SALARY - Taxable on receipt basis MEDICAL ALLOWANCE Medical Treatment Policy Yes No Yes Cash Allowance No Yes Yes No but allowed as special case Yes Treatment Medical Treatment fully exempt Cash allowance exempt up to 10% of Basic Salary Medical Treatment fully exempt Cash allowance fully taxable Medical Treatment taxable Cash allowance exempt up to 10% of Basic Salary MOTOR VEHICLE Business Use Exempt Personal Use 10 % of cost Partly Personal Partly Business 5% of cost RENT FREE ACCOMODATION Higher of A) Allowance that would be given if accommodation not taken B) 45% of Basic Salary PROVIDENT FUND Event Employee’s Contribution Employer’s Contribution Interest credited on acc. Balance Payment of accumulated balance on retirement/ resignation PENSION Exempt from tax Treatment Deduction not allowed under Salary Taxable but exempt up to lower of A) 150,000 B) 10 % of Basic Salary Taxable but exempt up to higher of A) 1/3rd of salary B) 16% of acc. Balance All receipts are fully exempt GRATUITY Type Gratuity Fund Payment to Employee Gratuity Scheme (Approved by FBR) Gratuity Scheme ( Unapproved by FBR) Treatment Completely exempt Exempt up to 300,000 Exempt up to lower of A) 75000 B) 50% of gratuity amount GOLDEN HANDSHAKE Amount to be taxed at the rate computed in accordance with the following formula, namely: — A/B% Where — A is the total tax paid or payable by the employee on the employee’s total taxable income for the three preceding tax years; and B is the employee’s total taxable income for the three preceding tax years EMPLOYEE SHARE SCHEME Event Receipt of option to acquire shares Exercising the option and/or receiving shares without restriction. Exercising the option and/or receiving shares with restriction. Treatment Not a taxable event Market Value on date of receiving shares reduced by any cost paid in respect of the option or the share. Market Value on the date where restriction ends as reduced by any cost paid respect of the option or the share. LOAN TO EMPLOYEE Benefit is taxable Situation Interest Free Loan Interest @ X% (X less than 10%) Interest @ X% (X more than 10%) Not applied on Treatment 10% of loan amount (10% - X%) of loan amount Not a taxable event as no benefit A) where loan amount is less than 1 million B) Such benefit arising to an employee due to waiver of interest by such employee on his account with the employer Income From Property - Taxable on accrual basis What constitutes RENT? A) Rent B) Non-Adjustable profit – charged over 10 years Where NAD is returned to an outgoing tenant, the already charged NAD is deducted from the new NAD received from the incoming tenant and then charged over 10 years. C) Forfeited deposit on sale/purchase of property Deductions Allowed 1) Repairs Allowance - 1/5th of RENT 2) Insurance Premium 3) Tax – water tax, property tax 4) Interest on loan – loan must be in relation to acquire, construct, renovate or reconstruct the property 5) Mortgage Charge 6) Admin and rent collection chargers – lower of (A) actual expense (B) 4% of gross rent 7) Legal fees - lawyers 8) Bad debts – unrecoverable rent subject to conditions (A) Tenant has vacated the property (B) Legal proceedings have started against the person not paying rent Income From Business - Profit and Loss account as per tax laws – specific purpose framework Allowed Deductions A deduction shall be allowed for any expenditure incurred by the person in the year wholly and exclusively for the purposes of business. Deductions Not Allowed 1) Tax on profits - income tax not allowed as deduction 2) Withholding tax 3) Any expense on which withholding tax has not been held back 4) Entertainment Expense – within the premises expenses are allowed for employees and customers. For foreign customers expenses outside the premises are also allowed. 5) Contribution made to provident fund (approved) will be allowed only up to 50% of the amount 6) Any fine or penalty – health regulations or safety regulations 7) Personal expenditure of the owner – employees expense are allowed 8) Any amount carried to reserve 9) Any amount paid by AOP to members of association 10) Where the account head total for an expense exceeds 250,000 and the payment is not done through banking channel, the expense will not be allowed This does not apply to (A) expenditures not exceeding 25000 and (B) expenses for utility/ freight/ travel/ postage 11) Salary or more than 25000 per month paid other than banking channel Depreciation 1) Reducing Balance Method for depreciation calculation: Rates Building 10% Furniture Fitting, Plant and Machinery & Motor Vehicles 15% Computer Equipment used for IT products 30% 2) Full year depreciation in the year of acquisition – no monthly working 3) No depreciation in the year of disposal 4) Gain/Loss on disposal goes to Profit & Loss Account. 5) Where an asset is used for both personal and business use only business use depreciation will be allowed as deduction. 