rule-10 specifies the prescribed limits as follows:
Expense has been incurred
a) wholly & exclusively for business
b) outside Pakistan for business transaction OR allocated as Head Office Expenses
c) inside Pakistan, for foreign customers & suppliers
d) at business premises for customers & clients
e) on meetings of shareholders, directors, agents or employees
f) on opening of a new branch
g) on entertainment of persons related directly to business
Entertainment means
v) Contributions to following funds:
a) Un-recognized Provident Fund c) Un-approved Superannuation Fund
b) Un-approved Pension Fund d) Un-approved Gratuity Fund
vi)
vii) Penalty / fine for violation of any law
viii) Personal expenditure
ix) Amount transferred to Reserve OR capitalization of profits in any way
x) Profit on debt
Brokerage / commission paid by an AOP to its members
Salary / remuneration
xi) Expenditure under single head of account exceeding Rs 50,000/- paid other than by :
a) crossed cheque d) other crossed banking instrument
b) crossed bank draft e) online transfer
c) crossed payorder f) payment through credit card
Above is not applicable to following:
a) expenditure not exceeding Rs 10,000/-
b) expenditure on account of:
- Utility bills - Postage
- Freight charges - Taxes/duties/fees/fines
- Travel fare
xii) Salary exceeding Rs 15,000/- per month, paid other than by:
- crossed cheque OR
- direct transfer to employee bank account
xiii) Capital expenditure
xiv) In case of pharmaceutical manufacturer any advertisement/publicity/sales promotion expense > 10% of turnover
meals, refreshment, reasonable leisure facility in accordance with traditions of business & subject to overall
norms of business
Contribution to Provident Fund OR any other fund for benefit of employees, in respect of which, arrangements have not been made for deduction of
tax at source at the time of making payments from the fund to employees
in case of purchase of Raw Material & Finished Goods, the disallowed expense shall be limited to 20% of total purchases

38
Asset
Depreciable Asset [Section-22(15)]
means any tangible movable property, immovable property or structural imporovement to immovable property owned by a person that :
a) has normal useful life exceeding one year
b) is likely to lose value as a result of normal wear and tear or obsolesence AND
c) is used wholly or partly by person in deriving income from business
it shall not include any asset whoes entire cost is allowed as deduction under Income Tax Ordinance 2001
Structural Improvement [Section-22(15)]
includes
Eligible Depreciable Asset [Section-23(5)]
means a depreciable asset which is not:
a) furniture & fittings
b) road transport vehicle not plying for hire
c) plant & machinery previously used in Pakistan
d) plant & machinery whoes entire cost is allowed as deduction under Income Tax Ordinance 2001
Business Asset [Section-75(7)]
means asset held wholly or partly for use in business, including stock-in-trade and depreciable asset
Personal Asset [Section-75(7)]
means asset held wholly for personal use
building, road, driveway, car park, railway line, pipeline, bridge, tunnel, airport runway, canal, dock, wharf, retaining wall, fence,
power lines, water or sewage pipes, drainage, landscaping or dam.
Where any asset is jointly owned by Tax Payer and Islamic Financial Institution under Musharika Financing or Diminishing Musharika Financing, such asset shall be
treated to be owned by “Tax Payer” [Proviso to S-22(15)]

39
Acquisition [Section-75]
- when the person begins to own the asset including when the right is granted OR
- when the personal asset is applied to business use
Cost [Section-76]
Consideration paid / payable in cash X
FMV of consideration given in kind X
Incidental expenditure for acquisition / disposal of asset X
Expenditure to alter or improve asset X
X
- Cost of Passenger transport vehicle not plying for hire shall not exceed Rs 2.5 million. [Section-22(13a)]
- Cost of immovable property shall not include cost of land [Section-22(13b)]
- Forex Gain/loss to be adjusted in cost of asset [Section-76(5 & 6)]
- Grant, subsidy, rebate, commission or any other assistance in relation to acquisition of asset [Section-76(10)]
if chargeble to tax then it will be included in cost of asset and vice versa
- If asset acquired in a non-arm's length transaction, then FMV of asset shall be treated as its cost [Section-78]
- If personal asset is applied to business use, then its FMV shall be treated as its cost [Section-76(3)]
- If asset is produced or constructed by person, then its cost will include following:
Total production/construction cost X
+ Incidental expenditure for acquisition / disposal of asset X
+ Expenditure to alter or improve asset X
X [Section-76(4)]
-
- If acquisition of an asset is derivation of an amount chargeable to tax, then its cost will include following:
Amount chargeable to tax X
Amount paid to acquire asset X
X [Section-76(8)]
- If acquisition of an asset is derivation of an amount exempt from tax, then its cost will include following:
Amount exempt from tax X
Amount paid to acquire asset X
X [Section-76(9)]
if asset has been acquired with a foreign currency loan, then increase or decrease in liability due to foreign
currency rate shall be adjusted in cost of asset
while determining above forex gain / loss the person's position under hedging agreement relating to foreign
currency loan shall also be considered
If an asset is partly disposed off, then its cost shall be apportioned between the part disposed off and part retained on basis of respective FMV at time of
acquisition of asset [Section-76(7)]

40
Depreciation [Section-22]
Method of tax depreciation : Diminishing/Reducing Balance Method
Rate of Depreciation : as per 3rd Schedule
Sr No Rate
I Building (All Types) 10%
II 15%
III 30%
IV
(a) 100%
(b) 20%
V 100%
Initial Allowance [Section-23]
Allowed for "eligible depreciable asset" used 1st time in Pakistan
Year in which commercial production is started
Rate of Initial Allowance
Plant & Machinery 25% of cost of eligible depreciable asset
Building 15% of cost of eligible depreciable asset
First Year Allowance [Section-23A] ( in lieu of Initial Allowance)
Conditions to be fulfilled:
i) Plant & machinery & equipment installed by Industrial Undertaking
- in rural or under developed area OR
-
ii) Owned and managed by a Company
Rate of First Year Allowance 90% of cost of eligible depreciable asset
Accelerated Tax Depreciation to alternate energy projects [Section-23B] (in lieu of Initial Allowance)
Conditions to be fulfilled:
i) Plant & machinery & equipment installed by Industrial Undertaking installed any where in Pakistan AND
ii) for generation of alternate energy AND
iii) Owned and managed by a Company
Rate of First Year Allowance 90% of cost of eligible depreciable asset
OR which ever is later
by cell phone manufacturer who qualifies for
exemption under clause 126N of part-I of second
schedule
Type of Asset
Furniture (including fittings) and machinery and plant (not otherwise specified), Motor vehicles
(all types), ships, technical or professional books.
Computer hardware including printer, monitor and allied items, Machinery & Equipment used in
manufacture of IT Products, aircrafts and aero engines.
In case of mineral oil concerns the income of which is liable to be computed in accordance with
the rules in Part-I of the Fifth Schedule.
Below ground installations
Offshore platform and productionInstallations.
A ramp built to provide access to persons with disabilities not exceeding Rs. 250,000 each.

