Content
Chapter No.
Chap#1
Chap#2
Chap#3
Chap#4
Chap#5
Chap#6
Chap#7
Chap#8
Chap#9
Chap#10
Chap#11
Chap#12
Chap#13
Chap#14
Chap#15
Chap#16
Chap#17
Chap#18
Chap#19
Chap#20
Chap#21
Chap#22
Chap#23
Chap#24
Chap#25
Chapter Name
Section – A [Income Tax]
Basics of Income Tax & Scope of Income
Income from Salary
Income from Property
Income from Capital Gains
Income from Other Source
Final Tax Regime
Deductible allowances & rebates
Income from Business Basic
Income from business In-admissible Expenses
Income from business Depreciation
Income from Business Other Areas
Association of Persons
Losses & Rebates
Income Tax Area not covered Earlier
Returns and Wealth Statement
Assessments
Appeals
Section – B [Sales Tax]
Sales Tax Definitions
Sales Tax Provisions
Sales Tax Registration and De-registration
Sales Tax Records
Section – C [Basics, Ethics and Constitution]
System of Taxation in Pakistan
Constitutional Provisions
Ethics
Code of Ethics
Page No
7
16
58
68
90
96
108
117
126
133
150
162
169
176
186
194
211
218
231
249
256
264
268
276
283
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Preface
This book is meticulously designed to serve as a comprehensive guide for students undertaking the ICAP
(Institute of Chartered Accountants of Pakistan) exams. It is equally beneficial for both fresh students and
repeaters. While the primary audience is ICAP students, the content is structured in a way that can also
support students from other professional bodies, providing high-quality material and structured learning.
The book is presented in two volumes, each with a distinct purpose to ensure holistic learning and effective
exam preparation.
Volume 1 is focused on delivering class notes in a clear and concise manner. It contains comprehensive
notes on every topic, well-structured examples, key summaries, flowcharts, and scenario-based questions
that allow students to develop a deeper understanding of the subject matter. This volume establishes
strong linkages between various topics, enhancing the students’ ability to grasp complex concepts and
retain the provisions with ease. The inclusion of summary sheets further reinforces the learning process,
enabling students to review key concepts efficiently.
Volume 2 is designed for practice and contains past papers from the last 30 ICAP exam attempts. In
addition, this volume includes examiner comments and the official marking schemes, providing a unique
opportunity for students to understand the examiners' expectations and refine their exam strategy. This
volume will be an invaluable tool for practicing real exam questions, assessing your preparedness, and
ensuring you are well-equipped to handle the types of questions that are most likely to appear in the exam.
While this book is comprehensive and well-structured, it is not intended as a replacement for the official
ICAP study text. Rather, it is designed to complement the study text, offering an alternative method of
studying by focusing on a more organized, practical, and exam-centric approach. By utilizing both resources
together, students can ensure a well-rounded and thorough preparation.
The content of this book is supported by smart notes, flowcharts, key summaries, practical exercises, and
advanced materials. These elements are carefully incorporated to simplify complex topics, facilitate
effective memorization, and enhance exam performance.
Attention to Accuracy:
Although extensive care has been taken to ensure the book is as error-free as possible, human error is
inevitable. In the event that any errors are identified, they will be promptly corrected and shared through
an updated drive link. If you come across any mistakes or have concerns regarding the content, please do
not hesitate to reach out. You can contact me via email at amjadfarrukh@hotmail.com or through
WhatsApp at 0334-0405073.
Closing Remarks:
It is my sincere hope that this book proves to be an invaluable resource, helping you to navigate through
the complex topics with confidence and ease. The approach adopted in this book is intended to empower
students to learn efficiently and excel in their exams. May ALLAH grant you success in all your academic
endeavors and in life. I request you to kindly remember us in your prayers.
Important For Chapter Wise Notes, or for any Updates in taxation Please scan the QR Code and keep
it touch with the updated book always, in case of any rectification, the soft form will be immediately
available so scan this QR Code and get yourself Updated Always
FRK
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SECTION- A INCOME TAX
Syllabus Weightage
Syllabus
Ref.
B
Teaching Hours
Grid
Income Tax Laws
Syllabu
Learning Outcomes
s Ref.
B
A
Weightage
70-80
60-75
Proficiency
levels
Testing
levels
P2
T2
Income Tax Laws
Central Concepts
Describe the central concepts and scope of income
B
Chargeability and Computation of Income and Tax
1
Compute income, taxable income and tax thereon under various heads
of income for non-corporates i.e. salary, income from property, income
from business, capital gains and income from other sources
P2
T2
2
Apply the provisions relating to carry forward, deductible allowances,
set-off of losses, tax credit and tax exemptions/concessions
P2
T2
P2
T2
P2
T2
C
1
2
3
Procedural Aspects: Returns, Assessments, Appeals and Records
Explain tax compliance requirements and related submissions
Identify persons required to furnish a return of income and wealth
statement.
Explain the provisions of law relating to the method of filing, revision,
due dates for filing and extension in the date for filing of
return/statement.
4
Prepare return of income and wealth statement along with its
reconciliation.
P2
T2
5
Communicate with Inland Revenue Authorities (filing applications,
representations and extensions).
P2
T2
P2
T2
6
Explain the provisions of law relating to various types of assessment.
7
Discuss the provisions of law relating to maintenance of records and
audit of income tax affairs of a person
P2
T2
8
Describe procedure involved in appeals before various appellate
authorities i.e. Commissioner (Appeals), Appellate Tribunal, High Court
and Supreme Court.
P2
T2
P2
T2
9
State provisions of law relating to alternative dispute resolution.
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Rates Used for Tax Year 2025
Tax rates for salaried individual (Salary Exceeds 75% of Taxable Income)
Sr.
No.
1.
2.
3.
4.
5.
6.
Taxable Income
Rate of Tax
Where the taxable income does not exceed Rs. 600,000
0%
Where taxable income exceeds Rs. 600,000 but does not
exceed Rs. 1,200,000
5% of the amount exceeding Rs.
600,000
Where taxable income exceeds Rs. 1,200,000 but does not
exceed Rs. 2,200,000
Where taxable income exceeds Rs. 2,200,000 but does not
exceed Rs. 3,200,000
Where taxable income exceeds Rs. 3,200,000 but does not
exceed Rs. 4,100,000
Rs. 30,000 plus 15% of the amount
exceeding Rs. 1,200,000
Rs. 180,000 plus 25% of the amount
exceeding Rs. 2,200,000
Rs. 430,000 plus 30% of the amount
exceeding Rs. 3,200,000
Rs. 700,000 plus 35% of the amount
exceeding Rs. 4,100,000
Where taxable income exceeds Rs. 4,100,000
Tax rates for non-salaried individuals and Association of Persons
Sr.
No.
Taxable Income (Rs.)
Rate of Tax
Where the taxable income does not exceed Rs.600,000
0%
Where the taxable income exceeds Rs.600,000 but does not
exceed Rs. 1,200,000
Where taxable income exceeds Rs. 1,200,000 but does not
exceed Rs. 1,600,000
Where taxable income exceeds Rs. 1,600,000 but does not
exceed Rs. 3,200,000
Where taxable income exceeds Rs. 3,200,000 but does not
exceed Rs. 5,600,000
Where taxable income exceeds Rs. 5,600,000
15% of the amount exceeding
Rs.600,000
Rs. 90,000 plus 20% of the amount
exceeding Rs. 1,200,000
Rs. 170,000 plus 30% of the amount
exceeding Rs, 1,600,000
Rs. 650,000 plus 40% of the amount
exceeding Rs. 3,200,000
Rs. 1,610,000 plus 45% of the
amount exceeding Rs.5,600,000
1.
2.
3.
4.
5.
6.
Tax Rate for a Professional Firm:
If an association of persons is a professional firm that cannot incorporate due to legal or regulatory rules,
the tax rate of 45% listed under serial number 6 of the Table will be reduced to 40%.
Where taxable income exceeds Rs. 5,600,000
Rs. 1,610,000 plus 40% of the amount
6.
exceeding Rs.5,600,000
Surcharge for High Earners: 10% on Gross Tax Liability for Income Exceeding Rs. 10 Million
A surcharge shall also be payable by every individual (including salaried) and Association of person
(AOP) @ 10% of the Gross tax liability where taxable income exceeds Rs.10 million.
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Capital gain on immovable property
Properties acquired on or before 30 June 2024
S.no
Holding period
1.
Where holding period
does not exceed one year
Exceeds one year but
does not exceed 2 years
Exceeds 2 years but does
not exceed 3 years
Exceeds 3 years but does
not exceed 4 years
Exceeds 4 years but does
not exceed 5 years
Exceeds 5 years but does
not exceed 6 years
Exceeds 6 years
2.
3.
4.
5.
6.
7.
Open plot Constructed
property
15%
15%
Flats
12.5%
10%
7.5%
10%
7.5%
0%
7.5%
5%
-
5%
0%
-
2.5%
-
-
0%
15%
Properties acquired after
01 July 2024
All properties
Active taxpayers
15%
Non-active persons at the
progressive slab rates
specified in
Division I for
individuals and AOP (this
rate shall not be less than
15% in any case) and at
corporate tax rate specified
in Division II for
companies.
-
Tax year 2025-Where securities acquired after 01 July 2024
Holding period
Regardless of holding period
Rate of Tax for active taxpayers
Active taxpayers
15% for persons appearing on the Active Taxpayers List on the
date of acquisition and the date of disposal of securities
Non-active taxpayers
Progressive rates specified in Division I for individuals and
association of persons and (29%) Division II for companies.
However, the rate of tax shall not be less than 15% in any case.
Tax year 2025 - Where securities acquired on or after 01 July 2022
Holding Period
Less than one year
More than one year but less than two years
More than two years but less than three years
More than three years but less than four years
More than four years but less than five years
More than five year but less than six years
More than 6 years
Tax year 2025 - Where securities acquired between 01 July 2013 to 30 June 2022
Rate of Tax
15%
12.5%
10%
7.5%
5%
2.5%
0%
Holding Period
Irrespective of the holding period
Tax year 2025 - Where securities acquired before 01 July 2013
Rate of Tax
12.5%
Holding Period
Irrespective of the holding period
Rate of Tax
0%
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Depreciation Table
Sr.no
I.
II.
III.
IV.
V.
Type of Assets
Building (all types).
Furniture (including fittings) and machinery and plant (not otherwise
specified), Motor vehicles (all types), ships, technical or professional
books.
Computer hardware including printer, monitor and allied items,
Machinery & Equipment used in manufacture of IT Products, aircrafts
and aero engines.
In case of mineral oil concerns the income of which is liable to be
computed in accordance with the rules in Part-I of the Fifth Schedule.
q Offshore platform and production Installations.
A ramp built to provide access to persons with disabilities not exceeding
Rs. 250,000 each.
Rate
10%
15%
30%
20%
100%
Initial Allowance @ 25% of Plant and Machinery
Dividend @ 15%
Profit on Debt (Upto 5 million @ 15%)
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Chapter
1
Basics of income tax & scope of income
Definition:
Income includes;
•
Any amount chargeable to tax under the Income Tax Ordinance, 2001 (e.g. income from salary)
•
Any amount subject to collection or deduction of tax under final tax regime (e.g. on exports);
•
Any amount treated as income under any provision of the Ordinance (e.g. dividends, royalty, profit on debt
etc.), and
•
Any loss of income
Heads of income
For the purposes of the imposition of tax and the computation of total income, all incomes shall be classified under
the following heads, namely:
• 1. Salary;
• 2. Income from property.
• 3. Income from business.
• 4. Capital gains; and
• 5. Income from other sources
Sum of amounts chargeable to tax under any particular head
xxx
Less:
Deductions (expenses) allowed in relevant head of income
(xx)
Income under a particular head of income
xxx
Tax Year
1. Tax Year-Section 74
There are three kinds of tax years as stipulated in Section 74 of the Income Tax Ordinance, 2001:
1. Normal tax year,
2. Special tax year
3. Transitional tax year.
1.1. Normal Tax Year:
A period of 12 months from 1 July to 30 June denoted by the calendar year in which the normal tax year ends. For
the year ending 30.6.2022 the tax year shall be 2022. The tax year shall be a period of 12 months ending on June
30th (hereinafter referred to as 'normal tax year') and shall be denoted by the calendar year in which 30th June
falls.
Calendar year is a year which ends on December 31.
1.2. Special Tax Year:
Any income year ending other than 30 June is special tax year and denoted by the calendar year relevant to the
normal tax year in which the closing date of the special tax year falls. Where a person is allowed, to use a 12 months'
period different from normal tax year, such period shall be that person's tax year (hereinafter referred to as 'special
tax year') and shall, be denoted by the calendar year relevant to normal tax year in which the closing date of the
special tax year falls.
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Chapter-1
Basic Of Income Tax & Scope of Income
Persons
Accounting year
Honda Atlas Cars
April 1, 2009 - March 31, 2010
Mr. Ahsan
July 1, 2010- June 30, 2011
GEF Firm
January 1, 2010-December 31, 2010
ABC Company
October 1, 2009-September 30, 2010
Example:
Special year 1.1.2022 to 31.12.2022 - this year end falls in the normal tax year 1.7.2022 to 30.6.2023 and therefore
tax year relevant to the normal tax year i.e. TAX YEAR 2023 shall be the Tax year for this special year as well.
Special tax year 1.10.2022 to 30.9.2023-tax year shall be 2024.
The FBR has authority to prescribe any special tax year in respect of any particular class of taxpayers. Few examples
of specified special tax year are as under:
Specified Special Year End
Sugar Mills
Insurance companies
Banks
30th September
31st December
31st December
The Board,• In the case of a class of persons having a special tax year may permit, through official Gazette, to use a
normal tax year; and
• In the case of a class of persons having a normal tax year may permit, through official Gazette, to use a
special tax year.
Class of person
Special tax year
Companies manufacturing sugar
1st October to 30th September
All insurance and banking companies
1st January to 31st December
1.3. Transitional Tax Year:
If a normal tax year or special tax year changes then the period from the day next following the last full tax
year to the date of commencement of new tax year shall be treated as transitional tax year.
Example:
Normal tax year 1.7.2021 to 30.6.2022 i.e. Tax year 2022 changes to special year 1.1.2023 to 31.12.2023 i.e. Tax
year 2024.
In this case, period from 1.7.2022 to 31.12.2022 shall be treated as a transitional tax year i.e. Transitional tax year
2023.
Where the tax year of person changes, the period between:
• the end of the last tax year prior to change and
• the date on which the changed tax year commences
Shall be treated as a separate tax year, to be known as the "transitional tax year"
Change in the Tax Year:
a) A person using normal tax year may apply to the Commissioner to allow him to use any special tax year.
b) A person using special tax year may apply to the Commissioner to allow him to change tax year
c) The Commissioner shall grant permission subject to conditions, if any, as the Commission special tax year
or normal tax year, may impose only if the person has shown a compelling need for the change.
d) If the Commissioner wants to reject the application, he shall provide an opportunity of being heard to the
person and shall record in the order the reasons for such rejection. In this person may file a review
application to the FBR and the decision of the FBR shall be final. case the
e) Similarly, if the Commissioner wants to withdraw his permission earlier allowed, he shall provide an
opportunity of being heard to the person and shall record in the order the reasons for such withdrawal of
permission. In this case the person may file a review application to the FBR and the decision of the FBR
shall be final.
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Chapter-1
Basic Of Income Tax & Scope of Income
Exercise:
Determine the tax year in respect of each accounting periods mentioned below:
a) 1.09.2022 to 31.08.2023
b) 1.01.2023 to 31.12.2023
c) 1.04.2023 to 31.03.2024
d) 1.05.2023 to 30.04.2024
e) 1.07.2023 to 30.06.2024
Answer
For all the five cases mentioned above, relevant tax year will be 2024 i.e. calendar year relevant to normal tax year
[1.07.2023 to 30.06.2024) in which the closing date (31.08.2023, 31.12.2023, 31.03.2024, 30.04.2024,
30.06.2024) of special year falls.
Exercise:
Mr. Junaid has following incomes from different heads of income:
Salary
Rs
1,075,000
Income from Property
335,000
Income from Business
1,025,000
Capital Gains on Immovable Property
237,900
Income from other sources
90,000
Compute his taxable income.
Answer
Taxable income under normal tax regime of Mr. Junaid is the sum of all above sources of income which is computed at Rs.
2,762,900.
Basic Definitions:
Definition: Person
•
•
•
•
an individual;
a company or association of persons incorporated, formed, organized or established in Pakistan or
elsewhere;
the Federal Government, a foreign government, a political subdivision of a foreign government,
or public international organization
Definition: Association of Persons
“Association of persons” includes a firm, a Hindu undivided family, any artificial juridical person and anybody of
persons formed under a foreign law, but does not include a company;
“Firm” means the relation between persons who have agreed to share the profits of a business carried on by all or
any of them acting for all.
Definitions: Board
• the Central Board of Revenue established under the Central Board of Revenue Act, 1924 (IV of 1924), and
• on the commencement of Federal Board of Revenue Act, 2007, the Federal Board of Revenue established under
section 3 thereof;
Definitions: Company
“Company” means:
1. a company as defined in the Companies Act, 2017
2. a Small company as defined in section 2 of the Income Tax Ordinance,2001
3. a body corporate formed by or under any law in force in Pakistan;
4. a modaraba;
5. a body incorporated by or under the law of a country outside Pakistan relating to incorporation of
companies;
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Chapter-1
Basic Of Income Tax & Scope of Income
6.
a foreign association, whether incorporated or not, which the Board has, by general or special order,
declared to be a company for the purposes of this Ordinance; a Provincial Government; or
7. a Local Government in Pakistan; or
8. a co-operative society, a finance society or any other society
9. a non-profit organization
10. a trust, an equity or a body of persons established or constituted by or under any law for the time being in
force
Definition: Trust
“trust” means an obligation annexed to the ownership of property and arising out of the confidence reposed in and
accepted by the owner, or declared and accepted by the owner for the benefit of another, or of another and the
owner, and includes a unit trust;
Definition: Public Company
“Public company” means —
(a) a company in which not less than 50% of the shares are held by the Federal Government or Provincial
Government;
(b) a company in which not less than 50% of the shares are held by a foreign Government, or a foreign company
owned by a foreign Government;
(c) a company whose shares were traded on a 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; or
(d) a unit trust whose units are widely available to the public and any other trust as defined in the Trusts Act,
There are two types of Companies
Public
Company
Private
Company
Public Company Includes:
A company otherthan Public company
-
50% ≥ Federal Government
50% ≥ Provisional Government
50% ≥ Foreign Government
50% ≥ Foreign Government
[Owned 100% by Foreign Govt]
Definition: Unit trust
“Unit trust” means any trust under which beneficial interests are divided into units such that the entitlements of the
beneficiaries to income or capital are determined by the number of units held
Definition: Private company
“Private company” means a company that is not a public company
Definition: Non-profit organization
“Non-profit organization” means any person other than an individual which is
(i)
established for religious, educational, charitable, welfare purpose for general public or development
purposes, or for the promotion of an amateur sport;
(ii)
formed and registered under any law as a non- profit organization;
(iii)
approved by the Commissioner for specified period, on an application made by such person in the
prescribed form and manner, accompanied by the prescribed documents and, on requisition, such other
documents as may be required by the Commissioner;
and none of the assets of such person are available for private benefit to any other person.
Definition: Charitable purpose
“Charitable purpose” includes;
• relief of the poor, education, medical relief and
• the advancement of any other object of general public utility
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Chapter-1
Basic Of Income Tax & Scope of Income
Exercise
1) Briefly state, with reasons, whether or not you consider the below mentioned companies to be a
public company for tax purpose.
•
PPL is a company incorporated under the Companies Act, 2017 and is not listed on any stock
exchange in Pakistan. 59 per cent of the shares in PPL are held by BBC Ltd, a company
incorporated in United Kingdom. United Kingdom holds 97% of the shares in BBC Ltd.
•
XYZ Limited is a public company incorporated under the Companies Act, 2017 whose shares
were traded on the Pakistan Stock Exchange from 01 August 2023 until 29 June 2024 on
which date the company was delisted on the exchange.
•
The Provincial Government of NWFP holds 50% of the shares in ABC Ltd, a public company
under the Companies Act, 2017. ABC Ltd is not listed on any stock exchange in Pakistan.
•
BRR is a public company under the Companies Act, 2017. 41% of the shares are held by the
Federal Government, 50% by the Government of Saudi Arabia and 9% by the individuals
and group companies. BRR is not listed on any stock exchange in Pakistan.
2) Anderson Inc, a public company incorporated under the law of the United Kingdom relating to the
incorporation of companies, has been operating in Pakistan for over 50 years. The control and
management of the Pakistan branch for the accounting year ended 31 December 2023 was situated
wholly outside Pakistan.
Required: Briefly state, with reasons whether Anderson Inc. will be assessed as a company for Pakistan
tax purposes for the relevant tax year.
Answer (a)
(iv)
A public company for Pakistan tax purposes, inter alia includes a company in which not less than
50% of the shares are held by a foreign government or a foreign company owned by a foreign
government. 59% of the shares in PPL are owned by BBC Ltd, which is a foreign company but BBC
Ltd is not wholly owned by the United Kingdom (foreign government). Therefore, PPL is not a
public company for Pakistan tax purpose.
(v)
A company whose shares are traded on a 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 is a public company
for tax purpose. Although the shares of XYZ Limited were traded on the Pakistan stock exchange
during the tax year 2024, XYZ Ltd did not meet the test of being a public company for tax purpose
since its shares were not listed on the Lahore stock exchange on 30 June 2024. XYZ Ltd is therefore
not a public company for tax purpose.
(vi)
A company in which not less than 50% of the shares are held by the Federal Government or
Provincial Government is a public company for tax purpose. Since the Provincial Government of
NWFP holds 50% of the shares in ABC Ltd, ABC Ltd is a public company for tax purpose
A public company for Pakistan tax purposes, inter alia means a company in which not less than
50% of the shares are held by a foreign government, therefore, BRR is a public company as 50%
of the shares are held by Government of Saudi Arabia.
(b) As per section 80, a company mean a body incorporated by or under the law of a country outside
Pakistan relating to incorporation of companies. Therefore, Anderson Inc. will be treated as company for
Pakistan tax purpose.
(vii)
Residential Status of an Individual
Residential status for tax purpose has no direct relationship with nationality or domicile. Residential status of an
individual is generally based on number of days he is physically present in Pakistan during a tax year.
Therefore, a foreigner can also be a resident person for Pakistan tax purpose. On the other hand, a Pakistan national
may become non-resident for tax purpose. A person may be a resident person in one tax year and may be a nonresident person in other tax year.
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Chapter-1
Basic Of Income Tax & Scope of Income
Residential Criteria for an Individual:
An individual would be a resident person for Pakistan tax purposes if the individual:
a) Is present in Pakistan for a period of, or periods amounting in aggregate to, 183 days or more in the tax
year; or
b) Is an employee of the Federal Government or a Provincial Government posted abroad in the tax year; or
c) Being a citizen of Pakistan, is not present in any other country for more than 182 days during the tax year
or who is not a resident taxpayer of any other country.
Rule 14 of the Income Tax Rules 2002:
Rule to count days an individual present in Pakistan becomes vital when a person has frequent visits to or from
Pakistan. Rule 14 of the Income Tax Rules prescribes the procedure for counting of days as under:
a) Part of a day that an individual is present in Pakistan counts as a whole day including:
b) A day of arrival in Pakistan
c) A day of departure from Pakistan
d) A public holiday
e) A day of leave
f) A day that the individual's activity in Pakistan is interrupted because of a strike, lock- out or delay in receipt
of supplies
g) A holiday spent in Pakistan before, during or after any activity in Pakistan A day or part of a day where an
individual is in Pakistan solely by reason of being in transit between two different places outside Pakistan
does not count as a day present in Pakistan.
Residential Status of a company
A company incorporated in Pakistan, provincial government and local government are resident without any
condition.
Other company (i.e. a company incorporated outside Pakistan) is resident if control and management of the affairs
is situated wholly in Pakistan in the year.
Residential Status of Association of Persons
AOP shall be considered as resident if control and management of the affairs is situated wholly or partly in Pakistan
in the year.
INDIVIDUAL
Citizen
183 Days Criteria
If NOT Applied,
Then
Non-Citizen
Resident in any other
country in Tax Year
183 Days Criteria Only
YES
YES
NO
Resident of
that Country
Spent more than 182 days
in any other country.
Resident
Day in transit
count
FSI/PSI
NO
Will be Pakistani Resident
183
183
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Chapter-1
Basic Of Income Tax & Scope of Income
Exercise:
Explain the residential status of the following persons for the tax year 2024:
(viii) Mr. Raza is working as Director Operations in the Ministry of Tourism. On 15 July 2023 he was
posted to Pakistan Embassy in Italy for two years.
(ix) Anderson LLC was incorporated as a limited liability Company in UK. The control and management
of its affairs was situated wholly in Pakistan. However, with effect from 01 November 2023, the
entire management and control was shifted to UK.
(x) On 01 February 2024, Mr.Sameel a citizen of Pakistan was sent to Pakistan by his UK based
company to work on a special project. He left Pakistan on 23 August 2024.
(xi) BBL is a non-listed public company incorporated under the Companies Act, 2017. All the
shareholders of the company are individuals. The control and management of affairs of the
company during the year was outside Pakistan.
(xii) Mr. Salman a property dealer in USA came to Pakistan on 01 February 2023. During his stay up to
02 August 2023 in Pakistan, he remained in Peshawar up to 30 June 2023 and thereafter till his
departure from Pakistan, in Quetta. Assume that Commissioner has granted him permission to use
calendar year as special tax year.
Answer
(i)
Being an employee of Federal Government, Mr. Raza would be treated as resident irrespective of
number of days he stays in Pakistan.
(ii)
A company shall be resident if control and management of the affairs of the company is situated
wholly in Pakistan at any time in the year. Therefore, company is resident irrespective of the fact
that it was incorporated in UK.
(iii) The stay of Mr. Sameel for the purpose of tax year 2024 is 150 days (28+31+30+31+30). Since
his stay in Pakistan is less than 183 days in tax year 2024, he is non-resident for tax purposes.
However, if he is not present in any other country for more than 182 days during the tax year or
he is not a resident taxpayer of any other country then he will be treated as resident of Pakistan.
(iv)
If a company is incorporated or formed by or under any law in force in Pakistan, it is treated as a
resident company. Such a company cannot be treated as non-resident merely on the basis that
the control and management of the affairs of the company were situated abroad. Therefore, BBL is
a resident company.
(v)
It is immaterial where he stayed in Pakistan. Number of days shall be counted from the day of his
arrival in Pakistan to the day of his departure in the following manner:
Accounting period 01 January 2023 to 31 December 2023 (Tax year 2024)
Month
No. of days
February 2023
29
March 2023
31
April 2023
30
May 2023
31
June 2023
30
July 2023
31
August 2023
2
Total
184
Since he was present in Pakistan for 184 days, therefore, he is resident individual.
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Chapter-1
Basic Of Income Tax & Scope of Income
Income with reference to Resident and Non-Resident (i.e. Scope of Total / Taxable Income)
The income of a resident person is computed by taking into account amounts that are his Pakistan-source income
and amounts that are his foreign-source income.
On the other hand, income of a non-resident person is computed by taking into account only the amounts that are
his Pakistan-source income.
Tax Treaty
Tax treaty shall apply in case of any contradiction between local laws and tax treaty e.g. if a tax treaty provides
exemption to a particular income say dividend income, then the local laws regarding taxability of dividend would
have no effect.
Foreign source income of a short-term resident
An individual shall be exempt in respect of his foreign-source income which is not brought / received in Pakistan if
he is resident only by reason of his employment and he is present in Pakistan for not exceeding 3 years.
This section does not apply on business established in Pakistan by an individual foreigner.
Foreign source income of a returning expatriate
If an individual citizen of Pakistan (returning expatriate) is resident in the current tax year but was non-resident in
the 4 preceding tax years, his foreign-source Income shall be exempt in the current tax year and in the following tax
year.
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Chapter-1
Basic Of Income Tax & Scope of Income
Foreign source salary of resident individual
Foreign source salary by a resident individual is exempt in Pakistan if he has paid foreign income tax on foreign
source salary or his employer has deducted tax at source from salary and paid to the revenue authority of that
foreign country.
Salary earned outside Pakistan shall be exempt if a citizen of Pakistan leaves Pakistan during a tax year and remains
abroad during that tax year.
Summary:
1. Income is defined as amounts chargeable to tax under the Income Tax Ordinance, 2001, including
salaries, profits from property, business, capital gains, and other sources, as well as losses of income.
2. Heads of Income: Incomes are classified under five heads:
o Salary
o Income from Property
o Income from Business
o Capital Gains
o Income from Other Sources
3. Computation of Taxable Income: The income under each head is calculated by deducting allowed
expenses from the total income.
4. Tax Year: There are three types of tax years:
o Normal Tax Year: 12 months from July 1 to June 30.
o Special Tax Year: Any income year ending other than June 30.
o Transitional Tax Year: Period between the end of a tax year and the start of a new one.
5. Normal Tax Year is from July 1 to June 30, and the calendar year corresponding to this period is the
tax year.
6. Special Tax Year: Can be applied for businesses or individuals whose year does not align with the
normal tax year.
7. Transitional Tax Year: This occurs when the tax year changes, treating the period between the old
and new tax year as transitional.
8. Change in Tax Year: Individuals or companies can apply to switch between normal and special tax
years, but approval from the Commissioner is required.
9. Residential Status: Determines how income is taxed—residents are taxed on worldwide income, nonresidents only on Pakistan-source income.
10. Rule 14 (for counting days): Provides a detailed method for calculating the number of days an
individual spends in Pakistan for tax residency purposes.
11. AOP (Association of Persons): Includes firms, Hindu undivided families, and other bodies of persons.
12. Definition of "Company": A company can be incorporated in Pakistan or abroad, and a company’s
residential status depends on where the management and control are situated.
13. Public Company: A company where the majority of shares (50% or more) are held by the government
or traded publicly.
14. Tax Treaties: In case of a conflict between local laws and tax treaties, the treaty provisions take
precedence. For example, tax treaties may exempt certain income like dividends from taxation.
15. Exemption for Foreign Source Income: Exemptions apply to individuals for foreign income under
certain conditions, such as foreign salary being exempt if taxed abroad.
Acronyms and Mnemonics to Retain Key Concepts:
• I-SIP (Income-Salary, Income from Property, Income from Business, Capital Gains, Income from Other
Sources) – to remember the Heads of Income.
• N-STT (Normal, Special, Transitional Tax Year) – helps remember the three types of tax years.
• R-183 (Resident: 183 Days Rule) – key reminder for determining Residential Status of an individual.
• AOP: Associates Of Profits – for Association of Persons.
• NTR (Normal Tax Year is from New To Required Calendar Year) – Normal tax year from July 1 to June
30.
• S-Tax (Special Tax Year) – Any other year ending other than June 30.
• TT (Tax Treaty) – Treaties Take precedence over local law.
• CO-COM (Company-Corporate Control & Management) – For Company Residential Status
(determined by where the control and management are located).
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Income from salary
Chapter
2
Mr. Name
Individual ; Resident
Tax year ; 2024
Computation of Taxable Income for the year
1. Salary;
2. Income from property;
3. Income from business;
4. Capital gains; and
5. Income from other sources
Salary
Model: Benefits received from Employer, No Deductions are allowed
Definitions (Sec. 21)
"Employee" means any individual engaged in employment.
"Employer" means any person who engages and remunerates an employee;
"Employment" includesI.
A directorship or other office involved in the management of a company (Any remuneration paid to the
directors for the purposes of rendering management services to the company will fall under the definition of
employment.)
II.
A position which gives the employee a fixed or ascertainable remuneration (It includes a person which is
remunerated on the basis of sales made by him)
III.
The holding or acting in any public office (Public offices refers to MNAs and MPAs)
Note:
It's important that master servant relationship exists between the person who is using the service and the
person who is rendering the service. If it does not exist, it will not be treated as an employment, rather it will be
considered as independent service rendered to the person who has hired him.
Example 1
The relationship between SBI College of accountancy and permanent faculty member is an employment
relationship, while the relation between SBI College of accountancy and visiting faculty member is not an
employment relationship.
The remuneration paid to the permanent faculty member is fixed irrespective of number of lectures taught by
him, while the remuneration paid to the visiting faculty member varies with the number of lectures taught by
him.
Example 2
ABC Company is in the business of repairing computers. The company has engaged Mr. Aslam on a monthly
salary of Rs. 30,000 and his job is to repair the computers of the company. One of the computers was damaged
badly due to some mishandling. The company called Mr. Babar from Hafeez center who charged the company
Rs. 200/ hour for three hours worked by him.
The relationship between ABC Company and Mr. Aslam is an employment relationship, while the relationship
between ABC Company and Mr. Babar is not an employment relationship because he is providing services in an
independent capacity.
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Chapter-2
Income From Salary
Basis of Taxation
Salary is taxable on receipt basis i.e. any salary received by an employee in a tax year shall be chargeable to tax.
Receipt [M.A.P]
A person shall be treated as having received an amount, benefit, or perquisite if it is a) Actually received by the person;
b) Paid
1. on behalf of the person,
2. at instruction of the person or
3. under any law; or
c) Made available to the person. [Section 69]
Explanation
a)
Mr. A has received the salary in cash
Applied on behalf
Employer deducts Rs. 2,000 per month from employee's salary and deposits the same amount in a provident fund
maintained on behalf of the employee.
At the instruction of person
Mr. Shah is working as an employee in a company. He has instructed to pay Rs. 10,000 as club membership fee
Under any law
Mr. Ajmal kanju is working as an employee in company on a monthly salary of Rs. 400,000. He has made default in the
payment of property tax amounting to Rs. 25,000.The Court passed an order to the company to deduct Rs 25,000 from his
salary and deposit the same amount in Government treasury.
When the employer will follow the instructions, the employee will be treated to have received the salary.
c)
Made available to the person
Employer has handed over the cheque to the employee. Employer has provided to employee the benefit in kind instead
of cash.
Laptop given to an employee instead of salary (benefit in kind).
b)
Example
Mr. Daniyal is working as Front Desk Officer in SBI. He joined the SBI on August 1, 2022. In TY 2023 salary per
month was Rs. 30,000 and in TY 2024 his salary per month was Rs. 40,000. As per the policy company pays salary to
the employee on the 2nd day after the end of each month. Calculate his salary income TY 2022 and 2023 on the basis
of available information.
Answer
Salary Income for TY 2022
(10 months x Rs 30,000/month) = Rs. 300,000
(First receipt is in the month of September)
Salary Income for TY 2023
(1 months x Rs 30,000/month + 11 month x Rs 40,000/ month) = Rs. 470,000
(First receipt is in the month of July (TY 2012) which represents June 2011 salary)
Exception to the Receipt Basis
•
•
In case of receipt of amount under salary which is paid in arrears and is expected to be charged at rate
higher than the rate which would have been charged if the amount was received in its relevant tax year,
the employee may by a notice to the Commissioner elect for tax rate applicable in the tax year in which
such salary was earned.
The above option shall be exercised by the due date for furnishing employee’s return of income for the tax
year in which the amount was received or such later date as may be extended by the Commissioner.
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Chapter-2
Income From Salary
Question
Mr. Rana has disclosed the following information
TỶ 2020
TỶ 2021
Salary/ Month
30,000
50,000
Due to some disturbance in city the salary of last 4 months of TY 2020 was given in TY 2021 and all other
payments were made on time.
You should assume the following slab rates:
200,001-400,000
0%
400,001-650,000
1%
650,001-900,000
5%
Answer
Option 1(On received basis)
TY 2020
Taxable Income
Tax Liability
TY 2021
Taxable Income
Tax Liability
(30,000x8)
240,000
Nil
(30,000x4+50,000x12)
(720,000x5%)
Option 2(On accrual basis)
TY 2020
Taxable Income
Tax liability
TY 2021
Taxable Income
Tax liability
Tax Payable:
Option I
Option 2
Therefore option 2 is feasible
720,000
36,500
(30,000x12)
360,000
Nil
(50,000x12)
(600,000x1%)
600,000
6,000
36,500
6,000
Definition of salary
Salary received by an employee from any employment, whether of a revenue or capital nature, including Capital receipts an example of capital receipt is golden hand shake receipt at the time of retirement.
(1) Any pay, wages or remuneration provided to an employee, including leave pay, payment in lieu of leave
overtime, bonus, commission, fees, gratuity or work condition supplements (such as for unpleasant
dangerous working conditions):
Gratuity: [It will be discussed later in chapter]
Work condition supplements [Mr. Ameer is working in a company which produces synthetic acid. During the
process of manufacturing some liquid evaporates which is dangerous for the health of employees. In
compensation for working in such dangerous conditions company pays Rs 20,000 per month to employee. It will
be Salary income of Mr. Ameer]
(2) Any perquisite [It will Be discussed Later in chapter]
(3) Any allowance provided by an employer including a cost of living, subsistence, rent, utilities, education,
entertainment, or travel allowance, excluding allowances solely expended for performing official duties;
Explanation: Any allowance solely expended in the performance of employee's duty does not include:
❖ Allowance which is paid in monthly salary on fixed basis or percentage of salary or
❖ Allowance which is not wholly, exclusively, necessarily or actually spent on behalf of
employer;
(4) An expense of an employee that is paid or reimbursed by the employer, other than reimbursements
performing official duties;
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Chapter-2
Income From Salary
(5) The amount of any profits in lieu of, or in addition to, salary including any amount received ❖ By a person for agreeing to enter into an employment relationship;
❖ By a person for agreeing to any conditions of employment or any changes to those conditions;
❖ On termination of employment, including compensation for redundancy or loss of employment a
golden handshake payment;
❖ From a provident or other fund, if it is not a repayment of contribution by the employee [it will be
discussed at the end of this document]; and
❖ By a person for agreeing to a restrictive covenant for any past, present or prospective employment.
(6) any pension or annuity or any supplement to a pension or annuity received / receivable from employer;
(7) any amount of gain earned under “Employee Share Scheme”;
(8) amount of tax chargeable on employee’s salary and borne by employer.
Example:
Mr. Arif Habib is a CFO of HBL Ltd., which is a leading commercial bank. A new company, Tesla Ltd. (TL) has
recently established with the strategy of acquiring top executives from the market. TL has approached Mr. Arif
to work as a CFO. TL offers him a handsome salary along with following benefits:
• Rs. 2,000,000 for agreeing to enter into contract of employment with TL and leaving HBL
• Rs. 4,200,000 for condition that Mr. Arif will not enter into contract with any other Company for a period
of 5 years.
Other terms:
• During the term of employment, Mr., Arif will not be posted abroad. If Mr. Arif is posted abroad, he will
be paid compensation.
• If due to recession, TL intends to layoff the employees, each employee will have an option to continue
employment or opt voluntary retirement in consideration of some termination benefit.
All such amounts shall be taxable under the head "Income from Salary"
➢
➢
An employee’s salary income, wherever received is taxed in Pakistan to the extent it relates to
employment exercised in Pakistan. However, salary received by Pakistan Government employee is
taxable in Pakistan whether employment is exercised in Pakistan or abroad.
A salaried taxpayer means a taxpayer whose salary income constitutes more than 75% of his taxable
income.
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Chapter-2
Income From Salary
Example
Mr. Bilal is working as an executive in a beverage company. He has provided you with the following details in order
to calculate his taxable income.
Rs.
Basic salary per month
100,000
House rent allowance per month
30,000
Allowance for official duty is 5% of basic salary
He received an allowance of Rs. 600,000 for attending a business meeting in foreign country. He spent Rs. 450,000.
Solution
Basic salary
House rent allowance
Allowance for official duty
Allowance for meeting
Taxable Income
(100,000 x 12)
(30,000 x 12)
(1,200,000 x 5%)
1,200,000
360,000
60,000
----1,620,000
Amount or Perquisite when treated received
An amount or perquisite shall be treated as received by an employee from any employment regardless of whether
the amount or perquisite is paid or provided:
➢
➢
➢
By the employee’s employer, an associate of the employer, or by a third party under an arrangement with
the employer or an associate of the employer;
By a past employer or a prospective employer; or
To the employee or to an associate of the employee or to a third party under an agreement with the
employee or an associate of the employee
Allowances
Any benefit provided by employer to the employee in fixed amount and in cash
Examples:
Cost of Living Allowance
House Rent Allowance
Medical Allowance
Utilities' Allowance
Educational Allowance
Conveyance Allowance
Traveling Allowance
Dearness Allowance
Introduction to valuation of perquisites
The term ‘perquisites’ may be defined as the casual emolument, fee or profit attached to an office or position in
addition to salary or wages. Perquisite may be cash (such as utility) or in kind (such as accommodation or motor
vehicle provided by the employer to an employee).
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Chapter-2
Income From Salary
Conveyance Provided
Following will be added in the income if employer has provided employee a motor vehicle in a tax year.
Use
Rule
Partly for personal and partly 5% of
for official use
(a) the cost to the employer For Owned Vehicle; or
(b) The fair market value of the motor vehicle at the commencement of its
lease, if it is taken on lease.
For personal Use
10% of
(a) the cost to the employer For Owned Vehicle
(b) The fair market value of the motor vehicle at the commencement of its
lease, if it is taken on lease
For official use
0%
Running and maintenance benefit for car will be separately taxable.
For above rule, "employee" includes a director of a company.
If in the question it is mentioned that employee is paying anything to employer in respect of service availed then
this will not be deducted because as per law only 10% or 5% is to be added as the case may be.
Question-1 Car acquired through purchase (by the employer)
Mr. Atif is a director of SBI. The SBI has provided him a car as a part of his salary package. The cost of the car
purchased by company is Rs. 8,000,000. Compute the amount to be added in the salary income if the car has
been provided for personal use only.
Answer-1
Amount to be added in salary income
(10% x Rs. 8,000,000)
800,000
Question-2 Car acquired on lease (by the employer)
Mr. JZ is a campus director of SBI. The SBI has provided him a car as a part of his salary package. The fair
market value of the car is Rs. 1,800,000 at the inception of lease. Gross lease rentals payable by the employer
amounts to Rs. 32,000 per month for five years. Compute the amounts to be added in the salary income of Mr.
JZ if:
(i) The car has been provided for both official and personal use
(ii) The car has been provided for personal use only.
Answer-2
(a) Amount to be added in salary income: (5% x Rs. 1,800,000)
90,000
(b) Amount to be added in salary income: (10% x Rs. 1,800,000)
180,000
Note: Answer-2
Lease rentals is irrelevant i.e. Rs. 1,320,000 (22,000 per month x 12 months x 5 years) is irrelevant. We will use
fair market value at the inception of lease
➢ Where, the services of a housekeeper, driver, gardener or other domestic assistant are provided by an
employer to an employee, the following shall be added in the salary income: The salary paid by employer
to person providing service less amount paid by employee to employer.
➢ "Services" includes the provision of any facility;
➢ If utilities are provided by an employer to an employee, the "Salary" shall include the fair market value the
utilities less amount paid by the employee to employer. "Utilities" includes electricity, gas, water and
telephone.
Question:
Mr. Imran.is working for Mr Hafiz. As per the terms of employment the employer pays directly for the utility
bills of the accommodation to the service providers of utilities against which employee has to pay a nominal
amount of Rs. 2,000 per month to the employer. The actual cost incurred by employer in whole of the tax year
for utilities for Imran’s accommodation is as follows:
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Chapter-2
Income From Salary
Water
Electricity
Gas
Basic salary per month is Rs. 50,000. Calculate taxable income.
Answer
Basic salary (50,000 x 12)
Cost incurred by employer (100,000+ 200,000+30,000)
Less: Paid by employee to employer (2,000 x12)
Taxable income
100,000
200,000
30,000
600,000
330,000
(24,000)
306,000
906,000
Interest free/concessional loan
Where a loan is provided by an employer to an employee the salary shall includeScenario
Amount to be added in salary income
Where no profit (interest) on loan is
paid by an employee
Where profit (interest) on loan paid by
employee is less than benchmark rate
Interest on loan calculated at bench mark rate
The difference between the profit on loan paid by the
employee and profit on loan computed at the
benchmark rate
However, nothing will be added in the salary income if:
The loan is up to Rs. 1,000,000.
The interest benefit is arising because employee has waived the interest to employer when
employee had provided the loan to the employer. (For example, as in case of provident fund sometimes)
It means that if the employee has given an interest free loan to the employer and in compensation employer also
gives to the employee an interest free loan than nothing will be added in salary income of employee irrespective of
the fact that he is earning a benefit.
"BENCHMARK RATE" MEANS(i) For the tax year 2003, a rate of 5% per annum; and
(ii) The rate for each coming year will be increased by 1%, but a cap will be placed at 10%
So rate for current and coming years is fix at 10%.
Question
Mr. Aleem is an employee of SBI Company. Mr. Aleem has availed a loan of Rs. 2,000,000 in tax year 2023
What amount shall be added into his income from salary on following alternate assumptions:
(a). No profit on loan is payable to company by Mr. Aleem
(b). Profit is payable to company at 6% per annum
(c). Profit is payable to company at 18% per annum
Answer
(a) Amount to be added in salary income on account of profit on loan.
(Rs. 2,000,000 x 10%)
200,000
(b) Amount to be added in salary income on account of profit on loan.
[Rs. 2,000,000 x (10% -6%)]
80,000
(c) Nothing will be added in his income.
Where employee uses a loan obtained from employer for acquisition of any asset or property producing income
under any head of income, it will be assumed that employee has paid profit (interest) equal to the benchmark rate
or actual [Higher of]
Question
Mr. Faizan has obtained a loan of Rs. 1,600,000 from employer on February 1, 2023 for the purpose of
purchasing a shop for his Tandoor. The interest charged by employer on this loan is 4% per annum. He has
provided you following details regarding TY 2023.
Details regarding business income
Revenue earned from business
1,200,000
Expenses incurred
300,000
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Chapter-2
Income From Salary
Details regarding salary income
Basic salary per month
Hose rent allowance per month
Required: Calculate his taxable income?
Answer
Income from salary
Basic Salary
(50,000 x 12)
House rent allowance
(30,000 x 12)
Interest benefit on loan (1,600,000 x (10%-4%) x 5/12)
Income from business
Revenue earned from business
Less: Expenses incurred
Less: Interest on loan calculated at
Benchmark rate
(1,600,000 x 10% x 5/12)
50,000
30,000
40,000
600,000
360,000
1,000,000
1,200,000
(300,000)
(66,667)
833,333
1,833,333
Note: If in above case interest charged by employer is higher than bench mark rate, than actual interest paid
will be allowed as expense.
Where an obligation of an employee towards employer is waived by the employer, it will be added in salary.
Obligation of employees may the following:
Loan received by an employee
Goods or services purchased on credit by employee
Question
Mr. Ali was entitled to the following during the tax year 2023 from his employer
Basic Salary for the tax year:
520,000
Education Allowance;
100,000
Mr. Ali obtained loan from his employer in tax year 2015 amounting to Rs. 1,400,000 but was unable to pay till
now. His employer has decided to waive the loan.
Required:
Compute the taxable income from salary of Mr. Ali?
Answer
Basic Salary for the tax year
Education Allowance
Loan waived by the employer
Taxable income from salary
➢
520,000
100,000
1,400,000
2,020,000
Where an obligation of an employee towards a third party is paid by the employer, it will be added in
salary.
Question
Suppose in above example, Mr. Ali also obtained loan from a Bank in tax year 2017 amounting to Rs.
380,000 but was unable to pay till present tax year. As a benefit, his employer has decided to pay the loan as
well. Compute the taxable income from salary of Mr. Ali for the tax year.
Answer:
Salary for the tax year
520,000
Education Allowance
100,000
Loan waived by the employer
1,400,000
Loan paid to the bank by the employer on Mr. Anjum's behalf
380,000
Taxable income from salary
2,400,000
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Chapter-2
Income From Salary
Where a property is transferred or services are provided by an employer to an employee, salary shall include:
➢ The Fair market value of service at the time it is provided less amount paid by employee to the employer.
➢ Fair market value of property at the time of transfer less amount paid by employee to the employer.
Question-1
Employer of Mr. Moye Moye agrees to provide pick and drop service from school to his home for his children.
The monthly expenditure for the employer in this regard amounts to Rs. 25,000.
Answer:
Rs. 300,000 (25,000 x 12 months) shall be added in the salary income of the Mr. Moye Moye
Question-2
Suppose Mr. Moye Moye pays Rs. 7,000 per month on account of pick and drop service provided by the
employer.
Answer:
Amount to be added in income from salary shall be computed as follows:
Amount paid by employer:
300,000
Less: Amount paid by Mr. Moye Moye: (7,000 x 12 months)
(84,000)
Amount to be added in income from salary
216,000
Valuation of Accommodation [Rule 4 of Income Tax Rules, 2002]
The value of accommodation provided by an employer to an employee shall be higher of:
a) 45% of the minimum of the time scale of the basic salary or the basic salary or
b) Amount that would have been paid by employer had no accommodation been provided
Employee includes a director of a company.
Note for students: If "Amount that would have been paid by employer had no accommodation been provided" is
not given in exam than we will compare 45% of basic salary with fair market rental of property (if it is given).
Minimum of time scale
It is the amount from where the salary scale of an employee starts e.g. (5,000-1,000-7,000) means salary will
starts with Rs. 5,000 with increment of Rs. 1,000 per annum up to maximum of Rs. 7,000.
Where house rent allowance is admissible @30% than in above provision 45% will be replaced with 30%.
(Note for student: It is not general rule. It is applicable for certain Government employees if question specifically
refers to it.)
Example-1
Basic salary of employee is Rs. 100,000/month. Employer has provided employee with a home. Calculate
taxable income?
Solution:
Basic salary (100,000 x 12)
1,200,000
Accommodation provided (45% of 1,200,000)
540,000
Taxable income
1,740,000
Note: As a general rule higher of 45% of Basic Salary or the amount that would have been paid had no
accommodation been provided is added in salary. The later one is not given. Hence, I am only adding 45% of
basic salary.
Example-2
An employees is paid a basic salary of Rs. 90,000 per month. Employer has provided the employee with a
furnished house. The house is not owned by the employer. Fair market rent of the house is Rs. 32,000 per
month.
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Chapter-2
Income From Salary
Solution:
Basic Salary
Accommodation provided: (Higher of)
45% of basic salary
Or-Fair market rent
(90,000 x 12)
(1,080,000 x 45%)
(32,000 x 12-384,000)
1,080,000
486,000
384,000
486,000
1,566,000
Self-hiring of property
If employee or his spouse owns a house which is given on rent to the employer and the employer has provided the
same house to employee as rent-free accommodation, then it will have two-fold effect:
1 Rent actually received by employee from employer will be income from property. (Fair market rent will
be ignored)
2 It will be a perquisite in the form of accommodation 45% of basic salary will be added under the head
salary.
Where an employer has provided a perquisite which is not covered above, the "Salary income" shall include the
fair market value of the perquisite at the time it is provided, less amount paid by the employee.
Description
Asset is Provided (only for a specified period/
means it is returnable to employer)
5% or 10% of cost for purchased vehicle
5% or 10% of FMV of vehicle obtained on lease
Transferred/sold/ Gifted
House
Higher of
45% basic salary or
Amount that would have been paid.
FMV – Consideration Paid =Benefit
in Salary
Laptop/oven/
washing machine/
Fridge etc.
Fair market rent of asset for the year less amount
paid by employee to employer
OR
Depreciation charged by employer in his books
less amount paid by employee to employer
FMV – Consideration Paid =Benefit
in Salary
Car
FMV – Consideration Paid =Benefit
in Salary
Medical facility/reimbursement or medical allowance
S.
No
1
Types
Tax treatment
Medical facility/Reimbursement of medical expenses is provided
as per terms of employment
2.
Medical facility/Reimbursement of medical expenses not as per
terms of employment
Only Medical allowance
Medical allowance + Medical facility/ Reimbursement of medical
expenses in accordance with terms of Facility/Reimbursement
will be exempt. Employment
Exempt (Provided that National
Tax Number of the hospital or
clinic, as the case may be, is given
and the employer also certifies and
attests the medical or hospital
bills)
Fully taxable.
3.
4.
5.
Exempt up to 10% of basic salary.
Allowance is Fully taxable
Facility/Reimbursement will be
exempt.
Medical allowance + Medical facility/ Reimbursement of medical Allowance is exempt up to 10%
expenses not in accordance with terms of employment
of basic salary.
Facility/Reimbursement will be
fully taxable.
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Chapter-2
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Exam note:
1.
2.
The term medical facility (hospitalization) comprises of the following scenarios:
a) medical insurance for hospitalization is borne by employer
b) Reimbursement of medical expense on account of hospitalization is made by employer;
c) Hospitalization is provided by insurance policy;
d) Personal medical expenses of employee are reimbursed by employer; and
e) Free medical treatment is provided by employer to employee.
If in income from salary question, both medical allowance and medical facility are given and medical
facility is as per terms, medical allowance will be fully taxable and facility will be exempt.
Question-1
Basic salary of Mr. Z is Rs. 40,000/month. Dearness allowance is Rs. 4,000/ month and house rent allowance is
Rs. 6,000/month. As per the terms of employment he is entitled for free hospitalization for which employer
incurred cost of Rs. 30,000.
