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This document provides notes related to the Income Tax Ordinance for the September 2022 exam attempt. It includes the syllabus breakdown, table of contents for the topics covered, and content on various tax-related concepts and provisions in Pakistan such as: - The system of taxation and history of tax laws in Pakistan. - Constitutional provisions related to taxes including the budget approval process. - Key concepts including the different types of tax years, types of taxpayers, and determining residential status. - Details on income from different sources such as salary, property, business, capital gains, and others. The document serves as a study guide, outlining the important chapters, concepts, and information examinees need to

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CAF – 02 Tax Practices Income Tax Notes for September 2022 attempt
2 Syllabus 5-10% 10% 60-75% 20-30% 5% 75% 60% 20% 30% 70 80 30 35 10 15 Teaching Hours Chapter 1 – 3 Chapter 4 – 16 Chapter 17 – 19
3 Table of Contents 1. System of taxation in Pakistan 2. Constitutional provisions on taxes 3. Ethics 4. Basic concepts of taxation 5. Salary 6. Income from property 7. Income from business 8. Capital gains 9. Income from other sources 10. Losses, deductible allowances, tax credits and exemptions 11. Taxation of individual and association of persons 12. Tax Regimes
4 System of Taxation in Pakistan 1. History of tax laws 2. Objectives of tax laws 3. Tools of taxation and Tax strategies 4. Basics of taxation 5. Principles of levy 6. Characteristics of tax laws
5 History of Tax Laws 1. Income Tax Act 1860 repealed in 1865 2. Income Tax Act 1886 3. Income Tax Act 1918 4. Super Tax Act 1917 5. Super Tax Act 1920 6. Income Tax Ordinance 1979 7. Income Tax Ordinance 2001 consolidated into Income Tax Act 1922
6 Objectives of Tax Law Tax Law Objective Tax on salary income Revenue Collection Any amount transferred otherwise than banking channel will be deemed as income Documentation of economy Tax on moveable assets of the taxpayers Fair distribution of wealth Higher taxes on import of luxury goods Reduction in imports of unnecessary goods and create good balance of trade Allow ability of expenditure of research & developments Promotion of research & developments Zero rating on Exports Promotion of Exports Tax credit on Donations to approved institutions To promote culture of payment of donation to only organised and regulated institutions Tax credit on investments Promote investments in listed companies Tax exemptions to software exports Promote software Industry Revenue Non revenue Development
7 Tools of Taxation 1. Tax Structure 2. Exemptions 3. Tax Concessions 4. Deductible Allowances 5. Tax Credits 6. Rebates a) Proportional b) Regressive c) Progressive
8 Basics of Taxation 1. Equality 2. Certainty 3. Convenience of Payment 4. Economy of Collection
9 Principles of Levy 1. Benefit Principle 2. Ability to Pay Principle 3. Equal Distribution Principle
10 Characteristics of Tax Laws 1. Enforced contribution 2. Payable in cash 3. Proportionate in character 4. Levied on income / transaction / property 5. Levied by state having jurisdiction 6. Levied by law making body of state 7. Levied for public purposes 8. Fiscal adequacy 9. Equality >>>ability of citizen to pay 10. Administrative feasibility 11. Consistency with economic goals
11 Constitutional Provisions on Taxes 2. Annual Budget Statement (ABS) 3. Budget Approval Process 4. Supplementary Budget 5. Distribution of Revenues among Provinces 6. Legislative list 1. Federal & Provincial Government The Constitution of The Islamic Republic of Pakistan 1973
12 Federal & Provincial Government Parliament Majlis-e-Shora President Senate (Upper House) National Assembly (Lower House) Province General Women Non-Muslim Total Balochistan 14 3 17 KPK 35 8 43 Punjab 148 35 183 Sindh 61 14 75 ICT 2 2 FATA 12 12 10 10 Total 272 60 10 342 Province General Technocrats / Ulema Women Non-Muslim Total Balochistan 14 4 4 1 23 KPK 14 4 4 1 23 Punjab 14 4 4 1 23 Sindh 14 4 4 1 23 ICT 2 1 1 4 FATA 4 4 Total 62 17 17 4 100 Prime Minister Minister A Minister B Minister C Cabinet Federation Province Rules Act Constitution of Pakistan Regulations Relevant Department (FBR) Law Federal Consolidated Fund Provincial Consolidated Fund Prime Minister Chief Minister
13 Revenue Collection Exchequer (Federal Consolidated Fund) Inflows Outflows Income Tax CVT WWF Sales Tax FED Custom Duty Deficit Loans & Grants Capital Receipts Revenue Receipts Non Tax Receipts Tax Receipts Other Taxes FBR Taxes Indirect Tax Direct Tax External Receipts Internal Receipts
14 Spending Exchequer (Federal Consolidated Fund) Inflows Outflows Expenditure Charged upon Federal Consolidated Fund [Article-81] Remuneration Any other sum declared by Constitution OR Majlise - shora Sums required to satisfy any judgement against Pakistan, by any Court or Tribunal Debts Payable by Federal Govt. Office Expenses/Admn Expenses, remuneration of officers and servants President Judges of Supreme Court and Islamabad High Court Chief Eelection Commissioner Speaker, Deputy Speaker of National Assembly Chairman, Deputy Chariman of Senate Auditor General of Pakistan O A
15 Budget Approval Process National Assembly (NA) - Annual Budget Statement (ABS) placed before NA - ABS is open for discussion - No voting required - After discussion, a Schedule of Expenditure (SOE) will be prepared - SOE will be signed by Prime Minister -Signed SOE will again be presented to NA - This time SOE is not open for discussion - Budget is approved Senate President • A head of expenditure is called “Grant” • Every grant should be recommended by Federal Government Finance Bill Finance Act
16 Supplementary Budget National Assembly (NA) - Supplementary Budget Statement (SBS) placed before NA - SBS is open for discussion - No voting required - After discussion, a Schedule of Expenditure (SOE) will be prepared - SOE will be signed by Prime Minister -Signed SOE will again be presented to NA - This time SOE is not open for discussion - Supplementary Budget is approved Senate President Finance Supplementary Bill Finance Supplementary Act
17 Distribution of Revenues among Provinces • Balochistan • KPK • Sindh • Punjab - Provincial Finance Minister + - Any other person with consultation of Governor - Provincial Finance Minister + - Any other person with consultation of Governor - Provincial Finance Minister + - Any other person with consultation of Governor - Provincial Finance Minister + - Any other person with consultation of Governor Federal Finance Minister President shall constitute National Finance Commission (NFC) which will finalize NFC Award
18 Legislative List Federal legislative list: 1. Duties of customs, including export duties. 2. Duties of excise, including salt, but not including alcoholic liquors, opium or other narcotics; 3. Taxes on income other than agricultural income; 4. Taxes on corporations. 5. Taxes on the sales and purchases of goods imported, exported, produced, manufactured or consumed, except sales tax on services. 6. Taxes on the capital value of the assets, not including taxes on immovable property. 7. Taxes on mineral oil, natural gas and minerals for use in generation of nuclear energy. 8. Taxes and duties on the production capacity of any plant, machinery, undertaking, establishment or installation in lieu of any one or more of them. 9. Terminal taxes on goods or passengers carried by railway, sea or air; taxes on their fares and freights. Province can legislate all taxes, other than above, such as: 1. Sales tax on services 2. Taxes on transfer of immoveable property 3. Professional tax 4. Tax on luxury houses 5. Tax on registration of luxury vehicles etc. 6. Property tax
19 Ethics Legislator Administrator Practitioner • Fairness • Transparency • Equity • Accountability Responsibilites of Tax Administrators • Obey taxation laws, no undue favors to tax payer • Honesty and integrity to maintain respect of Govt and Taxpayer • Impartial, fair, neutral and consistent in administing tax laws, without any prejudic to to race, social status, economic circumstances • Provide prompt, efficient and quality services to taxpayer • Refrain from actively participating in political activities • Accuracy of records and its confidentiality • Refrain from soliciting gifts • Make reasonable efforts to collect proper amount of tax at lowest possible cost • Diligently respond to valid tax refund claims • Educate Taxpayer on their rights and responsibilities Tax Payer Canons of Taxation-(by Adam Smith) • Canon of Equity • Canon of Certainity • Canon of Convenience of Payment • Canon of Economy of Collection Additional Canons • Canon of Productivity • Canon of Elasticity • Canon of Flexibility • Canon of Simplicity • Canon of Diversity Whistle Blower • Integrity • Objectivity • Confidentiality • Professional Behavior • Professional Competence & Due Care • Utilitarianism • Deontology • Virtue ethics ICAP Code of Ethics Tax Avoidance vs Tax Evasion
20 Ethics Tax Avoidance vs Tax Evasion - Tax avoidance is generally the legal exploitation of the tax regime to one's own advantage, to attempt to reduce the amount of tax that is payable by means that are within the law whilst making a full disclosure of the material information to the tax authorities. Examples of tax avoidance; (i) using tax deductions (ii) changing one's business structure through incorporation or (iii) establishing an offshore company in a tax haven. - Tax evasion is the general term for efforts by individuals, firms, trusts and other entities to evade the payment of taxes by illegal means. - Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability, and includes, in particular, dishonest tax reporting. Examples of tax evasion; (i) under declaring income, profits or gains; or (ii) overstating deductions.
21 Ethics ICAP Code of Ethics Threats which may arise; - Advocacy Threat - Self Review Threat Factors to evaluate level of threat; - The particular characteristics of the engagement - The level of tax expertise of the client’s employees. - The system by which the tax authorities assess and administer the tax in question and the role of the firm or network firm in that process - The complexity of the relevant tax regime and the degree of judgment necessary in applying it Usually, no threat is created from following work; - Assisting clients with their tax reporting obligations by drafting and compiling information, including the amount of tax due required to be submitted to the applicable tax authorities - Advising on the tax return treatment of past transactions and responding on behalf of the audit client to the tax authorities’ requests for additional information and analysis (for example, providing explanations of and technical support for the approach being taken All Audit Clients Materiality of amounts should be considered. Threats which may arise; - Advocacy Threat - Self Review Threat Audit Clients that are Not Public Interest Entities Safeguards: - Using professionals who are not audit team members - Having an appropriate reviewer who was not involved in providing the service Audit Clients that are Public Interest Entities A firm or a network firm shall not prepare tax calculations of current and deferred tax liabilities (or assets), if it is material.
22 Ethics Whistle Blower Whistle blower means a person who reports - concealment or - evasion of income tax leading to detection / collection of - Taxes - Fraud - corruption or - Misconduct To the competent authority having power to take action against - the person or - an income tax authority committing
Basic Concepts of Taxation 1. Tax Year 2. Types of Person 3. Residential Status 4. Tax Regimes 5. Common Rules 6. Geographical Source of Income 7. Important Definitions a) Public Company b) Private Company c) Non Profit Organization d) Small & Medium Enterprise e) Small Company f) Filer g) Non-filer 23
24 1. Tax Year [S-74] Time Bracket Normal Tax Year (NTY) End date is other than 30th June End date is 30th June Time period of less than 12 months Time period of 12 months Transitional Tax Year (TTY) Special Tax Year (STY) Denoted by Calendar Year relevant to NTY in which Year end falls Denoted by Calendar Year in which NTY ends Denoted by Calendar Year relevant to NTY in which Year end falls FBR has authority to prescribe STY TTY occurs because of change in TY from NTY to STY or vice versa TTY is the period between TY end date of last tax year and commencement date of next TY Industry Special Tax Year SRO Ref Sugar Manufacturing 1st October - 30th September 134(R)/68, July 31,1968 Rice Exporter 1st January - 31st December 367(I) /74, January 14,1974 Insurance 1st January - 31st December 878 (I) /95, August 30,1995
25 Change in Tax Year NTY STY STY - 1 STY - 2 STY NTY Tax Payer will give an application in writing to Commissioner of Income Tax (CIT) CIT is convinced that compelling need exists Not Convinced Give tax payer an opportunity of being heard in person Not Convinced 1) issue rejection orders 2) record reasons of rejection in order Tax Payer may file review application to FBR & decision of FBR shall be final Grant Permission through an order in writing
26 Tax Year Practice Determine the tax year in respect of each accounting periods mentioned below: a) 1.09.2015 to 31.08.2016 b) 01.04.2016 to 30.06.2016 c) 1.01.2016 to 31.12.2016 d) 1.04.2016 to 31.03.2017 e) 1.05.2016 to 30.04.2017 f) 1.07.2016 to 30.06.2017 STY TTY STY STY STY NTY TY 2017 TY 2016 TY 2017 TY 2017 TY 2017 TY 2017
27 2. Type of Person a) Tax Payer [S-2(66)] b) Person [S-80]
28 a) Tax Payer [S-2(66)] Any person or representative of person who; i. Derives an amount chargeable to tax ii. Is required to collect/deduct tax iii. is required to furnish return of income iv. is required to pay tax under Income Tax Ordinance 2001
29 b) Person [S-80] Following shall be treated as person; i. Individual ii. Company formed in Pakistan or elsewhere iii. AOP formed in Pakistan or elsewhere iv. Federal government v. Foreign government vi. Political subdivision of foreign government vii. Public International Organization
30 Company means following i. Company as defined in Companies Act 2017 ii. Body Corporate formed by or under any law in force in Pakistan iii. Modaraba iv. body incorporated by or under any law of country outside Pakistan relating to incorporation of companies v. cooperative society, finance society or any other society vi. non-profit organization vii. Trust viii. foreign association declared by FBR to be a company ix. Provincial Government x. Local Government xi. Small company as defined in Section -2
31 Association of Persons includes following i. Firm (means relation between persons who have agreed to share profits of business carried on by all or any one of them acting for all) ii. Hindu Undivided Family iii. Artificial Juridical Person iv. Any body of persons formed under foreign law And does not include “Company”
32 3. Residential Status a) Resident Individual b) Resident Company c) Resident AOP
33 a) Resident Individual [S-82] i. Not based on Nationality ii. Based on Physical Presence in Pakistan iii. Government servant posted abroad will be treated as resident, irrespective of his physical stay in Pakistan iv. Counting of days shall be made in accordance with Rule-14 of Income Tax Rules, 2002 0 – 182 days 183 days or more Non Resident Resident
34 Rule-14 of Income Tax Rules, 2002 Days not to be counted Days to be counted i. Day or part of day in Pakistan solely by reason of being in transit between two different places outside Pakistan Part of a day shall be counted as a whole day in following cases; i. Day of arrival in Pakistan ii. Day of departure from Pakistan iii. Public Holiday iv. Leave, including sick leave v. Holiday spent in Pakistan before, during or after activity in Pakistan vi. Day when activity was interrupted due to Strike, lockout, delay in receipt of supplies
35 b) Resident Company [S-83] i. Company incorporated in Pakistan ii. Provincial Government iii. Local Government iv. Company incorporated outside Pakistan Resident No further condition required Resident if, Control and Management of affairs situated wholly in Pakistan at any time in a Tax Year
36 b) Resident AOP [S-84] Resident if, Control and Management of affairs situated wholly or partly in Pakistan at any time in a Tax Year
37 Residential Status Practice i. Mr. Raza is working as Director Operations in the Ministry of Tourism. On 15 July 2017 he was posted to Pakistan Embassy in Italy for two years. ii. Anderson LLC was incorporated as limited liability Company in UK. The control and management of its affairs was situated wholly in Pakistan. However, with effect from 01 November 2017, the entire management and control was shifted to UK. iii. On 01 February 2018, Mr. Sameel was sent to Pakistan by his UK based company to work on a special project. He left Pakistan on 23 August 2018. iv. BBL is a non-listed public company incorporated under the Companies Act 2017. All the shareholders of the company are individuals. The control and management of affairs of the company during the year was outside Pakistan. v. Mr. Salman a property dealer in USA came to Pakistan on 01 February 2017. During his stay upto 02 August 2017 in Pakistan, he remained in Peshawar upto 30 June 2017 and thereafter till his departure from Pakistan, in Quetta. Assume that Commissioner has granted him permission to use calendar year as special tax year. vi. Peshawar LLC (PLLC) was incorporated as a limited liability company in UAE. PLLC has 5 directors out of which 2 are involved in management, the rest of them were situated in UAE. The 2 directors control the affairs of the company from Pakistan. Resident Resident Non Resident Resident Resident Resident Federal Govt Employee Control & Mngt in wholly in Pak any time in TY Stay less than 183 days Company incorporated in Pak Total stay 183 days Control & Mngt in wholly in Pak any time in TY
38 6. Geographical Source of Income a) Pakistan Source Income [S-2(40) & 101] b) Foreign Source Income [S-2(27) & 101(16)] Resident Non Resident Pakistan Source Income Taxable Taxable Foreign Source Income Taxable Not Taxable Section 11(5) & (6)
Income from Salary Employee Employment Employer Means any individual engaged in employment Means any person who engages and remunerates an employee Includes: i. Directorship or any other office involved in management of company OR ii. a position entitling the holder to a fixed or ascertainable remuneration OR iii. holding or acting in any public office 3 Important Questions: 1. Geographical Source of Income 2. Basis of Taxation 3. Residential Status recently changed 39 Deciding a Salary case
Income from Salary 1. Geographical Source of Income [S-101(1), (11) & (16)] Employment Exercised In Pakistan Outside Pakistan Payment of Salary made In Pakistan PSI FSI Outside Pakistan PSI FSI By or on behalf of FG/PG/LG in Pakistan PSI wherever employment is exercised 40 Pension/Annuity Resident FSI PSI PENR Born by Paid by
Income from Salary 2. Basis of Taxation 41 Cash Basis Accrual [S-12(7)] Arrears of salary received in tax year caused higher taxation, then tax payer by notice in writing to commissioner tax salary on accrual basis All Other Cases Amount OR Perquisite treated as received [S-12(5)]: as and when it is paid or provided; By (i) Employer (ii) Associate of employer (iii) Any 3rd party under agreement with employer or its associate By (i) Past employer (ii) Perspective employer To (i) Employee (ii) Associate of employee (iii) Any 3rd party under agreement with employee or its associate Receipt of Income [S-69]: Amount/benefit/perquisite treated as received when: (i) Actually received (ii) Applied on behalf/instruction of person OR under any law (iii) Made available to person
Income from Salary 3. Residential Status Recently Changed 42 Non Resident Resident Geographical Source of Income PSI FSI Residential Status FSI of Resident Foreign Source Salary of Resident [S-102]: Exempt if; - Foreign tax on salary is paid by individual OR - withheld by employer and paid to revenue authority of foreign country Citizen of Pakistan leaves Pakistan [S-51(2)]: If a citizen of Pakistan leaves Pakistan in a Tax Year and remains abroad during that tax year then Salary earned outside Pakistan shall be exempt Returning Expatriate [S- 51(1)]: If resident in a Tax Year but was Non-Resident in preceding 4 Tax Years Then all foreign source income will be exempt in tax year in which tax payer becomes resident and the following tax year Short term Resident [S-50]: FSI will be exempt Conditions: (i) Resident solely by reason of employment (ii) Present in Pakistan for 3 years or less Exceptions: (i) Income from business established in Pakistan (ii) Foreign Source Income brought into or received in Pakistan
Income from Salary 43 Deciding a Salary case: 1. Salary Definition 2. Deductions 3. Perquisites/Facilities/Benefits 4. Exemptions
Income from Salary 44 Salary [S-12(2)] Means: any amount received by employee from employment whether capital or revenue nature Includes: Perquisites [Section-13] means -items provided by employer in kind OR -cash reimbursed for expenses other than office purpose includes -Services of house keeper, driver, gardener, domestic assistant -Utilities -Any obligation of employee to employer, waived off by employer -Any obligation of employee to another person paid by employer -FMV of property transferred to employee reduced by any payment made by employee Allowances -Cost of Living Allowance -Subsistance Allowance -Rent -Utilities -Education -Entertainment -Travel Allowance; except for official tours -Pay -Wages -Other remuneration -Leave pay -Overtime -Bonus -Commission -Fee -Gratuity -Work condition Supplements Expenditure incurred by employee but paid by employer, other than official purposes Others -Pension, Annuity - Leave encashment -Vehicle wholly or partly for private use -Accommodation -Medical Facility -Interest free loan - Medical Allowance -Profits in lieu of salary -Employee Share Scheme
Income from Salary 45 Leave Encashment [2nd Schedule, Part-I, Clause-19]: Encashment of Leave Preparatory to Retirement Of (i) Government Employee (ii) Member of Armed Forces Exempt from Tax
Income from Salary 46 Valuation of Conveyance [Rule-5]: Taxable Vehicle leased by employer Vehicle owned by employer Official Use only Official & Personal use Personal Use only Usage Not Taxable 5% of FMV at commencement of lease 5% of cost of vehicle 10% of FMV at commencement of lease 10% of cost of vehicle
Income from Salary 47 Valuation of Accommodation [Rule-4]: Amount that would have been paid if accommodation was not provided 45% of MTS/Basic Salary Higher Taxable Accommodation provided in mufasal areas shall be taxable at 30% of MTS/Basic Salary
Income from Salary 48 Medical Allowance [2nd Sched, P-I, Clause 139]: Both Medical Facility/Reimbursement Not in accordance with terms of employment In accordance with terms of employment Medical Allowance Medical Allowance >>>>exempt upto 10% of Basic Salary Medical Facility>>>>>>totally taxable Taxable Medical Allowance >>>>Totally Taxable Medical Facility>>>>>>totally exempt if following conditions are met (i) Provide NTN of medical practitioner (ii) Attestation of expense by employer Totally exempt if following conditions are met: (i) Provide NTN of medical practitioner (ii) Attestation of expense by employer Exempt upto 10% of Basic Salary
49 Interest Free Loan [S-13(7) (8) & (14)]: Income from Salary Loan from employer @ benchmark rate or more Markup charged? Markup @ benchmark rate Included in Taxable Income Markup @ benchmark rate – Markup charged by employer Included in Taxable Income Nothing Taxable No Yes Yes Above is not applicable on loan upto Rs 1,000,000/- OR Where such benefit is extended by the employer due to waiver of interest by such employee on his accounts maintained with the employer. No X (X) X If loan is utilized by employee to acquire an asset (generating income under any head of income) Then employee shall be treated as having been paid markup @ benchmark rate or actual markup paid, which ever is higher. Benchmark Rate = 10%
Income from Salary 50 Profits in lieu of salary [S-12(2)(e)] (i) Payment of Employer's Contribution from provident fund (ii) Amount on termination of employment, whether voluntary basis or under an agreement (iii) Compensation for redundancy or loss of employment (e.g., Golden Hand Shake) (iv) Consideration for employee's agreement to : • enter into employment agreement • accept changes to conditions of employment • a restrictive covenant to any past, present or future employment Includes: [S-12(6)] Tax payer has option to get it taxed @ last 3 years average rate of tax Last 3 year’s taxable income Last 3 year’s tax liability = Average rate of tax
Income from Salary 51 Employee Share Scheme [S-14] Option/Right Acquired Shares disposed off Shares acquired without any restriction on transfer OR restriction removed afterwards Shares acquired with restriction on transfer Exercised Option/Right & Shares received Taxable under salary Consideration - Cost Paid Option/Right Disposed Off Nothing Taxable X (X) X FMV - Consideration paid to acquire option & shares X (X) X Taxable under salary Taxable under Capital Gains Disposal value - Consideration paid to acquire option & share - Amount previously included in Taxable income X (X) (X) X Nothing Taxable
Income from Salary 52 Deductions: Section 12(4): No deduction shall be allowed for any expense incurred by employee in deriving salary income.
