CAF - 2 Tax Practices, Tax Year 2024.pdf

Fawad Hassan
Fawad Hassan-
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CAF – 02 Tax Practices Notes for September 2022 attempt TaxYear 2024 Notes for March 2024 attempt
Table of Contents 1. Syllabus 2. System of taxation in Pakistan 3. Constitutional provisions on taxes 4. Ethics 5. Basic concepts of taxation 6. Salary 7. Income from property 8. Income from business 9. Capital gains 10. Income from other sources 11. Losses, deductible allowances, tax credits and exemptions 12. Taxation of individual and association of persons 13. Tax Regimes 14. Returns, Assessment, Records & Audit 15. Appeals, References, Petitions 16. Sales Tax Computations 17. Registration, Deregistration, Suspension, Blacklising 18. Returns & Records 19. Sales Tax Schedules 20. Income Tax Rates 2
Syllabus 5-10% 10% 60-75% 20-30% 5% 75% 60% 20% 30% O b j e ctive, system and historical background, c o n s t i t u t i o n a l p r o v i s i o n s a n d e t h i c s Income Ta x Sales Tax 70 80 30 35 10 15 Teaching Hours Chapter 1 – 3 Chapter 4 – 16 Chapter 17 – 19 3
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 7. Revenue Sources 4
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 Income Tax Act 1860 repealed in 1865 2.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 5
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 6
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 7
Basics of Taxation 1. Equality 2. Certainty 3. Convenience of Payment 4. Economy of Collection 8
Principles of Levy 1. Benefit Principle 2. Ability to Pay Principle 3. Equal Distribution Principle 9
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 10
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 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 7. Provincial Financial Procedures 1. Federal & Provincial Government The Constitution of The Islamic Republic of Pakistan 1973 12
Federal 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 Rules Act Constitution of Pakistan Regulations Relevant Department (FBR) Law 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
Provincial Financial Procedures Federation Province Federal Consolidated Fund Provincial Consolidated Fund Prime Minister Chief Minister 20
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 21
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. continued …. 22
Ethics Tax Avoidance vs Tax Evasion Payment of tax is avoided by complying with law but defeating the intension of the law. Payment of tax is avoided through illegal means or fraud. Taking advantage of loopholes in the law Employing unfair means & practices It is done by complying the provision of law It is an unlawful way of paying lower taxes and defaulter may be punished. Tax Avoidance is also called tax planning and is done before the tax liability arises. Tax evasion is blatant fraud and is done after the tax liability has arisen. Eg. making use of donating to approved charity recognized by the FBR, to claim a tax credit in future when computing the tax liability. Falsifying income tax return 23
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 Tax Calculation for Accounting Entries 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. 24
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 25
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) Permanant Establishment g) Women Enterprise 26
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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 28
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 29
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 30
2. Type of Person a) Tax Payer [S-2(66)] b) Person [S-80] 31
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 32
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 33
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 34
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” 35
3. Residential Status a) Resident Individual b) Resident Company c) Resident AOP 36
a) Resident Individual [S-82] i. Not based on Nationality, based on Physical Presence in Pakistan ii. Government servant posted abroad will be treated as resident, irrespective of his physical stay in Pakistan iii. Citizen of Pakistan, present in one foreign country iv. Citizen of Pakistan, who is not resident taxpayer of any other country, will be treated as resident v. 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 0 – 182 days Resident 37
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 38
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 39
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 40
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 41
4. Tax Regimes 1) Normal Tax Regime 2) Separate Block of Income 3) Final Tax Regime a) Income subject to Separate Charge b) Presumptive Tax Regime 4) Minimum Tax Regime 42
1. Normal Tax Regime Revenue – Allowable Deductions = Taxable Income Taxable Income x Tax Rate = Tax Imposed Tax Imposed – Tax Credits = Tax Payable 43
2. Separate Block of Income i. Tax rates defined for some specific incomes, which are not final tax ii. These are income specific rates and “type of person” does not affect it. iii. eg. Tax on Capital Gain on Immovable Property, Tax on Capital Gain on Securities etc 44
3(a). Final Tax Regime – i. Tax Imposed is final tax ii. Income is not chargeable to tax under any Head of Income iii. No deduction is allowed for expenditure incurred in deriving such income iv. Not Allowed : Set off of Losses, Deductible Allowances, Tax Credits v. e.g., Dividend, Profit on Debt, Royalty, FFTS, FFOSDS etc Income subject to Separate Charge 45
3(b). Final Tax Regime – Presumptive Taxation i. Tax deducted/collected is final tax ii. Tax deducted/collected is not refundable iii. Income is not chargeable to tax under any Head of Income iv. No deduction is allowed for expenditure incurred in deriving such income v. Not Allowed : Set off of Losses, Deductible Allowances, Tax Credits vi. e.g., Exports & Prizes and Winnings etc 46
4. Minimum Tax Regime i. Tax already collected/deducted is minimum tax. eg. Advance tax on commercial imports, Tax at source under section 153 etc ii. Tax on turnover is minimum tax. eg. Minimum tax under section 113 47
5. Common Rules a) Apportionment of Deduction b) Recouped Expenditure [S-70] c) Currency Conversion [S-71] d) Cessation of a Source of Income [S-72] e) Fair Market Value [S-68] f) Receipt of Income [S-69] g) Rule to prevent Double Derivation and Double Deduction [S-73] 48
a) Apportionment of Deductions [S-67 & Rule 13] Apportionment of Deductions [S-67] Any expenditure/deduction/allowance that relates with following shall be apportioned on reasonable basis: a) derivation of income under more than one head of income b) derivation of taxable income and income under Final Tax Regime c) derivation of income under any head of income and for any other purpose continued …….. “Deduction” will follow its “Income” 49
a. Apportionment of Deductions [S-67 & Rule 13] Apportionment of Expenditures Deductions and Allowances [Rule-13] Clearly Allocable to an Income Not clearly Allocable to an Income deductible/chargeable against that particular income Apportion on basis of following formula: Common Exp x Gross Receipts of a class of income/Gross Receipts of all classes of income Class of Income may include following: Salary Income Income from Property Income from Business (Speculative/Non Speculative) Capital Gains Other Sources Separate Block of Income Exempt Income Income under FTR Pakistan Source Income Foreign Source Income continued …….. 50
a. Apportionment of Deductions [Rule 13] a) Gross receipts are net of Sales Tax & Federal Excise Duty b) Nature and source of each class of income shall be considered for allocation c) Above allocation shall be certified by CA or CMA, in case accounts are required to be audited. The certificate shall be accepted by CIR only if variation in allocation from these rules is not more than 10% d) In case accounts are not required to be audited then apportionment shall be accepted by CIR only if variation in allocation from these rules is not more than 10% e) In certain transactions where net gains, brokerage, commission or other income is taken, than Gross Profits shall be taken as Gross Receipts 51
b) Recouped Expenditure [S-70] • will be treated as Income in the year of receipt. c) Currency Conversion [S-71] • all amounts shall be taken in Pak Rupee. • In case of foreign currency, it will be converted to Pak Rupee at SBP conversion rate on date when amount is taken into account for the purpose of Income Tax d) Cessation of Source of Income [S-72] • income derived before cessation of a source of income shall be chargeable to tax as if the source of income has not ceased f) Receipt of Income [S-69] – Income shall be treated as received, if: • amount actually received by person, • applied on behalf of person on his instructions or under any law • made available to the person g) Rule to prevent double derivation and double deduction [S-73] • Any income taxed on accrual basis shall not be taxed again on receipt basis and vice versa • Any expenditure deducted on accrual basis shall not be taxed on payment basis and vice versa 52
