Contents
CLASS TWO.................................................................................................................................................... 3
27/01/2021 ................................................................................................................................................... 3
CLASS THREE ................................................................................................................................................. 5
01/02/2021, Monday .................................................................................................................................... 5
CLASS FOUR................................................................................................................................................... 9
03/02/2021, Wednesday .............................................................................................................................. 9
CLASS FIVE ................................................................................................................................................... 14
08/02/2021 ................................................................................................................................................. 14
CLASS SIX ..................................................................................................................................................... 18
10/02/2021 ................................................................................................................................................. 18
CLASS SEVEN ............................................................................................................................................... 21
15/03/2021 ................................................................................................................................................. 21
CLASS EIGHT ................................................................................................................................................ 26
22/02/2021 ................................................................................................................................................. 26
CLASS NINE .................................................................................................................................................. 30
24/02/2021 ................................................................................................................................................. 30
CLASS TEN ................................................................................................................................................... 34
01/03/2021 ................................................................................................................................................. 34
CLASS ELEVEN ............................................................................................................................................. 39
03/03/2021 ................................................................................................................................................. 39
CLASS TWELVE ............................................................................................................................................ 43
08/03/2021 ................................................................................................................................................. 43
CLASS FOURTEEN ........................................................................................................................................ 47
15/03/2021 ................................................................................................................................................. 47
CLASS FIFTEEN............................................................................................................................................. 54
22/03/2021 ................................................................................................................................................. 54
CLASS SIXTEEN ............................................................................................................................................ 59
24/03/2021 ................................................................................................................................................. 59
CLASS TWO
27/01/2021

Simple example of tax brackets (tax slabs) for progressive taxation:
Income
Tax
0-500,000
No tax
500,001-
5%
2,000,001 -5,000,000
10%
5,000,001- 7,500,000
15%
Two ways of taxing income using this distribution:

Charge 15% tax on entire income of 7,000,000

Charge no tax on the first 500,000, charge 5% tax on 500,001 to 2,000,000, charge 10% on
2,000,001 to 5,000,000, and finally 15% on the last 5,000,001 to 7,000,000

Double book system is kept. One set of financial statements is shown to external users i.e.
auditors and one is kept for personal use.

If you don’t want to show a transaction to external users, you don’t want the income to be
taxed, you conduct it purely in cash. Some retailers don’t accept credit cards so that they
won’t have to pay tax on cash coming that is coming in instead.

FBR doesn’t have access to all bank accounts.
When you buy houses, agent might make you write two separate cheques: a smaller one one
for the account that is monitored by FBR, and a larger one for the account that isn’t
monitored by the FBR and therefore isn’t going to be taxed.

Money is whitened through businesses like laundries, cinemas, and most importantly through
buying prize bonds from those people who have actually received money from a prize bond.
A prize of 10 crore on a prize bond can be bought for 11 crore, and it can be shown that 10
crore were obtained from a prize bond.

My income is 10m, I lobby the governemnt to pass a law that if we pay charity out of our
income, the money being given to charity shouldn’t be taxed. I.e. if I pay 1m in charity, only
the remaining 9m will be taxed. The remaining money can be given to ‘employees’ who are
my relatives as salary. I can give salary out of the shop’s pocket to my childern instead of
giving them pocket money. This will be shown as an expense which will decrease my profit
and hence my taxable income.

Tax evasion means misstating figures on your financial statements, tax avoidance means
using legal loopholes to decrease taxes.
CLASS THREE
01/02/2021, Monday

Visit FBR’s website to find out about taxable income laws that will come in effect this year

Government changes taxation laws with respect to its budgeting and finances. As a result, the
relevant enforced income tax ordinance is amended.

Announced budget is applicable from 1st July of next year till 30th of June of the year after.