Income from Salary 53 Perquisites/Facilities/Benefits: 1. Pension 2. Commutation of Pension 3. Gratuity & Commutation of Pension 4. Provident Fund 5. Tax on Salary Born by Employer 6. Services provided by employer to employee 7. Utilities 8. Obligation of employee waived by employer 9. Obligation of employee to 3rd party, paid by employer 10. Property or service provided to employee 11. Any other perquisite 12. Self Hiring of Property 13. Superannuation Fund 14. Benevolent Fund
Income from Salary 54 Perquisites/Facilities/Benefits: 1. Pension [2nd Sched, Pt-I, Cl (8)&(9)] Member of Armed Force Employee of FG/PG Totally Exempt Others Age>60 Totally Exempt Works for same employer or its associate Taxable More than 1 pension Totally Exempt Higher amount is exempt Yes No Yes No Yes No
Income from Salary 55 Perquisites/Facilities/Benefits: 2. Commutation of Pension [2nd Sched, Pt-I, Cl (12)] Received from Government OR Received from Scheme approved by FBR Totally Exempt
Income from Salary 56 Perquisites/Facilities/Benefits: 3. Gratuity and Commutation of Pension [2nd Sched, Pt-I, Cl (13)] Rs 75,000/- OR 50% of amount (Which ever is less is exempt) Exempt upto Rs 300,000/- Totally Exempt Un-approved Gratuity OR Un-approved Commutation Gratuity & Commutation Scheme Approved by FBR Government Employee OR Approved Gratuity Fund by CIT under 6th Schedule Exemption not available to following: (i) Payment not received in Pakistan (ii) Payment received by Director of Company who is not employee of company (iii) Payment received by Non Resident (iv) Gratuity received by employee who has already received gratuity from same or another employer
Income from Salary 57 Perquisites/Facilities/Benefits: 4. Provident Fund [2nd Sched, Pt-I, Cl (23)] & [6th Sched, Pt-I, Cl (3), (4) & (5)] Already taxed in salary, therefore no treatment Employee Contribution Govt. PF Already taxed in salary, therefore no treatment Already taxed in salary, therefore no treatment Un-recognized PF Recognized PF Exempt Employer Contribution No treatment when contribution is made Rs 150,000 OR 10% of (Basic Salary + Dearness Allowance) (Lesser is exempt) Exempt Returns credited during year Return @ 16% OR 1/3rd of (Basic Salary + Dearness Allowance) (Higher is exempt) Exempt Accumulated Balance Paid No treatment when returns are credited Exempt Only employee’s contribution is exempt All other sums are taxable Note: Dearness Allowance is a type of Cost of Living Allowance
Income from Salary 58 Perquisites/Facilities/Benefits: 5. Tax on Salary Born by Employer [S-12(3)] Amount of salary income shall be grossed up by amount of tax payable by employer. Q. Mr. A has received taxable salary and allowances amounting to Rs 1,810,000 during tax year 2022. You are required to calculate his taxable income and tax payable under each of following situations: (i) 100% tax is to be borne by employer (ii) 40% of tax is to be borne by employer and balance to be borne by Mr. A (iii) Rs 50,000 is to be borne by employer and balance to be borne by Mr. A (iv) Mr. A shall pay only Rs 50,000 as tax and balance tax to be borne by employer
Income from Salary 59 Perquisites/Facilities/Benefits: 6. Services provided by employer to employee [S-13(5)] House keeper Gardner Driver Other domestic assistant Less: payment by employee to employer for these services Salary paid to them by employer X (X) X Taxable
Income from Salary 60 Perquisites/Facilities/Benefits: 7. Utilities [S-13(6)] Electricity Gas Water Telephone Less: payment by employee to employer for these utilities Fair Market Value of utilities X (X) X Taxable
Income from Salary 61 Perquisites/Facilities/Benefits: 8. Obligation of employee waived by employer [S-13(9)] Waived Amount Taxable 9. Obligation of employee payable to 3rd party paid by employer [S-13(10)] Paid Amount Taxable 10. Property or service provided to employee [S-13(11)] Less: payment by employee to employer Fair Market Value X (X) X Taxable
Income from Salary 62 Perquisites/Facilities/Benefits: 11. Any other perquisite [S-13(13)] Less: payment by employee to employer for perquisite Fair MV of perquisite X (X) X Taxable
Income from Salary 63 Perquisites/Facilities/Benefits: 12. Self Hiring of Property [S-15(5)] "Income from Salary" shall include value of accommodation in accordance with Rule-4 "Income from Property" shall include rent income in accordance with Section-15(4)&(5)
Income from Salary 64 Perquisites/Facilities/Benefits: 13. Superannuation Fund approved by Commissioner in accordance with Part-II of 6th Schedule [Cl-4-6] & 2nd Sched, P-I, Cl-25 : Employer’s Contribution During life time other than above In lieu of annuity On death Payment out of fund: Taxable Exempt Interest Credited
Income from Salary 65 Perquisites/Facilities/Benefits: 14. Benevolent Fund [2nd Sched, P-I, Cl-24] Any payment in accordance with "Central Employee Benevolent Fund & Group Insurance Act 1969" Exempt
Income from Salary 66 Exemptions: 1. Foreign Government Officials 2. Diplomatic & United Nations Exemptions 3. International Agreements 4. Perquisites without Marginal Cost to Employer 5. Special Allowance 6. Workers’ Participation Fund 7. Salary income of seafarer 8. Allowances to persons working outside Pakistan 9. Full Time teacher/researcher
Income from Salary 67 Exemptions: 1. Foreign Government Officials [S-43] Salary of foreign government employee shall be exempt from tax if: (i) employee is citizen of foreign country and not citizen of Pakistan (ii) services performed are similar to those performed by employees of Federal Government in foreign countries (iii) foreign government grants similar exemption to employees of the Federal Government performing similar services in such foreign country
Income from Salary 68 Exemptions: 2. Diplomatic & United Nations Exemptions [S-42] Following shall be exempt from tax: (i) Individuals entitled to privileges under the Diplomatic and Consular Privileges Act, 1972 (ii) Individuals entitled to privileges under the United Nations (Privileges and Immunities) Act, 1948 (iii) Pension received by citizen of Pakistan due to former employment in the United Nations or its specialized agencies, if the person’s salary from such employment was exempt under this Ordinance
Income from Salary 69 Exemptions: 3. Exemption under International Agreements [S-44] If Pakistan is not permitted to tax an income under TAX TREATY, it will be exempt from tax Salary received under an AID AGREEMENT is exempt from tax subject to following conditions: (i) Salary received by individual, who is not citizen of Pakistan (ii) Exemption will be to the extent provided in AID AGREEMENT (iii) AID AGREEMENT is between FG≈Fr.G FG ≈PIO (iv) Individual is not resident OR Is resident solely for performance of service under AID AGREEMENT (v) In case AID AGREEMENT is with Foreign Govt. then individual should be citizen of that country (vi) Salary is paid out of funds released to Pakistan under AID AGREEMENT Any income under a bilateral or multilateral technical assistance AGREEMENT is exempt from tax subject to following conditions:: (i) Income is received by person, who is not citizen of Pakistan (ii) Person is engaged as a contractor, consultant, or expert on a project in Pakistan (iii) Exemption will be to the extent provided in AGREEMENT (iv) AGREEMENT is between FG≈Fr.G FG ≈PIO (v) Project is financed out of funds released in accordance with AGREEMENT (vi) Person is not resident OR Is resident solely for performance of service under AGREEMENT (vii) Income is paid out of funds under AGREEMENT
Income from Salary 70 Exemptions: 4. Perquisites without Marginal Cost to Employer [2nd Sched, P-I, Cl-53A] Hospital/Clinic Educational Institution Hotel/Restaurant Any other notified by FBR Free/subsidized Medical Treatment Free/subsidized education Free/subsidized food during duty hours Totally Exempt
Income from Salary 71 Exemptions: 5. Special Allowance [2nd Sched, P-I, Cl-39] Any allowance, other than Conveyance and Entertainment Allowance, specially granted to meet expenses wholly and necessarily incurred in performance of office duties Exempt Clarification: The allowance solely expended in the performance of employee’s duty does not include; (i) allowance which is paid in monthly salary on fixed basis or percentage of salary; or (ii) allowance which is not wholly, exclusively, necessarily or actually spent on behalf of the employer
Income from Salary 72 Exemptions: 6. Workers’ Participation Fund [2nd Sched, P-I, Cl-26] Amount received as worker, out of Workers' Participation Fund Exempt
Income from Salary 73 Exemptions: 7. Salary Income of Seafarer [2nd Sched, P-I, Cl-4] Salary income shall be exempt if Pakistani seafarer is on Pakistan flag vessel for 183 days or more on vessel Foreign vessel No limit of number of days Following conditions required for exemption: (i) Income remitted to Pakistan (ii) through normal banking channel (iii) within 2 months of relevant tax year
Income from Salary 74 Exemptions: 8. Allowance to person working outside Pakistan [2nd Sched, P-I, Cl-5] Allowance from Govt of Pakistan to a citizen of Pakistan for rendering services outside Pakistan Exempt
Income from Salary 75 Exemptions: 9. Full Time teacher/researcher [2nd Sched, P-III, Cl-1(2)] Tax payable in salary shall be reduced by 25% if following conditions are fulfilled: (i) The individual is Full time teacher/researcher (ii) in non-profit education/research institution, duly recognized by a. Higher Education Commission (HEC) b. Board of Education c. University recognized by HEC (iii) including in any Government research institute Above shall not apply to teacher of medical profession who (i) derive income from private medical practice or (ii) receive share of consideration received from patients
Income from Property Owner/Landlord Property Land/Building Tenant Rent means: Amount received/receivable By owner of land/building As consideration to use/occupy OR right to use/occupy the land/building Rent includes: Forfeited deposit on contract for sale of land/building [S-15(1)&(2)] 2 Important Questions: 1. Geographical Source of Income 2. Basis of Taxation 76 Deciding a Property Income case Accrual Basis
Income from Property 1. Geographical Source of Income [S-101(9) & (10)] 77 Immovable Property situated in Pakistan Right to explore natural resources in Pakistan Rental Income shall be Pakistan Source Income Gain on disposal of above property or right shall also be Pakistan Source Income
Income from Property Deciding Income from Property Case: 78 Income from Property derived by a person 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 Rent
Income from Property Deciding Income from Property Case: 79 Rent i. 1/10th of advance will be treated as Rent in • TY of receipt & • 9 subsequent TYs ii. Nothing will be included in taxable income, in the tax year in which such advance is refunded iii. If tenancy is terminated before 10 years and previous advance is returned and new advance is received then: 1/10th of advance will be treated as Rent in • TY of receipt & • 9 subsequent Tys NON-ADJUSTABLE Advance (Building) [S-16] automatically included in taxable income because of accrual basis of taxation Advance ADJUSTABLE against Rent Taxable on accrual basis Rent Amount of new advance - Amount charged to tax earlier X X (X)
Income from Property Deciding Income from Property Case: 80 Rent [S-15], [S-39] & [S-66] Important !! (i) Rent received/receivable OR Fair Market Rent, which ever is higher, is taxable [S-15(4)] (ii) Above is not applicable if Fair Market Rent has already been included in salary income due to self hiring of property [S-15(5)] (iii) Following amounts shall be included in taxable income under the heads of income mentioned thereagainst; • Ground Rent • Rental income from sub-lease of land or building • Rental income from lease of building, together with Plant & Machinery • Amount of amenities, utilities, other services connected with renting • Amount received as consideration for vacating possession of building (iv) When a property is owned by two or more persons & their share is definite and ascertainable then Persons shall not be treated as AOP Share of each person's income from property shall be taxed separately Income from Other sources [S-39(1)(d)] [S-39(1)(e)] [S-39(1)(f)] & [S-15(3)] [S-39(1)(fa)] & [S-15(3A)] [S-39(1)(k)]
Income from Property Deciding Income from Property Case: 81 Allowable Deductions [S-15A] i. Building Repair Allowance ii. Insurance Premium-Building iii. Rates, tax, charge, cess not being Income Tax iv. Ground Rent v. Markup on loan to acquire, construct, renovate, extend, reconstruct property vi. HBFC Loan / Scheduled Bank Loan on scheme based on sharing rent (share in rent+share in appreciation in value) vii. Markup on mortgages/charges 1/5th of rent chargeable to tax Paid/Payable Paid/Payable Paid/Payable Paid/Payable Paid/Payable Paid
Income from Property Deciding Income from Property Case: 82 Allowable Deductions [S-15A] viii. Expenses wholly & exclusively for deriving rent including administrative and collection charges ix. Legal Charges x. Irrecoverable Rent xi. Inadmissible deductions [S-21] • Paid/Payable • maximum upto 4% of rent chargeable to tax • must be paid within 3 subsequent tax years • otherwise will be included in taxable income in 4th subsequent tax year • if unpaid amount which is included in taxable income, as above, is subsequently paid, then it will be allowed as deduction in tax year in which it is paid Paid/Payable (to defend title of property or defend any suit connected with property in a court) Conditions: i. Tenancy was bonafide ii. defaulting tenant has vacated property OR steps have been taken to compel tenant to vacate property iii. defaulting tenant is not occupying any other property of same person iv. person has taken all legal steps for recovery OR reasonable grounds exist that legal proceedings will be useless v. rent was previously included in taxable income and tax was duly paid (if irrecoverable rent is subsequently recovered, then it will be included in taxable income in tax year of recovery) will be studied in "Income from Business"
Income From Business 83 Business [S-2(10)]: Includes; • Trade • Commerce • Manufacture • Profession • Vocation OR adventure/concern in nature of above But does not include EMPLOYMENT Income from Business [S-18]: Following incomes shall be chargeable to tax under head "Income from Business" • Profits & gains • Income derived by trade/profession/similar association • Income from hire/lease • FMV of any benefit* OR perquisite • Management Fee Profit on debt : Lease rentals from lease of any asset shall be "Income from business" if "Profit on debt" earned by & distributed to this distributed share shall be "Income from Business" and not "Income from Other Sources" for Of any business carried on by person from sale of goods OR provision of services to members of tangible movable property from any past, present or perspective business relationship • 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 If person's business is to derive such income then it's "Income from business" otherwise it's "Income from Other Sources” Lessor is scheduled bank, investment bank, DFI, Modaraba, Leasing Co., Mutual fund OR Pvt Equity & venture capital fund Banking Co. or NBFC Skip Definition >>> Income subject to taxation under sections 5A, 5AA, 6, 7 and 7A shall not be chargeable to tax under section 18 Clarification: Income of co-operative societies from the sale of goods, immoveable property or provision of services to its members is and has always been chargeable to tax
Income From Business 84 Important Question: 1. Basis of Taxation Deciding a Business Income case
Basis of Taxation 85 When payable by person When due to person Stock in trade [S-35] Method of Accounting [S-32] 1. The method of accounting should be regularly employed 2. Company must employ accrual basis of accounting. 3. Other persons may apply cash basis of accounting OR accrual basis of accounting 4. FBR can prescribe a class of persons to follow cash or accrual basis of accounting 5. Change in method of accounting: a. Application to Commissioner in writing b. Satisfy commissioner that the change in method of accounting is necessary to clearly reflect taxable income c. Commissioner, if satisfied may approve, by an order in writing, that the method of accounting be changed 6. 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. Accrual Basis of Accounting [S-34] Cash Basis of Accounting [S-33] When paid Incur expense When received Derive income 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 (amount is payable by person when - all events determining liability have occurred - amount of liability can be ascertained with reasonable accuracy) (amount is due to person when he is entitled to receive it) Opening Stock Closing Stock Starting/1st period FMV when stock ventured in business Subsequent Period NRV Cost Lesser of Any of Marginal OR Absorption Costing Absorption Costing Cash Accounting Accrual Accounting
Deciding Business Income Case 86 1. Speculation Business 2. Deductions Allowed 3. Deductions not allowed 4. Assets 5. Acquisition & Cost 6. Depreciation 7. Initial Allowance 8. Disposal & Consideration 9. Depreciation on asset partly used in business 10. Leasing Business 11. Intangibles 12. Pre-commencement Expenditure 13. Scientific Research Expenditure 14. Bad Debts 15. Employee Training & Facilities 16. Profit on Debt, Financial Cost and Lease Payments
Deciding Business Income Case 87 1. Speculation Business [S-19]: Means: business in which, contract for purchase or sale of commodity is settled, 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. contract entered into by member of stock exchange or forward market to guard against jobbing or arbitrage transaction in ordinary course of business 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
Deciding Business Income Case 88 2. Deductions Allowed [S-20]: i. Any expenditure incurred wholly and exclusively for purpose of business ii. Depreciation of tangible assets, amortization of intangible assets & pre-commencement expenditures iii. Legal & financial advisory services & administrative cost incurred by amalgamated company for it's amalgamation iv. Animal used for business & profession becomes permanently disable or is dead then following deduction shall be allowed: (Above is not applicable in case of animals which are stock-in-trade) Actual Cost X Less:Amount realized from animal carcass (X) X
Deciding Business Income Case 89 3. Deductions not Allowed [S-21]: 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: in case of purchase of Raw Material & Finished Goods, the disallowed expense shall be limited to 20% of total purchases iv. Amount of commission paid or payable in excess of 0.2% of Sales of items listed in 3rd Sched of Sales Tax Act, 1990 to a person who is not appearing on ATL under ITO v. 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 meals, refreshment, reasonable leisure facility in accordance with traditions of business & subject to overall norms of business Note: All these people (who are entertained) should be related directly to the person’s business.