e) Fair Market Value Immovable Property • FBR shall, from time to time, determine FMV of immovable property of an area, through notification in official gazette • If value not determined by FBR then following shall determine FMV o District Officer (Revenue) o Provincial or Other Authority authorized in this behalf for stamp duty • price it would ordinarily fetch on sale or supply in the open market • FMV shall be determined without considering • following: o restriction on transfer o convertablility to cash • If price not Ascertainable as above, then CIT will determine FMV In case of • Property • Rent • Asset • Service • Benefit • Perquisite Others 53
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) 54
7. Important Definitions Public Company [S-2(47)] means • a company in which 50% or more shares are held by o Faderal Government OR o Provincial Government OR o Foreign Government OR o Foreign Company owned by Foreign Government OR • a company whoes shares are traded on a stock exchange registered in Pakistan and remained listed at end of the year • a unit trust, whose units are widely available to the public AND • any other trust as defined in the Trusts Act, 1882 55
7. Important Definitions Private Company [S-2(45)] • means a company that is not a Public Company Non Profit Organization [S-2(36)] means any person other than Individual which is any of the following; • established for religious, educational, charitable, welfare or development purposes OR • promotion of amature sport • formed and registered under any law as non-profit organization • approved by the Commissioner for specified period AND • none of the assets of such person are available for private benefit to any other person 56
7. Important Definitions Small & Medium Enterprise (SME) [S-2(59A)] means a person; • engaged in manufacturing u/s 153(7)(iv) AND • turnover in a TY does not exceed Rs 250 million If turnover in TY exceeds Rs 250 million Then it will not be an SME in that TY and in any subsequent TYs 57
7. Important Definitions Small Company [S-2(59AB)] means a company which fulfills all of following conditions: • registered under Companies Act 2017, on or after 01.07.2015 • (Paid up Capital + Undistributed Reserves) =< Rs 50 million AND • Number of employees =< 250 (at any time during tax year) AND • Annual Turnover =< Rs 250 million AND • not formed by splitting up OR reconstitution of a company already in existence AND • is not a small and medium enterprise 58
Permanent Establishment [S-2(41)] Includes means 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 [S-2(30C)] Negotiates Contracts? No Yes Fixed Place of business, used or maintained by person Virtual business presence i.e., business through internet 59
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7. Important Definitions Woman enterprise means • a start-up established on or after 01 July 2021 as o sole proprietorship concern owned by a woman or o an AOP all of whose members are women or o a company whose 100% shareholding is held by women Taxation • Tax payable shall be reduced by 25% • This benefit will not be available to business that is formed by o transfer or o reconstitution or o splitting up of an existing business. 61
Income from Salary Employee Employment Employer Means any individual engaged in employment Means any person who engages and remunerates an employee Includes: i. Directorship or any other office involved in management of company OR ii. a position entitling the holder to a fixed or ascertainable remuneration OR iii. holding or acting in any public office 3 Important Questions: 1. Geographical Source of Income 2. Basis of Taxation 3. Residential Status recently changed Heads of Income Deciding a Salary case 62
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 Salary Pension/Annuity Resident FSI PSI PENR Born by Paid by Heads of Income 63
Income from Salary 2. Basis of Taxation 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 Salary Heads of Income 64
Income from Salary 3. Residential Status Recently Changed 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 Salary Heads of Income 65
Income from Salary Deciding a Salary case: 1. Salary Definition 2. Deductions 3. Perquisites/Facilities/Benefits 4. Exemptions Salary Heads of Income 66
Income from Salary 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 Salary Heads of Income 67
Income from Salary Leave Encashment [2nd Schedule, Part-I, Clause-19]: Encashment of Leave Preparatory to Retirement Of (i) Government Employee (ii) Member of Armed Forces Exempt from Tax Definition Salary Heads of Income 68
Income from Salary 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 Definition Salary Heads of Income 69
Income from Salary 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 Definition Salary Heads of Income 70
Income from Salary 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 Definition Salary Heads of Income 71
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% Definition Salary Heads of Income 72
Income from Salary Profits in lieu of salary [S-12(2)(e)] (i) Payment of Employer's Contribution from provident fund (ii) Amount on termination of employment, whether voluntary basis or under an agreement (iii) Compensation for redundancy or loss of employment (e.g., Golden Hand Shake) (iv) Consideration for employee's agreement to : • enter into employment agreement • accept changes to conditions of employment • a restrictive covenant to any past, present or future employment Includes: [S-12(6)] Tax payer has option to get it taxed @ last 3 years average rate of tax Last 3 year’s taxable income Last 3 year’s tax liability = Average rate of tax Definition Salary Heads of Income 73
Income from Salary 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 Definition Salary Heads of Income 74
Income from Salary Deductions: Section 12(4): No deduction shall be allowed for any expense incurred by employee in deriving salary income. Salary Heads of Income 75
Income from Salary 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 Salary Heads of Income 76
Income from Salary 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 Perks Salary Heads of Income 77
Income from Salary 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 Perks Salary Heads of Income 78
Income from Salary 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 Perks Salary Heads of Income 79
Income from Salary 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 Perks Salary Heads of Income 80
Income from Salary 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 2024. You are required to calculate his taxable income and tax payable under each of following situations: (i) 100% tax is to be borne by employer (ii) 40% of tax is to be borne by employer and balance to be borne by Mr. A (iii) Rs 50,000 is to be borne by employer and balance to be borne by Mr. A (iv) Mr. A shall pay only Rs 50,000 as tax and balance tax to be borne by employer Perks Salary Heads of Income 81
Income from Salary Perquisites/Facilities/Benefits: 5. Tax on Salary Born by Employer [S-12(3)] Perks Salary Heads of Income 82
Income from Salary Perquisites/Facilities/Benefits: 5. Tax on Salary Born by Employer [S-12(3)] Perks Salary Heads of Income 83
Income from Salary Perquisites/Facilities/Benefits: 5. Tax on Salary Born by Employer [S-12(3)] Perks Salary Heads of Income 84
Income from Salary Perquisites/Facilities/Benefits: 5. Tax on Salary Born by Employer [S-12(3)] Perks Salary Heads of Income 85
Income from Salary 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 Perks Salary Heads of Income 86
Income from Salary 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 Perks Salary Heads of Income 87
Income from Salary 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 Perks Salary Heads of Income 88
Income from Salary 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 Perks Salary Heads of Income 89
Income from Salary 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) Perks Salary Heads of Income Analysis Scenario 1 Scenario 2 Scenario 3 Taxable Income Basic Salary House Rent Allowance Valuation of Accommodation Property Income 100 45 0 45 100 0 45 45 100 0 45 45 190 190 190 Cash Position Income: Salary Rent received Expense: - Rent 145 45 (45) 100 45 (0) 100 45 (0) 145 145 145 90
Income from Salary 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 Perks Salary Heads of Income 91