We’ll follow the INCOME TAX ORDINANCE OF 2001, which has been amended upto
0th June, 2020.
The cost of following legal restrictions is called the cost of compliance, which is lower for a
private limited company as compared to a public limited company, because the laws are more
strict for PLCs.
Public listed’s cost of compliance > Public unlisted’s cost of compliance as it has to follow the
“Code of corporate governance framework”
The ordinance defines “public company” while the Companies Act 2017 defines “public listed
company” and “private listed company”
a) 50% shares are held by Federal Government or Provincial Government or foreign government
or a foreign company owned by a foreign government
b) shares are traded on registered stock exchange in Pakistan at any time in the tax year and
which remained listed on that exchange at the end of that year
c) a unit whose units are widely available to the public and any other trust as defined in the
Trusts Act, 1952
There are about 200 sections in the ordinance, and then schedules which are appendices to the
ordinance. Sechdule 1 has information about tax rates, hence it is most relevant for this course.
Section 4: Tax on Taxable Income
Sub-section 1: what’s income tax? What’s taxable income? What’s a person? What’s a tax year?
You’ve to fulfill all four to qualify for income tax
Where does a company exist? USA’s law says it exists where it is registered. So Apple Inc.
shouldn’t follow USA’s ordinance, it should follow Ireland’s law. Now Ireland’s law says that
company exists where it’s decision-making takes place (meetings of BoD), which in this case is
USA. The BoD says that they’re all Irish so they’ll be following Ireland’s law. Hence Apple
doesn’t exist anywhere for tax purposes, as its not a person, so it doesn’t pay taxes.
Tax laws shouldn’t have citizenship because people work outside their country routienly, so they
wouldn’t have to pay tax. So laws should be based on where a person is working and for how
long.
If your permanent residence is listed on a ship and you live on rent, you’re not a citizen of any
countrya and don’t have to pay tax on your property.
Section 80: Person
Sub-section 1:
a) an individual (regardless of temporary or permanent residence) i.e. not minor
b) a company/association of persons incorporated, formed, organised, or established in Pakistan
or elsewhere.
c)
Sub-section 2: Partnership dissolves when a member dies, and not nessarily b/w blood relations,
Hindu undivided family is blood-related, doesn’t dissolve when a member dies. Communal
living system is classified as “association of persons.” It’s not dissolved when anyone dies or
leaves.
Partnership can be formed through a written or oral contract, or through implicit understanding.
Registeration of a partnership means getting it registered in the provincial secretariat, and filing
your agreement contract. Any sort of dispute will be settled in court on the basis of that
agreement contract.
“Profession” is regulated by a group of people i.e. you qualify as a doctor if PMDC recognizes
you as one, you become a CA if ICAP lets you be one, you become a lawyer in Pakistan if you
become a member of PBA. You won’t be able to represent a client in the UK: you need to be a
barrister for that. Professions can’t work as a company, they can work as firms i.e. partnerships.
Let’s say a partnership of CAs or doctors. Two doctors can’t work as a company because then
they won’t be personally liable about whatever happens to the patient. Similarly, a company
can’t be formed for providing tax consulting services because if a client has to pay a hefty
penalty due to the consultant’s mistake, then the consultant will be able to get away scot-free.
CLASS FOUR
03/02/2021, Wednesday
Section 80 pertains to the definition of a company
Should a company always be limited by shares? No, it can be limited by guaranteed as well, i.e.
the three stock exchanges of Pakistan were limited by guarantee. KSX had 200 members who
were the guaranters. For this membership ,they used to have a card that let them buy and sell
shares. They used to trade on behalf of non-members and used to charge a commission
Pakistan’s law says that the paid-in capital has to be either equal or higher than the par value.
If you go bankrupt, you will only have to pay the shareholders upto the amount equal to the par
value.
Companies Act 2017 gives different divisions of companies. It’s purpose can be to make profit
or to be a non-profit organization (Section 42 company) . A for-profit company can either be
limited by shares or by guarantee, or unlimited. A company limited by shares can either be
private or public. Biggest differences are of cost of compliance and no. of shareholders. A public
one may either be listed of unlisted.
Limited by shares = shareholders = ltd. in name
Limited by guarantee = ‘members of the company’ (who are the guaranters) = i.e. KSX (Guaratee) Ltd.
Trading Rights Entitlement Certificate lets you trade on the PSX which is now ltd.
Now that PSX has been formed, shareholder and member have become two different things. A
member can sell his trading rights but still be a shareholder.
Coming back to Section 80 Sub-section 2 clause (ii)
A body corporate is a separate legal entity that is formed by permission of either SECP or
Parliament or Senate or provincial governments (for provincial companies). For example the Civil
Aviation Authority, Port Qasim Authority, KPT, Korangi Fisheries, Pakistan Railways are body
corporates making money off of their respective businesses.
Clause (iii): Modaraba
When translated into English, Modaraba and Musharaka both mean ‘partnership’. These are
terminologies from Islamic Finance. In a mudaraba, not all partners contribute capital. The ones
not contributing through capital contribute through work. They are called working partners.
Since there’s a mutual agreement, sharing of profit is done however the members dem fit.
Working and paying partners both may be receiving equal amount of returns. However, the
losses will be born by the paying partners because according to shariat, losses are borne on the
basis of capital contribution.
In a musharaka, all partners contribute capital.
An asset management company manages peoples’ money or other fixed or non-fixed assets for
one person or a group of people
These AMCs are mutual funds
Or Hedge Fund: short sells derivatives, options, futures
Or Index Funds: on the basis of the market cap of a stock exchange.
AMCs don’t prefer operating on the profit sharing model. In place of this, the group of people or
person becomes the principal and make the AMC their agent . A principal-agent relationship is
formed, and the AMC gets a fixed salary plus comission based on performace. As an investor, I
might be more inclined towards a profit sharing model because I won’t have to pay a fixed fee to
the AMC if a loss is incurred, and there will be a higher probability of the MAC working more
diligently for me because they don’t get any money if I incur a loss.
These investors are not shareholders, there’s no Annual General Meeting, and there’s no board of
directors to be appointed. All decisions are taken by the AMC itself.
A mudaraba management company is an Islamic AMC that manages mudarabs. It follows the
Mudaraba Companies Ordinance 1980. Mudaraba has to be shariat compliant. Every mudaraba
is supposed to have shariat scholars who have the authority to allow or deny transactions on the
basis of shariat.
If Mudaraba had not been included in the definition, then it its income wouldn’t have been taxed.
It falls under the definition of Company so in taxation and company law, the laws of a company
are applicable to it.
Clause v: Cooperative Society – The Cooperative Societies Act, 1925
Cooperative Societies used to provide banking and financial services. When a bank’s ordinance
came after ‘47 it abolished cooperative societies and decreed that they must become banks and
come under the jurisdiction of the SBP.
PECHS –cooperative housing society. If you want to buy a house there, you have to register as a
member of the society. There are certain societies that restrict membership.
These societies were also formed for providing education i.e. making colleges.
DHA is a body corporate, not a cooperative society. It has its own act. You have to pay
membership fee, become a member of the DHA body corporate, and then you can buy a plot.
This fee is spent on maintainence.
Clause vb: Trust – A trust formed under the Trust Act 1882.
Members can use the plot for anything. Let’s say you announce that the plot will be used for a
Masjid and Madrassah, and you appoint two people to look after them. These two will be the
trustees. The important feature is that now, the land cannot be legally used for any other
purpose.
i.e. Shaukat Khanum Memorial Hospital, Edhi Foundation
When making a non-profit organization, one can form either a company, or a cooperative
society, or a trust. A trust will be the most profitable as it will have the least regulations.
Federal government is separate. Local governments will be taxed like governments.
CLASS FIVE
08/02/2021
Chapter 4 Part II
Section 74: closing date jis claender year mein fall krti hai wo tax year ka naam rakhenge.
i.e. 1st july 2018 till 30th June 2019 is the tax year of 2019. This is called a normal tax year
We can also have a special tax year:
i.e. the government prescribes
i) Banks, insurance companies, financial institutions: 1st january till 31st December. Reason is
that their financial statmentts are made for entire year as this is the way around the world. This is
mandated by this ordinance for companies. Company law just directs that financial statements
be made.
Corporate governance mandates that If company is listed, apart from yearly statements, you have
to publish quarterly and bi-annual statements as well.
So those institutions which do not qualify as companies, i.e. partnerships and sole
proprietorships, can make statements according to normal tax years.