Deciding Business Income Case 90 3. Deductions not Allowed [S-21]: v. Contributions to following funds: Un-recognized Provident Fund / Un-approved Pension Fund / Un-approved Superannuation Fund / Un-approved Gratuity Fund vi. 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 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 / Salary / remuneration paid by an AOP to its members
Deciding Business Income Case 91 3. Deductions not Allowed [S-21]: xi. Expenditure under single head of account exceeding Rs 250,000/- paid other than by : a. crossed cheque b. crossed bank draft c. crossed pay order d. other crossed banking instrument e. online transfer f. payment through credit card Above is not applicable to following: a. expenditure not exceeding Rs 25,000/- b. expenditure on account of: • Utility bills • Freight charges • Travel fare • Postage • Taxes/duties/fees/fines
Deciding Business Income Case 92 3. Deductions not Allowed [S-21]: xii. Salary exceeding Rs 25,000/- per month, paid other than by: a. crossed cheque OR b. direct transfer to employee bank account xiii. Capital expenditure xiv. In case of pharmaceutical manufacturer any advertisement/publicity/sales promotion expense > 10% of turnover xv. Utility bills in violation of prescribed conditions and limits xvi. With effect from 1st October 2020, any expenditure attributable to sales made by industrial undertaking, to person required to be registered but not registered under Sales Tax Act 1990. The attributable expense shall be calculated as follows: (A/B) x C Where; A = Total deductions claimed B = Turnover for the Tax Year C = Sales to one un-registered person upto Rs 100 million or above Disallowed expense shall not exceed 10% of claimed deductions FBR may exempt a person from this clause
Deciding Business Income Case 93 4. Assets: i. Depreciable Asset [S-22(15)]: Means any tangible movable property, immovable property or structural improvement 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 obsolescence AND c. is used wholly or partly by person in deriving income from business it shall not include any asset whose entire cost is allowed as deduction under Income Tax Ordinance 2001 ii. Structural Improvement [S-22(15)]: Includes 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. iii. Eligible Depreciable Asset [S-23(5)]: 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 whose entire cost is allowed as deduction under Income Tax Ordinance 2001 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)]
Deciding Business Income Case 94 4. Assets: iv. Business Asset [S-75(7)]: Means asset held wholly or partly for use in business, including stock-in-trade and depreciable asset v. Personal Asset [S-75(7)]: Means asset held wholly for personal use
Deciding Business Income Case 95 5. Acquisition & Cost: i. Acquisition [S-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 ii. Purchase of Asset through Banking Channel [S-75A]: Immovable property having FMV > PKR 5 million OR Any other asset having FMV > PKR 1 million iii. Cost [S-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 If not purchased through banking channel; Then amount shall not be considered as cost i. for calculating depreciation/ amortization and ii. for calculating gain on disposal.
Deciding Business Income Case 96 5. Acquisition & Cost: ii. Cost [S-76]: a. Cost of Passenger transport vehicle not plying for hire shall not exceed Rs 2.5 million. [Section-22(13a)] b. Cost of immovable property shall not include cost of land [Section-22(13b)] c. Forex Gain/loss to be adjusted in cost of asset [Section-76(5 & 6)] • 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 d. Grant, subsidy, rebate, commission or any other assistance in relation to acquisition of asset [Section-76(10)] if chargeable to tax then it will be included in cost of asset and vice versa e. If asset acquired in a non-arm's length transaction, then FMV of asset shall be treated as its cost [Section-78] f. If personal asset is applied to business use, then its FMV shall be treated as its cost [Section-76(3)]
Deciding Business Income Case 97 5. Acquisition & Cost: ii. Cost [S-76]: g. If asset is produced or constructed by person, then its cost will include following:[Section-76(4)] h. 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)] i. If acquisition of an asset is derivation of an amount chargeable to tax, then its cost will include following:[Section-76(8)] j. If acquisition of an asset is derivation of an amount exempt from tax, then its cost will include following:[Section-76(9)] Total production/construction cost X +Incidental expenditure for acquisition / disposal of asset X +Expenditure to alter or improve asset X X Amount chargeable to tax X Amount paid to acquire asset X X Amount exempt from tax X Amount paid to acquire asset X X
Deciding Business Income Case 98 6. Depreciation [S-22]: Method of tax depreciation : Diminishing/Reducing Balance Method Rate of Depreciation : as per 3rd Schedule Part-I Full Year depreciation in year of acquisition No Depreciation in year of disposal 7. Initial Allowance [S-23]: Allowed for "eligible depreciable asset" used 1st time in Pakistan OR Year in which commercial production is started Rate of Initial Allowance : as per 3rd Schedule Part-II which ever is later For assets used for first time on or after 1st July 2020 : Depreciation @ 50% of rate as per 3rd Schedule Part-I shall be allowed in year of acquisition Depreciation @ 50% of rate as per 3rd Schedule Part-I shall be allowed in year of disposal
Deciding Business Income Case 99 8. Disposal and Consideration: i. Disposal [S-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
Deciding Business Income Case 100 8. Disposal and Consideration: ii. Consideration for Disposal [S-77]: a. If Asset is lost or destroyed, then consideration shall include compensation, indemnity or damages received from: • insurance claim • Settlement • judicial decision b. If asset applied to personal use from business use or is discarded, then consideration shall be FMV of asset c. 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 d. 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: Amount Received X FMV of consideration in kind X X FMV of asset at time of disposal X Which ever is higher Actual consideration received on disposal x 2.5 million Actual cost paid to acquire vehicle [Section-77(2)] [Section-77(3)] [Section-22(10)] [Section-77(5)]
Deciding Business Income Case 101 8. Disposal and Consideration: ii. Consideration for Disposal [S-77]: e. If consideration for immovable property exceeds its cost, then it's consideration received shall be treated as cost. f. If asset disposed off in a non-arm's length transaction, then FMV of asset shall be treated as consideration. g. If depreciable asset is exported/transferred outside Pakistan, then its cost shall be treated as consideration received. [Section-22(13d)] [Section-78] [Section-22(14)]
Deciding Business Income Case 102 9. Depreciation on asset partly used in business: i. 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. ii. 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. iii. Written Down Value of such assets shall be calculated, as if the asset was wholly used for business purposes. iv. Asset shall be treated to be wholly owned by the taxpayer if asset is jointly owned by a taxpayer and an Islamic financial institution licensed by SBP or SECP under Musharika or diminishing Musharika arrangement v. On disposal of such asset, following shall be deducted from consideration [Section-22(3)] [Section-22(6)] 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 [Proviso to Section-22(15)] Tax WDV X Add: Depreciation Expense disallowed X X OR
Deciding Business Income Case 103 10. Leasing business: Leasing Co., Investment Bank, Modaraba, Scheduled Bank, Development Finance Institution i. Initial Allowance/First Year Allowance/Accelerated Tax Depreciation or Normal Depreciation is allowed as deduction only against lease rental income ii. Asset shall be treated as used in the business of lessor iii. On completion of lease term, asset shall be transferred to lesee and treated as disposed off by leasing company and the consideration received shall be residual value received by leasing company iv. The cost of asset realized through lease rentals + residual value should not be less than cost of the asset [Sections-22(12), 23(4), 23A(2), 23B(2)] [Section-22(13c)] [Section-77(4)] [Section-77(4)]
Deciding Business Income Case 104 11. Intangibles [S-24]: Means : patent, invention, design or model, secret formula or process, copyright, trade mark, scientific or technical knowledge, computer software, motion picture film, export quotas, franchise, license, intellectual property, or other like property or right, contractual rights and any expenditure that provides an advantage or benefit for a period of more than one year other than expenditure incurred to acquire a depreciable asset or unimproved land i. Cost of Intangibles: Means expenditure incurred in acquiring or creating intangible Includes expenditure for improving or renewing intangible ii. Conditions for amortization: a. intangible is wholly or partly used for business b. normal useful life is more than 1 year iii. Rules for amortization: a. Year of acquisition; Number of days basis (An intangible available for use on a day shall be treated as used on that day) b. Year of disposal; No amortization
Deciding Business Income Case 105 11. Intangibles [S-24]: iv. Rate of amortization: v. Intangible partly used for business and partly for any other use: Amortization expenses shall be restricted to fair proportion of intangible used for business. vi. Disposal: Upon disposal, following shall be included in income from business Cost Useful life in whole years Note: if useful life is not ascertainable, then it will be treated as 25 years Consideration X Written Down Value X X
Deciding Business Income Case 106 12. Pre-commencement Expenditure [S-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 i. Method: Straight line basis ii. Rate: as per 3rd Schedule, Part-III No deduction shall be allowed for expense which allowed as deduction under any other provision of Income Tax Ordinance 2001
Deciding Business Income Case 107 13. Scientific Research Expenditure [S-26]: Expenditure for scientific research Contribution to Scientific Research Institution to do research wholly and exclusively to derive income from business shall be allowed as deduction. • 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 to scientific research institution to do research for business not include expense incurred for o acquisition of depreciable asset or intangible o acquisition of immovable property o ascertaining existance/location/extent/quality of natural deposits • Scientific Research Institution: Means any institution certified by FBR to do scientific research in Pakistan
Deciding Business Income Case 108 14. Bad Debts [S-29]: i. Conditions to claim bad debts as expense a. Amount was previoulsy included in taxable income b. In case of a financial institution, the amount was lent to derive taxable income c. amount is written off as bad debts in accounts d. resonable grounds exist that debt is irrecoverable ii. Subsequent recovery of bad debts written off: Following shall be included in taxable income (10,000) 40,000 Deduction from income from business Included in income from business (20,000) 10,000 (20,000) 60,000 Less: amount previously not allowed Subsequent recovery Case (b) Case (a) 20,000 (80,000) 100,000 amount previously allowed as deduction Whole amount of debt
Deciding Business Income Case 109 15. Employee Training & Facilities [S-27]: Expenditure in respect of following is allowed: a. Educational institution/hospital for benefit of employees/dependents b. Institute for training of industrial workers recognized/aided/funded by Federal Govt / Proviscial Govt / Local Govt c. Training of Pakistani citizen under scheme approved by FBR established in Pakistan
Deciding Business Income Case 110 16. Profit on debt, Financial costs and Lease Payments [S-28]: i. Profit on debt: • on loan utilized for business purposes • paid by bank on deposit accounts ii. Financial costs: • by originator on securitization of receivables in respect of special purpose vehicle (SPV) iii. Lease rentals • paid to scheduled bank, financial institution or approved modaraba, leasing company, SPV • The principal amount in above rental for the cost of passenger transport vehicle not plying for hire shall not exceed Rs 2.5 million iv. Share of profit • under musharika scheme paid to a bank • under musharika scheme paid to certificate holders. Such scheme should be approved by SECP and Religious Board under Modaraba Ordinance 1980 • paid on funds borrowed from modaraba or participation term certificates v. State Bank of Pakistan (SBPs) share of profit paid by • House Building Finance Corporation (HBFC) • National Development Leasing Corporation • Small & Medium Enterprises Bank on investment/credit line provided by SBP
Capital Gains 111 2 Important Questions: 1. Geographical Source of Income 2. Basis of Taxation Deciding a Capital Gains case
Geographical Source of Income [S-101(13)] & [S-101A] 112 1. Gain on disposal of shares of Resident Company shall be Pakistan Source Income 2. Gain on disposal of Assets outside Pakistan [S-101A]
Basis of Taxation 113 Accrual basis, as Gain / Loss is to be taxed in year of disposal [S-37(1)]
Deciding a Capital Gains Case 114 1. Capital Gains [S-37] 2. Capital Gain on disposal of Securities [S-37A] 3. Special provisions relating to Capital Gains tax [S-100B] 4. Deduction of Losses from Capital Gains [S-38] 5. Rule 13A – 13P 6. Bonus Shares 7. Exemptions 8. Chapter Summary
Deciding a Capital Gains Case 115 1. Capital Gains [S-37] Capital Asset: Means “property of any kind held by person whether or not connected with business” Does not include i. Stock in trade ii. Depreciable asset iii. Intangibles iv. movable property held for personal use by person or dependents excluding following: a. painting, sculpture, drawing or other work of art b. Jewelry c. rare manuscript, folio or book d. postage stamp or first day cover e. coin or medallion f. Antique [S-37(5)] Capital Loss from disposal of these assets shall not be recognized, only capital gains will be recognized. [S-38(5)] Capital Gain from disposal of immovable property shall be determined on basis of Holding period as follows: upto 1 year >>>>>fully taxable 1 to 2 years>>>>>3/4 taxable 2 to 3 years>>>>>1/2 taxable 3 to 4 years>>>>>1/4 taxable more than 4 years>>>nothing taxable [S-37(3A)] Above gain shall be taxable as separate block of income @ 1st Sched, P-I, Div-VIII
Deciding a Capital Gains Case 116 1. Capital Gains [S-37] Gain on Capital Asset [S-37(2)]: Consideration - Cost Gain/Loss X (X) X Cost shall not include: • expenses deductible under any other provision of Income Tax Ordinance • inadmissible deductions under section 21 [S-37(4)] FMV on date of acquisition shall be treated as cost in following cases: • gift from a relative as defined in S-85(5), bequest, will • succession, inheritance, devolution • dissolution of AOP • liquidation of company [S-37(4A)] Gain or Loss on disposal shall be recognized in year of disposal even if cash basis of accounting is being adopted. [S-37(1)] If capital asset is held for more than 1 year Then 3/4th of capital gain will be taxable [S-37(3)] No loss on disposal shall be recognized if gain from such asset is not taxable [S-38(2)] this provision is not applicable on disposal of following capital assets: • shares of public company • vouchers of PTC • Modaraba Certificates • Redeemable Capital S-85(5) “relative” means: (a) an ancestor, a descendant of any of the grandparents, or an adopted child, of the individual, or of a spouse of the individual; or (b) a spouse of the individual or of any person specified in clause (a). If a gifted capital asset is disposed off within 2 years, then CIT may use “cost of transferer” as cost instead of “FMV”
Deciding a Capital Gains Case 117 2. Capital Gains on Securities [S-37A] Security [S-37A(3)] : Means: • share of a public company • voucher of Pakistan Telecommunication Corporation • Modaraba Certificate • an instrument of redeemable capital • debt Securities • derivative products • Unit of exchange traded fund Capital Gain from disposal of security shall be taxed as a separate block of income @ 1st Schedule, Part I, Division VII [S-37A(1)&(4)] Loss from securities shall be setoff only against gains from securities & can be c/f upto 3 subsequent TYs. This c/f is allowed only for loss arising during TY 2019 & onwards. [S-37A(5)] Corporate debt security Term Finance Certificates (TFCs), Sukuk Certificates (Sharia Compliant Bonds), Registered Bonds, Commercial Papers, Participation Term Certificates (PTCs) and all kinds of debt instruments issued by any Pakistani or foreign company or corporation registered in Pakistan [S-37A(3A)(a)] Government debt security Treasury Bills (T-bills), Federal Investment Bonds (FIBs), Pakistan Investment Bonds (PIBs), Foreign Currency Bonds, Government Papers, Municipal Bonds, Infrastructure Bonds and all kinds of debt instruments issued by Federal Government, Provincial Governments, Local Authorities and other statutory bodies [S-37A(3A)(b)] This section is not applicable on Banking Co & Insurance Co [S-37A(1)] shares will be treated as security, if at time of disposal, the company was a public company
Deciding a Capital Gains Case 118 3. Special provisions relating to Capital Gains tax [S-100B] Capital gains on disposal of listed securities and tax thereon, subject to section 37A, shall be determined in accordance with Eighth Schedule This section is not applicable on following: • mutual fund • banking company • NBFC • insurance company • modaraba • company, in respect of debt securities only and • any other person notified by FBR
Deciding a Capital Gains Case 119 4. Deduction of Losses from Capital Gains [S-38] If Gains from capital asset are not taxable Then Losses from same asset shall not be allowed for setoff [S-38(2)] Loss on following assets shall not be recognized: (a) A painting, sculpture, drawing or other work of art; (b) jewellery; (c) a rare manuscript, folio or book; (d) a postage stamp or first day cover; (e) a coin or medallion; or (f) an antique. [S-38(5)]
Deciding a Capital Gains Case 120 • Gain/loss computation shall be made on basis of FIFO inventory accounting method • FIFO not applicable in case of same day purchases, instead Average Method to be used [R-13N(5)] • NCCPL shall add 0.5% of trade (as incidental expenses) to transaction cost and consideration [R-13N(8)] • Capital loss shall be adjusted only against capital gain of security 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.
Deciding a Capital Gains Case 121 Bonus Shares • Cost of Bonus shares would be computed by spreading the cost of old shares over the old shares plus the bonus shares taken together. • Thereafter, this new cost of a share would be the same for old and new shares. • When bonus shares are disposed of, new cost will be taken for computation of capital gain. • Similarly, when the old shares are disposed of, new cost will be taken for computation of capital gain. Old Shares Bonus Shares No. of shares Price per share Total Investment 100 11 1,100 10 0 0 New Cost 110 1,100 = 10
Deciding a Capital Gains Case 122 Following Capital Gains are exempt from tax: 1. Transfer of a stock exchange membership rights 2. Capital gain on sale of shares of industrial undertaking set up in Export Processing Zones
Capital Gains 123 Under section 38(5) No loss to be recognized, only gains will be recognized Security [S-37A] Others Others Personal Use Immoveable Property Moveable Property Stock in trade Depreciable asset Intangibles Asset Banking Co Insurance Co Listed Security Separate Block Tax @ 1st Sched, P-I, D-VIII Separate Block Tax @ 1st Sched, P-I, D-VII Disposal Loss Gain Refer losses Holding period > 1 year No Yes Fully taxable 3/4th will be taxable Fully taxable in case of Banking Co/Insurance Co in respect of following: • shares of public company • vouchers of PTC • Modaraba Certificates • Redeemable Capital Other than following: mutual fund, banking company, NBFC, insurance company, modaraba, company, in respect of debt securities only and any other person notified by FBR Gain/loss calculation As per 8th Sched Un-listed Security
Income from Other Sources 124 1. What is it ? [Section-39] 2. Basis of Taxation 3. Deductions Allowed
Income from Other Sources 125 What is it ? [S-39] Income Loan/Advance/Deposit for issuance of shares/Gift Arrears of Profit on Debt
Income from Other Sources 126 Income Income of every kind RECEIVED in a tax year, which is not included in any other Head of Income and is not exempt from tax and is not subject to tax under section 5, 6 & 7 Includes: 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. Consideration for vacating possession of building, reduced by amount paid to acquire possession of building {to be included in taxable income of current tax year and 9 succeeding tax years in equal proportion.} xiv. Amount received from Approved Income Payment Plan OR Approved Annuity Plan xv. Amount/FMV of property received without consideration [except gift from relative as defined in S-85(5)] S-85(5) “relative” means: (a) an ancestor, a descendant of any of the grandparents, or an adopted child, of the individual, or of a spouse of the individual; or (b) a spouse of the individual or of any person specified in clause (a).