Income from Salary 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 Perks Salary Heads of Income 92
Income from Salary 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 Salary Heads of Income 93
Income from Salary 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 Salary Heads of Income Exemptions 94
Income from Salary 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 Salary Heads of Income Exemptions 95
Income from Salary 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 any person (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 Salary Heads of Income Exemptions FG can exempt income of any person, for any official development assistance financed loans and grants-in-aid 96
Income from Salary 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 Salary Heads of Income Exemptions 97
Income from Salary 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 Salary Heads of Income Exemptions 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 98
Income from Salary Exemptions: 6. Workers’ Participation Fund [2nd Sched, P-I, Cl-26] Amount received as worker, out of Workers' Participation Fund Exempt Salary Heads of Income Exemptions 99
Income from Salary 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 Salary Heads of Income Exemptions 100
Income from Salary 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 Salary Heads of Income Exemptions 101
Income from Salary Exemptions: 9. Full Time teacher/researcher [2nd Sched, P-III, Cl-1(2)] Salary Heads of Income Exemptions 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 102
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 Deciding a Property Income case Accrual Basis Heads of Income 103
Income from Property 1. Geographical Source of Income [S-101(9) & (10)] Property 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 Heads of Income 104
Income from Property Deciding Income from Property Case: 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 Property Heads of Income 105
Income from Property Deciding Income from Property Case: 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) Property Heads of Income 106
Income from Property Deciding Income from Property Case: 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)] Property Heads of Income 107
Income from Property Deciding Income from Property Case: 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 Property Heads of Income 108
Income from Property Deciding Income from Property Case: Allowable Deductions [S-15A] viii. Expenses wholly & exclusively for deriving rent including administrative and collection charges ix. Legal Charges x. Irrecoverable Rent xi. Any Expenditure • Paid/Payable • maximum upto 4% of rent chargeable to tax 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) Allowed on accrual basis, 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. Property Heads of Income 109
Income from Property Deciding Income from Property Case: Allowable Deductions [S-15A] xii. Any expenditure xiii. Inadmissible deductions [S-21] allowed to a person under this section as a deduction shall not be allowed as a deduction under any other head of income. will be studied in "Income from Business" Property Heads of Income 110
Income From Business 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 Heads of Income 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 111
Income From Business Important Question: 1. Basis of Taxation Deciding a Business Income case Heads of Income 112
Basis of Taxation 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 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 Heads of Income Value of benefit, from trading liability for which deduction was allowed, will be business income 113
Deciding Business Income Case 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 Business Heads of Income 114
Deciding Business Income Case 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 Business Heads of Income 115
Deciding Business Income Case 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 Business Heads of Income 116
Deciding Business Income Case Business Heads of Income 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. 117
Deciding Business Income Case 3. Deductions not Allowed [S-21]: vi. Contributions to following funds: Un-recognized Provident Fund / Un-approved Pension Fund / Un-approved Superannuation Fund / Un-approved Gratuity Fund vii. 50% of contribution to following funds: Approved Gratuity Fund / Approved Pension Fund / Approved superannuation fund viii. 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 ix. Penalty / fine for violation of any law x. Personal expenditure xi. Amount transferred to Reserve OR capitalization of profits in any way xii. Profit on debt / Brokerage / commission / Salary / remuneration paid by an AOP to its members Business Heads of Income 118
Deciding Business Income Case 3. Deductions not Allowed [S-21]: xiii. 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. Company [from date notified by FBR] b. expenditure not exceeding Rs 25,000/- c. expenditure on account of: • Utility bills • Freight charges • Travel fare • Postage • Taxes/duties/fees/fines Business Heads of Income 119
Deciding Business Income Case 3. Deductions not Allowed [S-21]: xiv. Expenditure (paid/payable) by a Company, under single head of account exceeding Rs 250,000/- other than by Digital Meansfrom business bank account of the taxpayer notified to the Commissioner under section 114A 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 This clause will be applicable from date notified by FBR Business Heads of Income Means digital payments and financial services including but not limited to • online portals or platforms for digital payments/receipts; • online interbank fund transfer services; • online bill or invoice presentment and payment services; • over the Counter digital payment services or facilities; • card payments using o Point of Sale terminals, o QR codes, o mobile devices, o ATMs, o Kiosk or • any other digital payments enabled devices or • any other digital or online payment modes. 120
Deciding Business Income Case Business Heads of Income 3. Deductions not Allowed [S-21]: xv. Salary exceeding Rs 32,000/- per month, paid other than by: a. crossed cheque OR b. direct transfer to employee bank account OR c. Digital Means xvi. Capital expenditure xvii. In case of pharmaceutical manufacturer any advertisement/publicity/sales promotion expense > 10% of turnover xviii. Utility bills in violation of prescribed conditions and limits xix. 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 121
Deciding Business Income Case Business Heads of Income 3. Deductions not Allowed [S-21]: xx. any expenditure attributable to sales claimed by any person who is required to integrate but fails to integrate his business with FBR through approved fiscal electronic device and software Provided that disallowance of expenditure under this clause shall not exceed 8%of the allowable deduction. 122
Deciding Business Income Case 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 e. immovable property OR structural improvement to immovable property 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)] Business Heads of Income 123
Deciding Business Income Case 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 Business Heads of Income 124
Deciding Business Income Case Business Heads of Income 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. Penalty @ 5% of higher of FBR value or DC rate will be payable 125
Deciding Business Income Case 5. Acquisition & Cost: ii. Cost [S-76]: a. Cost of Passenger transport vehicle not plying for hire shall not exceed Rs 7.5 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)] Business Heads of Income 126
Deciding Business Income Case 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 Business Heads of Income 127
Deciding Business Income Case 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 Business Heads of Income 128
Deciding Business Income Case 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 Business Heads of Income 129
Deciding Business Income Case 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 7.5 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 7.5 million Actual cost paid to acquire vehicle [Section-77(2)] [Section-77(3)] [Section-22(10)] [Section-77(5)] Business Heads of Income 130
Deciding Business Income Case 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)] Business Heads of Income 131
Deciding Business Income Case 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)] Business Heads of Income Tax WDV X Add: Depreciation Expense disallowed X X OR 132
Deciding Business Income Case 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)] Business Heads of Income 133