ii) Sugar Companies: easy way is to start statements when new sowing/reaping season starts i.e.
from 1st October till 30th September.
One can go to the FBR and get permission to make statements according to a special tax year for
a valid reason i.e.
a) You are a subsidiary of a foreign holding company. Because being a holding company means
having to publish consolidated financial statements that have data for all your subsidiaries.
Why consolidated? So that shareholders know how large the group of companies is.
i.e. if there are 400 subsidiaries, you add the sales for all 400 of them to get the sales for all
General Tyres makes statements from 1st March till April, because it’s a Japanese compnay and
Japan’s concept is to start F statements when new year begins.
Now, going back to section 4, we’ve to find out what taxable income is.
Section 9 tells us to find about it from clause a of section 10. It says we’ve to add heads of
income
Section 11 tells us about the heads of income from which allowances have to be subtracted.
Heads:
a) Salary: Income qualifies as salary when a contract of employment has been signed/affirmed
verbally. In law, employment is an agency relationship where employer is principal and
employee is the agent. If employee causes any harm/loss to the employer’s property/customers,
employer is liable to pay.
Income doesn’t qualify as a salary when there is a contract of services. Under this contract, either
written or implicit, there is no agency relationship. If I harm a car I’ve rented, Im liable to pay
damages. If my driver harms the rented car, he’s personally liable. Thre’s no concept of
employment.
Contract of employment spells out fixed working hours and till when the contract is valid.
Services are one time
Employment means you’ll have some supervisor
b) Income from Property: giving building on rent
c) Income from business: constructing a house and selling it. when you build a house to sell it,
its your inventory.
d) Capital Gains: income arising from disposal of assets i.e. selling plot of land
e) Income from Other Sources: dividends, profit, interest. In Pakistan, we don’t get ‘interest,’
so the ordinance doesn’t use the word ‘interest,’ it uses the word ‘profit on debt.’ When we go to
banks, we don’t sign loan contracts, we end up signing ‘non-Shariat compliant’ buy-and-sell
contracts.
This also includes prize bonds and winnings.
A + b + c + d +e – allowances = taxable income
‘FATCA’
CLASS SIX
10/02/2021
CHAPTER 3
TAX ON TAXABLE INCOME
PART II
HEAD OF INCOME: SALARY
Section 12
‘salary received’ means which hasn’t been received isn’t taxable. In accounting its called cashbased recording in accounting. We won’t use accural basis. Also, if July’s salary is received on
the 1st of August, it won’t be taxed in July, it’ll be taxed in August.
Question:
Tax year 2021 = 1st July 2020 till 30th June 2021
1st Aug + Sept + Oct + Nov + Dec + 1st Jan (December’s income) = (100k)(6) = 600,000
1st Feb + March + April + May = (110k)(5) = 550,000
Total salaried income = 1,150,000
If he’d been employed already, he’d get June’s salary on 1st of July, and that’d be included in
salary of current tax year
If you get a salary of 24 months at the same time, it gets taxed in current tax year and you don’t
have to pay tax in the next tax year.
Sometimes we take ‘advance against salary.’ We take upcoming months’ salary now as a loan,
hence it doesn’t have to be taxed.
Sub-section 2:
Even if it’s a gift from a family member, it will still be taxed if they are your employer.
Clause a: can be on hourly/daily/weekly basis.
“payment in lieu of leave” means leave encashment i.e. if I‘m not availing my paid leave or
additional paid leave that I’ve gotten permission for, then the money I’m getting as a reward will
be taxed too.
Clause b: something that you don’t get in cash i.e. car, house, mobile, even if your salary is less
than 500,000
Clause c: ‘cost of living’ given to lets say grade 16, 17, 18 officers who have to live in some
other city
‘subsistence’ means allowance given when people are protesting for a raise
‘entertainment’ for customers i.e. dinner or trip for getting a business
“allowance solely expended in the perfornace of the employee’s duties of employment” lets say
company pays you to attend a business trip in another city. If you save some money, you will
either have to return it back to the company or you’ll get to use it for your own purpose, but it
will be taxed.
Clause e: Money you get as an incentive to join a company will be considered a bonus and will
be taxed. Steve Jobs was kicked out and the BoD gave a sign-in bonus of $35m to Pepsi’s
marketing manager to become Apple’s CEO.
(ii) i.e taking on additional responsibilities or more hazardous jobs as a part of your job
(iii) to fire very powerful employees who have clout i.e. Pakistan Steel Mills is a government run
agency having government employees who are being given golden handshake payments because
they cannot be fired, otherwise the fired employee will keep filing fake cases. This makes it
easier to fire a large number of employees at the same time.
CLASS SEVEN
15/03/2021
It’s not specified whether the entertainment allowance is used for personal purposes or not, so we
will assume that it wasn’t used to entertain customers.
The car is a perquisite i.e. something that is given other than cash.
Ordinance doesn’t have petrol price because to change it we would have to go to the parliament
every 15 days. For such situations the FBR has rules. Legislature delegates some of the powers
to the concerned departments i.e. government gives HEC the power to decide how long a degree
program should be.
“as prescribed by the regulations,” and these regulations are made by the company.
So income tax rules are those rules for which the power of decision-making has been delegated
to the FBR by the legislature
The value of conveyance provided will be calculated using the Rules of Income Tax, 2002
Since car is sued for personal and official purposes both
We assume by default that the car is used for 12 months, unless given otherwise.
If it said that the car was given in January, we would compute the tax as
(150000)(6)/12
If employer offers a car, which s/he will maintain and buy him/herself, that will lower our
payable tax. If we were given cash allowance to buy a car and maintain it ourselves, our expense
and taxable income will be higher.
Company ususally gives us a car for 5 years (so that we don’t have to give tax on cost incase the
market value falls to a lower value), sells it to us on book value (so that we don’t ruin the car in
the time we have it for our personal use) and gives us a new car. (so that we can sell it in the
market for the market price and get a profit
Tax is different for salaried and non-salaried. You are salaried if income from salary is 75%+.
Clause 1 rates are used when there’s no salary, or salary is less than 75%. Clause 2 is used when
salary is greater than 75% of income.
Tax rate for salary is lower than for business income as business earnings
We use the 7th tax bracket for this question:
So income tax is:
If the employee is given a bonus of 100,000, income still stays within the 7th tax bracket, 22.5%
is deducted and the employee receives 77,500
Lets say we also have income from business:
Our income now comes in the 8th tax bracket, still of non-salaried individuals as salary is still
69% of the entire income, which is less than “75%+” and we are paying 30%
CLASS EIGHT
22/02/2021
Continuing “heads of income: salary”
Question: Ahmed gets a salary of PKR 100,000 monthly. He is also provided a rent-free
house by the employer. The MV of rent of the house is PKR 35,000 per month. If Ahmed
did not opt for the house, he would be provided a cash allowance of PKR 25,000 per
monyh. Ahmed has taken the option for the rent-free accomodation.
Ahmed should take the house instead of monthly allowance of 25k because then he’ll have to
buy the house himself, and since house is of 35k, the remaining 10k will come from his own
pocket.
We refer to section 4: Value of accomodation.
So if we weren’t given the house, we would’ve gotten an allowance of 25k pr month. This
value of the allowance we are getting (25k in this case) should not be less than 45% of the
salary. If it is, then we’ll take 45% of the salary. 45% of Ahmed’s salary is 540,000. Hence,
we’ll take 45% of the salary.
(we should compute this benefit using the market value of the land, but since is usually
government property it doesn’t have any value
If accomodation is given for business use i.e. you are sent to Hyderabad for two months for some
job, its not permanent residence, this won’t be added as a benefit in your salary income)
If we were taking cash allowance there would be no need to value or anything.
This benefit is usually availed by government employees.
Solution:
Salary (100,000 x 12 months)
1,200,000
Rent-free accomodation (25,000 for 12 months or 45% of salary
540,000
)
25kx12 = 300,000, and 45% of salary is 540,000. 540,000 is
higher so we dn’t take 300,000
Salary Income
1, 740,000
Changing the question a bit, lets say he gets 350,000 monthly, with a rent-free house by the
employer.
i.e.
Salary (350,000 x 12 months)
4,200,000
Rent-free accomodation (Taking 45% of salary
1,890,000
because we haven’t been given how much
allowance we’d get if we weren’t given the
accomodation, this means that value is zero)
6,090,000
We refer to 1st schedule to check tax rates.
On 5,000,000  670,000
Above at 22.5%  (6,090,000 – 670,000) = 5,420,000
Tax on above = 1,219,500
Total tax liability = 1,889,500
1,889500/12 = 76,271
So every month the employer will deduct 76,271 from my salary.
From my monthly salary of 350,000, I’ll get 350,000-76,271 = 273,729 every month
i.e. all salaried people (having salary as 75% of their entire income) don’t have to pay any tax to
the government by themselves.
This has created the misconception among people that since their employer is paying their tax on