Income from Other Sources 127 Loan/Advance/Deposit for issuance of shares/Gift Loan/Advance/Deposit for issuance of shares/Gift shall be treated as "Income from Other Sources" if: received from a tax payer other than a Banking Company OR Financial Institution 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
Income from Other Sources 128 Arrears of Profit on Debt from investment in: - National Saving Deposit Certificate - Defense Saving Certificate Which has resulted in income chargeable to tax at a higher rate of tax 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
Income from Other Sources 129 Basis of Taxation [S-39(1)] Income of every kind in a tax year RECEIVED
Income from Other Sources 130 Deductions Allowed [S-40] 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 & Machinery. 4. Initial Allowance on Plant & Machinery is allowed as deduction in case where Building is leased together with Plant & Machinery Deductions not allowed: 1. Expenditure allowed as deduction under any other head of income 2. Inadmissible Expenses under section 21
Losses 131 1. Set Off of Losses [Section-56, 58 & 59] 2. Carry Forward of Losses [Section-57, 58 & 59] 3. Limitation on Setoff & Carry Forward of Losses [S-59A] 4. Foreign Losses [S-104]
1. Set Off of Losses [Section-56, 58 & 59] 132 Loss arising from Set off against Salary Property Spec. Business Non Spec. Capital Gains Other Sources Salary Others Immovable Security Spec. Non Spec. Business Capital Gains Other Sources Security Immovables Others Property Not Allowed [S-56(1)] Loss not Possible O O O O P O P P O P P O O O O O O P O O O P O O O O P O O O P P O P P O P P O P P O • In case of losses from multiple heads of income, the loss from Business shall be set off last [S-56(3)] • 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 P O P O O O P
2. Carry Forward of Losses [Section-57, 58 & 59] 133 Salary Property Spec. Business Non Spec. Capital Gains Other Sources Security Immovables Others Loss not possible C/f Not Allowed Carry forward allowed upto 6 subsequent tax years Loss from earliest tax year shall be set off first 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; • Adjustment of un-absorbed depreciation in subsequent tax years shall be limited to 50% of business income of subsequent year • Above limit shall not apply if taxable income is less than Rs 10 million Un-absorbed depreciation shall be considered last C/f Not Allowed Carry forward allowed upto 3 subsequent tax years only if loss pertains to TY 2019 and onwards C/f Not Allowed Carry forward allowed upto 6 subsequent tax years Loss from earliest tax year shall be set off first Loss sustained from 1st July 2020 & onwards by a Resident Company managing hotel can be c/f upto 8 years
3. Limitation on Setoff & Carry Forward of Losses [S-59A] 134 i. 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 ii. In case of business loss, it shall be available to successor only by way of inheritance and shall not be available to any other successor iii. Loss due to depreciation, initial allowance and amortization etc shall be carried forward to unlimited periods • Adjustment of un-absorbed depreciation in subsequent tax years shall be limited to 50% of business income of subsequent year • Above limit shall not apply if taxable income is less than Rs 10 million iv. Business loss, speculation loss and capital loss cannot be carried forward unless determined by an order made under sections 120, 121 or 122
4. Foreign Losses [S-104] 135 1. Expenses incurred to derive foreign income are deductible only against that income 2. Foreign loss from a head of income, if not adjusted in relevant tax year, could be carried forward upto 6 subsequent tax years 3. 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. loss from Foreign Source Income can only be carried forward to 6 subsequent tax years against same head of income from foreign source
Deductible Allowances 136 1. Zakat [S-60] 2. Workers’ Welfare Fund [S-60A] 3. Workers’ Participation Fund [S-60B] 4. Profit on Debt [S-60C] 5. Education Expenses [S-60D]
Deductible Allowances 137 1. Zakat [S-60] Zakat under Zakat and Ushr Ordinance 1980 Profit on Debt Any other paid Allowed as deduction from “Income from Other Sources” Allowed as deductible allowance Not allowed If total income is less than amount of Zakat then: • Refund • Carry forward • Carry back
Deductible Allowances 138 2. Workers’ Welfare Fund [S-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 deductible allowance will be allowed for this payable expense
Deductible Allowances 139 3. Workers’ Participation Fund [S-60B] • Amount paid under "Companies' Profit (Workers' Participation) Act 1968" will be allowed as deductible allowance
Deductible Allowances 140 4. Profit on Debt [S-60C] Allowed to Individual 1. 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 2. Deductible allowance shall not exceed lower of following: • 50% of taxable income • Rs 2,000,000/- 3. Deductible allowance, if not utilized fully against taxable income shall not be carried forward to subsequent tax year Other Details Deductible Allowance for Profit on Debt on loan utilized for construction of new house or acquisition of house Purpose
Deductible Allowances 141 5. Education Expenses [S-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 1. Deductible allowance shall not exceed lower of following: • 5% of tuition fee paid • 25% of taxable income • 60,000 x Number of children 2. Deductible allowance, if not utilized fully against taxable income shall not be carried forward to subsequent tax year 3. Employer is not allowed to deduct these expenses while withholding tax from salary under section 149 Other Details Deductible Allowance for Tuition Fees paid in a Tax Year Purpose
Tax Credits 142 1. Tax payable by a tax payer shall be reduced by the amount of Tax Credits allowed to the tax payer. [Section-4(2)] 2. Tax credits allowed to the tax payer will be categorized under following: a) Foreign Tax Credits [Section-103] b) Tax Credits under Part X of Chapter III c) Tax Credit for Advance Tax and Tax deducted at source [Section 147 & Section 168] 3. Where more than one tax credits are allowed to a tax payer in a tax year then tax credits shall be applied in above mentioned order [Section-4(3)]
Foreign Tax Credits [S-103] 143 1. Needless to mention that Foreign Tax Credit is available to “Resident Person” in respect of “Foreign Source Income” taxable in Pakistan 2. Foreign Tax Credit shall be: a) Foreign Tax paid b) Pakistan Tax Payable in respect of income 3. Where tax payer has FSI under more than one Head of Income, this section shall be applied separately to each Head of Income 4. Unadjusted foreign tax credit shall not be refunded, carried back or carried forward 5. To avail this tax credit, foreign taxes must be paid with in two years after end of tax year in which foreign income was derived Which ever is Less Including “Withholding Tax” (Average rate of Pakistan Income Tax) Tax Imposed ÷ Taxable Income FSI after deducting directly relatable expenses & Expenses apportioned in accordance with S-67 x (Net Foreign Source Income)
2. Where individual is member of AOP, component "B" shall include share of profit from AOP, even if tax on income of AOP has been paid by the AOP [Section-65(1)(b)] 3. Component "A" shall be computed after including the share of profit from AOP [Section-65(1)(a)] Tax Credits under Part X of Chapter III 144 1. Tax Credits of each item under Part X of Chapter III [Section 61, 62, 62A & 63] shall be calculated using following formula: Tax Credit B A x C = Where: A = Tax Assessed before any Tax Credit under Part X of Chapter III B = Taxable Income C = This amount will be calculated for each type of tax credit under section 61 to 63
Tax Credits under Part X of Chapter III 145 61. Charitable donations 62. Tax credit for investment in shares and insurance 62A. Tax credit for investment in health insurance 63. Contribution to an Approved Pension Fund 64D. Tax credit for point of sale machine 65F. Tax credit for certain persons 65G. Tax credit for specified industrial undertakings
146 Tax Credits under Part X of Chapter III 1. Charitable Donations [S-61] Eligible Person Value “C” of formula Remarks Any Person Lesser of: i. Amount of Donation ii. 30% of Taxable Income in case of Individual and AOP In case of donation to associate, 15% of Taxable Income iii. 20% of Taxable income in case of Company In case of donation to associate, 10% of Taxable Income Amount paid or Property given to: i. Board of education or University in Pakistan established under Federal or Provincial Law ii. Educational Institution, hospital or relief fund established in Pakistan by Federal, Provincial or Local Govt. iii. Any non profit organization or any person eligible for tax credit under section 100C iv. Entities mentioned in 13th Schedule. If any property is given as donation, its FMV at the time it is given as donation shall be treated as donation. Valuation of property shall be carried out in accordance with Rule-228(4) & valuation of vehicles shall be carried out in accordance with Rule-228(2) If donation is given in Cash, then it must be paid by a Crossed Cheque
147 Tax Credits under Part X of Chapter III 2. Investment in Shares & Insurance [S-62] Eligible Person Value “C” of formula Remarks Resident person other than Company Lesser of: i. Cost of Acquisition of shares OR Sukuks OR unit of exchange traded fund OR Insurance Premium ii. 20% of Taxable Income iii. Rs =2,000,000/- Conditions in case of acquisition of shares: i. Only new shares of listed company ii. Person is original allottee of shares OR Shares are acquired from Privatization Commission of Pakistan Conditions in case of sukuks: i. Only new sukuks offered to public by listed company ii. Person is original allottee of sukuks iii. Sukkuks are traded on stock exchange in Pakistan Conditions in case of unit of exchange traded fund: i. Units 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“ If shares/sukkuks are disposed off within 24 months of its acquisition, OR insurance policy is surrendered within two years of its acquisition then tax payable shall be increased by the amount of tax credit previously claimed due to acquisition of these shares OR insurance policy. OR
148 Tax Credits under Part X of Chapter III 3. Investment in health insurance [S-62A] Eligible Person Value “C” of formula Remarks Resident Person being filer other than Company deriving "Salary Income" OR "Income from Business" Lesser of: i. Premium OR contribution paid ii. 5% of Taxable Income iii. Rs =150,000/- The health insurance premium/contribution is paid to: - Insurance company - Registered by SECP under Insurance Ordinance 2000
149 Tax Credits under Part X of Chapter III 4. Contribution to approved pension fund [S-63] Eligible Person Value “C” of formula Remarks Eligible Person under section 2(19A) having "Salary" or "Income from Business" Lesser of: i. Contribution to Approved Pension Fund under Voluntary Pension System Rules 2005 ii. 20% of Taxable Income Additional 2% of taxable income for each year above 40 years of age shall be allowed to person who fulfills following conditions; a) Joined pension fund after 01.07.2006 b) Joined pension fund at 41 years or above c) Additional 2% will be allowed in first 10 years d) Total contribution after addition of 2% should not exceed 50% of Taxable Income of preceding tax year e) Additional 2% is allowed only upto 30.06.2019 Limit: Above 20% and additional 2% combined, should not exceed 30% of taxable income of preceding tax year Tax Credit under this section is not available to transfer of balance: From: i. approved employment pension scheme ii. annuity scheme iii. approved occupational saving scheme To: individual pension account with any pension fund manager
150 Tax Credits under Part X of Chapter III 5. Tax credit for point of sale machines [S-64D] Eligible Person Amount of tax credit Remarks Any person who is required to integrate with Board’s computerized system for real time reporting of sale or receipt Lesser of: i. Amount invested for purchase of machine ii. Rs 150,000/- per machine Point of sale machine means; a machine meant for - processing and recording the sale transactions for goods or services, either - in cash or through - credit cards - debit cards - online payments in an internet enabled environment.
151 Tax Credits under Part X of Chapter III 6. Tax Credit for Certain Persons [S-65F] Eligible Person Amount of Tax Credit Remarks Following persons / Income: 1. persons engaged in coal mining projects in Sindh, supplying coal exclusively to power generation projects 2. a startup as defined in Section 2(62A) for the tax year in which the startup is certified by the Pakistan Software Export Board and the next following two TYs 3. Income from exports of computer software or IT services or IT enabled services as defined in Section 2(30AD) and (30AE) upto 30.06.2025: Provided that 80% of the export proceeds is brought into Pakistan in foreign exchange through normal banking channels 100% of tax payable including - minimum - alternate corporate tax and final tax Conditions for tax credit: 1. Return has been filed 2. In case of withholding agent, withholding tax statement filed 3. Sales tax returns (Federal/provincial) for the TY filled
152 Tax Credits under Part X of Chapter III 7. Tax Credit for specified industrial undertaking [S-65G] Eligible Person Amount of Tax Credit Remarks 1. Green field industrial undertaking as defined in Section 2(27A) engaged in ; (i) the manufacture of goods or materials or the subjection of goods or materials to any process which substantially changes their original condition; or (ii) ship building: Provided that: a) the person incorporated between the 30.06.2019 and 30.06.2024 b) the person is not - formed by the splitting up or reconstitution of an undertaking already in existence OR - formed by transfer of machinery, plant or building from an undertaking established in Pakistan prior to commencement of the new business and - is not part of an expansion project 2. Industrial undertaking set up by 30.06.2023 and engaged in the manufacture of plant, machinery, equipment and items with dedicated use (no multiple uses) for generation of renewable energy from sources like solar and wind, for 5 years, from the date such industrial undertaking is set up 25% of eligible investment, against - Tax payable - Minimum tax and - Final taxes. Excess tax credit can be c/f upto 2 subsequent Tys Eligible Capital Investments: Investment made in purchase and installation of new machinery, buildings, equipment, hardware and software, except self-created software and used capital goods
Tax Credit for Advance Tax and Tax deducted at source [S-147 & S-168] 153
Taxation of Individual 154 1. Principle of Taxation of Individual [S-86] 2. Deceased Individual [S-87] 3. Income of Minor Child [S-91] 4. Author [S-89]
1. Principle of Taxation of Individual [S-86] 155 Taxable income of each individual shall be determined separately
2. Deceased Individual [S-87] 156 Legal representative of deceased individual shall be responsible for following: tax payable, if individual had not died 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 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
3. Income of Minor Child [S-91] 157 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 inheritance Minor Child [S-2(33)] means an individual who is under the age of eighteen years at the end of a tax year
4. Author [S-89] 158 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 Association of Persons 159 1. Principles of taxation of AOP [S-92] 2. Individual as member of AOP [S-88] 3. Change in control of an entity [S-98] 4. Change in the constitution of an association of persons [S-98A] 5. Discontinuance of business or dissolution of an association of persons [S-98B] 6. Succession to business, otherwise than on death [S-98C]
1. Principles of Taxation of AOP [S-92] 160 • AOP shall be taxed separately from its members. • If AOP has paid tax on its profits, then share of profit of member shall be exempt from tax. • 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
2. Individual as Member of AOP [S-88] 161 Share of profit from AOP* , of individual member, shall be included in taxable income of individual member for rate purposes Tax Payable = (A/B) x C * excluding share in profit from income under FTR [S-4(4) & S-169(2)] A = is the amount of tax that would be assessed to the individual if share of profit from AOP were chargeable to tax B = taxable income if share of AOP was chargeable to tax C = actual taxable income
1. Change in control of an entity [S-98] 162 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: • it continues same business after the change, until the loss has been fully set off OR • until the loss has been fully set off, it does not engage in any new business or investment (where the principal purpose of the entity or the beneficial owners of the entity is to utilize the loss so as to reduce tax payable on the income from the new business or investment) "Entity" means Company or AOP "Underlying 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
2. Change in the constitution of an association of persons [S-98A] 163 If a change occurs in constitution of AOP then; 1. liability of filing the return of AOP shall be on those persons who were members of AOP at the time of filing of return 2. income of AOP shall be apportioned among the members on time basis 3. 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
3. Discontinuance of business or dissolution of an association of persons [S-98B] 164 1. 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 2. In case of death of member of AOP, the tax payable can be recovered from legal heirs of the deceased
4. Succession to business, otherwise than on death [S-98C] 165 1. If successor carries on the same business, then following shall apply: • predecessor shall be liable to pay tax on income before date of succession and • successor shall be liable to pay tax on the income after the date of succession 2. If predecessor cannot be found, then successor shall be liable to pay tax on income before date of succession 3. Where any tax payable under this section in respect of such business or profession cannot be recovered from the predecessor, it shall be recoverable from the successor, who shall be entitled to recover it from the predecessor.
Exemptions 166 1. Income Tax Ordinance [Section 41 – 55] 2. The Second Schedule [MS Excel Summary] i. Part I : Exemption from Total Income ii. Part II : Reduction in Tax Rates iii. Part III : Reduction in Tax Liability iv. Part IV : Exemption from Specific Provisions
167 12. Tax Regimes Heads of Income Salary Income Property Income Business Income Capital Gains Income from Other Sources Total Income - Deductible Allowances Taxable Income Rate from 1st Schedule Tax Imposed/Chargeable - Tax Credits Tax Payable - Withholding Tax/Adv Tax Income Tax Demand/Refund Normal Tax Reg. Separate Taxation Tax Collected/deducted is final tax Minimum Tax Reg 10 10 10 10 10 10% 50 (2) (10) 1 40 4 (1) 3 Final Tax Regime Losses Exemptions Final Tax Presumptive Tax Regime Final Tax
168 Tax Collected/Deducted is Final Tax Tax at Source Section 169 [S-154] Exports [S-156] Prizes & Winnings
169 Separate Taxation Separate Taxation Separate Block of Income Section 8 [S-5] Tax on Dividends [S-5AA] Tax on Investment in Sukuks [S-6] Tax on certain payments to Non Residents [S-7] Tax on shipping and air transport income of a non-resident person [S-7A] Tax on shipping of Resident Person [S-7B] Tax on Profit on Debt • To be discussed in relevant Head of Income
170 Dividend [S-2(19)] Company Shareholder Deduct tax on gross amount @ 1st Sched, Part-III, Div-I Cash Dividend [S-150] Dividend in specie [S-236S] Tax deducted will be Adjustable Pay tax on gross amount @ 1st Sched, Part-I, Div-III Tax Imposed will be Final Tax [S-5] Shareholder shall pay Final Tax after adjustment of tax deducted at source
171 Return on Sukuk Special Purpose Vehicle OR Company Sukuk Holder Deduct tax on gross amount @ 1st Sched, Part-III, Div-IB Return on Sukuk [S-150A] Tax deducted will be Adjustable Pay tax on gross amount @ 1st Sched, Part-I, Div-IIIB Tax Imposed will be Final Tax [S-5AA] Receiver of return shall pay Final Tax after adjustment of tax deducted at source
172 Special Purpose Vehicle Wapda Wapda First Sukuk Company Ltd Sukuk Holder Sukuk Certificate Funds for Purchase of Turbines Funds Title to Turbines Lease Turbines Lease Rental Return to Sukuk Holder Pay Exercise Price Get Title of Turbines Redeem Sukuk Return Sukuk Purchase Turbines
173 Payments to Non Residents Payment to Non Resident for Pakistan Source Royalty , Fee For Offshore Digital Services OR FFTS Non-Resident Deduct tax on gross amount @ 1st Sched, Part-I, Div-IV Payment to Non Resident [S-152(1)] Tax deducted will be Adjustable Pay tax on gross amount @ 1st Sched, Part-I, Div-IV Tax Imposed will be Final Tax [S-6] This section shall not apply on following: 1. Royalty: where property or right giving rise to royalty is effectively connected with PE of Non Resident. Such royalty shall be treated as business income of PE of Non Resident. 2. FFTS & FFODS: where services giving rise to fee are rendered through PE of Non Resident. Such fee shall be treated as business income of PE of Non Resident. 3. Royalty or FFTS exempt from tax.
174 [S-2(54)] Royalty Royalty means any amount Paid Payable Periodical or lumpsum as consideration for following (vi) (vii) supply of any assistance ancillary and subsidiary to any property or right mentioned above disposal of any right or property mentioned above (v) Use or right to use Industrial/commercial/scientific equipment (iv) Supply of Technical/industrial/commercial/scientific Knowledge/skill (iii) receive or right to receive visual image or sound transmitted by Satellite/Cable Optic Fiber Similar technology in connection with Television Radio Internet broadcasting (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 (i) Use or right to use Patent Invention Design Model Secret formula Process Trade mark Other like property/right Business Income
175 [S-2(23)] FFTS means any consideration, whether periodical or lump sum, for rendering : (b) consideration chargeable under head "Salary" (a) consideration for services in connection with construction, assembly or like project It does not include following Including services of technical or other personnel Managerial Technical Consultancy Services Provision of Service vs Know-how Business Income FFTS
176 [S-2(22B)] Fee for Offshore Digital Services means any consideration for providing following services by Non-Resident • online advertising including • digital advertising space, • designing, creating, hosting or maintenance of websites, • digital or cyber space for websites, • advertising, e-mails, online computing, blogs, online content and online data, • providing any facility or service for uploading, storing or distribution of digital content including • digital text, digital audio or digital video, online collection or processing of data related to users in Pakistan, • any facility for online sale of goods or services or any other online facility
177 [S-113] Minimum Tax Company Resident Turnover 100 million or above In TY 2017 or after Tax payable is less than [%age given in column (3) of Table in 1st Sched, P-I, Div-IX] x [Turnover] Due to: (i) Loss of the year (ii) Set off of loss of earlier year (iii) Exemption from tax (iv) Tax Credits OR Rebates (v) Allowances/Deductions (including Depreciation & Amortization) Individual AOP Specific Conditions General Conditions ✓ Turnover shall be treated as income ✓ Pay tax on basis of turnover @ 1st Sched, Part-I, Div-IX ✓ The excess tax paid due to minimum tax, shall be carried forward for adjustment against tax liability upto 5 subsequent tax years Tax Payable shall not include: (i) Final Tax (ii) Tax Payable u/s 4B Turnover means: Gross Sales Gross Fees Gross Fees Share of profit from AOP Excluding Sales Tax FED Trade Discount (mentioned on invoice) Deemed income on which Final Tax has been paid Deemed income on which Final Tax has been paid Deemed income on which Final Tax has been paid Including Commission Turnover means: Gross Sales Gross Fees (Services) Gross Fees (Contracts) Share of Company in AOP in above amounts Explanation: Turnover will include receipts from sale of immoveable property, taxable as business income.
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Income Tax.pdf

  • 1.
    CAF – 02 TaxPractices Income Tax Notes for September 2022 attempt
  • 2.
  • 3.
    3 Table of Contents 1.System of taxation in Pakistan 2. Constitutional provisions on taxes 3. Ethics 4. Basic concepts of taxation 5. Salary 6. Income from property 7. Income from business 8. Capital gains 9. Income from other sources 10. Losses, deductible allowances, tax credits and exemptions 11. Taxation of individual and association of persons 12. Tax Regimes
  • 4.
    4 System of Taxationin Pakistan 1. History of tax laws 2. Objectives of tax laws 3. Tools of taxation and Tax strategies 4. Basics of taxation 5. Principles of levy 6. Characteristics of tax laws
  • 5.
    5 History of TaxLaws 1. Income Tax Act 1860 repealed in 1865 2. Income Tax Act 1886 3. Income Tax Act 1918 4. Super Tax Act 1917 5. Super Tax Act 1920 6. Income Tax Ordinance 1979 7. Income Tax Ordinance 2001 consolidated into Income Tax Act 1922
  • 6.