41
Disposal [Section-75]
Asset is treated as disposed off when
- person parts with its ownership
- sold, exchanged, transferred, distributed, destroyed or lost
- cancelled, redeemed, relinquished
- transmitted
- put wholly to private use from business use
- discarded or ceased to be used
Gain or loss on disposal shall be calculated as follows:
Consideration for disposal X
Less:
Cost X
Initial Allowance OR (X)
First Year Allowance OR (X)
Accelerated Tax Depreciation (X)
Normal Depreciation (X)
X
Gain / Loss on disposal X
Consideration for disposal [Section-77]
Amount Received X
FMV of consideration in kind X
X
Which ever is higher
FMV of asset at time of disposal X
- If Asset is lost or destroyed, then consideration shall include compensation, indemnity or damages received from:
-- insurance claim
-- settlement
-- judicial decision [Section-77(2)]
- If asset applied to personal use from business use or is discarded, then consideration shall be FMV of asset [Section-77(3)]
-
[Section77(5)]
-
[Section-22(10)]
- If consideration for immovable property exceeds its cost, then it's consideration received shall be treated as cost. [Section-22(13d)]
- If asset disposed off in a non-arm's length transaction, then FMV of asset shall be treated as consideration. [Section-78]
- If depreciable asset is exported/transferred outside Pakistan, then its cost shall be treated as consideration received. [Section-22(14)]
chargeable to tax under head
"Income from Business"
If two or more assets disposed off in single transaction and consideration of each asset is not specified, then total consideration
received shall be apportioned on basis of FMV of each asset, at time of disposal
2.5 million
Actual cost paid to acquire vehicle
Actual consideration received on disposal x
If actual cost of passenger transport vehicle not plying for hire was more than Rs 2.5 million, then consideration shall be
calculated as follows:

42
Leasing Business:
Leasing Co., Investment Bank, Modaraba, Scheduled Bank, Development Finance Institution
-
[Sections-22(12), 23(4), 23A(2), 23B(2)]
- Asset shall be treated as used in the business of lessor [Section-22(13c)]
-
[Section-77(4)]
- The cost of assed realized through lease rentals + residual value should not be less than cost of the asset [Section-77(4)]
Depreciation on assets partly used in Business:
- [Section-22(3)]
-
- Written Down Value of such assets shall be calculated, as if the asset was wholly used for business purposes. [Section-22(6)]
- On disposal of such asset, following shall be deducted from consideration
Total cost of asset X
Less:
Initial Allowance-if any (X)
First Year Allowance-if any (X)
Accelerated Tax Depreciation-if any (X)
Normal Depreciation allowed as deduction (proportionate basis) (X)
X
On completion of lease term, asset shall be transferred to lesee and treated as disposed off by leasing company and
the cosideration received shall be residual value received by leasing company
Initial Allowance/First Year Allowance/Accelerated Tax Depreciation or Normal Depreciation is allowed as deduction only against lease rental income
Where asset is used partly for business purposes and partly for any other use, the depreciation expense shall be
restricted to fair proportional part which is used for business.
Initial Allowance/First Year Allowance/Accelerated Tax Depreciation shall be allowed on total cost of asset. The fact that asset was
partly used for business is irrelevant here.

43
Intangibles [Section-24]
means patent
invention
design or model
secret formula or process
copyright
trade mark
scientific or technical knowledge
computer software
motion pcture film
export quotas
franchise
license
intellectual property
contractual rights
any expenditure that provides advantage or benefit for more than 1 year
does not include expenditure on acquisition of depreciable assets or unimproved land
Cost of Intangibles:
means expenditure incurred in acquiring or creating intangible
includes expenditure for improving or renewing intangible
Conditions for amortization:
(i) intangible is wholly or partly used for business
(ii) normal useful life is more than 1 year
Rules for amortization:
Year of acquisition Number of days basis (An intangible available for use on a day shall be treated as used on that day)
Year of disposal No amortization
Rate of amortization:
Note:
if useful life is more than 10 years then it will be treated as 10 years
if useful life is not ascertainable, then it will be treated as 10 years
Intangible partly used for business and partly for any other use:
Amortization expenses shall be restricted to fair proportion of intangible used for business.
Disposal:
Upon disposal, following shall be included in income from business
Consideration X
Written Down Value X
X
Useful life in whole years
Cost

44
Pre-commencement Expenditure [Section-25]
means expenditure incurred before commencement of business wholly and exclusively to derive taxable income
includes cost of feasibility studies
construction of prototypes
trail production
does not include expenditure to acquire land
depreciable assets
Intangibles
Method: Straight line basis
Rate: 20% [Part-III of 3rd Schedule]
Note:
Scientifice Research Expenditure [Section-26]
Expenditure for scientific research
Contribution to Scientific Research Institution to do research
shall be allowed as dedcution.
- Scientific Research:
means activity in Pakistan in the field of natural or applied science for development of human knowledge
- Scientific Research Expenditure:
means expenditure on scientific research, for development of business
includes contribution of scientifice research institution to do research for business
not include expense incurred for
-- acquisition of depreciable asset or intangible
-- acquisition of immovable property
-- ascertaining existance/location/extent/quality of natural deposits
- Scientific Research Institution:
means any institution certified by FBR to do scientific research in Pakistan
No deduction shall be allowed for expense which allowed as deduction under any other
provision of Income Tax Ordinance 2001
wholly and exclusively to derive income from business