their behalf, they aren’t liable to file tax returns. People think that only those people need to file
tax returns who are paying their taxes by themselves i.e. non-salaried ones.
Taking the scenario a bit further,
If employer is paying the tax, it becomes a benefit, so its added in salary, and it is taxed again,
this concept is called tax on tax.
We gross up the actual tax by the percentage of tax that we’re paying:
Average rate of tax: tax liability/total taxable income
1,889,500 {100/(100 – 22.5%)}
We add this to the salary, then tax the total amount.
https://mega.nz/folder/pvJCjDoZ#-sz3oaAQmBBrZv_j6BAFCA/file/46o00AwC
CLASS NINE
24/02/2021
Part 2 – Head of Income: Salary
300,000/month x 12 = 3,600,000
Golden handshake 5,000,000
Salary + Golden Handshake = Total taxable income = PKR 8,600,000
Golden handshake is taxed at average tax rate of last three years
Since average rate for last 3 years is 10.50% (tax/taxable income)
Salary 300,000/month
3,600,000
Golden handshake
5,000,000
Taxable Income
8,600,000
Less: Separate Block – Golden handshake
(5,000,000)
Income taxable at normal rates
3,600,000
Add: separate block 5,000,000 x 10.5% =
525,000
Income tax liability
915,000
Section 13: Value of Perquisites
For house  either allowance or 45% of salary, whichever is higher
Car  5% of payment
Subsection 6: utility/telephone bills  will be subtracted from benefits if you pay by youurself,
decresing your taxable income
Subsection 7: Let’s say you get a loan at a interest-free rate or low interest rate because you work
at the bank
Q: Ahmed gets a salary of 300,000 per month. He is provided a rent-free accomodation, a
car for personal and official use costing 3 million, a driver with a monthly salary of 18,000
paid by his employer, and a cash allowance of 15,000/month, Ahmed took an interest free
loan of 2,000,000 on 1st october 2020. H repaid 500,000 on 30 June 2021, and will repay the
remaining amount on 30 june 2022
Salary (300,000 x 12 months)
3,600,000
Rent-free accomodation (45% of salary)
1,620,000
Car (3,000,000) at 5%
150,000
Driver Salary (18,000 x 12 months)
216,000
Cash Allowance (15,000 x 12 months)
180,000
Interest free loan (use benchmark rate of 10%
150,000
for 9 months)
5,916,000
On 5,000,000
670,000
(5,916,000-5,000,000) x 22.5%
206,100
Income tax liability
876,100
Part 2: What if Ahmed’s employer pays his tax liability?
Additional benefit = tax on tax (876100 x 100/
1,130,452
(100 – 22.5)
New taxable income
10,006,552
Subsection 8: pertains to property income
Subsection 9:
We get something as an employee, lets say a loan, we pay some of it back on the last day of the
tax year, the employer waives off the remaining liability. This means the remaining liability
becomes our income
Employer transfers me an asset, lets suppose a rent-free accomodation. He gives me 300,000 to
buy furniture. This 300,000 will be my allowance. Gives me a TV, that will also be a benefit. If
he pays for plumbing, that is also my benefit
Subsection 13: anything received from employer is a benefit.
Subsection 15 from next class
CLASS TEN
01/03/2021
Ahmed is working as a Director in a Listed Company at a monthly salary of PKR 400,000.
The company launched a share option scheme for its employees in march 2020 (tax year
2020). Ahemd received 10,000 options to buy the shares of the company at PKR 20 each.
One option entitles one share. Ahmed had to pay PKR 5 for each option – received the
options on 1st April 2020
On 1st June Ahmed exercised 4,000 options. The shares had a restriction on sale for one
year.
Market Value of one share on 1st April 2020 is PKR 85, market value on 1st June 2020 is
PKR 96, market value on PKR 99.
On 15th June 2021, Ahmed sold 3,000 options at PKR 15 per option. The market value of
one option on 1st April 2021 is PKR 6, market value on 1st June 2021 is PKR 9.
Compute tax for tax year 2021.
Like buying a registration form for Bahria town’s plot. It’s a derivative because its deriving its
value from another asset, it holds value as long as the asset is available, and it has a maturity.
Option: a right to buy or sell at a certain price
Section 14: Employee share schemes:
Subsection 1: The value of a right/option to acquire shares etc is not taxable
MV per share on 1st June 2020
96
Cost of share
(20)
Cost of option
(5)
On 1st June
60
Subsection 3 says that the purchase of the shares themselves cannot be taxed until the restriction
on selling has been lifted. It will be taxed on whatever the share price is when the restriction is
lifted
Exercising the right for 4,000 shares:
MV per share on 1st June 2020
99
Cost of share
(20)
Cost of option
(5)
On 1st June
74
4,000 shares x 74 = 296,000 to salary income
By selling 3,000 of our options, we are gaining income
Selling price of options
15
Cost of option
(5)
10
Salary income add = 3,000 x 10 = PKR 30,000
END OF HEAD OF INCOME: SALARY
Salary
Income From Property
Income from business
Capital Gains
Income from othre sources
Sub-total
Less: deductible allowance/expenses*
Taxable Income
*
Donation to an organization that is listed in the 2nd Schedule on page 461. List spans 61
sections. In this way you make a donation and it becomes an expense, lowering your income and
hence the tax you have to pay.
Tax will reduce with respect to the tax bracket which is applicable to you.
*
Zakat
PART IX: Deductable Allowances
Section 60: have to pay zakat under the Zakat and Ushr Ordinance, 1980
In the 1980s, the government made a central system where people had to pay their xakat and the
needy could apply there. The central fund started automatically deducting zakat from peole’s
savings in banks in Ramzan, and companies started deducting it from shareholders’ dividends.
If you give zakat to a family member, and opt out of zakat being deducted from your davings
automatically, then it won’t count as a deductable allowance.
-read subsection 1 on page 105 and 6-
CLASS ELEVEN
03/03/2021
PART X: Tax Credits
Ahmed is employed at a monthly salary iof PKR 250,000. He is provided with a rent-free
accomodation by his employer. He is also provided with a car for both official and personal use,
costing PKR 3 million. The company provides Ahmed with a driver whose salary is 20,000 per
month, but Ahmed is required to pre-imburse PKR 5,000 to the company. During the tax-year,
Ahmed gave PKR 200,000 DONATION TO AN ORGANIZATION LISTED IN THE 2ND
Schedule, and PKR 150,000 to a non-profit organziation. He also gave PKR 50,000 to a needy
family member
Salary (350,000 x 12 months)
4,200,000
Rent-free accomodation (45% of salary)
1,890,000
Car (3,000,000 x 0.05)
150,000
Driver (20,000 -5,000) x 12
180,000
Salary income
6,420,000
Heads of income:
Salary
6,420,000
Income from property
-
Income from business
-
Capital Gains
-
Income from other sources
-
Total of heads of income
6,420,000
Less: deductible allowances
Zakat
-
Donation (2nd schedule)
(200,000)
Taxable income
6,220,000
Since salary is more than 75% of income, we use salaried rates. 7th slab: taxable income exceeds
5,000,000 but does not exceed 8,000,000.
Computation of tax:
On 5,000,000
670,000
Above at 22.5%
274,5999
Tax
944,500
Tax credits are always from tax.
Avg rate of tax:
Tax/ Taxable Incme = 944,500/6,220,000 = 15.185%
Tax Credits
Donations – to NPO:
(22,777)
150,000 x 15.185%
Income tax liability
921,723
You have to inform employer before payroll of June is computed so that 22,777 doesn’t get
deducted from your salary.
Now, we assume that we didn’t donate 150,000. We donated 3,000,000 (3 million). Since
average rate of tax stays 15.185%,
3mn can’t be used so we’ll take 30% of taxable income
Subsection 3: If we donate an asset, asset’s fair market value is used.
Subsection 4: Cash donation will only be considered if it is made through cheque or bank
transaction.
Section 62: Tax Credit for Investment in Shares and Insurance
Pertains to individuals and association of persons
An open-ended mutual fund doesn’t have fixed share capital. There’s a restriction on selling
units to anyone else. A person wanting to sell will have to go to the fund itself to redeem them
for money. A person wanting to buy will have to buy from the fund itself. All bought units will
be new units. This fund is relevant to section 62.
A close-ended mutual fund has fixed share capital which is traded on the stock exchange.They
are usually second-hand, not new
One way of raising a capital is to form a company. Let’s say I have 2,000,000, and need a total of
5,000,000 to run my company. I issue shares of 3,000,000 at par value i.e 300,000 shares, and
people will buy. Eventually, IPO is done as an exit strategy, not to raise capital.
CLASS TWELVE
08/03/2021
Continuing Section 62:
Sukuks: ‘Islamic bonds’
Mudaraba: A trading Transaction
It takes place when an asset is being exchanged.
Let’s say we have a company that wants to set up a generator costing 100 million. A bank could
buy the generator at 100 mn, and sell it to you @ cost + profit, let’s say 120 million. We are
liable to pay 5 million every quarter.
“profit” is going to mimic market interest rates. This is considered halal because Islam allows us
to pay in installments and charge whatever selling price we want.
One important thing to notice is that according to Islamic finance, selling price cannot be
changed after it is fixed. If we default for 5 years, we are still liable to pay 120 million, not a
penny more.
Moving on to Sukuks:
We take a loan for running finance and sign over either a current or a non-current asset.
When we agree to keep a current asset i.e. land as collateral for a loan. The procedure is to create
a charge i.e. a contract with the bank that if we’re not able to repay, the bank has the first right
to sell the asset. Sometimes the loan’s value can be very high, so there can also be a second
charge. In this case, first charge is for one bank, second charge is for another bank.
In the government’s register, the ownership and selling rights have to be updated. Charge
registeration is also done at the registeration office. Now, if I want to sell my land, I need to