Deciding Business Income Case 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 Business Heads of Income 134
Deciding Business Income Case 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 Business Heads of Income 135
Deciding Business Income Case 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 Business Heads of Income 136
Deciding Business Income Case 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 Business Heads of Income 137
Deciding Business Income Case 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 Business Heads of Income 138
Deciding Business Income Case 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 Business Heads of Income 139
Deciding Business Income Case 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 Business Heads of Income F o l l o w i ng shall be allowed as expense 140
Capital Gains 2 Important Questions: 1. Geographical Source of Income 2. Basis of Taxation Deciding a Capital Gains case Heads of Income 141
Geographical Source of Income [S-101(13)] Gain on disposal of shares of Resident Company shall be Pakistan Source Income Capital Gains Heads of Income 142
Basis of Taxation Accrual basis, as Gain / Loss is to be taxed in year of disposal [S-37(1)] Capital Gains Heads of Income 143
Deciding a Capital Gains Case 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 Capital Gains Heads of Income 144
Deciding a Capital Gains Case 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 Gains Heads of Income Capital Gain from disposal of immovable property shall be taxable as separate block of income @ 1st Sched, P-I, Div-VIII 145
Deciding a Capital Gains Case 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)] Gain or Loss on disposal shall be recognized in year of disposal even if cash basis of accounting is being adopted. [S-37(1)] No loss on disposal shall be recognized if gain from such asset is not taxable [S-38(2)] Capital Gains Heads of Income 146
Deciding a Capital Gains Case 1. Capital Gains [S-37] Advance Tax on Shares [S-37(6-10)]: Capital Gains Heads of Income Seller Buyer Shares Payment Deduct Advance Tax @ 10% of FMV S-68 Pay to FBR within 15 days Application to CIT requesting payment without deduction of Adv. Tax OR deduction at reduced rate CIT agreed (after inquiry) Pay without deducting Advance Tax Furnish prescribed information to CIT within 30 days of sale CIT may also demand information through notice S-101A(4) Without reduction of liabilities 147
Deciding a Capital Gains Case 2. Capital Gains on Securities [S-37A] Security [S-37A(3)] : Means: • share of a public company • voucher of PTC • 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)] Section 37 shall apply and section 37A shall not apply on disposal of shares • of a listed company, made otherwise than through stock exchange & are not settled through NCCPL. The provisions of section 37 shall apply on such disposal of shares • through IPO during listing process except where details are provided to NCCPL • By Banking Co & Insurance Co [S-37A(1)] Capital Gains Heads of Income shares will be treated as security, if at time of disposal, the company was a public company 148
Deciding a Capital Gains Case 3. Special provisions relating to Capital Gains tax [S-100B] Capital gains on disposal of listed securities and tax thereon, including super tax under section 4C, 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 Capital Gains Heads of Income 149
Deciding a Capital Gains Case 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) jewelry; (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)] Capital Gains Heads of Income 150
Deciding a Capital Gains Case • 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 Heads of Income Capital Gains 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. 151
[S-236Z] Bonus Shares issued by Companies Shareholder Every Company Bonus Shares Withhold 10% Bonus Shares Remaining Shares Pay tax @ 10% Share Price Collect tax Tax not paid by shareholder within 15 days of share issuance Pay tax @ 10% of Share value within 15 days of book closure Dispose off shares to extent tax not paid by shareholder Final Tax Release Shares Listied Co.: Day-end price on 1st day of book closure Other Company: Prescribed value Heads of Income Capital Gains 152
Deciding a Capital Gains Case Heads of Income Capital Gains 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 3. Capital gain on sale of immovable property, earned by dependent of Shaheed belonging to Pakistan Armed Forces or a person who dies during service of armed forces or Federal or Provincial Governments 4. Capital Gain Tax rates shall be reduced by a. 50%, on first sale of immovable property allotted to employee of Armed forces OR FG OR PG (serving or retired) b. 75% on sale of above immovable property, after 3 years of acquisition 153
Capital Gains 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 Fully taxable 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 Capital Gains Heads of Income 154
Income from Other Sources 1. What is it ? [Section-39] 2. Basis of Taxation 3. Deductions Allowed Heads of Income 155
Income from Other Sources Other Sources What is it ? [S-39] Income Loan/Advance/Deposit for issuance of shares/Gift Arrears of Profit on Debt Heads of Income 156
Income from Other Sources 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)] xvi. Bonus Shares Other Sources Heads of Income 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). 157
Income from Other Sources 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 Other Sources Heads of Income 158
Income from Other Sources 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 Other Sources Heads of Income 159
Income from Other Sources Basis of Taxation [S-39(1)] Income of every kind in a tax year RECEIVED Other Sources Heads of Income 160
Income from Other Sources 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 Other Sources Heads of Income 161
Losses 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] Heads of Income 162
1. Set Off of Losses [Section-56, 58 & 59] Losses 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 Heads of Income P O P O O O P 163
2. Carry Forward of Losses [Section-57, 58 & 59] 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 Losses Heads of Income Loss sustained from 1st July 2020 & onwards by a Resident Company managing hotel can be c/f upto 8 years 164
3. Limitation on Setoff & Carry Forward of Losses [S-59A] 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 Losses Heads of Income 165
4. Foreign Losses [S-104] 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 Losses Heads of Income 166
Deductible Allowances 1. Zakat [S-60] 2. Workers’ Welfare Fund [S-60A] 3. Workers’ Participation Fund [S-60B] 4. Education Expenses [S-60D] Heads of Income 167
Deductible Allowances 1. Zakat [S-60] Deductible Allowances 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 Heads of Income 168
Deductible Allowances 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 Heads of Income 169
Deductible Allowances 3. Workers’ Participation Fund [S-60B] • Amount paid under "Companies' Profit (Workers' Participation) Act 1968" will be allowed as deductible allowance Deductible Allowances Heads of Income 170
Deductible Allowances 4. 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 Deductible Allowances Heads of Income 171
Tax Credits 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)] Heads of Income 172
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CAF - 2 Tax Practices, Tax Year 2024.pdf
CAF - 2 Tax Practices, Tax Year 2024.pdf
CAF - 2 Tax Practices, Tax Year 2024.pdf
CAF - 2 Tax Practices, Tax Year 2024.pdf
CAF - 2 Tax Practices, Tax Year 2024.pdf
CAF - 2 Tax Practices, Tax Year 2024.pdf
CAF - 2 Tax Practices, Tax Year 2024.pdf
CAF - 2 Tax Practices, Tax Year 2024.pdf
CAF - 2 Tax Practices, Tax Year 2024.pdf
CAF - 2 Tax Practices, Tax Year 2024.pdf
CAF - 2 Tax Practices, Tax Year 2024.pdf
CAF - 2 Tax Practices, Tax Year 2024.pdf
CAF - 2 Tax Practices, Tax Year 2024.pdf
CAF - 2 Tax Practices, Tax Year 2024.pdf
CAF - 2 Tax Practices, Tax Year 2024.pdf
CAF - 2 Tax Practices, Tax Year 2024.pdf
CAF - 2 Tax Practices, Tax Year 2024.pdf
CAF - 2 Tax Practices, Tax Year 2024.pdf
CAF - 2 Tax Practices, Tax Year 2024.pdf
CAF - 2 Tax Practices, Tax Year 2024.pdf
CAF - 2 Tax Practices, Tax Year 2024.pdf
CAF - 2 Tax Practices, Tax Year 2024.pdf
CAF - 2 Tax Practices, Tax Year 2024.pdf
CAF - 2 Tax Practices, Tax Year 2024.pdf
CAF - 2 Tax Practices, Tax Year 2024.pdf
CAF - 2 Tax Practices, Tax Year 2024.pdf
CAF - 2 Tax Practices, Tax Year 2024.pdf
CAF - 2 Tax Practices, Tax Year 2024.pdf
CAF - 2 Tax Practices, Tax Year 2024.pdf
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CAF - 2 Tax Practices, Tax Year 2024.pdf