Calculate his taxable income?
Answer-1
Basic salary
(40,000 x12)
Dearness allowance
(4,000 x 12)
House rent allowance
(6,000 x 12)
Hospitalization (Exempt being as per terms of employment)
Taxable Income
480,000
48,000
72,000
600,000
Question-2
Basic salary of Mr. AB is Rs. 40,000/month. Dearness allowance is Rs. 4,000/ month and house rent allowance
is Rs. 6,000/month. Medical allowance is 15% of basic salary.
Calculate his taxable income?
Answer-2
Basic salary
Dearness allowance
House rent allowance
Medical allowance
Less: Exempt up to 10% of basic salary
Taxable Income
(40,000 x 12)
480,000
(4,000 x 12)
48,000
(6,000 x 12)
72,000
(480,000 x 15%)
72,000
(480,000 x 10%)
(48,000)
24,000
624,000
Question-3
Basic salary of Mr. IK is Rs. 40,000/month. Dearness allowance is Rs. 4,000/ month and house rent allowance is
Rs. 6,000/month. As per the terms of employment he is entitled for free hospitalization for which employer
incurred cost of Rs. 30,000 which is in addition to medical allowance of
Rs. 3,000/month. Calculate his taxable income?
Answer-3
Basic salary
(40,000x12)
480,000
Dearness allowance
(4,000x12)
48,000
House rent allowance
(6,000x12)
72,000
Medical allowance (Fully taxable)
(3,000x12)
36,000
Hospitalization (Exempt being as per terms)
-Taxable Income
636,000
Question-4
Basic salary of Miss Inza is Rs.40,000/month. Dearness allowance is Rs. 4,000/ month and house rent allowance
is Rs. 6,000/month. Medical allowance is Rs. 5,000/month. Free hospitalization provided cost Rs. 50,000 which
is not as per terms of employment.
Calculate his taxable income?
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Chapter-2
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Answer-4
Basic salary
(40,000x12)
Dearness allowance
(4,000×12)
House rent allowance
(6,000x12)
Hospitalization (Chargeable being not as per terms)
Medical allowance
(5,000×12)
Less: Exempt up to 10% of basic salary (480,000 x10%)
Taxable Income
480,000
48,000
72,000
50,000
60,000
(48,000)
12,000
662,000
DETERMINATION/COMPUTATION OF OTHER COMPONENTS OF SALARY
Termination of employment / Golden Hand-Shake
An employee who has received an amount on termination of employment, including compensation for redundancy
or loss of employment and golden handshake.by notice to Commissioner, elect for the amount to be taxed at
following rate
A/B%
A is the tax paid by the employee on the employee's taxable income for 3 preceding tax years and
B is the employee's taxable income for 3 preceding tax years.
The above option can be exercised by due date of furnishing return of income. Commissioner may allow a longer
period.
Note: If there is a loss, say in one of the 3 preceding tax years then we will take the average of remaining
years.
Question
Mr. Babar Azam is an employee of PCB Company. He has provided you with the following details for TY 2021. His
basic salary is Rs. 40,000/month. Dearness allowance is Rs. 2,000/ month and house rent allowance is Rs.
20,000/month. He retired on April 30, 2021. Golden Handshake payment received on retirement amounted to Rs.
950,000
Details of preceding four tax years taxable income and tax liability is as follows. Calculate his taxable income and
tax liability,
Tax Year
Taxable income
Tax liability
2017
600,000
10,000
2018
1,000,000
48,000
2019
800,0000
24,000
2020
900,000
36,000
Treating Golden hand shake receipt in normal way
Income from salary (W-2)
Taxable Income
Tax liability
(30,000+15% x 370,000)
1,570,000
1,570,000
85,500
Treating Golden hand shake receipt as a separate block
Income from salary
Total income
Less: Golden handshake separate block
Taxable income-taxable under NTR
1,570,000
1,570,000
(950,000)
620,000_
Tax Liability
Tax liability on salary income other than golden hand shake (20,000 x 5%)
Add: Tax on Golden hand shake
(950,000 x (W-1) 4%)
1000
38,000
39,000
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Chapter-2
Income From Salary
(Working-1)
Tax Year
2008
2009
2010
Average rate
Taxable Income
1,000,000
800,000
900,000
2,700,000
Tax Liability
48,000
24,000
36,000
108,000
(108,000/2,700,000*100)
(Working-2)
Income from salary
Basic salary
Dearness allowance
House rent allowance
Golden handshake
4%
(40,000x10)
(2,000x10)
(20,000x10)
400,000
20,000
200,000
950,000
1,570,000
Gratuity
Definition: Section 2(3), “approved gratuity fund” means a gratuity fund approved by the Commissioner in
accordance with Part III of the Sixth Schedule;
Gratuity received from approved gratuity fund is fully exempt.
Gratuity received from approved scheme and unapproved fund or scheme is exempt upto the following limits:
Govt. Employees
Fully Exempt
Approved Gratuity Fund
Fully Exempt
Approved Scheme
Exempt up to Rs. 300,000
Un-Approved Gratuity*
Amount Received
XXX
Less: Lower of
Rs. 75,000
or
50% of amount received
(XX)
Add in Salary
XXX
Exemption in respect of unapproved gratuity shall not apply in the following cases:
(i) Any payment not received in Pakistan
(ii) Any payment received by a director of a company who is not a regular employee of such company
(iii) Any payment received by a non-resident
(iv) Any gratuity received by an employee who has already received any gratuity from the same or other employer.
Pension Definition: Section 2(3C), “Approved Pension Fund” means Pension Fund approved by Securities
and Exchange Commission of Pakistan (SECP) under Voluntary Pension System Rules, 2005, and managed by
a Pension Fund Manager registered with the SECP under Voluntary Pension System Rules, 2005;
•
•
•
Pension received by the citizen of Pakistan from the former employer shall be exempt from tax except
where the person continues to work for the same employer or an associate of the employer. Where a
person receives more than one pension, the exemption shall apply to higher of such pensions.
For a person over 60 years of age, all such pensions are exempt irrespective of the above mentioned
conditions
Pension received in respect of services rendered by a member of Armed Forces of Pakistan or Federal
Government or a Provincial Government is exempt from tax.
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Chapter-2
Income From Salary
Provident Fund (PF)
Provident fund is categorized into the following three categories:
(i) Government provident fund
(ii) Recognized provident fund
(iii) Unrecognized provident fund
Provisions regarding taxability in respect of employer/employee contribution, interest credited and accumulated
balance thereon is as follows
Particulars
Treatment (Recognized)
Unrecognized
No Treatment
No Treatment
Employee’s
Contribution
Employer’s
Contribution
Interest Credited
On Withdrawal
•
•
Employer’s contribution
Less: Lower of
Rs. 150,000
Or 10% of (B. S+D.A)
Interest Credited
Less: Higher of
16% of Acc. Balance
Or 1/3rd of (B. S+D.A)
XX
No Treatment
(XX)
XXX [Add in Salary]
XXX
No Treatment
(XX)
XXX [Add in Salary]
No Treatment
only the employer’s
contribution and
interest on
accumulated balance is
taxable in the year of
receipt
Salary for the purpose of provident fund includes basic salary + dearness allowance. All other allowances
are excluded.
There is no treatment of employee contribution as the amount is paid from salary and the same is already
included in his salary.
Benevolent fund:
Any benevolent grant paid from a Benevolent Fund to employees or members of their families is exempt.
Other benefits
Certain Perquisites without by virtue of employment.
The following perquisites received by an employee shall be exempt:
Free or subsidized food provided by hotels and restaurants to its employees during duty hours;
Free or subsidized education provided by an educational institution to the children of
employees;
3 Free or subsidized medical treatment provided by a hospital/clinic to its employees;
And other benefit for which the employer do not bear any marginal cost, as notified by Board
1
2
Question
Mr. Waseem is teaching in SBI College. His basic salary is Rs. 40,000/month. Dearness allowance is Rs. 2,000/
month and house rent allowance is Rs. 6,000/month. His child is also getting education in same school. College
charges a concessional fee of Rs. 40,000 per annum against the market charge of Rs. 65,000. Calculate income.
Answer-1
Basic salary
(40,000x12)
480,000
Dearness allowance
(2,000x12)
24,000
House rent allowance
(6,000x12)
72,000
Taxable Income
576,000
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Chapter-2
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Leave Encashment
Any amount received on encashment of leave preparatory to retirement is exempt, if received by a Government
employee& member of Armed Forces of Pakistan
Worker's Profit Participation Fund
It is fully exempt.
Foreign source salary of resident individuals [Already discussed in Chapter 1]
(1) Any foreign-source salary received by a resident individual shall be exempt if the individual has paid foreign
income tax on salary.
(2) It will be assumed that resident individual has paid foreign income tax if tax is withheld from salary by the
employer and paid to the revenue authority of the foreign country.
Where a citizen of Pakistan leaves Pakistan during a tax year and remains abroad during a tax year than salary
income earned outside Pakistan during that year shall be exempt from tax.
Note: In such case even if no tax is paid the foreign source salary income will remain exempt.
Example
Miss Hania Amir a citizen of Pakistan is employed in XYZ Company. She worked in XYZ Company from July 1, 2010
to January 31, 2011. She got a job in Saudi Arabia where she joined on March 1, 2011. She departed from Pakistan
on February 20, 2011. her monthly salary in Pakistan is Rs. 50,000 per month. Her monthly salary in Saudi Arabia
is Rs. 80,000 in Pak rupees. As on June 30th she was still in Saudi Arabia. she did not paid any tax on his salary in
Saudi Arabia. Calculate his taxable income?
Answer-1
Salary income (PSI)
(50,000x7)
350,000
Salary income (FSI)
Exempt
Taxable Income
350,000
Because hania remained outside Pakistan at the end of tax year, therefore her foreign source salary income is
exempt from tax irrespective of whether she has paid foreign income tax or not.
Exercise
Being a tax consultant, you are required to explain the tax implications/taxable income under the appropriate
head in respect of each of the following independent situations:
(i) As part of remuneration package, a company provides for reimbursement of telephone costs on actual basis
to its employees.
(ii) Actual expenditure incurred by an employee in relation to travelling and daily allowances is less than the
amount of allowances paid by the employer.
(iii) Mr. Hamid, a citizen of Pakistan was working with Zee (Pvt.) Ltd for last 15 years when he opted for early
retirement on 31 October 2023. He was due Rs. 5 million as a gratuity under the gratuity scheme of Zee (Pvt.)
Limited. The scheme was not approved by the FBR. Due to cash constraints, the gratuity though due to Hamid
on 31 October 2023 was not paid to Hamid. 0n 30 April 2024 at the request of Zee (Pvt.) Limited, Kee (Pvt.) Ltdan associated company of Zee (Pvt.) Ltd transferred the equivalent of Rs. 5 million in US Dollars into Hamid's
US dollar account in UAE in lieu of gratuity due from Zee (Pvt.) Limited.
(iv) A company has taken health insurance cover for its employees. The insurance company reimburses
employees for actual cost of medical services for themselves and their dependents.
(v) ABC Ltd has provided scholarship to one of his employees for higher studies abroad.
(vi) Mr. A has leased a car and pays for its lease rentals from his own sources. He uses the car for business
purpose. What will be the treatment of lease rentals paid and expenditure incurred on vehicle running and
maintenance?
(vii) A partner in a firm is entitled to a fixed remuneration each month. Would this constitute his salary income?
(viii) Mr. Azhar is 65 years old and his taxable salary for the tax year is Rs. 943,000. Mr. Azhar has obtained a
housing loan from a local bank. How the tax reduction for senior citizenship and deductible allowance for markup paid on loan will be calculated.
(ix) Mr. Aslam is 67 years old and employed as research scholar in a recognized non-profit institution. His
taxable salary for the tax year is Rs. 654,000. Azhar is of the view that he is entitled to both reductions i.e. in
respect of senior citizen allowance as well as for full time teacher allowance.
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(x) Mr. Sarmad has purchased a generator amounting to Rs. 1,000,000 from an interest free loan taken from his
employer. He rented the generator at an annual rental value of Rs. 250,000. Total expense of Rs. 25,000 was
expanded on repair, transport and maintenance of the generator
Answer
(i) Reimbursements of telephone expenses by the company will be treated as taxable benefits of employees in
case the facility is used for private purposes. There will be no tax
consequences to the extent the facility is used for official purpose.
(ii) Travelling and daily allowance spent to the extent for performance of duty will be exempt provided it is not
paid with monthly salary or on fixed basis. Any amount given in excess of actual spending will be fully taxable.
(iii) Since gratuity scheme is not approved, amount exempt from tax should be 50% of the amount received or
Rs. 75,000, whichever is less. However, since the payment is received outside Pakistan, the said exemption is
not available. The whole amount is chargeable to tax.
(iv) Reimbursement of actual medical expenditure by an employer is tax exempt. On a similar basis, there will
be no tax implications on reimbursement by the insurance company on behalf of the employer, or any tax
consequences for the employees on payment of health insurance premium by the employer.
(v) Scholarship granted to the employee will be exempt from tax provided the employer and the employee are
not associates
(vi) Expenditure incurred by an employee to earn salary income including travelling expenses and lease rental
payments is not tax deductible.
(vii) The remuneration paid by a firm to a partner is considered his share in the firm’s profit as partner is not
an employee of the firm.
(viii) Mr. Azhar is entitled to deductible allowance relating to housing loan has already allowed against his total
income. Further the tax reduction for senior citizen is no more available.
Tax free salary to employee
Where an employer agrees to pay tax on employee's salary, the employee's salary income shall be grossed up by
the tax payable by employer.
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Question-1
Mr. A provided following:
Basic Salary
House Rent allowance
Tax on salary is to be borne by employer.
Answer:
Income from Salary
Basic Salary
House Rent allowance
340,000/m
130,000/m
(340,000x12)
(130,000x12)
Add: Tax Benefit (W)
Salary Income
4,080,000
1,560,000
5,640,000
1,824,428
7,464,828
Tax liability
(700,000+35% of 3,364,828)
1,877,690
Less: Tax already paid by the employer
(1,824,428)
Tax payable with return
*53261_
*(Ideally it should be Rs. 0 but we have stopped calculation at Step 3 so it is not zero.)
Working:
Step 1 Salary Income
5,640,000
Tax on above
(700,000+35% of 1,540,000)
1,239,000
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Chapter-2
Income From Salary
Step 2 Salary Income
Tax on above (Table 2)
Step 3 Salary Income
Tax on above (Table 2)
Question-2
Mr. A provided following:
Income from salary
Basic Salary
House Rent allowance
Capital Gains
(5,640,000+1,239,000)
(700,000 +35% of 2,779,000)
(5,640,000+1,672,650)
(700,000 + 35% of 3,212,650)
6,879,000
1,672,650
7,312,650
1,824,428
340,000/m
130,000/m
600,000
Question-3
Mr. B provided following:
Income from salary
Basic Salary
House Rent allowance
Tax of Rs. 500 will be borne by employer.
40,000/m
30,000/m
Employee Share Schemes
"Employee share scheme" means any agreement under which a company may issue shares in the company to:
(a) An employee of the company or an employee of an associated company; or
(b) The trustee of a trust and the trustee may transfer the shares to an employee of the company or an employee of
an associated company.
Basic understanding of operation of employee share scheme
Terminologies
I.
Right/Option
II.
Exercise of right
III.
Face value of a share
IV.
Market value of a share
Simply, A letter stating that employee has a right to acquire shares at a
particular rate.
Person with the right letter purchases the shares at the rate mentioned in
the right letter. He then becomes the owner of shares.
The denomination of the share. Generally, it is Rs. 10 per share.
Price at which the share is traded in the stock market. This may be less
than, equal to or more than face value.
(b) Following events take place in employee shares scheme
Announcement of scheme
Issuance of Right letter
Exercise of right or Issuance of shares by the company.
Value of right/option (Taxability at time of grant of right or option)
The value of a right or option to acquire shares under an employee share scheme is not chargeable to tax.
Example
Mr. R bought a right for Rs. 3,000 on 01-April-2010. On 30-06-2010 fair value of the right is
Rs. 4,200. On 25-07-2010 he sold it for Rs. 4,400.
Answer
Tax year 2010 = No gain or loss will be recorded because value of a right is not chargeable to tax.
Tax year 2011 = Income from salary = Gain=A-B=4,400-3,000 1,400 [S. 14 (5)]
Disposal of right or option/ Sale of right or option
Where in a tax year, an employee disposes off a right or options to acquire shares under an employee share
scheme, the amount chargeable under the head "Salary" shall include the amount of any gain as calculated below:-
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A-B
Where A
is the consideration received for the disposal of the right or option; and
B
is the employee's cost in respect of the right or option.
Formula for disposal of right
Consideration received for the disposal of the right or option
Less: Cost of right or option
XXX
(xxx)
XXX
Exercise of right/Acquisition of shares/Issue of shares by company
Where shares are issued to an employee under an employee share scheme (including as a result of the
Exercise of an option), following amount is chargeable:
1 The fair market value of the shares at the date of issue less consideration given by the employee for the
shares and for rights or options.
Formula for exercise of right
Fair market value of the shares at the date of issue
Less: Cost of share
Less: Cost of right
XXX
(xxx)
(xxx)
XXX
Shares issued by company with restriction on transfer
Where shares are issued to an employee under an employee share scheme and there is a restriction on the transfer
nothing will be added in the income until the employee has a free right to transfer the shares. On getting the free
right to transfer, the salary shall include the fair market value of the shares at the time the employee has a free
right to transfer the shares less consideration given by the employee for the shares and for rights or options.
However if the employee disposes off the shares before getting the free right to transfer the shares, the salary shall
include the fair market value of the shares at the time the employee disposes of the shares less consideration given
by the employee for the shares and for rights or options.
Calculation of cost of shares for computing capital gain at the time of disposal
The cost of the shares shall be sum of(a) The consideration given by the employee for the shares;
(b) The consideration given by the employee for the grant of right or option; and
(c) The amount chargeable to tax under the head "Salary".
Note
1. In case of disposal of shares of private company, gain will be chargeable under the head capital gain.
2. In case of disposal of shares of public company, gain will be taxed as separate block because shares of public
company fall under the definition of securities
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Chapter-2
Income From Salary
Sr.
No
1
Basic Salary (Salary per month × Number of months employed during the tax year)
X
2
Bonus
X
3
Commission
X
4
Fees and Rewards
X
5
Overtime Payment received from employer
X
6
Amount received from employer for meeting any condition
X
7
Amount received from employer as a condition for joining his organization
X
8
Director's fee
X
9
Fee's for attending BOD meetings
X
10
Any allowances provided by employer I cash ( other than Conveyance, House rent and
medical allowance)
• Dearness Allowance
• Milk allowance
• Cost of living allowance
• Lunch allowance
• Education allowance
• Utilities allowance
• Inducement allowance
• Entertainment allowance
Amount received as work condition supplements due to unpleasant or dangerous
working conditions
Totally Taxable
Salary Summary Sheet
12
Special merit award
X
13
Leave fare assistant provided by employer (OR) Air ticket reimbursed
X
14
Reimbursement of personal expenses of employee provided by employer
• Utility bills of employee reimbursed by employer
• Internet usage of employee reimbursed by employer
• Children education expenses and school fee reimbursement by employer
• Funeral expenses of employee’s parents paid by employer
• Petrol provided by employer for residential generator of employee
Reimbursement of expenses (Allowance received) to meet official duties
16
Obligation or liability of employee towards employer is waived by the employer
18
Services of domestic servants (Housekeeper, gardener, driver) provided by employer
•
Totally
Taxable
Loan waived by employer
Salary of domestic servants borne and paid by employer
19
X
• TA/DA ( Special allowances ) received from employer
• Conveyance allowance received to meet official duties
• Free pick and drop facilities from home to office and vice versa
• Training expense of employee reimbursed by employer
Obligation or liability of employee towards third party paid by employer
• Life Insurance premium of employee paid by employer
• Annual subscription of club joined by employee paid by the employer
• Vehicle obtained by employee on rent a car basis but rent of vehicle is paid by
the employer
• School fee paid by employer
17
Less: Amount given by employee to employer for domestic servants (if any)
Assets (TV, Car, House, Fridge, Furniture, Washing machine) owned by employer but
transferred/sold to employee
Taxable
Rs
Totally
Exempt
15
Rs.
Totally
Taxable
11
Particulars
X
X
(X)
X
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FMV of asset at the date of transfer or sale to employee
20
Less: Amount paid by employee for purchase of asset from employer
Assets (TV, Fridge, Furniture, Washing machine) owned by employer but given to
employee for use only
X
(X)
Depreciation of the assets charged by the employer
X
X
Accommodation
21
House rent allowance
22
Accommodation provided by the employer (Higher of )
X
a) Annual letting Value
b) 45%( or 30%) of basic salary or MTS
X
X
Conveyance
23
Conveyance or travelling allowance
24
Motor Vehicle Provided by employer only for official use
25
Motor Vehicle Provided by employer only for personal use
• Owned vehicle given by the employer : 10% of the cost of the vehicle to the
employer
•
26
X
(Or)
Leases vehicle given by the employer : 10% of the FMV of the vehicle at the
inception of the lease
X
Motor Vehicle Provided by employer for official and private use
• Owned vehicle given by the employer : 5% of the cost of the vehicle to the
employer
(Or)
• Leases vehicle given by the employer : 5% of the FMV of the vehicle at the
inception of the lease
Guidelines for conveyance allowance:
• Taxable benefits of conveyance will be time apportioned if the vehicle isn’t
provided for the complete year
• If any expenditure paid by the employee connected with the conveyance shall be
deducted from the allowance provided
X
Medical Allowance and Medical facility
27
Medical Allowance only
Amount received
28
29
Less: 10% of the basic salary
Medical facility ( free hospitalization or medical expenses reimbursement) provided by
the employer only
• As per terms of contract provided with the NTN number of the practitioner
(Fully Exempt)
• Not as per the terms of employment ( Totally Taxable)
Medical allowance and medical facility both are provided by the employer
• Medical facility per terms of contract provided with the NTN number of the
practitioner (Fully Exempt)
• Medical allowance (Fully taxable )
(Or)
• Medical facility not as per the terms of employment ( Fully Taxable)
• Medical allowance received
Less : 10% of basic Salary
X
(X)
X
X
X
X
(X)
X
Concessional Loan from Employer
30
Interest on Loan @ 10% Benchmark Rate
Less Actual amount of interest paid to the employer
X
(X)
X
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Condition for loan:
• The loan must be obtained after the 1st July 2002
• The amount of loan must be more than R. 1,000,000
• The Rate at which the interest is obtained must be less than the benchmark rate
• Where the loan benefit is extended due to waiver of interest by such employee
then the loan will be exempt
Note:
• If the loan obtained from employer is used in the purchase of asset or property
or business for which the income is chargeable under the head of income then
the actual amount of interest or interest @ 10% whichever is higher shall be
allowed as deduction
• If the loan obtained from the employer is used in the purchase of property or
construction of new house then the actual amount of interest paid to the
employer shall be allowed as deductible allowance under section 64 A.
Provident Fund
31
Government Provident fund
32
Unrecognized provident fund
33
---
•
Employee’s contribution ( No treatment)
X
---
•
Employer’s contribution ( Fully Exempt )
X
---
•
•
Interest Credited ( Fully Exempt )
Receipt of accumulated balance ( Only employer’s contribution and interest
credited shall be taxable )
X
---
X
X
---
Recognized provident fund
•
Employee’s contribution ( No treatment)
X
•
Employer’s Contribution
X
Less : Exempt up to lower of
i.
Rs. 150,000 (or)
ii.
1/10 of ( Basic salary + Dearness allowance )
• Interest on recognized provident fund credited
Less : Exempt up to higher of
i.
1/3rd of ( Basic salary + Dearness allowance ) or
ii.
Interest credited @ 16%
• Receipt of accumulated amount under the recognized provident fund ( Fully
Exempt )
(X)
X
X
(X)
X
X
---
X
---
X
X
---
(300,000)
X
X
Gratuity or commutation of pension
34
35
36
37
Gratuity received by Govt. employees (Fully Exempt)
Gratuity received by non-government employees from gratuity fund approved by the
commissioner ( Fully Exempt )
Gratuity received by non-government employees from gratuity fund approved by the FBR
Less : Exempt up to Rs 300,000
Gratuity received by non-government employees from unapproved gratuity fund
Less Exempt up to lower of
1. Rs. 75,000 or
2. 50% of the amount received
(X)
X
Important guideline :
Unapproved gratuity or unapproved commutation of pension shall not be exempt in the
following cases:
a. Amount is not received in Pakistan
b. Amount received by the director of the company who is not regular employee of
such company
c. Amount received by the non-resident person
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d.
Income From Salary
Amount received by an employee who has already received an gratuity from the
same or any other employer.
Pension
38
Pension received by the citizen of Pakistan from the former employee (Fully Exempt)
Important guideline:
Pension received shall be taxable if :
a. A person receive a pension works for same employer or his associate after
retirement.
b. A person receives more than one pension then only one higher amount will be
exempt and remaining number of pensions will be taxable
The both conditions didn’t apply if the person is more than 60 years old.
X
---
Employee Share Scheme
39
When option ( right to acquire shares ) is obtained – Not a taxable event
40
When option ( right to acquire shares ) is sold / disposed off
41
42
43
44
---
Consideration received on the disposal of option
X
Less : Incidental expenses incurred to acquire the option
(X)
X
When shares are acquired (without any restrictions )
FMV at the date of issue of the shares
X
Less: Cost paid to acquire the shares
(X)
Less : Cost paid to acquire the option
(X)
X
When shares are acquired (with restriction on transfer) and employee retains the
shares till the uplifting of the restriction
FMV at the date when employee have the free right to transfer
X
Less: Cost paid to acquire the shares
(X)
Less : Cost paid to acquire the option
(X)
X
When shares are acquired (with restriction on transfer) and employee disposes
the shares before the uplifting of the restriction
FMV at the date when employee actually disposes of the shares
X
Less: Cost paid to acquire the shares
(X)
Less : Cost paid to acquire the option
(X)
X
When shares are disposed after getting the free right of disposal (C. Gain)
Consideration received on the disposal of shares
X
Less: Cost paid to acquire the shares
(X)
Less : Cost paid to acquire the option
(X)
Less : Incidental expenses paid to disposes of the shares
(X)
Less : Amount already taxed under the salary as a benefit received under the ESS
(X)
Total Taxable Salary
XXX
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SALARY EXTRACTED NUMERICAL FOR PRACTICE
IMPORTANT NOTE( THE FOLLOWING QUESTIONS ARE ONLY ASSIGNMENT BASED AND FOR
PRACTICE SO THE FOLLOWING RATES HAVE BEEN USED TO FIND TAX LIABILITY)
Assumed Rates for Solving These Assignment based Questions
Sr.no
1
2
3
4
5
6
Taxable Income
Where the taxable income does not exceed Rs. 600,000
Where taxable income exceeds Rs. 600,000 but does not
exceed Rs. 1,200,000
Where taxable income exceeds Rs. 1,200,000 but does not
exceed Rs. 2,400,000
Where taxable income exceeds Rs. 2,400,000 but does not
exceed Rs. 3,600,000
Where taxable income exceeds Rs. 3,600,000 but does not
exceed Rs. 6,000,000
Where taxable income exceeds Rs. 6,000,000
Rate of Tax
0%
2.5% of the amount exceeding Rs.
600,000
Rs. 15,000 plus 12.5% of the amount
exceeding Rs. 1,200,000
Rs. 165,000 plus 22.5% of the amount
exceeding Rs. 2,400,000
Rs. 435,000 plus 27.5% of the amount
exceeding Rs. 3,600,000
Rs. 1,095,000 plus 35% of the amount
exceeding Rs. 6,000,000
Question # 1
Mr. Zulfiqar, a senior executive of Mirza Petroleum Ltd (MPL), retired on 31" March after completion of
19 years of dedicated service.
The details of Mr. Zulfiqar's income for the year ended 30.6.20X8 are given below:
Income from MPL
Rupees
280,000
45,000
45,000
25,000
395,000
Basic salary
Medical allowance
Utilities allowance
Cost of living allowance
Total monthly salary
Market value of rent free accommodation provided
120,000
(ii) As per terms of employment, tax liability of Mr. Zulfiqar to the extent of Rs. 200,000 is to be borne by MPL.
(iii) On his retirement, he received gratuity of Rs. 2,660,000 from an unapproved gratuity fund
maintained by MPL.
(iv) He is receiving pension amounting to Rs.50,000 per month from the date of his retirement.
Required:
Compute taxable income and tax liability of Mr. Zulfiqar.
Question # 2
Mr. Zameer Ansari is working as a Chief Executive Officer in Wimpy (Private) Limited (WPL). Following are the
details of his income / receipts during the tax year 2023:
(a) His monthly cash remuneration in WPL is as follows:
Basic salary
Medical allowance
Utilities allowance
Rupees
200,000
30,000
10,000
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(b) In addition to the above, he was also provided the following benefits in accordance with his terms of
employment:
(i) Medical insurance for hospitalization and surgery, limited to Rs. 1,500,000 per annum.
(ii) Payment of his children’s school fees of Rs. 15,000 per month. The fee is deposited directly into
the school’s bank account.
(iii) Rent free furnished accommodation on 1000 square yards. The accommodation is located
within the municipal limits of Karachi.
(iv) Two company-maintained cars. One of the cars was purchased by WPL for Rs. 3,000,000 and is
exclusively for his business use. The second car was obtained on lease on February 1, 2017 and is used
partly for official and partly for personal purposes. The fair market value of the leased vehicle at the
time of lease was Rs. 1,800,000.
(v) Leave encashment amounting to Rs. 100,000 was paid to Mr. Zameer on July 5, 202
(c)
Mr. Zameer had received 15,000 shares of WPL on December 1, 2020 under an employee share scheme. He
had the option to transfer the shares on or after January 1, 2022. However, he sold all the shares on April 1, 2010.
Fair value of the shares were as follows:
▪ Rs. 35 per share on December 1, 2020
▪ Rs. 42 per share on January 1, 2022
▪ Rs. 48 per share on April 1, 2023
Tax deducted at source from his salary, amounted to Rs. 650,000.
Required:
Compute the taxable income, tax liability and tax payable by Mr. Zameer Ansari for the tax year 2023
Question # 3
Mateen was employed with Melody Ltd (ML) as an event organizer. On 30.6.2022 he resigned from his
employment without completion of notice period. On 1.7.2022 he joined another company Rock Star Ltd (RSL)
as a senior event organizer.
Following information is available relating to his assessment for the tax year 2023:
(a) On 1.7.2022 RSL paid Rs.280,000 to ML as compensation in lieu of un-served notice period by
Mateen.
(b) On 15.7.2022 Mateen received a gratuity of Rs.350,000 from an unrecognized gratuity fund
maintained by ML. He also received Rs.150,000 as leave encashment.
(c) In accordance with the terms of his employment with RSL, Mateen was provided with the following
emoluments / benefits during the tax year 2023:
(i) Basic salary of Rs.245,000 per month and utility allowance of Rs 21,000 per month.
(ii) A reimbursement of personal medical expenses up to 15% of the annual basic salary and Rs.250,000
on account of hospitalization charges of his daughter were made after procuring hospital bills showing
the national tax number of the hospital. These bills were also attested and certified by RSL.
(iii) For the first two months of his employment, a pick and drop facility was provided to Mateen at a
monthly rent of Rs.25,000. On 1.9.2022 RSL provided a company maintained 1300 cc car which was
partly used for private purposes. The cost of the car was Rs.2,500,000.
(iv) Monthly salary of Rs.6,000 was paid to Mateen's house keeper. Mateen however, reimbursed
20% of the house keeper's salary to RSL.
(v)
A special allowance of Rs.50,000 was paid to meet expenses necessarily to be incurred in the
performance of his official duties. Actual expenditure was Rs.40,000.
(vi) On 1.1.2023, he was provided an interest free loan of Rs.1,500,000. The prescribed benchmark rate is
10%per annum.
(vii) A commission of Rs.500,000 for introducing new clients to the company. Withholding tax was
deducted by RSL @ 12% from such payments.
(viii) The tax deducted at source from his salary by RSL for the tax year 2023 amounted to Rs.550,000 (other
than tax deducted on commission).
Required:
Compute the taxable income, mix liability and tax payable / refundable, if any, by Mateen for the tax year 2023
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Question # 4
Mr. Khursheed, Pakistani national, was employed as the chief financial officer in Zulfiqar Gas Company (ZGC), since
2012. Following information pertains to his income for the tax year 2023. Assume that he has provided the
following information on 25.9.2023 to his tax consultant for the purpose of computation of taxable income and tax
liability:
(I) Income from ZGC
Khursheed was employed with ZGC up to 31.12.2022. During this period he received the following
emoluments:
▪ Basic salary of Rs.400,000 per month, medical allowance of Rs.75,000 per month and utility allowance
equivalent to 10% of basic salary.
▪ A company-maintained car for official and private use. The car was purchased two years ago at a cost
of Rs.5 million. According to the company's policy, ZGC deducted Rs.10,000 per month from his salary,
for private use of the car.
Khursheed had undergone a major surgery during the year and incurred an expenditure of ks,1,500,000. ZGC
reimbursed the entire amount as a special case as it was not covered under the terms of employment.
Due to Poor health, Khursheed opted for early retirement on 31.12.2022 under the company's voluntary
retirement scheme.
He received the following benefits on his retirement:
▪ Rs.7,500,000 as a golden handshake under the voluntary retirement scheme.
▪ Rs.9,100,000 from an unapproved gratuity fund maintained by ZGC.
▪ Transfer of company's car for Rs.2,600,000. The amount was deducted from his final settlement.
The fair market value of the car as of 31.12.2022 was Rs.2,800,000.
The tax deducted at source from the salary amounted to Rs.2,500,000.
Required:
Compute the amount of taxable income, tax liability and tax payable / (refundable), if any, for the tax
year 2023.
Question # 5
Mr. Creative is working as Director Human Resources at Artistic Technologies Ltd (ATL). Following are the details
of his income/receipts during the latest tax year:
(a) Monthly cash remuneration from ATL:
Basic salary
Utilities allowance
Medical allowance
Rs. 300,000
15% of basic salary
12% of basic salary
(b) In addition to above, he was also provided the following benefits in accordance with his terms of
employment:
(i) Rent-free furnished accommodation in a bungalow situated on a 500 square yard plot of land. Rent for
a comparable accommodation facility in the vicinity is Rs.150,000 per month.
(ii) An 1800cc company-maintained car. The car was purchased two years ago at a cost of
Rs.1,600,000 and is used both for official and personal Purpose
Tax deducted at source from his salary was Rs.400,000.
Required:
Compute the taxable income, tax liability and tax payable for the latest tax year.
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Chapter-2
Income From Salary
Question # 6
Mrs. Aslam was employed with Sahal Ltd (SL) as a Marketing Manager. On 30.6.2022 she resigned from her
employment with SL On 1.7.2022, she joined H Pakistan Ltd (HPL), a quoted company, as a Marketing Director.
She has provided you the following information in respect of the tax year 2023:
(i)
In July 2022, she received following amounts from SL in final settlement:
▪ Leave encashment amounting to Rs.95,000.
▪ Gratuity of Rs.500,000 from an unrecognized gratuity fund maintained by SL.
▪ Reimbursement of Rs.100,000 against a health insurance policy. The insurance claim was lodged
by SL on behalf of Mrs. Aslam in January 2022.
(ii) In accordance with the terms of her employment, income tax related to her salary and benefits is to be
borne by HPL. Her emoluments/benefits during the tax year were as follows:
▪ Basic salary of Rs.200,000 per month.
▪ Medical allowance of Rs.60,000 per month.
▪ Rent free accommodation with annual letting value of Rs.480,000.
▪ Traveling allowance of Rs.50,000 per month. 60% of the amount was spent in the performance of
official duties.
▪ Provident fund @ 10% of basic salary. An equal amount was contributed by HPL.
(iii) Under an employee share scheme, Mrs. Aslam was awarded 5,000 shares in HPL on 1.1.2023. Under
the scheme she was not allowed to sell the shares up to 31.3.2023. She sold all the shares in HR. on
1.5.2023.
Fair value of the shares on the above dates was as follows:
▪ Rs.20 per share on 1.1.2023
▪ Rs.28 per share on 31.3.2023
▪ Its.32 per share on 1.5.2023
(iv) On 31-12-2022, she received a loan of Rs.400,000 from HPL. The loan carries a mark-up of MO per arum
The prescribed benchmark rate is 10%.
(v) She won the best executive employee award of HPL and received a laptop having a fair market value of
Rs.100,000.
Required:
Compute the taxable income, tax liability and tax payable for the tax year 2023
Question # 7
Sultan is working as electronic engineer with Ansari Electrical Company Limited (AECL). He
has provided you with the following information for the tax year ended 30 June 2023:
(a) His monthly cash remuneration in AECL is as follows:
Basic salary
Medical allowance
Utilities allowance
Market value of rent free accommodation
Rupees
480,000
48,000
55,000
75,000
(b) He was also provided the following benefits in accordance with the terms of his employment: (i)
Leave encashment amounting to Rs. 300,000.
(ii) Hospitalization cost is covered by an insurance policy upto the amount of Rs. 1.5 million. The insurance
premium relating to this benefit amounted to Rs. 55,000.
(iii) He is allowed to use his personal car for office use. Reimbursement of car running and maintenance
expenses amounted to Rs. 550,000. 15% of these expenses pertain to personal use.
(c) Rs. 200,000 were received from a private limited company for attending board meetings.
Required:
Under the provisions of the Income Tax Ordinance, 2001 compute the taxable income and tax thereon
for the tax year 2023. Tax rates are given on the last page:
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Income From Salary
Question # 8
Mukarram is working as a Commercial Manager in Airmen Engineering Limited (AEL), an unlisted public
company, for the past many years. He derived following emoluments during the tax year ended 30 June
2023:
Basic salary (per month)
Medical allowance (per month)
Housing allowance (per month)
Travel allowance (per month)
Rupees
250,000
37,500
25,000
11,500
In addition to above, Mukarram was also provided the following:
(i) A used company maintained car for both business and personal use. This car was provided to him on 1 July 2022
in replacement of his previous car. This car was purchased three years ago at a price of
Rs. 1,000,000. However, the fair market value of the car on 1 July 2022 was Rs. 800,000. On 1
September 2022, in accordance with the terms of his employment, AEL transferred the previous car to Mukarram
free of cost. The market value of the car at the time of transfer was Rs. 400,000 whereas its book value was Rs.
200,000. On 1 June 2023, Mukarram sold this car to his neighbor at a price of Rs. 350,000.
(ii) Performance related bonus of Rs. 500,000. The bonus was however, paid to him on 5 July 2023.
(iii) Two free buffet dinner coupons per month, one each for Mukarram and his wife in a five star hotel.
The coupons were provided in line with AEL’s policy for its management employees. The dinner costs
AEL Rs. 2,000 per person.
(iv) Reimbursement of Rs. 20,000 in respect of telephone and internet charges. 20% of this amount was spent by
Mukarram in performance of his official duties.
(v) Two air-conditioners and a washing machine for use at home. The combined book value of these
appliances was Rs. 300,000. The appliances are returnable to AEL after three years’ time. AEL
charged 10% depreciation on these appliances.
(vi) An option to purchase 20,000 shares in AEL on 1 May 2023 at Rs. 25 per share. The break-up value of AEL on
that date was Rs. 85 per share.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute the taxable
income of Mukarram for tax year 2023.
Question # 9
Wajahat, aged 48 years, is a marketing manager in Nayaab (Pvt.) Limited (NPL), a company engaged in the
manufacture and supply of tissue papers. The details of his monthly emoluments during the year ended 30 June
2023 are as under:
Rupees
Basic salary
70,000
Dearness allowance
10,000
Conveyance allowance
8,000
In addition to the above, Wajahat was also provided the following:
(i) Provident fund (PF) contribution of Rs. 8,400 per month. An equal amount per month was contributed
by Wajahat to the fund. Interest income of Rs. 391,000 at the rate of 20% of accumulated balance of PF was
credited to his PF account.
(ii) Reimbursement of electricity bills during the year amounting to Rs. 60,000.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute the total
income, taxable income and net tax payable by/refundable to Wajahat during the tax year 2023.
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Income From Salary
Question # 10
Bader is working as General Manager Finance with HiFi Limited (HFL) for the past two years. The details of his
monthly emoluments during the year ended 30 June 2023 are as under:
Basic salary
Medical allowance
House rent allowance
Rupees
250,000
28,000
120,000
In addition to above, Bader was also provided the following:
(i) Rs. 900,000 for signing a bond with HFL. According to the bond Bader would not resign from his
employment before the expiry of 30 June 2025.
(ii) Company maintained car for both official and private use. The car was purchased on 1 August 2022 at a fair
market value of Rs. 1,500,000.
(iii) On 1 January 2023 HFL sold an item of inventory to Bader for Rs. 12,000. The net realizable value of the
item of inventory at the end of 31 December 2022 and 30 June 2023 was Rs. 22,000 and Rs. 24,000
respectively. HFL had acquired it in July 2014 at a cost of Rs. 35,000.
(iv) An option was granted to Bader in August 2021 to acquire 2,500 shares in HFL’s parent company,
Mamoo plc. (MP), listed on Hong Kong stock exchange. However, the option was exercisable after
completion of one year of service with HFL. Bader paid an amount equivalent to PKR 200,000 to acquire the
option when the fair market value of the option was PKR 250,000.
On 1 September 2015 he paid an amount equivalent to PKR 300,000 to acquire the shares in MP. The shares
were issued to him on 15 September 2022 when the market value of each share was equivalent to PKR 375.
On 15 June 2023 Bader sold 2,000 shares in MP and received net proceeds equivalent to PKR 875,000 in his
bank account in Pakistan. This amount was received after deduction of bank charges of PKR 5,000 and
brokerage commission equivalent to PKR10,000.
Other information relevant to tax year 2023 is as under:
(i) On 1 July 2015 Bader received following payments from his previous employer Sultan Hospital
Limited:
▪ Rs. 600,000 in respect of termination benefits under an agreement.
▪ Rs. 485,000 against gratuity under an unapproved scheme.
(ii) On 1 November 2022 Bader fell ill and was admitted to Sultan Hospital Limited. The hospital incurred Rs.
65,000 on his treatment but did not charge anything to Bader.
(iii) Withholding tax deducted from Bader’s salary during tax year 2023 amounted to Rs. 1,105,000.
(iv) His total assessed taxable income and total taxes paid thereon during the three preceding tax years
amounted to Rs. 10,500,000 and Rs. 1,260,000 respectively.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute the taxable
income and net tax payable by or refundable to Bader for tax year 2023.
Question # 11
Taqi Ahmed is working as Director Marketing with Zee Textiles Limited (ZTL) for the last twenty five years.
Details of his monthly emoluments during the year ended 30 June 2023 are as under:
Basic salary
Conveyance allowance
Medical allowance
Rupees
440,000
44,000
44,000
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Income From Salary
In addition to the above, Taqi Ahmed has provided the following information:
(i)
He and his family members are covered under the health insurance policy in accordance with the terms
of employment. The amount of annual premium paid by ZTL was Rs. 200,000.
(ii)
During the year, daily allowance of Rs. 400,000 was received to meet the expenses for working on
assignments at ZTL’s factories located in Lahore and Multan.
(iii)
On 31 July 2023, the HR Committee approved a performance bonus for all employees for the year ended
30 June 2023. Taqi received Rs. 1,200,000 as performance bonus on 15 August 2023.
(iv)
On 31 March 2023, in recognition of completion of twenty five years of his service with ZTL, the
board of directors approved to waive the outstanding amount of loan taken by Taqi Ahmed.
This interest free loan of Rs. 2,500,000 was taken on 1 January 2021 and was repayable in fifty
equal monthly instalments commencing from May 20X5. The prescribed benchmark rate is
10% per annum.
(v)
(vi)
During the year, he received Rs. 100,000 for attending board meetings of ZTL. No tax was withheld from
this amount.
Amount of tax withheld by ZTL from his salary amounted to Rs. 2,000,000.
Other information relevant to tax year 2023 is as under:
(i) Salary is transferred to the bank account on 10th of the following month.
(ii) 10% annual increase was given to him effective 1st July in each of the last three years.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute under correct
head of income, the total income, the taxable income and net tax payable by or refundable to Taqi Ahmed for
the year ended 30 June 2023
Question # 12
Ahmer Ghazi has been working as director production in Delta Pakistan Limited (DPL) for last three years. He
received following monthly emoluments from DPL during the year ended 30 June 2023:
Basic salary
House rent allowance
Medical allowance
Rupees
650,000
95,000
70,000
In addition to the above, the employer also provided following to Ahmer Ghazi:
(i) Health insurance for him and his family members. The amount of annual premium paid by DPL was Rs.
50,000.
(ii) Return air ticket for Dubai worth Rs. 180,000 for him and his family as a reward for achieving the
production target.
(iii) Loan of Rs. 5 million was given to him on 1 August 20X7 at 6% per annum.
(iv) Withholding tax of Rs. 1,500,000 deducted from his salary was reimbursed to him.
Other information relevant to the tax year 2023 is as under:
(i) Under an employee share scheme 10,000 shares of DPL were allotted to Ahmer Ghazi on 1 January 2021.
According to the scheme, he was not allowed to sell/transfer the shares up to 31 December 2021. On 1 April
2023, he sold 6,000 shares of DPL for Rs. 33 per share. The face value of each share is Rs. 10. Fair market values
of each share on different dates were as follows:
▪ Rs. 20 per share on 1 January 2021
▪ Rs. 23 per share on 1 January 2022
▪ Rs. 29 per share on 30 June 2023
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute the following
for the year ended 30 June 2023:
(a) Total income
(b) Taxable income
(c) Net tax payable or refundable
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Question # 13
Saeed, a citizen of Pakistan, was working on a foreign vessel belonging to Delta Shipping Company (DSL) based
in Spain for the past three years. His monthly salary was USD 15,000 which was remitted to his Pakistani bank
account through normal banking channel. The amount received during the tax year 2023 was converted to Pak
Rupees at an average exchange rate of USD 1 = PKR 131.
On 1 October 2022, he resigned from DSL and joined Haris Pharma Limited (HPL) in Pakistan as a General
Manager. He was offered following monthly salary and allowance in HPL:
Basic salary
Medical allowance
Rupees
600,000
66,000
In addition to the above, he was also provided the following:
(i) Bonus equal to two monthly basic salaries. However, bonus amount was adjusted in proportion to the
duration of his stay in the company. The bonus amount was paid to him on 5 July 2023.
(ii) Two company maintained cars. Both cars were purchased on 1 October 2022. The car costing Rs.
3,500,000 was used for official purposes whereas the car costing Rs. 1,900,000 was used for personal
purposes.
(iii) Free lunch from the restaurant owned by one of HPL’s directors. The fair market value of food
provided to him during the year was Rs. 125,000.
(iv) A special allowance of Rs. 20,000 per month to meet expenses wholly and necessarily incurred in the
performance of his official duties. Actual expenses incurred by him during the year were Rs.
150,000.
(v) Provident fund contribution of Rs. 60,000 per month. An equal amount per month was also
contributed by Saeed to the fund.
Withholding tax deducted by HPL from Saeed’s salary during the tax year 2023 amounted to Rs.
1,300,000.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute under the
appropriate head of income, the total income, taxable income and net tax payable by or refundable to Saeed for
the tax year 2023
Question # 14
Sageer, a resident individual, is working as a full time professor at Knowledge Institute (KI) which is a non- profit
education and research institution and is duly recognized by Higher Education Commission. KI is entirely owned
and funded by Zinger Limited (ZL), a company listed on the Pakistan Stock Exchange.
Details of his monthly remuneration during the year ended 30 June 2023 are given below:
Basic salary
Medical allowance
Fair market rent of accommodation
Rupees
200,000
20,000
100,000
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In addition to the above, he was also provided the following:
▪ Health insurance for Sageer and his dependents as per the terms of employment. For this purpose, KI is
paying annual insurance premium of Rs. 40,000.
▪ Provident fund contribution of Rs. 15,000 per month to a recognized provident fund.
▪ An equal amount was also contributed by Sageer to the fund.
Additional information
(i) On 1 July 2022, Sageer was granted an option to acquire 10,000 shares in ZL at a price of Rs. 105 per share
under an employee share scheme. Sageer bought the option on the same date by paying Rs. 175,000 to KI
when the fair market value of the option was Rs. 200,000. He exercised the option on 30 September 2022
when the fair market value was Rs. 130 per share.
As per the scheme, he was not allowed to sell or transfer the shares before 31 December 2022. On
31 December 2022, the fair market value of ZL’s shares was Rs. 142. On 30 May 2023, he sold 5,000 of these
shares at Rs. 135 per share.
(ii) On 1 July 2022, Sageer obtained an interest free loan of Rs. 1,500,000 from KI in exchange for which he
agreed to waive the interest receivable on his provident fund balance maintained with KI. Interest provided
on provident fund balance for the year was 8%. The prescribed benchmark rate is 10%.
(iii) On 31 August 2022, he received leave encashment of Rs. 100,000 relating to previous yea
(iv) During the year, tax of Rs. 160,000 was deducted at source by KI.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute the taxable
income and net tax payable by or refundable to Sageer for the year ended 30 June 2023. Show all relevant
exemptions, exclusions and disallowances.
Question # 15
Nauman has been working as manager finance in Dua Limited (DL), a public listed company, for many years. He
received following monthly emoluments from DL during the year ended 30 June 2023:
Basic salary
Medical allowance
House rent allowance
Rupees
120,000
20,000
60,000
In addition to the above, the employer also provided him the following benefits:
(i)
Provident fund contribution of Rs. 18,000 per month to a recognized provident fund. An equal
amount was also contributed by Nauman to the fund. Interest income of Rs. 540,000 at the rate of
18% of accumulated balance of the fund was credited to Nauman’s account.
(ii)
On 1 July 2022, he was transferred to Lahore and was paid relocation allowance of Rs. 300,000.
(iii)
HR Committee approved a performance bonus for the year ended 30 June 2023 for all employees.
Nauman received Rs. 400,000 as performance bonus on 15 July 2023.
(iv)
On 1 April 2023, Nauman obtained a loan of Rs. 5,000,000 @ 6% per annum from DL to purchase
a new house for his own use. First instalment of the loan was paid on 30 June 2023. He incurred
legal expenses of Rs. 20,000 for obtaining the loan.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute total income
and taxable income of Nauman for the tax year 2023. Show all relevant exemptions, exclusions and
disallowances
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Question # 16
For the purpose of this question, assume that the date today is 31 August 2023. Basit, a senior manager at Master
Limited (ML), resigned on 31 January 2023 after completion of three and a half year of service. During the tax
year 2023, he received the following emoluments from ML:
(i) Salary of Rs. 610,000 per month.
(ii) Allowance of Rs. 60,000 per month for services of domestic servant. Out of which, he paid Rs. 36,000 per
month in respect of these services.
(iii) Allowance equal to 5% of salary solely expended in the performance of his duties of employment.
Additional information:
(i) On 1 July 2022, he leased a car having fair market value of Rs. 4,800,000 at a monthly rental of Rs.
120,000. He pays lease rentals from his own sources but has used this vehicle for both official and
personal purposes.
(ii) On 1 July 2022, 13000 shares of ML were allotted to Basit under an employee share scheme, against the
payment of Rs. 30 per share. According to the scheme, he was not allowed to sell transfer the shares upto
31 December 2022. On 31 May 2023, he sold 5000 shares of ML at its fair market value (FMV). FMV of each
share on different dates are as follows:
1 July 2021
Rs. 50
31 December 2021
Rs. 90
31 May 2022
Rs. 80
(iii) On 15 February 2023, he received the following payments from ML as final settlement:
▪ Rs. 320,000 on account of leave encashment.
▪ Rs. 2,200,000 under gratuity scheme approved by the board.
▪ Rs. 700,000 salary arrears related to tax year 2022.
(iv) Withholding tax deducted by ML from Basit’s salary during the tax year 2023 amounted to
Rs.1,400,000.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder: compute the total income,
taxable income and net tax payable by or refundable to Basit for the tax year 2023
Question # 17
Nasir has been working as head of finance in Asaaish (Private) Limited (APL). He received following monthly
emoluments from APL during the year ended 30 June 2023:
Basic salary
Medical allowance
Cost of living allowance
Rupees
800,000
100,000
200,000
In addition to the above, APL also provided him the following benefits:
(i) Residential house owned by APL for no rent. The fair market value of the rent was Rs. 300,000 per month.
(ii) Company maintained car. The car was acquired on lease by APL on 1 July 2021 at an annual rental of Rs.
1,100,000. The fair market value of the car as on 1 July 2021 and 30 June 2023 were Rs.
4,000,000 and Rs. 6,000,000 respectively. 70% of the car is used for office purpose while 30% is used for
personal purposes.
(iii) 250 liter of fuel every month. The average petrol price during the year was Rs. 180 per liter.
(iv) Reimbursement of car maintenance expenses upto Rs. 20,000 per month. During the year, APL
reimbursed Rs. 150,000 to him in this respect.