45
Bad Debts [Section-29]
Conditions to claim bad debts as expense
(i) Amount was previoulsy included in taxable income
(ii) In case of a financial institution, the amount was lent to derive taxable income
(iii) amount is written off as bad debts in accounts
(iv) resonable grounds exist that debt is irrecoverable
Subsequent recovery of bad debts written off:
Following shall be included in taxable income
PKR
Whole amount of debt 100,000
amount previously allowed as deduction (80,000)
20,000
Case (a) Case (b)
Subsequent recovery 60,000 10,000
Less: amount previously not allowed (20,000) (20,000)
Included in income from business 40,000
Deduction from income from business (10,000)
Employee Training and Facilities [Section-27]
Expenditure in respect of following is allowed:
(i) Educational institution/hospital
for benefit of employees/dependents
(ii) Institute for training of industrial workers
recognized/aided/funded by
Federal Govt / Proviscial Govt / Local Govt
(iii) Training of Pakistani citizen under scheme approved by FBR
established in Pakistan

46
Profit on debt, Financial costs and Lease Payments [Section-28]
Following shall be allowed as expense:
1 Profit on debt:
- on loan utilized for business purposes
- paid by bank on deposit accounts
2 Financial costs:
- by originator on securitization of receivables in respect of special purpose vehicle (SPV)
3 Lease rentals
- paid to scheduled bank, financial institution or approved modaraba, leasing company, SPV
4 Share of profit
- under musharika scheme paid to a bank
-
- paid on funds borrowed from modaraba or participation term certificates
5 State Bank of Pakistan (SBPs) share of profit paid by
- House Building Finance Corporation (HBFC)
- National Development Leasing Corporation
- Small & Medium Enterprises Bank
under musharika scheme paid to certificate holders. Such scheme should be approved by SECP and Religious Board under Modaraba
Ordinance 1980
on investment/credit line provided by SBP

47
Cash Basis of Accounting [Section-33]
Derive income when received
Incure expense when paid
Accrual Basis of Accounting [Section-34]
Derive income when due to person (amount is due to person when he is entitled to receive it)
Incure expense when payable by person (amount is payable by person when
- all events determining liability have occurred
- amount of liability can be ascertained with reasonable accuracy)
Un-paid Liability:
if deduction allowed in a tax year for an expense which is neither paid in same tax year nor paid in 3 subsequent tax years
then it will be included in taxable income in 4th subsequent tax year
if amount included in taxable income as stated above is paid in any later year
then it will be allowed as deduction in tax year in which it is paid
Method of Accounting [Section-32]
1 The method of accounting should be regulartly employed
2 Company must employe accrual basis of accounting.
Other persons may apply cash basis of accounting OR accrual basis of accounting
3 FBR can prescribe a class of persons to follow cash or accrual basis of accounting
4 Change in method of accounting:
- Application to Commissioner in writing
- Satify commissioner that the change in method of accounting is necessary to clearly reflect taxable income
- Commissioner, if satisfied may approve, by an order in writing, that the method of accounting be changed
5
Stock in trade [Section-35]
Opening Stock
(which ever is less)
Cost NRV
(any method may be chosen)
Marginal
Costing
Absorption
Costing
Closing Stock
While applying change in method of accounting, it must be ensured that no item of income or expense is omitted or accounted for
more than once.
Starting period /
1st period of produciton
FMV at the time stock is
ventured in the business
Subsequent period
Closing stock of previous period
Cash Basis of Accounting Accrual Basis of Accounting
Abosorption Costing

48
Public Company [Secion-2(47)]
means a company
- in which 50% or more shares are held by:
-- Faderal Government OR
-- Provincial Government OR
-- Foreign Government OR
-- Foreign company owned by foreign government
- whoes shares are traded on registered stock exchange in Pakistan at any time in tax year AND
remained listed till end of that tax year
Unit Trust whoes units are widely available to public
Any other trust as defined in Trust Act 1882
Private Company [Section-2(45)]
means a company that is not a public company
Trust [Section-80(2)(d)]
means an obligation annexed to ownership of property AND
such obligation arises out of confidence reposed in and accepted by owner
includes a unit trust
Unit Trust [Section-80(2)(e)]
means any trust under which beneficial interests are divided into units AND
entitlement of beneficiaries to income or capital are determined by number of units held
Small Company [Section-2(59A)]
is a company which fulfills all of following conditions:
i) registered under Companies Ordinance 1984, on or after 01.07.2005
ii) Paid up Capital x
+ Undistributed Reserves x
x is Rs 50 million or less
iii) Number of employees is 250 or less
at any time during tax year
iv) Annual Turnover is Rs 250 million or less
v) not formed by splitting up OR reconstitution of a company already in existance

49
Industrial Undertaking [Section-2(29C)]
means
1 undertaking setup in Pakistan and employs
(i) 10 or more persons AND involves use of electrical energy
any other form of energy mechanically transmitted
is not generated by human or animal energy
(ii) 20 or more persons AND does not involve use of electrical energy
any other form of energy mechanically transmitted
is not generated by human or animal energy
AND is engaged in any of following:
- manufacturing
- ship building
- Generation, conversion, transmission, distribution of electrical energy
- supply of hydraulic power
- mining and mineral deposits
2 any other industrial undertaking notified by FBR
OR
AND
OR
AND

50
Capital Asset [Section-37(5)]
means property of any kind held by person
whether or not connected with business
does not include
i stock in trade
ii depreciable assets
iii intangibles
iv movable property held for personal use by person or dependents
excluding following [Section-38(5)]:
i painting, sculpture, drawing or other work of art
ii jewellery
iii rare manuscript, folio or book
iv postage stamp or first day cover
v coin or medallion
vi antique
Gain on Capital Assets [Section-37(2)]
Consideration X
- Cost (X)
Gain/(Loss) X
Cost shall not include:
- expenses deductible under any other provision of Income Tax Ordinance
- inadmissible deductions under section 21
FMV on date of acquisition shall be treated as cost in following cases:
- gift, bequest, will
- succession, inheritence, devolution
- dissolution of AOP
- liquidatioin of company
Gain on Disposal of Capital Assets:
If capital asset is held for more than 1 year
then 3/4 th of capital gain will be taxable - shares of public company
- vouchers of PTC
- Modaraba Certificates
- Redeemable Capital
Loss on Disposal of Capital Assets:
No loss on disposal shall be recognized if gain from such asset is not taxable
Loss on disposal can be deducted only against capital gains
Capital Gains
Capital Loss from disposal of
these assets shall not be
recognized, only capital gains
will be recognized.
Gain or Loss on disposal shall be recognized in year of disposal even if cash basis of accounting is being adopted.
this provision is not applicable on disposal of follwing capital
assets:
[Section-37(4A)]