  • 1. CAF – 02 Tax Practices Notes for September 2022 attempt TaxYear 2024 Notes for March 2024 attempt
  • 2. Table of Contents 1. Syllabus 2. System of taxation in Pakistan 3. Constitutional provisions on taxes 4. Ethics 5. Basic concepts of taxation 6. Salary 7. Income from property 8. Income from business 9. Capital gains 10. Income from other sources 11. Losses, deductible allowances, tax credits and exemptions 12. Taxation of individual and association of persons 13. Tax Regimes 14. Returns, Assessment, Records & Audit 15. Appeals, References, Petitions 16. Sales Tax Computations 17. Registration, Deregistration, Suspension, Blacklising 18. Returns & Records 19. Sales Tax Schedules 20. Income Tax Rates 2
  • 3. Syllabus 5-10% 10% 60-75% 20-30% 5% 75% 60% 20% 30% O b j e ctive, system and historical background, c o n s t i t u t i o n a l p r o v i s i o n s a n d e t h i c s Income Ta x Sales Tax 70 80 30 35 10 15 Teaching Hours Chapter 1 – 3 Chapter 4 – 16 Chapter 17 – 19 3
  • 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 7. Revenue Sources 4
  • 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 5
  • 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 6
  • 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 7
  • 8. Basics of Taxation 1. Equality 2. Certainty 3. Convenience of Payment 4. Economy of Collection 8
  • 9. Principles of Levy 1. Benefit Principle 2. Ability to Pay Principle 3. Equal Distribution Principle 9
  • 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 10
  • 11. 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 11
  • 12. 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 7. Provincial Financial Procedures 1. Federal & Provincial Government The Constitution of The Islamic Republic of Pakistan 1973 12
  • 13. Federal 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 Rules Act Constitution of Pakistan Regulations Relevant Department (FBR) Law 13
  • 14. 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
  • 16. 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
  • 17. 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
  • 18. 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
  • 19. 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
  • 20. Provincial Financial Procedures Federation Province Federal Consolidated Fund Provincial Consolidated Fund Prime Minister Chief Minister 20
  • 21. 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 21
  • 22. 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. continued …. 22
  • 23. Ethics Tax Avoidance vs Tax Evasion Payment of tax is avoided by complying with law but defeating the intension of the law. Payment of tax is avoided through illegal means or fraud. Taking advantage of loopholes in the law Employing unfair means & practices It is done by complying the provision of law It is an unlawful way of paying lower taxes and defaulter may be punished. Tax Avoidance is also called tax planning and is done before the tax liability arises. Tax evasion is blatant fraud and is done after the tax liability has arisen. Eg. making use of donating to approved charity recognized by the FBR, to claim a tax credit in future when computing the tax liability. Falsifying income tax return 23
  • 24. 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 Tax Calculation for Accounting Entries 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. 24
  • 25. 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 25
  • 26. 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) Permanant Establishment g) Women Enterprise 26
  • 27. 27
  • 28. 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 28
  • 29. 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 29
  • 30. 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 30
  • 31. 2. Type of Person a) Tax Payer [S-2(66)] b) Person [S-80] 31
  • 32. 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 32
  • 33. 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 33
  • 34. 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 34
  • 35. 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” 35
  • 36. 3. Residential Status a) Resident Individual b) Resident Company c) Resident AOP 36
  • 37. a) Resident Individual [S-82] i. Not based on Nationality, based on Physical Presence in Pakistan ii. Government servant posted abroad will be treated as resident, irrespective of his physical stay in Pakistan iii. Citizen of Pakistan, present in one foreign country iv. Citizen of Pakistan, who is not resident taxpayer of any other country, will be treated as resident v. 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 0 – 182 days Resident 37
  • 38. 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 38
  • 39. 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 39
  • 40. 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 40
  • 41. 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 41
  • 42. 4. Tax Regimes 1) Normal Tax Regime 2) Separate Block of Income 3) Final Tax Regime a) Income subject to Separate Charge b) Presumptive Tax Regime 4) Minimum Tax Regime 42
  • 43. 1. Normal Tax Regime Revenue – Allowable Deductions = Taxable Income Taxable Income x Tax Rate = Tax Imposed Tax Imposed – Tax Credits = Tax Payable 43
  • 44. 2. Separate Block of Income i. Tax rates defined for some specific incomes, which are not final tax ii. These are income specific rates and “type of person” does not affect it. iii. eg. Tax on Capital Gain on Immovable Property, Tax on Capital Gain on Securities etc 44
  • 45. 3(a). Final Tax Regime – i. Tax Imposed is final tax ii. Income is not chargeable to tax under any Head of Income iii. No deduction is allowed for expenditure incurred in deriving such income iv. Not Allowed : Set off of Losses, Deductible Allowances, Tax Credits v. e.g., Dividend, Profit on Debt, Royalty, FFTS, FFOSDS etc Income subject to Separate Charge 45
  • 46. 3(b). Final Tax Regime – Presumptive Taxation i. Tax deducted/collected is final tax ii. Tax deducted/collected is not refundable iii. Income is not chargeable to tax under any Head of Income iv. No deduction is allowed for expenditure incurred in deriving such income v. Not Allowed : Set off of Losses, Deductible Allowances, Tax Credits vi. e.g., Exports & Prizes and Winnings etc 46
  • 47. 4. Minimum Tax Regime i. Tax already collected/deducted is minimum tax. eg. Advance tax on commercial imports, Tax at source under section 153 etc ii. Tax on turnover is minimum tax. eg. Minimum tax under section 113 47
  • 48. 5. Common Rules a) Apportionment of Deduction b) Recouped Expenditure [S-70] c) Currency Conversion [S-71] d) Cessation of a Source of Income [S-72] e) Fair Market Value [S-68] f) Receipt of Income [S-69] g) Rule to prevent Double Derivation and Double Deduction [S-73] 48
  • 49. a) Apportionment of Deductions [S-67 & Rule 13] Apportionment of Deductions [S-67] Any expenditure/deduction/allowance that relates with following shall be apportioned on reasonable basis: a) derivation of income under more than one head of income b) derivation of taxable income and income under Final Tax Regime c) derivation of income under any head of income and for any other purpose continued …….. “Deduction” will follow its “Income” 49
  • 50. a. Apportionment of Deductions [S-67 & Rule 13] Apportionment of Expenditures Deductions and Allowances [Rule-13] Clearly Allocable to an Income Not clearly Allocable to an Income deductible/chargeable against that particular income Apportion on basis of following formula: Common Exp x Gross Receipts of a class of income/Gross Receipts of all classes of income Class of Income may include following: Salary Income Income from Property Income from Business (Speculative/Non Speculative) Capital Gains Other Sources Separate Block of Income Exempt Income Income under FTR Pakistan Source Income Foreign Source Income continued …….. 50
  • 51. a. Apportionment of Deductions [Rule 13] a) Gross receipts are net of Sales Tax & Federal Excise Duty b) Nature and source of each class of income shall be considered for allocation c) Above allocation shall be certified by CA or CMA, in case accounts are required to be audited. The certificate shall be accepted by CIR only if variation in allocation from these rules is not more than 10% d) In case accounts are not required to be audited then apportionment shall be accepted by CIR only if variation in allocation from these rules is not more than 10% e) In certain transactions where net gains, brokerage, commission or other income is taken, than Gross Profits shall be taken as Gross Receipts 51