(v) Health insurance for Nasir and his dependents as per the terms of employment. For this purpose, APL is
paying annual insurance premium of Rs. 100,000. The insurance company incurred expenses of Rs. 500,000
on hospitalization of his dependents.
(vi) Ad-hoc relief allowance equal to one month’s basic salary keeping in view the increase in inflation.
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Nasir incurred a monthly expenditure of Rs. 20,000 from July 2022 to November 2022 while working from
home under the COVID guidelines issued by APL’s management.
Withholding tax deducted by APL from his salary during the tax year 2023 amounted to Rs. 4,500,000.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder:
compute the total income, taxable income and net tax payable by or refundable to Nasir for the tax year 2023.
Question 18
For the purpose of this question, assume that the date today is 30 September 2023.
Cheng, a Chinese citizen, has been in Pakistan since the year 2015. For career growth, he left his employment
with Hope Limited (HL), an unlisted FMCG, on 30 September 2022 and joined a leading chain of hotels namely
Desire Hotels (DH) on 1 October 2022. The details of his emoluments during the year ended 30 June 2023 are
a follows:
Particulars
HL
DH
--------- Rupees --------350,000
450,000
35,000
60,000
20,000
30,000
Basic salary per month
Medical allowance per month
Utilities allowance per month
Lunch provided by the employer at subsidized
rate – per month cost to employer
10,000
25,000
Company maintained car (for both official as well as
personal purposes):
▪ cost
3,000,000
5,000,000
▪ fair market value as on 30 June 2023
2,500,000
6,000,000
Annual bonus related to the tax year 2022
350,000
Gratuity under an unapproved scheme
1,225,000
Additional information (other benefits provided by DH):
(i) Two return air tickets to China to the extent of Rs. 600,000 for Cheng and his spouse. During the year, he
incurred Rs. 550,000 on account of his traveling to China.
(ii) Rs. 750,000 received for signing a bond with DH, according to which Cheng cannot leave the organization
before 30 June 2024.
(iii) Rs. 400,000 received from DH as commission for securing a large contract.
(iv) Payment of the outstanding loan of Rs. 3,800,000 by DH as per the terms of the employment contract. Cheng
had obtained this interest free loan from HL, for the construction of a house. On 1 July
2019, the house was given on rent under a 5-year rental agreement at an annual rental of Rs. 800,000.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute total income,
taxable income and tax payable by or refundable to Cheng for the tax year 2023. (Show all relevant
exemptions, exclusions and disallowances)
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Answer 1
Mr. Zulfiqar
Tax year 20X8
Computation of Taxable Income and Tax payable
Rs.
Salary
Basic salary 280,000 × 9
Medical allowance 45,000 × 9
Less: Exempt up to 10% of basic salary
Utility allowance 45,000 x 9
Cost of living allowance 25,000 x 9
Rent free accommodation 45% of basic salary
Tax liability borne by the employer
Gratuity from unrecognized fund
Less: Exempt up to Rs.75,000 or 50% of amount
Pension
From Mirza Petroleum (50,000 x 3) 150,000
From multinational Company (12,000 x 12) 144,000
Taxable salary
2,520,000
405,000
252,000
2,660,000
(75,000)
153,000
405,000
225,000
1,134,000
200,000
2,585,000
Exempt
144,000
7,366,000
Tax Liability
1,095,000+ 35% of 1,366,000.
1,573,100
Answer 2
Mr Zameer Asari
Computation of taxable income and tax thereon
For the tax year 2023
Rupees
Income from salary (A)
Basic salary (Rs. 200,000 x 12)
Medical allowance (Rs. 30,000 x 12) [Note 2]
Utilities allowance (Rs. 10,000 x 12)
School fees (Rs. 15,000 x 12)
Rent free furnished accommodation (Rs. 2,400,000 x 45%)
Car used for business purposes only (exempted)
Car used for personal as well as business purposes (Rs.1,800,000x5%)
Payment to an approved pension fund (exempted)
Employee share option - charged to salary in tax year 2020 and Leave encashment (paid
after tax year 2023)
Payment to approved pension fund-exempt
Income from Salary
Tax Liability
435,000+27.5% of 630,000.
2,400,000
360,000
120,000
180,000
1,080,000
90,000
4,230,000
608,250
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Answer 3
Mr. Mateen
Tax Year 2023
Computation of taxable income and tax liability
Rs.
SALARY
Compensation in lieu of unserved notice
Gratuity received from unapproved fund maintained by ML
Less: Exempt up to lower of 50% of gratuity or Rs.75,000
Leave encashment
Basic salary (245,000 × 12)
Utility allowance (21,000 × 12)
Company maintained car (5% of Rs.1,500,000 × 10/12) (b)
Salary of house keeper (6,000 x 12 × 80%)
Special allowance to meet office expenditures
280,000
350,000
(75,000)
50,000
Interest free loan (1,500,000 × 10% × 6/12) (c)
Commission from ML (d)
Taxable salary
275,000
150,000
2,940,000
252,000
62,500
57,600
75,000
500,000
4,592,100
Tax Liability
435,000+ 27.5% of 992,100
707,827
Answer 4
Mr. Khursheed
Tax Year 2022
Computation of taxable income and tax liability
Rs.
SALARY
Basic salary 400,000 × 6
Utility allowance 2,400,000 x 10%
Medical allowance 75,000 x 6
Less: 10% of basic salary
Medical reimbursement not in accordance with terms
Company maintained car (5% of Rs.5,000,000 × 6/12)
Golden handshake payment
Gratuity from unapproved fund
Less: Rs.75,000 or 50% of gratuity whichever is lower
Vehicle purchased from employer 2,800,000 - 2,600,000
Salary Income
Tax Liability
1,095,000+ 35% of 15,200,00
2,400,000
240,000
450,000
(240,000)
210,000
1,500,000
125,000
7,500,000
9,100,00
(75,000)
9,025,000
200,000
21,200,000
6,415,000
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Answer 5
Mr. Creative
Tax Year
Computation of taxable income and tax liability
Rs.
SALARY
Basic salary 300,000 × 12
Utility allowance 15% of basic salary
Medical allowance 12% of basic salary
Less: 10% of basic salary
Accommodation 45% of basic salary
Company maintained car 5% of Rs. 1,600,000
Taxable salary
Tax Liability
435,000+ 27.5% of 2,312,000
3,600,000
540,000
432,000
(360,000)
72,000
1,620,000
80,000
5,912,000
1,070,800
Answer 6
Mrs. Aslam
Tax Year 2023
Computation of taxable income and tax liability
Salary from HPL
Basic salary
Medical allowance
Less: exempt up to 10% of basic salary
Rent free accommodation: 45% of 2,400,000
Travelling allowance Rs.20,000 × 12
Contribution to recognized provident fund
Less: exempt up to lower of Rs.150,000 or 10% of basic + DA
Employee share scheme 5,000 shares × Rs.28
Laptop from employer
Taxable salary from HPL excluding tax borne by HPL
Tax borne by HPL as per working note
Taxable salary from HPL including tax borne by HPL (A)
Salary from SL
Leave encashment
Gratuity from unapproved fund
Less: Exempt up to lower of Rs. 75,000 or 50% of gratuity amount
Reimbursement against health insurance policy
Total (B)
2,400,000
720,000
(240,000)
240,000
(150,000)
480,000
1,080,000
240,000
90,000
140,000
150,000
4,580,000
853,125
5,433,125
95,000
500,000
(75,000)
Total Salary (A+B)
425,000
Exempt
520,000
5,953,125
Tax Liability
435,000+ 27.5% of 2,353,125
1,082,109
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Answer 7
Rs.
Salary
Basic Salary 480,000 x 12
Medical allowance 48,000 x 12
Utilities allowance 55,000 x 12
Accommodation 45% of basic salary
Leave encashment
Reimbursement of running expenses of personal car 550,000 x 15%
Fee for attending BOD meeting
Taxable salary
5,760,000
576,000
660,000
2,592,000
300,000
82,500
200,000
10,170,500
Tax Liability
1,095,000+ 35% of 4,170,500
2,554,675
Answer 8
Mr. Mukarram
Tax Year 2023
Computation of Taxable Income
Rs.
Salary
Basic salary Rs. 250,000 x 12
Medical allowance Rs. 37,500 x 12
Less: Exempt 10% of basic salary
Housing allowance Rs. 25,000 x 12
Travel allowance Rs. 11,500 x 12
Company maintained car 5% of the Rs. 1,000,000
FMV of the car transferred by the employer
Dinner coupons 2 x 12 x Rs. 2,000
Reimbursement of telephone and internet Rs. 20,000 x 80%
Depreciation of the appliances provided by the employer 10% of Rs. 300,000
Rs.
3,000,000
450,000
(300,000)
150,000
300,000
138,000
50,000
400,000
48,000
16,000
30,000
-4,132,000
Employee share scheme: taxable in the next year
Taxable salary
Tax Liability
435,000+ 27.5% of 5,132,000
1,846,300
Answer 9
Mr. Wajahat
Tax Year 2023
Computation of Taxable Income and Tax Liability
Salary
Basic Salary 70,000 x 12
Dearness allowance (DA) 10,000 x 12
Conveyance allowance 8,000 x 12
Recognized Provident Fund (PF)
Company's contribution
Less: Rs. 150,000 or 10% of basic salary + DA
Whichever is lower
Rupees
Rupees
Rupees
840,000
120,000
96,000
100,800
96,000
4,800
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Interest credited to RPF @ 20%
Less: Interest @ 16%
1/3rd of basic + DA
Whichever is Higher
Reimbursement of electricity bills
Taxable
391,000
312,800
320,000
320,000
Tax Liability
2.5% of 5,191,800
71,000
60,000
1,191,800
129,795
Answer 10
Mr. Badar
Tax Year 2023
Computation of Taxable Income and Tax Liability
Rs.
Salary from HFL
Basic Salary
Medical allowance 28,000 x 12
Less: exempt up to 10% of basic
House rent allowance
Bond signing amount
Company maintained car Rs. 1,500,000 x 5% x 11/12
Inventory item Rs. 22,000 - 12,000
Employee share scheme
- Fair market value 2,500 shares x Rs. 375
Cost paid Rs. 300,000 + 200,000
Taxable salary from HFL
Salary from Sultan Hospital
Termination benefits
Gratuity from unapproved scheme
Less: Exempt up to lower of Rs. 75,000 or 50% of gratuity amount
Medical treatment exempt under clause 53A Part I 2nd Schedule
Taxable Salary
3,000,000
336,000
300,000
937,500
500,000
36,000
1,440,000
900,000
68,750
10,000
437,500
5,892,250
600,000
485,000
75,000
Tax Liability
1,095,000+ 35% of 902,250
410,000
-6,902,250
1,410,787
Answer 11
Mr. TA
Tax Year 2023
Computation of Taxable Income and Tax Liability
Rs.
Salary
Basic salary 400,000 + (440,000 x 11)
Conveyance allowance 40,000 + (44,000 x 11)
Medical allowance 40,000 + (44,000 x 11
Travel and daily allowance to meet office expenses
Deemed income on interest on loan (Working Note)
Performance bonus received on 15.8.20X7 taxable in the year 20X8
Waiver of outstanding loan 2,500,000 - (22 x 50,000)
Fee for attending BOD meetings
1,200,000
Tax Liability
1,095,000+ 35% of 2,308,000
5,240,000
524,000
524,000
400,000
120,000
-1,400,000
100,000
8,308,000
1,902,800
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Answer 12
Mr. Ahmer Ghazi
Tax Year 2023
Computation of Taxable Income and Tax Liability
Rs.
7,800,000
1,140,000
840,000
-180,000
183,333
1,500,000
11,643,333
Salary
Basic salary 650,000 x 12
House rent allowance 95,000 x 12
Health insurance
Award for meeting sales target
Concessional loan benefits Rs. 5 million x 4% for 11 months
Tax paid by the employer
Taxable salary
Tax Liability
1095000+ 35% of 5,643,333
3,070,166
Answer 13
Mr. Saeed
Tax Year 20X9
Computation of Taxable Income and Tax Liability
Rs.
Salary from DSL:
Foreign sourse salary income exempt being returning expatriate
Salary from HPL
Basic salary 600,000 x 9
Medical allowance 66,000 x 9
Less: Exempt up to 10% of basic salary
Bonus: not received in the tax year 20X9
Company maintained car for personal use 1,900,000 x 10% x 9/12
Free lunch provided through an arrangement by employer
Special allowance to meet office expenditure Exempt
Contribution to PF (assumed to be recognized)
Actual contribution by HPL 60,000 x 9
Less: 10% of basic salary or Rs. 150,000
whichever is lower
Taxable Salary
-5,400,000
595,000
(540,000)
54,000
-142,500
125,000
---
180,000
540,000
150,000
Tax Liability
1,095,000+ 35% of 111,500
390,000
6,111,500
1,134,025
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Answer 14
Mr. Sageer
Tax Year 2023
Computation of Taxable Income and Tax Liability
Rs.
SALARY
Basic salary 200,000 x 12
Medical allowance 20,000 x 12
[Medical allowance is fully taxable if it is in addition to medical facility in
accordance with terms of employment
Rent free accommodation
Fair market rent of accommodation 100,000 x 12
45% of basic salary
Whichever is higher is taxable
2,400,000
240,000
1,200,000
1,080,000
1,200,000
Health insurance premium
Health insurance premium paid by the employer is not income of the employee.
Amount received by the employee from insurance company is income but the
same is exempt subject to the specified conditions
40,000
Contribution to recognized provident fund (PF) 15,000 x 12
Less: Exempt up to Rs. 150,000 or 10% of [basic salary + dearness allowance],
whichever is lower
180,000
Employee Share Scheme
FMV on 31st December 10,000 shares x Rs. 142
Cost of shares paid 10,000 shares x Rs. 105
Cost of option paid
--
(150,000)
30,000
1,420,000
(1,050,000)
(175,000)
195,000
[FMV of option is irrelevant]
Benefit of interest free loan
Exempt
[Benefit of interest free loan is exempt in the following cases:
Where the amount of loan does not exceed Rs. 1 million; or
Where such benefit is extended by the employer due to the waiver of interest by
such employee on his account (e.g. provident fund etc,) maintained with the
employer.]
Leave encashment
100,000
[Salary is taxable on receipt basis]
Taxable salary
4,165,000
Tax Liability
435,000+ 27.5% of 565,000
590,375
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Answer 15
Mr. Nauman
Computation of total income, taxable income and net tax payable/refundable
For tax year 2023
Rupees
Income from salary
Basic salary [120,000×12]
Medical allowance [240,000(20,000×12) –144,000(1,440,000×10%)]
House rent allowance (60,000×12)
Company maintained car for both official and personal use (1,400,000×5%)
Purchase of car on book value (1,000,000 – 450,000)
Employer’s contribution to provident fund
[18,000×12=216,000–144,000(1,440,000×10%) (Allowed limit is 1/10 of the basic salary OR
150,000 whichever is lower)
Interest on provident fund [540,000–480,000{higher of: interest @ 16% i.e 480,000
(540,000÷18%)×16 OR 480,000(1/3rd of basic salary i.e. (1,440,000÷3)}]
Relocation allowance
Bonus – [not taxable in TY2023 as it is received in July 2023)
Loan obtained on concession rate [5,000,000×4%(10%-6%)×(3÷12)
Legal expenses – Not deductible being no deduction shall be allowed for expenses incurred in
earning salary income
Total income from salary
Tax Liability
165,000+ 22.5% of 6,058,000
1,440,000
96,000
720,000
70,000
550,000
72,000
60,000
50,000
3,058,000
1,528,050
Answer 16
Mr. Basit
Computation of total income, taxable income and net tax payable/refundable
For tax year 2023
Salary
Pakistan source income:
Salary [610,000×7]
Allowance for services of domestic servant [60,000×7]
Allowance @ 5% of salary solely expended in the performance of his duties
of employment (4,270,000×5%)
Acquired car on lease
Shares acquired under employee share scheme [1,170,000(13,000×90) 390,000(13,000×30)]
Leave encashment
Gratuity (2,200,000–300,000)
Salary arrears of tax year 2022
Foreign source income:
Salary (3,200×250×3)
Total income from salary
Tax Liability
1095000+ 35% of 5,003,500
Rupees
4,270,000
420,000
213,500
780,000
320,000
1,900,000
700,000
2,400,000
11,003,500
2,846,225
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Answer 17
Income From Salary
Mr. Nasir
Computation of total income, taxable income and net tax payable/refundable
For tax year 2022
Rupees
Salary
Income from salary:
Basic salary (800,000×12)
Medical allowance (100,000×12)
Cost of living allowance (200,000×12)
Housing [360,000{300,000 OR 360,000(45%×800,000) whichever is higher}×12]
Company maintained car (4,000,000×5%)
Fuel [(250×180) ×12×30%]
Maintenance of car
Hospitalization born by insurance company
Ad-hoc relief allowance
Expenses incurred for work from home
Tax Liability
1,095,000+ 35% of 12,682,000
9,600,000
1,200,000
2,400,000
4,320,000
200,000
162,000
800,000
18,682,000
5,533,700
Answer 18
Mr. Cheng
Tax Year 2024
Computation of taxable income and tax liability
SALARY from HL:
Basic salary 350,000 x 3
1,050,000
Medical allowance 35,000 x 3
105,000
Less: Exempt up to 10% of basic salary
105,000
-Utilities allowance 20,000 x 3
60,000
Lunch provided by the employer
30,000
-Company maintained car 3,000,000 x 5% x 3/12
37,500
Bonus of previous year received in the current year
350,000
Unapproved gratuity scheme
1,225,000
Less: Exempt up to Rs.75,000 or 50% of amount receivable
whichever is lower
75,000
1,150,000
Benefit of interest free loan 3,800,000 x 10% x 3/12
95,000
SALARY from DH
Basic salary 450,000 x 9
4,050,000
Medical allowance 60,000 x 9
540,000
Less: Exempt up to 10% of basic salary
405,000
Utilities allowance 30,000 x 9
135,000
Lunch provided by the employer
270,000
Company maintained car 5,000,000 x 5% x 9/12
225,000
-Air tickets for trip to China
187,500
Consideration for signing a bond
550,000
Commission
750,000
Repayment of loan by the employer
400,000
3,800,000
Taxable salary
12,885,000
Tax Liability
1095000+ 35% of 6,885,000
35,04,750
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Chapter
3
Income from property
Income from Property
1) Movable
2) immovable
Dispose/Sell
Capital Gain
Rent Out
income from property
Taxation model
1) Accrual Basis
2) Revenue Model i.e. Rent -Expenditure= Net Income
3) Part of Normal tax Regime (Expense Allowed)
Income Calculation
Income – Expenditure = Net Income
Property (S.U.R.F)
1) S= Signing Amount
2) U= Non-adjustable amount
3) R= Rent Received
4) F= Forfeited Deposit
R.C.T/C.R
XXX
XXX
XXX
XXX
XXX
Income Calculation
1) Signing Amount: Paid by the tenant to the Landlord, to enter him into the agreement of tenancy [Totally
Taxable]
2) Forfeited Deposit: Deposit forfeit by the owner in respect of contract for sale of property[Totally Taxable]
3) Rent: [Totally Taxable]
❖
❖
❖
❖
Consideration received/ receivable
By an owner of a land for a tax year
For the use or occupation of land or building
Also includes Forfeited Deposit
[Always takes higher of a) Rent Received / Receivable or b) Fair Market Value (A.L.V)
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Chapter-3
Income From Property
Example
Miss. Katrina is a relative of Miss. Depika. Miss Depika lets out a house to Miss. Katrina at a subsidized rent
per month of Rs. 12,000. However, rent prevailing in the market for the house of similar size is Rs. 20,000
per month. For the purpose of rent income under income from property, Rs, 20,000 shall be taken as it is
higher than actual rent received
Explanation of Rent:
LAND OR BUILDING includes
• Open plot of land rented out
• Land rented along with building
Example of forfeited deposit
Miss Sonam Bajwa contacted Property dealer to sell her house, she entered into the contract and Rs.
5,000,000 and remaining payment will be received by three months, later on buyer refused to buy the
house, Sonam Bajwa confiscate the amount she received due to default of contract this is known as
forfeited deposit
Income Related to Property Taxed in Various Heads
Exempt
Agriculture Income
Capital Gain
Other Source
Disposal of Personal
Property
Business
1) Sub-letting of
Property
2) Income Under
Amenities Utilities,
services etc.
3) Property Rented out
with Machinery
4) Vacating the
property [1/10]
1) sale purchase
of property
2) Dealer
3) Builders
4) Business
Property
Un-adjustable amounts received in relation to buildings [Sec. 16]
(1) Where the owner of a building receives from a tenant an amount which is not adjustable against the rent, it shall
be chargeable under the head "Income from Property" in the tax year in which it was received and the following 9
tax years in equal proportion.
Amount Received × 1/10 = Add in Property
(2) Where an amount which is not adjustable against the rent is refunded by the owner to the tenant on termination
of the tenancy before the expiry of 10 years, no portion of the amount shall be allocated to the tax year in which it
is refunded or to any subsequent tax year.
(3) Where the owner has refunded non-adjustable amount to the tenant, on termination of tenancy, and the owner
lets out the building to succeeding tenant than new advance less such portion of the earlier amount that was charged
to tax, shall be chargeable under the head "Income from Property" in the tax year in which it was received and the
following 9 tax years in equal proportion.
Note: Non-adjustable advance in case of open plot of land (given on rent) is not taxable under the law.
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Chapter-3
Income From Property
Example
Mr. M Amir rented out his house to Qasim on 1-9-12 at monthly rent of Rs. 80,000. The fair market rent per month
is Rs. 90,000. In addition to monthly rent, Qasim also agreed to pay Rs. 600,000 as non-adjustable advance. Qasim
vacated the house on 31-1-15. The house was given to new tenant Umar on 1-02-15 at monthly rent of Rs. 120,000.
The new tenant gave Rs. 900,000 as non-adjustable amount which was partly used to repay Rs. 600,000 to old
tenant.
Required:
Calculate Gross income from property for tax year 2013, 2014 and 2015.
Solution
TY 2013
Rental income
(90,000 x 10 months)
900,000
Add: Nonadjustable
(600,000/10)
60,000
Gross rent
960,000
TY 2014
Rental income
Add: Nonadjustable (600,000/10) 60,000
Gross rent
TY 2015
Rental income
Add: Non-adjustable amount
Received from new tenant
Less: Already taxed In TY 2014
In TY 2013
780,000 /10
Gross rent
(90,000 x 12)
1,140,000
(90,000 x 7+120,000 x 5)
(600,000/10)
(600,000/10)
1,080,000
1,230,000
900,000
(60,000)
(60,000)
78,000
1,308,000
Exercise:
Mr A had let out the property to Mr. B for a sum of Rs.150,000 per month in July 2023. Mr B has paid a sum
of Rs. 500,000 as non-adjustable advance. After the expiry of two years, Mr B vacated the premises and Mr
A returned the advance to Mr B. Thereafter, Mr C acquired the possession on the same rental amount.
However, the amount of non-adjustable advance was increased to Rs.600,000.
Required:
Compute the gross income from the said property for the years 2024 and 2025 before allowing the
admissible deductions.
Answer
Income from Property for tax year 2024
Particulars
Amount
Rent
150,000 x 12
1,800,000
Add Un adjustable Advance
500,000/10
50,000
Total Gross rental Income without deductions
1,850,000
Income from Property for the year 2025
Particulars
Amount
Rent
150,000 x 12
Add: Un-adjustable Advance
600,000
1,800,000
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Chapter-3
Income From Property
Less: Already recognised income in the last two years (Rs. 500,000/10 (100,000)
x 2 years)
Balance Chargeable advance in 10 years
500,000/10
Total Gross rental Income without deductions
50,000
1,850,000
Treatment of advance adjustable against rent
If the advance is adjustable against rent it will be ignored in the question.
[Expense will be Allowed and Income from Property treated under N.T.R]
Tax Will be calculated at Normal Rates
Signing Amount
Un-adjustable Amount(1/10)
Rent Received
Forfeited Deposit
Chargeable Rent
Less Admissible Deductions*
RS
X
X
X
X
XXX
Deduction in computing income chargeable under the head income from property
(1) Following deductions shall be allowed under the head "Income from Property"
a. In respect of repairs to a building, an allowance equal to one-fifth of the rent chargeable to tax:
Note: Repair allowance will not be allowed in case where only open plot is given on rent.
Note: Repair allowance will not be allowed in case where forfeited deposit is received in case of
open plot/land
Note: Repair allowance will be allowed in case where forfeited deposit is received in case of
contract for sale of house/building.
b. Insurance premium paid (or payable) in the year to insure the building;
c. local rate, tax, charge or cess paid (or payable) on property or the rent from the property to any local
authority or government in the year (excluding income tax);
d. ground rent paid (or payable) for the property;
Miss. JZ has a piece of land. FA wants to construct a house on that land and finally he constructed
his own house on JZs land. Now FA will pay JZ the ground rent of Rs.300,000 per month. FA later
on rented out his house to QZ at monthly be allowed as deduction to FA
e.
f.
g.
h.
i.
j.
any profit paid (or payable) on any money borrowed to acquire, construct, renovate, extend or reconstruct
the property;
if the property is acquired, constructed, renovated, extended, or reconstructed with capital contributed by
the House Building Finance Corporation or a scheduled bank, the share in rent and share towards
appreciation in the value of property;
where the property is mortgaged (or other capital charge), the profit or interest paid;
any expenditure paid (or payable) wholly and exclusively for deriving rent including administration and
collection charges up to lower of;
a. actual expense or
b. 4% of rent chargeable to tax
Legal charges paid (or payable) to defend the title of the property or any suit connected with the property in
court; and
where there are reasonable grounds to believe that unpaid rent is irrecoverable, an allowance equal to the
unpaid rent if:
i.
Tenancy was bona fide, the defaulting tenant has vacated the property or steps have been taken to
compel the tenant to vacate the property and the defaulting tenant is not in occupation of any other
property of the person;
ii.
Owner has initiated legal proceedings or he believe that legal proceedings would be useless; and
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Chapter-3
iii.
iv.
Income From Property
Unpaid rent has previously been included under the head "Income from Property" and tax has been
paid on it.
Where any unpaid rent allowed as a deduction is wholly or partly recovered, the amount recovered
shall be chargeable in the tax year of receipt.
❖ Where a deduction is allowed to a person for any expenditure in deriving "Income from Property" and the
person has not paid the related liability within 3 years of the end of the tax year in which the deduction was
allowed, the unpaid liability shall be chargeable under the head "Income from Property" in the first tax year
following the end of the three years
❖ Where an unpaid liability is taken to income as above and the person subsequently pays the liability, the
person shall be allowed a deduction for the amount paid in the year of payment.
❖ Any expenditure allowed as a deduction under this head shall not be allowed under any other head.
❖ The deductions which are not allowed under the head income from business will also not be allowed under the
head income from property.
Example
Mr. Asim rented out his own house to Mr. Imran against a rent of Rs. 55,000/month. As per the terms Rs. 5,000/m
is charged against rendering of utility & sweeper services. This Rs. 5,000 is included in Rs. 55,000. The actual
expenditures incurred by Mr. Asim are
Repair of house
7,000/m
Property tax of house
2,100/m
Utility bills
1,800/m
Sweeper wages
1,000/m
His Income from business in current year is Rs. 900,000.
Calculate his Total Income
Solution
-Income from business
900,000
- Income from other source
(5,000-1,8000-1,000) x 12
26,400
- Income from property
(W-1)
454,800
Taxable income-taxable under NTR
1,381,200
(W-1) Income from property
Gross Rent
Less: Admissible deductions
Repair allowance
Property tax of house
Rent chargeable to tax
(50,000 x12)
600,000
(600,000 x 1/5)
(2,100 x 12)
(120.000)
(25,000)
454,800
Income of joint owners / Co-Ownership
(1) Where any property is owned by two or more persons and their respective shares are definite and ascertainable:
a) The persons shall not be assessed as an AOP in respect of the property; and
b) The share of each person in the income from the property for a tax year shall be taxable in their own hands
respectively and not as AOP.
(2) This section shall not apply in computing income chargeable under the head "Income from Business". Note:
Where any property chargeable under section 15 is owned by two or more persons and their respective shares in
that property are not definite and ascertainable, the property will be considered as being jointly owned by an
association of persons (AOP) and taxable income and tax payable thereon will be computed as per the principles of
taxation for AOP.
Exam Note: If AOP is earning both income from business and income from property, then income from property
will be taxable in the hands of AOP and not the members(For Details Visit AOP)
Example
Mr. A and B are joint owners of a house and they have provided the following data:
Profit sharing ratio amongst A and B
60:40
Rental income earned from house for TY 2013
3,000,000
Calculate tax liability for A and B?
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Chapter-3
Income From Property
Solution-1
Mr. A
Income from property
Tax liability – A
Mr. B
Income from property
Tax liability
(2,400,000 x 60%)
75,000+ (240,000 x 20%)
1,440,000
123,000
(2,400,000 x 40%)
15,000+ (160,000 x 15%)
(W-1) Income from property
Gross receipt
Less: Admissible deductions
Repair allowance
960,000
39,000
3,000,000
(3,000,000 x 1/5)
(600,000)
2,400,000
Example
Qasim and Talha jointly own a house in Lahore. Qasim has 75% share in the house. On 1 July 2015, the house was
let out at an annual rental value of Rs. 10 million. This amount includes Rs. 100,000 per month for utilities,
cleaning and security.
During the tax year 2016, the owners incurred the following expenditures in relation to the house:
Rupees
Utility bills paid to utility companies, security charges paid to security guard and cleaning
500,000
expenses paid to sweeper
Repair and maintenance
450,000
Insurance premium
340,000
Collection charges
25,000
Qasim and Talha have no other source of income. All the above expenses were incurred by them jointly.
Required:
Calculate tax liability of Qasim and Talha for the tax year 2016.
Solution-2
Income of Qasim
Income from Other Source
((W-2) 700,000 x 75%)
525,000
Income from property
(W-1) (B)
5,006,250
Taxable income:
5,531,250
Tax Payable to Govt.
(650,000+40% x 2,331,250)
1,582,500
Income of Talha
Income from Other Source
Income from property
Taxable income
Tax Payable to Govt.
((W-2) 700,000 x 25%)
(W-1) (C)
175,000
1,668,750
1,843,750
243,125
(170,000+30% x 243,750)
(W-1) Income from property
Gross Rent
(10,000,000 100,000 x 12)
Less Admissible deductions
Repair allowance
(8,800,000 x 1/5)
Insurance premium
Collection charges lower of:
Actual charges
25,000
4% of chargeable rent (4% x 8,800,000)
352,000
Rent chargeable under NTR
(A)
Share of Qasim
Share of Talha
(6,675,000 (A) x 75%)
(6,675,000 (A) x 25%)
8,800,000
(1,760,000)
(340,000)
(B)
(C)
(W-2) Income from other source
Rent charged for utilities and security (100,000 x 12)
Less: Utilities and security expense
(25,000)
6,675,000
5,006,250
1,668,750
1,200,000
(500,000)
700,000
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Chapter-3
Income From Property
Agriculture Income
1.
2.
3.
Agriculture income means an income, which satisfies the following conditions:
▪ The income is derived from land. The income may be in the form of rent or revenue;
▪ The land must be used for agriculture purpose and be situated in Pakistan;
Agricultural Income derived by a person during the tax year shall be exempt from tax.
Various sources of agriculture income are:
a. Income of the cultivator or receiver of rent-in-kind from the sale of agriculture produce without
performing any further process.
b. Income from the performance of any process by the cultivator or receiver of rent-in-kind, generally
employed to render the produce fit to be taken to market.
c. Income from building shall also be agriculture income, subject to the following conditions
▪ Building is owned and occupied by the cultivator or receiver of rent-in-kind;
▪ Building is situated in the immediate vicinity of the land used for agricultural purposes;
▪ Building is required as a dwelling house, a store house or other out building by the
cultivator or the receiver of rent-in-kind due to his connection with the agriculture land.
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‫‪Chapter-3‬‬
‫‪Income From Property‬‬
‫)‪ (Agricultural Income Explanation in Urdu‬زرعی آمدنی کی وضاحت‬
‫مستثنی رکھا گیا ہے‪ ،‬اور یہ قواعد و‬
‫زرعی آمدنی ایک ایسی آمدنی ہے جو کچھ مخصوص شرائط کو پورا کرتی ہے۔ ان شرائط کے تحت ہی اسے ٹیکس سے‬
‫ٰ‬
‫‪:‬ضوابط پاکستان میں قاب ِل اطالق ہیں۔ ذیل میں زرعی آمدنی کی اہم خصوصیات اور مثالیں بیان کی گئی ہیں تاکہ آپ اس کی بہتر سمجھ حاصل کر سکیں‬
‫زرعی آمدنی کی تعریف ‪1.‬‬
‫زرعی آمدنی سے مراد ایسی آمدنی ہے جو زمین سے حاصل ہوتی ہے‪ ،‬اور یہ آمدنی کرایے یا محصول کی صورت میں ہو سکتی ہے۔‬
‫‪:‬شرائط یہ ہیں کہ‬
‫آمدنی ایسی زمین سے حاصل ہو جو زراعت کے لیے استعمال ہوتی ہو۔ ‪-‬‬
‫زمین پاکستان میں واقع ہو اور زرعی مقصد کے لیے ہی استعمال کی جا رہی ہو۔ ‪-‬‬
‫زرعی آمدنی پر ٹیکس سے چھوٹ ‪2.‬‬
‫مستثنی ہو گی۔‬
‫کسی بھی شخص کی طرف سے کسی مالی سال میں حاصل کی گئی زرعی آمدنی پر ٹیکس نہیں لگایا جائے گا‪ ،‬یعنی یہ آمدنی ٹیکس سے‬
‫ٰ‬
‫زرعی آمدنی کے ذرائع ‪3.‬‬
‫‪:‬زرعی آمدنی کے مختلف ذرائع درج ذیل ہیں‬
‫کاشتکار یا وصول کنندہ کی طرف سے فروخت کردہ پیداوار سے آمدنی ‪a.‬‬
‫اگر کاشتکار یا وہ شخص جس کو پیداوار کا حصہ ملتا ہے‪ ،‬زرعی پیداوار کو کسی اضافی پراسیس کیے بغیر فروخت کر دے تو اس سے حاصل ہونے والی‬
‫آمدنی زرعی آمدنی کہالئے گی۔‬
‫مثال‪ **:‬اگر ایک کاشتکار اپنے کھیت سے گندم اگاتا ہے اور اسے مارکیٹ میں بیچ دیتا ہے تو یہ زرعی آمدنی ہوگی۔**‬
‫کاشتکار یا وصول کنندہ کی طرف سے زرعی پیداوار کو مارکیٹ کے قابل بنانے کے لیے پراسیس کرنا ‪b.‬‬
‫اگر کاشتکار یا وصول کنندہ زرعی پیداوار کو مارکیٹ میں بیچنے کے قابل بنانے کے لیے کوئی ایسا عمل انجام دے جو عام طور پر کیا جاتا ہے تو اس آمدنی‬
‫کو بھی زرعی آمدنی کہا جائے گا۔‬
‫مثال‪ **:‬گنے کی کٹائی کے بعد اس کی چھالئی کرنا تاکہ اسے فروخت کیا جا سکے‪ ،‬تو اس عمل کے بعد حاصل ہونے والی آمدنی بھی زرعی آمدنی **‬
‫سمجھی جائے گی۔‬
‫زرعی زمین سے منسلک عمارتوں سے آمدنی ‪c.‬‬
‫‪:‬کچھ مخصوص شرائط کے تحت عمارتوں سے حاصل ہونے والی آمدنی بھی زرعی آمدنی میں شمار ہو سکتی ہے۔ اس کی شرائط درج ذیل ہیں‬
‫عمارت کا مالک وہی شخص ہو جو کاشتکار ہو یا وصول کنندہ ہو۔ ‪-‬‬
‫عمارت زرعی زمین کے بالکل قریب واقع ہو۔ ‪-‬‬
‫یہ عمارت کاشتکار کے رہنے‪ ،‬گودام یا دیگر زرعی مقاصد کے لیے استعمال ہو۔ ‪-‬‬
‫مثال‪ **:‬اگر ایک کاشتکار کی زمین کے ساتھ ایک کمرہ ہے جسے وہ اپنی پیداوار ذخیرہ کرنے کے لیے استعمال کرتا ہے اور وہ کمرہ صرف اس کے **‬
‫زرعی کام کی وجہ سے وہاں موجود ہے‪ ،‬تو اس کمرے سے متعلق آمدنی بھی زرعی آمدنی کہالئی جا سکتی ہے۔‬
‫زرعی آمدنی کی اہمیت‬
‫مستثنی رکھا گیا ہے تاکہ کاشتکاروں کو معاشی طور پر مضبوط کیا جا سکے اور زرعی شعبے کی حوصلہ افزائی‬
‫پاکستان میں زرعی آمدنی کو ٹیکس سے‬
‫ٰ‬
‫ہو۔ اس کے ذریعے نہ صرف کسانوں کو آسانی فراہم کی جاتی ہے بلکہ ملک کی معیشت میں زرعی پیداوار کا حصہ بڑھایا جاتا ہے۔‬
‫**‪:‬مثال کے طور پر**‬
‫ایک کاشتکار جو اپنی زمین سے سبزیاں اگا کر فروخت کرتا ہے‪ ،‬اس کی اس آمدنی پر ٹیکس نہیں لگے گا‪ ،‬کیونکہ یہ زرعی آمدنی ہے۔ اسی طرح اگر کسی‬
‫مستثنی ہوگی۔‬
‫زمین سے کرایہ کی صورت میں آمدنی آ رہی ہے اور وہ زمین زرعی مقاصد کے لیے استعمال ہو رہی ہے‪ ،‬تو وہ بھی ٹیکس سے‬
‫ٰ‬
‫مستثنی رکھا گیا ہے تاکہ زرعی شعبے کی مدد کی جا سکے اور کاشتکاروں کو رعایت دی جا سکے۔‬
‫اس طرح سے پاکستان میں زرعی آمدنی کو ٹیکس سے‬
‫ٰ‬
‫‪Self-Hiring of Property‬‬
‫‪Where an employee or his spouse is the owner of any such building that is given on rent to the employer and the‬‬
‫‪employer has provided the same building to the employee against his entitlement for a rent free accommodation,‬‬
‫‪then it will have following effect‬‬
‫‪• Receipt of rent of building is chargeable to tax under the head income from property.‬‬
‫‪• Any rent received by the employee or his spouse shall be property income of the recipient and be treated‬‬
‫‪accordingly.‬‬
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Chapter-3
•
Income From Property
The building is provided by the employer to his employee as a rent free accommodation. It will be a
perquisite and added in the salary income of the employee
Where rent received or receivable is less than fair market rent for the property, the person shall be treated as having
received the fair market rent for the period the property is let on rent in the tax year. However, this shall not apply
in the case of self-hiring where fair market rent is already included in the income of the lessee, chargeable to tax
under the head “Salary”.
Example 1: Employee Receives Rent Equal to Fair Market Rent
Scenario:
Ali is an employee at XYZ Corporation. He owns an apartment that he has rented out to his employer, XYZ
Corporation. XYZ provides this same apartment back to Ali as rent-free accommodation under his
employment entitlement. The fair market rent for the apartment is PKR 500,000 annually, and Ali receives
this exact amount from his employer.
Tax Treatment:
• Income from Property: The PKR 500,000 rent that Ali receives is considered Income from
Property and will be taxed accordingly.
• Perquisite (Employee Benefit): The provision of rent-free accommodation by the employer
(using Ali’s own apartment) is treated as a perquisite or employee benefit. Therefore, the fair
market rent of PKR 500,000 will also be added to Ali's Salary income as an additional benefit.
Result:
Ali’s total taxable income includes PKR 500,000 under Income from Property and another PKR 500,000
added to Salary income as a perquisite.
Example 2: Rent Received is Below Fair Market Rent
Scenario:
Sarah works for ABC Ltd. and owns a house she rents to her employer for PKR 300,000 annually. However,
the fair market rent for this property is PKR 400,000. ABC Ltd. provides Sarah with this house as rent-free
accommodation based on her employment benefits.
Tax Treatment:
• Deemed Fair Market Rent: Since the rent Sarah receives (PKR 300,000) is lower than the fair
market rent (PKR 400,000), Sarah will be considered to have received PKR 400,000 (fair market
rent) as income from property.
• Perquisite Addition to Salary: The fair market rent amount (PKR 400,000) will also be added to
Sarah's Salary income as a perquisite.
Result:
Sarah’s total taxable income includes PKR 400,000 as Income from Property and PKR 400,000 added to
Salary income as a benefit.
Example 3: Fair Market Rent is Already Included in Salary
Scenario:
Ahmed is employed by DEF Industries. He owns a building rented to DEF for PKR 600,000 annually, which
DEF provides back to Ahmed as rent-free accommodation. The fair market rent for this building is PKR
600,000, but DEF has structured Ahmed’s salary to already include this fair market rent component,
treating it as part of his taxable Salary.
Tax Treatment:
• Income from Property: The rent received (PKR 600,000) will be treated as Income from
Property.
• No Additional Perquisite for Rent-Free Accommodation: Since the fair market rent is already
included in Ahmed’s Salary income as a taxable component, no further addition as a perquisite is
needed.
Result:
Ahmed’s taxable income includes PKR 600,000 under Income from Property and PKR 600,000 already
considered in Salary income, ensuring no double taxation on the same amount.
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Chapter-3
Income From Property
Income from Property (Summary Sheet)
Sr.
No
Particulars
Taxable
Rs
Rs.
Rent Chargeable to Tax (RCT)
1
Signing amount
2
Non-Adjustable amount
X
•
If received from 1st tenant (Amount × 1/10)
•
If received from succeeding tenant
(Or)
Amount Received
X
Less : Amount Already charged to tax from previous tenant
(X)
X
X
X
(Always take 1/10 of non-adjustable amount for current year)
3
Rent Received (Higher of )
• Rent received (or)
4
• FMV/ ALV
Forfeited advance against sale of property
5
Owner’s Burden ( i.e tax etc ) paid by the tenant
X
6
Irrecoverable rent received
X
7
Adjustable Advance
X
8
Non-Payment of expense ( previously allowed as deduction )
X
Total Rent Chargeable to Tax ( R.C.T )
XXX
X
Less: Allowable deductions
9
Repairs allowance ( 1/5 of RCT )
Note:
It is the mandatory deductions, actual repair charges will be ignored for property
(Except Open Plot)
For open plot no Repairs will be taken, only actual expenses will deducted if they had
incurred
Any tax in connection with Property
• Property Tax
• Corporation/Municipal tax
• Local Tax
• Any other Tax
X
11
Ground rent (if property is on leased land)
X
12
Interest on moneys borrowed for property
X
13
Interest on loan against mortgage of property
X
14
Share of Rent paid to H.B.F.C
X
15
Rent collection charges ( Up to 4% of RCT )
X
16
Legal Charges in connection with the property
X
17
Irrecoverable Rent ( Subject to the conditions )
X
18
Payment of expenses already treated as income due to its non-payment
X
10
Total Income of property
X
(XXX)
XXX
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Income from capital gain
Chapter
4
Definition: Gain arise due to Disposal of Capital assets is known as capital gain
Gain:
Gain = Consideration received - cost of assets
Actual Selling Price or Fair Market
Whichever is higher
Purchase Price of Asset
Incidental expense for acquiring
Asset
Expenses incurred in disposal of
Asset
Total
XXX
XXX
XXX
XXX
Mr. Agha Majid purchased Painting costing Rs.400 and also paid commission on purchase of Rs.50. After
few days, Painting sold for Rs.1,120. Commission paid on sale amounted to Rs20. Calculate
gain/loss on disposal?
Consideration =A = 1,120
Cost =B (400 + 50 +20 = 470)
Gain = A -B
Gain =1,120 -470=650
Income from Capital Gain will be taxed on Accrual Basis
The gain is taxable in the year in which it is earned and not the year in which it is received. It means if we sell the
shares in TY 2016 and receive cash in TY 2017, income will be taxed in 2016
Disposal [D.E.S.E.R.T S.T.A. R L.C.D]
Disposal includes
1
Sold
2
Exchanged
3
Transferred
4
Distributed
5
Cancelled
6
Redeemed
7
Relinquished
8
Destroyed
9
Lost
10
Expired
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Chapter-4
Income From Capital Gains
11
Surrendered.
12
13
The application of a business asset to
personal use or vice versa
The transmission of an asset by succession or
under a will
Capital Assets [S.O.D.A]
“Capital asset" means property of any kind held by a person, whether or not connected with a business, but does
not include
• S = Stock-in-trade, consumable stores or raw materials held for the purpose of business;
• O = Other movable Property held for personal use by the person or his family dependent.
• D= Depreciable Assets for which depreciation is charged
• A= Amortization deduction is allowed under the head income from Business
Example of capital assets:
•
•
•
•
Shares of a private company. Private Company is a company that does not fall under the definition
of Public company.
Share of member in partnership firm
A painting, sculpture, drawing or other work of art, jewelry, a rare manuscript, folio or book, a
postage
Stamp or first day cover, a coin or medallion; or an antique held for personal use.
Income From Capital Gains
A) Normal Tax Regime
B) Separate Block
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Chapter-4
Income From Capital Gains
Gain = A-B
Gain = Consideration received - cost of assets
Purchase Price of Asset +
Actual Selling Price or Fair Market
Whichever is higher.
Incidental expense for acquiring Asset +
Expenses incurred in disposal of Asset.
U/S 37 & 38
➢
If dispose = Gain = Totally Taxable
➢
Loss can be incurred and adjusted in U/S 37 [ discuss later]
➢
No loss can be incurred in U/S 38 [ If incurred then no adjustment will be made]
Withholding Tax on Sale of Shares (Sec-37(6)-(10))
The Finance (Supplementary) Act 2023 introduced new rules under section 37 for withholding tax on share sales
outside the Securities (section 37A). Here's a breakdown:
1. Tax Deduction Requirement:
o
When buying shares of a company (except listed shares settled through NCCPL), the buyer must
withhold 10% of the fair market value as an advance, adjustable tax. This deduction applies at the
time of payment or registration with SECP/SBP, whichever comes first.
2. Registration Trigger for Tax:
o
The tax must be deducted upon share registration, even if payment hasn't been made. The withheld
tax is payable to the Federal Government within 15 days.
3. Fair Market Value:
o
The fair market value of shares is calculated without adjusting for any liabilities, following Rule
19H of the Income Tax Rules, 2002.
4. Repatriable Shares Requirement:
o
The State Bank of Pakistan requires a certificate from the Commissioner to verify tax payment
before repatriable shares can be transferred or registered. (SRO 776(I)/2023)
5. Exemption or Reduced Rate Certificate:
o
Buyers can apply to the Commissioner for a certificate of exemption or a reduced tax rate if they
believe the sale qualifies for it.
6. Seller’s Obligation:
o
Sellers must submit required documents or information to the Commissioner within 30 days of the
sale, unless requested sooner in writing.
7. Listed Companies Off-Market Transactions:
o
Shares of listed companies not traded on a registered stock exchange or settled through NCCPL are
excluded from section 37A and now fall under section 37 for tax collection. This rule aims to cover
off-market transactions.
Example
1. Tax Deduction Requirement:
Example: Ali buys shares of a private company from Sara. Since these shares are not listed or settled through
NCCPL, Ali must deduct 10% of the shares' fair market value as advance tax. If the shares are worth PKR
1,000,000, Ali withholds PKR 100,000 as tax.
2. Registration Trigger for Tax:
Example: Ali registers the shares with SECP before he completes the payment to Sara. Even though he hasn’t
paid Sara yet, Ali must still pay the PKR 100,000 tax to the Federal Government within 15 days of registration.
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Chapter-4
Income From Capital Gains
3. Fair Market Value:
Example: Ali calculates the fair market value of the shares at PKR 1,000,000. He cannot reduce this value by any
debts or liabilities related to the company when calculating the tax, as per Rule 19H.
4. Repatriable Shares Requirement:
Example: If Sara, a foreign investor, sells shares to Ali and these are repatriable shares, the State Bank of
Pakistan will require a certificate from the Commissioner confirming that the tax has been paid before
approving the share transfer or registration.
5. Exemption or Reduced Rate Certificate:
Example: Ali believes the shares he’s buying are exempt from tax or subject to a lower tax rate. He applies to the
Commissioner for a certificate of exemption or a reduced tax rate before completing the transaction.
6. Seller’s Obligation:
Example: After selling her shares, Sara must provide the Commissioner with relevant documents and
information about the sale within 30 days. If the Commissioner requests this sooner, Sara must respond within
the time specified in the written notice.
7. Listed Companies Off-Market Transactions:
Example: Sara sells her shares of a listed company directly to Ali, outside the registered stock exchange and
without NCCPL settlement. In this case, section 37 applies instead of section 37A, so Ali will need to follow
section 37’s tax rules for off-market transactions.
Example of capital assets:
Category 1:
•
Shares of a private company. Private Company is a company that does not fall under the definition
of Public company.
• Share of member in partnership firm
Category 2:
A painting, sculpture, drawing or other work of art, jewelry, a rare manuscript, folio or book, a postage
Stamp or first day cover, a coin or medallion; or an antique held for personal use.
Note: These categories are only prepared for better understanding of students. They should not use the
"Category" word in paper.
Tax treatment of above mentioned categories
Gain
loss
Category 1
Gain is income
Loss is allowed as deduction
Category 2
Gain is income
Loss is not allowed as deduction
Exempt asset
Gain is not income
Loss is not allowed as deduction
Brain Teaser (Solve the Question and feel the Loss
Mr. Abdullah purchases a Necklace for his wife on their 1 st month anniversary. He paid Rs. 70,000 for gold
and paid 3,000 extra to the goldsmith to engrave the name of his wife on the necklace. After 6 month of his
marriage his wife left him due to his ever lasting engagement with CA-Final.
Later he got broke and decided to sell that necklace to his cousin for Rs. 75,000.
Required: Calculate his Gain/ Loss under relevant head of income.
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Chapter-4
Income From Capital Gains
Separate Block of Income
Definition: This regime applies to certain types of income, where specific tax rates are applied and various
expenses related to earning that income can be deducted.
Expense Deductibility: Under this regime, taxpayers are allowed to deduct relevant expenses from their income.
For example, if you have income from the disposal of securities or immovable assets (capital assets), you can
subtract related expenses to determine your net taxable income.
Losses: Losses can arise and are generally considered under this regime. For instance, if you incur a loss from the
sale of securities or capital assets, this loss can be carried forward or adjusted
against future gains from similar sources.
Examples: Income from the gain on disposal of securities, gain on disposal of immovable assets
(capital assets), etc.
➢ Following rules apply to income subject to separate charge:
(i)
Tax imposed is a final tax
(ii) The amount of such income is not reduced by:
(a) Any deductible allowance
(b) The set off of any loss
(iii) The final tax payable is not reduced by any tax credit allowed (foreign tax credit or tax
credits on donations, investments etc.)
(iv) The liability of the recipient of such income is discharged to the extent that:
(a)
In the case of shipping and air transport income, the tax is paid in accordance with relevant sections of the
Ordinance; or
(b) In any other case, the final tax payable has been deducted at source.
Immovable Property
•
•
•
•
Disposed/ Sold
Separate Block of Income
Personal Property
Depreciable Property Builders, Developer, will be a part of business
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Chapter-4
Income From Capital Gains
Gain = A-B
A gain arising on the disposal of immoveable property (open plot or constructed property or flat) situated in
Pakistan by a person in a tax year shall be chargeable to tax as separate block on the basis of holding period as
under:
(These rates will be given in exam don’t need to memorize them)
Properties acquired on or before 30 June 2024
S.no
1.
2.
3.
4.
5.
6.
7.
Holding period
Where holding period
does not exceed one year
Exceeds one year but
does not exceed 2 years
Exceeds 2 years but does
not exceed 3 years
Exceeds 3 years but does
not exceed 4 years
Exceeds 4 years but does
not exceed 5 years
Exceeds 5 years but does
not exceed 6 years
Exceeds 6 years
Open plot
15%
Constructed property Flats
15%
15%
12.5%
10%
7.5%
10%
7.5%
0%
7.5%
5%
-
5%
0%
-
2.5%
-
-
0%
-
Properties
acquired after
01 July 2024
All properties
Active
taxpayers
15%
Non-active
persons at the
progressive slab
rates specified in
Division I for
individuals and
AOP (this rate
shall not be less
than 15% in any
case) and at
corporate tax
rate specified in
Division II for
companies.
Purchase of immoveable property in cash [Sec 75A]
If immovable property having fair market value (FBR value or DC rate whichever is applicable) greater than Rs. 5
million is purchased in cash, then it will have the following implications:
i.
Such amount shall not be treated as cost for computation of any gain on disposal
ii.
Such person shall pay a penalty of 5% of the fair market value (paid in cash).