show the office an offical permission from the bank that removes the charge.
If I don’t have fixed assets, I’ll sign over my non-current assets like my inventory or my stock as
collateral. A charge can’t be fixed on non-current assets. I make an agreement with the bank that
a certain amount of my inventory and stock is permanently under their ownership until I repay
the loan. This can be risky because sometimes inventory get burnt, damaged, or stolen.
In Islamic Finance, we make a Special Purpose Vehicle Company, that operates only for one
specific task. It is a sukuk institution, created by the company that wants a loan. This
company’s aim is to generate finances on the basis of feasibility. For a loan of 100 million, our
SPV issues sukuk certificates of 1 million to 100 people to raise the money and transfer it to us
for our running finances. Next, we arrange such that our land is owned by the SPV, and we are
paying it rent (in place of interest), and that rent goes to the sukuk holders as income. This is
considered to be a bond because rent will be fixed periodic payment.
The or means that I’ll get a tax credit on only one of these, if I have both. I can choose which
one.
If I have money lying around its better to invest in money market mutual funds because the tax
credit is very high on them.
Do a research on cash investments that have no entry loans or exit loans.
Retirement Benefits in context of Section 63: Contribution to Approved Pension Fund
There are three types of retirement benefits, atleast one of which the owner is liable to give to the
employee:
1) Gratuity: A one-time lumpsum payment. It is computed based on
Number of years worked x last drawn salary.
a) Gratuity Scheme: This should be shown as an expense according to the accrual concept
i.e.recording the loss when it is due, not when it is actually being paid. After 1 year, I record the
P&L expense and liability. Liability will increase year by year.
If company becomes bankrupt, our assets stop having any value because they’re now not
generating any cash. Often we don’t receive our receivables either after bankrupcy is filed. Our
employee will become our creditor. All creditors will be treated equally. If liability is 1 million
and value of assets is 400,000, 40% will be paid per dollar. Liability holders having charges will
be paid in full, then normal liability holders will be given money (with whom we are included),
then shareholders will be given money.
b) Gratuity Fund: An alternate route is to create a gratuity fund. It has trustees that are
employees. The company, instead of recording liability and expense, will transfer the money to
the fund itself. Now, if bankruptcy happens, employees will be paid in full. However, every year
there is going to be a substantial cash outflow.
Government wants companies to prefer a fund over a scheme, so it has attached higher tax
benefits to gratuity funds.
2) Provident Fund:
Two parties contribute to this fund: employees and the employer. It can be a fixed percentage of
the salary. Normally the rate is 10% in Pakistan. Every month, the employee puts 10% of his
salary in the fund, while the employer puts the same amount. As the money grows, the
provident fund invests the money, and the return is given to employee and employer both.
3) Pension
CLASS FOURTEEN
15/03/2021
Pension = exempt from taxx
Provident dund = employers contribution benefit – employee contribution is not an expense
Employer contribution is
A gratuity may be in the form of a scheme or a fund. A fund is more beneficial than a scheme.
A fund is made a few years after business has started operating and there is a substantial number
of employees.
Section 13 on page 463
There are two kinds of directors: executive and non-executive. Executive ones are the
employees that are on the payroll, while non-executive ones are the people running the company.
Non-executives don’t get either a salary or a retirement benefit.
This concept is important in corporate governance, which says that yout BoD should have both
kinds of directors, so both parties have equal power.
There are two companies on which the insurance industry is running: American Insurance Group
(AIG) and Lloyds. When a Pakistani company wants to insure itself against damages, a Pakistani
insurance company will reinsure some of the amount to a foreign company, usually to one of
these two. AIG was given the largest bailout $40billion during the 2008 crisis, which was caused
by its own substandard mortgages. 2.5bn was being given to employees as a bonus according to
contract, but due to a huge public outrcry, the government presented a law that for that particular
year, 90% of the bonuses would be taxed, due to which the employees declined the offer for a
bonus.
This is how laws work.
Question:
Ahmed has been an employee of a listed company for the last 25 years. His monthly salary
is PKR 400,000. He is provided a rent-free accomodation, and a car for both personal and
official use costing PKR 3 mn. He retired on 30th June 2021. On his retirement, he received
PKR 2 mn from an unrecognized gratuity scheme, and PKR 2.5 mn from a recognized
provident fund. Both payments were received 30th June 2021. He invested PKR 2.2 mn in a
mutual fund on 30th June, 2021, and made a donation of PKR 100,000 to an organization
listed in the 2nd schedule.
Salary (400,000 x 12 months)
4,800,000
Rent-free accomodation (45% of salary)
2,160,000
Car (3,000,000 x 5%)
150,000
Unrecognized gratuity scheme
1,925,000
2,000,000
Less: 50% (1m) or 75,000, whichever is lower
(75,000)
Provident fund = exempt from tax
Total
9,035,000
Less: Donation
(100,000)
8,935,000
According to 8th tax slab in the salaried table,
On 8,000,000
1,345,000
On 935,000
233,750
1,578,750
Now, we’ll look for any possible tax credits. Ahmed has invested in a mutual fund
Cost
2,200,000
20% of taxable income
1,787,000
Which is lower? 1,787,000, so tax credit will
be available on this
(1,787,000 x 1,578750)/ 8,935,000 = (315,750)
1,578,750 – 315,750 = 1,263,000 = Income tax liability
Section 15: income from property is received and receivable BOTH. Salary was taxable if
received only.
Rent does not pertain to income from renting out a car/generator etc.
Rent means two things:
1) Payment in return for using/occupying property
2) Forfeited Deposit. Let’s say I’ve a property having MV of 10 mn. I find a buyer. Buyer wil
check the title of the property, original document having name of the seller, and the name under
which the property has been registered at the registrar’s office. We usually enlist the services a
state agent who has lawyers working for him. Then the property is audited. Then cash has to be
gathered, converted from credit etc.
Then we make an agreement to sell i.e. that we will conduct the transaction within the next 3
months. We get the consideration for this contract in the form of token money, which is a kind
of advance payment. Rule of thumb is to cahrge 10% of the MV as token money.
This money is part of rent. If buyer is not able all of the money, whatever is paid is considered
as rent.
If seller receives a better offer after token money has been paid, seller will have to pay double
the token money (2mn here) in damages, and then make a contract with the second offerer.
If property prices are rising, we can use token money to leverage the situation in our favor. I can
do an agreement to sell for 6 months, take 1 mn as token money, and find another buyer who is
offering more than 10 mn, lets say 11 million. I sell the property for 11 million, pay 10 million in
damages to the first buyer, and keep 1 million in my pocket.
Token money is forfeited deposit.
Subsection 3 says that normally when we rent out a property, we’re renting out floor space. If
machinery is installed (factory), has central air conditioning or generators (mall) then this falls
under income from other sources.
Sometimes there are different contracts for lets say a shop and the air conditioner installed in it.
3A: If owner is paying the utility bills, then entire income falls under income from other
sources
7: rates from Division VI A of Part 1 of First Schedule are used for income from property, if tax
is being computed for an individual or an association of persons. If its being calculated for
a company then normal rates are used.
Question:
Ahmed gave his flat on rent at PKR 100,000 for 1st July 2019 (tax year 2020) for a period of
3 years.
Rent (100,000 x 12 months)
1,200,000
Total
1,200,000
On 1,000,000
60,000
15% on 200,000
30,000
90,000
CLASS FIFTEEN
22/03/2021
Remember limits for for tax credits and deductions for exam
Situation: Owner has a building, rents it out for a period of 15 years to a bank. The monthly rent
is 250,000. Entire rent to be paid is 45,000,000.
Even though it’ll be recorded as an asset in the owner’s books, he cannot use it for the next 15
years. Owner has the right to sell during the period, but not the right to possession. Bank has
right to possession.
If this contract if rent is cancellable with a notice, owner can notify the bank to move out in a
few months. If not, (lets say bank has done massive renovations to build a new branch) owner
cannot take back possession until the contract ends.
If the owner gets a great offer for the building, way above the market value, but has to transfer
possession as well, he will have to breach the contract with the bank, and pay some
compensation to the bank. This will fall under ‘income from other sources’ for the bank.
Let’s say the bank wants to shift its branch to a more profitable location after 5 years. Also, the
rate of rent in the market is now 300,000. If the contract allows the bank to sublet the building,
the bank can do so after moving out and shifting its branch. This income will fall into the bank’s
income from other sources, even though the bank is receiving rental income.
If the contract is non-cancellable, the bank has an obligation of paying 450,000 the day the
contract is signed. I’ll record a liability of 450,000, and the right-to-use the asset of 450,000. If