    6 Objectives of TaxLaw Tax Law Objective Tax on salary income Revenue Collection Any amount transferred otherwise than banking channel will be deemed as income Documentation of economy Tax on moveable assets of the taxpayers Fair distribution of wealth Higher taxes on import of luxury goods Reduction in imports of unnecessary goods and create good balance of trade Allow ability of expenditure of research & developments Promotion of research & developments Zero rating on Exports Promotion of Exports Tax credit on Donations to approved institutions To promote culture of payment of donation to only organised and regulated institutions Tax credit on investments Promote investments in listed companies Tax exemptions to software exports Promote software Industry Revenue Non revenue Development
  • 7.
    7 Tools of Taxation 1.Tax Structure 2. Exemptions 3. Tax Concessions 4. Deductible Allowances 5. Tax Credits 6. Rebates a) Proportional b) Regressive c) Progressive
  • 8.
    8 Basics of Taxation 1.Equality 2. Certainty 3. Convenience of Payment 4. Economy of Collection
  • 9.
    9 Principles of Levy 1.Benefit Principle 2. Ability to Pay Principle 3. Equal Distribution Principle
  • 10.
    10 Characteristics of TaxLaws 1. Enforced contribution 2. Payable in cash 3. Proportionate in character 4. Levied on income / transaction / property 5. Levied by state having jurisdiction 6. Levied by law making body of state 7. Levied for public purposes 8. Fiscal adequacy 9. Equality >>>ability of citizen to pay 10. Administrative feasibility 11. Consistency with economic goals
  • 11.
    11 Constitutional Provisions onTaxes 2. Annual Budget Statement (ABS) 3. Budget Approval Process 4. Supplementary Budget 5. Distribution of Revenues among Provinces 6. Legislative list 1. Federal & Provincial Government The Constitution of The Islamic Republic of Pakistan 1973
  • 12.
    12 Federal & ProvincialGovernment Parliament Majlis-e-Shora President Senate (Upper House) National Assembly (Lower House) Province General Women Non-Muslim Total Balochistan 14 3 17 KPK 35 8 43 Punjab 148 35 183 Sindh 61 14 75 ICT 2 2 FATA 12 12 10 10 Total 272 60 10 342 Province General Technocrats / Ulema Women Non-Muslim Total Balochistan 14 4 4 1 23 KPK 14 4 4 1 23 Punjab 14 4 4 1 23 Sindh 14 4 4 1 23 ICT 2 1 1 4 FATA 4 4 Total 62 17 17 4 100 Prime Minister Minister A Minister B Minister C Cabinet Federation Province Rules Act Constitution of Pakistan Regulations Relevant Department (FBR) Law Federal Consolidated Fund Provincial Consolidated Fund Prime Minister Chief Minister
  • 13.
    13 Revenue Collection Exchequer (Federal Consolidated Fund) Inflows Outflows Income Tax CVT WWF SalesTax FED Custom Duty Deficit Loans & Grants Capital Receipts Revenue Receipts Non Tax Receipts Tax Receipts Other Taxes FBR Taxes Indirect Tax Direct Tax External Receipts Internal Receipts
  • 14.
  • 15.
    15 Budget Approval Process NationalAssembly (NA) - Annual Budget Statement (ABS) placed before NA - ABS is open for discussion - No voting required - After discussion, a Schedule of Expenditure (SOE) will be prepared - SOE will be signed by Prime Minister -Signed SOE will again be presented to NA - This time SOE is not open for discussion - Budget is approved Senate President • A head of expenditure is called “Grant” • Every grant should be recommended by Federal Government Finance Bill Finance Act
  • 16.
    16 Supplementary Budget National Assembly(NA) - Supplementary Budget Statement (SBS) placed before NA - SBS is open for discussion - No voting required - After discussion, a Schedule of Expenditure (SOE) will be prepared - SOE will be signed by Prime Minister -Signed SOE will again be presented to NA - This time SOE is not open for discussion - Supplementary Budget is approved Senate President Finance Supplementary Bill Finance Supplementary Act
  • 17.
    17 Distribution of Revenuesamong Provinces • Balochistan • KPK • Sindh • Punjab - Provincial Finance Minister + - Any other person with consultation of Governor - Provincial Finance Minister + - Any other person with consultation of Governor - Provincial Finance Minister + - Any other person with consultation of Governor - Provincial Finance Minister + - Any other person with consultation of Governor Federal Finance Minister President shall constitute National Finance Commission (NFC) which will finalize NFC Award
  • 18.
    18 Legislative List Federal legislativelist: 1. Duties of customs, including export duties. 2. Duties of excise, including salt, but not including alcoholic liquors, opium or other narcotics; 3. Taxes on income other than agricultural income; 4. Taxes on corporations. 5. Taxes on the sales and purchases of goods imported, exported, produced, manufactured or consumed, except sales tax on services. 6. Taxes on the capital value of the assets, not including taxes on immovable property. 7. Taxes on mineral oil, natural gas and minerals for use in generation of nuclear energy. 8. Taxes and duties on the production capacity of any plant, machinery, undertaking, establishment or installation in lieu of any one or more of them. 9. Terminal taxes on goods or passengers carried by railway, sea or air; taxes on their fares and freights. Province can legislate all taxes, other than above, such as: 1. Sales tax on services 2. Taxes on transfer of immoveable property 3. Professional tax 4. Tax on luxury houses 5. Tax on registration of luxury vehicles etc. 6. Property tax
  • 19.
    19 Ethics Legislator Administrator Practitioner •Fairness • Transparency • Equity • Accountability Responsibilites of Tax Administrators • Obey taxation laws, no undue favors to tax payer • Honesty and integrity to maintain respect of Govt and Taxpayer • Impartial, fair, neutral and consistent in administing tax laws, without any prejudic to to race, social status, economic circumstances • Provide prompt, efficient and quality services to taxpayer • Refrain from actively participating in political activities • Accuracy of records and its confidentiality • Refrain from soliciting gifts • Make reasonable efforts to collect proper amount of tax at lowest possible cost • Diligently respond to valid tax refund claims • Educate Taxpayer on their rights and responsibilities Tax Payer Canons of Taxation-(by Adam Smith) • Canon of Equity • Canon of Certainity • Canon of Convenience of Payment • Canon of Economy of Collection Additional Canons • Canon of Productivity • Canon of Elasticity • Canon of Flexibility • Canon of Simplicity • Canon of Diversity Whistle Blower • Integrity • Objectivity • Confidentiality • Professional Behavior • Professional Competence & Due Care • Utilitarianism • Deontology • Virtue ethics ICAP Code of Ethics Tax Avoidance vs Tax Evasion
  • 20.
    20 Ethics Tax Avoidance vsTax Evasion - Tax avoidance is generally the legal exploitation of the tax regime to one's own advantage, to attempt to reduce the amount of tax that is payable by means that are within the law whilst making a full disclosure of the material information to the tax authorities. Examples of tax avoidance; (i) using tax deductions (ii) changing one's business structure through incorporation or (iii) establishing an offshore company in a tax haven. - Tax evasion is the general term for efforts by individuals, firms, trusts and other entities to evade the payment of taxes by illegal means. - Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability, and includes, in particular, dishonest tax reporting. Examples of tax evasion; (i) under declaring income, profits or gains; or (ii) overstating deductions.
  • 21.
    21 Ethics ICAP Code ofEthics Threats which may arise; - Advocacy Threat - Self Review Threat Factors to evaluate level of threat; - The particular characteristics of the engagement - The level of tax expertise of the client’s employees. - The system by which the tax authorities assess and administer the tax in question and the role of the firm or network firm in that process - The complexity of the relevant tax regime and the degree of judgment necessary in applying it Usually, no threat is created from following work; - Assisting clients with their tax reporting obligations by drafting and compiling information, including the amount of tax due required to be submitted to the applicable tax authorities - Advising on the tax return treatment of past transactions and responding on behalf of the audit client to the tax authorities’ requests for additional information and analysis (for example, providing explanations of and technical support for the approach being taken All Audit Clients Materiality of amounts should be considered. Threats which may arise; - Advocacy Threat - Self Review Threat Audit Clients that are Not Public Interest Entities Safeguards: - Using professionals who are not audit team members - Having an appropriate reviewer who was not involved in providing the service Audit Clients that are Public Interest Entities A firm or a network firm shall not prepare tax calculations of current and deferred tax liabilities (or assets), if it is material.
  • 22.
    22 Ethics Whistle Blower Whistle blowermeans a person who reports - concealment or - evasion of income tax leading to detection / collection of - Taxes - Fraud - corruption or - Misconduct To the competent authority having power to take action against - the person or - an income tax authority committing
  • 23.
    Basic Concepts ofTaxation 1. Tax Year 2. Types of Person 3. Residential Status 4. Tax Regimes 5. Common Rules 6. Geographical Source of Income 7. Important Definitions a) Public Company b) Private Company c) Non Profit Organization d) Small & Medium Enterprise e) Small Company f) Filer g) Non-filer 23
  • 24.
    24 1. Tax Year[S-74] Time Bracket Normal Tax Year (NTY) End date is other than 30th June End date is 30th June Time period of less than 12 months Time period of 12 months Transitional Tax Year (TTY) Special Tax Year (STY) Denoted by Calendar Year relevant to NTY in which Year end falls Denoted by Calendar Year in which NTY ends Denoted by Calendar Year relevant to NTY in which Year end falls FBR has authority to prescribe STY TTY occurs because of change in TY from NTY to STY or vice versa TTY is the period between TY end date of last tax year and commencement date of next TY Industry Special Tax Year SRO Ref Sugar Manufacturing 1st October - 30th September 134(R)/68, July 31,1968 Rice Exporter 1st January - 31st December 367(I) /74, January 14,1974 Insurance 1st January - 31st December 878 (I) /95, August 30,1995
  • 25.
    25 Change in TaxYear NTY STY STY - 1 STY - 2 STY NTY Tax Payer will give an application in writing to Commissioner of Income Tax (CIT) CIT is convinced that compelling need exists Not Convinced Give tax payer an opportunity of being heard in person Not Convinced 1) issue rejection orders 2) record reasons of rejection in order Tax Payer may file review application to FBR & decision of FBR shall be final Grant Permission through an order in writing
  • 26.
    26 Tax Year Practice Determinethe tax year in respect of each accounting periods mentioned below: a) 1.09.2015 to 31.08.2016 b) 01.04.2016 to 30.06.2016 c) 1.01.2016 to 31.12.2016 d) 1.04.2016 to 31.03.2017 e) 1.05.2016 to 30.04.2017 f) 1.07.2016 to 30.06.2017 STY TTY STY STY STY NTY TY 2017 TY 2016 TY 2017 TY 2017 TY 2017 TY 2017
  • 27.
    27 2. Type ofPerson a) Tax Payer [S-2(66)] b) Person [S-80]
  • 28.
    28 a) Tax Payer[S-2(66)] Any person or representative of person who; i. Derives an amount chargeable to tax ii. Is required to collect/deduct tax iii. is required to furnish return of income iv. is required to pay tax under Income Tax Ordinance 2001
  • 29.
    29 b) Person [S-80] Followingshall be treated as person; i. Individual ii. Company formed in Pakistan or elsewhere iii. AOP formed in Pakistan or elsewhere iv. Federal government v. Foreign government vi. Political subdivision of foreign government vii. Public International Organization
  • 30.
    30 Company means following i.Company as defined in Companies Act 2017 ii. Body Corporate formed by or under any law in force in Pakistan iii. Modaraba iv. body incorporated by or under any law of country outside Pakistan relating to incorporation of companies v. cooperative society, finance society or any other society vi. non-profit organization vii. Trust viii. foreign association declared by FBR to be a company ix. Provincial Government x. Local Government xi. Small company as defined in Section -2
  • 31.
    31 Association of Personsincludes following i. Firm (means relation between persons who have agreed to share profits of business carried on by all or any one of them acting for all) ii. Hindu Undivided Family iii. Artificial Juridical Person iv. Any body of persons formed under foreign law And does not include “Company”
  • 32.
    32 3. Residential Status a)Resident Individual b) Resident Company c) Resident AOP
  • 33.
    33 a) Resident Individual[S-82] i. Not based on Nationality ii. Based on Physical Presence in Pakistan iii. Government servant posted abroad will be treated as resident, irrespective of his physical stay in Pakistan iv. Counting of days shall be made in accordance with Rule-14 of Income Tax Rules, 2002 0 – 182 days 183 days or more Non Resident Resident
  • 34.
    34 Rule-14 of IncomeTax Rules, 2002 Days not to be counted Days to be counted i. Day or part of day in Pakistan solely by reason of being in transit between two different places outside Pakistan Part of a day shall be counted as a whole day in following cases; i. Day of arrival in Pakistan ii. Day of departure from Pakistan iii. Public Holiday iv. Leave, including sick leave v. Holiday spent in Pakistan before, during or after activity in Pakistan vi. Day when activity was interrupted due to Strike, lockout, delay in receipt of supplies
  • 35.
    35 b) Resident Company[S-83] i. Company incorporated in Pakistan ii. Provincial Government iii. Local Government iv. Company incorporated outside Pakistan Resident No further condition required Resident if, Control and Management of affairs situated wholly in Pakistan at any time in a Tax Year
  • 36.
    36 b) Resident AOP[S-84] Resident if, Control and Management of affairs situated wholly or partly in Pakistan at any time in a Tax Year
  • 37.
    37 Residential Status Practice i.Mr. Raza is working as Director Operations in the Ministry of Tourism. On 15 July 2017 he was posted to Pakistan Embassy in Italy for two years. ii. Anderson LLC was incorporated as limited liability Company in UK. The control and management of its affairs was situated wholly in Pakistan. However, with effect from 01 November 2017, the entire management and control was shifted to UK. iii. On 01 February 2018, Mr. Sameel was sent to Pakistan by his UK based company to work on a special project. He left Pakistan on 23 August 2018. iv. BBL is a non-listed public company incorporated under the Companies Act 2017. All the shareholders of the company are individuals. The control and management of affairs of the company during the year was outside Pakistan. v. Mr. Salman a property dealer in USA came to Pakistan on 01 February 2017. During his stay upto 02 August 2017 in Pakistan, he remained in Peshawar upto 30 June 2017 and thereafter till his departure from Pakistan, in Quetta. Assume that Commissioner has granted him permission to use calendar year as special tax year. vi. Peshawar LLC (PLLC) was incorporated as a limited liability company in UAE. PLLC has 5 directors out of which 2 are involved in management, the rest of them were situated in UAE. The 2 directors control the affairs of the company from Pakistan. Resident Resident Non Resident Resident Resident Resident Federal Govt Employee Control & Mngt in wholly in Pak any time in TY Stay less than 183 days Company incorporated in Pak Total stay 183 days Control & Mngt in wholly in Pak any time in TY
  • 38.
    38 6. Geographical Sourceof Income a) Pakistan Source Income [S-2(40) & 101] b) Foreign Source Income [S-2(27) & 101(16)] Resident Non Resident Pakistan Source Income Taxable Taxable Foreign Source Income Taxable Not Taxable Section 11(5) & (6)
  • 39.
    Income from Salary EmployeeEmployment Employer Means any individual engaged in employment Means any person who engages and remunerates an employee Includes: i. Directorship or any other office involved in management of company OR ii. a position entitling the holder to a fixed or ascertainable remuneration OR iii. holding or acting in any public office 3 Important Questions: 1. Geographical Source of Income 2. Basis of Taxation 3. Residential Status recently changed 39 Deciding a Salary case
  • 40.
    Income from Salary 1.Geographical Source of Income [S-101(1), (11) & (16)] Employment Exercised In Pakistan Outside Pakistan Payment of Salary made In Pakistan PSI FSI Outside Pakistan PSI FSI By or on behalf of FG/PG/LG in Pakistan PSI wherever employment is exercised 40 Pension/Annuity Resident FSI PSI PENR Born by Paid by
  • 41.
    Income from Salary 2.Basis of Taxation 41 Cash Basis Accrual [S-12(7)] Arrears of salary received in tax year caused higher taxation, then tax payer by notice in writing to commissioner tax salary on accrual basis All Other Cases Amount OR Perquisite treated as received [S-12(5)]: as and when it is paid or provided; By (i) Employer (ii) Associate of employer (iii) Any 3rd party under agreement with employer or its associate By (i) Past employer (ii) Perspective employer To (i) Employee (ii) Associate of employee (iii) Any 3rd party under agreement with employee or its associate Receipt of Income [S-69]: Amount/benefit/perquisite treated as received when: (i) Actually received (ii) Applied on behalf/instruction of person OR under any law (iii) Made available to person
  • 42.
    Income from Salary 3.Residential Status Recently Changed 42 Non Resident Resident Geographical Source of Income PSI FSI Residential Status FSI of Resident Foreign Source Salary of Resident [S-102]: Exempt if; - Foreign tax on salary is paid by individual OR - withheld by employer and paid to revenue authority of foreign country Citizen of Pakistan leaves Pakistan [S-51(2)]: If a citizen of Pakistan leaves Pakistan in a Tax Year and remains abroad during that tax year then Salary earned outside Pakistan shall be exempt Returning Expatriate [S- 51(1)]: If resident in a Tax Year but was Non-Resident in preceding 4 Tax Years Then all foreign source income will be exempt in tax year in which tax payer becomes resident and the following tax year Short term Resident [S-50]: FSI will be exempt Conditions: (i) Resident solely by reason of employment (ii) Present in Pakistan for 3 years or less Exceptions: (i) Income from business established in Pakistan (ii) Foreign Source Income brought into or received in Pakistan
  • 43.
    Income from Salary 43 Decidinga Salary case: 1. Salary Definition 2. Deductions 3. Perquisites/Facilities/Benefits 4. Exemptions
  • 44.
    Income from Salary 44 Salary[S-12(2)] Means: any amount received by employee from employment whether capital or revenue nature Includes: Perquisites [Section-13] means -items provided by employer in kind OR -cash reimbursed for expenses other than office purpose includes -Services of house keeper, driver, gardener, domestic assistant -Utilities -Any obligation of employee to employer, waived off by employer -Any obligation of employee to another person paid by employer -FMV of property transferred to employee reduced by any payment made by employee Allowances -Cost of Living Allowance -Subsistance Allowance -Rent -Utilities -Education -Entertainment -Travel Allowance; except for official tours -Pay -Wages -Other remuneration -Leave pay -Overtime -Bonus -Commission -Fee -Gratuity -Work condition Supplements Expenditure incurred by employee but paid by employer, other than official purposes Others -Pension, Annuity - Leave encashment -Vehicle wholly or partly for private use -Accommodation -Medical Facility -Interest free loan - Medical Allowance -Profits in lieu of salary -Employee Share Scheme
  • 45.
    Income from Salary 45 LeaveEncashment [2nd Schedule, Part-I, Clause-19]: Encashment of Leave Preparatory to Retirement Of (i) Government Employee (ii) Member of Armed Forces Exempt from Tax
  • 46.
    Income from Salary 46 Valuationof Conveyance [Rule-5]: Taxable Vehicle leased by employer Vehicle owned by employer Official Use only Official & Personal use Personal Use only Usage Not Taxable 5% of FMV at commencement of lease 5% of cost of vehicle 10% of FMV at commencement of lease 10% of cost of vehicle
  • 47.
    Income from Salary 47 Valuationof Accommodation [Rule-4]: Amount that would have been paid if accommodation was not provided 45% of MTS/Basic Salary Higher Taxable Accommodation provided in mufasal areas shall be taxable at 30% of MTS/Basic Salary
  • 48.
    Income from Salary 48 MedicalAllowance [2nd Sched, P-I, Clause 139]: Both Medical Facility/Reimbursement Not in accordance with terms of employment In accordance with terms of employment Medical Allowance Medical Allowance >>>>exempt upto 10% of Basic Salary Medical Facility>>>>>>totally taxable Taxable Medical Allowance >>>>Totally Taxable Medical Facility>>>>>>totally exempt if following conditions are met (i) Provide NTN of medical practitioner (ii) Attestation of expense by employer Totally exempt if following conditions are met: (i) Provide NTN of medical practitioner (ii) Attestation of expense by employer Exempt upto 10% of Basic Salary
  • 49.
    49 Interest Free Loan[S-13(7) (8) & (14)]: Income from Salary Loan from employer @ benchmark rate or more Markup charged? Markup @ benchmark rate Included in Taxable Income Markup @ benchmark rate – Markup charged by employer Included in Taxable Income Nothing Taxable No Yes Yes Above is not applicable on loan upto Rs 1,000,000/- OR Where such benefit is extended by the employer due to waiver of interest by such employee on his accounts maintained with the employer. No X (X) X If loan is utilized by employee to acquire an asset (generating income under any head of income) Then employee shall be treated as having been paid markup @ benchmark rate or actual markup paid, which ever is higher. Benchmark Rate = 10%
  • 50.