Example
Mr. B purchased an open plot on 22.09.2023 which cost him Rs.2,000,000. The plot was sold on 25.03.2024 at
Rs.8,000,000. Another constructed property was acquired on 05.09.2023 at Rs.6,000,000 and sold at Rs.12,000,000
on 23.05.2024. Assuming that both properties were acquired and sold as per value notified by the Board, the capital
gain and tax thereon will be calculated as under
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Chapter-4
Income From Capital Gains
Answer
As holding period of both plot and constructed property is upto one year, therefore 100% gain will be taxable @
15%
Total capital gain Rs.6m+6m = 12,000,000
Tax liability @ 15% = 1,800,000
Exercise
Mr. Y purchased an open plot on 22.05.2022 at a cost of Rs.4,000,000. The plot is sold on 25.06.2024 at Rs.7,000,000.
Another constructed property is acquired on 08.09.2022 at Rs.9,000,000 and sold at Rs. 14,000,000 on 25.06.2024.
Assuming that both properties were acquired and sold as per value notified by the Board, the capital gain and tax
thereon is calculated as under:Answer
Gain on sale of plot = 7,000,000 - 4,000,000 = Rs.3,000,000
As the holding period of plot is more than two but less than 3 years, it will be taxable @ 10%. Gain on sale of
constructed property = 14,000,000 - 9,000,000 = Rs.5,000,000
As the holding period of the constructed property is more than one but less than 2 years, it will be taxable @ 10%.
Total capital gain = Rs.3,000,000 + Rs.5,000,000 = Rs.8,000,000
Tax liability @ 10% = 800,000
Example
On 15 January 2021, Mr. A sold a house situated in Karachi for Rs. 15,000,000: He had purchased this house in July
2020 for Rs. 19,000,000 out of which Rs. 6,000,000 was paid in cash.
Answer
Cash exceeding Rs.5 million will not be considered as cost.
Therefore, gain will be calculated as follows:
Consideration
Cost
Gain
=A
=B
=A-B
=
=
=
15,000,000
13,000,000
2,000,000
Further Mr. A will also have to pay penalty of Rs. 6,000,000 x 5%= Rs. 300,000.
The following table sets out the application of this section:
Questions
Property Details
Solutions
Total Cost of
property bought
Amount Paid in
Cash
Cost as per ITO,
2001.
Penalty @5% of
cash payment
Rs.
Rs.
Rs.
Rs.
Property 1
4,000,000
1,000,000
4,000,000
0
Property 2
3,500,000
2,000,000
3,500,000
0
Property 3
95,000,000
30,000,000
65,000,000
1,500,000
Property 4
103,000,000
12,000,000
91,000,000
600,000
Exemption on Capital gain
Capital gain is exempt where person is dependent of Shaheed belonging to Pakistan Armed Forces (PAFs) or a
person who dies during service of PAFs or Federal or Provincial Governments.
Taxation at Reduced Rate
Capital Gain Tax rates have been reduced by 50% in case of the first sale of immovable property acquired or
allotted to ex-servicemen and serving personnel of Armed Forces or ex-employees or serving personnel of Federal
and Provincial Governments, being original allottees of the immovable property, duly certified by the allotment
authority.
Moreover, in case of any capital gain arising after completion of 3 years from date of acquisition of immoveable
property the amount of tax payable for above persons shall be reduced by 75%.
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Chapter-4
Income From Capital Gains
Example
Mr. Daniyal has disposed of an immovable property (Open Plot) after holding it for a period of 2.5
was purchased for Rs.100,000 on 1 September 2016 and is sold for Rs. 150,000.
Calculate tax payable?
Solution
Gain
(150,000- 100,000) = Rs.50, 000
Tax liability
50,000 x 10% = Rs.5, 000
years. It
Tax on deemed income [Section 7E]
A resident person owning capital assets in Pakistan will be taxed on deemed income arising from capital assets
(for tax year 2022 and onwards).
A definition of Capital asset' has been provided, which effectively means that such tax is leviable only in respect of
immovable property' (e.g. house, any building, manufacturing plant etc.) situated in Pakistan owned by resident
persons.
Deemed income shall be computed as 5% of the fair market value (as determined by the FBR under section 68
i.e. FBR Value or DC Rate) of capital assets (house, building etc.) situated in Pakistan held on the last day of the tax
year. The rate of tax will be 20%. [in other way you can say 1% of the FMV will be the tax]
The following definition of capital asset already discussed
“Capital asset" means property of any kind held by a person, whether or not connected with a business, but does
not include [S.O.D.A]
• S = Stock-in-trade, consumable stores or raw materials held for the purpose of business;
• O = Other movable Property held for personal use by the person or his family dependent.
• D= Depreciable Assets for which depreciation is charged
• A= Amortization deduction is allowed under the head income from Business
The following properties are also excluded, namely: a) One capital asset (immoveable property) owned by the resident person,
b) Self-owned business premises from where the business is carried out by the person and is appearing on the
active taxpayers' list at any time during the year;
c) Self-owned agriculture land where agriculture activity is carried out by person excluding farmhouse and
land annexed thereto;
"Farmhouse" means a house constructed on
• A total minimum area of 2,000 square yards
• With a minimum covered area of 5,000 square feet
• Used as a single dwelling unit.
d) capital asset (immoveable property) allotted toi.
A Shaheed or dependents of a shaheed belonging to Pakistan Armed Forces;
ii.
Following persons of Pakistan Armed Forces or Federal or Provincial Government:
• A person or dependents of the person who dies while in service
• War wounded person while in service
• An ex-serviceman/ ex-employee or serving personnel, (original allottees of the capital asset);
e) Any property from which income is chargeable to tax (under the Ordinance) and tax has been paid on it;
f) Capital asset in the first tax year of acquisition where tax (under section 236K) has been paid;
g) Where the fair market value of the capital assets in aggregate (excluding the capital assets mentioned in
clauses (a)-(f)) does not exceed Rs. 25,000,000;
h) Capital assets owned by a provincial government or a local government;
i) Capital assets owned by a local authority, a development authority, builders and developers for land
development and construction.
Provided that the exclusions mentioned at clauses (a), (e), (D), and (g) of this sub-section shall not apply in case of a
person not appearing in the active taxpayers' list, other than persons covered in rule 2 of the Tenth Schedule.
If the tax liability under section 7E is not discharged, then the registrar (or the person registering the transfer) is
required not to register the transfer of the subject property.
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Chapter-4
Income From Capital Gains
Summary (To understand)
A deemed income tax is applied to resident individuals owning capital assets (immovable property) in Pakistan,
starting from the 2022 tax year. This tax is calculated as 1% of the fair market value (FMV) of these assets, based on
FBR or DC rates.
The following capital assets are exempt from deemed income tax:
1. Primary exemptions (S.O.D.A):
o
o
o
o
S - Stock-in-trade or business inventory
O - Personal movable property
D - Depreciable assets
A - Assets with amortization allowances
2. Special property exemptions:
o One primary property owned by the person.
o Business premises owned by active taxpayers.
o Agricultural land used for farming (excluding large farmhouses).
o Property for families of deceased/wounded service members.
o Properties with paid tax, newly acquired, or valued under PKR 25 million.
o Government, local authority, and development properties.
If the owner is not on the active taxpayers’ list, certain exemptions do not apply, and property transfers cannot be
registered without clearing tax dues.
Acronym: CAPITAL
C - Capital assets (primary residence, business premises, farming land, exempted service member properties)
A - Active taxpayer status for exemptions
P - Personal movable and self-owned assets
I - Inventory (stock-in-trade for business)
T - Tax-paid properties and first-year acquisitions
A - Amortization and depreciation-allowed assets
L - Low-value properties (under PKR 25 million) and government/local authority assets
Example
1. Resident person owning capital assets in Pakistan:
o Example: Faraz, a Pakistani resident, owns a commercial building in Lahore. Since he lives in
Pakistan and owns this immovable property, he’s subject to the deemed income tax on his
building under Section 7E.
2. Non-Residents Exempt:
o Example: Nadia, a non-resident Pakistani living in the UK, owns an apartment in Karachi.
Because she’s a non-resident, she doesn’t have to pay this deemed income tax on her property
in Pakistan.
3. Capital Asset Definition – Only Immovable Property:
o Example: Ayesha owns a house and some land in Islamabad. Since these are immovable
properties, they are considered capital assets under this rule and are potentially taxable. But if
she also owns a car and jewelry, these items aren’t taxed under Section 7E since they aren’t
classified as immovable property.
4. Deemed Income Computation at 5% of FMV:
o Example: Bilal’s property in Karachi has a fair market value (FMV) of PKR 20,000,000.
Deemed income for this property will be calculated as 5% of FMV, which is PKR 1,000,000.
5. Effective Tax Rate of 1% on FMV:
o Example: Based on the above FMV, Bilal’s tax rate is 20% on the deemed income of PKR
1,000,000. This equates to PKR 200,000, which is effectively 1% of the FMV (20,000,000 x
1%).
6. Excluded Immovable Properties:
o i. One immovable property owned by the resident person:
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Chapter-4
Income From Capital Gains
Example: Zara lives in her only house in Islamabad. This primary residence is exempt
from the deemed income tax, as it’s her single immovable property.
o ii. Property with rental income on which tax is paid:
▪ Example: Rehan rents out his office space in Lahore and pays rental income tax. This
property is exempt from deemed income tax as he’s already paying tax on rental
income.
o iii. First-year acquisition with withholding tax paid:
▪ Example: Sania bought a plot in 2023 and paid withholding tax under section 236K at
purchase. Since it’s her first year owning this plot, it’s exempt from deemed income
tax.
o iv. Aggregate FMV of capital assets below PKR 25 million:
▪ Example: Tariq owns two plots with a combined FMV of PKR 15 million. Since the
total FMV is under PKR 25 million, these properties are exempt.
7. Exclusions Not Valid for Non-Active Taxpayers:
o Example: If Zara from the above example isn’t on the Active Taxpayers’ List, her primary
residence exemption may not apply, making it taxable.
8. Self-Owned Business Premises:
o Example: Yasir runs a shop in a building he owns. Since he uses this as his business premises
and is on the Active Taxpayers’ List, this property is exempt from deemed income tax.
9. Agricultural Land:
o Example: Ahmed owns land where he grows crops outside Multan. This agricultural land is
exempt, provided it’s used solely for farming and doesn’t include a large farmhouse as defined.
10. Property Owned by Armed Forces Families:
o Example: The family of Major Saeed, a shaheed from the Pakistan Army, owns a property
given to them by the government. This property is exempt from deemed income tax.
11. Government-Owned Property:
o Example: A provincial government owns a large office building in Lahore. Since it’s
government-owned, this property is exempt from deemed income tax.
12. Development Authority and Builder Property:
o Example: The Lahore Development Authority (LDA) owns undeveloped land for a future
project. This property is exempt from deemed income tax as it’s owned by a development
authority.
13. Property Transfer Restriction if Tax Liability Not Paid:
o Example: If Bilal attempts to sell his property in Karachi without paying the deemed income
tax under Section 7E, the property registrar will refuse to register the transfer until he settles
the tax dues.
▪
Example:
Miss Sonam Bajwa is doing a wholesale business and registered for income tax and sales tax purposes. Her
name is appearing on the active taxpayers' list.
Sonam has the following immovable properties in her own name on 30.6.20X8:
S#
1
2
3
4
5
6
Assets
House in DHA, Phase 8 Lahore at 500 square yards purchased in 20X2 being used by
Sonam Bajwa as her main residence
House in Bahria Town at 600 square yards purchased in 20X4 being used by Sonam
Bajwa occasionally with her sister katrina Kaif
Farmhouse in Muridkee at 5,000 square yards purchased last year being used by
Sonam Bajwa as her recreational activities
Godown in kasur, Karachi being used to store stock-in-trade
Imported machinery to be used for manufacturing of gloves as Sonam Bajwa is also
planning to start manufacturing activities as well
Open plot of 500 square yards in DHA, Islamabad purchased last year. Sonam Bajwa
intends to gift this plot to her Husband on his birthday
FMV Rs.
35,000,000
18,000,000
15,000,000
21,000,000
45,000,000
12,000,000
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Chapter-4
Income From Capital Gains
7
Flat of 2,500 square feet in Bahria Town Phase 8 Rawalpindi.
This flat is given on rent by Sonam Bajwa at a monthly rent of Rs. 125,000 and
declared rental income after allowable deductions in her return of income
8
Flat in Gulistan e Jauhar, Karachi of 1,800 square feet purchased on
30.5.20X7. Sonam Bajwa intends to let out this flat but still vacant till 30.6.20X8
9
Open plot of 1,000 square yards in DHA, Lahore purchased on 25.6.20X8 and paid
withholding tax at the time of purchase
Sonam Bajwa intends to transfer this plot as gift to her husband Farrukh on the
occasion of his marriage on 5.7.20X8
Required:
2,000,000
3,600,000
27,000,000
Calculate the amount of tax to be paid on deemed income on capital assets under section 7E of The
Income Tax Ordinance, 2001.
Answer:
The Properties listed at serial number 1,4,5,7 and 9 do not fall within the ambit of deemed income under
section 7E:
FMV of capital assets for the purpose of deemed income and tax thereon:
S#
2
3
6
8
Total FMV
Assets
House in Bahria Town
Farmhouse in Muridkee
Open plot of 500 square yards in DHA, Islamabad
Flat in Gulistan e Jauhar, Karachi
FMV
18,000,000
15,000,000
12,000,000
3,600,000
48,600,000
Deemed income @ 5% of Rs.48,600,000
2,430,000
Income Tax on Deemed Income @ 20%
486,000
Or Alternatively
[FMV x 1% (48,600,000 x 1% = 486.000)]
Scenario 1: Tax on Single Property Held at Year-End
Details:
• Arif, a resident of Pakistan, owns a commercial building in Lahore.
• Fair Market Value (FMV): PKR 30,000,000
• Applicable tax rate: 1% of FMV (since the deemed income is 5% of FMV taxed at 20%).
Calculation:
1. Deemed income = 5% of FMV = 5% x 30,000,000 = PKR 1,500,000
2. Tax = 20% of deemed income = 20% x 1,500,000 = PKR 300,000
Answer: Arif’s tax on this property is PKR 300,000.
Scenario 2: Multiple Properties with Aggregate FMV Below Exemption Threshold
Details:
• Farzana, a resident of Pakistan, owns two plots in Karachi.
• FMV of Plot 1: PKR 10,000,000
• FMV of Plot 2: PKR 12,000,000
• Total FMV: PKR 10,000,000 + PKR 12,000,000 = PKR 22,000,000
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Calculation: Since the total FMV of Farzana’s properties is below the PKR 25 million threshold, she is
exempt from the deemed income tax under Section 7E.
Answer: Farzana does not owe any tax on her properties due to the exemption.
Scenario 3: Tax on a Rented Property
Details:
• Kamran, a resident of Pakistan, owns an office building he rents out in Islamabad.
• FMV: PKR 50,000,000
• Kamran pays tax on the rental income from this property.
Calculation: Since Kamran is already paying tax on the rental income from this property, it is excluded from
the deemed income tax calculation under Section 7E.
Answer: Kamran does not owe any additional tax under Section 7E for this property.
Scenario 4: Property Exceeding Exemption Threshold with Tax Calculation
Details:
• Sara, a resident of Pakistan, owns two residential buildings in Karachi.
• FMV of Building 1: PKR 20,000,000
• FMV of Building 2: PKR 15,000,000
• Total FMV: PKR 35,000,000
Calculation:
1. Total FMV exceeds PKR 25 million, so both buildings are subject to tax.
2. Deemed income = 5% of total FMV = 5% x 35,000,000 = PKR 1,750,000
3. Tax = 20% of deemed income = 20% x 1,750,000 = PKR 350,000
Answer: Sara owes a tax of PKR 350,000 on her properties.
Scenario 5: Tax on a Recently Purchased Property with First-Year Exemption
Details:
• Bilal, a resident of Pakistan, purchased a plot in Faisalabad in 2023 and paid the withholding tax under
Section 236K at the time of purchase.
• FMV of the Plot: PKR 18,000,000
Calculation: Since this is Bilal’s first tax year of ownership and he has already paid the withholding tax at
purchase, he is exempt from deemed income tax on this property for this tax year under Section 7E.
Answer: Bilal does not owe any deemed income tax for this property for the current tax year.
Securities U/S 37-A (SPREAD)
Includes:
S - Share of a public company
P - Pakistan Telecommunication voucher
R - Redeemable capital instrument
E - Exchange-traded fund unit
A - Asset-backed Modaraba Certificate
D - Debt securities and derivatives
Bonus shares
Includes bonus units in a unit trust.
Derivative Products
"Derivative products" means a financial product which derives its value from underlying security, May be traded
on stock exchange and includes and includes (FORCE)
F - Future commodity contracts
O - Options
R - Rights contracts
C - Cash settled future contracts
E - Exchange-traded deliverable future contracts
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Debt securities means
Corporate Debt Securities such as Term Finance Certificates (TFCs), Sukuk Certificates (Sharia Compliant Bonds),
Registered Bonds, Commercial Papers, Participation Term Certificates (PTCS) and all kinds of debt instruments
issued by any Pakistani or foreign company registered in Pakistan; and
Government Debt Securities such as Treasury Bills (T-Bills), Federal Investment Bonds (PIBS), Foreign Currency
Bonds, Government Papers, Municipal Bonds, Infrastructure Bonds and all kinds of debt instruments issued by
Federal Government, Provincial Governments.
Capital gain on disposal of securities [37A]
The capital gain from disposal of securities (other than gain that is exempt from tax) shall be chargeable to tax at
prescribed rates.
Provisions of section 37A shall not apply to the following persons:
• a banking company,
• an insurance company
Gain = A-B
Gain = Consideration received - cost of
assets
Actual Selling Price or Fair
Market
Purchase Price of Securities
Incidental expense for acquiring
Securities
Whichever is higher
Expenses incurred in disposal of
Securities
Tax year 2025-Where securities acquired after 01 July 2024
Holding period
Regardless of holding period
Rate of Tax for active taxpayers
Active taxpayers
15% for persons appearing on the Active Taxpayers List on the date of
acquisition and the date of disposal of securities
Non-active taxpayers
Progressive rates specified in Division I for individuals and association
of persons and (29%) Division II for companies. However, the rate of tax
shall not be less than 15% in any case.
Tax year 2025 - Where securities acquired on or after 01 July 2022
Holding Period
Less than one year
More than one year but less than two years
More than two years but less than three years
More than three years but less than four years
More than four years but less than five years
More than five year but less than six years
More than 6 years
Rate of Tax
15%
12.5%
10%
7.5%
5%
2.5%
0%
Tax year 2025 - Where securities acquired between 01 July 2013 to 30 June 2022
Holding Period
Irrespective of the holding period
Rate of Tax
12.5%
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Tax year 2025 - Where securities acquired before 01 July 2013
Holding Period
Irrespective of the holding period
✓
✓
✓
✓
Rate of Tax
0%
For the purpose of this section, shares of public company" shall be considered as security if such company
is a public company at the time of disposal of such shares.
Gain on securities shall be treated as a separate block of income.
The holding period of a security shall be counted from the date of acquisition to the date of disposal.
Loss on disposal of securities in current year shall be setoff only against the gain from any other securities.
Loss that has not been set off in current year can be carried forward to the subsequent 3 tax years from the
tax year in which loss was first computed. However, loss can be adjusted only against the gain from disposal
of securities.
Market-Based Transaction and Exception to U’S 37-A
Normal tax liability as applicable under section 37 shall apply on disposal of following:
i.
Shares of a listed company made otherwise than through registered stock exchange and which are not
furnished to NCCPL for computation of capital gains and tax thereon under section 37A.
ii.
Shares through initial public offer during listing process except where the detail of such disposal is settled
through NCCPL; for computation of capital gains and tax thereon under section 37A.
In case of a Market-Based Transaction involving any security, a notional expense equal to 0.5% of the sale proceeds
and 0.5% of the security's cost will be applied instead of actual charges like brokerage, commission, levy, and other
related incidental expenses. This notional deduction, however, does not apply to open-ended mutual funds' units
or future contracts initiated by PMEX members.
For clarification, a "Market-Based Transaction" refers to a transaction conducted at a registered stock exchange
in Pakistan or on the platform of the National Clearing Company of Pakistan Ltd (NCCPL).
1. ‫غیر رجسٹرڈ اسٹاک ایکسچینج پر شیئرز کی فروخت‬:
• ‫وضاحت‬: ‫ اگر کسی لسٹڈ کمپنی کے شیئرز کو رجسٹرڈ اسٹاک ایکسچینج کے ذریعے نہیں بیچا جاتا اور ان کی تفصیالت‬NCCPL ‫کے‬
‫ کے تحت نارمل ٹیکس الگو ہوگا۔‬37 ‫پاس نہیں دی جاتیں تو ان پر سیگشن‬
• ‫مثال‬: ‫ علی نے‬XYZ ‫ کے تحت ٹیکس لگے گا۔‬37 ‫ تو ان پر سیگشن‬،‫کمپنی کے شیئرز ایک نجی خریدار کو بیچے‬
2. ‫( ابتدائی عوامی پیشکش‬IPO) ‫کے ذریعے شیئرز کی فروخت‬:
• ‫وضاحت‬: ‫ اگر شیئرز‬IPO ‫ سوائے اس کے کہ‬،‫ کے تحت ٹیکس لگے گا‬37 ‫ کے ذریعے بیچے جائیں تو ان پر سیگشن‬NCCPL ‫ان کی‬
‫تفصیالت پر کارروائی کرے۔‬
• ‫مثال‬: ‫ سارہ نے‬ABC ‫ کمپنی کے شیئرز‬IPO ‫ تو اگر‬،‫ کے ذریعے بیچے‬NCCPL ‫ کے‬37 ‫کے ذریعے کارروائی نہ ہو تو اس پر سیگشن‬
‫تحت ٹیکس لگے گا۔‬
3. ‫مارکیٹ بیسڈ ٹرانزیکشن میں نیشنل اخراجات کا اطالق‬:
• ‫وضاحت‬: ‫ جو اصل‬،‫ نیشنل اخراجات کا اطالق ہوگا‬%0.5 ‫ بیچنے کی قیمت اور سیکیورٹی کی الگت پر‬،‫مارکیٹ بیسڈ ٹرانزیکشن میں‬
‫ کمیشن وغیرہ کی جگہ پر آئے گا۔ یہ اخراجات اوپن اینڈڈ میوچل فنڈز یا‬،‫ بروکریج‬PMEX ‫کے مستقبل کے معاہدوں پر الگو نہیں ہوں‬
‫گے۔‬
• ‫مثال‬: ‫ روپے۔‬500 ‫ یعنی‬،‫ نیشنل اخراجات لگیں گے‬%0.5 ‫ تو اس پر‬،‫ روپے تھی‬100,000 ‫احمد نے ایک شیئر بیچا جس کی قیمت‬
4. ‫مارکیٹ بیسڈ ٹرانزیکشن کی تعریف‬:
• ‫وضاحت‬: ‫ مارکیٹ بیسڈ ٹرانزیکشن وہ ٹرانزیکشن ہوتی ہے جو پاکستان کے رجسٹرڈ اسٹاک ایکسچینج یا‬NCCPL ‫کے پلیٹ فارم پر کی‬
‫جائے۔‬
• ‫مثال‬: ‫آ‬yesha ‫ نے‬GHI ‫ تو یہ مارکیٹ بیسڈ ٹرانزیکشن شمار ہوگی۔‬،‫کمپنی کے شیئرز پاکستان اسٹاک ایکسچینج پر بیچے‬
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Chapter-4
Income From Capital Gains
Here's a breakdown of each point in the rule, with explanations and examples to illustrate how it works:
1. Normal Tax Liability for Disposal of Shares Outside Registered Stock Exchange
Explanation: If someone disposes of shares from a listed company but does not do so through a registered stock
exchange or does not submit the details to the National Clearing Company of Pakistan Limited (NCCPL), Section
37's standard tax rules apply. This means capital gains on these sales are subject to regular capital gains tax (CGT)
under Section 37 rather than Section 37A, which governs market-based transactions.
Example:
• Scenario: Ali owns shares in XYZ Ltd., a listed company. Instead of selling them on the Pakistan Stock
Exchange, he sells the shares directly to a private buyer without informing NCCPL.
• Tax Implication: Since this sale didn't go through a registered exchange and wasn't reported to NCCPL,
Ali’s transaction will be taxed under Section 37 as a standard capital gain, not under Section 37A (which is
typically lower for market-based transactions).
2. Normal Tax Liability for Shares Disposed of Through Initial Public Offering (IPO)
Explanation: If shares are sold through an Initial Public Offering (IPO) during the listing process, Section 37
(standard CGT rules) applies instead of Section 37A. However, if the IPO sale details are processed by NCCPL, then
Section 37A may apply, depending on NCCPL’s role in computing the gains and related tax.
Example:
• Scenario: Sara decides to sell her shares in ABC Ltd. as part of the IPO process, during which ABC Ltd. is
being listed on the stock exchange. Since her sale is part of an IPO, it qualifies under Section 37 and will be
taxed accordingly unless NCCPL handles the computation.
• Tax Implication: Since this is an IPO and NCCPL hasn’t processed her transaction, Sara will pay CGT
under Section 37. However, if NCCPL handled her transaction details, she could be eligible for Section 37A
treatment.
3. Notional Expense Deduction in Market-Based Transactions
Explanation: For market-based transactions, the taxpayer can claim a notional (estimated) expense deduction
instead of actual expenses like brokerage or commission. This deduction is calculated as 0.5% of both the sale
price and the cost of the security. However, this deduction does not apply to units of open-ended mutual funds or
future contracts by Pakistan Mercantile Exchange (PMEX) members.
Example:
• Scenario: Ahmed sells shares of DEF Ltd. on the Pakistan Stock Exchange with a sale price of PKR 100,000
and a purchase cost of PKR 80,000.
• Calculation: Instead of claiming his actual brokerage fees, Ahmed can apply the notional deduction:
o Sale notional expense = 0.5% of PKR 100,000 = PKR 500
o Cost notional expense = 0.5% of PKR 80,000 = PKR 400
o Total Notional Expense Deduction: PKR 500 + PKR 400 = PKR 900
• Tax Implication: Ahmed can deduct PKR 900 from his capital gain as notional expenses instead of actual
brokerage or other incidental expenses.
4. Definition of Market-Based Transaction
Explanation: A "Market-Based Transaction" is any transaction conducted on a registered stock exchange in
Pakistan or using NCCPL’s platform. This designation is essential because transactions classified as market-based
are subject to different tax rules (Section 37A), which often provide beneficial tax rates or exemptions compared
to non-market transactions under Section 37.
Example:
• Scenario: Ayesha sells shares of GHI Ltd. on the Pakistan Stock Exchange, with all transaction details
routed through NCCPL.
• Implication: Since Ayesha’s sale is conducted on a registered exchange and processed by NCCPL, it
qualifies as a market-based transaction. Therefore, her transaction will be taxed under Section 37A rather
than Section 37, which could offer her a lower CGT rate or exemption.
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Chapter-4
Income From Capital Gains
Question
Mr. Ameer has disposed off the following assets in TY 2025:
Assets
Date of purchase
Date of sale
Cost
Sale proceeds
Shares of AB Private Company
1.1.2020
1.1.2025
300,000
900,000
Shares of GE Unlisted
1.1.2021
31.3.2025
30,000
10,000
*Shares of R listed company
18.7.2022
15.10.2024
60,000
75,000
*Shares of P listed Company
20.5.2024
25.10.2024
35,000
40,000
*The disposal is made through registered stock exchange and is settled through NCCPL.
He has also informed you that he has earned income from business of Rs. 1,000,000 during the year. Calculate his
tax liability?
Answer
Income from business
1,000,000
Income from capital gain
(W-1)
580,000
Income from capital gain - Securities (separate block)
(W-2)
18,950
Total income
1,598,950
Less: Income from capital gain - Securities (separate block)
1,580,000
Taxable income-taxable under NTR
(18,950)
Income from capital gain
AB Private Company
(900,000-300,000)
600,000
GE unlisted Company
(10,000-30,000)
(20,000)
580,000
(W-2)
Income from capital gain - Separate block
R Co.
(75,000-60,000)-0.5% of 135,000
14,325
P Co.
(40,000-35,000) - 0.5% of 75,000
4,625
FIFO or weighted average
Gain on security shall be computed on the basis of First in First out (FIFO) method.
If shares are sold on same day, average method will apply.
1. FIFO Method Example
Scenario:
• Investor: Ahmed
• Shares Purchased:
o 100 shares at Rs. 50 each on January 1.
o 100 shares at Rs. 60 each on February 1.
• Shares Sold: 150 shares on March 1 at Rs. 75 each.
Solution using FIFO:
• According to FIFO, the first shares purchased are considered the first ones sold.
• Ahmed’s 150 shares sold will be considered as:
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o 100 shares bought at Rs. 50 each.
o 50 shares bought at Rs. 60 each.
Calculation of Gain:
• Cost of 100 shares sold at Rs. 50 each = 100 × Rs. 50 = Rs. 5,000
• Cost of 50 shares sold at Rs. 60 each = 50 × Rs. 60 = Rs. 3,000
• Total Cost of 150 shares sold = Rs. 5,000 + Rs. 3,000 = Rs. 8,000
Sale Price of 150 shares = 150 × Rs. 75 = Rs. 11,250
• Gain = Sale Price – Cost Price = Rs. 11,250 – Rs. 8,000 = Rs. 3,250
Gain on Security (FIFO) = Rs. 3,250.
2. Weighted Average Method Example
Scenario:
• Investor: Ali
• Shares Purchased:
o 100 shares at Rs. 50 each on January 1.
o 100 shares at Rs. 60 each on February 1.
• Shares Sold: 150 shares on March 1 at Rs. 75 each.
Solution using Weighted Average:
• Total Cost of Shares Purchased = (100 × Rs. 50) + (100 × Rs. 60) = Rs. 5,000 + Rs. 6,000 = Rs. 11,000
• Total Number of Shares Purchased = 100 + 100 = 200 shares
• Weighted Average Cost per Share = Total Cost / Total Shares = Rs. 11,000 / 200 = Rs. 55
Calculation of Gain:
• Cost of 150 shares sold at Rs. 55 each = 150 × Rs. 55 = Rs. 8,250
• Sale Price of 150 shares = 150 × Rs. 75 = Rs. 11,250
• Gain = Sale Price – Cost Price = Rs. 11,250 – Rs. 8,250 = Rs. 3,000
Gain on Security (Weighted Average) = Rs. 3,000.
Summary:
• FIFO Method: The first shares purchased are sold first. In this example, the gain is Rs. 3,250.
• Weighted Average Method: The average cost of all shares purchased is calculated and applied to the
shares sold. In this example, the gain is Rs. 3,000.
Capital loss adjustment disallowed (Rule 13 F)
Capital loss adjustment shall not be admissible in the following cases, namely
1. Wash Sale
If an investor sustains loss on disposal of a security and in one month's period he or his related party purchases
the same security, thus maintaining his portfolio.
2. Cross Trade
Where coordinated reshuffle of securities between two related accounts of the same investor (or between two
related brokerage houses) is undertaken to artificially realize capital losses without selling the securities to an
outsider.
3. Tax Swap Sale
In this case investor who realized loss does not repurchase the same security. In this case he chooses another
similar security in same sector. Through this he has eliminated tax liability and has also maintained the portfolio
at the same risk return profile.
1. Wash Sale
Explanation:
•
‫اگر کوئی سرمایہ کار کسی سیکیورٹی کی فروخت پر نقصان اٹھاتا ہے اور پھر ایک ماہ کے اندر اسی سیکیورٹی کو‬
‫ تو اس صورت میں اُس نقصان کو سرکاری طور پر تسلیم‬،‫دوبارہ خرید لیتا ہے یا اس کے قریبی رشتہ دار خرید لیتے ہیں‬
‫نہیں کیا جائے گا۔‬
• ‫وجہ‬: ‫یہ اس لیے ہوتا ہے کہ سرمایہ کار نے صرف سیکیورٹی کو فروخت کیا لیکن اپنی پورٹ فولیو کی ساخت برقرار‬
‫رکھی۔‬
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‫‪Chapter-4‬‬
‫‪Income From Capital Gains‬‬
‫‪Example (Wash Sale) in Urdu:‬‬
‫•‬
‫کمال نے ‪ 100‬شیئرز ایک کمپنی کے ‪ 50‬روپے میں خریدے تھے‪ ،‬اور اس نے ان شیئرز کو ‪ 30‬روپے میں فروخت کر‬
‫کے ‪ 2,000‬روپے کا نقصان اٹھایا۔‬
‫پھر ایک ماہ کے اندر‪ ،‬کمال نے وہی ‪ 100‬شیئرز دوبارہ ‪ 35‬روپے میں خرید لیے۔ •‬
‫•‬
‫چونکہ کمال نے ایک ماہ کے اندر وہی شیئرز دوبارہ خریدے‪ ،‬اس لیے اُس نقصان کو سرکاری طور پر تسلیم نہیں کیا‬
‫جائے گا اور وہ اپنے ٹیکس میں اس کو ایڈجسٹ نہیں کر سکتا۔‬
‫•‬
‫‪2. Cross Trade‬‬
‫‪Explanation:‬‬
‫•‬
‫اگر کسی سرمایہ کار کے دو متعلقہ اکاؤنٹس (یا دو متعلقہ بروکریج ہاؤسز کے درمیان) میں سیکیورٹیز کا تبادلہ کیا جائے‬
‫تاکہ مصنوعی طور پر سرمائے کے نقصانات کو ظاہر کیا جا سکے بغیر کہ سیکیورٹیز کو باہر کسی دوسرے شخص کو‬
‫بیچا جائے‪ ،‬تو ایسا نقصان ایڈجسٹ نہیں کیا جا سکتا۔‬
‫یہ تبادلہ مصنوعی طور پر نقصان دکھانے کے لیے کیا جاتا ہے تاکہ ٹیکس کی بچت کی جا سکے‪ ،‬جبکہ ‪:‬وجہ •‬
‫سیکیورٹیز حقیقت میں ایک ہی شخص کے پاس رہتی ہیں۔‬
‫‪Example (Cross Trade) in Urdu:‬‬
‫ریاض کے پاس ‪ 100‬شیئرز ایک کمپنی کے ہیں جن کی قیمت ‪ 100‬روپے ہے۔ •‬
‫•‬
‫ریاض نے اپنے بروکریج اکاؤنٹ میں ‪ 100‬شیئرز ‪ 80‬روپے میں فروخت کیے اور دوسرے بروکریج اکاؤنٹ میں وہی‬
‫شیئرز ‪ 80‬روپے میں خرید لیے۔‬
‫•‬
‫اس طرح‪ ،‬ریاض نے مصنوعی نقصان ‪ 2,000‬روپے دکھایا‪ ،‬لیکن چونکہ دونوں اکاؤنٹس اس کے ہی تھے‪ ،‬اس کا یہ‬
‫نقصان ٹیکس کے حساب سے ایڈجسٹ نہیں ہوگا۔‬
‫‪3. Tax Swap Sale‬‬
‫‪Explanation:‬‬
‫•‬
‫اس صورت میں‪ ،‬سرمایہ کار جو نقصان محسوس کرتا ہے وہ سیکیورٹی کو دوبارہ نہیں خریدتا‪ ،‬بلکہ اسی شعبے میں‬
‫کوئی دوسری سیکیورٹی خرید لیتا ہے تاکہ اس کے پورٹ فولیو کی ساخت برقرار رہے اور وہ ٹیکس کی ذمہ داری سے‬
‫بچ جائے۔‬
‫اس طرح‪ ،‬سرمایہ کار ٹیکس کا بوجھ کم کر لیتا ہے لیکن خطرات اور منافع کی صورتحال بھی برقرار رکھتا ہے۔ ‪:‬وجہ •‬
‫‪Example (Tax Swap Sale) in Urdu:‬‬
‫•‬
‫حسان نے ایک کمپنی کے ‪ 100‬شیئرز ‪ 200‬روپے میں خریدے‪ ،‬اور ان شیئرز کو ‪ 150‬روپے میں بیچ کر ‪5,000‬‬
‫روپے کا نقصان اٹھایا۔‬
‫اس کے بعد حسان نے اسی شعبے کی ایک اور کمپنی کے ‪ 100‬شیئرز ‪ 150‬روپے میں خریدے۔ •‬
‫•‬
‫حسان نے تکنیکی طور پر سیکیورٹی کو فروخت کیا‪ ،‬لیکن اس نے ٹیکس کی بچت کے لیے وہی شعبہ برقرار رکھا اور‬
‫اس کا پورٹ فولیو ایک ہی خطرے اور منافع کے پروفائل پر رہا۔‬
‫•‬
‫اس صورت میں‪ ،‬ٹیکس سے بچنے کے لیے جو نقصان اٹھایا گیا‪ ،‬وہ ایڈجسٹ نہیں کیا جائے گا کیونکہ اس نے اسی‬
‫سیکٹر میں دوسری سیکیورٹی خریدی۔‬
‫‪Summary in Urdu:‬‬
‫جب سرمایہ کار وہی سیکیورٹی ایک ماہ کے اندر دوبارہ خرید لیتا ہے جس پر اس نے نقصان اٹھایا ہو‪1. Wash Sale: ،‬‬
‫تو نقصان ایڈجسٹ نہیں کیا جاتا۔‬
‫جب ایک ہی سرمایہ کار کے اکاؤنٹس کے درمیان سیکیورٹیز کا تبادلہ کیا جاتا ہے تاکہ مصنوعی ‪2. Cross Trade:‬‬
‫نقصان ظاہر کیا جا سکے‪ ،‬تو اس نقصان کو ایڈجسٹ نہیں کیا جائے گا۔‬
‫جب سرمایہ کار نقصان کی سیکیورٹی کو نہیں خریدتا‪ ،‬بلکہ اسی شعبے کی دوسری سیکیورٹی ‪3. Tax Swap Sale:‬‬
‫خریدتا ہے تاکہ ٹیکس کی بچت کی جا سکے‪ ،‬تو اس نقصان کو ایڈجسٹ نہیں کیا جائے گا۔‬
‫‪These rules are designed to prevent artificial loss realization and tax avoidance strategies that don't‬‬
‫‪involve genuine market activity.‬‬
‫‪Payment of advance tax on capital gain‬‬
‫‪Every investor other than individual shall e-file statement of advance tax on capital gain within 7 days after the‬‬
‫‪end of each quarter and will pay the tax.‬‬
‫‪Note‬‬
‫‪If the sole business of a company is to manage its investment in different subsidiaries then income of company‬‬
‫‪would be:‬‬
‫‪• dividend income and‬‬
‫‪• Capital gains.‬‬
‫‪Such income of the company would be chargeable to tax under the head income from business.‬‬
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‫‪Chapter-4‬‬
‫‪Income From Capital Gains‬‬
‫‪Non-Recognition Rule‬‬
‫‪In the following modes of transfer of a capital asset no capital gain or loss shall arise where the recipient is a resident‬‬
‫‪in Pakistan in the relevant tax year‬‬
‫‪I.‬‬
‫‪Transfer of assets between spouses under an agreement to live apart‬‬
‫‪II.‬‬
‫‪Under a gift from relative, bequest or will‬‬
‫‪III.‬‬
‫‪By succession, inheritance or devolution‬‬
‫‪IV.‬‬
‫‪A distribution of assets on dissolution of an AOP or on liquidation of a company‬‬
‫ ‪“Relative” in addition to an individual means:‬‬‫‪An ancestor, a descendant of any of the grandparents, or an adopted child, of the individual, or of a spouse of the‬‬
‫‪individual; or‬‬
‫‪A spouse of the individual or of any person specified above‬‬
‫‪Non-Recognition Rule‬‬
‫‪ (Capital‬کا مطلب یہ ہے کہ کچھ مخصوص معامالت میں کسی سرمایہ کاری یا اثاثے کی منتقلی پر نہ تو کوئی منافع ‪Non-Recognition Rule‬‬
‫۔ یہ قاعدہ صرف اس صورت میں الگو ہوتا ہے جب وصول کنندہ پاکستان کا رہائشی )‪ (Capital Loss‬تسلیم کیا جائے گا اور نہ ہی نقصان )‪Gain‬‬
‫ہو۔‬
‫زوجین کے درمیان اثاثے کی منتقلی‪1. Transfer of Assets Between Spouses Under an Agreement to Live Apart ( ،‬‬
‫)جہاں علیحدہ رہنے کا معاہدہ ہو‬
‫‪Explanation in Urdu:‬‬
‫اگر شوہر اور بیوی کے درمیان اثاثے کی منتقلی ہوتی ہے اور وہ علیحدہ رہنے کے معاہدے کے تحت ایک دوسرے کو اثاثے منتقل کرتے ہیں‪ ،‬تو‬
‫اس منتقلی پر نہ تو کوئی سرمایہ کاری منافع تسلیم کیا جائے گا اور نہ ہی نقصان۔‬
‫‪Example:‬‬
‫محمد اور عائشہ کا فیصلہ ہوتا ہے کہ وہ علیحدہ رہیں گے۔ محمد اپنی کمپنی کے ‪ 10‬الکھ روپے کے شیئرز عائشہ کو منتقل کرتا ہے۔ •‬
‫•‬
‫اس منتقلی پر نہ تو محمد کو منافع تسلیم کیا جائے گا اور نہ ہی عائشہ کو نقصان۔ کیونکہ یہ اثاثہ شوہر اور بیوی کے درمیان علیحدہ رہنے‬
‫کے معاہدے کے تحت منتقل ہوا ہے۔‬
‫)تحفہ‪ ،‬وصیت یا وراثت کے تحت اثاثہ کی منتقلی( ‪2. Under a Gift from Relative, Bequest, or Will‬‬
‫‪Explanation in Urdu:‬‬
‫اگر کسی رشتہ دار سے تحفہ یا وراثت کے طور پر اثاثہ منتقل ہوتا ہے‪ ،‬تو اس پر نہ تو کوئی سرمایہ کاری منافع اور نہ ہی نقصان تسلیم کیا جائے‬
‫گا۔‬
‫‪Example:‬‬
‫سلطان نے اپنے بیٹے زاہد کو اپنی جائیداد میں سے ‪ 5‬مرلہ زمین تحفے میں دی۔ •‬
‫•‬
‫چونکہ یہ اثاثہ تحفے کے طور پر دیا گیا ہے‪ ،‬اس پر نہ تو زاہد کو سرمایہ کاری منافع تسلیم کیا جائے گا اور نہ ہی سلطان کو کوئی‬
‫نقصان۔‬
‫)وراثت‪ ،‬وراثت یا تسلسل کے ذریعے اثاثہ کی منتقلی( ‪3. By Succession, Inheritance or Devolution‬‬
‫‪Explanation in Urdu:‬‬
‫جب کسی شخص کا انتقال ہو جاتا ہے اور اس کی جائیداد قانونی طور پر وراثت یا تسلسل کے ذریعے منتقل ہوتی ہے‪ ،‬تو اس پر نہ تو سرمایہ کاری‬
‫منافع تسلیم کیا جائے گا اور نہ ہی نقصان۔‬
‫‪Example:‬‬
‫جواد کا انتقال ہو جاتا ہے اور اس کی تمام جائیداد اس کی بیٹی مریم کو وراثت میں ملتی ہے۔ •‬
‫چونکہ یہ اثاثہ وراثت کے ذریعے منتقل ہوا ہے‪ ،‬اس پر نہ تو مریم کو منافع تسلیم کیا جائے گا اور نہ ہی جواد کو نقصان۔ •‬
‫کے خاتمے یا کمپنی ‪4. A Distribution of Assets on Dissolution of an AOP or on Liquidation of a Company (AOP‬‬
‫)کی تصفیہ کے دوران اثاثے کی تقسیم‬
‫‪Explanation in Urdu:‬‬
‫یا کمپنی کی تصفیہ کی حالت میں اثاثے تقسیم کیے جاتے ہیں‪ ،‬تو اس میں بھی کسی قسم کا منافع یا نقصان تسلیم )‪ (AOP‬اگر کسی کاروباری شراکت‬
‫نہیں کیا جائے گا۔‬
‫‪Example:‬‬
‫•‬
‫کامیاب کمپنی‪ ،‬جو تین شراکت داروں کے درمیان قائم تھی‪ ،‬نے کاروبار ختم کرنے کا فیصلہ کیا۔ اس کے بعد کمپنی نے اپنی جائیدادوں‬
‫اور اثاثوں کی تقسیم کی۔‬
‫اس اثاثہ کی تقسیم پر نہ تو شراکت داروں کو منافع تسلیم کیا گیا اور نہ ہی نقصان‪ ،‬کیونکہ یہ تقسیم کمپنی کی تصفیہ کے دوران ہوئی۔ •‬
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Chapter-4
Income From Capital Gains
Definition of "Relative" (‫)رشتہ دار کی تعریف‬
Explanation in Urdu:
"‫رشتہ دار" سے مراد وہ افراد ہیں جو درج ذیل میں شامل ہیں‬:
• ‫ دادا دادی یا نانا نانی کے نسلوں میں سے ہو۔‬،‫کوئی شخص جو آپ کے والدین‬
• ‫آپ کا شریک حیات۔‬
• ‫آپ کا اپنایا ہوا بچہ۔‬
Example in Urdu:
• ‫ تو یہ تحفہ "رشتہ دار" کے تحت آتا ہے۔‬،‫اگر حسن اپنی بیوی فاطمہ کو جائیداد بطور تحفہ دیتا ہے‬
•
‫ تو یہ بھی "رشتہ دار" کے تحت آتا‬،‫ جو کہ اس کے والدین کی نسل سے تعلق رکھتی ہے‬،‫ریاض اپنی بیٹی نبیلہ کو اپنی زمین دے دیتا ہے‬
‫ہے۔‬
Summary (‫)خالصہ‬:
• Non-Recognition Rule ‫کا مقصد یہ ہے کہ مخصوص حاالت میں اثاثوں کی منتقلی پر سرمایہ کاری کے منافع یا نقصان کو تسلیم‬
‫ یا کسی شراکت داری یا‬،‫ وراثت کے طور پر منتقل ہو‬،‫نہ کیا جائے۔ یہ تب الگو ہوتا ہے جب اثاثہ کسی رشتہ دار کو تحفے میں دیا جائے‬
‫کمپنی کے تصفیہ کے دوران تقسیم کیا جائے۔‬
Deemed cost for the recipient
The cost of capital asset in the hands of transferor shall be treated the cost for the recipient
Taxability in the hand of recipient
✓ Transfer of assets under and agreement to live apart is exempt in the hands of recipient
✓ Transfer of assets under inheritance is a capital receipt and therefore not taxable in the hands of recipient
Employee share schemes
Where shares are issued to an employee as a result of employee share scheme, the cost of the shares to the
employee shall be the sum of(a) The consideration, if any, given by the employee for the shares;
(b) The consideration, if any, given by the employee for the grant of any right or option to acquire shares; and
(c) The amount chargeable to tax under the head "Salary" under those sub-sections.
Exercise
Briefly explain the income tax implications in respect of each of the following independent situations for the tax
year 2025
(i)
1 January 2025: Ilyas entered into a contract for the sale of his 250 Square Yards plot in Islamabad to
Mr. Sohail for a consideration of Rs. 50,000,000. Sohail paid Rs. 5,000,000 at the time of the contract
for sale. However, he failed to pay the balance of the amount by 30 April 2025 and Ilyas forfeited the
Rs. 5,000,000 in accordance with the terms of the contract. Subsequently, the plot was sold for Rs.
49,000,000 to Mr Mumtaz on 30 June 2025. Ilyas had inherited the house on 25 June 2019, on which
date the fair market value of the plot was estimated at Rs. 45,000,000 . His father had originally
purchased the plot for Rs.39,000,000 in 1 July 2002.
(ii)
15 February 2025 Bilal discarded a machine which he had imported from China for Rs. 1,000,000 on
1 January 2025 to start the business. However, the machine was badly damaged during the shipment,
rendering it unfit for use. The shipping company paid him Rs. 850,000 as damages. The scrap value of
the machine on the date it was discarded was estimated to be Rs. 200,000. The documentation
charges incurred in connection with the claim for damages were Rs. 25,000
(iii) On March 01, 2025 Mr. Aleem sold 10,000 shares in Pakistan Telecommunication Limited, a
company listed on Karachi Stock Exchange, for Rs. 300,000. He had purchased these shares on July
01, 2024 for Rs. 200,000. Brokerage and other expenses on sale transaction were Rs. 1,500. Mr.
Aleem is a in the active taxpayers list under the Income tax Law. The disposal is made otherwise than
through registered stock exchange and which are not settled through NCCPL. How tax would be
changed if Mr Saleem disposed these share through registered stock exchange and which are settled
through NCCPL?
(iv) On June 15, 2025 Imran sold his personal car for Rs. 1,500,000. The car has been originally purchased
for Rs. 1,200,000 on September 13, 2022.
(v)
Mr. Salman sold his antique watch for Rs. 150,000 in tax year 2025. The watch had been gifted to him
by his mother back in 2010. Its fair market value at the time of gift was Rs. 250,000. His mother
originally purchased the watch for Rs.50,000.
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Chapter-4
Income From Capital Gains
Exercise
Mr. Mobeen owns different assets. The detail of these assets along with mode and value of acquisition and
nature of transactions is as under:
(i)
On 15 June, 2025, Mr. Mobeen sold 5,000 shares of M/s ABC (Pvt.) Limited for a sum of Rs. 625,000.
These shares were gifted to him by his friend on 13 September, 2024 on which date the fair market
value of the shares was Rs 525,000. His friend has originally purchased these shares in tax year 2021
for a sum of Rs 500,000.
(ii)
Mr. Mobeen has also 10,000 shares of XYZ Limited, a listed company, which were transferred to him
through inheritance from father date to be specified 01/07/2024. His father was original allottee of
these shares at Rs.10 per share. FMV of these shares at the time of inheritance was Rs. 12 per share.
On 30 January 2025, Mr. Mobeen sold 2,000 shares out of them at Rs. 40,000, through NCCPL. The
break-up value of these shares as per balance sheet of the company was Rs. 15 per share; however,
the price ruling in the market on the date of sale was Rs. 20 per share. Ignore notional cost.
(iii) Mr. Mobeen has also paid a sum of Rs. 60,000 for purchase of dining table set on 15 January 2011 for
his personal use. He sold the said set to Mr. Gufran for a sum of Rs. 90,000 on 27 June, 2025.
(iv) Mr. Mobeen also has a habit of collection of postage stamps. His collection includes 2,000 stamps of
different countries and occasions. He collected these stamps in many years. The cost of these stamps
aggregates to Rs. 275,000. However, due to paucity of space in the home, he is not able to continue
this habit therefore he sold these stamps for a sum of Rs.740,000 in a stamp exhibition.
Required:
You are required to compute the taxable income and tax liability of Mr. Mobeen for tax year 2025?
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Chapter-4
Income From Capital Gains
Income from Capital Gains (Summary)
Sr.
No
A
Particulars
Taxable
Rs
Rs.
Capital Gain under NTR
[(FMV/ Sale Price/ Amount Received) – (Cost of Asset + Incidental Expenses + Further
Charges)]= Gain / Loss On Disposal
Gain U/S 37
•
Disposal of Pvt. Company Shares
X
•
Disposal of Membership card
X
•
Disposal of share in partnership firm
X
•
Disposal of Mining Rights
X
•
Gain U/S 38
Disposal of painting, sculpture, drawing, or other art work
X
•
Disposal of Jewellery
X
•
Disposal of A postage stamp
X
•
Disposal of a coin or medallion
X
• Disposal of Antique
Note:
No loss will be recognized on disposal of these assets U/S 38
B
X
Capital Gain Under SBOI
[(FMV/ Sale Price/ Amount Received) – (Cost of Asset + Incidental Expenses + Further
Charges)]= Gain / Loss On Disposal
Gain U/S 37-A
X
•
Disposal of shares of Public Company
X
•
Disposal of Vouchers of PTCL
X
•
Disposal of Modarba Certificates
X
•
Disposal of Redeemable capital instruments
X
•
Disposal of Debt Securities
X
•
Disposal of Derivative Product
X
Disposal of Immovable Property
FMV/ Sale proceeds ( Higher of )
X
Less : Cost of the Property ( Land + Development Expense)
Note:
The Gain on Disposal of Property shall be taxed under SBOI
(X)
•
X
The Rate will be decided on the basis of type of property
Total Income From Capital Gain ( Including SBOI )
XXX
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Income from other sources
Chapter
5
Scope:





Income of every kind received by a person in a tax year,
if it is not included in any other heading,
other than income exempt from tax under this Ordinance,
shall be chargeable to tax in that year under the heading
“Income from Other Sources.
Chargeability:
Income from other sources is chargeable to tax on ‘receipt basis’. Thus, any income from other sources which is
accrued for a tax year but is not received is not chargeable in that tax year.
Income From Other Source
N.T.R
F.T.R
1) Additional payment on delayed refund under any tax law
Melinda Gates paid tax Rs. 30 million to FBR for the tax year 2024, later on she realized she had paid an excess
payment of Rs. 5 million, therefore she filed a refund application. FBR agreed to refund the excess amount, however
the refund is delayed so the department paid her 6 million (1 million as additional payment on delayed refund.)
Comment on the Income Status….