  • 52. b) Recouped Expenditure [S-70] • will be treated as Income in the year of receipt. c) Currency Conversion [S-71] • all amounts shall be taken in Pak Rupee. • In case of foreign currency, it will be converted to Pak Rupee at SBP conversion rate on date when amount is taken into account for the purpose of Income Tax d) Cessation of Source of Income [S-72] • income derived before cessation of a source of income shall be chargeable to tax as if the source of income has not ceased f) Receipt of Income [S-69] – Income shall be treated as received, if: • amount actually received by person, • applied on behalf of person on his instructions or under any law • made available to the person g) Rule to prevent double derivation and double deduction [S-73] • Any income taxed on accrual basis shall not be taxed again on receipt basis and vice versa • Any expenditure deducted on accrual basis shall not be taxed on payment basis and vice versa 52
  • 53. e) Fair Market Value Immovable Property • FBR shall, from time to time, determine FMV of immovable property of an area, through notification in official gazette • If value not determined by FBR then following shall determine FMV o District Officer (Revenue) o Provincial or Other Authority authorized in this behalf for stamp duty • price it would ordinarily fetch on sale or supply in the open market • FMV shall be determined without considering • following: o restriction on transfer o convertablility to cash • If price not Ascertainable as above, then CIT will determine FMV In case of • Property • Rent • Asset • Service • Benefit • Perquisite Others 53
  • 54. 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) 54
  • 55. 7. Important Definitions Public Company [S-2(47)] means • a company in which 50% or more shares are held by o Faderal Government OR o Provincial Government OR o Foreign Government OR o Foreign Company owned by Foreign Government OR • a company whoes shares are traded on a stock exchange registered in Pakistan and remained listed at end of the year • a unit trust, whose units are widely available to the public AND • any other trust as defined in the Trusts Act, 1882 55
  • 56. 7. Important Definitions Private Company [S-2(45)] • means a company that is not a Public Company Non Profit Organization [S-2(36)] means any person other than Individual which is any of the following; • established for religious, educational, charitable, welfare or development purposes OR • promotion of amature sport • formed and registered under any law as non-profit organization • approved by the Commissioner for specified period AND • none of the assets of such person are available for private benefit to any other person 56
  • 57. 7. Important Definitions Small & Medium Enterprise (SME) [S-2(59A)] means a person; • engaged in manufacturing u/s 153(7)(iv) AND • turnover in a TY does not exceed Rs 250 million If turnover in TY exceeds Rs 250 million Then it will not be an SME in that TY and in any subsequent TYs 57
  • 58. 7. Important Definitions Small Company [S-2(59AB)] means a company which fulfills all of following conditions: • registered under Companies Act 2017, on or after 01.07.2015 • (Paid up Capital + Undistributed Reserves) =< Rs 50 million AND • Number of employees =< 250 (at any time during tax year) AND • Annual Turnover =< Rs 250 million AND • not formed by splitting up OR reconstitution of a company already in existence AND • is not a small and medium enterprise 58
  • 59. Permanent Establishment [S-2(41)] Includes means 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 [S-2(30C)] Negotiates Contracts? No Yes Fixed Place of business, used or maintained by person Virtual business presence i.e., business through internet 59
  • 60. 60
  • 61. 7. Important Definitions Woman enterprise means • a start-up established on or after 01 July 2021 as o sole proprietorship concern owned by a woman or o an AOP all of whose members are women or o a company whose 100% shareholding is held by women Taxation • Tax payable shall be reduced by 25% • This benefit will not be available to business that is formed by o transfer or o reconstitution or o splitting up of an existing business. 61
  • 62. Income from Salary Employee Employment Employer Means any individual engaged in employment Means any person who engages and remunerates an employee Includes: i. Directorship or any other office involved in management of company OR ii. a position entitling the holder to a fixed or ascertainable remuneration OR iii. holding or acting in any public office 3 Important Questions: 1. Geographical Source of Income 2. Basis of Taxation 3. Residential Status recently changed Heads of Income Deciding a Salary case 62
  • 63. 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 Salary Pension/Annuity Resident FSI PSI PENR Born by Paid by Heads of Income 63
  • 64. Income from Salary 2. Basis of Taxation 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 Salary Heads of Income 64
  • 65. Income from Salary 3. Residential Status Recently Changed 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 Salary Heads of Income 65
  • 66. Income from Salary Deciding a Salary case: 1. Salary Definition 2. Deductions 3. Perquisites/Facilities/Benefits 4. Exemptions Salary Heads of Income 66
  • 67. Income from Salary 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 Salary Heads of Income 67
  • 68. Income from Salary Leave Encashment [2nd Schedule, Part-I, Clause-19]: Encashment of Leave Preparatory to Retirement Of (i) Government Employee (ii) Member of Armed Forces Exempt from Tax Definition Salary Heads of Income 68
  • 69. Income from Salary 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 Definition Salary Heads of Income 69
  • 70. Income from Salary 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 Definition Salary Heads of Income 70
  • 71. Income from Salary 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 Definition Salary Heads of Income 71
  • 72. 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% Definition Salary Heads of Income 72
  • 73. Income from Salary Profits in lieu of salary [S-12(2)(e)] (i) Payment of Employer's Contribution from provident fund (ii) Amount on termination of employment, whether voluntary basis or under an agreement (iii) Compensation for redundancy or loss of employment (e.g., Golden Hand Shake) (iv) Consideration for employee's agreement to : • enter into employment agreement • accept changes to conditions of employment • a restrictive covenant to any past, present or future employment Includes: [S-12(6)] Tax payer has option to get it taxed @ last 3 years average rate of tax Last 3 year’s taxable income Last 3 year’s tax liability = Average rate of tax Definition Salary Heads of Income 73
  • 74. Income from Salary 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 Definition Salary Heads of Income 74
  • 75. Income from Salary Deductions: Section 12(4): No deduction shall be allowed for any expense incurred by employee in deriving salary income. Salary Heads of Income 75
  • 76. Income from Salary 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 Salary Heads of Income 76
  • 77. Income from Salary 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 Perks Salary Heads of Income 77
  • 78. Income from Salary 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 Perks Salary Heads of Income 78
  • 79. Income from Salary 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 Perks Salary Heads of Income 79
  • 80. Income from Salary 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 Perks Salary Heads of Income 80
  • 81. Income from Salary 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 2024. You are required to calculate his taxable income and tax payable under each of following situations: (i) 100% tax is to be borne by employer (ii) 40% of tax is to be borne by employer and balance to be borne by Mr. A (iii) Rs 50,000 is to be borne by employer and balance to be borne by Mr. A (iv) Mr. A shall pay only Rs 50,000 as tax and balance tax to be borne by employer Perks Salary Heads of Income 81
  • 82. Income from Salary Perquisites/Facilities/Benefits: 5. Tax on Salary Born by Employer [S-12(3)] Perks Salary Heads of Income 82
  • 83. Income from Salary Perquisites/Facilities/Benefits: 5. Tax on Salary Born by Employer [S-12(3)] Perks Salary Heads of Income 83
  • 84. Income from Salary Perquisites/Facilities/Benefits: 5. Tax on Salary Born by Employer [S-12(3)] Perks Salary Heads of Income 84
  • 85. Income from Salary Perquisites/Facilities/Benefits: 5. Tax on Salary Born by Employer [S-12(3)] Perks Salary Heads of Income 85
  • 86. Income from Salary 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 Perks Salary Heads of Income 86
  • 87. Income from Salary 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 Perks Salary Heads of Income 87
  • 88. Income from Salary 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 Perks Salary Heads of Income 88