    Income from Salary 50 Profitsin lieu of salary [S-12(2)(e)] (i) Payment of Employer's Contribution from provident fund (ii) Amount on termination of employment, whether voluntary basis or under an agreement (iii) Compensation for redundancy or loss of employment (e.g., Golden Hand Shake) (iv) Consideration for employee's agreement to : • enter into employment agreement • accept changes to conditions of employment • a restrictive covenant to any past, present or future employment Includes: [S-12(6)] Tax payer has option to get it taxed @ last 3 years average rate of tax Last 3 year’s taxable income Last 3 year’s tax liability = Average rate of tax
  • 51.
    Income from Salary 51 EmployeeShare Scheme [S-14] Option/Right Acquired Shares disposed off Shares acquired without any restriction on transfer OR restriction removed afterwards Shares acquired with restriction on transfer Exercised Option/Right & Shares received Taxable under salary Consideration - Cost Paid Option/Right Disposed Off Nothing Taxable X (X) X FMV - Consideration paid to acquire option & shares X (X) X Taxable under salary Taxable under Capital Gains Disposal value - Consideration paid to acquire option & share - Amount previously included in Taxable income X (X) (X) X Nothing Taxable
  • 52.
    Income from Salary 52 Deductions: Section12(4): No deduction shall be allowed for any expense incurred by employee in deriving salary income.
  • 53.
    Income from Salary 53 Perquisites/Facilities/Benefits: 1.Pension 2. Commutation of Pension 3. Gratuity & Commutation of Pension 4. Provident Fund 5. Tax on Salary Born by Employer 6. Services provided by employer to employee 7. Utilities 8. Obligation of employee waived by employer 9. Obligation of employee to 3rd party, paid by employer 10. Property or service provided to employee 11. Any other perquisite 12. Self Hiring of Property 13. Superannuation Fund 14. Benevolent Fund
  • 54.
    Income from Salary 54 Perquisites/Facilities/Benefits: 1.Pension [2nd Sched, Pt-I, Cl (8)&(9)] Member of Armed Force Employee of FG/PG Totally Exempt Others Age>60 Totally Exempt Works for same employer or its associate Taxable More than 1 pension Totally Exempt Higher amount is exempt Yes No Yes No Yes No
  • 55.
    Income from Salary 55 Perquisites/Facilities/Benefits: 2.Commutation of Pension [2nd Sched, Pt-I, Cl (12)] Received from Government OR Received from Scheme approved by FBR Totally Exempt
  • 56.
    Income from Salary 56 Perquisites/Facilities/Benefits: 3.Gratuity and Commutation of Pension [2nd Sched, Pt-I, Cl (13)] Rs 75,000/- OR 50% of amount (Which ever is less is exempt) Exempt upto Rs 300,000/- Totally Exempt Un-approved Gratuity OR Un-approved Commutation Gratuity & Commutation Scheme Approved by FBR Government Employee OR Approved Gratuity Fund by CIT under 6th Schedule Exemption not available to following: (i) Payment not received in Pakistan (ii) Payment received by Director of Company who is not employee of company (iii) Payment received by Non Resident (iv) Gratuity received by employee who has already received gratuity from same or another employer
  • 57.
    Income from Salary 57 Perquisites/Facilities/Benefits: 4.Provident Fund [2nd Sched, Pt-I, Cl (23)] & [6th Sched, Pt-I, Cl (3), (4) & (5)] Already taxed in salary, therefore no treatment Employee Contribution Govt. PF Already taxed in salary, therefore no treatment Already taxed in salary, therefore no treatment Un-recognized PF Recognized PF Exempt Employer Contribution No treatment when contribution is made Rs 150,000 OR 10% of (Basic Salary + Dearness Allowance) (Lesser is exempt) Exempt Returns credited during year Return @ 16% OR 1/3rd of (Basic Salary + Dearness Allowance) (Higher is exempt) Exempt Accumulated Balance Paid No treatment when returns are credited Exempt Only employee’s contribution is exempt All other sums are taxable Note: Dearness Allowance is a type of Cost of Living Allowance
  • 58.
    Income from Salary 58 Perquisites/Facilities/Benefits: 5.Tax on Salary Born by Employer [S-12(3)] Amount of salary income shall be grossed up by amount of tax payable by employer. Q. Mr. A has received taxable salary and allowances amounting to Rs 1,810,000 during tax year 2022. You are required to calculate his taxable income and tax payable under each of following situations: (i) 100% tax is to be borne by employer (ii) 40% of tax is to be borne by employer and balance to be borne by Mr. A (iii) Rs 50,000 is to be borne by employer and balance to be borne by Mr. A (iv) Mr. A shall pay only Rs 50,000 as tax and balance tax to be borne by employer
  • 59.
    Income from Salary 59 Perquisites/Facilities/Benefits: 6.Services provided by employer to employee [S-13(5)] House keeper Gardner Driver Other domestic assistant Less: payment by employee to employer for these services Salary paid to them by employer X (X) X Taxable
  • 60.
    Income from Salary 60 Perquisites/Facilities/Benefits: 7.Utilities [S-13(6)] Electricity Gas Water Telephone Less: payment by employee to employer for these utilities Fair Market Value of utilities X (X) X Taxable
  • 61.
    Income from Salary 61 Perquisites/Facilities/Benefits: 8.Obligation of employee waived by employer [S-13(9)] Waived Amount Taxable 9. Obligation of employee payable to 3rd party paid by employer [S-13(10)] Paid Amount Taxable 10. Property or service provided to employee [S-13(11)] Less: payment by employee to employer Fair Market Value X (X) X Taxable
  • 62.
    Income from Salary 62 Perquisites/Facilities/Benefits: 11.Any other perquisite [S-13(13)] Less: payment by employee to employer for perquisite Fair MV of perquisite X (X) X Taxable
  • 63.
    Income from Salary 63 Perquisites/Facilities/Benefits: 12.Self Hiring of Property [S-15(5)] "Income from Salary" shall include value of accommodation in accordance with Rule-4 "Income from Property" shall include rent income in accordance with Section-15(4)&(5)
  • 64.
    Income from Salary 64 Perquisites/Facilities/Benefits: 13.Superannuation Fund approved by Commissioner in accordance with Part-II of 6th Schedule [Cl-4-6] & 2nd Sched, P-I, Cl-25 : Employer’s Contribution During life time other than above In lieu of annuity On death Payment out of fund: Taxable Exempt Interest Credited
  • 65.
    Income from Salary 65 Perquisites/Facilities/Benefits: 14.Benevolent Fund [2nd Sched, P-I, Cl-24] Any payment in accordance with "Central Employee Benevolent Fund & Group Insurance Act 1969" Exempt
  • 66.
    Income from Salary 66 Exemptions: 1.Foreign Government Officials 2. Diplomatic & United Nations Exemptions 3. International Agreements 4. Perquisites without Marginal Cost to Employer 5. Special Allowance 6. Workers’ Participation Fund 7. Salary income of seafarer 8. Allowances to persons working outside Pakistan 9. Full Time teacher/researcher
  • 67.
    Income from Salary 67 Exemptions: 1.Foreign Government Officials [S-43] Salary of foreign government employee shall be exempt from tax if: (i) employee is citizen of foreign country and not citizen of Pakistan (ii) services performed are similar to those performed by employees of Federal Government in foreign countries (iii) foreign government grants similar exemption to employees of the Federal Government performing similar services in such foreign country
  • 68.
    Income from Salary 68 Exemptions: 2.Diplomatic & United Nations Exemptions [S-42] Following shall be exempt from tax: (i) Individuals entitled to privileges under the Diplomatic and Consular Privileges Act, 1972 (ii) Individuals entitled to privileges under the United Nations (Privileges and Immunities) Act, 1948 (iii) Pension received by citizen of Pakistan due to former employment in the United Nations or its specialized agencies, if the person’s salary from such employment was exempt under this Ordinance
  • 69.
    Income from Salary 69 Exemptions: 3.Exemption under International Agreements [S-44] If Pakistan is not permitted to tax an income under TAX TREATY, it will be exempt from tax Salary received under an AID AGREEMENT is exempt from tax subject to following conditions: (i) Salary received by individual, who is not citizen of Pakistan (ii) Exemption will be to the extent provided in AID AGREEMENT (iii) AID AGREEMENT is between FG≈Fr.G FG ≈PIO (iv) Individual is not resident OR Is resident solely for performance of service under AID AGREEMENT (v) In case AID AGREEMENT is with Foreign Govt. then individual should be citizen of that country (vi) Salary is paid out of funds released to Pakistan under AID AGREEMENT Any income under a bilateral or multilateral technical assistance AGREEMENT is exempt from tax subject to following conditions:: (i) Income is received by person, who is not citizen of Pakistan (ii) Person is engaged as a contractor, consultant, or expert on a project in Pakistan (iii) Exemption will be to the extent provided in AGREEMENT (iv) AGREEMENT is between FG≈Fr.G FG ≈PIO (v) Project is financed out of funds released in accordance with AGREEMENT (vi) Person is not resident OR Is resident solely for performance of service under AGREEMENT (vii) Income is paid out of funds under AGREEMENT
  • 70.
    Income from Salary 70 Exemptions: 4.Perquisites without Marginal Cost to Employer [2nd Sched, P-I, Cl-53A] Hospital/Clinic Educational Institution Hotel/Restaurant Any other notified by FBR Free/subsidized Medical Treatment Free/subsidized education Free/subsidized food during duty hours Totally Exempt
  • 71.
    Income from Salary 71 Exemptions: 5.Special Allowance [2nd Sched, P-I, Cl-39] Any allowance, other than Conveyance and Entertainment Allowance, specially granted to meet expenses wholly and necessarily incurred in performance of office duties Exempt Clarification: The allowance solely expended in the performance of employee’s duty does not include; (i) allowance which is paid in monthly salary on fixed basis or percentage of salary; or (ii) allowance which is not wholly, exclusively, necessarily or actually spent on behalf of the employer
  • 72.
    Income from Salary 72 Exemptions: 6.Workers’ Participation Fund [2nd Sched, P-I, Cl-26] Amount received as worker, out of Workers' Participation Fund Exempt
  • 73.
    Income from Salary 73 Exemptions: 7.Salary Income of Seafarer [2nd Sched, P-I, Cl-4] Salary income shall be exempt if Pakistani seafarer is on Pakistan flag vessel for 183 days or more on vessel Foreign vessel No limit of number of days Following conditions required for exemption: (i) Income remitted to Pakistan (ii) through normal banking channel (iii) within 2 months of relevant tax year
  • 74.
    Income from Salary 74 Exemptions: 8.Allowance to person working outside Pakistan [2nd Sched, P-I, Cl-5] Allowance from Govt of Pakistan to a citizen of Pakistan for rendering services outside Pakistan Exempt
  • 75.
    Income from Salary 75 Exemptions: 9.Full Time teacher/researcher [2nd Sched, P-III, Cl-1(2)] Tax payable in salary shall be reduced by 25% if following conditions are fulfilled: (i) The individual is Full time teacher/researcher (ii) in non-profit education/research institution, duly recognized by a. Higher Education Commission (HEC) b. Board of Education c. University recognized by HEC (iii) including in any Government research institute Above shall not apply to teacher of medical profession who (i) derive income from private medical practice or (ii) receive share of consideration received from patients
  • 76.
    Income from Property Owner/Landlord Property Land/Building Tenant Rentmeans: Amount received/receivable By owner of land/building As consideration to use/occupy OR right to use/occupy the land/building Rent includes: Forfeited deposit on contract for sale of land/building [S-15(1)&(2)] 2 Important Questions: 1. Geographical Source of Income 2. Basis of Taxation 76 Deciding a Property Income case Accrual Basis
  • 77.
    Income from Property 1.Geographical Source of Income [S-101(9) & (10)] 77 Immovable Property situated in Pakistan Right to explore natural resources in Pakistan Rental Income shall be Pakistan Source Income Gain on disposal of above property or right shall also be Pakistan Source Income
  • 78.
    Income from Property DecidingIncome from Property Case: 78 Income from Property derived by a person 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 Rent
  • 79.
    Income from Property DecidingIncome from Property Case: 79 Rent i. 1/10th of advance will be treated as Rent in • TY of receipt & • 9 subsequent TYs ii. Nothing will be included in taxable income, in the tax year in which such advance is refunded iii. If tenancy is terminated before 10 years and previous advance is returned and new advance is received then: 1/10th of advance will be treated as Rent in • TY of receipt & • 9 subsequent Tys NON-ADJUSTABLE Advance (Building) [S-16] automatically included in taxable income because of accrual basis of taxation Advance ADJUSTABLE against Rent Taxable on accrual basis Rent Amount of new advance - Amount charged to tax earlier X X (X)
  • 80.
    Income from Property DecidingIncome from Property Case: 80 Rent [S-15], [S-39] & [S-66] Important !! (i) Rent received/receivable OR Fair Market Rent, which ever is higher, is taxable [S-15(4)] (ii) Above is not applicable if Fair Market Rent has already been included in salary income due to self hiring of property [S-15(5)] (iii) Following amounts shall be included in taxable income under the heads of income mentioned thereagainst; • Ground Rent • Rental income from sub-lease of land or building • Rental income from lease of building, together with Plant & Machinery • Amount of amenities, utilities, other services connected with renting • Amount received as consideration for vacating possession of building (iv) When a property is owned by two or more persons & their share is definite and ascertainable then Persons shall not be treated as AOP Share of each person's income from property shall be taxed separately Income from Other sources [S-39(1)(d)] [S-39(1)(e)] [S-39(1)(f)] & [S-15(3)] [S-39(1)(fa)] & [S-15(3A)] [S-39(1)(k)]
  • 81.
    Income from Property DecidingIncome from Property Case: 81 Allowable Deductions [S-15A] i. Building Repair Allowance ii. Insurance Premium-Building iii. Rates, tax, charge, cess not being Income Tax iv. Ground Rent v. Markup on loan to acquire, construct, renovate, extend, reconstruct property vi. HBFC Loan / Scheduled Bank Loan on scheme based on sharing rent (share in rent+share in appreciation in value) vii. Markup on mortgages/charges 1/5th of rent chargeable to tax Paid/Payable Paid/Payable Paid/Payable Paid/Payable Paid/Payable Paid
  • 82.
    Income from Property DecidingIncome from Property Case: 82 Allowable Deductions [S-15A] viii. Expenses wholly & exclusively for deriving rent including administrative and collection charges ix. Legal Charges x. Irrecoverable Rent xi. Inadmissible deductions [S-21] • Paid/Payable • maximum upto 4% of rent chargeable to tax • must be paid within 3 subsequent tax years • otherwise will be included in taxable income in 4th subsequent tax year • if unpaid amount which is included in taxable income, as above, is subsequently paid, then it will be allowed as deduction in tax year in which it is paid Paid/Payable (to defend title of property or defend any suit connected with property in a court) Conditions: i. Tenancy was bonafide ii. defaulting tenant has vacated property OR steps have been taken to compel tenant to vacate property iii. defaulting tenant is not occupying any other property of same person iv. person has taken all legal steps for recovery OR reasonable grounds exist that legal proceedings will be useless v. rent was previously included in taxable income and tax was duly paid (if irrecoverable rent is subsequently recovered, then it will be included in taxable income in tax year of recovery) will be studied in "Income from Business"
  • 83.
    Income From Business 83 Business[S-2(10)]: Includes; • Trade • Commerce • Manufacture • Profession • Vocation OR adventure/concern in nature of above But does not include EMPLOYMENT Income from Business [S-18]: Following incomes shall be chargeable to tax under head "Income from Business" • Profits & gains • Income derived by trade/profession/similar association • Income from hire/lease • FMV of any benefit* OR perquisite • Management Fee Profit on debt : Lease rentals from lease of any asset shall be "Income from business" if "Profit on debt" earned by & distributed to this distributed share shall be "Income from Business" and not "Income from Other Sources" for Of any business carried on by person from sale of goods OR provision of services to members of tangible movable property from any past, present or perspective business relationship • 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 If person's business is to derive such income then it's "Income from business" otherwise it's "Income from Other Sources” Lessor is scheduled bank, investment bank, DFI, Modaraba, Leasing Co., Mutual fund OR Pvt Equity & venture capital fund Banking Co. or NBFC Skip Definition >>> Income subject to taxation under sections 5A, 5AA, 6, 7 and 7A shall not be chargeable to tax under section 18 Clarification: Income of co-operative societies from the sale of goods, immoveable property or provision of services to its members is and has always been chargeable to tax
  • 84.
    Income From Business 84 ImportantQuestion: 1. Basis of Taxation Deciding a Business Income case
  • 85.
    Basis of Taxation 85 Whenpayable by person When due to person Stock in trade [S-35] Method of Accounting [S-32] 1. The method of accounting should be regularly employed 2. Company must employ accrual basis of accounting. 3. Other persons may apply cash basis of accounting OR accrual basis of accounting 4. FBR can prescribe a class of persons to follow cash or accrual basis of accounting 5. Change in method of accounting: a. Application to Commissioner in writing b. Satisfy commissioner that the change in method of accounting is necessary to clearly reflect taxable income c. Commissioner, if satisfied may approve, by an order in writing, that the method of accounting be changed 6. 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. Accrual Basis of Accounting [S-34] Cash Basis of Accounting [S-33] When paid Incur expense When received Derive income 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 (amount is payable by person when - all events determining liability have occurred - amount of liability can be ascertained with reasonable accuracy) (amount is due to person when he is entitled to receive it) Opening Stock Closing Stock Starting/1st period FMV when stock ventured in business Subsequent Period NRV Cost Lesser of Any of Marginal OR Absorption Costing Absorption Costing Cash Accounting Accrual Accounting
  • 86.
    Deciding Business IncomeCase 86 1. Speculation Business 2. Deductions Allowed 3. Deductions not allowed 4. Assets 5. Acquisition & Cost 6. Depreciation 7. Initial Allowance 8. Disposal & Consideration 9. Depreciation on asset partly used in business 10. Leasing Business 11. Intangibles 12. Pre-commencement Expenditure 13. Scientific Research Expenditure 14. Bad Debts 15. Employee Training & Facilities 16. Profit on Debt, Financial Cost and Lease Payments
  • 87.
    Deciding Business IncomeCase 87 1. Speculation Business [S-19]: Means: business in which, contract for purchase or sale of commodity is settled, 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. contract entered into by member of stock exchange or forward market to guard against jobbing or arbitrage transaction in ordinary course of business 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
  • 88.
    Deciding Business IncomeCase 88 2. Deductions Allowed [S-20]: i. Any expenditure incurred wholly and exclusively for purpose of business ii. Depreciation of tangible assets, amortization of intangible assets & pre-commencement expenditures iii. Legal & financial advisory services & administrative cost incurred by amalgamated company for it's amalgamation iv. Animal used for business & profession becomes permanently disable or is dead then following deduction shall be allowed: (Above is not applicable in case of animals which are stock-in-trade) Actual Cost X Less:Amount realized from animal carcass (X) X
  • 89.
    Deciding Business IncomeCase 89 3. Deductions not Allowed [S-21]: 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: in case of purchase of Raw Material & Finished Goods, the disallowed expense shall be limited to 20% of total purchases iv. Amount of commission paid or payable in excess of 0.2% of Sales of items listed in 3rd Sched of Sales Tax Act, 1990 to a person who is not appearing on ATL under ITO v. 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 meals, refreshment, reasonable leisure facility in accordance with traditions of business & subject to overall norms of business Note: All these people (who are entertained) should be related directly to the person’s business.
  • 90.
    Deciding Business IncomeCase 90 3. Deductions not Allowed [S-21]: v. Contributions to following funds: Un-recognized Provident Fund / Un-approved Pension Fund / Un-approved Superannuation Fund / Un-approved Gratuity Fund vi. 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 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 / Salary / remuneration paid by an AOP to its members
  • 91.
    Deciding Business IncomeCase 91 3. Deductions not Allowed [S-21]: xi. Expenditure under single head of account exceeding Rs 250,000/- paid other than by : a. crossed cheque b. crossed bank draft c. crossed pay order d. other crossed banking instrument e. online transfer f. payment through credit card Above is not applicable to following: a. expenditure not exceeding Rs 25,000/- b. expenditure on account of: • Utility bills • Freight charges • Travel fare • Postage • Taxes/duties/fees/fines
  • 92.