6) When calculating gain/loss on such asset which was used for both personal and business use, add back the depreciation which was earlier not allowed. 7) For the computation of WDV, the whole depreciation is deducted (both allowed and not allowed) and then computation is done for next year. 7) Initial Allowance – Rate is 25% – only in 1st year – it is fully available regardless of personal/business use %. Allowed only for eligible depreciable asset A) Road Transport Vehicle Plying for Hire – I.A can be claimed, no restriction of cost to 7.5 million Not plying for hire – I.A cannot be claimed, restriction of cost to 7.5 million is mandatory. (where such an asset is disposed, the consideration at the time of disposal will also be restricted) (consideration x restricted value/actual value) B) Plant and Machinery not used in Pakistan C) Computer and IT Equipment Intangible Assets Amortization – straight line method On useful life, if useful life not ascertainable then 25 years. Based on number of days used. Pre-commencement Expenditure Amortize 20% per year for 5 years. Association of Persons (AOP) 1) Partnerships are separately taxable 2) Share or profit that the partners get from AOP is exempt from tax, however, this exempt income will be added to the taxable income to find out the rate of tax (only for purpose of finding the tax rate). Tax to be calculated using the rate and then find the avg. rate of tax. This avg. rate would then be applied on the actual taxable income (without the exempt income). Capital Gain Gain on Capital Asset Capital asset is any property of any kind, held by a person whether or not connected with a business except A) inventory, consumable stores etc B) any property where the person gets depreciation of amortization deduction C) any movable property held for personal use other than those mentioned in 38(5) 38 (5) includes: i) Painting, sculpture, drawing or any other work or art ii) Jewelry iii) Rare manuscript iv) Postage stamp v) Coin or medallion vi) Antique Gain on Immovable Property Taxed as separate block of income - Separates rates given in 1 st schedule Gain on Disposal of Securities Listed securities (public company) Separate Block of income – separate rates Not listed (Private or public company) Normal Rate of Tax PUBLIC COMPANY Stock exchange of Pakistan Separate Block of Income New York Stock Exchange Normal Rate Income From Other Sources 1) Any income not part of any other head of income is classified as Income from other source. Expenses are allowed to be deduced from IFOS including tax depreciation and initial allowance. 2) Dividend – no expense against dividend income 7.5% Power generation company – HUBCO/CAPCO 25% where company is not paying taxes – example: export processing zones 15% all others (example: listed company) Dividend amount received should be grossed up. 3) Royalty – patent expense allowed. For authors, laptop etc. 4) Profit on Debt – taxable @ 15% as separate block if it is less than 5 million, If more than 5 million then normal rate of taxation. 5) Rent from sub-lease of land or building 6) Rent of building with plant and machinery 7) Prize on Prize bond or cross word puzzle – 15% 8) Other prizes such as lottery, raffle, winning a quiz – 20% 9) Where a tenant gets compensation for vacating a property, that amount as reduced by anything paid earlier is charged under IFOS over period of 10 years. (Amount/10) Deductible Allowance Zakat Only zakat which is paid to central zakat fund is allowed as deduction. Zakat paid to any relative or other person is not allowed as deduction Education Expense Only allowed if income is less than 1.5 million. Deduction allowed lower of A 5% of tuition fee paid B 25% of taxable income C 60000 x # of children Tax Credits Charitable Donation Donation paid to approved organization either in cash or in kind (FMV) Avg. Rate of Tax * X Where X is lower of A actual donation given B 30% of taxable income in case of individual or AOP 20% of taxable income in case of company Private Pension Funds Only applicable when income derived under the head salary or income from business Avg. Rate of Tax * X Where X is lower of A actual premium/ contribution given B 20% of taxable income Sales Tax - 18% - This is not a tax on business. It is paid by consumers. Output Tax – Sales Input Tax – Purchases Taxable Supply a) Normal Rate/Standard Rate – 18% - input tax adjustable b) Zero Rate – 0 % - all exports are zero rated – input tax refund Exempt Supplies No charge of sales tax - Input tax is not admissible Who will collect Sales Tax? Those who are registered persons. What happens when not registered? Not allowed to adjust input tax against output tax. Adjustment only allowed to a registered person. Adjustment When adjusting input tax, the maximum amount that would be allowed would be 90% of the Output Tax.