51
Capital Gain from Immovable Property [Section-37(1A)]
Capital Gain from disposal of immovable property shall be taxed as a separate block of income.
Tax applicable @ 1st Schedule, Part-I, Division VIII
Capital Gain on Sale of Securities [Section-37A]
- This section is not applicable on Banking company and Insurance company
- Capital Gain from disposal of securities shall be taxed as a separate block of income.
- Capital Gain or Loss on disposal shall be calculated on basis of FIFO method [Rule-13D]
- In case of securities purchased on same day, average method shall be adopted while calculating capital gain or loss.
- Security means
Shares of public company
Vouchers of PTC
Modaraba Certificates
Redeemable Capital Corporate debt security
Debt Security which means &
Derivatives Government debt security
- Tax Rates [1st Schedule, Part I, Division VII]
Note for Holding Period:[Rule-13C]
0-182 days 6 months
183-365 days 1 year
- Captial loss from these securities can only be set off against capital gain from these securities [Rule-13D]
- Capital loss cannot be carrired forward [Rule-13D]
- Capital loss shall not be recoginzed in case of following transactions [Rule-13F]
Wash Sales Sold security repurchased, within 1 month, to maintain portfolio
Tax Swap Sale Repurchase of security in same industry sector to maintain risk of portfolio
Cross Sale Transaction made between two accounts of one investor. No sale made to any outsider.
- Method of calculation of tax on securities [Rule-13H]:
At end of every tax year, calculate tax on disposal of securities, seperately on :
securities held for 6 months
securities held for 1 year
Investor shall calculate and pay tax on securities disposed off during tax year
Quarterly advance tax is liable to be calculated and paid by investor other than individual
Such investor shall e-file statement of advance tax within 7 days from end of quarter
- Capital Gains Exempt from Tax:
i) Transfer of a stock exchange membership rights [2nd Schedule, Part-I, Clause 110B]
ii) Capital gain on sale of shares of industrial undertaking set up in Export Processing Zones [2nd Schedule, Part-I, Clause 114]
Gain or loss shall be computed in accordance with Eighth Schedule, which is not
applicable on following tax payers:
mutual fund, Modaraba, banking company, NBFC, insurance company, any
company for its debt security, any person notified by the FBR

52
stock in trade Immovable Property
depreciable assets
intangibles (Separate Block)
u/s 38(5) Others Security Others
painting, sculpture, drawing or other work of art
jewellery
rare manuscript, folio or book
postage stamp or first day cover
coin or medallion
antique Means
Shares of public company
Vouchers of PTC
Modaraba Certificates
Redeemable Capital Corporate debt security
Debt Security which means &
Derivatives Government debt security
Othters
(Separate Block)
Section 79: Non Recognition Rule
Gain Loss
i between spouses under agreement to live apart Holding period more than 1 year (Refer Losses)
ii transmission on death
iii gift Yes No
iv to shareholder on liquidation of company
v to members of AOP on its dissolution 3/4 th will be taxable fully taxable
vi compulsory acquisition of asset under any law, when
consideration is reinvested in asset of like kind within one year Tax Rates [1st Schedule, Part I, Division VII]
No gain/loss to be recognized on disposal of asset to a Resident in case of
following transfers:
Capital Gains
Asset
Moveable Property
Personal Use
Disposal
Tax Rates [1st Schedule, Part I, Division VIII]
Gain or loss shall be computed in accordance with Eighth Schedule, which is not
applicable on following tax payers:
mutual fund, Modaraba, banking company, NBFC, insurance company, any
company for its debt security, any person notified by the FBR
Capital Loss from disposal of these assets shall not be recognized,
only capital gains will be recognized.
Banking Company / Insurance
Company

53
Income from Other Sources [Section-39]
(1) Income of every kind RECEIVED in a tax year, Section 5
which is not included in any other Head of Income and Section 6 Tax on certain payments to Non-Residents
is not exempt from tax and Section 7 Tax on shipping and air transport income of Non-Resident
is not subject to tax under section 5, 6 & 7
It includes following:
i Dividend
ii Royalty
iii Profit on Debt
iv Additional payments on tax refunds under tax laws
v Ground Rent
vi Rent from sub-lease of land or building
vii Income from lease of building, together with Plant & Machinery
viii Income from amenities/utilitites connected with renting of building
ix Annuity/Pension
x Prize bond, lottery, raffle winnings, cross word puzzles, sale promotion prizes offered by a company
xi Consideration for provision, use or exploitation of property or natural resources
xii FMV of benefit for provision, use or exploitation of property or natural resources
xiii
xiv Amount received from Approved Income Payment Plan OR
Approved Annuity Plan
xv Bonus Shares
(2) - Loan shall be treated as "Income from Other Sources" if:
- Advance
- Deposit for issuance of shares received from a tax payer other than a Banking Company OR Financial Institution
- Gift AND
is received otherwise than by a Crossed Cheque or Banking Channel
Above is not applicable to advance payments for sale of goods or supply of services
(3) Arrears of Profit on debt, from Investment in:
National Saving Deposit Certificate
Defence Saving Certificate
then taxpayer may elect for profit to be taxed in the tax year to which it relates.
Taxpayer can elect this option by notice in writing to Commissioner before due date of filing return of income OR
such later date as may be allowed by Commissioner in writing
have resulted in income chargeable to tax at a higher rate of tax
Tax on Dividend
Income from Other Sources
to be included in taxable income of current tax
year and 9 succeeding tax years in equal
proportion.
Consideration for vacating possession of building, reduced by
amount paid to acquire possession of building