the contract is cancellable, we may have a right-to-use for 15 years, and we may have a liability
for 15 years. Now there’s no certainity so I don’t have to record the entire amount. Now, the
bank will amortize the right-to-use the land in its assets as time goes by. Decpreciation expense
will also be recorded in income statement. Liability will also periodically become lower. This is
IFRS 16 (lease)
Hence asset does not mean something you always own and use, it is something that you control.
This is the new leasing standard that came last year. Substance over form doesn’t matter
anymore. Right to use an asset is the present value of the lease obligation, which is the noncancellable amount.
Since asset is something that gives economic benefit for more than 12 months, such an
agreement that gives the right-to-use an asset must be for longer than 12 months.
-----------------
Going to the ordinance,
Toll Manufacturing: entire factory’s production is for a certain brand i.e. Nike. This means I’ve
rented out my entire factory. This means Nike needs to record their obligation and right-to-use
both. In accounting it will be a lease, but for calculating tax, it will come under income from
other sources.
Question:
Ahmed gave his house on lease for 5 years, at a monthly rate of 100,000, starting 1st
January 2020. He is employed at a monthly salary of 300,000 at a local factory. He is
provided a car costing 2 million for both official and personal use. He doesn’t get any other
allowance.
Salary (300,000 x 12 months)
3,600,000
Car (2,000,000 x 5%)
100,000
Income from Salary
3,700,000
Rent (100,000 x 12 months)
1,200,000
Income from Property
1,200,000
We are computing tax for tax year 2021, which starts from 1st July 2020. We rented out the
apartment before that, so that means we are getting rental income for the entire relevant tax year.
Salary
3,700,000
Income from Property
1,200,000
Incoem from Business
-
Capital Gains
-
Income from other sources
-
Taxable income
4,900,000
Less: Separate block of income -property
(1,200,000)
Income taxable at normal rates
3,700,000
Now we decide whether we will use the salaried-rates or the non-salaried rates. Since salary is
higher than 75% of the person’s income, he’s salaried.
Sixth slab says 370,000 uptil 3.5 million, then 20% at the income above.
Computation of tax:
On 3,500,000
370,000
Above
40,000
410,000
Separate block of income – property
On 1,000,000
60,000
(1,200,000 -1,000,000) x 15%
30,000
90,000
Tax
500,000
Deductions from section 15A in next class. Subsection 7 says that an individual or an
association of persons will have to pay entire tax under normal salaried/non-salaried tax
rates, if they are availing some deductions i.e. expenses.
CLASS SIXTEEN
24/03/2021
15A: Deductions
Whether a company incurs an expense or doesn’t incur it for repairing property, 20% or onefifth is rebatable.
Insurance deduction is also available, but not for life insurance.
(d) If government sells property to you, it is called a free hold transaction, and you and your
descendants have perpetual ownership of it.
Let’s say I have a lot of money, and I want to do a business. I purchase land from all those
people who have free hold. I become the permanent owner. I make a housing society and lease
the houses. I give the tenants the right to sell their lease or sublet the apartment for the lease
period. The leasing period is usually 99 years. There is a fee for renewing the lease.
For example, the government has sold land on free hold to the military estate, which has leased
it to DHA. DHA has made plots on it, and alloted it to people. The allotment is done on the basis
of sub-leasing. After 99 years, the land will belong to DHA. Since DHA is the military’s agent,
its lease will be renewed for free, but the general public will have to pay a fee for renewing the
sub-lease.
DHA has to pay ground rent to the military estate for the plots. DHA doesn’t pay it by itself, it
generates an annual voucher for you that has to be paid to the military estate.
Bahria Town doesn’t have a lease from the governemnt yet. Until Bahria Town gets its lease, the
people who’ve purchased the plots there can’t get their sub-leases. They can’t do any
construction or live there or sell their sub-leases.
( g) if property is kept as collateral, a charge is created on it, which can be rebated as a deduction
Banks don’t take your property papers, they create a charge in its registration documents.
(h) if Iincur an expense for administration or collection, upto 4% can be rebated. For example,
I’ve rented out all the apartments in a building and have hired people for collection of rent,
maintainence, management etc.
(i) hiring a lawyer for
We can have expenses in property, not in salary.
Compiled list of expenses:
1) Repairs – allowance
2) Insurance
3) Property Tax/Water Charges
4) Ground Rent
5) Interest on loan/profit
6) Administration/Management charges (4%)
7) Legal expenses
Other expenditures cannot qualify as expenses.
However, for a business income, anything expenditure even remotely related to the business is
an expense
(j) tenant is not paying some rent, and bad debt has been recorded after all legal steps have been
takena nd the tenatnt has vacated the property
------------Sub-section 3: If a liability has not been paid off after 3 years of recording it as an expense to
lower our income, it will be added back to the income and will be taxed. Increasing expenses to
decrease profit is a good idea to legally avoid tax, but those expenses have to be paid off
eventually, they cannot stay in the accounts payable for more than 3 years.
Question:
Ahmed is employed at a monthly salary of Rs. 300,000. He is provided a car costing Rs. 3.5
million for both personal and official use since 2019. He took an interest-free loan from his
employer of Rs. 2 million on 1st January 2021. Ahmed owns a flat that has been given on
rent since July 2018. The monthly rent is Rs. 80,000, and the lease will end in the year 2025.
Ahmed also owns a plot. H agreed to sell the plot for Rs. 10 million on 1st October 2020,
and recerived token money (deposit) equal to 10% of the selling price. In April 2021, the
buyer informed Ahmed that he will not continue with the agreement and Ahmed forfeited
this amount.
Salary (300,000 x 12)
3,600,000
Car Benefit (2,500,000 x 5%)
175,000
Interest-free loan) (2,000,000 x 10% x 6/12)
100,000
Income from salary
3,875,000
Rent (80,000 x 12)
960,000
Forefeited Deposit (10% of 10
1,000,000
million)
Total rent
1,960,000
No tax credits.
Scenario B: Availing Separate Tax Rate for rental Income
We still use non-salaried rate because salary is less than 75% of taxable income
Salary
3,875,000
Property Income (no deductions)
1,960,000
Taxable Income
5,835,000
Less: separate block of income – property
(1,960,000)
Income taxable at normal rate
3,875,000
Computation of tax
On 3,000,000
370,000
Above at 25%
218,750
588,750
On 1,000,000
60,000
Above at 15%
144,000
204,000
Income tax liability = 588,750 + 204,000 = 792,750
CLASS SEVENTEEN
29/03/2021
Section 16: Non-adjustable amount received in relation to buildings
Normally we pay something to the owner, to get a long-term contract and to get the power to
sublet the property.
A gave his flat to B for a period of 6 years on monthly rent of Rs. 10,000 The lease term
started from 01/01/2015. B gave Rs. 1,000,000 as non-adjustable deposit to A. B can give
this flat to C on rent. C can also sublet it if B allows.
This lease or pagri system is preferred because it is cheaper than actually purchasing the
apartment.
Always divide non-adjustable deposit by 10 for total 10 years, no matter the duration of
the amount.
Question:
Ahmed owns a flat that is given on a 15-year lease since 01/01/2019, for 50k/month. Ahmed
took a non-adjustable deposit at the start of the lease of Rs. 1,500,000. Ahmed also owns a
plot. He agreed to sell it to Babar on 01/03/2021 at 10,000,000 and received 15% as token
money. In May 2021, Babar informed Ahmed that he will not be able to arrange the
remaining amount, therefore Ahmed forfeited this token money.
Tax Year 2021 (1st July 2020-31st June 2021)
Land is on rent for the entire tax year as we rented it out in the previous tax year.
Rent (50,000 X 12 months)
600,000
Non-adjustable deposit TY 2019 – 1,500,000/10
150,000
Forfeited deposit (15% of 10,000,000)
1,500,000
Rent
2,250,000
Assuming Ahmed claims expenses – normal tax rates
Repair/maintainance: 1/5th of 2,250,000
(450,000)
Repair allowance is supposed to be 1/5th of rent, and this rent will include all sources of income
that are to be added to the rent itself.
Tax Year 2019:
Rent (50k x 6 motnhs)
300,000
Non-adjustable deposit
150,000
450,000
Tax Year 2020:
Rent (50k x 12 months)
600,000
Non-adjustable deposit
150,000
750,000
On 01/01/2021 Ahmed asked Ali (tenatnt) to vacate the porpoerty and paid 2.5 mn to Ali. N
01/04/2021 Ahmed agve this propeoty to Babar at 80,000/month, andreceived a nonadjustable deposit of 3 mn, for a lease term of 20 years.
Subsection 2 says that if property is vacated before 10 years of lease are up, no tax will be
charged on the non-adjustable deposit for that year or for the subsequent years. This is
because the deposit has now been returned.
Subsection 3 says that if a succeding tenant gets the apartment, the succeeding amount gets
taxed after the money taxed from the previous non-adjustable deposit is subtracted
Rent from Ali (50kx 6)
300,000
Non-adjustable deposit –
1,500,000 from Ali (refunded)
Rent from Babar (80k x 3
240,000
months)
Non-adjustable deposit from
3,000,000
suceeding tenant
Less: already taxed
(300,000)
2,700,000
2,700,000
3,240,000
For Ali (tenant) for TY 221
Ali paid 1.5 million as non-adjustable deposit to Ahmed in TY2019.
In TY 2021, he received 2.5mn upon vacating
Received
2,500,000
Paid
(1,500,000)
Income from other sources
1,000,000 /10
1,000,000 will be taxable over a period of 10 years
100,000
INCOME FROM BUSINESS
Section 18. Income from Business