Answer [ Rs. 1 million is paid in excess of Rs. 5 Million. So this 1 million will be a part of Income from Other Source]
2) Ground Rent
Farrukh & Co. is in search of land for the construction of its head office. He approached Mr. Daniyal to provide a
land which is currently under the ownership of Daniyal at M.M Alam Road. As per mutual agreement Farrukh &
Co. decided to take the land on rent and will construct the head office and will pay the annual rent of Rs. 3,000,000
to Daniyal. Comment on the Rent received by Daniyal….
Solution:
Ground rent will be allowed as an expense to Farrukh and will be income from other source of Daniyal
3) Rent from the sub-lease of land or a building;
Mr. Doremon has let out his house to Nobita for a monthly rent of Rs. 40,000 on 1st November 2023, the house
comprises of two floor (each floor rent is Rs. 20,000) on 1st January 2024 Nobita decided to let out the ground floor
to his friend Shizuka at a monthly rent of Rs. 25,000. Calculate the Income for the Tax year 2024 for Doremon and
Nobita.
Solution
Mr. Doremon Income [40,000 x 8 = 320,000]
Mr. Nobita Income:
Rent received for floor [25,000 x 6 = 150,000]
Rent paid for the floor [20,000 x 6 = 120,000]
Net Income = 30,000
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Chapter-5
Income From Other Source
4) Income from the lease of any building together with plant or machinery;
Rent Received
XXX
Less: Expenses (Repairs & Maint.)
(X)
Depreciation
(X)
Initial Allowance
(X)
Net Income
XXX
(Visit Past Paper for the Practice of this rule)
5)Income from provision of amenities, utilities or any other service connected with renting of
building
Income Received
XXX
Less: Expenses
(X)
Net Income
XXX
To Do Question (Solve by Yourself) Mr. Jz rented his flat to Mr. AB for a monthly rent of Rs. 100,000. In addition
to the rent he also provided the laundry services to AB for which he charges 15,000 per month his actual expenses
on laundry was 8,000 per month. In addition to the laundry he also provided the generator to AB at a monthly rent
of Rs. 5,000 while he paid the rent of the generator the owner Rs. 3,000 per month. He also provided the Security
guard for which he charged Rs. 12,000, this amount is included in the rent. His annual expenditure on the security
guard is 130,000 Rs.
Calculate the income of Jz under the relevant head
6)- Income deemed u/s 111- unexplained assets or income;
7)- Any annuity or pension [Other Then Salary]
8)- Any amount received by a person from Approved Income Payment Plan or Approved Annuity
Plan under Voluntary Pension System Rules, 2005.
10)- Any other amount received as consideration for the provision, use or exploitation of
property, including from the grant of a right to explore for, or exploit, natural resources;
Mr. Ghareeb owns a land in the Middle of Balochistan, one day from nowhere a Mr Ameer approached him and
makes him aware that there might be a possibility of copper underneath his land. Mr. Ghareeb has no knowledge
about this and how to explore it, Mr Ameer ask his permission to explore the land with a monthly payment of Rs.
200,000 to him.
(Ans: 200,000 x 12 = 2,400,000 will be the Income from other source of Mr Ghareeb)
11) The fair market value of any benefit, whether convertible to money or not, received in
connection with the provision, use or exploitation of property;
Continuing the above example :In Addition to the Amount Mr. Ameer, also agreed that Ghareeb will get the 20% of
the copper extracted in a year. He received his share of copper on 31 st March and sold the all copper to GM Cables
for Rs. 1,000,000.
(Ans: 1,000,000 will be a part of income from other source of Ghareeb)
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Chapter-5
Income From Other Source
12) Any amount received by a person as consideration for vacating the possession of a building
or part thereof.
Any amount received by a person as consideration for vacating the possession of a building or part thereof, reduced
by any amount paid by the person to acquire possession of such building or part thereof. This income shall be
taxable in 10 years from the year of receipt in equal proportion.
13) Any gift received without the consideration
any amount or fair market value of any property received without consideration or received as gift, other than gift
received from grandparents, parents, spouse, brother, sister, son or a daughter. (Gift Received in cash even from
relatives will be taxable)
During the tax year 2020, Sadiq received a flat as gift from his uncle, Mumtaz Alvi. The flat was located in posh area
of Lahore and its fair market value at the time of gift was Rs. 4.5 million. Discuss the tax treatment of the flat received
by Sadiq. (Ans : 4.5 million will be a part of his income)
Tax Treatment of Gifts Under Various Income Heads
• Gifts Received from an Employer
□ Tax Treatment: Any gift received from your employer is considered part of your income and is taxable under
the head "Salary."
□ Rationale: Since the gift is provided by the employer, it is viewed as a form of compensation or benefit related to
your employment, similar to a bonus or other fringe benefits. As such, it is added to your taxable salary and taxed
according to the applicable income tax rates.
•
Gifts in the Form of Assets Received from Relatives
□ Tax Treatment: Gifts received in the form of assets (such as property, jewellery, or other valuables) from relatives
are exempt from tax.
□ Rationale: Gifts from close family members are generally not considered taxable income. The tax law provides
this exemption to avoid the burden of taxation on transfers within families, recognizing these as personal,
non-commercial transactions.
•
Gifts Received from Relatives or Friends in the Form of Cash
□ Tax Treatment: Gifts received in the form of CASH from relatives or friends are
taxable under the head "Income from Other Sources. The fair market value of ANY gift received from
friends is taxable under the head "Income from Other Sources
□Rationale: Cash gifts, unlike asset gifts from relatives, are considered a potential source of income. Therefore, to
prevent the misuse of cash gifts for tax evasion, they are taxed under "Income from Other Sources," unless
specifically exempt under certain conditions.
•
Gifts Received from a Tenant
□ Tax Treatment: Gifts received from a tenant are taxable under the head "Income from Property."
□ Rationale: A gift from a tenant is considered a form of rental income, possibly linked to the property rented out.
As such, it falls under "Income from Property" since it arises due to the landlord-tenant relationship and is related
to the rental income stream.
•
Gifts Received Under a Business Relationship
□ Tax Treatment: Gifts received in the course of a business relationship are taxable under the head "Income from
Other Sources."
□ Rationale: Gifts exchanged in a business context are viewed as income since they could be related to transactions,
services rendered, or other business dealings. To ensure fairness and prevent underreporting of business earnings,
such gifts are included as "Income from Other Sources."
•
Gifts Received from a Company as a Shareholder
□ Tax Treatment: If a shareholder receives a gift from a company, it is treated as a dividend.
□ Rationale: Gifts from a company to its shareholders are considered a
distribution of profits, akin to dividends. The tax law treats these gifts as dividends to prevent
companies from disguising profit distributions as gifts to avoid dividend taxation.
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Chapter-5
Income From Other Source
14) Any Amount received as loan
Any amount received as a
 Loan
 Advance
 deposit for issuance of shares or
 gift by a person in a tax year from another person (Not being a banking Co. or financial institution)
Otherwise than by
➢ Cross check drawn on bank or
➢ Banking channel from a person holding a NTN Number
Shall be treated as “Income from Other Source”
Exception: This rule shall not be applied to
➢ Advance for Sale of Goods
➢ Advance For Supply of Services
If a Person Holds NTN
He Should make the payment to anyone following
modes:➢ Cross Cheques
➢ Any Other Banking Channel
If a person doesn’t holds NTN
He Should make the payment to anyone through
following modes:➢
Cross Cheques
Mr. Atif Received the following amounts
1. Loan received from Grandfather in Cash [Part of Income from Other Source]
2. Loan From uncle through banking channel (Uncle have NTN) [Not Part Of Income]
3. Gift received from mother in Cash [Part of Income from Other Source]
To Do Question (Solve by Yourself) Mr. Abid is constructing his house and for the purpose of meeting the
construction expenses, he intends to obtain a loan of Rs. 500,000 from his friend professor, who is in the business
of money lending. He is advised that such loan shall be charged under his taxable income. You are required to
advise Abid under which circumstances this loan won’t be a part of his income
To Do Question (Solve by Yourself) Mr. Kachra Seth owner of Heera Pheri Kabariya received the following
Payments:
➢ Loan of Rs. 200,000 in cash from Raju (Having NTN)
➢ Loan of Rs. 250,000 from Totla Seth in Cash (Not Having NTN)
➢ Loan of Rs. 350,000 from Babu Bhaiya through crossed Cheque (Having No NTN)
➢ Loan of Rs. 450,000 from Sham through online transfer (Having No NTN)
➢ Received a Iphone 15 Pro Max (512 Gb) from Anjali. (Her employer)
Required: Comment on each transaction
15) Income splitting: Royalty income of Authors
Where the time taken by an author of a literary or artistic work to complete the work exceeds 24 months, the
author may elect to treat any lump sum amount received by the author in a tax year on account of royalties in
respect of the work as having been received in that tax year and the preceding two tax years in equal
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Question
Mr. Danishwar, a renowned author, completed his book on "Human Behavior" in two and a half years
time. He received a lump sum amount of Rs. 900,000 in May 2010 on account of royalty. Briefly explain
the taxability of the above situation
(Marks 3)
Question
Mr. Pansari provided further information for the tax year 20X4:
i.
Received a royalty of Rs. 2,000,000 from K Publishing on a book written on Wild Hunting. Mr.
Pansari completed the book in 19 months and all the costs relating to its publication were borne
by the publisher. The applicable tax rates in tax years 20X2 and 20X3 were 16% and 18%
respectively.
Tax treatment:
Total royalty of Rs.2 million is required to be included in taxable income for the tax year 20X4 as the
completion time of the book does not exceed 24 months.
IFOS SUMMARY SHEET
Sr.
No
1
Lecture, teaching and examination fee received
X
2
Professional fee received
X
3
Additional Payment on delayed Refund
X
4
Ground Rent Received
X
5
Rent from Sub-lease of land or building
X
6
Income from lease of Building with Plant & Machinery
Particulars
7
Taxable
Rs
Rs.
Rent Received
X
•
Less: Initial allowance and Depreciation charges
(X)
•
•
Less: Repairs and collection charges
Less: Property Tax paid
(X)
(X)
•
Less : Any expenditure related to this building and machinery
(X)
8
Income from provision of amenities, utilities or any other services connected with them
Less: Any expenditure actually paid in respect of this income
9
Any annuity or pension received from any person ( other than employer)
10
Any amount received in respect for provision, use or exploitation of property, including
the grant for the use or exploit of of property
11
The FMV of any benefit whether convertible to money or not, received in connection with
the provision, use or exploitation of property
X
X
(X)
X
X
X
12
X
Any amount received for vacating the possession of the property
Taxable amount = (Received amount – amount paid) ÷ 10 years
X
13
Any amount received by the person from Approved Income payment plan or Approved
annuity plan under the Voluntary pension system Rules
X
14
FMV of any property received as gift without any consideration other than relative
X
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15
Any amount of loan, advance, deposit for issuance of shares or gift received from another
person
•
•
Amount received from a person (having NTN) through crossed cheque ( Exempt)
Amount received from a person (having NTN) through a normal banking channel
(Exempt)
--
•
•
Amount received from a person (having NTN) in form of cash (Totally Taxable)
Amount received from a person (having no NTN) through crossed cheque (
Exempt)
Amount received from a person (having no NTN) through a normal banking
channel (Totally Taxable)
Amount received from a person (having no NTN) in form of cash (Totally
Taxable)
X
•
•
16
19
-X
X
Prize on prize bond and crossword puzzle
Raffle, Lottery, Prize on winning a quiz or prize offered by companies for
promotion of sales
FTR
FTR
Dividend Income
•
18
--
Prizes and Winnings
•
•
17
Income From Other Source
Pakistan Source dividend income @ 15%
FTR
• Foreign Source dividend income
Profit on Debt (Interest Income)
X
•
•
Bank profit & Profit from PLS account
Profit on Saving certificates under NSC including Defense saving certificates and
post office certificates
FTR
•
Profit on certificates, debentures issued by a company or financial institution
FTR
• Profit on securities issued by the government such as PIBs
Royalty Income
• Pakistan source Royalty income or fee for technical services received by nonresident person @ 15%
• Pakistan source Royalty income or fee for technical services received by nonresident person through permanent establishment in Pakistan
FTR
FTR
FTR
X
•
Royalty Income received by resident non-professional writer
X
•
Royalty income of authors for literary work completed in more than 24 months
[ amount received as royalty income ÷ 3 years]= amount taxable in current
year and in two preceding years]
X
Total Income from other Source Excluding FTR
XXX
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Final tax regime
Chapter
6
Final tax regime (Gross income basis)
Definition: This regime applies to certain types of income where the tax paid is considered final, and no further
deductions or adjustments are allowed.
Expense Deductibility: Under FTR, expenses related to earning the income cannot be deducted.
Tax Credits: Tax credits are also not allowed under this regime. This means that even if you qualify for tax credits,
they cannot be applied to reduce the tax liability for income falling under FTR.
Income Classification: Income under FTR does not fall under any specific heads of income. Instead, it is included
in the total income solely to calculate the total income. After calculating the total income, the amount of FTR income
is then subtracted from the total income to apply separate
tax rates.
Losses: Losses are not considered under FTR. If losses are incurred from sources of income taxed under FTR, they
cannot be used to offset other income or be carried forward.
Refunds: There is no refund of non-adjustable tax collected or deducted at source unless such tax exceeds the
amount of final tax for which the taxpayer is chargeable.
Assessment: An assessment is deemed to have been made, and the taxpayer is required to furnish a return of
income in respect of such income.
Examples:
Examples of FTR under the Income Tax Ordinance 2001
• Dividend
• Profit on Debt (Except Co.)
• Commission & Brokerage
• Royalty
• Exports
• Fee for Technical Services of Non-Resident
• Prizes, Winnings
• Lottery
Dividend [DIVIDE]
“Dividend” includes
➢ Any distribution by a company to its shareholders out of accumulated profit. Dividend may be distribution
of:❖ Debentures or deposit certificates
❖ Assets of company including money or
❖ Reduction of capital by the company
❖ After tax profit of a branch of Foreign company operating in Pakistan.
❖ Amount expended by a private company on behalf for benefit of shareholder.
❖ Loan or advance given by a private company (ITO) to its shareholders.
❖ Liquidation of company
➢ All distributions must be up to the extent of accumulated profits possessed by the company at date of
distribution.
"DIVIDE":
D - Debentures or Deposit certificates issued as dividends.
I - Income (after-tax profits) of a foreign branch (such as in Pakistan).
V - Value distribution from accumulated profits (assets or reduction of capital).
I - In-kind distributions (non-cash like assets) to shareholders.
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D - Dividend on liquidation of a company (excluding certain conditions).
E - Expenses or advances made by a company for the benefit of its shareholders (also considered dividends)
➢
•
•
•
Following payments are not dividends;
Loan or advance by a private company involved in lending business.
Subsequent dividend if the payment is set-off against the loan already treated as dividend.
Remittance of after tax profit by a branch of Petroleum Exploration and Production (E&P) foreign company,
operating in Pakistan.
•
Distribution on liquidation of company or reduction of capital by company in respect of any share for full
consideration, or redemption of debentures or debenture stocks, where the holder of the share or
debenture is not entitled in the event of liquidation to participate in the surplus assets.
For this rule, a memorable acronym could be "NOT DIVIDEND", which reflects the concept that the following
payments are not considered dividends. Here's how the acronym breaks down:
N - No loan or advance by a private company involved in lending business (e.g., If a private lending company
gives a loan to a shareholder, it is not considered a dividend).
O - Offset subsequent dividends against prior loans (e.g., A dividend paid that is set off against a loan
previously treated as a dividend is not considered a new dividend).
T - Taxable remittance of after-tax profit from a foreign Petroleum Exploration and Production (E&P) branch
in Pakistan (e.g., If a foreign company’s branch remits its after-tax profits, it is not classified as a dividend).
D - Distribution during liquidation or capital reduction where the shareholder is not entitled to surplus
assets (e.g., When a company liquidates and the shareholder doesn’t have a claim on remaining assets, the
distribution is not a dividend).
I - Invested capital or redemption of debentures is not considered a dividend (e.g., Redemption of debentures
or stocks is not treated as a dividend if there’s no claim on surplus assets).
V - Venture funds (not considered dividends in certain cases).
I - Initial capital return or refunds of capital.
D - Dividend set-offs.
E - Earnings remittance by foreign branches (again, specifically from E&P companies).
N - Non-participating in liquidation (if shareholder does not have a claim on the surplus in liquidation).
D - Debt distribution (return of capital or loan repayment).
Example:
1. Loan or Advance by Lending Business: A private company involved in lending, such as "XYZ Lending
Co.," gives a loan of Rs. 500,000 to its shareholder, Mr. Ali. This amount is not considered a dividend
under the tax law, even if Mr. Ali is a shareholder.
2. Subsequent Dividend Set-Off: "ABC Ltd." paid a dividend of Rs. 200,000 to its shareholder, Mr. Z, who
then set off this amount against an outstanding loan. The Rs. 200,000 cannot be considered a new
dividend.
3. Petroleum Branch Profit Remittance: A branch of a foreign Petroleum Exploration company
operating in Pakistan, "XYZ Petroleum Co.," remits Rs. 1,000,000 in after-tax profits back to its parent
company. This remittance is not considered a dividend.
4. Distribution During Liquidation: In the liquidation of "DEF Ltd.," the shareholders receive payments
for the shares they hold. However, if the shareholder is not entitled to the surplus assets in case of
liquidation, this payment is not considered a dividend.
Definition of Accumulated Profits:
Accumulated profits refer to the profits that a company has earned and retained over time, which are
available for distribution to shareholders as dividends. It includes:
1. Reserves: Any reserve created by the company that is partly or wholly made up of profits that are
allowed as tax-deductible (or exempt) under the law.
2. Total profits: All the profits that the company has earned up to the date of dividend distribution (or
liquidation if the company is being liquidated).
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Example:
Example 1: Profit Accumulation in Regular Business
Let's consider a company XYZ Ltd. that has been operating for several years. At the end of each year, XYZ Ltd.
earns profits but retains a portion of those profits for future operations.
• Year 1: XYZ Ltd. earns Rs. 5,000,000 in profit. The company decides to retain Rs. 3,000,000 as an
accumulated profit in the form of reserves.
• Year 2: The company earns an additional Rs. 4,000,000 in profit and decides to retain Rs. 2,500,000
as reserves for future expansion.
Now, when XYZ Ltd. decides to pay a dividend in Year 3, the accumulated profit from Year 1 (Rs. 3,000,000)
and Year 2 (Rs. 2,500,000) can be used to calculate the total amount available for dividend distribution.
• Total accumulated profits for dividend distribution: Rs. 5,500,000.
So, the company can declare a dividend based on these accumulated profits, including the reserves made in
the previous years.
Example 2: Profit Accumulation in Liquidation
Let’s say ABC Ltd. is in the process of liquidation. The company has earned profits over its operational years,
and as per the liquidation process, it decides to distribute the profits to its shareholders.
• ABC Ltd. has earned profits of Rs. 10,000,000 in total over its years of operation, and at the time of
liquidation, it has Rs. 2,000,000 in accumulated profits.
In this case, the accumulated profits available for distribution to the shareholders would be the total profits
the company made up to the date of liquidation, i.e., Rs. 2,000,000.
• Accumulated profits available for liquidation distribution: Rs. 2,000,000.
These profits would be used to distribute a final amount to the shareholders before the company is completely
liquidated.
Key Points:
• Reserves and profits of the company are considered part of accumulated profits.
• These profits can be used for dividend distribution during regular business operations or at the time
of liquidation.
• The profits that are accumulated up to the point of dividend distribution or liquidation are what
constitute the accumulated profits available for payout.
Question
You are a tax partner in a local firm of Chartered Accountants. You have been approached by some of the clients
for opinion on the possible tax implication/treatment of certain matters. Under the provisions of the Income
Tax Ordinance, 2001 and Rules made thereunder, discuss the tax implication/treatment in the following
independent case:
On 31.7.20X9 Noble (Pvt.) Ltd (NPL) received a notice from Officer of Inland Revenue asking it to deposit
withholding tax of Rs.3,750,000 in respect of a loan of Rs.25,000,000 which was provided by NPL to one of its
shareholders on 31.12.20X8. NPL's accumulated profits at the time of provision of loan amounted to
Rs.20,000,000. (Marks 3)
Answer
When a private company provides loan to any of its shareholders, the loan is treated as a dividend to the extent
the company's accumulated profits. Since NPL had accumulated profit of Rs.20 million at that time, the entire
amount of loan of Rs.25,000,000 shall not be considered as dividend. Therefore, NPL was required to withhold
tax of Rs.3,000,000 i.e. 15% of Rs.20 million instead of Rs.3,750,000 from the payment.
•
•
•
Tax is required to be deducted from dividend income which is taxable under
FTR as full and final tax liability for a shareholder including a corporate shareholder and no
expense or deduction is allowable from such income.
The general rate is 15% of gross dividend. However, different tax rates are applicable in
specific cases are as under:
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Recipient of dividend
Tax rate
Dividend paid by Independent Power Producers with specified conditions
7.5%
Dividend received from a company where no tax is payable by such company due to
exemption, carry forward of loss or tax credits
25%
Dividend received from Special Purpose Vehicle:
0%
0% in case of a Real Estate Investment Trust (REIT) scheme as recipient of dividend;
35%
and
35% in case of other recipients
Other dividend in case of corporate and non-corporate shareholders
15%
Zakat deducted from dividend income:
No deduction is allowed from FTR income.
However, zakat paid out of dividend income is deductible from normal taxable income, if any
Incorrect tax deduction from dividend income:
In case of incorrect tax deduction by a withholding agent, any excess or short deduction shall be adjusted accordingly
from normal tax liability.
Example: A company has deducted tax @ 10% from dividend income instead of 15% then tax@ 15% shall be
included in tax liability after rebates and withholding @ 10% shall be deducted from tax liability and
automatically be adjusted Same treatment in case of other FTR items.
Dividend received from any foreign company
Summary of relevant provisions are:
Section 5 [charging section]:
Dividend income is taxable @ 15% of the gross dividend under FTR
Section 150 [tax withholding section]:
Tax is deductible from gross dividend @ 15%.
Result:
Dividend income is taxable @ 15% general rate whether tax is deductible not such as dividend from
any foreign company.
The foreign company does not deduct tax from such dividend income as per Pakistan tax laws, tax @ 15% is therefore
required to be included in tax liability after rebates. [Part of NTR]
If the foreign company has deducted tax from dividend as per that foreign Country’s laws then foreign tax credit
shall not be allowed in Pakistan as the dividend income falls under FTR where no tax credit is allowed.
Bonus Shares
Bonus shares are taxable @ 10% of the specified value under FTR and the company issuing bonus
shares is obliged to collect tax from the shareholders as under
a) A company issuing bonus shares shall deposit tax in the government treasury within 15 days of
the first day of closure of books @ 10% of the value of bonus shares.
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b) Value of bonus shares in case of a listed company
Value of bonus shares in case of a listed company shall be day-end price on the first day of closure of
books.
c)Value of bonus shares in case of an unlisted company including private company
Value of bonus shares in case of an unlisted company including private company shall be the value
as prescribed under the law.
Rule 231G of the Income Tax Rules
Value of bonus shares issued by an unlisted company shall be the face value or break-up value whichever is higher.
Break-up value shall be determined as ordinary paid-up capital + reserves (excluding capital reserves, share premium
reserves) divided by total number of ordinary shares after the issuance of bonus shares based on the latest financial
statements approved by the BOD for the purposes of issuance of bonus shares.
d) The tax deposited by the company shall be collected from the shareholders before the issue of bonus
shares.
If any shareholder does not pay tax nor collects its bonus shares within 15 days of issuance Of bonus shares, the
company may dispose of such number of shares sufficient to recover The amount of tax deposited by it on behalf of
the shareholder.
Difference between bonus shares and dividend in specie is as under
•
Bonus shares is a situation where A Ltd issues additional shares of A Ltd to its shareholders free of cost in
lieu of cash dividend
• Dividend in specie is a situation where A Ltd has shares of B Ltd and transfers the same to its shareholders
free of cost in lieu of cash dividend.
Taxability of dividend income and capital gain in case of bonus shares and dividend in specie can be Summarized as
under:
• The amount of dividend in specie (i.e. FMV of shares at the time of transfer to the shareholder) shall be
taxed as dividend under FTR at the rates specified for normal dividend income whereas value of bonus
shares is taxable under FTR @ 10% of the value as mentioned above at the time of issue of bonus shares.
• The difference between the consideration received and the cost (i.e. the amount of dividend income) shall
be taxable as capital gain both in cases of bonus shares and dividend in specie.
Cost of bonus shares shall be:
➢
➢
➢
➢
➢
Ex-bonus price if tax has already been paid in case of a listed company;
The value prescribed (i.e. Break-up value or face value whichever is higher), if tax is paid in case of an
unlisted company; and
Zero, if no tax is paid
Capital gain on disposal of shares of a public company settled through NCCPL is taxable as separate block
of income at specified tax.
Capital gain on disposal of shares of a private company is taxable under normal tax structure.
Payment on account of royalty, Fee for technical services and other services received by a nonresident
Pakistan source royalty, fee for technical services and other services received by a non-resident is subject to
withholding tax at the following % which is full and final tax liability:
15% on royalty income
10% on fee for offshore digital services, fee for money transfer operations, card network services, payment
gateway services, inter-bank financial telecommunication service fee for technical services
However, royalty income is taxable under normal tax structure as business income if it is effectively connected with
a Permanent Establishment (PE) in Pakistan of the non-resident person,
Likewise, services above mentioned are also taxable under normal tax structure as business income if the services
are rendered through a PE in Pakistan.
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Chapter-6
Final Tax Regime
Definition of Royalty
"Royalty" means any amount paid or payable, however described or computed, whether periodical or a lump sum,
as consideration for –
a) the use of, or right to use any patent, invention, design or model, secret formula or process, trademark or
other like property or right;
b) the use of, or right to use any copyright of a literary, artistic or scientific work, including films or video
tapes for use in connection with television or tapes in connection with radio broadcasting, but shall not
include consideration for the sale, distribution or exhibition of cinematograph films;
c) the receipt of, or right to receive, any visual images or sounds, or both, transmitted by satellite, cable, optic
fiber or similar technology in connection with television, radio or internet broadcasting;
d) the supply of any technical, industrial, commercial or scientific knowledge, experience or skill;
e) the use of or right to use any industrial, commercial or scientific equipment;
f) the supply of any assistance that is ancillary and subsidiary to, furnished as a means of enabling the
application or enjoyment of, any such and is property or right as mentioned in sub-clauses (a) through (e):
and
g) the disposal of any property or right referred to in sub-clauses (a) through (e):
"P-CLIPS"
Each letter of the acronym represents one of the key points in the definition of royalty:
• P – Patent, Invention, Design, Trademark (Use of patents, designs, models, trademarks, or
similar rights)
• C – Copyright (Literary, Artistic, or Scientific Works) (Use of copyrights, including films or
video tapes for TV/radio)
• L – Literary, Artistic, Scientific Knowledge (Supply of technical or scientific knowledge,
experience, or skills)
• I – Industrial or Commercial Equipment (Use or right to use industrial, commercial, or
scientific equipment)
• P – Provision of Ancillary Assistance (Ancillary or subsidiary assistance enabling the
application or enjoyment of the rights)
• S – Sale or Disposal of Property (Disposal of any property or right as described in the above
points)
Example to Remember:
Imagine you're receiving royalty payments for the use of various intellectual property rights. P-CLIPS
will remind you of the following scenarios:
• Patent (invention, designs)
• Copyright (literary, artistic)
• Literary works or scientific knowledge
• Industrial equipment
• Provision of assistance or support
• Sale or disposal of property rights
This acronym should make it easier to recall the elements included in the definition of royalty.
Here are real-life examples referring to companies or industries based on the P-CLIPS acronym for royalty
payments:
1. P – Patent, Invention, Design, Trademark
Example:
• Apple Inc. licenses its patents for its iPhone technology to other manufacturers in exchange for
royalty payments. For instance, companies like Qualcomm earn royalties from Apple for using
Qualcomm's patented mobile chipsets in Apple’s devices like iPhones.
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2. C – Copyright (Literary, Artistic, or Scientific Works)
Example:
• Warner Bros. pays royalties to J.K. Rowling for the use of her copyrighted Harry Potter books in
movies, merchandise, theme parks, and other adaptations. Additionally, Disney pays royalties to
authors, animators, and artists for characters and stories used in films, merchandise, and television
shows.
3. L – Literary, Artistic, or Scientific Knowledge
Example:
• IBM pays royalties to Alfred Aho and Jeffrey Ullman for their scientific work on algorithms and data
structures used in their software products. These royalties are part of the compensation for the use of
their scientific knowledge in software development.
4. I – Industrial or Commercial Equipment
Example:
• Caterpillar Inc., a company known for manufacturing construction and mining equipment, licenses its
heavy machinery to various construction firms. These companies pay royalties to Caterpillar for the
right to use its industrial equipment in major construction projects globally.
5. P – Provision of Ancillary Assistance
Example:
• Microsoft pays royalties to third-party developers who create software or apps that work with
Microsoft’s Windows OS and Office Suite. For example, companies like Adobe pay royalties to
Microsoft for the integration of Adobe software into Microsoft products or platforms, offering
ancillary assistance to users of both.
6. S – Sale or Disposal of Property Rights
Example:
• The Beatles sold the rights to their music catalog to Michael Jackson in 1985, which included the right
to receive royalties from the sales of their music. Sony/ATV Music Publishing later acquired the
rights, and the Beatles continue to receive royalties whenever their music is played on radio stations,
streamed online, or used in films.
Definition of Fee for Technical Services
"Fee for technical services" means any consideration, whether periodical or lump sum, for the rendering of any
managerial, technical or consultancy services including the services of technical or other personnel, but does not
includeconsideration for services rendered in relation to a construction, assembly or like project undertaken by the
recipient; or
consideration taxable under the head "Salary"
Definition of "Permanent establishment"
"Permanent establishment" means a place of business through which the business of the person is wholly or partly
carried on, and includesa) a place of management, branch. Office, factory or workshop premises foe soliciting orders, warehouse,
permanent sales exhibition or sales outlet, other than a liaison office except where the office engages in the
negotiation of contracts (other than contracts of purchase);
b) Mine. oil or gas well, quarry or any other place of extraction of natural resources
ba) an agricultural, pastoral or forestry property;
bb) virtual business presence in Pakistan including any business where transactions are conducted
through internet or any other electronic medium, with or without having any physical presence
c) a building site, a construction, assembly or installation project or supervisory activities connected with
such site or project but only where such site, project and its connected Supervisory activities continue for
a period or periods aggregating more than ninety days within any twelve-months period;
d) the furnishing of services, including consultancy services, by any person through employees or other
personnel engaged by the person for such purpose;
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e) a person acting in Pakistan on behalf of the person (hereinafter referred to as the ("agent"), other than an
agent of independent status acting in the ordinary course of business as such, if the agenti.
has and habitually exercises an authority to conclude contracts on behalf of the other person;
ii.
has no such authority, but habitually maintains a stock-in-trade or other merchandise from which
the agent regularly delivers goods or merchandise on behalf of the other person; or
f) Any substantial equipment installed, or other asset or property capable of activity giving rise to income
MONEY-VIP:
1. M - Management / Office
(A place of management, office, or factory where business is conducted.)
2. O - Oil, Gas, or Mine
(Sites like mines, oil wells, or gas extraction locations.)
3. N - Natural Resources / Agriculture
(Agricultural, pastoral, or forestry properties.)
4. E - Electronic Presence (Online Business)
(Business conducted through the internet or other digital platforms.)
5. Y - Yard or Construction Site
(A construction, assembly, or installation site continuing over 90 days.)
6. V - Virtual Services
(Providing services, like consultancy, through employees or personnel.)
7. I - Independent Agent
(An agent who has the authority to conclude contracts on behalf of the business.)
8. P - Property or Equipment
(Substantial property, equipment, or assets that can generate income.)
MONEY-VIP Real-Life Examples
1. M - Management / Office
o Example: Google’s Office in Pakistan
Google operates a management office in Pakistan, which is used to conduct business activities
such as client meetings, negotiations, and operations. Even though Google may have a limited
physical presence in Pakistan, the office qualifies as a Permanent Establishment due to its
management and business functions.
2. O - Oil, Gas, or Mine
o Example: Shell Pakistan’s Oil and Gas Operations
Shell operates oil and gas extraction sites in Pakistan. These mines and drilling sites are
considered a Permanent Establishment (PE) under the definition because they involve
physical extraction of natural resources (oil and gas), which creates a taxable presence in the
country.
3. N - Natural Resources / Agriculture
o Example: Nestlé Pakistan’s Dairy Operations
Nestlé operates dairy farms in various parts of Pakistan, especially for milk collection for its
dairy products. This falls under the category of natural resources/agriculture property as
they are extracting milk (a natural resource) and running a business operation on
agricultural property, which constitutes a Permanent Establishment.
4. E - Electronic Presence (Online Business)
o Example: Amazon’s Online Presence in Pakistan
Amazon operates its e-commerce platform globally, including business transactions in
Pakistan. While Amazon may not have physical stores or offices in Pakistan, the online
presence and business transactions (sales, customer service) conducted over the internet
still qualify as a Permanent Establishment, as income is generated from the country.
5. Y - Yard or Construction Site
o Example: China State Construction Engineering Corporation (CSCEC) in Pakistan
CSCEC, a large construction company, is involved in the construction of infrastructure
projects like roads, bridges, and buildings in Pakistan. Their operations typically involve a
construction site where activities continue for extended periods, often exceeding 90 days. As
such, this construction site is classified as a Permanent Establishment due to its prolonged
presence.
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6. V - Virtual Services
o Example: Accenture Consulting Services in Pakistan
Accenture, a global consulting firm, provides services such as business consulting, technology
services, and outsourcing in Pakistan. It employs staff in the country or works with local
teams. Even though many of their services are virtual, such as remote consulting, it qualifies
as a Permanent Establishment due to the ongoing provision of services with personnel
engaged locally.
7. I - Independent Agent
o Example: Coca-Cola’s Distribution Agreement in Pakistan
Coca-Cola has local distributors in Pakistan who act as agents for the company. These agents
regularly conclude contracts to distribute Coca-Cola’s products and maintain stock-in-trade.
Coca-Cola’s operations through these agents create a Permanent Establishment due to the
authority of agents to act on behalf of the company.
8. P - Property or Equipment
o Example: Microsoft Data Centers in Pakistan
Microsoft operates data centers worldwide, including a significant one in Pakistan. The
servers and substantial equipment within these data centers qualify as a Permanent
Establishment because they generate revenue and operate in the country. Microsoft’s taxable
presence is based on the equipment’s use to conduct business in the region.
Profit on debt i.e. interest income
"Profit on debt" whether payable or receivable, means
➢
➢
Any profit, yield, interest, discount, premium or other amount, owing under a debt, other than a return of
capital; or
Any service fee or other charge in respect of a debt, including any fee or charge incurred in respect of a
credit facility which has not been utilized.
The following interest incomes are covered in specific provisions:
•
•
•
•
Profit on certificates under National Savings Scheme including Defense Saving Certificates (DSC) and Post
Office Saving Account.
Bank profit including profit and loss sharing (PLS) account
Profit on certificates, debentures etc. including Term Finance Certificates, Certificates of Investment issued
by a company or a financial institution.
Profit on securities issued by federal, provincial or local government such as Pakistan Investment Bonds.
The tax rates applicable on the above interest income are:
Tax rate
For a company (normal corporate tax rate)
29%
For an individual and AOP where profit on debt:
15% on gross amount
does not exceed Rs.5 million
Normal slab rates
[separate block of income]
exceeds Rs.5 million
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Note for students:
Profit on debt in each case is not covered in the above specific provisions e.g. payment on account of interest on loan
through loan agreement is not covered under specific provisions and therefore the same is taxable under normal tax
structure irrespective of any limit.
Therefore, if an individual gives loan to a company through loan agreement (other than through debentures etc.)
then no tax shall be deducted in this case and the interest income of the individual shall be taxable under the head
income from other sources at normal slab rates.
Interest income on Bahbood Saving Certificates, Pensioners' Benefit account and Shuhada Family Welfare
account is not taxable under separate block of income - refer chapter of rebates.
Interest income is exempt in certain cases and therefore no tax shall be deducted. Few examples are:
➢
➢
➢
➢
➢
➢
➢
Profit from foreign currency accounts in Pakistan by non-resident persons.
Profit from rupee account by a non-resident individual holding a Pakistan Origin Card (POC) or National ID
Card for Overseas Pakistanis (NICOP) or CNIC where foreign exchange remittance is made exclusively for
this purpose.
Profit received by a non-resident on a security issued by a resident where: (section 46)
The persons are not associates;
The security was widely issued outside Pakistan for raising a loan for a business in Pakistan;
The profit was paid outside Pakistan; and
The profit was paid on any security approved by the FBR.
Zakat deducted from interest income:
No deduction including zakat is allowed where profit on debt is taxable as separate block of income. (While can
be claimed as deductible allowance.
Question
GM Ltd is considering an option to issue TFC outside Pakistan for the purpose of raising funds for use in its business in
Pakistan. To induce the investors for acquiring
TFCs of the Company, it intends to advertise that the income on the same will not be taxable in Pakistan.
Required:
List down the conditions to be fulfilled for claiming exemption on profit on debt payable on TFCs being issued by the
company.
(Marks 05)
Exercise:
Omega (Pvt.) Limited is engaged in the business of trading and sale of fertilizers. The company has extended loan of Rs. 2.5
million to one of its shareholders on 30 June 2023 when the accumulated profits of the company were Rs. 1.8 million.
Determine the amount to be treated as dividend.
Required: Determine the amount to be treated as dividend.
Robin Petroleum International (RPI), a company incorporated in Netherlands, is operating in Pakistan as a branch. RPI
has entered into an agreement with the Government of Pakistan under which RPI has been given the right to explore and
produce crude oil and natural gas in specified areas of Sindh and Baluchistan.
Required: Explain the tax implications on RPI’s branch in Pakistan of the remittance of the after tax profits of the branch to
its head office in the Netherlands.
Mr Z has received dividend Rs.75,000 net of Zakat Rs.10,000 and tax @15%.
Required: Determine the amount to be treated as dividend.
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Answer
a) The amount of loan to the extent of accumulated profits will be treated as dividend i.e. Rs. 1,800,000
b) Remittance of after- t a x profit of a branch of a foreign company operating in Pakistan is considered as
dividend. However, remittance of after-tax profit by a branch of Petroleum Exploration and Production (E&P)
foreign company operating in Pakistan is excluded from the definition of dividend. As the Pakistan branch of RPI
is a branch of an E & P foreign company operating in Pakistan, the remittance of the after tax profits of RPI’s
branch in Pakistan would not be considered to be dividend income.
c) Total taxable dividend is Rs.100,000 i.e. (75,000+10,000)/85%
Exercise
Certain types of payments by a private company to its shareholders can be treated as "dividend" under the Income Tax
Ordinance, 2001.
State the conditions necessary for the application of this rule and the exceptions to it.
Answer
The following types of payment made by a private company as defined under the Companies Act, 2017 may be treated as
"dividend", to the extent to which the company possesses accumulated profits:
Payment by way of advance or loan to a shareholder; or
Any payment for the individual benefit of any shareholder.
EXCEPTIONS:
Any advance or loan made to a shareholder in the ordinary course of the business, where lending of money is a substantial
part of the business of the company.
Any dividend paid which is set off by the company against any amount previously paid and treated as dividend
Exercise
Rose Company Ltd has a paid up capital of Rs.5 million consisting 500,000 shares of Rs.10 each. On 30.6.2001 the
company's balance sheet shows accumulated profits of Rs.1.5 million. Last year the company also created a reserve of Rs.1
million for issue of bonus shares. The company has to be liquidated. The official liquidator realized Rs.6.5 million and
distribution among the shareholders was made at the rate of Rs.13 per share. Shewani Group owns 200,000 shares in the
company. How much of the amount received by Shewani Group is dividend? Please explain your answer
Answer
3 x 200,000 = Rs.600,000 shall be treated as dividend.
According to the Income Tax Ordinance, any distribution by a company to its shareholders on liquidation to
the extent of accumulated profits immediately before its liquidation shall be treated as dividend.
Therefore, distribution @ Rs.3 per share is taxable as dividend.
Exercise
A company engaged in manufacturing activities has decided to provide loan to one of its shareholders. Explain the
tax implication on the company as well as the shareholder if the Company:
i. Is registered under the Companies Act as a private limited company.
ii. Is an unlisted public company.
(i)If the company is a private company as defined in the Companies Act
Tax implications on shareholders
The definition of Dividend includes any payment by a private company by way of loan to its shareholder for the
individual benefit of the shareholder, to the extent of accumulated profits. Accordingly, amount received by the
shareholder shall be considered as dividend in the hands of the shareholder and the tax rate applicable on
dividend shall apply accordingly.
Tax implications on private limited company
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Company being a withholding agent is responsible to deduct withholding tax at the specified rate from the
payment being considered as dividend.
(ii)If the company is unlisted public company
In this case loan to a shareholder is not included in the definition of dividend and therefore no tax implications
for the shareholder or the company.
Exercise
Tamba Pakistan (Pvt) Ltd is engaged in the manufacture of pharmaceutical products. Its board of directors has
approved a 3-year loan to one of its major shareholders.
Required:
Explain the tax implications of the above transaction on the company as well as the shareholder
Answer
Tax implications on shareholders
The definition of Dividend includes any payment by a private company by way of loan to its shareholder for the
individual benefit of the shareholder, to the extent of accumulated profits. Accordingly, amount received by the
shareholder shall be considered as dividend in the hands of the shareholder and the tax rate applicable on
dividend shall apply accordingly.
Tax implications on private limited company
Company being a withholding agent is responsible to deduct withholding tax at the specified rate from the
payment being considered as dividend.
Exercise
On 25.8.20X8, the Officer of Inland Revenue has issued a notice to Rahat Foods (Private) Ltd
(RFPL) to deposit withholding income tax of Rs.1,950,000 in respect of loan amounting to
Rs.13,000,000 given to Mr. Nadeem, a shareholder of RFPL, by treating the amount of loan as
dividend. The notice was served to the company on 30.8.20X8.
According to RFPL's records, the loan was given to Mr. Nadeem on 25.5.20X7 when accumulated
profit of the company was Rs.12,000,000.
In the light of the provisions of the Income Tax Ordinance, 2001 explain whether you agree with
the notice issued to RFPL by the Officer of Inland Revenue.
Solution
The definition of dividend as per Income Tax Ordinance, 2001 includes any payment by a private
company by way of advance or loan to a shareholder or any payment by any such company on
behalf, or for the individual benefit, of any such shareholder, to the extent of accumulated profits
of the company.
Therefore, the tax officer is correct to the extent of treating the loan as dividend. However, he made
error in treating the entire amount of Rs.13 million as dividend because the amount of
accumulated profit was Rs.12 million on that date. Therefore, only Rs.12 million can be treated as
dividend.
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Chapter
7
Deductible allownaces & rebates
Tax credits /rebates
What is rebate or tax credit?
Rebate or tax credit is a tax benefit whereby tax liability is reduced in specified situations according to the specified
percentage or formula such as donation given to an approved charitable organization.
The following tax credits / rebates are allowable:
a) Full time teacher allowance - clause 2 Part III 2nd Schedule
b) Tax credit on profit of Bahbood Savings Certificates or Pensioners' Benefit account and Shuhada Family Welfare
Account maintained with National Savings Centres c) Foreign tax credit (also called Unilateral relief or Cross Border Transaction Relief)-section 103
d) Tax credit:
i.
on charitable donations - section 61
ii.
on approved Pension Fund - section 63
iii.
for point of sale machine - section 64D
Format & Summary of Rebates
Total Taxable Income Under NTR only
XXX
Less: Deductible allowances
•
Zakat Paid under Zakat & Ushr Ordinance (Sec-60)
(X)
•
Worker’s Welfare Fund (WWF) (Sec-60A)
(X)
•
Worker’s Profit Participation Fund (WPPF) (Sec-60B)
(X)
•
Deductible allowance for educational expense (Sec-60D)
➢ 5% of tuition fee paid by the individual
➢ 25% of Taxable Income
➢ Rs. 60,000 multiplied by the number of children of the individual
lower one will be allowed
(X)
Total Taxable Income Under NTR only
XXX
Taxation ( Salaried/ Non-Salaried)
Tax Liability Under NTR
XXX
Tax Liability
Less Tax Credits
XXX
Full Time Teacher or a Researcher Allowance (Separate Working)
Foreign Tax Credit
(X)
(X)
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Average Relieves:
Donations to Charitable Institutions (61)
K
Contribution to an Approved Pension Fund (63)
M
Tax credit on point of sale machine (64D)
Y
Average Relieves =
𝑇𝑎𝑥 𝐴𝑠𝑠𝑒𝑠𝑠𝑒𝑑
𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝐼𝑛𝑐𝑜𝑚𝑒
𝑥 (𝐾, 𝑀)
Add: Separate Block Income
Capital Gain U/S 37-A
XXX
Gain on disposal of property
XXX
Golden Handshake
XXX
Add: Tax on FTR
XXX
Total Tax liability
XXX
Less : Tax Deducted at source
(XXX)
Less: FTR
(XXX)
Less: All WHT
(XXX)
XXX
Add: Tax Credit disallowed (If any)
(X)
Tax Payable
XXX
Type of Credit
Full Time Teacher
or Researcher
Allowance
(Clause 2 part III
of 2nd Schedule)
(FTTA)
Conditions Necessary
He should a full time teacher or a researcher,
Employed in a nonprofit education or research
institution.
Institution is duly recognized by Higher Education
Commission (HEC),
a Board of Education or
a University recognized by the HEC, including
government training and research institution,
Calculation of Credit
Foreign Tax Credit
u/s 103 (FTC)
A person must be resident
Foreign income is taxable in Pakistan
There is no tax treaty between both countries.
Tax is paid within two years after the end of the tax year
in which the foreign income to which the tax relates.
Lower of
Actual Tax Paid
Or
The Pakistan tax payable in
respect of the income at
average rate of tax:
𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝑆𝑜𝑢𝑟𝑐𝑒 𝐼𝑛𝑐𝑜𝑚𝑒
𝑥 𝑇𝑎𝑥
𝑇𝑜𝑡𝑎𝑙 𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝐼𝑛𝑐𝑜𝑚𝑒
Tax liability of salary x 25%
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Average Relieves
Type
S 61
Donations to Charitable
Institutions
S 63
Contribution to an
Approved Pension Fund
S 64
Tax Credit on Point of
Sales Machine
Conditions
Paid by a crossed cheque or in kind to:
Any board of education, educational institution or
any university in Pakistan run by Govt.
any govt. hospital or relief fund
Any non-profit organization.
Entities mentioned in 13th Schedule
An Individual holds NTN or Valid CNIC.
Driving income under the head salary or income
from business.
Contributes or pay premium in the year in
approved pension fund under the Voluntary
Pension System Rules, 2005.
Amount Lower of
Actual amount
Or
Rs.
Any Person who is required to integrate with
FBR’s system for real time reporting of sale or
receipt shall be entitled to tax credit on purchase
cost of POS machine
Purchase cost of POS machine
Rs. 150,000 per machine
30% of taxable income
(15%/10% for Associates)
Actual amount
or
20% of taxable income
K
M
Y
Explanation of Deductible Allowances and Rebates
Deductible allowances (Sec 60, 60A, 60B & 60D)
Definition:
“Deductible allowance” means an allowance that is deductible from total income
Zakat (Sec 60)
A person is entitled to a deductible allowance for the amount of any Zakat paid by the person in a tax year under
the Zakat and Ushr Ordinance, 1980.
Where the Zakat has been deducted out of the profit on debt (which is chargeable under the head “income from
other sources”), such Zakat shall not be deducted out of the total income, rather, it shall be allowed as a deduction
while computing income from other sources.
Where the amount of Zakat is more than total income, the excess amount shall not be refunded or carried forward
or carried back.
Worker’s welfare fund (Sec 60A)
A person shall be entitled to a deductible allowance for the amount of any Workers’ Welfare Fund (WWF) paid by
the person in the tax year under Workers’ Welfare Fund Ordinance, 1971 or under any law relating to the Workers’
Welfare Fund enacted by Provinces after the Eighteenth Constitutional Amendment Act, 2010. However, no
deductible allowance will be allowed where any amount is paid to provinces by trans-provincial organizations (a
person having operations in more than one province).
Worker’s participation fund (Sec 60B)
A person shall be entitled to a deductible allowance for the amount of any Workers’ Participation Fund paid by the
person in a tax year in accordance with the provisions of the Companies Profit (Workers’ Participation) Act, 1968
under any law relating to the Workers’ profit participation Fund enacted by Provinces after the eighteenth
Constitutional Amendment Act, 2010. However, no deductible allowance will be allowed where any amount is paid
to provinces by trans-provincial organizations (a company having operations in more than one province).
Deductible allowance for education expenses (Sec 60D)
Every individual shall be entitled to a deductible allowance in respect of tuition fee paid by the individual in a tax
year provided that the taxable income of the individual is less than Rs.1,500,000.
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The amount of an individual ‘s deductible allowance allowed for a tax year shall not exceed the lesser of
—
(i)
•
5% of the total tuition fee paid by the individual in the year;
•
25% of the person’s taxable income for the year; and
•
an amount computed by multiplying 60,000 with number of children of the individual.
(ii)
Any allowance or part of an allowance for a tax year that is not able to be deducted for the year shall not
be carried forward to a subsequent tax year.
(iii)
Allowance shall be allowed against the tax liability of either of the parents making payment of the fee on
furnishing national tax number (NTN) or name of the educational institution.
(iv)
Allowance shall not be taken into account for computation of tax deduction from Salary under section 149.
Tax Credits and Rebates
Full time teacher allowance:
➢
➢
➢
➢
A full-time teacher or a researcher of a recognized non-profit educational or research institution including
government research institutions shall be allowed a reduction of 25% of tax payable.
The institution must be recognized by Higher Education Commission or a Board of Education or a
University recognized by Higher Education Commission.
This additional tax reduction would be allowed on tax liability on taxable salary. Other income, if any, would
be excluded for this purpose.
This rebate shall not apply to teachers of medical profession who derive income from private medical
practice or who receive share of consideration from patients.
Explanation
Full time teacher means a person employed purely for teaching and not performing any administrative or
managerial jobs e.g. principals, headmasters, directors, vice-chancellors, chairmen, controllers etc.
Similarly a full time researcher means a person purely employed for research job only in a research institution and
such institution is purely performing research activities.
Example
Mr. B has disclosed the following income for the tax year 20X8:
– Taxable salary as a full time teacher from an approved non-profit educational institution Rs.3,300,000
– Taxable other sources Rs.500,000
Calculate tax liability.
Solution
Mr. B
Tax year 20X8
Computation of taxable income and tax liability
Taxable salary as a full time teacher
3,300,000
Taxable other sources
500,000
Taxable income
3,800,000
Tax liability (Salaried Case)
Tax on Rs.3,200,000
430,000
Tax on Rs.600,000 @ 30%
180,000
610,000
Less: Full time teacher allowance (as per working)
115,000
Tax liability
495,000
Working of full time teacher allowance: Salary Income
3,300,000
Tax on Rs.3,200,000
430,000
Tax on Rs.100,000 @ 30%
30,000
460,000
Full time teacher allowance 25% of Rs.367,500
115,000
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Chapter-7
Deductible Allowances & Rebates
Example
Mr. Z has disclosed the following income for the tax year 20x8:
– Taxable salary as a full time teacher from an approved non-profit educational institution Rs.5,800,000
– Taxable other sources Rs.1,700,000
Calculate tax liability.
Tax credit for profit on Bahbood Savings Certificates or Pensioners' Benefit Account or Shuhada Family
Welfare Account
a) Profit on Certificates issued by, or accounts maintained with, National Savings Centres is taxable at 15%
fixed tax and therefore normal slab rates do not apply on such profit.
Withholding tax shall also be deducted by the National Saving Centres at the time of payment of profit on
debt.
b) Profit on Bahbood Savings Certificates issued by, or Pensioners' Benefit Account and Shuhada Family
Welfare Account maintained with, National Savings Centres (such profit) is not subject to withholding tax
and normal slab rates apply on such profit.
However, tax rate shall not exceed 5% of such profit which means that if average rate of tax on income
including such profit is more than 5% then tax credit on such profit would apply to reduce the tax on 5%
on such profit.
[Average rate of tax is A/B where A is the tax liability before tax credit for profit on Bahbood Certificates
etc. and B is the taxable income]
Example
Mr. E disclosed the following income during the tax year 20X8:
Income from business
Profit on Bahbood Savings Certificate
Calculate tax liability.
Rs.3,3000,000
Rs.1,000,000
Solution
Income from business
Profit on Bahbood Savings Certificate Taxable income
Tax liability (Non-Salaried Case)
Income tax on Rs.3,200,000
Income tax on Rs.900,000 @ 40%
Tax credit on Profit on Bahbood Savings Certificate
Tax on profit on certificate at average tax rate
(1,010,000/4,300,000) x 1,000,000
Tax @ 5% on profit on bahbood certificates
Tax credit
Tax liability
3,300,000
1,000,000
4,300,000
650,000
360,000
1,010,000
234,884
50,000
184,884
825,116
Example
Mr. F disclosed the following income during the tax year 20X8:
Salary income Rs.4,200,000
Profit on Bahbood Savings Certificate Rs.600,000
Calculate tax liability.