54
Deductions in computing "Income from Other Sources" [Section-40]
Allowable Deductions:
1 Expenditure paid to derive income from other sources, other than expenditure of Capital nature
An expenditure is of Capital Nature if it has a useful life of more than 1 year
2 Zakat under Zakat & Ushr Ordinance 1980, paid by the person, at the time when profit on debt is paid to the person
3 Depreciation on Plant & Machinery and building is allowed as deduction in case where Building is leased together with Plant & Manchinery
4 Initial Allowance on Plant & Machinery is allowed as deduction in case where Building is leased together with Plant & Manchinery
Deductions not allowed:
1 Expenditure allowed as deduction under any other head of income
2 Inadmissible Expenses under section 21

55
Definition [Section-2(19)]
Following distributions by a Company
to its Shareholders is included in definition of Dividend
to the extent of its Accumulated Profits whether capitalized or not
i
ii Any distribution of Debentures, Debenture Stock or Deposit Certificate
iii Any distribution on liquidation of company
iv Any distribution on reduction of capital
v
Taxation of Dividend [Section-5, 8 & 150]
Dividend income is taxed under Final Tax Regime and is subject to tax rates mentioned in table below
No deduction shall be allowed in computing income from divident [Section-8(b)]
Dividend shall not be reduced by deductible allowance or set off of any loss [Section-8(c)]
Tax payable on dividend shall not be reduced by any tax credits [Section-8(d)]
7.50% on dividend decleared by 7.50% on dividend decleared by
- Purchaser of Power Project privatized by WAPDA - Purchaser of Power Project privatized by WAPDA
- Company set up for power generation - Company set up for power generation
- Company supplying coal to power generation projects - Company supplying coal to power generation projects
12.50% Dividend received from mutual fund 15.00% Filers other than above
20.00% Non-Filers other than above
15.00%
Dividend received by a company from collective investment
scheme / REIT /
mutual fund etc
All other cases
25%
Dividend
Loan or advance to shareholder or payment for the benefit of
shareholder, made by a private company (as defined in
Companies Ordinance 1984) or trust
(when loan will be repaid, then taxpayer can claim refund of
tax paid by him because of loan amount being treated as
dividend)
Tax Rates for Dividend Income
Division III, Part I, 1st Schedule
Withholding Tax rates for Dividend Income
Division I, Part III, 1st Schedule
Except, such distributions which were made in cash AND
where shareholder was not entitled to participate in surplus
assets in the event of liquidation
Except, where lending money is substantial part of business of
company in its ordinary course of business
Except, remittance by branch of Petroleum Exploration and
Production Foreign Company
Except, where dividend is paid and set off by company against
the loan or advance treated as dividend
Remittance of after tax profits by branch of a foreign company to the foreign
company is also included in definition of Dividend
Any distribution which entails release of assets including money
of the company

56
Royalty [Section-2(54)]
paid or payable
Royalty means any amount however described or computed as consideration for following;
whether periodical or lump sum
(i) use or right to use patent
invention process
design trademark
model other like property or right
(ii) use or right to use copyright or 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 sale, distribution or exhibition of cinematograph films
(iii) receive or right to receive visual image or sound transmitted by
satellite television
cable in connection with radio
optic fiber internet broadcasting
similar technology
(iv) supply of technical knowledge or
industrial skill
commercial
scientific
(v) use or right to use industrial equipment
commercial
scientific
(vi) supply of any assistance ancilliary and subsidiary to any property or right mentioned above
(vii) disposal of any right or property mentioned above
Fee for Technical Services [Section-2(23)]
means any consideration, whether periodical or lump sum, for rendering :
managerial
technical
consultancy services
including services of technical or other personnel.
It does not include following
(a) consideration for services in connection with construction, assembly or like project
(b) consideration chargeable under head "Salary"
secret formula
Royalty & Fee for Technical Services

57
Pakistan Source Royalty and Fee for Technical Services paid to Non-Resident [Section-6]
1 Tax Rate on Gross Amount 15% [Division IV, Part I, 1st Schedule]
The tax deducted at source shall be final tax
2 Above is not applicable on following:
(i) Royalty when property or right giving rise to royalty is effectively connected with
Permanent Establishment in Pakistan of Non Resident
(ii) Fee for Technical Services when services giving rise to fee are provided through
Permanent Establishment in Pakistan of Non Resident
(iii) Royalty and Fee for Technical Services exempt from tax
Where Royalty and Fee for Technical Services fall under Final Tax Regime following shall apply:
No deduction shall be allowed in computing income from Royalty and Fee for Technical Services [Section-8(b)]
Royalty and Fee for Technical Services shall not be reduced by deductible allowance or set off of any loss [Section-8(c)]
Tax payable on Royalty and Fee for Technical Services shall not be reduced by any tax credits [Section-8(d)]
This will be treated as "Income from Business"
of Permanent Establishment in Pakistan of Non
Resident

58
Profit on Debt [Section-2(46)]
Profit on debt, whether payable or receivable shall mean:
1 profit
yield
interest
discount
premium
other amount
2 service fee fee
other charges other charges
Taxation of Profit on Debt [Section 7B & 151]
Filer Non Filer
Profit on Debt upt Rs 25,000,000 Profit upto Rs 500,000/- 10% 10%
Rs 25,000,001 to 50,000,000 Profit above Rs 500,000/- 10% 17.50%
Rs 50,000,001 and above
These rates are not applicable on Company
Rs 5,625,000 + 15% of amount
above Rs 50,000,000
10%
Tax Rates for Profit on Debt Withholding Tax rates for Profit on Debt
Division III, Part I, 1st Schedule [Division IA, Part III, 1st Schedule]
Rs 2,500,000 + 12.5% of
amount above Rs 25,000,000
Profit on Debt
owing under a debt other than return on capital
in respect of debt including for un-utilized credit facility