Income from principle line of business

Fee charged for services, vocation for skill-based services (i.e. carpenter, performers,
athletes,

Income from tangible movable property i.e. furniture, equipment (if rented out by tenant
then its income from other sources)
(For immovable property we get income from property)

Any benefit (not in cash) or perquisite, due to business relations {if its due to employment
then its income from salary}
Benefit includes any waiver received on debt or profit on debt i.e.
For example: Business takes a loan from a bank. Business returns half the amount, the bank
waives off the other half OR supplier wavies off some amount that you owe him  it’ll be a
benefit

Income of any asset-management company i.e. modaraba
For taxation of income from business, we look at the P&L Account i.e. the income statement of
the business.
If business gives loan, interest received comes under income from other sources, except for
banks because loaning is a bank’s principle line of business.
Profit or Loss Account (income statement)
Revenue – sales of goods/services/fee
Less: Expenses
Profit (accounting profit)
We decide what qualifies as profit/revenue/expense using accounting rules.
IAS  IFRS
USA – GAAP – FASB
UK – GAAP - FRC
Hence I might not be able to compare the statements of a UK based company and a USA based
company. Pakistan was one of the first countries to adopt IFRS in the 1980s.
S
CLASS EIGHTEEN
31/03/2021
Section 21: Deductions Not Allowed (in business profits)
-
Clause a: Any tax/cess/rate paid computed/paid based on profits/business gains/income. Tax
based on other things i.e. property, water, can be taken as an expense. Or any tax
-
Clause b: Anything listed in part V (pg 256):
List includes advance tax and Deduction of Tax at source. Advance tax is not an expense,
because tax liability is set off automatically.
-
Clause c: if someone is supposed to deduct tax while giving/receiving payment and doesn’t,
they can’t avail it as an expense
i.e. If employer not deducting tax for employee’s salary before giving salary, authority not
collecting tax on imported goods, tax not collected on payment of sale of goods
-
Clause c(a): If you’re an inactive tax payer, you cannot avail an expense on whatever
payment you make in your business (will study in Sales tax in advanced taxation)
-
Clause d: entertainment expenditures other than the ones prescribed in income tax rules of
FBR
(allowed according to Income Tax Rules 2002, chapter II, part II, section 10: expenses
outside Pakistan i.e. fairs/exhibitions/conferences; expenses inside Pakistan: foreign
customers/suppliers’ accomodation, travel, tour; local customers: expeses occured at
business premises; expediture occurred in all meetings i.e. AOGM, EOGM, expenditure on
opening of new branch)
So what’s not allowed? Local customers being entertained outside business premises.
-
Any contribution made to unrecognized/ unapproved fund/ gratuity fund/ superannuity/
provident fund
If unapproved/approved isn’t specified in question, we assume that it’s approved.
We are making payments as an employer into a retirement scheme/fund. Under income from
salary, we were getting a benefit as an employee)
Let’s say we put 12% of an employee’s salary of 100,000 into a provident fund. We paid 1.2
mn as salary and put 144,000 in the fund. These are both my expenses if fund is approved. If
not, only his salary is my expense. The 144,000 is a benefit for the employee, and he has to
add either 150,000 or 10% of the salary (whichever is higher) to his salary income.
-
Clause g: Any fine/penalty paid or payable
-
Any personal expenditure (only business expenses allowed)
-
Any capitalized amount (that has been transferred to reserve fund) because we’ve already
paid tax on it.
-
Any profit on debt (interest), brokerage fee, commission, salary, or othr renumeration paid
by association of persons to a member of association i.e. to a partner of a partnership. It is
classified as profit, not as expense.
-
Cash payments exceeding 250,000 (aggregate of a year)If monthly payment is less than 25k
(let’s say salary of 24k), then it can be taken as an expense. Otherwise has to be paid throuh
banking channel
-
If monthly salary is greater than 25k and is paid in cash, then its not allowed
Some bills have to be paid in cash: postage, travel fare, utility bills, freight charges,
payment of taxes/duties/fines. These are allowed
Cross check isnt done for these because of bounced cheque expense.
- For pharmaceuticals: can take 10% expense for their advertising/marketing expense. Biggest
expense is of free samples provided to doctors/clinics, and that of procuring certain
doctors/clinics so that they sell their medicines.
There are two things for a drug: a generic name and a trademark. Generic name refers to
formula. The one who discovers the formula can get it patented for 10 years. Now, only this
person/company can manufacture it i.e. paracetamol, augmentin etc. Pakistan is one of the few
countries where doctors prescribe medicines by their trademark names rather than by their
generic names. In countries where doctors can write generic names, clients have the option of
purchasing any variant of the drug produced by any company.
*Adjusting the P&L account wrt tax laws*
When we’re working as a tax consultant, we ask our clients to tells us their inflows and
outflows. We don’t ask them about their income and their expenses.
Question:
Ali, who was born on 30th May 1954, has provided the following information for his
business for the year ended 30th june 2020. We have to compute taxable profit (not
accounting profit)
Revenue
9,000,000
Less: Expenses
Salaries & Wages (note 1)
(2,262,000)
Car Expenses (Note 2)
(200,000)
Gifts and Donations (Note 3)
(250,000)
Legal Charges (Note 4)
(60,000)
Rent and Maintenance (Note 5)
(1,550,000)
Net Profit
4,678,000
Note 1: Ali’s monthly salary is 100,000 (owner), Zahid’s salary is 60k (brother). These are
paid through bank. Office assistant’s salary is 26,000 and peon’s 22,500. These are given in
cash.
Note 2: Car expenses include 120,000 relating to Ali’s car, and remaining is for Zahid’s car.
A car costing 3mn we purchased by the business on 1st July 2020. Ali estimates that his
personal usage is 25%.
Another car costing 2.5mn was purchased on 1st December 2020 and given to Zahid. He
estimates 40% of his usage to be personal.
Note 3:
Gifts and donations include:
1) LED television costing 60,000 to Zahid on 1st january 2021
2) New diaries embossed with logo costing 40,000
3) Donation of 25,000 to an organization listed in the 2nd schedule
4) Donation of 50,000 to an approved NPO
5) Donation of 75,000 to a distant relative who is facing financial difficulties.
Note 4: Legal charges include Rs 25,000 paid to a lawyer to defend internet domain name,
another was paid 35,000 to appear in family court on behalf of Zahid.
Another car costing 2.5 mn was purchased on 1st December 2020 and given to Zahid. He
estimates 40% personal usage
Note 5: Rent and maintainence includes 1.2 mn rent for office on 1st July 2020 for a period
of 2 years. 250,000 was paid to buy new furniture for the business in January 2021.
The WDV of furniture was 510,000 on 1st July 2020.
{Ali’s salary is incorrect. Cannot have salary when there’s no employment contract. }
can’t have salary in a partnership either. The salary we record in accounting for partners is not an
expense in law, it is appropriation distribution. They are being being given a guranteed
profit. For interest on capital, money is taken from appropriation as well. So this is profit aka
drawing as well.
If Ali and Zahid form a private limited company, they can have an employment contract with
their company, as shareholders can be employees attheir own company. This is also valid for a
SMC
We look at the tax ordinance for treatment of the cash payment.}
Net Profit
4,678,000
Add: Ali’s drawing (100,000 x 12) This qualifies as drawings
1,200,000
Zahid’s salary (employee of company)
Add: Salary office assistant > 25k in cash (26,000 x 12)
312,000
Peon’s salary (22,500 x 12) – allowed as <25,000
-
05/04/2021: Skipped
CLASS NINETEEN
7/04/2021
Add: Ali’s business expense for car (0.25 personal usage x120,000)
30,000
Zahid’s car expense (fully allowed)
Car purchases (capital expenditure not allowed. We’ll get depreciation
expense)
LED – deductible expense
Diaries – deductible as marketing expense
Add: Donation of 25,000 – allowed as benefit, deductible from total of
heads of income
Add: Donation of 50,000 – allowed as tax credit, deductible after
computation of tax
Add: Donation of 75,000 to relative
Legal expenses: allowed because benefit is provided to employee
Legal expense: allowed because defending domain name is business
expense
Add: Prepaid rent expense for tax year 2022
Add: new furniture – capital expenditure not allowed
Net Profit
-
Tax Depreciation - computed in next class
Net Profit
(430,875)
6,889,125
25,000
50,000
75,000
600,000
350,000
7,320,000
Bribery is allowed as an expense in India because supreme court has rules that a business
absolutely cannot run without bribery. It isn’t allowed as an expense in Pakistan, so it can be
shown as ‘speed money’ in expenses.
Advertisement/marketing expense: newspaper/radio/TV annoucements about donations,
scholarships, buildings, gameshow prizes, prize money/products in lucky contests or PR
activities, alternate media,sales force hired for personal selling, payment for placement of
products. Basically, donations that are marketed can be classified as marketing expense.
If there is some accounting depreciation expense in our P&L, it is computed on the basis of
accounting rules, so it is not allowed. It needs to be added back, it cannot be taken as an
expense. This is for avoiding any profit manipulation because we can use a depreciation
method/depreciation rate of our choice.
However, tax depreciation is allowed, through the reducing balance method. Under this
method, there is no limited life of an asset. Rates for tax depreciation are given in third
schedule. First there will be a footnote showing the previous year’s rates, ignore that. Next, we
have the relevant table, which shows that:
If the ramp’s cost increases above 250,000, it’ll be considered to be a part of the building and
will be depreciated alongwith the building.
Low depreciation rates are often used to kickstart the economy after a financial setback or crisis.
CLASS TWENTY
12/04/2021
Depreciation of Assets used in a Business
Division III: Special Provisions
Section 22:
Subsection 1: depreciation allowed for those depreciable items that were used in the current tax
year
Subsection 2: depreciation deduction for the TY is computed against the WDV of the asset,
using rates listed in Part I of the Third Schedule.
Update for 2021: if asset is purchased after TY20 i.e. during TY21, you’ll get 50% of the
depreciation that you were orignially getting
Subsection 3: Full depreciation if item is fully used for business, no depreciation if item is fully
used for personal purposes, depreciation for the %age used in buisness if item is used for both
purposes.
Subsection 6: when asset is used partly for business and partly for personal purposes,
depreciation will be computed while assuming that the asset has been solely used for business
purposes and not at all for personal purposes.
Subsection 4: deleted
Subsection 5: Since we use reducing balance method of depreciation,
the WDV of a depreciable asset of a person at the beginning of the TY shall be
Case
Asset acquired in current TY
Any other case
Treatment
Cost of asset to person – initial allowance
Cost of asset to person – depreciation
deductions – initial allowance
[for straight-line method (which we won’t use), we get 15% depreciation against the cost in the
1st year, then 15% against the WDV in the succeeding years]
Subsection 7: Total depreciation deductions allowed can’t exceed the asset’s cost (during
ownership period)
Subsection 8: no depreciation expense can be availed for the year in which the asset is sold
However, if the asset has been used for the first time during TY21 or succeeding TYs, 50%
depreciation expense can be availed for the year in which it is sold
Subsection 12: Depreciation allowed to leasing agencies is on the basis of the income they
generate from the leasing itself.
Subsection 13:
Clause a: Bus/Car/Rickshaw/Aeroplane (not a truck) not plying for hire i.e. not charging money
for the transportation – this applies when it isn’t being used for commercial purposes
Will not have a cost of more than 2.5 mn for the purpose of tax depreciation. If my vehicle cost
15 mn, I’ll compute depreciation on the basis of 2.5 mn. Will this be beneficial for me or not?
No, because the government doesn’t want us to buy expensive cars for personal use.
However, if my vehicle of 15 mn is not plying for hire, then I can avail depreciation deduction
on the entire cost.
Clause b: no depreciation on land. Cost of immovable property/improvement of immovable