    Deciding Business IncomeCase 92 3. Deductions not Allowed [S-21]: xii. Salary exceeding Rs 25,000/- per month, paid other than by: a. crossed cheque OR b. direct transfer to employee bank account xiii. Capital expenditure xiv. In case of pharmaceutical manufacturer any advertisement/publicity/sales promotion expense > 10% of turnover xv. Utility bills in violation of prescribed conditions and limits xvi. With effect from 1st October 2020, any expenditure attributable to sales made by industrial undertaking, to person required to be registered but not registered under Sales Tax Act 1990. The attributable expense shall be calculated as follows: (A/B) x C Where; A = Total deductions claimed B = Turnover for the Tax Year C = Sales to one un-registered person upto Rs 100 million or above Disallowed expense shall not exceed 10% of claimed deductions FBR may exempt a person from this clause
  • 93.
    Deciding Business IncomeCase 93 4. Assets: i. Depreciable Asset [S-22(15)]: Means any tangible movable property, immovable property or structural improvement 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 obsolescence AND c. is used wholly or partly by person in deriving income from business it shall not include any asset whose entire cost is allowed as deduction under Income Tax Ordinance 2001 ii. Structural Improvement [S-22(15)]: Includes 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. iii. Eligible Depreciable Asset [S-23(5)]: 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 whose entire cost is allowed as deduction under Income Tax Ordinance 2001 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)]
  • 94.
    Deciding Business IncomeCase 94 4. Assets: iv. Business Asset [S-75(7)]: Means asset held wholly or partly for use in business, including stock-in-trade and depreciable asset v. Personal Asset [S-75(7)]: Means asset held wholly for personal use
  • 95.
    Deciding Business IncomeCase 95 5. Acquisition & Cost: i. Acquisition [S-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 ii. Purchase of Asset through Banking Channel [S-75A]: Immovable property having FMV > PKR 5 million OR Any other asset having FMV > PKR 1 million iii. Cost [S-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 If not purchased through banking channel; Then amount shall not be considered as cost i. for calculating depreciation/ amortization and ii. for calculating gain on disposal.
  • 96.
    Deciding Business IncomeCase 96 5. Acquisition & Cost: ii. Cost [S-76]: a. Cost of Passenger transport vehicle not plying for hire shall not exceed Rs 2.5 million. [Section-22(13a)] b. Cost of immovable property shall not include cost of land [Section-22(13b)] c. Forex Gain/loss to be adjusted in cost of asset [Section-76(5 & 6)] • 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 d. Grant, subsidy, rebate, commission or any other assistance in relation to acquisition of asset [Section-76(10)] if chargeable to tax then it will be included in cost of asset and vice versa e. If asset acquired in a non-arm's length transaction, then FMV of asset shall be treated as its cost [Section-78] f. If personal asset is applied to business use, then its FMV shall be treated as its cost [Section-76(3)]
  • 97.
    Deciding Business IncomeCase 97 5. Acquisition & Cost: ii. Cost [S-76]: g. If asset is produced or constructed by person, then its cost will include following:[Section-76(4)] h. 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)] i. If acquisition of an asset is derivation of an amount chargeable to tax, then its cost will include following:[Section-76(8)] j. If acquisition of an asset is derivation of an amount exempt from tax, then its cost will include following:[Section-76(9)] Total production/construction cost X +Incidental expenditure for acquisition / disposal of asset X +Expenditure to alter or improve asset X X Amount chargeable to tax X Amount paid to acquire asset X X Amount exempt from tax X Amount paid to acquire asset X X
  • 98.
    Deciding Business IncomeCase 98 6. Depreciation [S-22]: Method of tax depreciation : Diminishing/Reducing Balance Method Rate of Depreciation : as per 3rd Schedule Part-I Full Year depreciation in year of acquisition No Depreciation in year of disposal 7. Initial Allowance [S-23]: Allowed for "eligible depreciable asset" used 1st time in Pakistan OR Year in which commercial production is started Rate of Initial Allowance : as per 3rd Schedule Part-II which ever is later For assets used for first time on or after 1st July 2020 : Depreciation @ 50% of rate as per 3rd Schedule Part-I shall be allowed in year of acquisition Depreciation @ 50% of rate as per 3rd Schedule Part-I shall be allowed in year of disposal
  • 99.
    Deciding Business IncomeCase 99 8. Disposal and Consideration: i. Disposal [S-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
  • 100.
    Deciding Business IncomeCase 100 8. Disposal and Consideration: ii. Consideration for Disposal [S-77]: a. If Asset is lost or destroyed, then consideration shall include compensation, indemnity or damages received from: • insurance claim • Settlement • judicial decision b. If asset applied to personal use from business use or is discarded, then consideration shall be FMV of asset c. 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 d. 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: Amount Received X FMV of consideration in kind X X FMV of asset at time of disposal X Which ever is higher Actual consideration received on disposal x 2.5 million Actual cost paid to acquire vehicle [Section-77(2)] [Section-77(3)] [Section-22(10)] [Section-77(5)]
  • 101.
    Deciding Business IncomeCase 101 8. Disposal and Consideration: ii. Consideration for Disposal [S-77]: e. If consideration for immovable property exceeds its cost, then it's consideration received shall be treated as cost. f. If asset disposed off in a non-arm's length transaction, then FMV of asset shall be treated as consideration. g. If depreciable asset is exported/transferred outside Pakistan, then its cost shall be treated as consideration received. [Section-22(13d)] [Section-78] [Section-22(14)]
  • 102.
    Deciding Business IncomeCase 102 9. Depreciation on asset partly used in business: i. 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. ii. 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. iii. Written Down Value of such assets shall be calculated, as if the asset was wholly used for business purposes. iv. Asset shall be treated to be wholly owned by the taxpayer if asset is jointly owned by a taxpayer and an Islamic financial institution licensed by SBP or SECP under Musharika or diminishing Musharika arrangement v. On disposal of such asset, following shall be deducted from consideration [Section-22(3)] [Section-22(6)] 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 [Proviso to Section-22(15)] Tax WDV X Add: Depreciation Expense disallowed X X OR
  • 103.
    Deciding Business IncomeCase 103 10. Leasing business: Leasing Co., Investment Bank, Modaraba, Scheduled Bank, Development Finance Institution i. Initial Allowance/First Year Allowance/Accelerated Tax Depreciation or Normal Depreciation is allowed as deduction only against lease rental income ii. Asset shall be treated as used in the business of lessor iii. On completion of lease term, asset shall be transferred to lesee and treated as disposed off by leasing company and the consideration received shall be residual value received by leasing company iv. The cost of asset realized through lease rentals + residual value should not be less than cost of the asset [Sections-22(12), 23(4), 23A(2), 23B(2)] [Section-22(13c)] [Section-77(4)] [Section-77(4)]
  • 104.
    Deciding Business IncomeCase 104 11. Intangibles [S-24]: Means : patent, invention, design or model, secret formula or process, copyright, trade mark, scientific or technical knowledge, computer software, motion picture film, export quotas, franchise, license, intellectual property, or other like property or right, contractual rights and any expenditure that provides an advantage or benefit for a period of more than one year other than expenditure incurred to acquire a depreciable asset or unimproved land i. Cost of Intangibles: Means expenditure incurred in acquiring or creating intangible Includes expenditure for improving or renewing intangible ii. Conditions for amortization: a. intangible is wholly or partly used for business b. normal useful life is more than 1 year iii. Rules for amortization: a. Year of acquisition; Number of days basis (An intangible available for use on a day shall be treated as used on that day) b. Year of disposal; No amortization
  • 105.
    Deciding Business IncomeCase 105 11. Intangibles [S-24]: iv. Rate of amortization: v. Intangible partly used for business and partly for any other use: Amortization expenses shall be restricted to fair proportion of intangible used for business. vi. Disposal: Upon disposal, following shall be included in income from business Cost Useful life in whole years Note: if useful life is not ascertainable, then it will be treated as 25 years Consideration X Written Down Value X X
  • 106.
    Deciding Business IncomeCase 106 12. Pre-commencement Expenditure [S-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 i. Method: Straight line basis ii. Rate: as per 3rd Schedule, Part-III No deduction shall be allowed for expense which allowed as deduction under any other provision of Income Tax Ordinance 2001
  • 107.
    Deciding Business IncomeCase 107 13. Scientific Research Expenditure [S-26]: Expenditure for scientific research Contribution to Scientific Research Institution to do research wholly and exclusively to derive income from business shall be allowed as deduction. • 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 to scientific research institution to do research for business not include expense incurred for o acquisition of depreciable asset or intangible o acquisition of immovable property o ascertaining existance/location/extent/quality of natural deposits • Scientific Research Institution: Means any institution certified by FBR to do scientific research in Pakistan
  • 108.
    Deciding Business IncomeCase 108 14. Bad Debts [S-29]: i. Conditions to claim bad debts as expense a. Amount was previoulsy included in taxable income b. In case of a financial institution, the amount was lent to derive taxable income c. amount is written off as bad debts in accounts d. resonable grounds exist that debt is irrecoverable ii. Subsequent recovery of bad debts written off: Following shall be included in taxable income (10,000) 40,000 Deduction from income from business Included in income from business (20,000) 10,000 (20,000) 60,000 Less: amount previously not allowed Subsequent recovery Case (b) Case (a) 20,000 (80,000) 100,000 amount previously allowed as deduction Whole amount of debt
  • 109.
    Deciding Business IncomeCase 109 15. Employee Training & Facilities [S-27]: Expenditure in respect of following is allowed: a. Educational institution/hospital for benefit of employees/dependents b. Institute for training of industrial workers recognized/aided/funded by Federal Govt / Proviscial Govt / Local Govt c. Training of Pakistani citizen under scheme approved by FBR established in Pakistan
  • 110.
    Deciding Business IncomeCase 110 16. Profit on debt, Financial costs and Lease Payments [S-28]: i. Profit on debt: • on loan utilized for business purposes • paid by bank on deposit accounts ii. Financial costs: • by originator on securitization of receivables in respect of special purpose vehicle (SPV) iii. Lease rentals • paid to scheduled bank, financial institution or approved modaraba, leasing company, SPV • The principal amount in above rental for the cost of passenger transport vehicle not plying for hire shall not exceed Rs 2.5 million iv. Share of profit • under musharika scheme paid to a bank • under musharika scheme paid to certificate holders. Such scheme should be approved by SECP and Religious Board under Modaraba Ordinance 1980 • paid on funds borrowed from modaraba or participation term certificates v. State Bank of Pakistan (SBPs) share of profit paid by • House Building Finance Corporation (HBFC) • National Development Leasing Corporation • Small & Medium Enterprises Bank on investment/credit line provided by SBP
  • 111.
    Capital Gains 111 2 ImportantQuestions: 1. Geographical Source of Income 2. Basis of Taxation Deciding a Capital Gains case
  • 112.
    Geographical Source ofIncome [S-101(13)] & [S-101A] 112 1. Gain on disposal of shares of Resident Company shall be Pakistan Source Income 2. Gain on disposal of Assets outside Pakistan [S-101A]
  • 113.
    Basis of Taxation 113 Accrualbasis, as Gain / Loss is to be taxed in year of disposal [S-37(1)]
  • 114.
    Deciding a CapitalGains Case 114 1. Capital Gains [S-37] 2. Capital Gain on disposal of Securities [S-37A] 3. Special provisions relating to Capital Gains tax [S-100B] 4. Deduction of Losses from Capital Gains [S-38] 5. Rule 13A – 13P 6. Bonus Shares 7. Exemptions 8. Chapter Summary
  • 115.
    Deciding a CapitalGains Case 115 1. Capital Gains [S-37] Capital Asset: Means “property of any kind held by person whether or not connected with business” Does not include i. Stock in trade ii. Depreciable asset iii. Intangibles iv. movable property held for personal use by person or dependents excluding following: a. painting, sculpture, drawing or other work of art b. Jewelry c. rare manuscript, folio or book d. postage stamp or first day cover e. coin or medallion f. Antique [S-37(5)] Capital Loss from disposal of these assets shall not be recognized, only capital gains will be recognized. [S-38(5)] Capital Gain from disposal of immovable property shall be determined on basis of Holding period as follows: upto 1 year >>>>>fully taxable 1 to 2 years>>>>>3/4 taxable 2 to 3 years>>>>>1/2 taxable 3 to 4 years>>>>>1/4 taxable more than 4 years>>>nothing taxable [S-37(3A)] Above gain shall be taxable as separate block of income @ 1st Sched, P-I, Div-VIII
  • 116.
    Deciding a CapitalGains Case 116 1. Capital Gains [S-37] Gain on Capital Asset [S-37(2)]: Consideration - Cost Gain/Loss X (X) X Cost shall not include: • expenses deductible under any other provision of Income Tax Ordinance • inadmissible deductions under section 21 [S-37(4)] FMV on date of acquisition shall be treated as cost in following cases: • gift from a relative as defined in S-85(5), bequest, will • succession, inheritance, devolution • dissolution of AOP • liquidation of company [S-37(4A)] Gain or Loss on disposal shall be recognized in year of disposal even if cash basis of accounting is being adopted. [S-37(1)] If capital asset is held for more than 1 year Then 3/4th of capital gain will be taxable [S-37(3)] No loss on disposal shall be recognized if gain from such asset is not taxable [S-38(2)] this provision is not applicable on disposal of following capital assets: • shares of public company • vouchers of PTC • Modaraba Certificates • Redeemable Capital S-85(5) “relative” means: (a) an ancestor, a descendant of any of the grandparents, or an adopted child, of the individual, or of a spouse of the individual; or (b) a spouse of the individual or of any person specified in clause (a). If a gifted capital asset is disposed off within 2 years, then CIT may use “cost of transferer” as cost instead of “FMV”
  • 117.
    Deciding a CapitalGains Case 117 2. Capital Gains on Securities [S-37A] Security [S-37A(3)] : Means: • share of a public company • voucher of Pakistan Telecommunication Corporation • Modaraba Certificate • an instrument of redeemable capital • debt Securities • derivative products • Unit of exchange traded fund Capital Gain from disposal of security shall be taxed as a separate block of income @ 1st Schedule, Part I, Division VII [S-37A(1)&(4)] Loss from securities shall be setoff only against gains from securities & can be c/f upto 3 subsequent TYs. This c/f is allowed only for loss arising during TY 2019 & onwards. [S-37A(5)] Corporate debt security Term Finance Certificates (TFCs), Sukuk Certificates (Sharia Compliant Bonds), Registered Bonds, Commercial Papers, Participation Term Certificates (PTCs) and all kinds of debt instruments issued by any Pakistani or foreign company or corporation registered in Pakistan [S-37A(3A)(a)] Government debt security Treasury Bills (T-bills), Federal Investment Bonds (FIBs), Pakistan Investment Bonds (PIBs), Foreign Currency Bonds, Government Papers, Municipal Bonds, Infrastructure Bonds and all kinds of debt instruments issued by Federal Government, Provincial Governments, Local Authorities and other statutory bodies [S-37A(3A)(b)] This section is not applicable on Banking Co & Insurance Co [S-37A(1)] shares will be treated as security, if at time of disposal, the company was a public company
  • 118.
    Deciding a CapitalGains Case 118 3. Special provisions relating to Capital Gains tax [S-100B] Capital gains on disposal of listed securities and tax thereon, subject to section 37A, shall be determined in accordance with Eighth Schedule This section is not applicable on following: • mutual fund • banking company • NBFC • insurance company • modaraba • company, in respect of debt securities only and • any other person notified by FBR
  • 119.
    Deciding a CapitalGains Case 119 4. Deduction of Losses from Capital Gains [S-38] If Gains from capital asset are not taxable Then Losses from same asset shall not be allowed for setoff [S-38(2)] Loss on following assets shall not be recognized: (a) A painting, sculpture, drawing or other work of art; (b) jewellery; (c) a rare manuscript, folio or book; (d) a postage stamp or first day cover; (e) a coin or medallion; or (f) an antique. [S-38(5)]
  • 120.
    Deciding a CapitalGains Case 120 • Gain/loss computation shall be made on basis of FIFO inventory accounting method • FIFO not applicable in case of same day purchases, instead Average Method to be used [R-13N(5)] • NCCPL shall add 0.5% of trade (as incidental expenses) to transaction cost and consideration [R-13N(8)] • Capital loss shall be adjusted only against capital gain of security 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.
  • 121.
    Deciding a CapitalGains Case 121 Bonus Shares • Cost of Bonus shares would be computed by spreading the cost of old shares over the old shares plus the bonus shares taken together. • Thereafter, this new cost of a share would be the same for old and new shares. • When bonus shares are disposed of, new cost will be taken for computation of capital gain. • Similarly, when the old shares are disposed of, new cost will be taken for computation of capital gain. Old Shares Bonus Shares No. of shares Price per share Total Investment 100 11 1,100 10 0 0 New Cost 110 1,100 = 10
  • 122.
    Deciding a CapitalGains Case 122 Following Capital Gains are exempt from tax: 1. Transfer of a stock exchange membership rights 2. Capital gain on sale of shares of industrial undertaking set up in Export Processing Zones
  • 123.
    Capital Gains 123 Under section38(5) No loss to be recognized, only gains will be recognized Security [S-37A] Others Others Personal Use Immoveable Property Moveable Property Stock in trade Depreciable asset Intangibles Asset Banking Co Insurance Co Listed Security Separate Block Tax @ 1st Sched, P-I, D-VIII Separate Block Tax @ 1st Sched, P-I, D-VII Disposal Loss Gain Refer losses Holding period > 1 year No Yes Fully taxable 3/4th will be taxable Fully taxable in case of Banking Co/Insurance Co in respect of following: • shares of public company • vouchers of PTC • Modaraba Certificates • Redeemable Capital Other than following: mutual fund, banking company, NBFC, insurance company, modaraba, company, in respect of debt securities only and any other person notified by FBR Gain/loss calculation As per 8th Sched Un-listed Security
  • 124.
    Income from OtherSources 124 1. What is it ? [Section-39] 2. Basis of Taxation 3. Deductions Allowed
  • 125.
    Income from OtherSources 125 What is it ? [S-39] Income Loan/Advance/Deposit for issuance of shares/Gift Arrears of Profit on Debt
  • 126.
    Income from OtherSources 126 Income Income of every kind RECEIVED in a tax year, which is not included in any other Head of Income and is not exempt from tax and is not subject to tax under section 5, 6 & 7 Includes: 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. Consideration for vacating possession of building, reduced by amount paid to acquire possession of building {to be included in taxable income of current tax year and 9 succeeding tax years in equal proportion.} xiv. Amount received from Approved Income Payment Plan OR Approved Annuity Plan xv. Amount/FMV of property received without consideration [except gift from relative as defined in S-85(5)] S-85(5) “relative” means: (a) an ancestor, a descendant of any of the grandparents, or an adopted child, of the individual, or of a spouse of the individual; or (b) a spouse of the individual or of any person specified in clause (a).
  • 127.
    Income from OtherSources 127 Loan/Advance/Deposit for issuance of shares/Gift Loan/Advance/Deposit for issuance of shares/Gift shall be treated as "Income from Other Sources" if: received from a tax payer other than a Banking Company OR Financial Institution 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
  • 128.
    Income from OtherSources 128 Arrears of Profit on Debt from investment in: - National Saving Deposit Certificate - Defense Saving Certificate Which has resulted in income chargeable to tax at a higher rate of tax 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
  • 129.
    Income from OtherSources 129 Basis of Taxation [S-39(1)] Income of every kind in a tax year RECEIVED
  • 130.
    Income from OtherSources 130 Deductions Allowed [S-40] 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 & Machinery. 4. Initial Allowance on Plant & Machinery is allowed as deduction in case where Building is leased together with Plant & Machinery Deductions not allowed: 1. Expenditure allowed as deduction under any other head of income 2. Inadmissible Expenses under section 21
  • 131.
    Losses 131 1. Set Offof Losses [Section-56, 58 & 59] 2. Carry Forward of Losses [Section-57, 58 & 59] 3. Limitation on Setoff & Carry Forward of Losses [S-59A] 4. Foreign Losses [S-104]
  • 132.
    1. Set Offof Losses [Section-56, 58 & 59] 132 Loss arising from Set off against Salary Property Spec. Business Non Spec. Capital Gains Other Sources Salary Others Immovable Security Spec. Non Spec. Business Capital Gains Other Sources Security Immovables Others Property Not Allowed [S-56(1)] Loss not Possible O O O O P O P P O P P O O O O O O P O O O P O O O O P O O O P P O P P O P P O P P O • In case of losses from multiple heads of income, the loss from Business shall be set off last [S-56(3)] • 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 P O P O O O P
  • 133.