59
Set Off of Losses [Section-56, 58 & 59]:
Set off against
Loss arising from
Speculation Others Security
Immovable
Property
Others
Speculation [S-58(1)] P O O O O O
Others P P O O P P
Security Rule-13D O O P O O O
Immovables O O O P O O
Others [S-59(1)] O O O O P O
P P O O P P
In case of losses from multiple heads of income, the loss from Business shall be set off last.
Losses from income which is exempt from tax shall not be treated.
Losses not set off shall be carried forward only against same head of income.
Carry Forward of Losses [Section-57, 58 & 59]:
Loss not possible
Carry forward allowed upto 6 subsequent tax years
Loss from earliest tax year shall be set off first
Un-absorbed depreciation could be carried forward to unlimited time
Un-absorbed depreciation shall be considered last
Security
Immovables
Limitation on Setoff & Carry Forward of Losses [S-59A]:
-
-
- Loss due to depreciation, initial depreciation and amortization etc shall be carried forward to unlimited periods
-
In case of AOP, the loss shall be set off and carry forward only against income of AOP and in no case be utilized by its Member against their taxable income
Not Allowed
Not Allowed
Property
Other Sources
Speculation
Others
Business
Others
Capital Gains
In case of business loss, it shall be available to successor only by way of inheritence and shall not be available to any other successor
Business loss, speculation loss and capital loss cannot be carried forward unless determined by an order made under sections 120, 121 or 122
Salary
Set Off and Carry Forward of Losses
Not Allowed
[S-56(1)]
Salary Property
Other
Sources
Business Capital Gains
Not Possible
Other Sources
Salary
Property
Business
Capital Gains

61
Description Section Eligible Person
Charitable Donations 61 Any Person
i Amount of donation i Board of education or University in Pakistan established under Federal or Provincial Law
ii 30% of Taxable Income, in case of Individual & AOP ii Educational Instiution, hospita or relief fund established in Pakistan by Federal, Provincial or Local Govt.
iii 20% of Taxable Income, in case of Company iii Any non profit organization
If any property is given as donation, its FMV at the time it is given as donation shall be treated as donation.
If donation is given in Cash, then it must be paid by a Crossed Cheque
i 30% of Taxable Income, in case of Individual & AOP
ii 20% of Taxable Income, in case of Company
Only these donations can be paid in cash and condition of payment through Crossed Cheque shall not apply
62 Lesser of Conditions in case of acquisition of shares:
i i Only new shares of listed company
ii Person is original allottee of shares OR
ii 20% of Taxable Income Shares are acquired from Privatization Commisssion of Pakistan
iii Rs =1,500,000/-
Conditions in case of acquisition of sukkuks:
i Only new sukkuks offered to public by listed company
ii Person is original allottee of sukkuks
iii Sukkuks are traded on stock exchange in Pakistan
Conditions in case of Insurance Premium:
i Only life insurance premium
ii Insurance company must be registered by SECP under Insurance Ordinance 2000
iii Person must be deriving income under "Salary" or "Income from Business"
Instead of tax creidt, a Deductible Allowance shall be allowed if donation has been paid to institutions mentioned in clause 61,
Part-I, 2nd Schedule, subject to following limits.
Tax Credits under Part X of Chapter III [from Section 61 to Section 65E]
Value "C" of tax credit formula
Lesser of Amount paid or Property given to:
Remarks
Investment in shares
and insurance
Resident person
other than Company
Cost of Acquisition of shares OR Sukkuks OR Insurance
Premium

62
62A Lesser of The health insurance premium/contribution is paid to:
i Premium/Contribution paid - Insurance company
- Registered by SECP under Insurance Ordinance 2000
ii 5% of Taxable Income
iii Rs =150,000/-
63 Lesser of Eligible Person under Section-2(19A) means:
i individual, pakistani
who holds valid NTN or
CNIC or NICOP issued by NADRA
ii 20% of Taxable Income
PLUS
Tax Credit under this section is not available to transfer of balance:
from:
a) Joined pension fund after 01.07.2006 approved employment pension scheme
b) Joined pension fund at 41 years or above annuity scheme
c) Additional 2% will be allowed in first 10 years approved occupational saving scheme
to:
individual pension account with any pension fund manager
e) Additional 2% is allowed only upto 30.06.2019
Limit:
Value "C" of tax credit formula Remarks
Investment in health
insurance
Resident Person
being filer other
than Company
deriving "Salary
Income" OR
"Income from
Business"
Contribution to
Approved Pension Fund
Eligible Person
under section
2(19A) having
"Salary" or
"Income from
Business"
Contribution to Approved Pension Fund under Voluntary
Pension System Rules 2005
additional 2% of taxable income for each year above 40 years
of age shall be allowed to person who fulfills following
conditions;
d) Total contribution after addition of 2% should not exceed
50% of Taxable Income of preceeding tax year
Above 20% and additional 2% combined, should not exceed
30% of taxable income of preceeding tax year

63
64B 2% of Tax Payable for every 50 employees Other Conditions:
upto maximum of i Company was formed to establish and operate a new manufacturing unit
10% of Tax Payable
ii Company is incorporated and Unit is setup between 01.07.2015 to 30.06.2019 (both days inclusive)
Employees must be registered with
EOBI (Employees' Old age Benefit Institution) iii Manufacturing unit is managed by the Company itself
ESSI (Employees' Social Security Institution)
iv Company is registered under Companies Ordinance 1984 and has its registered office in Pakistan
Tax Credit shall be given upto 10 years
v Unit is not established by
by transfer of Plant & Machinery from manufacturing unit already in existance before 01.07.2015
vi
vii Manufacturing unit shall be treated as "setup" when it is ready for trial or commercial production
Employment generation
by manufacturer
splitting up or reconstitution or reconstruction of an undertaking already in existance before 01.07.2015 OR
If a company has availed this tax credit and subsequently any fact is discovered by Commissioner that the company was not
entitlted to claim it, then tax payable of relevant tax year shall be recomputed by Commissioner.
Amount of Tax Credit Remarks
Company formed to
establish & operate
new manufacturing
unit