property will not include land.
Clause d: if we sell immovable property at a consideration higher than its cost, then the
consideration becomes the new cost. We won’t gain any monetary beenfit wrt taxation.
Subsection 15:
Structural improvement on immovable asset means modification I’ve made on land/buildings
that I don’t own i.e. door, driveway, pipeline, tunnel, ventilation system, landscaping, drainage
etc. It’ll be considered my asset even thought I don’t own the building and I’ll spread its expense
over the x number of years that I use it for.
Also, if you get an asset through Modaraba/Musharaka facility, it’ll be treated as your asset and
not the Islamic banking institution’s asset. Not for bank. Bank gets depreciation for asset that
it leases to me.
--------------Continuing question from previous class: we compute tax depreciation and subtract it from the
adjusted net profit:
We’ll get depreciation on the car because:
1) partly personal partly business
2) passenger transport vehicle. We’ve to find out whether its plying for hire or not? No, because
it hasn’t been mentioned. Cost will be restricted to 2.5 million.
Checking rates in 3rd schedule
Ali’s car not plying for hire, cost restricted
2,500,000
Tax Depreciation after 1st July 2020 (15% x 50% (187,500)
x 2,500,000)
WDV – 30th June 2021 (cost – dep)
2,312,500
Assuming usage for TY2022
Opening WDV
2,312,500
Business
75%
140,625
Personal
Tax Depreciation 15%
WDV – 30th June 2022
(346,875)
250,156.25
Car not plying for hire
2,500,000
Tax Depreciation (15% x 50% x 2,500,000)
(187,500)
Business
60%
FULL
EXPENSE
WDV on 30/06/2021
2,312,500
For Zahid’s car purchased on 1st December 2020
A company’s CEs/Directors are considered as employees for the purpose of tax depreciation.
LED Television: no depreciation as it’s a capital asset
Recently purchased furniture:
Cost
Depreciation (0.50 x 0.15 x 350,000)
WDV on 30/06/2021
350,000
(26,250)
323,750
Previously Purchased Furniture:
Opening WDV (01/07/2021)
Tax Depreciation 15%
WDV on 30/06/2022
510.000
(76,500)
433,500
Total depreciation deduction:
Ali’s Car
Zahid’s car
LED television
New furniture
Old furniture
Total tax depreciation
(140,625)
(187,500)
(26,250)
(76,500)
430,875
CLASS TWENTY ONE
14/04/2021
When we do deduction from P&L, we only get 70%.
Car – cost restricted
2,500,000
Business (70%)
Personal (30%)
Depreciation 15%
(375,000)
(262,500)
(112,500)
WDV on 30/06/2020
2,125,000
Depreciation 15%
318,750
223,125
(95,625)
WDV on 30/06/2021
1,806,250
Car sold in TY22; no deduction in year of sale
Add: Deduction not allowed
208,095
WDV on 31/12/2021
2,014,375
Consideration (3mn*2.5mn/4mn)
1,875,000
Loss on sale of car
139,375
When we sell the car, we don’t get any depreciation, because full depreciation was recorded
when we purchased.
Looking at ordinance,
Hence no depreciation in year of sale, unless we purchased it after 1st July 2020 i.e. after tax
year 2021 had begun, but in our question we haven’t done so.
Clause a and b of subsection 8 tell us that when we dispose of the asset, we will add our profit
to our P&L , and if it’s a loss, we will deduct our loss from our P&L.
Consideration (selling price/market value) < WDV at time of sale = loss
Consideration (selling price/market value) > WDV at time of sale = profit
Subsection 9: if asset is being used for personal and official purposes both, then we add back
our depreciation deduction that isn’t allowed (personal purposes) to our WDV before
comparing it to the consideration. We don’t need to do this for an asset that is solely being used
for business purposes.
Subsection 10:
This means that when we compare our “WDV before sale” to our consideration, we will not
compare it to the full consideration if our vehicle is not plying for hire.We restricted our cost
to 2.5 mn when buying, so its only fair that we compare WDV to a reduced value as well. What
is this reduced value? We’ll basically reduce our actual consideration by the same proportion
with which we reduced our cost when buying.
Section 23: We get an initial allowance for using something for the first time in Pakistan.
Allowance is 25% for plant and machinery (computer equipment).
NO INITIAL ALLOWANCE ON :
-
Furniture
-
Car not plying for hire
-
Building
-
Fittings
-
Any plant/machinery previously used in Pakistan
Initial allowance is always computed before depreciation.
Question:
If it weren’t plying for hire, we wouldn’t get an initial allowance, and we would restrict it’s cost.
Sub-section 5 says you get both initial allowance and depreciation before computing WDV.
Basically, government is encouraging the purchase of such assets that benefit the economy.
Cost
4,000,000
Business (100%)
Personal (0%)
Initial Allowance (25%)
(1,000,000)
3,000,000
Tax Depreciation 15% for TY20
(450,000)
WDV on 30/06/2020
2,550,000
Tax Depreciation 15% for TY21
(382,500)
WDV on 30/06/2021
2,167,500
Consideration
3,000,000
Gain on sale of car in TY22
832,500
This gain is part of the head Income from Business and will be added to the P&L for TY22
This gain is not a capital gain and will not be added to “income from capital gains”
New Question:
Full depreciation bcs we bought it before 1st July 2020.
Also we get initial allowance @ 25% because computer equipment is included in plant and
machinery
Cost
100,000
Business (70%)
Personal (30%)
Initial allowance (25%)
(25,000)
75,000
Tax Depreciation 30% TY20
(22,500)
WDV on 30/06/20
52,500
Tax Depreciation 30% TY21
(15,750)
WDV on 30/06/21
36,750
(15,750)
(6.750)
11,025
(4,725)
No depreciation in year of sale i.e. TY22
Add: Deductions not allowed
11,475
WDV before sale
48,225
Consideration
60,000
Gain on sale of laptop
11,775
New Question:
Bought after 1st july 2020 so 50% depreciation instead of full
Cost
100,000
Initial allowance 25%
(25,000)
Business (70%)
Personal (30%)
(7,875)
(3,375)
(13,387.5)
(5,737.5)
75,000
Depreciation (30%x50%) TY21
(11,250)
WDV on 30/06/2021
63,750
Depreciation 30% TY22
(19,125)
WDV on 30/06/2022
44,625
Depreciation TY23 (30%x50%)
(6,693.75)
(4,685.625)
(2,008.125)
37,931.25
Add: Depreciation not allowed
11,120.625
WDV before sale
49,051.875
Consideration
60,000
Gain on Sale
10,948
In TY23, 4,685.625 will be added to the P&L and 10,948 will be deducted from it.
CLASS TWENTY TWO
19/04/2021
Rate is 90%. Is given when you put up industry in some particular underdeveloped areas i.e.
some export processing zones. These are the areas where people usually avoid putting up plants
so employment opportunities aren’t that great. Hence this is an incentive to rpovide employment
to the local population
Rate is also 90%. Is given in lieu of initial allowance for any energy power plant producing
renewable energy.
Only one can be availed out of initial allowance, first year allowance, and accelerated
depreciation.
Section 24: Intangibles
Sub-section 1:
To receive ammortization on an intangible asset it:
-Should have a life of one year or more
-Should have been used in business either wholly or partly concerned tax year
Ammortization is basically straight-line depreciation. Other methods of depreciation are
reducing balance, straight deprecition, sum of year digit, and machine hours method. Tangible
asset depreciation can be calculated suing any of the methods mentioned above. For intangibles,
only straight-line method can be used.
Sub-section 2:
If entire cost of the intangible asset has been taken as an expense in the P&L, we won’t get
ammortization expense on it.
Sub-section 3:
Ammortization = cost of asset/useful life in years
Sub-section 4: If there’s no discernible useful life, we assume it is 25 years.
Sub-section 5: if asset is used for business and personal purposes both, we only get
ammortization expense for the %age used in business, the way we get tax depreciation for only
the %age used in business
Sub-section 6: If intangible hasn’t b;een used for entire year, ammortization deduction will be
calculated as:
(Ammortization)(No. of days it was used in business)/(Total days in tax year)
We don’t do this for tax depreciation on tanglibe assets because the method of no. of days can
only be used for straight line method.
Sub-section 7: ammortization can’t be greater than cost
Sub-section 8: Absolutey no ammortization allowed in the year of sale, regardless of when
it is sold.
Clause a: We’ll compare WDV with consideration and subtract to get either gain/loss which will
be added to/subtracted from the head of “income from business”
Sub-section 11: Doesn’t include self-generated goodwill. Goodwill is only recorded when we
buy a business for more than its WDV.
Section 25: Pre-commencement expenditure
In accounting, such expenditures are not allowed as assets as it will bloat profits.
In taxation, such expenditures are allowed as assets and can be ammortized.
However, this isn’t in the shareholders’ interests because they won’t know that such precommencement expenditures beign recorded as assets aren’t actually assets.
Says that ammortization rate is 20%
Question:
Life of patent is 10 years atm.
Ammortization (1,000,000/10 years)
100,000
Days (1st jan-30-30th June)
30+28+31+30+31+30= 181
(100,000)(181)/365)
CLASS TWENTY THREE
21/03/2021
Head of Income: Capital Gains
Received when we dispose off capital assets
Disposal doesn’t mean just sale, it also means an asset going out of our possession.
-Asset can be stolen
-It can be lost
-It can be damaged/destroyed
-You can die (asset transferred)
Section 75 of Part III Assets gives u the definition of disposal:
-
When association expands it distributes its assets
-
When a company is liquidated it
-
When governemtn gives us rights to assets (i.e. the right to fishing through a license) it can
cancel them
-
When we redeem bonds/reedeemable shares/financial instruments
-
Relinquishing: when an inherited asset is refused and given over to someone else
-
A bond/patent can get expired
-
Surrendered
Capital asset means any property held, connected or not to the business, except the
inventory/raw materials/stock-in-trade,any property entitling us to depreciation or
amortization (intangible assets). Because selling inventory means income from business.
Capital asset includes land because we don’t get depreciation allowance on land.
It excludes movable personal assets (furniture/car/AC). Capital assets are immovable i.e. an
apartment.
However, Section 38, Subsection 5 gives some personal movable assets that will be taxed under
income from capital gains:
-Works of art (A painter/artist selling his works of art will not tax his income under capital gains
because this is his inventory)
- Jewellery
- Manuscripts/old books
- First day cover stamps
- Coins/medallions
- Antiques
No definition in ordinance. (UK’s law says it has to be older than 15 years and market value
must be greater than cost)
Capital gains is taxed under normal tax rates. Some assets listed in 3A (3B has been omitted)
are taxed at different rates i.e. under separate block of income:
1. Immovable property
Using asset personally or renting out  not a depreciable asset
CLASS TWENTY-FOUR
26/04/2021
Capital gains continued
If a transaction is related to investment, then it is part of capital gains.
Section 37: Capital Gains
Sub-section 2:
Gain on sale is computed by subtracting conisderation from the cost.
Sub-section 3:
If capital asset is held for more than one year, then its gain will be 3/4th of the gain i.e
(Consideration – cost)3/4
The holding period is computed strictly on the basis of the date of sale and date of purchase,
and neither on the tax year nor on the calender year.
Question:
Head of Income: Salary
Salary (400,000x12)
4,800,000
Medical allowance- upto 10% exempt from tax
0
Total salary income
4,800,000
Head of Income: Capital Gains
Gain on sale of painting (2,000,000-800,000)(3/4)
900,000
Gain on sale of coin (350,000-150,000)
200,000
Total Capital Gain
1,100,000
Total of heads of income
5,900,000
Taxed at different rates of it’s immovable proerty i.e. land or shares of a public company. For tax
rates of capital gains we use Division VIII.
Question: Ali is employed at a monthly salary of 400,000.
He sold his shares of a private company- gains of 60,000 and holding period is less than one
year.
He sold land – gains of 1,000,000 and holding period is 15 months.
He sold a painting – gains of 30,000 and holding period is 24 months.
He sold shares of PSO (lsited on PSX) –gains of 100,000 and holding period is 36 months.
Salary (400,000 x 12)
4,800,000
Capital Gains
Private company shares
60,000
60,000
Land (separate block)
1,000,000 x3/4
750,000
Painting
30,000x3/4
22.500
Public company shares
100,000
Total of capital gains
932,500
Taxable income
5,732,500
Less: separate block of income
(750,000)
– immovable property
Less: separate block of income
(100,000)
- public company shares
Taxable at normal rates i.e.
4,882,500
salaried
On 3,500,000
370,000
Abovwe at 20%
276000
Separate block of income – immovable property
750,000  Tax rate 2.5%  18,750
Sepaeat
646,500