Foreign Tax Credit
Section 103 of the Ordinance lays down different aspects of foreign tax credit in the following
manner:
1) In case a resident taxpayer derives foreign source income chargeable to tax in respect of which he has paid foreign
income tax, the taxpayer shall be allowed a tax credit of an amount equal to the lesser of:
a) the foreign income tax paid; or
b) the Pakistan tax payable in respect of the income.
2) The Pakistan tax payable in respect of foreign source income shall be computed by applying the average rate of
Pakistan income tax applicable to the taxpayer for the year against the taxpayer’s net foreign source income for the
year.
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3) If a taxpayer has foreign income under more than one head of income, this principle shall apply separately to
each head of income.
4) Income derived by a taxpayer from carrying on a speculation business shall be treated as a separate head of
income.
5) If a person has more than one type of tax credits available to him, these shall be applied in the following order:
a) Foreign tax credit u/s 103
b) Tax credit/rebate on donations, investment, enlistment, etc.,
c) Advance tax and tax deducted/collected at source
6) Any tax credit or part of a tax credit allowed for a tax year which is not credited shall not be refunded, carried
back to the preceding tax year, or carried forward to the following tax year.
7) A foreign tax credit shall be allowed only if the foreign income tax is paid within two years after the end of the
tax year in which the foreign income to which the tax relates was derived by the resident taxpayer.
Example C:
Mr. Junaid's income for the tax year 20X8 is as under:
Taxable Pakistan source income:
Salary
Other source
Foreign source business income taxable in Pakistan
Foreign tax paid in the foreign country
Calculate tax liability.
1,800,000
1,000,000
1,500,000
330,000
Definition: Average rate of Pakistan Income Tax
“Average rate of Pakistan income tax” in relation to a taxpayer for a tax year, means the percentage that the Pakistani
income tax (before allowance of the tax credit under this section) has of the taxable income of the taxpayer for the
year;
•
•
“foreign income tax” includes a foreign withholding tax; and
“net foreign-source income” in relation to a taxpayer for a tax year, means the total foreign-source income
of the taxpayer charged to tax in the year, as reduced by any deductions allowed to the taxpayer for the
year that:
• relate exclusively to the derivation of the foreign-source income; and
• are reasonably apportioned to the derivation of foreign-source income
Rebate on Donations - Section 61
A person shall be entitled to a tax credit / rebate on the donation, voluntary contribution or subscription in cash
through banking channel or in kind i.e. any property is given by the person to the following:
a) Any board of education or university in Pakistan established under any law.
b) Any educational institution, hospital or relief fund in Pakistan established or run by Federal, provincial or local
government.
c) Any non-profit organization, trust or welfare organization approved by the tax authorities established for the
purpose of religious, education, charitable, welfare or for promotion of sports.
d) Entities, organizations and funds mentioned in 13th Schedule to the Income Tax Ordinance, 2001 such as The
Citizen Foundation and Pakistan Disabled Foundation.
"Charitable purpose" includes relief of the poor, education, medical relief and the advancement of any other object
of general public utility.
"Non-profit organization" means any person other than an individual, which is:
(a) Established for religious, educational, charitable, welfare purposes for general public, or for the promotion
of an amateur sport;
(b) Registered under any law as a non-profit organization [such as under Trust Act or section 42 of the
Companies Act 2017];
(c) Approved by the Commissioner for specified period; and
(d) None of its assets confers a private benefit to any other person.
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Limit on the amount eligible for rebate
Tax credit shall be allowed at average rate of tax on the lower of the following:
i.
Actual amount of donation or FMV of property at the time it is given; or
ii.
30% of taxable income (20% in case of a company)
Note for students:
Rebate on donation is allowed at average rate of tax which is A/B where:
A is the tax liability before rebate on donation; and
B is the taxable income.
Same average rate of tax shall be taken for the purpose of rebates under sections 61 and 63 i.e. rebate on donations
and approved pension fund.
However, where donation is given to an associate by the donor then tax credit shall be allowed at average rate of
tax on the lower of the following:
i. actual amount of donation or FMV of property at the time it is given; or
ii. 15% of taxable income (10% in case of a company)
Value of donation in kind
Value of items donated in kind shall be taken as per Rule 228(4) of the Income Tax Rules 2002, summary of which
is as under:
a) Imported items:
Value for the purpose of custom duty along with all duties and charges paid by the donor
b) Items manufactured in Pakistan:
Purchase price along with duties and charges paid by the donor
c) Used depreciable items:
Tax Written down Value (WDV) i.e. cost - tax depreciation
d) Motor vehicles:
i.
New vehicles imported by the donor shall be valued at CIF value (ie. Cost Insurance and Freight) plus all
duties and charges till their registration.
ii.
New vehicles locally purchased shall be valued at price paid by the donor plus al duties and charges till
their registration.
iii.
Used vehicles imported by the donor shall be valued at the import price adopted by the Custom Authorities
plus all charges and duties till their registration.
iv.
Value adopted in the first year shall be reduced by 10% of the said value (e on straight line basis) for each
successive year up to a maximum of 5 years.
v.
Used vehicles locally purchased shall be valued as:u
• If vehicles are up to 5 years old, value shall be original cost as reduced by 10% for every year
following the year in which it was imported or purchased
• If vehicles are more than 5 years old, value shall be purchase price paid by the donor for the used
car or 50% of the original value whichever is higher
e) Other items:
Fair market value as determined by the Commissioner. The most common example in this category is used
personal assets.
Example
Mr. Akhtar disclosed the following income and expenditures relevant to the tax year 20X8
❖ Taxable salary Rs.4,000,000 from a non-profit organization as a full time teacher
❖ Taxable other source Rs.1,020,000
❖ Cheque received under inheritance Rs.8,200,000
❖ Zakat paid Rs.148,000
❖ Donations to approved charitable organizations through banking channel Rs.1,500,000
Calculate tax liability of Mr. Akhtar for the tax year 20X8.
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Example
Mr. Fazal disclosed the following income and expenditures relevant to the tax year 20X8 # Taxable salary
Rs.1,700,000 from a non-profit organization as a full-time teacher
# Taxable other source Rs.1,320,000
# Cheque received under inheritance Rs.5,000,000
# Zakat paid Rs.148,000
# Donations to approved charitable organizations through banking channel Rs.900,000 Calculate tax liability of
Mr. Fazal for the tax year 20X8.
Allowance for contribution to Approved Pension Fund (APF) - Section 63
An eligible person deriving income under the head "salary" or "income from business" is entitled to a tax credit on
contribution or premium paid to APF under Voluntary Pension System Rules at the average rate of tax on the
lower of:
i. total contribution or premium paid during the year;
ii.20% of taxable income of the current tax year.
Eligible personAn individual Pakistani who holds a valid National Tax Number (NTN) or Computerized National
Identity Card (CNIC).
Transfer of existing balance of an account to another account under Voluntary Pension Scheme Rules shall not
qualify for rebate. It means that the original investment by a person shall be eligible for such rebate.
Tax credit for point-of-sale machine
(1) Any person who is required to integrate with FBR's computerized system for real time reporting of sale or
receipt, shall be entitled to tax credit on purchase cost of point-of-sale machine.
"Point of sale machine" means a machine meant for processing and recording the sale transactions for goods or
services, either in cash or through credit and debit cards or online payments in an internet enabled environment.
(2) The amount of tax credit for a tax year in which point of sale machine is installed, integrated and configured
with the FBR's computerized system shall be lesser of i.
Purchase cost of point-of-sale machine; or
ii.
Rs.150,000 per machine.
If the amount of tax rebates is more than the tax liability then no refund shall be allowed nor is the same allowed
to be carried forward or carried back (except few cases as mentioned in chapter of losses).
However, if tax paid or deducted at source is more than the tax liability then the excess shall be refunded or
carried forward.
Transfer of rebate to an AOP by a member
If the person is a member of an AOP, any tax credit that could not be claimed by such member can be claimed by
the AOP of which he is member, in the same year.
For this purpose, a copy of written agreement between the member and the AOP shall be furnished along with the
return of income of AOP [A return of income is a document prescribed by the FBR which is used by the taxpayer to
declare his taxable income and tax liability]
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Question 1:
Mr. Z, a resident person for tax purposes, requested you to calculate his tax liability from the following
information:
i.
Taxable salary Rs.16,000,000 as a full-time teacher from an approved non-profit educational institution
ii.
Taxable other source Rs.2,000,000
iii.
Taxable business income from a foreign country Rs.1,500,000 where Mr. Z paid income tax of Rs.200,000.
There is no tax treaty with that foreign country.
iv.
Zakat was deducted at source Rs.70,000. He also paid zakat of Rs.230,000 to his relatives
v.
Donation was paid by him Rs.110,000 to a private approved charitable institution in cash for which he
has a proper receipt
vi.
He donated his household furniture to a government hospital. FMV is estimated at Rs.1,050,000
Question 2:
Mr. Y requested you to calculate his tax liability from the following information:
i.
Taxable salary as a full-time teacher from a recognized non-profit educational institution Rs.8,800,000
ii.
Taxable income from other sources Rs.5,100,000
iii.
Zakat deducted by the bank Rs.122,000
iv.
Mr. Y received Rs.8,000,000 through inheritance
v.
He made the following donations:
a) Donation to a government hospital in cash Rs.120,000
b) Donation to a government educational institution through cheque Rs.80,000
c) Donation to a private charitable approved institution through cheque Rs.1,200,000
vi.
He joined an approved pension fund (APF) during the year and contributed Rs.2,850,000 towards APF.
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Income From business- basics
A. Definitions
a) Business Income
b) Speculative Income
B. Deductions
a. General
i. Admissible Deductions
ii. In-admissible Deductions
b. Capital Expenditures
i. Depreciation
ii. Initial Allowance
iii. Intangibles
iv. Amortization
c. Disposal of Assets
i. Disposal and acquisition of assets
ii. Cost
iii. Consideration received
iv. Non-arm's length transactions
v. Non-recognition rules
d. Specific Deductions
i. Scientific Research Expenditure
ii. Employee Training and Facilities
iii. Profit on debt
iv. Bad Debts
e. Method of accounting
i. Method of accounting
ii. Cash-basis accounting
iii. Accrual-basis accounting
iv. Stock-in-trade
Chapter
8
( S – 18)
( S – 19)
(S – 20)
(S – 21)
(S – 22)
(S – 23)
(S – 24)
(S – 25)
(S – 75)
(S – 76)
(S – 77)
(S – 78)
(S – 79)
( S – 26)
( S – 27)
( S – 28)
( S – 29)
( S – 32)
( S – 33)
( S – 34)
( S – 35)
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Income from business
1.
The following incomes of a person for a tax year, other than income exempt from tax under this Ordinance, shall
be chargeable to tax under the head “Income from Business”–
a. the profits and gains of any business carried on by a person at any time in the year;
b. any income derived by any trade, professional or similar association from the sale of goods or provision of
services to its members;
c. any income from the hire or lease of tangible movable property;
d. the fair market value of any benefit or perquisite, whether convertible into money or not, derived by a
person in the course of, or by virtue of, a past, present, or prospective business relationship
Example
Mr. Malik Riaz contracted with DHA to build phase- 120 in Lahore. DHA decided to give them Rs.100 million and
1 canal plot in the same phase. The fair market value of the plot was Rs.10 million. The total business income is
Rs.110 million (100+10).
Explanation (ITO).For the purposes of this clause, it is declared that the word ‘benefit’ includes any benefit derived by way of waiver
of profit on debt or the debt itself under the State Bank of Pakistan, Banking Policy Department, Circular No.29 of
2002 or in any other scheme issued by the State Bank of Pakistan.
e.
any management fee derived by a management company (including a modaraba management company)
2.
Any profit on debt derived by a person where the person’s business is to derive such income shall be chargeable
to tax under the head “Income from Business” and not under the head “Income from Other Sources”.
Example:
Mr. Sam deposited Rs.1 million in HBL bank. HBL issued loan to Mr. Man Rs.1 million. HBL charged interest
from Mr. Man Rs.200, 000/- and paid interest to Mr. Sam Rs. 100,000/-. The taxable income of HBL under
the head BUSINESS shall be Rs. 200,000/- and taxable income of Mr. Sam shall be Rs. 100,000/- under the
head INCOME FROM OTHER SOURCES. Mr. Sam is running a business of cloth in Nawaz cloth market.
3.
Any amount received by a banking company or a non-banking finance company, where such amount represents
distribution by a mutual fund or a Private Equity and Venture Capital Fund out of its income from profit on debt,
shall be chargeable to tax under the head “Income from Business” and not under the head “Income from Other
Sources”
4.
Where a lessor, being a scheduled bank or an investment bank or a development finance institution or a
modaraba or a leasing company has leased out any asset, whether owned by it or not, to another person, any
amount paid or payable by the said person in connection with the lease of said asset shall be treated as the
income of the said lessor and shall be chargeable to tax under the head “Income from Business”.
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Examples:
1- MCB bank (scheduled bank) owned a building in Lahore and let out the same building to Khadim
Enterprises at ALV of Rs. 500/- and also leased 5 cars at annual rent of Rs.200/-. MCB also-taken a
building on rent in Karachi for his office purposes. The upper portion of that building is given on rent
to Mr. Bhai at an annual rent of Rs.50/-. Total income (Rs. 750/-) received from Lahore building
(owned), Karachi building (being a tenant) and lease of car shall be taxed under the head BUSINESS
income.
2- Mr. Ghareeb is running a business of rent-a-car and also owned a building in Lahore. He let out the
same building to Khadim Enterprises at ALV of Rs. 500/- and also leased 5 cars at annual rent of
Rs.200/-. Mr. Ghareeb also-taken a building on rent in Karachi for his office purposes. The upper
portion of that building is given on rent to Mr. at an annual rent of Rs.50/-. The detail of taxable income
shall be as follows
Income from Property
Rs. 500
Income from Business
Rs.200
Income from Other Sources
Rs.50
Total Taxable Income
Rs.750
Important aspects of income from business
General principles relating to taxation of business income are summarized below:
• A resident person is taxed on his worldwide business income whereas a non-resident person is liable
to tax in respect of his income to the extent it is Pakistan-sourced.
• Income may be recorded using the cash or accrual basis of accounting. Companies are, however,
required to follow the accrual system of accounting for its business income.
• Expenditure incurred wholly and exclusively for the purpose of business is generally allowable in tax
except for certain specific provisions of law which are discussed later in the chapter.
• The profits which are taxed under section 18 are the real profits and not notional profits. Therefore,
gain arising from revaluation/impairment of fixed assets / investments or unrealized gain or loss
arising from revaluation of foreign currency related debtors and creditors is not taxable as these are
not real profits and can only be taxed when these are actually realized.
• Profits can arise only out of the trading (revenue) receipts. Capital receipts are not taxable unless
expressly made taxable under the Income Tax Ordinance, 2001.
• Those profits and gains of a business are chargeable to tax which are carried on by the taxpayer at any
time during the tax year. However, following receipts are taxable even if the taxpayer does not carry
on business during the tax year:
• Recovery in cash or kind against a deduction/loss allowed previously against business income
• Gain on sale of depreciable assets
• Recovery made out of bad debts allowed in preceding year
• Trading liabilities or any portion thereof which is found not to have been paid within the
expiration of three years of the end of the tax year in which it was allowed
• Sum received after discontinuance of a business
•
Speculation business
Definition:
In this section, “speculation business” means any business in which a contract for the purchase and sale of any
commodity (including stocks and shares) is periodically or ultimately settled otherwise than by the actual delivery
or transfer of the commodity, but does not include a business in which –
a. a contract in respect of raw materials or merchandise is entered into by a person in the course of
a manufacturing or mercantile business to guard against loss through future price fluctuations for
the purpose of fulfilling the person’s other contracts for the actual delivery of the goods to be
manufactured or merchandise to be sold;
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b.
c.
a contract in respect of stocks and shares is entered into by a dealer or investor therein to guard
against loss in the person’s holding of stocks and shares through price fluctuations; or
a contract is entered into by a member of a forward market or stock exchange in the course of any
transaction in the nature of jobbing arbitrage to guard against any loss which may arise in the
ordinary course of the person’s business as such member.
Example:
In August 2015, LT signed a future contract with Mubarak Enterprises (ME) for the purchase of 500 metric tons
of maize at Rs. 15,800 per metric ton. The delivery was expected to be made in October 2015. ME also agreed to
repurchase the entire lot at the price prevailing on the date of sale. In October 2015 price of maize increased to
Rs. 18,240 per metric ton and LT sold the entire lot to ME without taking delivery. (CA-Inter, Spring 2016)
(Ans: The gain Rs.1,220,000 [500 x (18,240 – 15,800)] is taxable under the head speculative income.)
In simple terms, "speculation business" refers to any type of business where transactions are made in
commodities, stocks, or shares. Here, instead of actually taking or giving physical possession of the items, the
transactions are settled with cash based on price changes. The main focus here is making a profit from price
fluctuations rather than exchanging real goods.
Let's go through each part with real-life examples for clarity:
Speculation Business Example:
• Speculation Business (example): Suppose a trader enters into a contract to buy 100 tons of wheat on
paper without actually intending to receive the physical wheat. After a week, instead of taking delivery
of the wheat, the trader sells the contract to someone else, profiting from the price change in the
market. This is speculation because there was no intention of handling the actual wheat; the goal was
to make money from the price change.
Exceptions to Speculation Business:
Certain transactions are not considered speculation because they involve real business purposes, such as
protecting against losses. These are outlined in points (a), (b), and (c):
1. Manufacturing or Merchandising (example):
o A company that produces bread anticipates a rise in wheat prices. To protect against this, it
enters into a futures contract to buy wheat at the current price. The company intends to use
the wheat to make bread, so this contract helps it avoid loss due to future price increases.
Since this transaction is for safeguarding actual manufacturing, it isn’t considered speculative.
2. Dealer or Investor in Stocks (example):
o Imagine an investor holds a large number of shares in a company but fears that the stock price
may drop in the short term. To protect against this loss, the investor enters into a contract to
sell the shares at a certain price in the future. Here, the investor’s intent is not to speculate but
to protect their current investment from losing value, so this isn’t classified as speculation.
3.
Member of Forward Market or Stock Exchange (example):
o A broker, who works in a stock exchange, engages in “jobbing arbitrage.” For instance, they
buy shares from one client and sell similar shares to another client to balance supply and
demand. If this broker enters contracts to offset possible losses while balancing these trades,
it’s not considered speculation, as this is part of their regular business operations to maintain
liquidity and manage risk.
These exceptions demonstrate that the primary purpose of the transaction matters. If the goal is merely profit
from price fluctuations without physical exchange, it’s speculative. However, if the goal is to protect against
business risks (like price volatility in raw materials or stock holdings), it falls under one of these exceptions and
is not classified as a speculation business.
Where a person carries on a speculation business:
(a) That business shall be treated as distinct and separate from any other business carried on by the person;
(b) This part shall apply separately to the speculation business and the other business of the person;
(c) Apportionment of deductions shall apply as if the profits and gains arising from a speculation business were
a separate head of income (Sec 67);
(d) Any profits and gains arising from the speculation business for a tax year computed in accordance with
this part shall be included in the person`s income chargeable to tax under the heading “Income from
Business”
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(e) Any loss of the person arising from the speculation business sustained for a tax year shall be set off only
against the income of the person from any other speculation business of the person chargeable to tax for
that year;
(f) If a speculation loss sustained by a person for a tax year is not wholly set off, then the amount of the loss not
set off shall be carried forward to the following tax year and applied against the income of any speculation
business of the person in that year and so on, but no speculation loss shall be carried forward to more than
six tax years immediately succeeding the tax year for which the loss was first computed.
Exercise: Speculation Business
M/s XYZ Enterprises deals in cloth trading. Total revenue from cloth trading was Rs. 10,000,000 during the
year 20YY. The gross profit from the trading business was amounting to Rs. 2,000,000.
During the year, the price fluctuations were very high in cloth market. Considering this trend, M/s XYZ
Enterprises also made forward purchasing of cloth to reap the benefit of price fluctuations. In April 20YY, The
enterprises agreed to purchase Bengali cloth of 20,000 bundles at the rate of 100 per bundle, the delivery of
which was expected in June 20YY. The seller agreed to purchase the same goods at the rate ruling at the date
of sale. In June the price of Bengali cloth has been increased to Rs. 120 per bundle. M/s XYZ Enterprises
disposed of that cloth of 20,000 bundles to the seller at the market prevailing rate without taking any delivery
of stocks, Total revenue from sale of cloth aggregates to Rs. 2,400,000, Therefore, the Enterprise earned
income of Rs. 400,000.
Total administrative and general expenses of Rs. 1,000,000 were incurred during the year 20YY. Compute the
taxable income and tax liability.
It is worth mentioning that carry forward loss of the Enterprise was Rs. 1,000,000 in respect of business.
Whereas speculation loss was Rs. 250,000.
Answer
Particulars
Gross Revenue
Speculation Business
2,400,000
Trading Business
Total
10,000,000
12,400,000
Gross Profit
400,000
2,000,000
2,400,000
Expenditure (1,000,000 x
2,400,000/12,400,000)
193,548
806,452
1,000,000
Net income
206,452
1,193,548
1,400,000
Carry forward loss
250,000
1,000,000
1,250,000
Taxable Income/ (loss) for the year
*(43,548)
193,548
*Speculation loss carried forward
** Loss of speculation business cannot be set off with trading business.
Deductions in computing income chargeable under the head
A. Expenditures incurred for business purpose:
A deduction shall be allowed for any expenditure incurred by the person in the year wholly and exclusively for the
purposes of business.
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Some of the examples of expenditures that may be allowed as deductions are given below:
1.
2.
3.
4.
Cost of the goods purchased and utilized for business.
Cost of goods manufactured and sold.
Rent for premises used for the business.
Any tax, charge or rate other than income tax or based on profit. (Custom
tax, road tax, property tax, municipal tax.
5. Repair charges of any asset used for the business.
6. Insurance premium paid for the insurance of assets.
7. Any sum paid to the employee (few exceptions).
8. Actual number of bad debts.
9. Expenditure incurred on any educational institution or hospital for the
benefits of the employee or their dependents.
10. Expenditure incurred on training of the employees.
11. Annual Subscription paid to a registered trade association.
12. Expenditures on foreign delegations.
13. Any expenditure wholly and exclusively for business.
B. Animals which used for business:
Animals which have been used for the purposes of the business or profession otherwise than as stock-in-trade and
have died or become permanently useless for such purposes, the difference between the actual cost to the taxpayer
of the animals and the amount, if any, realized in respect of the carcasses or animals.
Actual cost of the animals
XXX
Less: Amount realized in respect of carcass or
animal
(XXX)
Amount to be allowed as deduction
XXX
Example:
• Habib Dairy Ltd purchased three cows for dairy business at Rs.100,000/- each in tax year 20X1.
Vaccination cost of each cow was Rs.2,000/-. One cow became permanently disabled and was sold at
Rs.20,000/- in tax year 20X3. Compute the deductions allowed under the business income (ANS: In tax
year 20X1 total business expenditures will be Rs.6,000/- (2,000 x 3). Similarly, no expenditures will be
allowed in 20X2. In tax year 20X3 Rs.80,000 (100,000-20,000) will be charged as business expense. )
• Cost of sale included Rs. 400,000 in respect of the cost of two cows as they became permanently useless
for milking purposes. These cows were originally purchased for TL’s dairy farm in Faisalabad for Rs.
200,000 each. TL sold these cows in the market for Rs. 80,000 each, for which no entry has been made
in the accounts. (Cost, net of sale, is an allowable deduction, which means 400,000 – 160,000 (80kx2) =
240,000 should be deducted from account. Rather 240k the company has deducted Rs.400k. The
additional cost of Rs.160,000 should be added back in the profits of the company)
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C. Depreciation & Amortization
Where expenditures incurred in acquiring a depreciable asset or an intangible, with a useful life of more than one
year or is pre-commencement expenditure, the person must depreciate or amortize the expenditures. (because
capital expenditures are not allowed).
Examples:
• Office building purchased at Rs.50 million. This is not a business expenses rather depreciation shall be
charged.
• Administrative expenses included Rs.4.8 million, paid against purchase of industrial software having a
useful life of three years. This amount will be added back in the accounting profit and amortization for
the year will be deducted to reach at taxable income.
• The Company incurred an expenditure of Rs.2, 000, 000 on sales promotion. It has been estimated that
the benefit of such expenditure will extend to 3 years and, therefore, the same is being amortized over
a period of 3 years. However, for tax purposes, the whole of the expenditure has been claimed.
D. Amalgamation Expense
Where any expenditure is incurred by an amalgamated company on legal and financial advisory services and other
administrative cost relating to planning and implementation of amalgamation, a deduction shall be allowed for such
expenditure.
Examples:
Alpha Ltd. and Beta Ltd. merged to form a new company Xeta Ltd. Xeta Ltd. paid Rs.5 million for the
merger. 5 million is allowed as an expense to Xeta Ltd. These expenditures are not allowed to Alpha Ltd
and Beta Ltd.
Note for the student
• Section 21 provides a list of deductions which are not admissible for tax purpose e.g. penalty paid for the
•
•
•
•
•
•
•
•
violation of any law, rules or regulation is not admissible for tax purpose even though charged in the
accounts.
There may be a situation where an expense has been charged in the accounts but the same is not admissible
for tax purpose as per section 21 or any other provision of the Ordinance.
In this case the expenditure needs to be added back in the accounting profit while determining taxable
income e.g. salary of an employee is required to be paid through banking channel if it exceeds the specified
amount per month and if paid in cash would become inadmissible for tax purpose.
There may be a situation where an income has been credited in the accounts but not taxable due to
exemption provided in the tax laws. This needs to be deducted from accounting profit.
In certain cases, an amount may have the same treatment for accounting purpose as well as tax purpose
e.g. rent paid for business premises through banking channel is admissible tax deduction but no adjustment
is required as the same has already been charged in the accounts.
There may be a timing difference despite the fact that an item has the same treatment for accounting and
tax purposes e.g. provision for doubtful debt is an accounting expense in the year when provision is created
but allowable tax expense in the year when the same is written off as per section 29 of the Ordinance.
In this case this amount shall be added back in the year when provision is made and shall deducted in the
year when it is written off.
An expenditure which is allowable for tax purpose in the year in which it is charged in the accounts is
termed as against revenue expenditure.
As against revenue expenditure, capital expenditures are those expenditures which provide benefit to the
business entity for more than one year and they are depreciated or amortized.
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•
Income From Business -Basics
Tax laws provide rules for calculation of tax depreciation which are normally different from the accounting
concepts of depreciation. Therefore, accounting depreciation shall be added back in the accounting profit
and tax depreciation including initial allowance etc. shall be deducted from accounting profit while
determining taxable profit
Question
A Ltd has disclosed the following particulars and requested you to compute taxable
income of the company:
a) Accounting profit before tax
b) Charged to the above accounting profit
i. Accounting depreciation
ii. Penalty paid on contravention of the Companies Act
(Inadmissible for tax purpose)
iii. Advertisement (admissible for tax purpose)
iv. Provision for doubtful debts during the year (inadmissible)
c) Other information
i. Depreciation as per tax provisions
ii. Doubtful debts written off during the year against provision in the
previous year Rs.18,000 which was added back in the previous
year.
Iii. Sale of wastages during production Rs.400,000 included in the
accounting income also taxable income as per tax provisions.
Answer:
Rs.
5,000,000
1,400,000
57,000
2,000,000
25,000
1,650,000
Rs.
Accounting profit
Accounting depreciation
Penalty in violation of law
Provision for doubtful debts
Less: Tax depreciation
Provision for doubtful debts written off
5,000,000
1,400,000
57,000
25,000
1,650,000
18,000
1,668,000
4,814,000
Apportionment of expenditure, deductions and allowances – Section 67
Where expenditures, deductions and allowances relate to –
(1) the derivation of more than one head of income; or
(2) derivation of income comprising of taxable income on net income basis and any
(3) the derivation of income chargeable to tax under a head of income and to some other purpose,
The expenditures, deductions and allowances shall be apportioned on any reasonable basis taking into account of
the relative nature and size of the activities to which the amounts relate.
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Chapter-8
Income From Business -Basics
Rules for apportionment of expenditures, deductions and allowances (Rule 13)
Common expenditure, deductions and allowances means any expenditure, deductions and allowances that is not
clearly allocable to any particular class or classes of incomes. Rules regarding apportionment of such expenses,
deductions and allowances are given as follows:
• Any expenditure, deduction or allowance that is incurred for particular class of income (chargeable
income, FTR income or exempt income) shall be allocated/apportioned to that class only.
• Any common expenditure shall be apportioned amongst each class of income according to the following
formula:
• Amount of expense x Gross receipts for the class of income
Gross receipts for all class of income
Note: Gross receipts means net off receipts or turnover of sales tax of FED paid.
•
•
•
While allocating common expenditure, deductions and allowances (particularly selling expenses) the
nature and source of each class of income must be taken into account.
The basis determined for allocation of expenditure, deductions and allowances should be certified by a
Chartered Accountant or a Cost and Management Accountant. This certificate shall be accepted by CIR
unless there is significant variations (10% + beyond the limits) from allocation under the rules.
Where in case of certain transaction the net gain, brokerage, commission and other income is taken as
turnover, then the gross profit from business shall be taken as gross receipts for the purpose of
apportionment of expenditure
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Chapter
09
Income from business- in-admissible
expenses
Deductions not admissible - General concept
An expense may be an accounting expense but inadmissible for tax purpose which shall be added back in the
accounting profit while calculating taxable income. There may also be a situation where a particular item is a tax
expense but not charged in the accounts e.g. initial allowance of a depreciable asset which needs to be deducted
from accounting profit.
Section 21 of the Income Tax Ordinance specifies deductions which are not admissible for purpose. There are other
inadmissible deductions as well such as provision for doubtful debts [section 29] which are discussed in a later
chapter.
Tax, charge or levy paid to the government
Any cess, rate or tax paid or payable in Pakistan or a foreign country on the profits of the business as a % or
otherwise on the basis of such profits.
Taxes and duties which are not based on profit are admissible such as custom duties on import of raw material and
property tax on business premises.
Tax payable under the Income Tax Ordinance is not allowable deduction. Normal presentation in the accounts is as
under:
Net profit before tax
8,000,000
Provision for taxation
2,100,000
Net Profit after tax
5,900,000
In the above case, we can take net profit before tax as a starting figure for the purpose of calculation of taxable
income and in this case we do not need to add back provision for taxation However, if we start with the figure of net
profit after tax only then provision for taxation shall be added back.
Examples:
Following tax payments are not allowed as business expense:
• Tax paid at the time of filing of tax return;
• Tax assessed by the commissioner of inland revenue;
• Sales tax claimable as input tax
• Tax payable on foreign source income.
Following payments are allowed as business expense:
• Custom duty paid at import stage
• Short Sales tax liability paid of previous year
• Vehicle tax paid in cash amounting to Rs. 55,000 for eight office cars
Tax deduction from payment received by a taxpayer
Any amount of income tax deduction from the taxpayer is not allowable tax expense.
This amount is advance payment of tax and shall be deducted from tax liability e.g. tax deduction from payment to
A Ltd (a manufacturing company) on account of supply of goods is not a Profit and Loss account item for A Ltd but
deductible from tax liability to arrive at tax payable by /refundable to A Ltd.
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Chapter-09
Income From Business-In-Admissible Expenses
Example:
Payment received against supply of goods Rs.95, 500/- net of tax deducted @ 4.5%. The total taxable income
shall beRs.100, 000/- (95,500/95.5x100) because tax deducted shall not be allowed as an expense.
Tax deduction from payments made by a taxpayer as business expenditures
Any expenditure, payment of which is subject to withholding tax is not allowable tax expense unless the person has
paid or deducted and paid the required withholding tax
However, disallowance in respect of purchases of raw materials and finished goods shall not exceed 20% of
purchases of raw materials and finished goods.
It means that default in case of withholding tax will result in disallowance of such expenditure. However, the
Commissioner has power to recover, from the recipient or the payer, the amount of tax not deducted and / or paid
and in this case section 21(c) shall not apply.
It should also be considered whether a taxpayer is obliged to deduct tax or not e.g. an individual or AOP having
turnover of less than Rs.100 million is not obliged to deduct tax while making payment on account of commission
[section 233] and in this case section 21(c) shall not apply and therefore commission expense would remain
admissible tax deduction.
Few more examples where tax is not required to be deducted are:
➢ where salary of an employee does not exceed the basic exemption
➢ where payment in aggregate during a financial year is less than:
▪ Rs.75,000 for purchase of goods; and
▪ Rs.30,000 on account of services.
➢ where payment to a non-resident is not chargeable to tax in Pakistan
➢ Individual and AOP (not included in specific category such as educational institutions) paying rent of less
than Rs.1.5 million in a year
Example:
• Zahoor Ltd business expenses included rent of branch office Rs.600, 000/- and manager salary Rs.
350,000/-. Income tax has not been withheld from salaries and rent. Rent expenses are not allowed as an
expense because payment is made without deduction of tax whereas, salary is allowed as tax expense
because tax should not be deducted as it is below Rs.600, 000/-.
• Hameed paid Rs. 50,000/- as consultancy to a non-resident without deduction of tax this amount is not
allowed as an expense
• Bashir paid Rs. 50,000/- as consultancy to Mr. Michael (a non-resident) without deduction of tax because
he has taken exemption certificate from tax department. This amount is allowed as an expense because
was not deductible.
Example:
Stock Enterprises, purchased stock (raw material and finished goods) of Rs.100,000/- and made a payment
of Rs.100,000/- against services. The payments were made through cheques but tax was not deducted. Total
expenditures disallowed will be:
Stock (100,000 x 20%)
Services
Rs.20,000/Rs.100,000/-
Tax payable by any other person borne by the taxpayer
An employer is allowed to pay the tax payable by an employee in addition to normal salary and in this case the said
tax payment shall be considered as:
-salary income for the employee [Tax borne by employer] and
-salary expense in the hands of employer and is allowable tax expense. Any obligation of an employee paid
by the employer is an employment perquisite.
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Chapter-09
Income From Business-In-Admissible Expenses
Cases other than salary:
In other cases, tax payable by any other person is not legally allowed to be paid by the taxpayer. It is a considered
opinion that if a taxpayer pays tax liability of any other person then the said tax payment would not be allowed as
tax expense.
Example:
• Hameed paid Rs. 50,000/- as consultancy to a non-resident without deduction of tax (@10%) but he
deposited Rs.5,000/- as tax in government treasury. Total expense allowed is Rs.50,000/-. Tax deposited
Rs.5,000/- is not allowed as an expense.
• Mr. Raees paid salary of Rs. 650,000/- to his manager for the current year without deduction of tax of
Rs.2,500/- but he deposited Rs.2,500/- as tax in government treasury. Total expense allowed is
Rs.652,500/-. Tax deposited Rs.2,500/- is allowed as an expense because section 13 says, tax born by the
employer shall be a part of salary.
Tax deduction from interest paid to non-resident
Profit on debt shall be Pakistan source income if the debt is used for business in Pakistan. Therefore,
interest income earned by a non-resident person is taxable in Pakistan irrespective of the fact whether such
non-resident person has a permanent establishment in Pakistan or not.
However, 2nd Schedule provides exemptions in specified cases. Likewise, interest income may be exempt
under any tax treaty or taxable at lower tax rate.
It means that any person making payment on account of interest to a non-resident person shall deduct tax
unless any specific exemption is available. In case of default, interest expense would be disallowed.
Almost similar concept is applicable for payment to Non-resident on account of 'fee for technical services',
'fee for offshore digital services' and 'royalty' etc. with reference to business in Pakistan.
▪
▪
▪
▪
Commission to inactive persons on items covered under 3rd Schedule of the Sales Tax Act, 1990
Commission expense shall be inadmissible if it is in excess of 0.2% of gross amount of supplies of items listed in 3rd
Schedule of the Sales Tax Act where the recipient of commission is not appearing in the active taxpayers' list under
the Income Tax Ordinance.
Notes for Students:
Few examples of 3rd Schedule items are: cigarettes, juices, ice cream, beverages, bottled water, shampoo, soap,
toothpaste, cosmetics, tea, toilet paper and tissue paper, spices sold in retail packing with brand name and trade
mark, cement, household electrical goods and gas appliances etc.
Here are three examples of the rule regarding commission expenses for items listed in the 3rd Schedule of the
Sales Tax Act:
1. Example 1 - Shampoo Supply
A cosmetics distributor supplies shampoo worth PKR 10,000,000. They pay a commission of PKR
50,000 (0.5%) to a salesperson who is not on the active taxpayers' list (ATL). According to the rule,
only up to 0.2% commission of the supply value, which is PKR 20,000, is admissible as an expense. The
remaining PKR 30,000 (50,000 - 20,000) will be inadmissible, as it exceeds the permissible limit of
0.2%.
2.
3.
Example 2 - Cement Supply
A company sells cement worth PKR 20,000,000 and pays a commission of PKR 60,000 (0.3%) to an
agent who is not on the ATL. The allowable commission expense is 0.2% of PKR 20,000,000, which
equals PKR 40,000. Therefore, PKR 20,000 (60,000 - 40,000) will be inadmissible as a commission
expense.
Example 3 - Bottled Water Supply
A bottled water company makes a supply of PKR 5,000,000 and pays a commission of PKR 15,000
(0.3%) to a distributor not on the ATL. Here, only 0.2% of PKR 5,000,000, which is PKR 10,000, is
allowable. Hence, PKR 5,000 (15,000 - 10,000) will be considered inadmissible due to exceeding the
0.2% limit.
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Chapter-09
Income From Business-In-Admissible Expenses
Entertainment Expenditure
Entertainment expenditure in excess of the prescribed limit is not allowable deduction.
The types of entertainment expenditures that are allowable tax expense are mentioned in Rule 10 of the Income
Tax Rules. A summary of which is as under:
Entertainment expenditure. 1) A deduction for entertainment expenditure shall be limited to expenditure incurred by a person which is –
a. Outside Pakistan on entertainment in connection with business transactions;
b. In Pakistan on entertainment of foreign customers and suppliers;
c. On entertainment of customers and clients;
d. on entertainment at a meeting of shareholders, agents, directors or employees; or
e. on entertainment at the opening of branches.
2) A person shall be allowed a deduction only for expenditure incurred on the entertainment of persons
related directly to the person's business.
3) "Entertainment" means the provision of meals, refreshments, and reasonable leisure facilities in
accordance with the tradition of business and subject to overall norms and customs of business in Pakistan.
Examples:
• Administration expenditures includes entertainment expenditure of Rs. 128,000 incurred on arrival of
foreign customers for business purposes are allowed as an expense
• Administration expenditures includes entertainment expenditure of Rs. 130,000 incurred by the director
for personal hoteling purposes are not allowed as an expense
Contribution to Provident, Gratuity or Superannuation
▪
▪
▪
Any contribution made by the person to a fund that is not a recognized provident fund, approved
superannuation fund, or approved gratuity fund or approved pension fund;
An amount in excess of fifty percent of total contribution made by a person (employer) to approved gratuity
fund, approved pension fund or an approved superannuation fund.
Any contribution made by the person to any provident or other fund established for the benefit of
employees of the person, unless the person has made effective arrangements to secure that tax is deducted
from any payments made by the fund in respect of which the recipient is chargeable to tax under the head
"Salary";
FBR circular on tax calculation is as under:
▪ Provision for the year is inadmissible (add)
▪ Payment to employees is admissible for tax purpose (less)
It means that expense in the above cases is allowable tax expense on payment basis.
Penalty or Fine
Any fine or penalty for the violation of any law, rule or regulation is not admissible.
Certain penalties are allowable tax expenses which are not for the violation of any law, rule or regulation e.g.
▪ Penalty for late repayment of loan installment or late payment of interest
▪ Demurrage to custom authorities
▪ Late payment surcharge with utility bills
▪ Liquidated damages or penalty for breach of a contract in the ordinary course of business
Note for students:
Incorrect declaration / affidavit given to any government department such as custom authorities is a violation of
law and any penalty in this respect is inadmissible.
Personal Expenses
Any personal expense by the taxpayer is not admissible
However, any asset e.g. car given to an employee for use is treated as business purpose and any personal use by the
employee would not render the expense inadmissible.
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Chapter-09
Income From Business-In-Admissible Expenses
Amounts transferred to Reserves
Any amount carried to a reserve fund or capitalized in any way is not admissible.
Certain payments to a member by an Association of Persons (AOP)
Profit on debt, brokerage, commission, salary or other remuneration by an AOP to its members is not admissible for
tax purpose.
These items should be added back on the assumption that the same have been charged in the accounts unless
otherwise specified. However, if it appears from the question that these items have been charged in the
appropriation account then the same shall not be added back.
Rent paid by a firm to a partner for his residence is a part of salary expense of the firm and therefore not admissible
for tax purpose.
However, if a partner's premises is used by the firm and rent is paid to the partner then the same shall be treated
as rent expense which is allowable tax expense and need not be added back.
Illustration:
An AOP having two partners Mr. A and Mr. B with equal share:
Accounting profit
1,800,000
Accounting depreciation
Salary to partner A
Commission to partner B
Less: Tax depreciation
Taxable income
Income tax
Divisible income
200,000
900,000
50,000
2,950,000
550,000
2,400,000
315,000
2,085,000
Share of profit from AOP is exempt in the hands of individual members but the same shall be included for rate
purpose in other taxable income except income under FTR.
One should observe that salary is included in the share of profit from AOP in the above calculation. In fact, if a
member of an AOP receives salary or other remuneration, interest, commission or brokerage from the same AOP it
becomes part and parcel of share of profit from AOP and not considered as a separate income.
However, any other payment received from the firm shall be considered separately e.g. rent of partner's premises
used by the firm is taxable as property income in the hands of the partner.
Payment of Salary through banking channel
Salaries and wages are required to be paid through crossed cheque or direct transfer of funds to the employee's
bank account or through digital mode.
However, this condition is not applicable where the salary of an employee does not exceed Rs.32,000 per month.
Payment of salary and wages is inadmissible in the following cases:
▪ Taxable salary paid without tax deduction
▪ Salary to a member by an AOP
▪ Salary paid in cash where it exceeds Rs.32,000 per month
Payment of Business expenditures (other than salary) by an individual or AOP through banking
channel
Other expenditures are also required to be paid by a business entity other than a company through crossed
banking instrument showing transfer of the amount from business bank account of the taxpayer.
However, this condition is not applicable in the following cases:
▪ Where aggregate of a single account head does not exceed Rs.250,000 for the year; or
▪ Single payment up to Rs.25,000; or
▪ Payment on account of freight, travel fare, postage, utility and other government dues
Online transfer of payment from the business account of the payer to the business account of banking channel,
subject to the condition that such transactions are verifiable from the bank payee as well as payments through
credit card shall be treated as transactions through the bank statements of the respective payer and the payee.
This clause shall also apply for a company unless section 21(la) has been made effective by the FBR.
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Chapter-09
Income From Business-In-Admissible Expenses
Payment of Business expenditures (other than salary) by a company through banking channel
Other expenditures are required to be paid by a company through digital means from business bank account
notified to the Commissioner.
Definition of digital means
"Digital means" means digital payments and financial services including but not limited toa) online portals or platforms for digital payments/receipts;
b) online interbank fund transfer services;
c) online bill or invoice presentment and payment services;
d) over the Counter digital payment services or facilities;
e) card payments using Point of Sale terminals, QR codes, mobile device, ATMs, Kiosk or any other digital
payments enabled services; or
f) any other digital or online payment modes.
However, this condition is not applicable in the following cases:
Where aggregate of a single account head does not exceed Rs.250,000 for the year; or Single payment up to
Rs.25,000; or
Payment on account of freight, travel fare, postage, utility and other government dues
Note for students:
According to the proviso to section 21(la), this clause shall be effective from such date as the FBR may notify in the
official Gazette. It means that this clause is not effective for a company unless notified by the FBR. However, till that
date section 21(1) as above is applicable for a company as well.
Sales promotion expenses by a pharmaceutical manufacturer
Sales promotion, advertisement and publicity expenses by a pharmaceutical manufacturer in excess of 10% of
turnover are inadmissible.
Utility bills in excess of limits
Utility bills in excess of limits as may be prescribed shall be inadmissible.
Sr.
Transaction
Decision
1
Total office expenditures during the year were Rs.450,000/-. All payments were
made through cross cheques except Rs.40,000/- and Rs.9,000/- in cash.
40,000 is
Disallowed
2
Total office expenditures during the year were Rs.249,000/-. All payments were
made through cross cheques except Rs.20,000/- and Rs.9,000/- in cash.
Nothing is
disallowed
3
Total Freight charges during the year were Rs.150,000/-. The whole expenditures
were incurred in cash.
Nothing is
disallowed
4
Director of the company paid printing charges Rs.150,000/- through his personal
bank account.
Disallowed
Expenditures attributable to sales made by an industrial undertaking to persons not registered
under the Sales Tax Act, 1990-Section 21(q)
Expenditures attributable to sales made by an industrial undertaking to persons required to be registered but not
registered under the Sales Tax Act, 1990 shall be inadmissible according to the following formula: Where(A/B) x C
A is the total deductions i.e. expenditures
B is the turnover for the tax year; and
C is the sales exclusive of sales tax and federal excise duty to persons required to be registered but not registered
under the Sales Tax Act, 1990 where sales is Rs.100 million or more per person.
However, disallowance of expenditures under this clause shall not exceed 10% of total expenditures.
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Chapter-09
Income From Business-In-Admissible Expenses
Example:
Total sales of A Ltd is Rs.800 million including sales to:
Mr. Y, an unregistered wholesaler, Rs.120 million; and Mr. Z, an unregistered wholesaler, Rs.70 million.
Total expenditures of A Ltd Rs.650 million.
Calculate the amount of disallowance under section 21(q) of the Income Tax Ordinance, 2001.
Solution:
Sales to Mr. Z does not fall within the ambit of section 21(q) as the sales is not Rs.100 million or more.
Expenditures attributable to sales to Mr. Y are as under:
(650/800) x 120 = 97.5 million
Therefore, the expenditures disallowed under this clause are lower of the following:
▪ Expenditures as per formula above Rs.97.5 million; or
▪ 10% of the total expenditures Rs.65 million.
Disallowed expenditures are Rs.65 million.
Expenditures attributable to sales claimed by any person fails to integrate with FBR
Expenditures attributable to sales claimed by any person who is required to integrate with FBR but fails to integrate
his business with FBR.
However, disallowance of expenditures shall not exceed 8% of allowable deductions.
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Chapter
10
Income from business depreciation
•
•
•
•
•
•
Method of depreciation
Rate of depreciation (dep.) and initial allowance (IA)
Computation of dep. and IA (asset fully and partially used for business)
Written down value of a depreciable asset (taxable entity and exempt entity)
Computation of gain/loss
o Normal / general case
o Partial used asset disposed off
o Passenger Transport Vehicle NOT plying for hire (Value > Rs. 7.5 million)
o Disposal of Immoveable Property (SP>Cost)
o Export of depreciable assets
Cost and Consideration of an asset
Depreciable asset
Depreciable asset means any tangible movable property, immovable property (other than unimproved land), or
structural improvement to immovable property, owned by a person that —
a) has a normal useful life exceeding one year;
b) is likely to lose value as a result of normal wear and tear, or obsolescence; and
c) is used wholly or partly by the person in deriving income from business chargeable to tax,
but shall not include any tangible movable property, immovable property, or structural improvement to immovable
property in relation to which a deduction has been allowed under another section of this Ordinance for the entire
cost of the property or improvement in the tax year in which the property is acquired or improvement made by the
person;
Provided that where a depreciable asset is jointly owned by a taxpayer and an Islamic financial institution licensed
by the State Bank of Pakistan or Securities and Exchange Commission of Pakistan, as the case may be, pursuant to
an arrangement of Musharika financing or diminishing Musharika financing, the depreciable asset shall be treated
to be wholly owned by the taxpayer.
Structural improvement
Structural improvement in relation to immovable property, includes any building, road, driveway, car park, railway
line, pipeline, bridge, tunnel, airport runway, canal, dock, wharf, retaining wall, fence, power lines, water or
sewerage pipes, drainage, landscaping or dam
Normal Depreciation
1. Subject to this section, a person shall be allowed a deduction for the depreciation of the person‘s
depreciable assets used in the person‘s business in the tax year.
2. Subject to sub-section the depreciation deduction for a tax year shall be computed by applying the rate
specified in Part I of the Third Schedule against the written down value of the asset at the beginning of the
year.
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Chapter-10
Income From Business-Depreciation
Sr.
No
Assets
Rate of
Depreciation
1
Building (all types)
10%
2
Furniture (including fittings)
15%
3
15%
4
Machinery and plant (not otherwise specified), Motor vehicles (all types), ships,
technical or professional books, Ships
A ramp built for disable persons not exceeding Rs. 250,000 each.
100%
5
Below ground installation in mineral oil concerns.
100%
6
30%
7
Computer hardware, allied items, machinery and equipment used in manufacture
of IT products.
Aircrafts, aero-engines and aerial photographic apparatus
8
Offshore platforms and production installations in mineral oil concerns.
20%
30%
3. Normal depreciation on an asset acquired during a tax year shall be calculated on full year’s basis (where
the asset is commissioned for use) on the cost of the asset as reduced by initial allowance (or first year
allowance or accelerated depreciation) while no depreciation shall be calculated in the year of disposal.
4. The written down value of a depreciable asset of a person at the beginning of the tax year shall be
a. Where the asset was acquired in the tax year, the cost of the asset to the person as reduced by any
initial allowance in respect of the asset under section 23; or
b. In any other case, the cost of the asset to the person as reduced by the total depreciation deductions
(including any initial allowance under section 23) allowed to the person in respect of the asset in
previous tax years.
Explanation,- For the removal of doubt, it is clarified that where any building, furniture, plant or machinery is used for
the purposes of business during any tax year for which the income from such business is exempt, depreciation admissible
under sub-section (1) shall be treated to have been allowed in respect of the said tax year and after expiration of the
exemption period, written down value of such assets shall be determined after reducing total depreciation deductions
(including any initial allowance under section 23) in accordance with clauses (a) and (b) of this sub-section.
Example:
Exempt Ltd. was incorporated in 2017. Its business income was exempted for two years under Income Tax Laws. It
purchased plant and a car in 2017. The depreciation for the year 2019 shall be as follows: (Assume same tax rules
in the previous years)
Year
2017
2018
2019
Assets
Plant-AB
Plant-A
Car-A
Tax
Allowances
Depreciation Rates
15%
15%
15%
Cost
5,000,000
3,000,000
1,500,000
Initial allowance
(1,250,000)
(750,000)
Depreciable Value
3,750,000
2,250,000
1,500,000
Depreciation
(562,500)
(337,500)
(225,000)
(1,125,000)
WDV – 2017
3,187,500
1,912,500
1,275,000
(3,125,000)
Depreciation
(478,125)
(286,875)
(191,250)
(956,250)
WDV – 2018
2,709,375
1,625,625
1,083,750
(956,250)
Depreciation
(406,406)
(243,844)
(162,563)
(812,813)
WDV - 2019
2,302,969
1,381,781
921,188
(812,813)
(2,000,000)
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Chapter-10
Income From Business-Depreciation
Initial Allowance Sec-23
The WDV of an asset shall be computed after the deduction of the initial allowance. The provision regarding the
initial allowance is discussed under the section 23 of the Ordinance and that section states that:1.
A person who places an eligible depreciable asset into service in Pakistan for the first time in a tax year shall
be allowed a deduction for initial allowance, when the asset is used by the person for the purposes of his
business for the first time or the tax year in which commercial production is commenced, whichever is later.
eligible depreciable asset means a depreciable asset other than —
a)
b)
c)
d)
2.
3.
any road transport vehicle unless the vehicle is plying for hire;
any furniture, including fittings;
any plant or machinery that has been used previously in Pakistan; or
any plant or machinery in relation to which a deduction has been allowed under another section of this
Ordinance for the entire cost of the asset in the tax year in which the asset is acquired
The amount of the initial allowance of a person shall be computed @ 25% for plant and machinery. The rules
containing for the measurement of the cost of the asset is discussed under section 76.
An initial allowance allowed to lessor in respect of assets owned by him and leased to another person shall
be deductible only against the lease rental income derived in respect of such assets
Definition: Industrial Undertaking
“Industrial undertaking” means
a) an undertaking which is set up in Pakistan and which employs,
i. ten or more persons in Pakistan and involves the use of electrical energy or any other form of energy which is
mechanically transmitted and is not generated by human or animal energy; or
ii. twenty or more persons in Pakistan and does not involve the use of electrical energy or any other form of
energy which is mechanically transmitted and is not generated by human or animal energy: and which is engaged
in—
i. the manufacture of goods or materials or the subjection of goods or materials to any process which substantially
changes their original condition; or
ii. ship-building; or
iii. generation, conversion, transmission or distribution of electrical energy, or the supply of hydraulic power; or
iv. the working of any mine, oil-well or any other source of mineral deposits;
v. from the 1st day of May, 2020, a person directly involved in the construction of buildings, roads, bridges and
other such structures or the development of land, to the extent and for the purpose of import of plant and
machinery to be utilized in such activity, subject to such conditions as may be notified by the Board;
vi. from the first day of July, 2020 a resident company engaged in the hotel business in Pakistan;
vii. telecommunication companies operating under the license of Pakistan Telecommunication Authority (PTA)
Definition of "Industrial Undertaking" Examples
a) An undertaking set up in Pakistan that employs:
• i. Ten or more persons with electrical/mechanical energy:
Example: A textile factory in Karachi that uses large textile machinery powered by electricity and
employs over ten workers qualifies as an industrial undertaking.