64
65B 10% of Investment Conditions:
i Investment has been made by Company in Plant & Machinery for following purposes;
extension
expansion
balancing
modernization
replacement
of P&M already installed
ii P&M is installed in an industrial undertaking setup in Pakistan
iii
iv Tax credit is available in the year in which P&M is installed
v Investment has been made from 01.07.2010 to 30.06.2019
vi Tax Credit is available from 01.07.2010 to 30.06.2019
vii Excess tax credit can be carried forward to 2 following tax years
20% of Investment Conditions:
i Company is setup before 01.07.2011
ii Investment in P&M is made from 100% from new equity [new equity has been explained in section 65E]
iii Investment has been made by Company in Plant & Machinery for following purposes;
balancing
modernization
replacement
of P&M already installed
iv P&M is installed in an industrial undertaking setup in Pakistan
v
vi Tax credit is available in the year in which P&M is installed
vii Investment is made and P&M installed between 01.07 2011 to 30.06.2019
viii Excess tax credit can be carried forward to 5 following tax years
If a company has availed this tax credit and subsequently any fact is discovered by Commissioner that the company was not entitlted to claim it, then tax payable of relevant tax year shall be recomputed by Commissioner.
Investment in Plant &
Machinery
This Tax Credit can be adjusted against tax liability under Normal Tax Regime, Final Tax Regime and
Minimum Tax
Company (Industrial
Undertaking)
Minimum Tax

65
65C 20% of tax payable
65D Conditions:
A x (B/C) i Company is incorporated an setup between 01.07.2011 to 30.06.2019
A =Tax Assessed before any tax credit ii
B =New shares issued for cash
iii Tax credit will be available from date of setup or date of commercial production which ever is later
C
iv Industrial undertaking is managed by company itself
v Company is registered under Companies Ordinance 1984 and has its registered office in Pakistan
vi Industrial Undertaking is not established by
by transfer of Plant & Machinery from industrial undertaking already in existance before 01.07.2011
vii Industrial Undertaking is setup with atleast 70% equity raised through issuance of new shares for cash
viii Industrial Undertaking shall be treated as "setup" when it is ready for trial or commercial production
ix
Tax credit shall be allowed in the year of enlistment on stock exchange and following three tax years.
Tax credit for last two years shall be ten percent of tax payable
Minimum Tax
If a company has availed this tax credit and discontinued its business in subsequent five years OR subsequently any fact is discovered by Commissioner that the company was not entitlted to claim it, then tax payable of relevant tax year shall be
recomputed by Commissioner.
Enlistment on Stock
Exchange
Company opts for
enlistment on stock
exchange in
Pakistan
Newly established
Industrial Undertaking
Company (Industrial
Undertaking)
splitting up or reconstitution or reconstruction of an undertaking already in existance before 01.07.2011 OR
[obtaining short term loans for meeting working capital requirement shall not disqualify tax payer from claiming this tax
credit]
Company was formed to establish and operate a new industrial undertaking, including corporate dairy farming
=Amount invested to setup new industrial undertaking

66
65E where separate accounts maintained for project Other conditions
A x (B/C) i Company is setup in Pakistan before 01.07.2011 and P&M is installed between 01.07.2011 to 30.06.2019
A =Tax Assessed before any tax credit ii
B =New shares issued for cash expansion of P&M already installed OR
undertaking a new project
C
iii
all other cases
iv
New Equity
means equity raised through fresh issue of shares against cash AND
shall not include loans from shareholders and directors
Company invests atleast 70% new equity in purchase and installation of Plant & Machinery for industrial undertaking for
If a company has availed this tax credit and discontinued its business in subsequent five years OR subsequently any fact is discovered by Commissioner that the company was not entitlted to claim it, then tax payable of relevant tax year shall be
recomputed by Commissioner.
Tax credit shall be allowed for 5 years from date of setup or commencement of commercial production which ever is later
=Amount invested to purchase & install P&M for Industrial
Undertaking This Tax Credit can be adjusted against tax liability under Normal Tax Regime, Final Tax Regime and
Minimum Tax
[obtaining short term loans for meeting working capital requirement shall not disqualify tax payer from claiming this tax
credit]
Industrial undertaking
established before
01.07.2011
Company (Industrial
Undertaking
including corporate
dairy farming)
Tax Payable in proportion of new equity to total equity
(including new equity)

67
Agricultural Income [S-41]
Agricultural income shall be exempt from tax
Agricultural income means:
Land situated in Pakistan & Agriculture OR
used for agricultural purposes OR
OR occupied by
Cultivator used for
Receiver of rent in kind
AND
AND
Total Income X
- MV of Agricultural Produce (X)
Income chargeable to tax X
Only MV is allowed as deduction
No deduction shall be allowed for any expenditure incurred as cultivator or as a receiver of rent in kind
MV = market price for the produce at the time it is used as raw material if it is ordinarily sold in the market, otherwise
cultivation expense + land rent
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 specialised agencies
if the person’s salary from such employment was exempt under this Ordinance
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
building is in immediate vicinity
of Land
building is required as a
dewelling house, store house or
out building
Performance of process ordinarily employed to
render produce fit to be taken to market
Any income from Building
Exemptions & Tax Concessions
Sale of produce on which only above process has
been performed
Rent/Revenue from Any income from land situated in Pakistan and used for
owned and occupied by receiver
of rent of land
Agriculture Produce used as Raw Material [Rule-11]
If a cultivator or receiver of agricultural produce as rent in kind uses agriculture produce as raw materials in his
business, then:

68
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 Federal Govt. Foreign Govt. OR
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 Federal Govt. Foreign Govt. OR
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
President's Honours [S-45]:
Following awarded by President of Pakistan shall be exempt from tax:
i Allowance attached to any honour
award
medal
ii Any monetary award
Profit on Debt [S-46]:
Profit on debt will be exempt from tax subject to following conditions:
i Received by Non Resident
ii on security issued by resident person
iii persons are not associates
iv security was widely issued by the resident person outside Pakistan
v security was issued for the purposes of raising a loan outside Pakistan
vi loan is to be used for business carried on by the person in Pakistan
vii profit on debt is paid outside Pakistan
viii security is approved by FBR for purpose of this section
Scholarships [S-47]:
scholarship granted to meet cost of person’s education shall be exempt
Except: where scholarship is paid directly or indirectly by an associate
Support payments under an agreement to live apart [S-48]:
Income received by spouse as support payment under an agreement to live apart shall be exempt