    2. Carry Forwardof Losses [Section-57, 58 & 59] 133 Salary Property Spec. Business Non Spec. Capital Gains Other Sources Security Immovables Others Loss not possible C/f Not Allowed Carry forward allowed upto 6 subsequent tax years Loss from earliest tax year shall be set off first 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; • Adjustment of un-absorbed depreciation in subsequent tax years shall be limited to 50% of business income of subsequent year • Above limit shall not apply if taxable income is less than Rs 10 million Un-absorbed depreciation shall be considered last C/f Not Allowed Carry forward allowed upto 3 subsequent tax years only if loss pertains to TY 2019 and onwards C/f Not Allowed Carry forward allowed upto 6 subsequent tax years Loss from earliest tax year shall be set off first Loss sustained from 1st July 2020 & onwards by a Resident Company managing hotel can be c/f upto 8 years
  • 134.
    3. Limitation onSetoff & Carry Forward of Losses [S-59A] 134 i. 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 ii. In case of business loss, it shall be available to successor only by way of inheritance and shall not be available to any other successor iii. Loss due to depreciation, initial allowance and amortization etc shall be carried forward to unlimited periods • Adjustment of un-absorbed depreciation in subsequent tax years shall be limited to 50% of business income of subsequent year • Above limit shall not apply if taxable income is less than Rs 10 million iv. Business loss, speculation loss and capital loss cannot be carried forward unless determined by an order made under sections 120, 121 or 122
  • 135.
    4. Foreign Losses[S-104] 135 1. Expenses incurred to derive foreign income are deductible only against that income 2. Foreign loss from a head of income, if not adjusted in relevant tax year, could be carried forward upto 6 subsequent tax years 3. 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. loss from Foreign Source Income can only be carried forward to 6 subsequent tax years against same head of income from foreign source
  • 136.
    Deductible Allowances 136 1. Zakat[S-60] 2. Workers’ Welfare Fund [S-60A] 3. Workers’ Participation Fund [S-60B] 4. Profit on Debt [S-60C] 5. Education Expenses [S-60D]
  • 137.
    Deductible Allowances 137 1. Zakat[S-60] Zakat under Zakat and Ushr Ordinance 1980 Profit on Debt Any other paid Allowed as deduction from “Income from Other Sources” Allowed as deductible allowance Not allowed If total income is less than amount of Zakat then: • Refund • Carry forward • Carry back
  • 138.
    Deductible Allowances 138 2. Workers’Welfare Fund [S-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 deductible allowance will be allowed for this payable expense
  • 139.
    Deductible Allowances 139 3. Workers’Participation Fund [S-60B] • Amount paid under "Companies' Profit (Workers' Participation) Act 1968" will be allowed as deductible allowance
  • 140.
    Deductible Allowances 140 4. Profiton Debt [S-60C] Allowed to Individual 1. 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 2. Deductible allowance shall not exceed lower of following: • 50% of taxable income • Rs 2,000,000/- 3. Deductible allowance, if not utilized fully against taxable income shall not be carried forward to subsequent tax year Other Details Deductible Allowance for Profit on Debt on loan utilized for construction of new house or acquisition of house Purpose
  • 141.
    Deductible Allowances 141 5. EducationExpenses [S-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 1. Deductible allowance shall not exceed lower of following: • 5% of tuition fee paid • 25% of taxable income • 60,000 x Number of children 2. Deductible allowance, if not utilized fully against taxable income shall not be carried forward to subsequent tax year 3. Employer is not allowed to deduct these expenses while withholding tax from salary under section 149 Other Details Deductible Allowance for Tuition Fees paid in a Tax Year Purpose
  • 142.
    Tax Credits 142 1. Taxpayable by a tax payer shall be reduced by the amount of Tax Credits allowed to the tax payer. [Section-4(2)] 2. Tax credits allowed to the tax payer will be categorized under following: a) Foreign Tax Credits [Section-103] b) Tax Credits under Part X of Chapter III c) Tax Credit for Advance Tax and Tax deducted at source [Section 147 & Section 168] 3. Where more than one tax credits are allowed to a tax payer in a tax year then tax credits shall be applied in above mentioned order [Section-4(3)]
  • 143.
    Foreign Tax Credits[S-103] 143 1. Needless to mention that Foreign Tax Credit is available to “Resident Person” in respect of “Foreign Source Income” taxable in Pakistan 2. Foreign Tax Credit shall be: a) Foreign Tax paid b) Pakistan Tax Payable in respect of income 3. Where tax payer has FSI under more than one Head of Income, this section shall be applied separately to each Head of Income 4. Unadjusted foreign tax credit shall not be refunded, carried back or carried forward 5. To avail this tax credit, foreign taxes must be paid with in two years after end of tax year in which foreign income was derived Which ever is Less Including “Withholding Tax” (Average rate of Pakistan Income Tax) Tax Imposed ÷ Taxable Income FSI after deducting directly relatable expenses & Expenses apportioned in accordance with S-67 x (Net Foreign Source Income)
  • 144.
    2. Where individualis member of AOP, component "B" shall include share of profit from AOP, even if tax on income of AOP has been paid by the AOP [Section-65(1)(b)] 3. Component "A" shall be computed after including the share of profit from AOP [Section-65(1)(a)] Tax Credits under Part X of Chapter III 144 1. Tax Credits of each item under Part X of Chapter III [Section 61, 62, 62A & 63] shall be calculated using following formula: Tax Credit B A x C = Where: A = Tax Assessed before any Tax Credit under Part X of Chapter III B = Taxable Income C = This amount will be calculated for each type of tax credit under section 61 to 63
  • 145.
    Tax Credits underPart X of Chapter III 145 61. Charitable donations 62. Tax credit for investment in shares and insurance 62A. Tax credit for investment in health insurance 63. Contribution to an Approved Pension Fund 64D. Tax credit for point of sale machine 65F. Tax credit for certain persons 65G. Tax credit for specified industrial undertakings
  • 146.
    146 Tax Credits underPart X of Chapter III 1. Charitable Donations [S-61] Eligible Person Value “C” of formula Remarks Any Person Lesser of: i. Amount of Donation ii. 30% of Taxable Income in case of Individual and AOP In case of donation to associate, 15% of Taxable Income iii. 20% of Taxable income in case of Company In case of donation to associate, 10% of Taxable Income Amount paid or Property given to: i. Board of education or University in Pakistan established under Federal or Provincial Law ii. Educational Institution, hospital or relief fund established in Pakistan by Federal, Provincial or Local Govt. iii. Any non profit organization or any person eligible for tax credit under section 100C iv. Entities mentioned in 13th Schedule. If any property is given as donation, its FMV at the time it is given as donation shall be treated as donation. Valuation of property shall be carried out in accordance with Rule-228(4) & valuation of vehicles shall be carried out in accordance with Rule-228(2) If donation is given in Cash, then it must be paid by a Crossed Cheque
  • 147.
    147 Tax Credits underPart X of Chapter III 2. Investment in Shares & Insurance [S-62] Eligible Person Value “C” of formula Remarks Resident person other than Company Lesser of: i. Cost of Acquisition of shares OR Sukuks OR unit of exchange traded fund OR Insurance Premium ii. 20% of Taxable Income iii. Rs =2,000,000/- Conditions in case of acquisition of shares: i. Only new shares of listed company ii. Person is original allottee of shares OR Shares are acquired from Privatization Commission of Pakistan Conditions in case of sukuks: i. Only new sukuks offered to public by listed company ii. Person is original allottee of sukuks iii. Sukkuks are traded on stock exchange in Pakistan Conditions in case of unit of exchange traded fund: i. Units 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“ If shares/sukkuks are disposed off within 24 months of its acquisition, OR insurance policy is surrendered within two years of its acquisition then tax payable shall be increased by the amount of tax credit previously claimed due to acquisition of these shares OR insurance policy. OR
  • 148.
    148 Tax Credits underPart X of Chapter III 3. Investment in health insurance [S-62A] Eligible Person Value “C” of formula Remarks Resident Person being filer other than Company deriving "Salary Income" OR "Income from Business" Lesser of: i. Premium OR contribution paid ii. 5% of Taxable Income iii. Rs =150,000/- The health insurance premium/contribution is paid to: - Insurance company - Registered by SECP under Insurance Ordinance 2000
  • 149.
    149 Tax Credits underPart X of Chapter III 4. Contribution to approved pension fund [S-63] Eligible Person Value “C” of formula Remarks Eligible Person under section 2(19A) having "Salary" or "Income from Business" Lesser of: i. Contribution to Approved Pension Fund under Voluntary Pension System Rules 2005 ii. 20% of Taxable Income Additional 2% of taxable income for each year above 40 years of age shall be allowed to person who fulfills following conditions; a) Joined pension fund after 01.07.2006 b) Joined pension fund at 41 years or above c) Additional 2% will be allowed in first 10 years d) Total contribution after addition of 2% should not exceed 50% of Taxable Income of preceding tax year e) Additional 2% is allowed only upto 30.06.2019 Limit: Above 20% and additional 2% combined, should not exceed 30% of taxable income of preceding tax year Tax Credit under this section is not available to transfer of balance: From: i. approved employment pension scheme ii. annuity scheme iii. approved occupational saving scheme To: individual pension account with any pension fund manager
  • 150.
    150 Tax Credits underPart X of Chapter III 5. Tax credit for point of sale machines [S-64D] Eligible Person Amount of tax credit Remarks Any person who is required to integrate with Board’s computerized system for real time reporting of sale or receipt Lesser of: i. Amount invested for purchase of machine ii. Rs 150,000/- per machine Point of sale machine means; a machine meant for - processing and recording the sale transactions for goods or services, either - in cash or through - credit cards - debit cards - online payments in an internet enabled environment.
  • 151.
    151 Tax Credits underPart X of Chapter III 6. Tax Credit for Certain Persons [S-65F] Eligible Person Amount of Tax Credit Remarks Following persons / Income: 1. persons engaged in coal mining projects in Sindh, supplying coal exclusively to power generation projects 2. a startup as defined in Section 2(62A) for the tax year in which the startup is certified by the Pakistan Software Export Board and the next following two TYs 3. Income from exports of computer software or IT services or IT enabled services as defined in Section 2(30AD) and (30AE) upto 30.06.2025: Provided that 80% of the export proceeds is brought into Pakistan in foreign exchange through normal banking channels 100% of tax payable including - minimum - alternate corporate tax and final tax Conditions for tax credit: 1. Return has been filed 2. In case of withholding agent, withholding tax statement filed 3. Sales tax returns (Federal/provincial) for the TY filled
  • 152.
    152 Tax Credits underPart X of Chapter III 7. Tax Credit for specified industrial undertaking [S-65G] Eligible Person Amount of Tax Credit Remarks 1. Green field industrial undertaking as defined in Section 2(27A) engaged in ; (i) the manufacture of goods or materials or the subjection of goods or materials to any process which substantially changes their original condition; or (ii) ship building: Provided that: a) the person incorporated between the 30.06.2019 and 30.06.2024 b) the person is not - formed by the splitting up or reconstitution of an undertaking already in existence OR - formed by transfer of machinery, plant or building from an undertaking established in Pakistan prior to commencement of the new business and - is not part of an expansion project 2. Industrial undertaking set up by 30.06.2023 and engaged in the manufacture of plant, machinery, equipment and items with dedicated use (no multiple uses) for generation of renewable energy from sources like solar and wind, for 5 years, from the date such industrial undertaking is set up 25% of eligible investment, against - Tax payable - Minimum tax and - Final taxes. Excess tax credit can be c/f upto 2 subsequent Tys Eligible Capital Investments: Investment made in purchase and installation of new machinery, buildings, equipment, hardware and software, except self-created software and used capital goods
  • 153.
    Tax Credit forAdvance Tax and Tax deducted at source [S-147 & S-168] 153
  • 154.
    Taxation of Individual 154 1.Principle of Taxation of Individual [S-86] 2. Deceased Individual [S-87] 3. Income of Minor Child [S-91] 4. Author [S-89]
  • 155.
    1. Principle ofTaxation of Individual [S-86] 155 Taxable income of each individual shall be determined separately
  • 156.
    2. Deceased Individual[S-87] 156 Legal representative of deceased individual shall be responsible for following: tax payable, if individual had not died 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 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
  • 157.
    3. Income ofMinor Child [S-91] 157 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 inheritance Minor Child [S-2(33)] means an individual who is under the age of eighteen years at the end of a tax year
  • 158.
    4. Author [S-89] 158 Authorhas 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
  • 159.
    Taxation of Associationof Persons 159 1. Principles of taxation of AOP [S-92] 2. Individual as member of AOP [S-88] 3. Change in control of an entity [S-98] 4. Change in the constitution of an association of persons [S-98A] 5. Discontinuance of business or dissolution of an association of persons [S-98B] 6. Succession to business, otherwise than on death [S-98C]
  • 160.
    1. Principles ofTaxation of AOP [S-92] 160 • AOP shall be taxed separately from its members. • If AOP has paid tax on its profits, then share of profit of member shall be exempt from tax. • 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
  • 161.
    2. Individual asMember of AOP [S-88] 161 Share of profit from AOP* , of individual member, shall be included in taxable income of individual member for rate purposes Tax Payable = (A/B) x C * excluding share in profit from income under FTR [S-4(4) & S-169(2)] A = is the amount of tax that would be assessed to the individual if share of profit from AOP were chargeable to tax B = taxable income if share of AOP was chargeable to tax C = actual taxable income
  • 162.
    1. Change incontrol of an entity [S-98] 162 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: • it continues same business after the change, until the loss has been fully set off OR • until the loss has been fully set off, it does not engage in any new business or investment (where the principal purpose of the entity or the beneficial owners of the entity is to utilize the loss so as to reduce tax payable on the income from the new business or investment) "Entity" means Company or AOP "Underlying 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
  • 163.
    2. Change inthe constitution of an association of persons [S-98A] 163 If a change occurs in constitution of AOP then; 1. liability of filing the return of AOP shall be on those persons who were members of AOP at the time of filing of return 2. income of AOP shall be apportioned among the members on time basis 3. 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
  • 164.
    3. Discontinuance ofbusiness or dissolution of an association of persons [S-98B] 164 1. 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 2. In case of death of member of AOP, the tax payable can be recovered from legal heirs of the deceased
  • 165.
    4. Succession tobusiness, otherwise than on death [S-98C] 165 1. If successor carries on the same business, then following shall apply: • predecessor shall be liable to pay tax on income before date of succession and • successor shall be liable to pay tax on the income after the date of succession 2. If predecessor cannot be found, then successor shall be liable to pay tax on income before date of succession 3. Where any tax payable under this section in respect of such business or profession cannot be recovered from the predecessor, it shall be recoverable from the successor, who shall be entitled to recover it from the predecessor.
  • 166.
    Exemptions 166 1. Income TaxOrdinance [Section 41 – 55] 2. The Second Schedule [MS Excel Summary] i. Part I : Exemption from Total Income ii. Part II : Reduction in Tax Rates iii. Part III : Reduction in Tax Liability iv. Part IV : Exemption from Specific Provisions
  • 167.
    167 12. Tax Regimes Headsof Income Salary Income Property Income Business Income Capital Gains Income from Other Sources Total Income - Deductible Allowances Taxable Income Rate from 1st Schedule Tax Imposed/Chargeable - Tax Credits Tax Payable - Withholding Tax/Adv Tax Income Tax Demand/Refund Normal Tax Reg. Separate Taxation Tax Collected/deducted is final tax Minimum Tax Reg 10 10 10 10 10 10% 50 (2) (10) 1 40 4 (1) 3 Final Tax Regime Losses Exemptions Final Tax Presumptive Tax Regime Final Tax
  • 168.
    168 Tax Collected/Deducted isFinal Tax Tax at Source Section 169 [S-154] Exports [S-156] Prizes & Winnings
  • 169.
    169 Separate Taxation Separate TaxationSeparate Block of Income Section 8 [S-5] Tax on Dividends [S-5AA] Tax on Investment in Sukuks [S-6] Tax on certain payments to Non Residents [S-7] Tax on shipping and air transport income of a non-resident person [S-7A] Tax on shipping of Resident Person [S-7B] Tax on Profit on Debt • To be discussed in relevant Head of Income
  • 170.
    170 Dividend [S-2(19)] Company Shareholder Deducttax on gross amount @ 1st Sched, Part-III, Div-I Cash Dividend [S-150] Dividend in specie [S-236S] Tax deducted will be Adjustable Pay tax on gross amount @ 1st Sched, Part-I, Div-III Tax Imposed will be Final Tax [S-5] Shareholder shall pay Final Tax after adjustment of tax deducted at source
  • 171.
    171 Return on Sukuk SpecialPurpose Vehicle OR Company Sukuk Holder Deduct tax on gross amount @ 1st Sched, Part-III, Div-IB Return on Sukuk [S-150A] Tax deducted will be Adjustable Pay tax on gross amount @ 1st Sched, Part-I, Div-IIIB Tax Imposed will be Final Tax [S-5AA] Receiver of return shall pay Final Tax after adjustment of tax deducted at source
  • 172.
    172 Special Purpose Vehicle Wapda Wapda First Sukuk Company Ltd Sukuk Holder SukukCertificate Funds for Purchase of Turbines Funds Title to Turbines Lease Turbines Lease Rental Return to Sukuk Holder Pay Exercise Price Get Title of Turbines Redeem Sukuk Return Sukuk Purchase Turbines
  • 173.
    173 Payments to NonResidents Payment to Non Resident for Pakistan Source Royalty , Fee For Offshore Digital Services OR FFTS Non-Resident Deduct tax on gross amount @ 1st Sched, Part-I, Div-IV Payment to Non Resident [S-152(1)] Tax deducted will be Adjustable Pay tax on gross amount @ 1st Sched, Part-I, Div-IV Tax Imposed will be Final Tax [S-6] This section shall not apply on following: 1. Royalty: where property or right giving rise to royalty is effectively connected with PE of Non Resident. Such royalty shall be treated as business income of PE of Non Resident. 2. FFTS & FFODS: where services giving rise to fee are rendered through PE of Non Resident. Such fee shall be treated as business income of PE of Non Resident. 3. Royalty or FFTS exempt from tax.
  • 174.
    174 [S-2(54)] Royalty Royalty meansany amount Paid Payable Periodical or lumpsum as consideration for following (vi) (vii) supply of any assistance ancillary and subsidiary to any property or right mentioned above disposal of any right or property mentioned above (v) Use or right to use Industrial/commercial/scientific equipment (iv) Supply of Technical/industrial/commercial/scientific Knowledge/skill (iii) receive or right to receive visual image or sound transmitted by Satellite/Cable Optic Fiber Similar technology in connection with Television Radio Internet broadcasting (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 (i) Use or right to use Patent Invention Design Model Secret formula Process Trade mark Other like property/right Business Income
  • 175.
    175 [S-2(23)] FFTS means anyconsideration, whether periodical or lump sum, for rendering : (b) consideration chargeable under head "Salary" (a) consideration for services in connection with construction, assembly or like project It does not include following Including services of technical or other personnel Managerial Technical Consultancy Services Provision of Service vs Know-how Business Income FFTS
  • 176.
    176 [S-2(22B)] Fee forOffshore Digital Services means any consideration for providing following services by Non-Resident • online advertising including • digital advertising space, • designing, creating, hosting or maintenance of websites, • digital or cyber space for websites, • advertising, e-mails, online computing, blogs, online content and online data, • providing any facility or service for uploading, storing or distribution of digital content including • digital text, digital audio or digital video, online collection or processing of data related to users in Pakistan, • any facility for online sale of goods or services or any other online facility
  • 177.
    177 [S-113] Minimum Tax Company ResidentTurnover 100 million or above In TY 2017 or after Tax payable is less than [%age given in column (3) of Table in 1st Sched, P-I, Div-IX] x [Turnover] Due to: (i) Loss of the year (ii) Set off of loss of earlier year (iii) Exemption from tax (iv) Tax Credits OR Rebates (v) Allowances/Deductions (including Depreciation & Amortization) Individual AOP Specific Conditions General Conditions ✓ Turnover shall be treated as income ✓ Pay tax on basis of turnover @ 1st Sched, Part-I, Div-IX ✓ The excess tax paid due to minimum tax, shall be carried forward for adjustment against tax liability upto 5 subsequent tax years Tax Payable shall not include: (i) Final Tax (ii) Tax Payable u/s 4B Turnover means: Gross Sales Gross Fees Gross Fees Share of profit from AOP Excluding Sales Tax FED Trade Discount (mentioned on invoice) Deemed income on which Final Tax has been paid Deemed income on which Final Tax has been paid Deemed income on which Final Tax has been paid Including Commission Turnover means: Gross Sales Gross Fees (Services) Gross Fees (Contracts) Share of Company in AOP in above amounts Explanation: Turnover will include receipts from sale of immoveable property, taxable as business income.
  • 178.
  • 179.
  • 180.
  • 181.
  • 182.
  • 183.
  • 184.
  • 185.
  • 186.
  • 187.
  • 188.