• ii. Twenty or more persons without electrical/mechanical energy:
Example: A small-scale pottery enterprise in Punjab that employs 25 artisans working manually,
without using any electric or mechanical power, qualifies as an industrial undertaking.
b) Engaged in Specific Activities:
• i. Manufacture or substantial processing of goods/materials:
Example: An iron foundry in Lahore that melts and molds raw iron to produce hardware tools
significantly changes the raw materials’ original condition, qualifying it as an industrial
undertaking.
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•
ii. Ship-building:
Example: Karachi Shipyard and Engineering Works, involved in ship-building and maintenance, is
a significant example of an industrial undertaking in ship-building.
• iii. Generation, conversion, or distribution of electrical energy or hydraulic power:
Example: The Water and Power Development Authority (WAPDA) generates and distributes
electricity across Pakistan, classifying it as an industrial undertaking.
• iv. Working of mines, oil-wells, or other mineral deposits:
Example: Pakistan Petroleum Limited (PPL), which explores and extracts oil and natural gas in
Pakistan, qualifies as an industrial undertaking under this category.
• v. Construction and development (from May 1, 2020):
Example: A construction company like National Logistics Cell (NLC), which is involved in building
roads, bridges, and other infrastructure and imports specialized machinery for these projects, is
considered an industrial undertaking for this purpose.
• vi. Hotel business (from July 1, 2020):
Example: A resident company, such as Pearl Continental Hotels, involved in providing hospitality
services within Pakistan qualifies as an industrial undertaking under this clause.
• vii. Telecommunication company licensed by PTA:
Example: Jazz Pakistan, a telecommunication company licensed by PTA to provide
telecommunication services, qualifies as an industrial undertaking under this definition.
Acronym to remember the Definition
Acronym: EMP-MINES-HOT-TEL
• E - Energy (uses electrical or mechanical energy)
• M - Manufacturing (manufacture or substantial processing of goods/materials)
• P - People (ten or more with energy; twenty or more without energy)
• M - Mines (working of mines, oil-wells, mineral deposits)
• I - Infrastructure (construction of buildings, roads, bridges, and development)
• N - No energy (work without using mechanical or electrical energy)
• E - Electricity (generation, conversion, distribution of electrical or hydraulic power)
• S - Ship-building
• H - Hotels (resident companies in the hotel business)
• O - Oil-well (working of oil-wells or any mineral deposits)
• T - Telecommunication companies (licensed by PTA)
• T - Textile/Transmission (any factory or company engaged in substantial manufacturing and
transmission/distribution of energy)
5. Where a depreciable asset is used in a tax year partly in deriving income from business chargeable to tax and
partly for another use, the deduction allowed under this section for that year shall be restricted to the fair
proportional part of the amount that would be allowed if the asset was wholly used to derive income from business
chargeable to tax.
Example –: (A)
Mr. Depreciable purchased a building at a price of Rs. 10 million, for house and his office purposes and started using
a portion of his house for business office. The area covered by his office is almost 60%.
100% Use
60%
Cost of Building
10,000,000
Initial Allowance
(-----------)
Depreciation
(1,000,000)
(600,000)
WDV - Year 1
9,000,000
(600,000)
Depreciation
(900,000)
(540,000)
WDV - Year 2
8,100,000
10,000,000
Year – 2
Year -1
Tax allowances - fully business used =
(1,000,000)
Tax allowances - 60% business used =
(600,000)
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(Dep. Not allowed 400k)
Year -2
Tax allowances - fully business used =
(900,000)
Tax allowances - 60% business used =
(540,000)
(Dep. Not allowed 360k)
Total Depreciation not allowed in two years (400+360) = 760,000
(6) Where, in any tax year, a person disposes of a depreciable asset, no depreciation deduction shall be allowed
under this section for that year and gain / loss shall be = Consideration – Tax WDV
(7) Where the asset is partly used for business purposes, the written down value of the asset to compute gain, shall
be increased by the amount that is not allowed as a deduction, because of partial use for business purposes.
Example:
Assume the data given in example A, the asset was sold at Rs. 9million. Computation of gain or loss when the asset
was fully used for business or if used 60% for the business.
Full business Use
60% business use
Sale Price
9,000,000
9,000,000
WDV
(8,100,000)
(8,100,000)
0
(760,000)
900,000
140,000
Depreciation not allowed
Taxable Gain
Special Cases:
Passenger Transport Vehicle NOT plying for hire (Value > Rs. 7.5 million)
The maximum cost for depreciation purposes of a passenger transport vehicle not plying for hire, is 2.5 million
rupees and gain on that vehicle shall be computed as follows:
𝐺𝑎𝑖𝑛 = 𝑆𝑃 𝑥
7.5 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
− 𝑇𝑎𝑥 𝑊𝐷𝑉 (𝑏𝑎𝑠𝑒𝑑 𝑜𝑛 7.5 𝑚𝑖𝑙𝑙𝑖𝑜𝑛)
𝐴𝑐𝑢𝑡𝑎𝑙 𝐶𝑜𝑠𝑡
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Actual Price = 10,000,000
Vehicle Value
Allowed Cost
7,500,000
Initial Allowance
7,500,000
Depreciation
(1,125,000)
WDV - Year -1
6,375,000
Depreciation Year -2
(956,250)
5,418,750
Sale Price
9,300,000
Gain
1,556,250
1,556,250 = 9,300,000 𝑥
To DO Question
7.5 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
− 5,418,750
10,000,000
Q # 1 PEL. Ltd disposed one of its vehicles for Rs. 8,000,000 in tax year 20X2. The vehicle was purchased in tax
year 20X1. Cost of the vehicle was Rs. 7,800,000.
Compute the amount of taxable gain?
Q#2 Mr. JZ disposed of a car used in business on May 18, 20X1 for Rs. 6,300,000. It was purchased for Rs
7,650,000 and its tax WDV on June 30, 20X0 was Rs. 6,200,000.
Compute gain/(loss) on disposal?
Disposal of Immoveable Property (SP>Cost)
Where the consideration received on the disposal of immovable property exceeds the cost of the property, the
consideration received shall be treated as the cost of the property.
Example: Assume the data in example A, building was fully used for business purposes and was sold in third year
at 15 million.
𝐺𝑎𝑖𝑛 = 𝑆𝑎𝑙𝑒 𝑃𝑟𝑖𝑐𝑒 − (𝑆𝑎𝑙𝑒 𝑃𝑟𝑖𝑐𝑒 − 𝑇𝑎𝑥 𝐴𝑙𝑙𝑜𝑤𝑎𝑛𝑐𝑒)
𝐺𝑎𝑖𝑛 = 15,000,000 − (15,000,000 − 1,900,000)
Gain 1,000,000+900,000 = 1,900,000
Export of depreciable assets
Where a depreciable asset that has been used by a person in Pakistan is exported or transferred out of Pakistan,
the person shall be treated as having disposed of the asset at the time of the export or transfer for a consideration
received equal to the cost of the asset.
𝐺𝑎𝑖𝑛 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐴𝑠𝑠𝑒𝑡𝑠 − (𝐶𝑜𝑠𝑡 𝑜𝑓 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝑇𝑎𝑥 𝐴𝑙𝑙𝑜𝑤𝑎𝑛𝑐𝑒)
The gain shall be equal to accumulated tax depreciation and initial allowance
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TO Do Question
Q#1 A company disposed of its factory building for Rs. 10,000,000. Cost of the building was Rs. 8,000,000. And
WDV of the building at the time of the disposal is Rs. 6,500,000.
Compute the gain or loss on disposal?
Q#2 Mr. J disposed of its factory building on May 18, 20X1 for Rs. 650,000. It was purchased for Rs. 400,000 and
its WDV on 30 June 20X0 was Rs. 277,000.
Compute gain or (loss) on disposal?
Q#3 Mr. J exported a computer which was previously used as a fixed asset in his business to Bangladesh against
consideration of Rs. 300,000. The cost of the asset was 200,000. And its WDV at the time of disposal was Rs.
20,000.
Compute gain or loss on disposal?
Question
During the tax year 2024, CFG (Pvt.) Limited disposed of the following assets:
(a) Immoveable property was sold for Rs. 150 million. The cost of the property was Rs. 100 million. Upto tax year
2022, tax depreciation of Rs. 30 million had been allowed on the immoveable property.
(b) A machine used in the business in Pakistan, was exported to USA. The export proceeds amounted to Rs. 45
million. The cost and written down value of the machinery was Rs. 35 million and 28 million respectively.
(c) Two buses were disposed of for Rs. 2.5 million. They were acquired in tax year 2021. The tax written down
value of buses at the beginning of the tax year 2023 was Rs. 2.4 million. The buses were being used partly i.e.
60% for business purpose. Tax rate of depreciation is 15%.
Required:
Calculate tax gain on loss on disposal of above asset
Solution
(a)
Rs. In Million
Sale Proceed
150
Cost (Note)
150
Depreciation allowed
(30)
WDV at the time of disposal
(120)
Gain on disposal
30
Note: For computing gain on disposal of immoveable property, the consideration received shall be treated as
the cost of property if the consideration exceeds its cost (Gain on disposal shall be equal to the depreciation
allowed).
b)
Consideration received equal to actual cost
35
WDV at the time of disposal Gain on disposal
(28)
Gain on Disposal
7
For computing gain on disposal of depreciable asset by way of export that has been used previously in Pakistan,
the consideration received shall be treated as the cost of asset (Gain on disposal shall be equal to depreciation
allowed)
(c)
Sale proceed
Less: WDV at beginning of the year
Depreciation not allowed (2.4/0.85 x 0.15 x 0
Loss on disposal
Rs. In Million
2.5
(2.4)
(0.17)
(0.07)
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WDV of the asset, in case asset is used partly for business and party for non-business purpose, shall be computed
on the basis that the asset has been solely used to derive business income. It means that depreciation allowed as
well as disallowed shall be deducted from the cost of the asset in arriving at the WDV. However, the WDV of the
asset shall be increased by the amount of depreciation disallowed on account of non-business use at the time of
disposal.
Asset
Disposal [D.E.S.E.R.T S.T.A. R L.C.D]
Disposal includes
1
Sold
3
Transferred
5
Cancelled
7
Relinquished
9
Lost
11
Surrendered.
13
2
4
6
8
10
12
Exchanged
Distributed
Redeemed
Destroyed
Expired
The transmission of an asset by succession or
under a will
The application of a business asset to
personal use or vice versa
▪
▪
▪
▪
Transmissions of asset by succession or by will, shall be treated as a disposal of asset by deceased at the
time asset is transmitted.
The application of a business asset to personal use shall be treated as a disposal of asset.
Where a business asset is discarded or ceases to be used in business, it shall be treated to have been
disposed of.
A disposal shall include the disposal of a part of an asset.
Disposal of an Asset in Parts
In a case where a part of an asset is disposed of, the cost of the asset shall be apportioned between the part of the
asset disposed and part of the asset retained in the business. The cost of the asset is apportioned on the basis of
the FMV of both parts at the time of acquisition.
Acquisition of an Asset
A person shall be treated as having acquired an asset at any of the following times:
• When he begins to own an asset
• When he is granted any right to own an asset; or
• When a personal asset is applied for a business use.
Cost of an Asset
The cost of an asset acquired by a person shall be determined in accordance with the following rules.
Purchase of an Asset
Where a person purchases an asset, its cost of acquisition shall be including the following amounts;
1. Consideration paid for the asset. The consideration may be in Cash or in Kind. Where the consideration is
in kind then the fair market value of an asset given as consideration (on the date when new asset is
acquired) shall be taken as consideration for new asset.
2. Expenses incurred on acquisition of an asset.
i.
Broker’s Commission
ii.
Registration Charges
iii.
Tax such as CVT
iv.
Cost of valuation report by a valuers in respect of acquisition of asset of a capital nature
3. Expenses incurred on alteration or improvement of an asset.
4. Expenses incurred on disposal of an asset.
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Example
UBL Limited purchased a vehicle for Rs. 190,000 and incurred Rs. 10,000 on its registration, etc. after three years
the company sold out the vehicle for Rs. 160,000. The total Accumulated depreciation till the time of disposal was
Rs. 97,600. An amount of Rs. 5,000 will be expended on the disposal
Required: Compute the gain/ (loss) on disposal of vehicle.
Answer:
Rs.
Disposal Consideration
Less: WDV at time of disposal
Cost:
Purchase price
Expenses of registration
Expenses on disposal
Total
Less: Accumulated Depreciation
Gain on disposal of vehicle
190,000
10,000
5,000
205,000
(97,600)
Rs.
160,000
(107,400)
52,600
Purchase of Assets through banking channel
The following assets are required to be purchased through banking channel:
• Immovable property having FMV exceeding Rs. 5 Million (FMV fixed by FBR or value fixed by the
provincial authority for the purpose of stamp duty, whichever is higher); and
• Other asset having FMV exceeding Rs. 1 Million
If the above asset is not purchased through banking channel then:
• The asset shall not be eligible for tax depreciation or amortization; and
• Cost shall be treated as zero for computation of any gain on sale of such asset
The above provision is applicable for all types of asset.
Personal Asset treated as business asset
Where a personal asset is applied for business and treated as acquired by the business, then the fair market value
at the time the asset is applied for business shall be taken as cost of asset
Asset produced or Constructed by a person
Where a person has himself produced or constructed an asset, then the following amount shall be included in the
cost of such asset:
▪ Total cost incurred in producing or constructing the asset
▪ Expenses incurred on bringing the asset in usable condition
▪ Expenses incurred for alteration or improvement of an asset
▪ Expenses incurred on disposal of an asset.
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Example
PPL Limited purchased a machine for Rs. 1,350,000. The company incurred the following expenses in respect of
the machine:
Rs
Freight, Octroi and other charges
15,000
Loading and unloading charges
2,000
Spares purchased for the erection of the machine
3,000
Labor and other expenses connected with erection
5,000
Wages paid to the worker during the month of erection of machine
5,000
Oil and lubricants during the month
500
Required: Compute the cost of the machine
Solution
Cost of the Machine
Purchase Price
Add: Expenses on machine to bring it in useable condition
Freight etc.
Loading unloading
Spares
Labor Charges
Total cost of Machine
Rs.
15,000
2,000
3,000
5,000
Rs.
1,350,000
25,000
1,3750,000
Asset Acquired with a Foreign Currency Loan
Where an asset is acquired with a loan in foreign currency and exchange rate fluctuation increases or decreases the
liability of the person in Pak Rupees, then any increase or decrease in the tax liability, before full and final repayment
of the loan shall also be added to or deducted from the cost of the asset.
Notes:
▪ For the purpose of depreciation, difference on account of foreign currency fluctuation, if any shall be
taken into account in the year of occurrence.
▪ The terms and conditions of any hedging agreement shall be considered in determining whether the
exchange rate fluctuations have any effect on person’s liability.
▪ When an asset is acquired against foreign currency loan and as result of hedging agreement there is no
change in the liability of person in local currency terms, so there will be no change in the cost of asset.
Example:
Bill Limited acquired a foreign currency loan amounting to US$ 40,000 in the beginning of the year 2010. The loan
was repayable in eight half yearly installment of US$ 5,000. The loan was utilized for import of a plant valuing equal
to the amount of loan. At the time of obtaining the loan and importing the plant 1US$= 100 PKR. The company
incurred the following expenses in connection with the plant:
Insurance and sea freight
Rs. 20,000
Port expenses
5,000
Custom duty and excise duty on import
55,000
Inland freight and octroi charges
10,000
Expenses on installation of plant
10,000
After payment of four installments the exchange rate fluctuated and next two installments were paid @ Rs. 105
and Rs. 110, respectively per USD.
Required:
Compute the cost of the plant prior to and after the change in exchange rate. Also compute the depreciation for the
year 2010, 2011, and 2012 assuming the depreciation is charged at 15%.
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Solution
Cost of plant prior to change (Tax year 2010)
Purchase price ( US $ 40,000 @ Rs. 100)
Add: Other Costs:
Insurance and sea freight
Port Expenses
Custom duty and excise duty
Inland freight and octroi
Installation expense
Total Cost
Rs.
4,000,000
20,000
5,000
55,000
10,000
10,000
4,100,000
Depreciation for the year 2010 and 2011
Total Cost
Less: Initial Allowance ( 4,100,000 * 25% )
Depreciation ( 4,100,000 – 1,025,000) * 15%
WDV at the year end
Rs.
4,100,000
(1,025,000)
(461,250)
2,613,750
WDV at the beginning of year 2011
Depreciation for the year (2,613,750 * 15%)
WDV at the year end
2,613,750
(392,063)
2,221,687
Cost of plant after change (Tax Year 2012)
WDV at the Beginning of the year
Add: increase in liability due to change in exchange rate
At 5th Installment ( $ 5,000 * Rs. 5 ( 105-100)
At 6th Installment ( $ 5,000 * Rs 10( 110-100)
Revised WDV
2,221,687
Depreciation for the year (2,296,687 * 15%)
WDV at the Year End
(344,503)
1,952,184
25,000
50,000
2,296,687
Asset acquired from any Subsidy, Etc.
The amount of the grant, subsidy, rebate, commission or any other assistance received or receivable in respect of
acquisition of an asset shall not be included in the cost of such asset. However where the amount of grant, etc. is
chargeable to tax under the ordinance then such amount shall also be included in the cost of the asset.
Example
A charitable institution received a grant of Rs. 150,000 for purchase of some equipment. The required asset was
purchased against Rs. 170,000. Compute the cost of the Asset in each of the following conditions;
1. The grant is not chargeable to tax
2. The grant is chargeable to tax.
Answer
1. Grant not chargeable to tax
Purchase value of equipment
Rs. 170,000
Less: grant received for equipment
(150,000)
Cost of the Asset
20,000
2. Grant chargeable to tax
In this case the cost of the asset will be Rs. 170,000 as the grant received is chargeable to tax.
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Where Acquisition of an Asset is derivation of an Amount chargeable to tax/ Exempt to tax
• Where the acquisition of an asset by a person is the derivation of an amount chargeable
to tax, the cost of the asset shall be the amount so charged plus any amount paid by the person for the asset.
• Where the acquisition of an asset by a person is the derivation of an amount exempt from tax, the cost of
the asset shall be the exempt amount plus any amount paid by the person for the asset
1. Acquisition of an Asset Where Amount is Chargeable to Tax
Example:
A manufacturing company, ABC Pvt. Ltd., earns a government grant of Rs.2,000,000 to purchase advanced
machinery that will increase production efficiency. This grant is treated as taxable business income. ABC
Pvt. Ltd. also contributes an additional Rs.500,000 from its own funds to cover the total cost of the
machinery.
Calculation of the Cost of the Asset (Machinery):
• Since the government grant (Rs.2,000,000) is chargeable to tax as business income, it will be
included in the cost of the asset.
• The company’s additional contribution (Rs.500,000) will also be included.
Total Cost of the Asset = Taxable Grant Amount (Rs.2,000,000) + Company Contribution (Rs.500,000)
= Rs.2,500,000
Explanation:
For ABC Pvt. Ltd., the cost of the machinery is Rs.2,500,000, including the taxable grant amount and its
additional payment.
2. Acquisition of an Asset Where Amount is Exempt from Tax
Example:
A non-profit educational institution, XYZ Foundation, receives a donation of Rs.1,200,000 from a
corporate sponsor to buy computers for its training labs. Since XYZ Foundation is registered as a tax-exempt
organization, this donation is exempt from tax. The foundation also invests an additional Rs.300,000 of its
funds for software licenses and setup.
Calculation of the Cost of the Asset (Computers):
• Since the donation (Rs.1,200,000) is exempt from tax, it will be included in the cost of the computers.
• The foundation’s additional payment (Rs.300,000) will also be included.
Total Cost of the Asset = Exempt Donation Amount (Rs.1,200,000) + Additional Payment (Rs.300,000)
= Rs.1,500,000
Explanation:
The total cost of the computers for XYZ Foundation is Rs.1,500,000, including the exempt donation amount
and its extra payment for software and setup.
3. Acquisition of a Business Asset with Mixed Taxable and Exempt Amounts
Example:
A construction business, BuildCo Ltd., receives a subsidy of Rs.800,000 from the government to purchase
safety equipment for workers on a large infrastructure project. This subsidy is partially taxable; Rs.500,000
of it is considered taxable business income, while Rs.300,000 is tax-exempt under specific government
subsidy rules. BuildCo Ltd. also spends an extra Rs.200,000 from its own funds to complete the purchase of
the equipment.
Calculation of the Cost of the Asset (Safety Equipment):
• The taxable portion of the subsidy (Rs.500,000) and the exempt portion (Rs.300,000) are both
included in the cost.
• The company’s additional payment (Rs.200,000) is also included.
Total Cost of the Asset = Taxable Amount (Rs.500,000) + Exempt Amount (Rs.300,000) + Additional
Payment (Rs.200,000) = Rs.1,000,000
Explanation:
The total cost of the safety equipment for BuildCo Ltd. is Rs.1,000,000, combining the taxable and exempt
portions of the subsidy with the company’s own payment.
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Exercise
Burewala Express Limited (BEL) is in the business of manufacturing and sale of component parts for automobile
assembly industry. On 1 January 2022, BEL took a loan of US$ 500,000 from GHI Bank, USA, which was utilized
for purchasing the plant. The loan is repayable in 5 equal instalments in US Dollars. The rate of exchange on 1
January 2022 was US$ 1 equal to Rs.196 and the loan liability was recorded in the books of account of BEL at Rs.
98,000,000 (US$ 500,000 x Rs.196). Other relevant information is as follows:
1. The Project was completed in June 2023, but was only commissioned for use on 31 July 2023. The total amount
spent by BEL on the plant was Rs.200,000,000
2. On 1 July 2023, the Government of Pakistan (GOP) voluntarily paid BEL Rs.10,000,000 as a subsidy in respect
of the plant installed in the Project.
3. The first instalment of US$ 100,000 towards repayment of the US Dollar loan was paid to GHI Bank on 30 June
2024 when the exchange rate was US$ 1= Rs.198.
Required:
Calculate the initial allowance, depreciation and written down value of the plant on 30 June 2024 for preparing
the tax return for tax year 2024
Solution
Description
Note
Cost of the plant
Amount
200,000,000
Subsidy
1
(10,000,000)
Exchange fluctuation
2
200,000
Cost of the plant
190,200,000
Less: Initial allowance @ 25%
(47,550,000)
Written down value
142,650,000
Less: Depreciation @ 15%
(21,397,500)
Written down value
121,252,500
Notes:
N-1:
In determining the cost of an asset for tax purposes the actual amount spent by a person in acquiring an asset is
required to be reduced by the amount of any grant, subsidy, rebate, commission or any other assistance
received or receivable by the person in respect of the acquisition of the asset except where the said amount
received is chargeable to tax . Further the amount of Rs. 10 million
is not income for tax purpose but is a capital receipt on the grounds that
(a) The amount was voluntarily paid by GOP without any consideration
(b) The company did not ask for the subsidy
(c) Amount received did not arise out of any legal or contractual obligation
(d) The amount is not traceable nor even remotely connected to any source of income
N-2:
An amount of Rs. 200,000 will be added to the cost of the asset due to the depreciation of the Pakistani Rupee
from Rs. 98 to Rs. 100 against the dollar.
Where a person has acquired an asset with a foreign currency loan (repayable in foreign currency) and before
the loan is fully repaid, there is an increase or decrease in the loan liability of the person in terms of Pakistan
rupees, due to a change in the rate of exchange of the foreign currency, the amount by which the liability has
increased or decreased is to be added to or reduced from the cost of the asset. In other words, the cost of the
asset acquired with the foreign currency loan is recomputed for tax purposes
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Cost of leased Asset
Cost of depreciable asset acquired by the lessee on maturity or pre-mature termination of finance lease agreement
is the residual value or bargain purchase price as the case may be.
Question
Motor vehicle
Cost at the time acquired
Finance obtained under finance lease
Bargain purchase price:
Before payment of 7th installment
After payment of 7th but before payment of 11th installment
After payment of 11th but before payment of 17th installment
After payment of 17th but before payment of 22th installment
Residual value on maturity of lease
Monthly lease rentals
No. of installments
Rs.
1,000,000
1,000,000
1,000,000
750,000
500,000
250,000
70,000
60,000
22
Solution
Cost of motor vehicle for the purpose of depreciation deduction
Before payment of 7 installments
After paying 7 installments
After paying 11 installments
After paying 17 installments
On maturity of lease i.e. after paying 22 installments
1,000,000
750,000
500,000
250,000
70,000
Consideration Received
❑ The consideration received by a person on disposal of an asset shall be the aggregate of:
(i) amount received by the person for asset or the fair market value thereof, whichever is higher; plus
(ii) the fair market value of any consideration received in kind determined at the time of disposal.
❑ If an asset has been lost or destroyed by a person, the consideration received for the asset shall include any
compensation, indemnity or damages received by the person under:
(i) an insurance policy, indemnity or other agreement;
(ii) a settlement; or
(iii) a judicial decision.
❑ The consideration received for an asset treated as disposed of when applied to personal use or is discarded or
ceased to be used shall be the fair market value of the asset determined at the time it is applied to personal use or
discarded or ceased to be used in business, as the case may be.
❑The consideration received by a scheduled bank, financial institution, modaraba, or leasing company approved
by the Commissioner in respect of an asset leased by the company to another person shall be the residual value
received by the leasing company on maturity of the lease agreement subject to the condition that the residual value
plus the amount realized
during the term of the lease towards the cost of the asset is not less than the original cost of the asset.
❑ Where two or more assets are disposed of by a person in a single transaction and the consideration received for
each asset is not specified, the total consideration received by the person shall be apportioned among the assets
disposed of in proportion to their respective fair market values determined at the time of the transaction.
❑ The Board may prescribe rules for determination of consideration received for any asset.
"FAIR DEALS"
Each letter in "FAIR DEALS" represents a key aspect of the rules for consideration received:
1. F - Fair Market Value: Use the higher of the sale price or fair market value as the consideration.
2. A - Assets Exchanged in Kind: Consideration includes fair market value of any non-cash (in-kind)
payments.
3. I - Insurance or Indemnity Compensation: If an asset is lost or destroyed, include any
compensation received.
4. R - Residual Value for Leasing Companies: Leasing companies recognize the residual value
received as consideration.
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5.
6.
7.
8.
9.
Income From Business-Depreciation
D - Discarded or Personal Use Assets: Consideration is the fair market value if the asset is
moved to personal use or discarded.
E - Exempt Amount Rules by Board: Rules prescribed by the Board apply for specific types of
assets.
A - Apportion Multiple Assets: Apportion total consideration when multiple assets are disposed
of in one transaction.
L - Loss or Damage Settlements: Include settlements or judicial decisions as part of
consideration for damaged or lost assets.
S - Sales or Fair Market Value Comparison: Always compare sale amount with fair market value
to use the higher amount.
1. Consideration Received Based on Sale Price or Fair Market Value
• Example:
Mr. Ahmed sells a piece of land for Rs.2,000,000. However, the fair market value of the land at the
time of sale is Rs.2,500,000.
• Explanation:
Since the fair market value (Rs.2,500,000) is higher than the amount received (Rs.2,000,000), the
consideration for tax purposes will be Rs.2,500,000. This rule ensures that the fair market value is
used when it is greater than the sale price, preventing undervaluation of assets.
2. Consideration Includes Fair Market Value of Any Non-Cash (In-Kind) Payments
• Example:
Ms. Sara exchanges her commercial property with Mr. Bilal’s car dealership for vehicles worth
Rs.3,000,000. At the time of the exchange, the fair market value of Ms. Sara’s property is
Rs.2,800,000.
• Explanation:
The consideration received by Ms. Sara will be the fair market value of the vehicles she received
(Rs.3,000,000) because it is in-kind and valued higher than the property’s market value. This rule
ensures that when assets are exchanged without cash, the fair market value of the received assets
is used to determine the consideration amount.
3. Consideration on Loss or Destruction of an Asset
• Example:
A manufacturing company owns machinery worth Rs.500,000. Due to an accident, the machinery
is destroyed. The company receives Rs.450,000 as insurance compensation for the loss.
• Explanation:
The compensation received (Rs.450,000) will be the consideration for tax purposes. This point
clarifies that compensation received from insurance, indemnity, settlements, or court decisions
due to loss or destruction of an asset is considered as consideration.
4. Consideration When an Asset is Applied for Personal Use, Discarded, or Ceased to be Used
• Example:
A business owner, Mr. Faisal, stops using a car from his business fleet and transfers it to his
personal use. The fair market value of the car at the time of transfer is Rs.700,000.
• Explanation:
For tax purposes, the consideration will be Rs.700,000, as this is the fair market value of the asset
at the time it was moved to personal use. This rule captures situations where assets are not sold
but are removed from business use, ensuring that fair market value is used as consideration.
5. Consideration for Scheduled Banks, Financial Institutions, Modarabas, and Leasing Companies
• Example:
A leasing company leases a car to a client for three years. The car's initial cost is Rs.1,200,000. By
the end of the lease term, the company receives a residual value of Rs.300,000.
• Explanation:
The consideration received by the leasing company at the end of the lease is the residual value,
Rs.300,000, provided it plus the lease payments made toward the car’s cost cover the original cost.
This rule applies specifically to leasing arrangements, ensuring that the residual value is properly
accounted for in taxation.
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6. Consideration Apportioned When Multiple Assets are Disposed of Together
• Example:
Mr. Khalid sells two pieces of machinery in a single transaction for a total of Rs.600,000. The fair
market values of Machinery A and Machinery B are Rs.400,000 and Rs.200,000, respectively.
• Explanation:
The consideration will be apportioned based on the fair market values: Rs.400,000 for Machinery
A and Rs.200,000 for Machinery B. This ensures that when assets are disposed of together, each
asset’s fair market value proportionately determines the consideration received for each item.
7. Board Prescribing Rules for Determining Consideration Received
• Example:
The Federal Board of Revenue (FBR) issues a rule that the consideration received for a specific
type of agricultural machinery should be determined based on its average market rate from the
last three years if sold during certain seasons.
• Explanation:
This rule clarifies that the tax authority can set specific rules for determining consideration on
certain types of assets, providing guidance in cases where the market fluctuates widely or needs
specialized assessment criteria.
24.Intangibles.
Definitions u/s 24
Cost in relation to an intangible, means any expenditure incurred in acquiring or creating the intangible, including
any expenditure incurred in improving or renewing the intangible; and
Intangible means any patent, invention, design or model, secret formula or process, copyright 1icensce, trade mark,
scientific or technical knowledge, computer software, motion picture film, export quotas, franchise, license,
intellectual property, or other like property or right, contractual rights and any expenditure that provides an
advantage or benefit for a period of more than one year (other than expenditure incurred to acquire a depreciable
asset or unimproved land).
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Examples:
1. Administrative expenditures include Computer software of Rs. 2,800,000. The software was acquired on
25 February 2016 with an estimated useful life of 4 years. Special year ended September.
(Answer: Add back Rs.2.8 million in profit and loss and deduct Rs.418, 082 (2,800,000 ÷4) x (218/365))
2. Administrative expenditures include Rs. 5,000,000 being the cost of a right to use a formula for the
development of a new chemical compound. TL obtained the rights on 1 March 20X5 from High Tec Inc. USA
for twelve years. Special year ended December.
(Answer: Add back Rs.5 million in profit and loss and deduct Rs. 37,742,000= (5,000÷10×306 ÷365))
Amortization
1) A person shall be allowed an amortization deduction in accordance with this section in a tax year for the
cost of the person‘s intangibles–
i.
that are wholly or partly used by the person in the tax year in deriving income from
business chargeable to tax; and
ii.
that have a normal useful life exceeding one year.
2) No deduction shall be allowed under this section where a deduction has been allowed under another
section of this Ordinance for the entire cost of the intangible in the tax year in which the intangible is
acquired.
3) The amortization deduction of a person for a tax year shall be computed as
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐼𝑛𝑡𝑎𝑛𝑔𝑖𝑏𝑙𝑒
𝐴𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛 =
𝑥 𝑁𝑜. 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑢𝑠𝑒𝑑 𝑖𝑛 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟
𝑌𝑒𝑎𝑟𝑠 𝑥 365
4) Where an intangible does not have an ascertainable useful life then the same shall be treated as 25 years.
5) Where an intangible is used in a tax year partly in deriving income from business chargeable to tax and
partly for another use, the deduction allowed under this section for that year shall be restricted to the fair
proportional part of the amount that would be allowed if the intangible were wholly used to derive
income from business chargeable to tax.
Where, in any tax year, a person disposes of an intangible, no amortization deduction shall be allowed under this
section for that year and gain/loss shall be computed as = Consideration – WDV
(Written down value = Cost – Accumulated amortization)
25. Pre-commencement expenditure.
Definition
pre-commencement expenditure means any expenditure incurred before the commencement of a business wholly
and exclusively to derive income chargeable to tax, including the cost of feasibility studies, construction of
prototypes, and trial production activities, but shall not include any expenditure which is incurred in acquiring land,
or which is depreciated or amortized under section 22 or 24.
Example
Cost of sales included Rs. 80,000/- incurred for test run.
(Answer: Add back Rs.80, 000 profit and loss and deduct Rs. 16,000 (80,000 x 20%))
1.
2.
3.
4.
A person shall be allowed a deduction for any pre-commencement expenditure in accordance with this
section.
Pre-commencement expenditure shall be amortized on a straight-line basis @ 20% per annum.
The total deductions allowed under this section in the current tax year and all previous tax years in respect
of an amount of pre-commencement expenditure shall not exceed the amount of the expenditure.
No deduction shall be allowed under this section where a deduction has been allowed under another
section of this Ordinance for the entire amount of the pre-commencement expenditure in the tax year in
which it is incurred.
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26. Scientific research expenditure.
A person shall be allowed a deduction for scientific research expenditure incurred in Pakistan in a tax year wholly
and exclusively for the purpose of deriving income from business chargeable to tax.
Definitions
Scientific research means any activity undertaken in Pakistan in the fields of natural or applied science for
the development of human knowledge;
Scientific research expenditure means any expenditure incurred by a person on scientific research undertaken in
Pakistan for the purposes of developing the person‘s business, including any contribution to a scientific research
institution to undertake scientific research for the purposes of the person‘s business, other than expenditure
incurred –
(a) in the acquisition of any depreciable asset or intangible;
(b) in the acquisition of immovable property; or
(c) for the purpose of ascertaining the existence, location, extent or quality of a natural deposit; and
Scientific research institution means any institution certified by the Board as conducting scientific research in
Pakistan.
Example 1: Research for Product Development
• Scenario:
A pharmaceutical company, MedCare Ltd., conducts research in Pakistan to develop a new
medicine. The company incurs Rs.500,000 on lab equipment, employee salaries, and material costs
for the research project. The research is conducted to improve their existing line of business and
develop a product that will generate taxable income.
• Explanation:
MedCare Ltd. can claim a tax deduction for the Rs.500,000 spent on scientific research
expenditure, as it was directly related to the development of a product to derive income from its
pharmaceutical business. The expenditure is wholly and exclusively for the purpose of deriving
taxable business income.
• Why It Qualifies:
The expenditure is for research activities in the natural sciences (pharmaceuticals), conducted
within Pakistan, and aimed at developing the business. It does not include costs for depreciable
assets or immovable property, so it is eligible for the deduction.
Example 2: Contribution to a Research Institution
• Scenario:
Tech Innovations Ltd., a technology company, contributes Rs.1,000,000 to a certified scientific
research institution in Pakistan to support their research on artificial intelligence (AI)
technologies that could benefit their product development. The contribution is made to advance AI
research, which will be used to improve Tech Innovations Ltd.'s business operations.
• Explanation:
The Rs.1,000,000 contribution to the certified research institution qualifies as scientific research
expenditure. The research is related to improving the business, specifically for AI technology,
which will generate business income in the future.
• Why It Qualifies:
The contribution is made to a scientific research institution certified by the Board, and it supports
research that directly benefits the business. Therefore, it qualifies for the deduction.
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Example 3: Salaries of Employees Engaged in Scientific Research
• Scenario:
AgriTech Ltd., an agricultural technology company, spends Rs.800,000 on the salaries of scientists
and researchers working on developing a new pesticide. The research is essential to AgriTech
Ltd.'s business operations, as the pesticide will be marketed to generate taxable income.
• Explanation:
The salaries of employees working on scientific research for the development of the pesticide are
considered scientific research expenditure. AgriTech Ltd. can claim a tax deduction for this
expenditure as it is incurred wholly and exclusively for business purposes in Pakistan.
• Why It Qualifies:
The expenditure on salaries directly relates to scientific research aimed at developing a new
product (pesticide), which will generate income for the business. The research is conducted in
Pakistan and is in the field of applied science (agriculture). It qualifies because it is not related to
acquiring depreciable assets or immovable property.
Summary:
In each of these examples:
• The expenditure is incurred for research directly benefiting the business and aimed at generating
taxable income.
• The research is conducted in Pakistan in the fields of natural or applied sciences, and it qualifies
for a tax deduction under the rules for scientific research expenditure.
• Costs for acquiring assets like machinery, property, or resources for determining natural deposits
are excluded from this deduction.
27. Employee training and facilities.
A person shall be allowed a deduction for any expenditure (other than capital expenditure) incurred in a tax year
in respect of—
(a) any educational institution or hospital in Pakistan established for the benefit of the person‘s employees and their
dependents;
(b) any institute in Pakistan established for the training of industrial workers recognized, aided, or run by the
Federal Government or a Provincial Government or a Local Government; or
(c) the training of any person, being a citizen of Pakistan, in connection with a scheme approved by the Board for
the purposes of this section
Example 1: Corporate Training at a Government-Recognized Institute
• Scenario:
ABC Ltd., a manufacturing company in Lahore, sends 20 employees to the Punjab Skills
Development Fund (PSDF), a government-recognized institute, for a 6-month training program
on advanced industrial skills. The total expenditure incurred by the company for the training
program is Rs.400,000, which includes the course fees and travel expenses for employees.
• Explanation:
The Rs.400,000 expenditure is eligible for a tax deduction under Section 27(b) because the
training was conducted by a government-recognized institute (PSDF), which is supported by the
provincial government. The training program directly benefits ABC Ltd. by upgrading the skills of
its employees, making it eligible for the deduction.
• Why It Qualifies:
The training program was provided by an institute supported by the government, and the
expenditure was incurred for the benefit of the company’s employees. It’s a non-capital
expenditure, making it eligible for a deduction.
Example 2: Establishing an In-House Educational Institution
• Scenario:
XYZ Textile Mills sets up an in-house educational facility in Karachi, where employees and their
dependents can take free courses in basic literacy, health awareness, and job-specific skills. The
company spends Rs.600,000 in one tax year on setting up classrooms, hiring teachers, and
providing educational materials.
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•
Income From Business-Other Areas
Explanation:
The Rs.600,000 expenditure incurred by XYZ Textile Mills qualifies for a tax deduction under
Section 27(a) because the educational facility is established specifically for the benefit of the
employees and their dependents. The company has set up the facility to improve the well-being
and skills of its workforce.
Why It Qualifies:
Since the educational institution benefits the employees and their dependents, and it is established
in Pakistan, the company is entitled to a tax deduction for these expenses under Section 27(a).
Example 3: Government-Approved Skill Development Program for Pakistani Citizens
• Scenario:
TechSolutions Pvt. Ltd., a software development company, launches a training program to teach
software engineering skills to young Pakistani graduates. The program is approved by the Federal
Board of Revenue (FBR) as part of a national skill development initiative. The total expenditure
for the training program, including instructor fees and materials, is Rs.500,000.
• Explanation:
The Rs.500,000 expenditure qualifies for a tax deduction under Section 27(c) because the training
program is approved by the FBR as part of a national skill development scheme. The program is
designed to train Pakistani citizens, making it eligible for the deduction.
• Why It Qualifies:
The training program is aligned with a government-approved scheme, aimed at improving the skill
set of Pakistani citizens, and TechSolutions Pvt. Ltd. has incurred expenses in line with the
approved program. This is considered a valid training expenditure for tax purposes.
Interest expense, Lease rentals and Special purpose vehicle - Section 28
a) Followings are tax deductible from business income if related to taxable business income:
b) Profit on debt if the debt is utilized for business purpose (for capital expenditure as well as for working
capital requirement) However, exchange loss if any is a capital expenditure in respect of a loan in foreign
currency utilized for capital expenditure.
c) Share of profit under musharika scheme to a bank
d) Financial cost of securitization of receivable to Special Purpose Vehicle (SPV) by an originator
e) Profit on debt on Term Finance Certificates or other interest-bearing certificates issued by a company
Assets taken on lease:
Tax depreciation on leased assets is not admissible instead lease rentals to the approved financial Institution,
modaraba or leasing company or SPV on behalf of an originator are allowable tax expense for the lessee where the
asset is used for business purpose.
In case of finance lease, accounting depreciation and finance charge shall be added back to the purpose accounting
profit and the lease rentals shall be deducted to arrive at taxable income.
Security/initial deposit paid in respect of lease is not allowable tax expenditure. However, if the security deposit is
forfeited on transfer of asset to the lessee then the said initial deposit additional payment, if any, shall be considered
as the cost of asset for the lessee for the, of tax depreciation.
Lease of passenger transport vehicle not plying for hire.
Lease rentals to the extent of principal amount shall not exceed Rs.2.5 million in respect of lease If cost of a
passenger transport vehicle not plying for hire.
Example:
A Ltd, a manufacturing company acquired a car for its chief executive from a leasing company. Cost of the car is Rs.3
million.
Lease rentals for the tax year paid to the leasing company Rs.900,000 including repayment of principal amount
Rs.675,000.
Calculate the amount of lease rentals that can be claimed as allowable deduction.
Solution Lease Rentals allowed as deduction are 787,500
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Question
You are a tax partner in a local firm of Chartered Accountants. You have been approached by some of the clients for
opinion on the possible tax implication/treatment of certain matters.
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, discuss the tax
implication/treatment in the following independent case:
On 1.9.20X6 Mega (Pvt) Ltd (MPL), engaged in the business of manufacturing plastic bottles, had obtained a
machinery on finance lease. For the year ended 30.9.20X9 MPL charged interest of Rs.228,000 to the profit and loss
account on account of such finance lease. Total lease rentals paid during the year amounted to Rs.475,000.
At the end of the lease term which expired on 31.8.20X9, the machinery was transferred to MPL at a residual value
of Rs.764,000. The market value of the machinery on the date of its transfer amounted to Rs.868,000.
Answer
In case of a finance lease, accounting depreciation and interest charged to the accounts are inadmissible deductions.
However, the lease rentals of Rs.475,000 are admissible deduction.
After transfer of machinery to MPL, tax depreciation would be admissible at residual value of Rs.764,000.
For the purpose of tax depreciation, the residual value of the machinery (and not its market value) shall be treated
as its tax WDV, as residual value is the consideration that was paid by MPL.
The machinery would not be eligible for initial allowance as it was already in use of MPL.
Special Purpose Vehicle (SPV)
•
•
•
•
•
•
A public company having the prescribed amount of paid up capital, a trust or a body corporate may be
registered as SPV with SECP for the purpose of Securitization of receivables under the Companies (Assets
Backed Securitization) Rules.
An Originator including a leasing company and modaraba may transfer its receivables to SPV in
consideration of a mutually agreed payment by SPV who is entitled to collect the receivables.
Lease rentals of an asset, used by a lessee expense for his taxable business income, to SPV on behalf of an
originator is allowable tax expense for the lessee.
Financial cost of securitization of receivables by an Originator in respect of SPV is an allowable tax expense.
Payment by SPV to an Originator in respect of securitization of receivables shall not be subject to tax
deduction at source.
Income of special purpose vehicle is exempt if at least 90% of accounting profit other than capital gain is
distributed as dividend other than issue of bonus shares.
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29. Bad debts.
Conditions to claim Bad Debts
A person shall be allowed a deduction for a bad debt in a tax year if the following conditions are satisfied,
namely:—
(a) the amount of the debt was –
(i)
previously included in the person‘s income from business chargeable to tax; or
(ii)
in respect of money lent by a financial institution in deriving income from business
chargeable to tax;
(b) the debt or part of the debt is written off in the accounts of the person in the tax year; and
(c) there are reasonable grounds for believing that the debt is irrecoverable.
Bad Debts allowed recovered
Where a person has been allowed a deduction in a tax year for a bad debt and in a subsequent tax year the person
receives in cash or kind any amount in respect of that debt, the following rules shall apply, namely:–
Actual bad debts < Bad debts allowed
(a) where the amount received exceeds the difference between the whole of such bad debt and the amount
previously allowed as a deduction under this section, the excess shall be included in the person‘s income under
the head ―Income from Business‖ for the tax year in which it was received; or
Actual bad debts > Bad debts allowed
(b) where the amount received is less than the difference between the whole of such bad debt and the amount
allowed as a deduction under this section, the shortfall shall be allowed as a bad debt deduction in computing
the person‘s income under the head ―Income from Business‖ for the tax year in which it was received.
Example:
Good Debts Enterprises (GDE) made a sale of Rs.100/- to Bad Debts Ltd. (BDL) in tax year 2018. This sale was shown
in the taxable income of 2018. In 2019, DGE received nothing from BDL and booked it as bad debts in its books of
accounts and claim bad debts from tax department. Tax department only allowed Rs.60/- as bad debts by assuming
that Rs.40/- will be recovered from the BDL. Following are the possible situations and their tax treatment in 2020
Situation
1
A
B
C
D
E
F
Actual Receipts
from
BDL
(Rupees)
2
10
30
40
60
80
100
Actual Bad
(Rupees)
3
90 (100-10)
70 (100-30)
60 (100-40)
40 (100-60)
20 (100-80)
NIL (100-100)
debts
Bad
debts
allowed (Rupees)
Tax Treatment (Rupees)
4
60
60
60
60
60
60
5 = 3-4
30 Expenses
10 Expenses
No Treatment
20 Income
40 Income
60 Income
To do Question
Ms. Shagufta is running a business in the name of Al Nafay Business Solutions. In the tax year 2023,
she claimed bad debts of Rs. 1,000,000 and Rs. 1,500,000 from its clients Mr. Junaid and Mr.
Nawaz. She was allowed deduction of bad debts of Rs. 750,000 and Rs. 800,000 with respect of
receivable from Mr. Junaid and Mr. Nawaz in Tax year 2023. During 2024, she received following
sums from these two debtors:
Mr. Junaid Rs.900,000
Mr. Nawaz Rs. 500,000
Work out the amount to be added/allowed on account of bad debts in the tax year 2024.
Method of accounting: Section 32 and stock in trade
a) There are two methods of accounting; accrual-basis accounting (also called mercantile accounting system)
and cash-basis accounting.
b) A company is required to follow accrual-basis accounting. A business entity other than a company may
follow cash-basis accounting or accrual-basis accounting at its discretion regularly applied.
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c) Change in the method of accounting:
A person may apply for a change in the method of accounting and the Commissioner may, by order in writing,
approve such an application but only if satisfied that the change is necessary to clearly reflect the person's
taxable business income.
If a person's method of accounting has changed, the person shall make adjustments to items of income,
deduction, credit or any other items affected by the change so that no item is omitted and no item is taken into
account more than once.
d) The FBR has authority to prescribe any specific manner of maintaining books for any particular business or
profession.
e) Accrual-basis accounting:
• Income is taxable when it is due to the person i.e. when the person is entitled to receive it even if
the time for discharge of the entitlement is postponed or the amount is payable by installments.
• An expenditure is allowable when it is payable by the person i.e. when all the events have occurred
that determine liability and the amount can also be determined with reasonable accuracy.
Notes for students:
Tax treatment of provision for slow moving stock, wastage, discount or warranty is the same as in case of
provision for doubtful debts.
If liability is determined against a provision, then it would be allowed as tax expense such as provision for bonus
to employees.
• An expenditure period of 3 from the end of the basis accounting is required to be paid within a period of 3
years from the end of the tax year in which it was allowed.
• Any unpaid liability against such expense shall be chargeable to tax in the 4th year. However, if the said
amount is paid subsequently then it shall be allowed as a tax deduction. This is usually termed as trading
liability outstanding for more than 3 years.
-
This provision is not applicable in the following cases:
-
Where the expense was against exempt income therefore the expense was not allowed as tax expense.
-
Where the expense was disallowed by the tax department after conducting tax audit etc.
Where the debit side of a liability is not a tax expense e.g. loan payable or advance from customers or
where the expenditure was disallowed under any provision of the Income Tax Ordinance, 2001 such
as penalty for the violation of any law, rule or regulation.
Where the expense was against income taxable under FTR and the expense was not allowable as tax
expense e.g. exports
35. Stock-in-trade.
Cost of sales shall be computed as follows:
opening value of the person ‘s stock-in-trade
Add: cost of stock-in-trade acquired
Less: closing value of stock-in-trade
Valuation of Closing Stock
Cost or NRV
Closing stock shall be computed at cost or NRV whichever is lower.
Absorption Cost Method / Prime Cost Method
• Prime cost or absorption cost method may be adopted by a person who is preparing its accounts
on cash basis and
• Absorption cost method accounting shall be adopted by a person who is preparing its accounts on
accrual basis.
FIFO / Weighted Average
Where particular items of stock-in-trade are not readily identifiable, a person may account for that stock on the
first-in-first-out method or the average-cost method but, once chosen, a stock valuation method may be changed
only with the written permission of the Commissioner and in accordance with any conditions that the Commissioner
may impose.
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Chapter-11
Income From Business-Other Areas
Where the person commenced to carry on business in the year, the fair market value of any stock-in-trade acquired
by the person prior to the commencement of the business.
Definitions u/s 35
Absorption-cost method means the generally accepted accounting principle under which the cost of an item
of stock-in-trade is the sum of direct material costs, direct labour costs, and factory overhead costs;
Average-cost method means the generally accepted accounting principle under which the valuation of stockin-trade is based on a weighted average cost of units on hand;
Direct labor costs means labor costs directly related to the manufacture or production of stock-in-trade;
Direct material costs means the cost of materials that become an integral part of the stock-in-trade
manufactured or produced, or which are consumed in the manufacturing or production process;
Factory overhead costs means the total costs of manufacturing or producing stock-in-trade, other than direct
labour and direct material costs;
First-in-first-out method means the generally accepted accounting principle under which the valuation of
stock-in-trade is based on the assumption that stock is sold in the order of its acquisition;
Prime-cost method means the generally accepted accounting principle under which the cost of stock-in-trade
is the sum of direct material costs, direct labour costs, and variable factory overhead costs;
Stock-in-trade means anything produced, manufactured, purchased, or otherwise acquired for manufacture,
sale or exchange, and any materials or supplies to be consumed in the production or manufacturing process,
but does not include stocks or shares; and
Variable factory overhead costs means those factory overhead costs which vary directly with changes in
volume of stock-in-trade manufactured or produced.
Method of Accounting
Individual / AOP
Companies
Cash Basis
Accrual Basis
Prime Cost
Absorption Cost
Closing Stock Valuation
Concept of small company
Small company has been defined to mean a company registered under the Companies Act on
or after 1.7.2005 which:
a) has paid-up capital plus undistributed reserves not exceeding Rs.50 million;
b) has employees not exceeding 250 at any time during the year;
c) has annual turnover not exceeding Rs.250 million;
d) is not formed by the splitting up or the reconstitution of company already in existence; and
e) is not a small and medium size enterprise.
▪ Benefit for a small company
Income tax rate of a small company is 20% of taxable income
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Chapter-11
Income From Business-Other Areas
Women enterprise and its taxation
Definition
woman enterprise means a start-up established on or after 1/7/2021
• As sole proprietorship concern owned by a woman or
• An AOP all of whose members are women or
• A company whose 100% shareholding is held or owned by women
Taxation
Tax payable by women enterprise on profits and gains derived from business chargeable to tax under the head
income from business shall be reduced by 25%,
However, this benefit will not be available to business that is formed by the transfer or reconstitution or splitting
up of an existing business.
Scenario-Based Example: Women Enterprise and its Taxation
Scenario 1: Sole Proprietorship by a Woman
• Business Description:
Sara's Boutique is a clothing store in Lahore, founded by Sara Khan, a woman entrepreneur, on
July 5, 2021. The boutique sells custom-made dresses and accessories. The boutique is a sole
proprietorship owned and operated entirely by Sara.
• Profit and Tax Calculation:
In the first tax year, Sara's Boutique earns a profit of Rs.1,000,000. According to the tax laws for
women enterprises, the business qualifies for a 25% reduction in the tax payable on the profits
derived from business.
