Income Tax Ordinance 2001 narrated in slides

1. Income From BusinessHeads of Income
105
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

2. Income From BusinessHeads of Income
106
5 Important Questions:
1. Permanent Establishment
2. Geographical Source of Income
3. Taxation of PENR
4. Thin Capitalization
5. Basis of Taxation
Deciding a
Business Income
case

3. Permanent Establishment [S-2(41)]Heads of Income
107
Includesmeans a fixed place of business through which the business of the
person is wholly or partly carried on
Not a PE
Purchase
Contract
Activities
continued for
more than 90
days in past
12 months
Dependent
Agent
Independent
Agent
Place of management, branch, office,
factory, workshop, premises for
soliciting orders, warehouse, permanent
sales exhibition or sales outlet, other
than Liaison Office
mine, oil or
gas well,
quarry or
any other
place of
extraction of
natural
resources
an
agricultural,
pastoral or
forestry
property
Construction
/ Installation
Project
Furnishing
Services
through
employees
Agent in
Pakistan
Substantial
equipment
installed to
generate
income
PE
Sales
Contract
Liaison Office
Negotiates
Contracts?
No
Yes Dependent Agent:
has and habitually exercises an authority to conclude contracts on behalf of the other person
has no such authority, but habitually maintains a stock-in-trade or other merchandise from which the
agent regularly delivers goods or merchandise on behalf of the other person;
Business

4. Geographical Source of Income
[S-101(2),(3),(4),(5),(13A),(14)]
Heads of Income
108
Business
Business Income
Insurance/Reinsurance
Premium
PENR
Business Income is attributable to
PSI
Business
carried on
in Pakistan
Non ResidentResident
Resident Insurance
Company
Remuneration is paid by
Resident OR PENR
Professional Services
Services of Entertainers
Sports Person
Independent services
including:
Business
connection in
Pakistan
Other activities
similar to those
provided through
PE of Non
Resident
Sale of Goods
similar to those
sold by PE of Non
Resident
Gain on disposal
of any asset used
to derive above
Pakistan Source
Income
Overseas Insurance Co.

5. Taxation of PENR [S-105]Heads of Income
109
Business
1. Profits of PENR shall be determined separately from Non-Resident as independent and distinct entity
2. Expenses incurred by PENR for the purpose of business shall be allowed as deduction, whether incurred in Pakistan or elsewhere
3. Head Office expenses upto a maximum of [HO Expenses x Turnover of PENR / Worldwide Turnover]
Not Allowed
(O)
Allowed
(P)
Oi) Royalty OR Fees for use of tangible OR intangible asset by PENR
ii) Compensation for services performed for PENR (including management services)
Amounts paid/payable by PENR to its Head Office or to another PE:
iii) Profit on Debt on money lent to PENR (except in case of Banking Business)
P
O
O
Above expenses actually paid by Head Office or by another PE and reimbursed by PENR
Amounts charged by PENR to its Head Office or to another PE:
Oi) Royalty OR Fees for use of tangible OR intangible asset by PENR
Insurance Premium on above Profit on debt paid by NR
iii) Profit on Debt on money lent to PENR (except in case of Banking Business)
P
O
O
Above expenses actually paid by PENR and reimbursed by Head Office or by another PE
Head Office Expenses:
Means; executive or general
administrative expense incurred by NR
for business operations in Pakistan of
PENR
Includes:
• Rent, rates taxes except foreign
income tax
• Repair
• Insurance premium for risk of
damage outside Pakistan
• Salary to Head Office employee
• Travelling expense of employee
• Any other prescribed expenseProfit on Debt paid by NR to finance operations of PENR O
ii) Compensation for services performed for PENR (including management services) O

6. Thin Capitalization [S-106]Heads of Income
110
Business
Foreign Company/Foreign Controller (FC) Foreign Controlled Resident Company (FCRC)
(50% or more ownership held by FC, individually OR through associates)
Other than;
- Financial Institution
- Banking Company
- Branch of FC
Foreign Equity
Foreign Debt
Associate
Profit on Debt
Dividend Not an expense
Is an expense
Foreign Equity Foreign Debt
Foreign Debt
Foreign Debt
Profit on
Debt
Allowed as
expense
Foreign
Debt
Profit on
Debt
Not Allowed
as expense
Profit on Foreign Debt, which exceeds 3 times of Foreign Equity at
any time during TY will not be allowed as expense
Foreign Debt:
Greatest amount at any time in TY of following;
(i) Debt payable to FC OR Associate of FC:
(Profit on debt is deductible expense for
FCRC & POD is not taxable in hands of FC
OR is taxable @ lower than corporate rate
of tax applicable on FC)
(ii) Debt payable to any other person who
owes similar debt to FC OR Associate of FC
Foreign Equity:
Sum of following at beginning of TY;
(i) Paid up Capital owned by FC OR Associate of
FC
(ii) Proportionate share premium account
balance
(iii) Proportionate accumulated profit balance
(iv) Proportionate Asset Revaluation Reserve
(i) Debt owed by FCRC to FC OR Associate of FC
(ii) Proportionate accumulated losses balance

7. Basis of TaxationHeads of Income
111
Business
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 paidIncur expense
When receivedDerive 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

8. Deciding Business Income CaseHeads of Income
112
Business
1. Speculation Business
2. Deductions Allowed
3. Deductions not allowed
4. Assets
5. Acquisition & Cost
6. Depreciation
7. Initial Allowance
8. First Year Allowance
9. Accelerated Tax Depreciation to Alternate Energy Projects
10. Disposal & Consideration
11. Depreciation on asset partly used in business
12. Leasing Business
13. Intangibles
14. Pre-commencement Expenditure
15. Scientific Research Expenditure
16. Bad Debts
17. Employee Training & Facilities
18. Profit on Debt, Financial Cost and Lease Payments

9. Deciding Business Income CaseHeads of Income
113
Business
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

10. Deciding Business Income CaseHeads of Income
114
Business
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)
Actula Cost X
Less:Amount realized from animal carcass (X)
X

11. Deciding Business Income CaseHeads of Income
115
Business
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. 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

12. Deciding Business Income CaseHeads of Income
116
Business
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

13. Deciding Business Income CaseHeads of Income
117
Business
3. Deductions not Allowed [S-21]:
xi. Expenditure under single head of account exceeding Rs 50,000/- 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 10,000/-
b. expenditure on account of:
• Utility bills
• Freight charges
• Travel fare
• Postage
• Taxes/duties/fees/fines

14. Deciding Business Income CaseHeads of Income
118
Business
3. Deductions not Allowed [S-21]:
xii. Salary exceeding Rs 15,000/- 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 > 5% of turnover