  • 89. Income from Salary 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 Perks Salary Heads of Income 89
  • 90. Income from Salary 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) Perks Salary Heads of Income Analysis Scenario 1 Scenario 2 Scenario 3 Taxable Income Basic Salary House Rent Allowance Valuation of Accommodation Property Income 100 45 0 45 100 0 45 45 100 0 45 45 190 190 190 Cash Position Income: Salary Rent received Expense: - Rent 145 45 (45) 100 45 (0) 100 45 (0) 145 145 145 90
  • 91. Income from Salary 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 Perks Salary Heads of Income 91
  • 92. Income from Salary 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 Perks Salary Heads of Income 92
  • 93. Income from Salary 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 Salary Heads of Income 93
  • 94. Income from Salary 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 Salary Heads of Income Exemptions 94
  • 95. Income from Salary 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 Salary Heads of Income Exemptions 95
  • 96. Income from Salary 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 any person (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 Salary Heads of Income Exemptions FG can exempt income of any person, for any official development assistance financed loans and grants-in-aid 96
  • 97. Income from Salary 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 Salary Heads of Income Exemptions 97
  • 98. Income from Salary 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 Salary Heads of Income Exemptions 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 98
  • 99. Income from Salary Exemptions: 6. Workers’ Participation Fund [2nd Sched, P-I, Cl-26] Amount received as worker, out of Workers' Participation Fund Exempt Salary Heads of Income Exemptions 99
  • 100. Income from Salary 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 Salary Heads of Income Exemptions 100
  • 101. Income from Salary 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 Salary Heads of Income Exemptions 101
  • 102. Income from Salary Exemptions: 9. Full Time teacher/researcher [2nd Sched, P-III, Cl-1(2)] Salary Heads of Income Exemptions 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 102
  • 103. 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 Deciding a Property Income case Accrual Basis Heads of Income 103
  • 104. Income from Property 1. Geographical Source of Income [S-101(9) & (10)] Property 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 Heads of Income 104
  • 105. Income from Property Deciding Income from Property Case: 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 Property Heads of Income 105
  • 106. Income from Property Deciding Income from Property Case: 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) Property Heads of Income 106
  • 107. Income from Property Deciding Income from Property Case: 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)] Property Heads of Income 107
  • 108. Income from Property Deciding Income from Property Case: 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 Property Heads of Income 108
  • 109. Income from Property Deciding Income from Property Case: Allowable Deductions [S-15A] viii. Expenses wholly & exclusively for deriving rent including administrative and collection charges ix. Legal Charges x. Irrecoverable Rent xi. Any Expenditure • Paid/Payable • maximum upto 4% of rent chargeable to tax 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) Allowed on accrual basis, 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. Property Heads of Income 109
  • 110. Income from Property Deciding Income from Property Case: Allowable Deductions [S-15A] xii. Any expenditure xiii. Inadmissible deductions [S-21] allowed to a person under this section as a deduction shall not be allowed as a deduction under any other head of income. will be studied in "Income from Business" Property Heads of Income 110
  • 111. Income From Business 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 Heads of Income 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 111
  • 112. Income From Business Important Question: 1. Basis of Taxation Deciding a Business Income case Heads of Income 112
  • 113. Basis of Taxation 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 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 Heads of Income Value of benefit, from trading liability for which deduction was allowed, will be business income 113
  • 114. Deciding Business Income Case 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 Business Heads of Income 114
  • 115. Deciding Business Income Case 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 Business Heads of Income 115
  • 116. Deciding Business Income Case 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 Business Heads of Income 116
  • 117. Deciding Business Income Case Business Heads of Income 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. 117
  • 118. Deciding Business Income Case 3. Deductions not Allowed [S-21]: vi. Contributions to following funds: Un-recognized Provident Fund / Un-approved Pension Fund / Un-approved Superannuation Fund / Un-approved Gratuity Fund vii. 50% of contribution to following funds: Approved Gratuity Fund / Approved Pension Fund / Approved superannuation fund viii. 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 ix. Penalty / fine for violation of any law x. Personal expenditure xi. Amount transferred to Reserve OR capitalization of profits in any way xii. Profit on debt / Brokerage / commission / Salary / remuneration paid by an AOP to its members Business Heads of Income 118
  • 119. Deciding Business Income Case 3. Deductions not Allowed [S-21]: xiii. 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. Company [from date notified by FBR] b. expenditure not exceeding Rs 25,000/- c. expenditure on account of: • Utility bills • Freight charges • Travel fare • Postage • Taxes/duties/fees/fines Business Heads of Income 119
  • 120. Deciding Business Income Case 3. Deductions not Allowed [S-21]: xiv. Expenditure (paid/payable) by a Company, under single head of account exceeding Rs 250,000/- other than by Digital Meansfrom business bank account of the taxpayer notified to the Commissioner under section 114A 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 This clause will be applicable from date notified by FBR Business Heads of Income Means digital payments and financial services including but not limited to • online portals or platforms for digital payments/receipts; • online interbank fund transfer services; • online bill or invoice presentment and payment services; • over the Counter digital payment services or facilities; • card payments using o Point of Sale terminals, o QR codes, o mobile devices, o ATMs, o Kiosk or • any other digital payments enabled devices or • any other digital or online payment modes. 120
  • 121. Deciding Business Income Case Business Heads of Income 3. Deductions not Allowed [S-21]: xv. Salary exceeding Rs 32,000/- per month, paid other than by: a. crossed cheque OR b. direct transfer to employee bank account OR c. Digital Means xvi. Capital expenditure xvii. In case of pharmaceutical manufacturer any advertisement/publicity/sales promotion expense > 10% of turnover xviii. Utility bills in violation of prescribed conditions and limits xix. 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 121
  • 122. Deciding Business Income Case Business Heads of Income 3. Deductions not Allowed [S-21]: xx. any expenditure attributable to sales claimed by any person who is required to integrate but fails to integrate his business with FBR through approved fiscal electronic device and software Provided that disallowance of expenditure under this clause shall not exceed 8%of the allowable deduction. 122
  • 123. Deciding Business Income Case 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 e. immovable property OR structural improvement to immovable property 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)] Business Heads of Income 123
  • 124. Deciding Business Income Case 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 Business Heads of Income 124
  • 125. Deciding Business Income Case Business Heads of Income 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. Penalty @ 5% of higher of FBR value or DC rate will be payable 125
  • 126. Deciding Business Income Case 5. Acquisition & Cost: ii. Cost [S-76]: a. Cost of Passenger transport vehicle not plying for hire shall not exceed Rs 7.5 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)] Business Heads of Income 126
  • 127. Deciding Business Income Case 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 Business Heads of Income 127