69
Income of Federal, Provicial or Local Government [S-49]:
Income of following is exempt from tax:
Faderal Govt.
Provicial Govt.
Local Govt.
Foreign-source income of short-term resident individuals [S-50]
Exceptions:
Foreign-source income of returning expatriates [S-51]
All foreign source income will be exempt from tax subject to following conditions:
If individual is resident in a Tax Year but was Non-Resident in preceeding 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
Exemptions and tax concessions in Second Schedule [S-53]
Second Schedule: Part -I Exemption from taxable income
Part-II Reduction in tax rates
Part-III Reduction in tax liability
Part-IV Exemption from specific provisions
Exemptions and tax provisions in other laws [S-54]
Any exemption provided in any other law shall not have effect unless it is also provided for in the Income Tax Ordinance 2001
Limitation of Exemption [S-55]
If any income is exempt from tax it shall be limited to the original recipient of that income and shall not extend to any person receiving any payment wholly or in part
out of that income.
development authority
other body
institution
except its income from business outside its jurisdiction area
corporation
company
regulatory authority
Deduction/collection of Advance tax not applicable on amount received by above.
All exemptions under this section is not available to
owned/controlled directly/indirectly by above
Income from sale of spectrum licenses by PTA on behalf of the Federal Govt. after 01.03.2014 shall be
treated as income of the Federal Government and not of the PTA
Foreign source income will be exempt from tax subject to following conditions:
1- Resident solely by reason of employment
2- Resident for 3 years or less
1- Income from business established in Pakistan
2- Foreign Source Income brought into or received in Pakistan

70
Principle of Taxation of Individual [S-86]
- Taxable income of each individual shall be determined seperately
Deceased Individual [S-87]
- Legal representative of deceased individual shall be responsible for following:
i tax payable, if individual had not died
ii tax payable on income from estates of deceased individual
- Above liability shall be limited to the capability of estates of deceased.
- Proceedings against deceased, before death shall be treated as taken against Legal Representative AND
continued against Legal Representative
- Proceedings against deceased, after death could be taken as if deceased would have servived
- Legal Representative means: a person who in law represents the estate of a deceased person
includes: any person who intermeddles with the estate of the deceased and
Income of Minor Child [S-91]
- Income of Minor Child under head "Income from Business" shall be treated as income of parent with highest taxable income
- Above not applicable on "Income from Business" acquired through inheritence
Minor Child [S-2(33)]
means an individual who is under the age of eighteen years at the end of a tax year
Author [S-89]
-
where a party sues or is sued in representative character the person on whom the estate devolves on
the death of the party so suing or sued
Author has an option that the amount received by him on account of royalties be taxed in that tax year and the preceding two tax years in equal
proportions
if time taken by author of his literary or artistic work exceeds twenty-four months
Taxation of Individual

71
Principles of taxation of AOP [S-92]
- AOP shall be taxed seperately from its members
- If AOP has paid tax on its profits, then share of profit of member shall be exempt from tax.
-
Individual as member of AOP [S-88]
- The share of profit from AOP* , of individual member, shall be included in taxable income of individual member for rate purposes
Tax Payable = A x C
B
B = taxable income if share of AOP was chargeable to tax
C = actual taxable income
Change in constitution of AOP [S-98A]
If a change occurs in constitution of AOP then;
- liability of filing the return of AOP shall be on those persons who were members of AOP at the time of filing of return
- income of AOP shall be apportioned among the members on time basis
-
Discontinuance of business or dissolution of AOP [S-98B]
-
- In case of death of member of AOP, the tax payable can be recovered from legal heirs of the deceased
Change in control of entity [S-98]
i it continues same business after the change, until the loss has been fully set off AND
ii until the loss has been fully set off, it does not engage in any new business or investment
"Entity" means Company or AOP
Note: Taxation of Joint Venture shall be same as that of AOP
Taxation of AOP
If member(s) of AOP is a Company, then AOP shall pay tax on its profits excluding the share of company. That share will be included in taxable income of
company and shall be taxable @ applicable on company
If there is a change of 50% or more in the underlying ownership of an entity, any loss incurred before the change shall not be allowed as a deduction after the change,
unless the entity fulfills following conditions:
where the principal purpose of the entity or the beneficial owners of the entity is to utilise the loss so as to reduce tax payable on the income from the
new business or investment
"Underlaying ownership" means an ownership interest in the entity held, directly or indirectly through an interposed entity or entities, by an
individual or by a person not ultimately owned by individuals
* excluding share in profit from income under
FTR [S-4(4) & S-169(2)]
is the amount of tax that would be assessed to the individual if share of profit from AOP were chargeable to tax=A
if tax assessed on a member cannot be recovered from him it shall be recovered from the association of persons as constituted at the time of filing the
return
If AOP is dissolved or discontinues its business then any tax payable by AOP is recoverable from any person who was a member at the time of dissolution or
discontinuance

72
Foreign Tax Credit [S-103]
- If resident person derives foreign source income in respect of which foreign income tax has been paid,
then tax credit will be allowed for an amount equal to the lesser of following:
i Foreign Income Tax paid OR
ii Pakistan Tax Payable
Pakistan Tax Payable = (Average rate of Pakistan income tax) x (Net foreign-source income)
Average rate of Pakistan income tax = Tax Imposed / Taxable Income
Net foreign source income = (total foreign-source income) - (deductions allowed to the taxpayer under this Ordinance)
deductions that relate exclusively for derivation of foreign income OR
deductions related to section 67
- If there is foreign income under more than one head of income, this section shall apply separately to each head of income
-
-
Foreign Losses [S-104]
- Expenses incurred to derive foreign income are deductible only agianst that income
- Foreign loss from a head of income, if not adjusted in relevant tax year, could be carried forward upto 6 subsequent tax years
- In case there is brought forward loss of more than one tax year, the loss of earliest tax year shall be set off first
Above provisions narrate that :
i loss from Foreign Source Income cannot be setoff against Pakistan Source Income
ii loss from Foreign Source Income cannot be setoff against any other head of income under Foreign Source Income
iii
Tax credit under this section, if not utilized, shall not be refunded, carried back to the preceding tax year, or carried forward to the following tax year
Tax credit will be allowed only if foreign income tax is paid within two years after the end of the tax year in which the foreign income was derived
Foreign Source Income of Residents
loss from Foreign Source Income can only be carried forward to 6 subsequent tax years against same head of income from foreign
source

73
Notes
on
Sales Tax

CAF 6 Principles of Taxation (Tax Year 2018)

CAF 6 Principles of Taxation (Tax Year 2018)

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