  • 128. Deciding Business Income Case 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 Business Heads of Income 128
  • 129. Deciding Business Income Case 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 Business Heads of Income 129
  • 130. Deciding Business Income Case 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 7.5 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 7.5 million Actual cost paid to acquire vehicle [Section-77(2)] [Section-77(3)] [Section-22(10)] [Section-77(5)] Business Heads of Income 130
  • 131. Deciding Business Income Case 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)] Business Heads of Income 131
  • 132. Deciding Business Income Case 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)] Business Heads of Income Tax WDV X Add: Depreciation Expense disallowed X X OR 132
  • 133. Deciding Business Income Case 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)] Business Heads of Income 133
  • 134. Deciding Business Income Case 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 Business Heads of Income 134
  • 135. Deciding Business Income Case 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 Business Heads of Income 135
  • 136. Deciding Business Income Case 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 Business Heads of Income 136
  • 137. Deciding Business Income Case 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 Business Heads of Income 137
  • 138. Deciding Business Income Case 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 Business Heads of Income 138
  • 139. Deciding Business Income Case 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 Business Heads of Income 139
  • 140. Deciding Business Income Case 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 Business Heads of Income F o l l o w i ng shall be allowed as expense 140
  • 141. Capital Gains 2 Important Questions: 1. Geographical Source of Income 2. Basis of Taxation Deciding a Capital Gains case Heads of Income 141
  • 142. Geographical Source of Income [S-101(13)] Gain on disposal of shares of Resident Company shall be Pakistan Source Income Capital Gains Heads of Income 142
  • 143. Basis of Taxation Accrual basis, as Gain / Loss is to be taxed in year of disposal [S-37(1)] Capital Gains Heads of Income 143
  • 144. Deciding a Capital Gains Case 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 Capital Gains Heads of Income 144
  • 145. Deciding a Capital Gains Case 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 Gains Heads of Income Capital Gain from disposal of immovable property shall be taxable as separate block of income @ 1st Sched, P-I, Div-VIII 145
  • 146. Deciding a Capital Gains Case 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)] Gain or Loss on disposal shall be recognized in year of disposal even if cash basis of accounting is being adopted. [S-37(1)] No loss on disposal shall be recognized if gain from such asset is not taxable [S-38(2)] Capital Gains Heads of Income 146
  • 147. Deciding a Capital Gains Case 1. Capital Gains [S-37] Advance Tax on Shares [S-37(6-10)]: Capital Gains Heads of Income Seller Buyer Shares Payment Deduct Advance Tax @ 10% of FMV S-68 Pay to FBR within 15 days Application to CIT requesting payment without deduction of Adv. Tax OR deduction at reduced rate CIT agreed (after inquiry) Pay without deducting Advance Tax Furnish prescribed information to CIT within 30 days of sale CIT may also demand information through notice S-101A(4) Without reduction of liabilities 147
  • 148. Deciding a Capital Gains Case 2. Capital Gains on Securities [S-37A] Security [S-37A(3)] : Means: • share of a public company • voucher of PTC • 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)] Section 37 shall apply and section 37A shall not apply on disposal of shares • of a listed company, made otherwise than through stock exchange & are not settled through NCCPL. The provisions of section 37 shall apply on such disposal of shares • through IPO during listing process except where details are provided to NCCPL • By Banking Co & Insurance Co [S-37A(1)] Capital Gains Heads of Income shares will be treated as security, if at time of disposal, the company was a public company 148
  • 149. Deciding a Capital Gains Case 3. Special provisions relating to Capital Gains tax [S-100B] Capital gains on disposal of listed securities and tax thereon, including super tax under section 4C, 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 Capital Gains Heads of Income 149
  • 150. Deciding a Capital Gains Case 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) jewelry; (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)] Capital Gains Heads of Income 150
  • 151. Deciding a Capital Gains Case • 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 Heads of Income Capital Gains 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. 151
  • 152. [S-236Z] Bonus Shares issued by Companies Shareholder Every Company Bonus Shares Withhold 10% Bonus Shares Remaining Shares Pay tax @ 10% Share Price Collect tax Tax not paid by shareholder within 15 days of share issuance Pay tax @ 10% of Share value within 15 days of book closure Dispose off shares to extent tax not paid by shareholder Final Tax Release Shares Listied Co.: Day-end price on 1st day of book closure Other Company: Prescribed value Heads of Income Capital Gains 152
  • 153. Deciding a Capital Gains Case Heads of Income Capital Gains 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 3. Capital gain on sale of immovable property, earned by dependent of Shaheed belonging to Pakistan Armed Forces or a person who dies during service of armed forces or Federal or Provincial Governments 4. Capital Gain Tax rates shall be reduced by a. 50%, on first sale of immovable property allotted to employee of Armed forces OR FG OR PG (serving or retired) b. 75% on sale of above immovable property, after 3 years of acquisition 153
  • 154. Capital Gains 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 Fully taxable 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 Capital Gains Heads of Income 154
  • 155. Income from Other Sources 1. What is it ? [Section-39] 2. Basis of Taxation 3. Deductions Allowed Heads of Income 155
  • 156. Income from Other Sources Other Sources What is it ? [S-39] Income Loan/Advance/Deposit for issuance of shares/Gift Arrears of Profit on Debt Heads of Income 156
  • 157. Income from Other Sources 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)] xvi. Bonus Shares Other Sources Heads of Income 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). 157
  • 158. Income from Other Sources 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 Other Sources Heads of Income 158
  • 159. Income from Other Sources 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 Other Sources Heads of Income 159
  • 160. Income from Other Sources Basis of Taxation [S-39(1)] Income of every kind in a tax year RECEIVED Other Sources Heads of Income 160
  • 161. Income from Other Sources 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 Other Sources Heads of Income 161
  • 162. Losses 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] Heads of Income 162
  • 163. 1. Set Off of Losses [Section-56, 58 & 59] Losses 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 Heads of Income P O P O O O P 163
  • 164. 2. Carry Forward of Losses [Section-57, 58 & 59] 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 Losses Heads of Income Loss sustained from 1st July 2020 & onwards by a Resident Company managing hotel can be c/f upto 8 years 164
  • 165. 3. Limitation on Setoff & Carry Forward of Losses [S-59A] 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 Losses Heads of Income 165
  • 166. 4. Foreign Losses [S-104] 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 Losses Heads of Income 166
  • 167. Deductible Allowances 1. Zakat [S-60] 2. Workers’ Welfare Fund [S-60A] 3. Workers’ Participation Fund [S-60B] 4. Education Expenses [S-60D] Heads of Income 167
  • 168. Deductible Allowances 1. Zakat [S-60] Deductible Allowances 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 Heads of Income 168
  • 169. Deductible Allowances 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 Heads of Income 169
  • 170. Deductible Allowances 3. Workers’ Participation Fund [S-60B] • Amount paid under "Companies' Profit (Workers' Participation) Act 1968" will be allowed as deductible allowance Deductible Allowances Heads of Income 170
  • 171. Deductible Allowances 4. 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 Deductible Allowances Heads of Income 171
  • 172. Tax Credits 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)] Heads of Income 172