• Tax Payable Before Deduction:
o Tax Rate: 30% (general tax rate for business income)
o Tax on Rs.1,000,000 profit: Rs.300,000
• Tax Payable After 25% Reduction:
o Reduced Tax Payable: Rs.300,000 - (25% of Rs.300,000) = Rs.225,000
• Explanation:
Since Sara's Boutique is a sole proprietorship owned entirely by a woman, it qualifies for the
25% tax reduction on its profits. This reduces the tax payable to Rs.225,000 from the original
Rs.300,000.
Scenario 2: Women-Owned AOP (Association of Persons)
• Business Description:
Women Entrepreneurs AOP is a business established by four women: Ayesha, Fatima, Zainab,
and Hina, who are all partners in the firm. The AOP was formed on August 15, 2021, to provide
consultancy services for small businesses.
• Profit and Tax Calculation:
The business earns a profit of Rs.2,500,000 in the first tax year. As an AOP formed entirely by
women, the profits are subject to a 25% tax reduction under the women enterprise rules.
• Tax Payable Before Deduction:
o Tax Rate: 30%
o Tax on Rs.2,500,000 profit: Rs.750,000
• Tax Payable After 25% Reduction:
o Reduced Tax Payable: Rs.750,000 - (25% of Rs.750,000) = Rs.562,500
• Explanation:
The Women Entrepreneurs AOP qualifies for the 25% tax reduction as it is owned and operated
by women. The final tax payable after the reduction is Rs.562,500.
Scenario 3: Women-Owned Company
• Business Description:
TechGals Pvt. Ltd., a software development company, is fully owned by women. The company
was established on October 1, 2021, and its entire shareholding is held by women shareholders.
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Income From Business-Other Areas
•
Profit and Tax Calculation:
The company earns a profit of Rs.5,000,000 in the tax year. As a 100% women-owned company, it
qualifies for the 25% tax reduction on its profits.
•
Tax Payable Before Deduction:
o Tax Rate: 30%
o Tax on Rs.5,000,000 profit: Rs.1,500,000
Tax Payable After 25% Reduction:
o Reduced Tax Payable: Rs.1,500,000 - (25% of Rs.1,500,000) = Rs.1,125,000
Explanation:
TechGals Pvt. Ltd. is a 100% women-owned company, and therefore, it is eligible for the 25% tax
reduction on its profits. The tax payable after the reduction is Rs.1,125,000.
•
•
Exclusion from Benefit:
• Scenario 4: Transfer or Reconstitution of Existing Business
• Business Description:
Green Ventures Pvt. Ltd. is a business that was originally established in 2015 as a sole
proprietorship by a male entrepreneur. In 2022, the business was transferred to Sara, a woman,
and restructured into a 100% women-owned company.
• Taxation:
Even though Green Ventures Pvt. Ltd. is now owned entirely by a woman, the 25% tax reduction
does not apply because the business was formed through the transfer or reconstitution of an
existing business.
• Explanation:
According to the law, the 25% tax reduction is not available to businesses that are formed by
the transfer, reconstitution, or splitting up of an existing business. Since Green Ventures Pvt.
Ltd. was restructured from an already existing business, it does not qualify for the reduction.
Key Points to Remember:
• The 25% tax reduction is available only to new start-ups owned entirely by women (either as a
sole proprietorship, AOP, or company).
• The tax benefit is not applicable if the business is created through the transfer or splitting up of
an existing business.
Minimum tax regime
Turnover is defined as
A) Gross sales or gross receipts, exclusive of
i.
Sales Tax and Federal Excise duty or
ii.
any trade discounts shown on invoices,
iii.
and also excluding sales / receipts taxable under FTR
B) Gross fees for the rendering of services, commissions and gross receipts from contracts; except covered under
FTR
C) the company‘s share of the amounts stated above of any association of persons of which the company is a
member.
[Note: Early Payment discount shall not be excluded from turnover & receipts from all business activities includes sales
of immoveable property taxable under business Income]
Certain types of incomes are subject to minimum tax under the ITO, 2001 to assure that certain portion of tax is
paid by the taxpayer.
Various incomes which are treated as minimum tax under the Income Tax Ordinance, 2001 are:
1. Minimum tax under section 113 on turnover.
2. Commercial importer under section 148(7).
3. Tax deduction at source @ 11% from gross amount of service rendered under section 153 for all persons other
than a company.
4. Tax collected upto the electricity bill amount of Rs.360,000 per annum for a person other than company under
section 235.
➢ Under the minimum tax regime, tax already deducted at source is treated as minimum tax which is then
compared with liability under the normal tax regime.
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Chapter-11
Income From Business-Other Areas
In case liability under normal tax regime is greater than tax already deducted, the person is required to pay
liability under normal tax regime.
In case tax already deducted is greater than liability under normal tax regime, then same is treated as final
tax.
➢
➢
Minimum tax on the income of certain persons [Sec 113] or turnover taxation
This section shall apply to
➢ A resident company,
➢ An individual or an AOP (having turnover of Rs. 100 million or above in the tax year 2017 or in any
subsequent tax year) and
➢ Permanent establishment of a non-resident company
•
•
The above entities shall pay tax @ 1.25% of turnover if their tax liability is nil or less than 1.25% of turnover.
Even if the income of the business entity is exempt from income tax or no tax is otherwise payable on
account of loss for the tax year, brought forward loss, tax credit, depreciation etc.
Reduced rates of minimum tax have been specified in certain cases such as:• 0.75% for Oil marketing companies and poultry farming
• 0.25% for distributors of pharmaceutical products, FMCGs and cigarettes and flour and rice mills
• Minimum tax in excess of normal tax liability shall be c/f and adjusted against the tax liability of subsequent
3 tax years
• This provision doesn’t applies on certain cases like NPO
Example: for carry forward of minimum tax in excess of normal tax liability (ignore withholding tax in this
example):
Year
Normal tax liability
1.25% of turnover
1
10,000
60,000
2
90,000
63,000
3
120,000
75,000
Solution:
Year 1
Tax liability
(Excess minimum tax c/f Rs.50,000)
60,000
Year 2
Normal tax liability
90,000
Less: b/f excess minimum tax of year
27,000
Tax liability
63,000
(Excess minimum tax of year 1 c/f to year 3 Rs.23,000)
Year 3
Normal tax liability
Less: b/f excess minimum tax of year
Tax liability
120,000
123,000
97,000
Fair Market Value - Section 68
(a)The FMV of any property or rent, asset, service, benefit or perquisite at a particular time shall be the price
which the property or rent, asset, service, benefit or perquisite would ordinarily fetch on sale or supply in the
open market at that time.
(b)The FMV of any property or rent, asset, service, benefit or perquisite shall be determined without regard to any
restriction on transfer or to the fact that it is not otherwise convertible cash.
(c)Where the price, other than the price of immovable property, referred to in (a) above is n ordinarily
ascertainable, such price may be determined by the Commissioner.
(d)FMV of immovable properties: The FBR is empowered to notify, through notifications, the FMV of immovable
property situated in different parts of Pakistan.
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Chapter-11
Income From Business-Other Areas
Where the FMV of immovable properties of an area is not notified by the FBR, the value fixed by the District
Officer (Revenue) or provincial or any other authorized authority for the purpose of stamp duty shall be deemed
to be the FMV of that immovable property.
Foreign currency transactions i.e. currency conversion - Section 71
(a) Every amount taken into account under this Ordinance shall be in Rupees.
(b) Where an amount is in a foreign currency, the amount shall be converted to the Rupee at
State Bank of Pakistan rate applying between the foreign currency and the Rupee on the date
the amount is taken into account for the purposes of this Ordinance.
Agricultural produce cultivated and used as raw material in the business
Agricultural income is exempt under section 41 of the Income Tax Ordinance 2001.Agricultural income is
exempt under section 41 of the Income Tax Ordinance 2001 If a cultivator or receiver of agricultural produce
as rent-in-kind uses agricultural produce raised or received by him as raw materials in a business then the
market value of the agricultural produce shall be allowed as a deduction from business. It means that the same
shall be considered as purchase cost for the business. However, where the agricultural produce is not
ordinarily sold in the market i.e. the market value is not determinable then the cultivation expenses and the
land revenue taxes / rent paid for the area are allowable tax deductions from business
Example 1: Agricultural Produce Used in a Manufacturing Business
• Business Description:
Green Fields Ltd. is a company that manufactures organic fertilizers. The company owns
agricultural land and cultivates wheat, which is later used as a raw material in the production of
compost fertilizers. The wheat is cultivated and used in the business.
• Agricultural Income and Tax Calculation:
o Agricultural Produce: Wheat cultivated by the company.
o Market Value of Wheat: Rs.100,000.
o Cultivation Expenses: Rs.50,000 (for seeds, labor, and other farming expenses).
o Land Revenue Taxes: Rs.10,000.
• Tax Treatment:
o The market value of the wheat used as raw material, Rs.100,000, is allowed as a
deduction from the company’s business income.
o Since the wheat is cultivated and used in the business, the Rs.100,000 will be considered
the purchase cost for the fertilizer production.
o If the wheat were not sold in the market and its value could not be determined, then the
business would be allowed to deduct the cultivation expenses of Rs.50,000 and the land
revenue taxes of Rs.10,000 as deductions from business income.
Example 2: Agricultural Produce Used in a Food Processing Business
• Business Description:
Farm Fresh Foods Pvt. Ltd. is a food processing company that manufactures jams and juices. The
company receives fruit crops from a cultivator as rent-in-kind for the land they lease.
• Agricultural Income and Tax Calculation:
o Agricultural Produce Received: 500 kg of mangoes (market value Rs.75,000).
o Market Value of Mangoes: Rs.75,000.
o Processing Expenses for Business: Rs.30,000 (cost of processing mangoes into jams and
juices).
o Land Revenue Taxes Paid: Rs.5,000.
• Tax Treatment:
o The company is allowed to deduct the market value of mangoes (Rs.75,000) from its
business income because the mangoes are used as raw material for manufacturing jam
and juice.
o If the market value was not determinable (for example, if the mangoes were not sold in
the market), the company could instead claim the cultivation expenses (cost to grow the
mangoes) and land revenue taxes (Rs.5,000) as deductions.
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Chapter-11
Income From Business-Other Areas
Example 3: Agricultural Income Used in a Livestock Business
• Business Description:
Agri Livestock Enterprises is a business engaged in raising livestock. The business cultivates
corn on its land, which is used as feed for the cattle. The corn is not sold in the market but is used
directly for livestock feeding.
•
•
Agricultural Income and Tax Calculation:
o Agricultural Produce (Corn): 1,000 kg of corn (market value Rs.40,000).
o Cultivation Expenses: Rs.20,000.
o Land Revenue Taxes: Rs.3,000.
Tax Treatment:
o Since the corn is used as raw material in the business, the business is allowed to deduct
the market value of the corn, which is Rs.40,000, from its business income as a raw
material cost.
o In a scenario where the market value is not determinable (if the corn is not sold in the
market), the business is allowed to deduct the cultivation expenses of Rs.20,000 and the
land revenue taxes of Rs.3,000 from its business income.
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Chapter
12
1.
Associations of persons
Treatment of share of profit in the hands of members
• AOP includes a firm, a Hindu undivided family, any artificial juridical person and anybody of persons
formed under a foreign law, but does not include a company
Note for students: Partnership firm and joint venture are the common examples of AOP.
• AOP pays income tax at the prescribed rates on its income taxable under normal tax regime.
• Share of profit from AOP is exempt in the hands of members but the same shall be included in taxable income only
for rate purpose.
• Share of loss from AOP is not adjustable against income of the members nor is it considered for rate purpose.
AOP itself carries forward its losses.
• If income of AOP is exempt then share of profit of exempt income shall not be included in taxable income of
members for rate purposes.
Basic principles for taxation of AOP
❑ An association of persons is considered a separate entity from its members (partners).
Accordingly, the AOP is liable to tax separately from the members of the association.
❑ An AOP is treated as tax resident for a tax year if the control and management of its affairs
is situated wholly or partly in Pakistan at any time during that tax year.
❑ A resident AOP is taxable on its worldwide income.
❑ If the AOP has paid tax for a tax year, the amount received by a member of the association in the capacity as
member out of the income of the association shall be exempt from tax. However, such share of member is included
in income of the member for determination of tax rate i.e. for rate purpose (discussed below in detail).
❑ However, in case an association of persons has a turnover of three hundred (Rs.300) million or more during the
tax year or any of the preceding tax years, the share of a member will not be exempt from tax unless the
association files financial statements duly audited by a firm of Chartered Accountants or a firm of Cost and
Management Accountants along with the income tax return.
❑ If at least one of the members of an AOP is a company, the share of such company or companies shall be
excluded for the purpose of computing the total income of the AOP and the company or companies shall be taxed
separately at the rates applicable to the companies, according to their share.
❑ The AOP is entitled to set off and carry forward its losses as per normal procedure. However, share of loss from
AOP is neither adjustable against the income of its members nor it is considered for rate purpose.
❑ Where a change occurs in the constitution of a firm during a tax year, the firm’s income is apportioned amongst
the members on a time basis.
❑ The responsibility for filing the tax return of a firm for any tax year rests with the persons who are members in
the firm on the date the firm is required to file its tax return.
❑ Where a firm dissolves or discontinues carrying on business, any tax payable by the firm isrecoverable from
any person who was a member in the firm at the time of dissolution or discontinuance of business. Tax payable
can also be recovered from legal heirs of the deceased partners.
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Chapter-12
Associations Of Persons
Individual as a member of AOP
If, for a tax year, an individual has taxable income besides exempt share of profit from AOP, then the amount of tax
payable on the taxable income of the individual shall be computed in accordance with the following formula:
(A/B) x C
A = is the amount of tax that would be assessed to the individual for the year if the amount or amounts exempt
from tax (i.e. share of profit from AOP) were chargeable to tax
B = is the taxable income of the individual for the year if the amount or amounts exempt from tax under (i.e. share
of profit from AOP) were chargeable to tax; and
C = is the individual‘s actual taxable income for the year
Key points for solving AOP numerical
Following points should be kept in mind when solving AOP numerical:
Any profit on debt, brokerage, commission, salary or other remuneration paid by an association of
persons to a member of the association is not allowed as an expense; hence it should be added back to the
taxable income of AOP.
• “FBR has clarified that it is the profit before tax of AOP that will be included in the taxable income of
its members for rate purpose”
• Share of loss from AOP is neither adjustable against income of its members nor it is considered for rate
purpose.
• If an AOP has any income that falls under final tax regime (FTR) then members share from such income
shall not be added in the taxable income of the member.
Example 1
1,800,000
Taxable income of AOP
Tax on Rs.1,200,000
75,000
Tax on Rs.600,000 @ 20%
120,000
195,000
Divisible income.
1,605,000
•
Mr. A and Mr. B are the partners with equal share. Therefore, share of profit is Rs.802,500 for
each partner.
Mr. A also provided the following information:
Taxable other sources
1,650,000
-Taxable capital gain on disposal of private companies shares
1,210,000
Zakat deducted by the bank
10,000
-Taxes deducted / paid at source
125,000
Required:
Calculate tax payable by Mr. A with the return of income.
Solution
Taxable other sources
Taxable capital gains
Total income
1,650,000
1,210,000
2,860,000
Less: Zakat deducted at source
10,000
Taxable income
2,850,000
Add: Share of profit from AOP for rate purpose
900,000
Taxable income for rate purpose
3,750,000
Tax liability (Non-Salaried Case)
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Chapter-12
Associations Of Persons
income tax on Rs.3,000,000
465,000
Income tax on Rs.750,00 @ 30%
225,000
690,000
Income tax on Rs.2,850,000
𝐴 𝑋 𝐶= 690,000/3750,000
524,400
x 2,850,000
Less: Taxes deducted / paid at source
Example 2
Mr. C has disclosed the following information:
-Taxable capital gain on disposal of private companies shares
-Taxable other sources
- Share of profit from a firm
- Zakat deducted at source by the bank
-Taxes deducted / paid at source
Required:
Calculate tax payable with the return of income.
125,000
1,440,000
600,000
660,000
45,000
38,000
Solution
Tax payable with return of income Rs.246,597
Notes for students:
If an individual is a member of AOP and has other normal taxable income as well then
Section 65(1) specifies a specific treatment for rebates, if any, in respect of donation and
APF that the components A and B i.e. average rate of tax for such rebates would include the
effect of share of profit from AOP.
It is a considered opinion that share of profit from AOP shall not be considered i.e. actual
taxable income and actual tax liability would be considered for other aspects such as:
• To decide salaried or non-salaried case (i.e. taxable salary would be divided by
actual taxable income)
• Foreign tax credit
• Amount of limits for rebates such as maximum 30% for donation and so on
• Limits on deductions for education expenses
Example 3
Mr. D has disclosed the following information:
-Taxable salary
-Taxable capital gain on disposal of private companies' shares
-Foreign source business income not exempt in Pakistan
-Tax paid in the foreign country equivalent to Pak Rupees
-Share of profit from AOP
- Zakat deducted at source by the bank
- Donation to an approved charitable institution through cheque
- Taxes deducted / paid at source
Required:
Calculate tax payable with the return of income.
2,800,000
300,000
360,000
27,000
320,000
17,000
50,000
16,000
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Solution
Taxable salary
Taxable capital gain
Foreign source income
Total income
Less: Zakat deducted at source
Taxable income
Add: Share of profit from AOP for rate purpose
Taxable income for rate purpose
Tax liability (Salaried Case)
Income tax on Rs.3,763,000
Tax on Rs.3,600,000
435,000
Tax on Rs.163,000 @ 27.5%
44,825
479,825
Income tax on Rs.3,443,000
𝐴 𝑋 𝐶 = 479,825 x 3,443,000
𝐵
3,763,000
2,800,000
300,000
360,000
3,460,000
17,000
3,443,000
320,000
3,763,000
439,021
Less: Foreign tax credit
Tax paid in the foreign country
Tax in Pakistan at average rate of tax
439,021/3,443,000 x 360,000
Whichever is lower
27,000
45,904
Less: Rebate on donation (479,825 / 3,763,000) x 50,000
Less: Taxes deducted / paid at source
Tax payable with return of income
27,000
412,021
6,376
405,645
16,000 389,645
Transfer of rebate from a member to its AOP
If the person is a member of an AOP, any tax credit that could not be claimed by such
member can be claimed by the AOP of which he is member, in the same year. For this
purpose, a copy of written agreement between the member and the AOP shall be furnished
along with the return of income of AOP.
Share of profit from AOP in the hands of a company - Section 92
If a company is a member in an AOP (e.g. in a joint venture) then:
• The share of such company shall be excluded from taxable income of aop;
• The share of the company shall be included in the taxable income of the company;
and therefore it is taxable at the applicable corporate tax rate which is 29%.
It means that the share of a company being a member in an AOP shall not be taxable in the hands of
AOP. The company is required to tax its share in the normal manner applicable for a company.
Loss incurred by AOP:
In case of loss incurred by an AOP and a company is a member then share of loss shall not be
excluded from tax loss as the AOP shall c/f its losses and no member is entitled to set off or
c/f the loss of AOP as per section 59A.
Example 4
(a) Gross revenue of AOP
(b) Allowable tax expenses of AOP
(c) Taxes paid at source by AOP
25,000,000
11,000,000
2,000,000
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(d) The AOP has three members with the following share:
• A Ltd 30% share
• Mr. Y 35% share
• Mr. Z 35% share
(e) A Ltd.’s taxable business income is Rs.3,000,000 other than share of profit from AOP.
Advance tax paid by A Ltd is Rs.1,300,000
(f) Mr. Y earned non-salaried taxable income Rs.4,000,000 in his personal capacity.
(g) Mr. Z does not have any other income.
(a)
Required:
Calculate tax liability of each member.
Solution
Gross revenue of AOP
25,000,000
Less: Allowable tax expenses
11,000,000
Taxable income of AOP including company's share
14,000,000
Less: A Ltd's share for separate consideration 30% of 14m
4,200,000
Taxable income excluding A Ltd's share
9,800,000
Income tax on Rs.4,000,000
765,000
Income tax on Rs.5,800,000 @ 35%
2,030,000
2,795,000
Income divisible between Mr. Y and Mr. Z
7,005,000
Tax payable by AOP
2,795,000
Tax liability as above
2,000,000
Advance tax paid
600,000
Less: claimed by A Ltd
1,400,000
Tax payable with return of income
1,395,000
Share of Mr. Y and Mr. Z Rs.3,502,500 each
Tax liability of A Ltd
29% of Rs.4,200,000+ 3,000,000
Less: Advance tax paid by A Ltd
Tax Payable
Tax liability of Mr. Y (Non-Salaried Case)
Taxable income
Add: share of profit from AOP for rate purpose
Taxable income for rate purpose
Income tax on Rs.7,502,500
Income tax on Rs.4,000,000
Income tax on Rs.3,502,500 @ 35%
Income tax on Rs.4,000,000
A xC = 1,990,875 x 4,000,000
B
7,502,500
2,088,000
1,300,000
788,000
4,000,000
3,502,500
7,502,500
765,000
1,225,875
1,990,875
1,061,446
Tax liability of Mr. Z is nil
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Co-ownership of property - Section 66
Where any property is owned by two or more persons and their respective shares in that property
are definite and ascertainable then co-ownership of property is not considered as an AOP for the
purpose of rental income and therefore rental income is not taxable as a separate tax entity. Share
of taxable rental income is taxable in the hands of each co-owner.
This provision is applicable in each case other than income from business. Examples may be:
• Rental income under the head income from property
• Rental income under the head income from other sources
• Capital gain on disposal of shares with joint ownership
Note for students in respect of co-ownership:
Co-ownership of property shall not be considered as an AOP in respect of rental income. However, if an AOP
(already established as an AOP) buys any property from its resources then the rental income shall be taxable in the
hands of AOP despite the fact that the property is registered in the name of one or more partners.
In this case the AOP shall be the beneficial owner of the property.
Similarly, if any property is owned by two or more persons and their respective shares in that property are not
definite and ascertainable, the property will be considered as being jointly owned by an AOP and taxable income
and tax payable thereon will be computed as per the principles of taxation for AOP.
Other areas relating to AOP
1.
Change in the constitution of an AOP - Section 98A
Where a change occurs in a tax year in the constitution of an AOP, liability of filing the return on behalf of the AOP
for the tax year shall be on the AOP as constituted at the time of filing of such return but the income of the AOP shall
be apportioned among the members who were entitled to receive it.
However, where the tax assessed on a member cannot be recovered from him it shall be recovered from the AOP as
constituted at the time of filing the return.
2.
Discontinuance of business or dissolution of an AOP-Section 98B
Where any business carried on by an AOP has been discontinued, or where an AOP is dissolved, all the provisions of
the income tax ordinance shall apply as if no such discontinuance or dissolution had taken place.
Every person, who was, at the time of such discontinuance or dissolution, a member of such AOP and the legal
representative of any such person who is deceased, shall be jointly and severally liable for the amount of tax
payable by the AOP.
3.
Succession to business, otherwise than on death-Section 98C
(1) Where a person carrying on any business (predecessor) has been succeeded in any tax year by any other
person (successor), otherwise than on the death of the predecessor, and the Successor continues to carry on
that business,• the predecessor shall be liable to pay tax in respect of the income of the tax year in which the succession
took place up to the date of succession and of any previous tax year; and
• The successor shall be liable to pay tax in respect of the income of such tax year after the date of
succession.
Where the predecessor cannot be found, the tax liability in respect of the tax year in which the succession
took place up to the date of succession and of any previous tax year shall be that of the successor and all the
provisions of the income tax ordinance shall apply accordingly.
(3) Where any tax payable in respect of such business cannot be recovered from the predecessor, it shall be
recoverable from the successor, who shall be entitled to recover it from the predecessor.
(2)
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Income of a minor child (Sec 91)
Section 91 of the Ordinance states the procedure for levy of tax on the income of a minor child in the following
manner:
(i)
Any income of a minor child for a tax year chargeable under the head "Income from Business" shall be
chargeable to tax as the income of the parent of the child with the highest taxable income for that year.
(ii)
The above provisions shall not apply to the income of a minor child from a business acquired by the child
through an inheritance.
Exercise
Associated Consultants is a joint venture (JV) of Mr. Ghulam Rasool and Consultancy Enterprises, a sole
proprietorship of Mr. Ahsan. The JV is not registered with registrar of firms. The proportion of interest of the
members in the JV is 70:30 between Mr. Ghulam Rasool and Mr. Ahsan respectively. The JV is engaged in the
providing of accounting, taxation and other services to different departments. During the year, total Income of the
JV under the normal tax regime was Rs.2,000,000 against the total revenue of Rs.30,000,000. It is worth mentioning
that Mr. Ahsan earned following income during the year:
Salary from Joint Venture = Rs. 450,000
Profit on debt from joint venture = Rs. 400 000
Compute the taxable income and tax liability of the Joint Venture for tax year 2024 (Ignore the minimum tax
provision.)
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Losses & rebates
Chapter
13
This chapter deals with the following issues:
1.
Set off of losses
2.
Carry forward of losses including unabsorbed depreciation and amortization
Set off of losses
If a person sustains a loss under any head of income in a tax year, the same can be set-off against the income from
any other head of income except for “income under the heads ‘salary’
For example, a business loss can be set-off against income under the head “Income from other source” or any other
head of income.
Exception to the Normal Rule
•
•
•
•
•
Loss in speculation business cannot be set-off against any other income. Capital loss cannot be set-off
against any other income.
Loss from any head of income falling under final tax regime.
Loss in a case where the income would have been an exempt income e.g. loss of agriculture income cannot
be set-off against any taxable income.
No loss except loss under the head “Income from Business” (including income from speculation business)
and “Capital gain” can be carried forward.
If a person sustains loss under the head “Income from Business” in addition to loss under any other head,
the loss under the head “Income from Business” shall be set-off last.
Carry forward of losses
Carry forward of Business loss
➢
➢
➢
➢
If business loss (other than depreciation, amortization and speculation loss) sustained in a tax year cannot
be fully set-off in that year with income under any other head, it can be carried forward to subsequent tax
years.
No loss shall be carried forward to more than six tax years immediately succeeding the tax year in which
the loss was first computed.
If a person has a business loss carried forward for more than one tax years, the loss of earliest tax year shall
be set-off first.
Where a loss, referred above relating to a tax year commencing on or after the First day, of July, 2020 is
sustained by a resident company engaged in the hotel business in Pakistan the said loss shall be carried
forward for a period of eight years.
Carry forward of speculation business losses
➢
➢
➢
➢
If a person sustains a loss in a tax year from any speculation business ,he can set off such loss only against
profits of any other speculation business carried on by him during the same tax year.
If any loss cannot be so set-off, either wholly or partly, such portion of loss can be carried forward up to six
tax years immediately succeeding the tax year in which it was sustained.
In the subsequent years too, the speculation loss can be set-off against income of any speculation business
only. It means that loss from speculation business cannot be adjusted against income under any other head.
If a person has a speculation loss carried forward for more than one tax years, the loss of earliest tax year
shall be set-off first.
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Chapter-13
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Carry forward of capital losses
➢
➢
➢
➢
A capital loss sustained by a person during a tax year cannot be set-off against income of that person under
any other head of income, for that tax year.
The amount of capital loss which cannot be set-off shall be carried forward up to six tax years immediately
succeeding the tax year in which the loss was sustained.
In the subsequent years too, capital loss can be set-off against capital gain only. It means that capital loss
cannot be adjusted against income under any other head.
If a person has a capital loss carried forward for more than one tax year, the loss of earliest tax year shall
be set-off first
Limitations on set off and carry forward of losses
An AOP whose profits are chargeable to tax under Income Tax Ordinance, 2001 shall be entitled to a set off
or carry forward and set-off any loss of AOP against the income of AOP in the manner explained above.
➢ Any members of an AOP shall not be entitled to set off or carried forward and set off loss of AOP against his
income.
➢ Any person who has succeeded in the business of another person otherwise than by inheritance, shall not
be entitled to set off or carry forward and set off loss of predecessor.
Head-wise situation of c/f is as under
➢
Heads of income
Salary
Income from property
Other source
Capital gain
Speculation Business
C/f Provisions
Loss cannot arise under the head salary.
Any other loss cannot be adjusted against salary income
Loss in a tax year can be set-off against any other head of income other than salary and
FTR. Any unadjusted loss under the head income from property cannot be carried
forward.
Loss in a tax year can be set-off against any other head of
income other than salary and FTR. Any unadjusted loss under the head other sources
cannot be carried forward.
Section 37
Capital loss can be carried forward only against future capital gains up to 6 years next
following the tax year in which the loss occurred.
Section 37A
Loss on disposal of securities under section section 37A (shares of public company etc.)
shall be set off only against the gain from any other securities under section 37A and
any unadjusted loss shall be carried forward to 3 subsequent tax years only against gain
under section 37A.
However, loss under section 37 can be adjusted against taxable
capital gain under section 37A
The taxpayer will be entitled for adjustment of prior years' capital loss on FIFO basis
subject to condition that the capital loss for the current year, if any, will be set-off first.
Speculation loss can be carried forward only against future speculation gains up to 6
years next following the tax year in which the loss occurred.
Speculation business means any business in which purchase and sale transaction of any
commodity including shares is settled otherwise than actual delivery or transfer of the
commodity but does not include a contract:
a) to cover future price fluctuation of any commodity to be manufactured or sold in
future through actual delivery or transfer of the commodity.
b) to cover loss on account of future price fluctuation of shares held by an investor or
dealer.
c) by a member of forward market or stock exchange to cover any loss which may arise
in the ordinary course of his business as a member.
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Chapter-13
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Business - other than
speculation
(i.e.
normal business)
Normal business loss in a tax year can be adjusted against any head of income other
than salary and FTR but it can be carried forward only against future business income
up to 6 years next following the tax year in which the loss occurred. Loss in hotel
business by a resident company in the tax year
2021 and onwards shall be c/f up to 8 years next following the tax year in which the
loss occurred.
Example: Mr. A has declared his income / loss for the current tax year as under:
Business loss
Rs.900,000
Taxable salary income
Rs.1,200,000
Taxable other source
Rs.800,000
Answer:
Taxable salary income
1,200,000
Taxable other sources
800,000
Business loss
900,000
Business loss c / f
100,000
[It cannot be adjusted against salary income]
Taxable income
1,200,000
Summary of losses
Heads of Income
Treatment of Loss
Loss Adjustment
Set off
Carry
Forward
Adj. of gain against other
heads
Salary Income
N/A
N/A
N/A
No Loss Can adjust
Income From Property
setoff
Biz + CG+IFO
N/A
No Loss Can adjust
Business Income
Setoff
/
Forward
Spec.
IFO
Biz +Spec
IFP+IFO
Speculative Income
Carry Forward
N/A
Spec.
IFP+BIZ+IFO
u/s 37
Carry Forward
N/A
CG
IFP+BIZ+IFO
U/s 38
N/A
N/A
N/A
IFP+BIZ+IFO
u/s 37A (securities)
Setoff
/
Forward
N/A
US 37-A
IFP+CG, BIZ+IFO
Income
Sources
Setoff
CG +Biz
N/A
IFP+BIZ
Carry
+CG+
Capital Gain
Foreign
Losses
from
other
Carry
Can only be adjusted against foreign income of same head. However, Pakistan losses can be
adjusted against foreign gains.
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Chapter-13
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Example of set off and c/f of normal business loss
Tax year 20X7 - Taxable other source
Normal business loss.
Tax year 20X8 - Taxable other source
Business income
Solution:
TAX YEAR 20X7
Taxable other source
Normal business loss
Business loss of tax year 20X7 c/f to tax year 20x8
TAX YEAR 20X8
Taxable other source
Business income
1,100,000
Less: B/f business loss
1,800,000
Taxable income
Business loss of tax year 20X7 c/f to tax year 20X9
2,000,000
3,800,000
2,400,000
1,100,000
2,000,000
3,800,000
1,800,000
2,400,000
nil
2,400,000
700,000
Unabsorbed Depreciation
Unabsorbed depreciation and amortizations of intangible or pre-commencement expenditure
Tax deprecation (including initial allowance or accelerated depreciation) and amortization for tax year or
any Portion thereof which could not be absorbed against available profits represent unabsorbed
depreciation / amortization which is part of business loss and normal rues for set-off and c/f shall apply
except that there is no time limit for the purpose of c/f of this amount.
➢ However, where taxable income of a tax year is Rs.10 million or more then unabsorbed depreciation and
amortization shall be adjusted only against 50% of the taxable business income of that year after adjusting
any b/f normal business loss.
➢ Depreciation and amortization for the tax year shall be set off last.
Format to Solve the Question
Taxable income of year 2 before tax depreciation and amortization
xxx
Lest: Income other than business income
(xxx)
xxx
Less: Normal business loss b/f from year 1
(xxx)
xxx
Less: Unabsorbed depreciation and amortization of year 1
(xxx)
xxx
Less: Tax depreciation and amortization of year 2
(xxx)
Taxable business income
xxx
Add: Income other than business income
xxx
Taxable income
xxx
➢
Illustration:
A Ltd's business loss of year 1 was Rs.20,000,000 including unabsorbed depreciation of Rs. 12,000,000. The
company's taxable income before depreciation de year 2 is Rs.28,000,000 including income from other source
Rs.1,500,000. Tax depreciation of year 2 is Rs.8,200,000.
Compute the taxable income, if any, and the amount of loss to be carried forward by the company in year 2.
Answer:
Taxable income of year 2 before tax depreciation
Less: Income from other source
Taxable business income of year 2 before tax depreciation
Less: B/f normal business loss of year 1
28,000,000
1,500,000
26,500,000
8,000,000
18,500,000
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Less: Unabsorbed depreciation of year 1 [50% of 18.5m]
Less: Tax depreciation of year 2
Taxable business income
Other source
Taxable income
Unabsorbed tax depreciation of year 1 c/f 12m - 9.25m
Foreign source income - section 104
9,250,000
8,200,000
1,050,000
1,500,000
2,550,000
2,750,000
a) foreign loss under a particular head of income shall be treated as a separate head of Income. Speculation business
shall also be treated as a separate head of income.
b) foreign loss cannot be adjusted against any Pakistan-source income. However, Pakistan source loss can be
adjusted against foreign source income.
c) Any foreign source loss under a head of income shall be carried forward only against foreign source income under
that head up to 6 years next following the tax year in which the loss occurred.
d) foreign tax credit, if applicable, shall be calculated separately for each head of foreign source income.
Other areas (Rebates Not Discussed Earlier)
Tax credit for certain persons - section 65F
(A) Following persons / incomes shall be allowed a tax credit equal to 100% of the tax payable including minimum
tax and FTR:
(a) persons engaged in coal mining projects in Sindh supplying coal exclusively to power generation projects;
(b) a start-up for the tax year in which the start-up is certified by the Pakistan Software Export Board (PSEB) and
the next following two tax years;
(i) Definition of startup - section 2(62A)
A business of a resident person that commenced on or after 1.7.2012 and the person is engaged in or intends to
offer technology driven products or services provided that the person is registered with and duly certified by PSEB
and has turnover of less than Rs.100 million in each of the last 5 tax years.
(ii) Startup established by woman
Tax payable by woman enterprise on business income shall be reduced by 25%
Definition of woman enterprise
Woman enterprise means a startup established on or company wed by a woman or AOP where all members are
women or a company whose 100% shareholding is held by women.
This benefit shall not be available to a business formed by the transfer or reconstitution or reconstruction or
splitting up on an existing business.
Note for students:
The benefit of 25% reduction in tax liability is available where 100% tax credit is not available for any reason.
(B) Conditions for tax credit
(a) return has been filed;
(b) withholding tax statements for the relevant tax year have been filed, if required; and
(c) sales tax returns have been filed, if required.
Definition of Online marketplace
"online marketplace" means an information technology platform run by e-commerce entity over an electronic
network that acts as a facilitator in transactions that occur between a buyer and a seller.
Benefits for Online marketplace:
• Minimum tax shall be 0.25% of turnover instead of 1.25% in other cases
• Tax rate on commission and brokerage shall be 5%
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Summary: Tax Credit for Certain Persons (Section 65F)
1. Tax Credit Eligible Persons:
o Coal Mining in Sindh: 100% tax credit for coal mining projects supplying coal exclusively
to power generation.
Startups:
▪ Tax Credit: 100% of tax payable for startups certified by the Pakistan Software
Export Board (PSEB) in the year of certification and the following two years.
▪ Women Enterprises: Startups wholly owned by women (sole proprietorship,
AOP, or company) get a 25% reduction in tax payable.
Conditions for Tax Credit:
o Return and withholding tax statements must be filed.
o Sales tax returns must be filed (if applicable).
Online Marketplaces:
o Minimum Tax: 0.25% of turnover (instead of 1.25%).
o Tax Rate on Commission/Brokerage: 5%.
o
2.
3.
Acronym to Remember: C-SSW-O
• C: Coal Mining Projects (Sindh, 100% tax credit)
• S: Startups (PSEB-certified, 100% tax credit for 3 years)
• S: Startups by Women (25% reduction in tax)
• W: Withholding & Sales Tax Returns Filed
• O: Online Marketplaces (0.25% minimum tax, 5% on commission)
Tax credit for specified industrial undertakings - section 65G
(A) Capital investment in purchase and installation of new machinery, buildings, equipment, hardware and software
(excluding self-created software and used capital assets) shall be allowed an investment tax credit of 25% of the
investment amount against tax payable including FTR and minimum tax by the following persons:
(a) green field industrial undertaking engaged in –
(i) manufacture of goods which substantially changes their original condition; ог
(ii) ship building:
Provided that the person incorporated between 30.6.2019 and 30.6.2024 and the person is not formed by
the splitting up or reconstitution of an undertaking already in existence or by transfer of machinery or
building from an undertaking established in Pakistan prior to commencement of new business and is not
part of an expansion project; and
(b) industrial undertaking set up by 30.6.2023 and engaged in the manufacture of machinery, equipment and items
with dedicated use (no multiple uses) for generation of renewable energy from sources like solar and wind, for a
period of five years beginning from the date such industrial undertaking is set up.
(B) Any unadjusted tax credit shall be carried forward to the two subsequent tax years.
Definition of industrial undertaking
Industrial Undertaking means –
(a) an undertaking which is set up in Pakistan and which employs, (i) ten or more persons in Pakistan and involves the use of electrical energy or any other form of energy
which is mechanically transmitted and is not generated by human or animal energy; or
(ii) twenty or more persons in Pakistan and does not involve the use of electrical energy or any other form
of energy which is mechanically transmitted and is not generated by human or animal energy: and which
is engaged in the manufacture of goods, ship-building, generation or distribution of electrical energy, or the
supply of hydraulic power or the working of any mine, oil-well or any other source of mineral deposits
(b) a person directly involved in the construction of buildings, roads, bridges and other such structures or the
development of land, to the extent and for the purpose of import of plant and machinery to be utilized in such
activity
(c) a resident company engaged in the hotel business in Pakistan; and
(d) telecommunication companies operating under the Telecommunication Authority (PTA).
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Definition of greenfield industrial undertaking
"greenfield industrial undertaking" means [section 2(27A)] –
(a) a new industrial undertaking which is (i) set up on land which has not previously been utilized for any commercial, industrial or manufacturing
activity and is free from constraints imposed by any prior work;
(ii) built without demolishing, revamping, renovating, upgrading, remodeling or modifying any existing
structure, facility or plant;
(iii) not formed by the splitting up or reconstitution of an undertaking already in existence or by transfer
of machinery, plant or building from an undertaking established in Pakistan prior to commencement of the
new business and is not part of an expansion project;
(iv) using any process or technology that has not earlier been used in Pakistan and is so approved by the
Engineering Development Board; and
(b) is approved by the Commissioner on an application made in the prescribed form and manner, accompanied by
the prescribed documents and, such other documents as may be required by the Commissioner:
Summary: Tax Credit for Certain Persons (Section 65F)
1.
2.
Eligible Persons for Tax Credit:
o Coal Mining Projects (Sindh): Tax credit of 100% on tax payable for coal mining projects
supplying coal to power generation.
o Startups:
▪ 100% Tax Credit: Available for startups certified by Pakistan Software Export
Board (PSEB) for the first three years.
▪ Women Enterprises: Startups fully owned by women get a 25% reduction in tax
on business income.
o Online Marketplaces:
▪ Minimum Tax: Reduced to 0.25% of turnover instead of 1.25%.
▪ Tax on Commission/Brokerage: 5% tax rate.
Conditions for Tax Credit:
o Filing of return, withholding tax statements, and sales tax returns (where required).
**Acronym to Remember: C-SWOT
• C: Coal Mining (100% tax credit for Sindh coal mining projects)
• S: Startups (100% tax credit for first 3 years)
• W: Women Enterprises (25% tax reduction)
• O: Online Marketplaces (0.25% minimum tax, 5% on commission)
• T: Tax Filing Requirements (Return, withholding, sales tax statements)
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Chapter
14
Income tax areas not covered earlier
SECTION WISE INCOME TAX IMPORTANT NOTES
The following issues are covered in this chapter:
1. Diplomatic and United Nations - exemption
2. Foreign government officials - exemption
3. International agreements - exemption
4. Honors by the President
5. Scholarship
6. Support payment under an agreement to live apart
7. Recouped expenditures - section 70
8. Cessation of source of income - section 72
9. Associates - definition
10. Representative of a deceased individual-section 87
11. Exemptions and tax concessions in the Second Schedule-section 53
12. Exemptions and tax provisions in other laws - section 54
13. Limitation of exemption - section 55
14. Definitions [not covered in earlier chapters / paras]
15. Agriculture Produces as raw material
16. Exemption under foreign investment (Promotion and Protection) Act, 2022
Exemption - Diplomatic and United Nations - Section 42
Income of an individual is exempt if he is entitled to privileges under:
- Diplomatic and Consular Privileges Act
- United Nations (Privileges and Immunities) Act
Any pension received by a citizen of Pakistan from United Nations or its specialized agencies
is exempt if his salary from such employment was exempt in Pakistan.
Exemption - Foreign Government Officials - Section 43
Salary of a foreign government official is exempt in respect of services in Pakistan to such government if:
a. The employee is a citizen of the foreign government and not a citizen of Pakistan
b. Services are similar to those performed by Pakistan government officials in foreign countries; and
c. That foreign government grants similar exemption to Pakistan government officials
Exemptions under International Agreements - Section 44
Certain incomes are exempt under tax treaties i.e. an agreement for the avoidance of double
taxation. Tax treaties shall apply in case of any contradiction between any tax treaty and the
local laws.
Income of a foreign national is exempt to the extent provided in an Agreement between
Pakistan and a foreign country or a public international organization subject to certain
conditions.
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Chapter-14
Income Tax Areas Not Covered Earlier
Exemption under Foreign Investment (Promotion and Protection) Act, 2022
(the Act 2022) Section 44A
(a) Taxes on income (including capital gains), advance income tax, minimum and final taxes
under the Income Tax Ordinance, 2001 shall be exempt in respect of qualified investment
(such as Reko Diq project in Balochistan) under the Act 2022.
(b) All investors and shareholders of the qualified investment, their associates and
companies specified in the Act 2022 including third party lenders on account of any loan
shall also be exempt from taxes and other provisions of the Income Tax Ordinance.
Honors by the President -Section 45
Any monetary award or allowance attached to any honor, award or medal awarded by the
president of Pakistan is exempt.
Scholarship-Section 47
Any scholarship granted to meet education cost is exempt other than scholarship paid
directly or indirectly by an associate.
Education expense paid by an employer to an employee or his dependents is a taxable perquisite.
Support payment under an agreement to live apart - Section 48
Amount received by a spouse as support payment under an agreement to live apart is exempt.
Recouped expenditure - Section 70
Any amount subsequently received in cash or in kind in respect of any tax expenditure or tax
loss shall be treated as income.
Cessation of source of income - Section 72
If any taxable activity has ceased and subsequently any benefit is derived in cash or in kind
from this activity then it shall be taxable in the normal manner and all the provisions of the
Ordinance shall apply accordingly.
Associates-Section 85
1.
2.
3.
4.
5.
Two persons shall be associates where one may reasonably be expected to act in
accordance with the intentions of the other, or both persons may reasonably be expected
to act in accordance with the intentions of a third person.
One person sufficiently influences, either alone or together with associate, the other
person i.e. economic or financial dependency
One person enters into a transaction, directly or indirectly, with the other who is a
resident of zero tax area.
Two persons shall not be associates solely by reason of employment.
Following shall be treated as associates:*
a) An individual and his relative
b) Members of AOP
c) A member and his AOP where the individual either alone or together with
his associates controls 50% or more share in profit or loss of AOP
d) A trust and its beneficiaries
e) A shareholder and the company where the shareholder either alone or
together with his associates controls 50% or more voting power or rights to
dividend or capital.
f) Two companies where a person either alone or together with his associates
controls in both the companies 50% or more voting power or rights to dividend or
capital
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Chapter-14
Income Tax Areas Not Covered Earlier
Definition of Relative:
"Relative" in relation to an individual, means
(a) An ancestor, a descendant of any of the grandparents, or an adopted child, of the
individual, or of a spouse of the individual; or
(b) A spouse of the individual or of any person specified in clause (a).
Legal representative of a deceased individual-Section 87
a. The legal representative of a deceased individual shall be liable for any tax that the
individual would have become liable for if the individual had not died and any tax
payable in respect of the income of the deceased's estate.
b. The liability of a legal representative shall be limited to the extent to which the
deceased's estate is capable of meeting the liability which shall be the first charge
on the deceased's estate.
c. Any tax proceeding taken against the deceased before his death shall be treated as
taken against the legal representative and may be continued from the stage at which
the proceeding stood on the date of the deceased's death.
d. Any tax proceeding which could have been taken against the deceased if the
deceased had survived may be taken against the legal representative of the
deceased.
e. "Legal representative" means a person who in law represents the estate of a
deceased person, and includes any person who intermeddles with the estate of the
deceased and where a party sues or is sued in representative character the person
on whom the estate devolves on the death of the party so suing or sued.
Exemptions and tax concessions in 2nd Schedule to the Income Tax
Ordinance-Section 53
1. The income or persons specified in 2nd Schedule shall be a. Exempt from tax, subject to specified conditions, if any;
b. Subject to lower rate of tax as are specified therein;
c. Allowed a tax reduction, subject to any conditions and extent specified therein; or
d. Exempt from the operation of any provision of the income tax ordinance,
subject to any conditions and extent specified therein.
2. The Federal Government or FBR with the approval of the Federal Minister-incharge may add, omit or change any clause of 2nd Schedule, whenever
circumstances exist to take immediate action for the purposes of:
- National security;
- Natural disaster;
- National food security in emergency situations;
- Protection of national economic interests in situations arising out of
abnormal fluctuation in international commodity prices;
- Implementation of bilateral and multilateral agreements;
- Granting an exemption from any tax imposed including a reduction in tax liability
- An exemption from the operation of any provision of this Ordinance to any
international financial institution or foreign Government owned financial
institution operating under an agreement.
3. All amendments in the 2nd Schedule in a financial year shall be placed before the
National Assembly. If not placed before the National Assembly, the amendment
shall stand rescinded on the expiry of the financial year in which it was issued.
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Income Tax Areas Not Covered Earlier
Exemptions and tax provisions in other laws - Section 54
No provision in any other law providing fora. An exemption from any tax imposed under this Ordinance;
b. A reduction in the rate of tax imposed under this Ordinance;
c. A reduction in tax liability of any person under this Ordinance; or
d. An exemption from the operation of any provision of
this Ordinance, Shall have legal effect unless also provided for
in this Ordinance.
Limitation of exemption - Section 55
Where any income is exempt from tax, the exemption shall be limited to the original
recipient of that income and shall not extend to any person receiving any payment wholly
or in part out of that income. It means that if income of a company is exempt then salary
income received by the employees and dividend income received by shareholders would
be taxable unless specifically exempt.
Definitions [not covered in earlier paragraphs / chapters]
"Income" includes:
- Any amount chargeable to tax;
- Any amount subject to collection or deduction of tax under final tax regime;
- Any amount treated as income; and
- Any loss of income.
"Iris" means a web based computer program for operation and management of Inland Revenue
taxes and laws administered by the FBR.
"Officer of Inland Revenue" means any Additional Commissioner, Deputy Commissioner Assistant
Commissioner, Inland Revenue Officer, Inland Revenue Audit Officer, District Taxation Officer,
Assistant Director Audit or any other officer however designated or appointed by theBoard for the
purposes of this Ordinance.
"Principal Officer" used with reference to a company or AOP includes a. A director, a manager, secretary, agent, accountant or any similar officer; and
b. Any person connected with the management or administration of the company or
aop upon whom the commissioner has served a notice of treating him as the
principal officer thereof.
"Taxpayer" means any person who derives taxable income, and includesa. Any person who is required to deduct or collect tax as withholding agent; or
b. Any representative of a person who derives taxable income;
c. Any person required to furnish a return of income or pay tax under this ordinance.
A. above
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Practice Questions [Read the Chapter for the Answers of these Theoretical Questions]
Question 1
Define the term 'Taxpayer' under the Income Tax Ordinance.
Question 2
Define the term 'Total Income' under the Income Tax Ordinance.
Question 3
What does the term 'Income' mean under the Income Tax Ordinance?
Question 4
Define the term "Principal Officer" with reference to the Income Tax Ordinance.
Question 5
Who is liable to discharge the tax liability of a deceased person, and to what extent?
Question 6
One of your clients, Mr. Nadir who is the legal representative of his deceased uncle Mr. Ather, has
approached you seeking your views with regard to his legal obligations under section 87 on the
following matters:
i.
Taxation of income earned by Mr. Ather prior to his death and the extent of tax
liability of Mr. Nadir in respect of such income.
ii.
Legality of the tax assessment proceedings pending against Mr. Ather at the time of his death.
Question 7
What are the circumstances in which two or more persons shall be considered as associates
under the Income Tax Ordinance 2001?
Question 8
Identify the situations in which two companies shall be considered to be associates within the
meaning of the Income Tax Ordinance 2001.
Question 9
Briefly explain the term "legal representative" with reference to the Income Tax Ordinance, 200
Question 10
Mr. Zia's father expired in March 2009. Being the only heir, he received all his father's business and
assets. In August 2009, a notice was received from the income tax department in the name of his
father to pay unpaid tax liabilities along with penalty and default surcharge.
Mr. Zia is of the view that since his father expired, the notice is irrelevant
Required:
In the light of Income Tax Ordinance, explain the correct legal position of Mr. Zia with regard
to his father's income tax liabilities and the related income tax proceedings.
Question 11
Mr. Hyder is the legal representative of his deceased uncle since 5.1.2010 and manages his estate
worth Rs.10 million approximately.
On 10.8.2010, he received two notices from the Income Tax Department requiring him to:
- Submit details of his uncle's income for the tax year 2009.
- Make payment of Rs.12 million against his uncle's income for the tax year 2007 and 2008.
Required:
Advise Mr. Hyder about the extent of his tax liability in respect of the income earned by his uncle
before 5.1.2010. Also advise him about his obligations relating to the tax assessment proceedings
pending/arising against his uncle.
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Question 12
Under the Income Tax Ordinance 2001, where a person is reasonably expected to act in accordance
with the intentions of another person, both persons are considered as associates.
Required:
(1) Explain the term “person” in the above context.
(2) State the circumstances in which a company and its shareholder shall be considered as associates.
Question 13
Mr. A is responsible for managing the property of his uncle who died on 5.2.20X3. The
approximate worth of the property is Rs.7 million.
In August 20X3, a notice was received from income tax department in the name of his uncle
requiring details of his income for the tax year 20X2 along with demand for payment of tax in
respect of previous year amounting to Rs.8.5 million.
Required:
Advise Mr. A as regards the following:
(a) Extent of A’s liability in respect of the income earned by his uncle before 5.2.2013.
(b) His obligations relating to the tax assessment proceedings pending/arising against his uncle.
Question 14
Under the Income Tax Ordinance 2001, explain the term “Associate”.
State the circumstances under which a shareholder in a company and the company may be
regarded as associates.
Question 15
The Income Tax Department initiating a proceeding against Mobeen, issued a demand note
requiring him to pay the outstanding amount of his tax liability for tax year 20X5 along with default
surcharge.
However, before settlement of his tax liability, Mobeen died in a car accident.
Required:
Under the provisions of the Income Tax Ordinance, 2001:
(1) Describe whether tax authorities would be able to recover the amount of tax after Mobeen’s
death and what would be the extent of such recovery.
(Marks 3)
(2) Comment on the status of the proceedings initiated against Mobeen.
(Marks 2)
Question 16
Under the provisions of the Income Tax Ordinance, 2001 describe the following:
(1) Meaning of the term ‘Associates’.
(Marks 2)
(2) Circumstances in which a member of an association of persons and the association may
be regarded as associates.
(Marks 2)
(3) Situation in which members of an association of persons may not be regarded as associates.
(Marks 2)
Question 17
Under the provisions of the Income Tax Ordinance, 2001 compute taxable income or loss under
correct head of income for tax year 20X8, in the following case:
Mrs. Raees separated from her spouse due to certain disagreements. Under an agreement to live
apart, her spouse provided her a house and paid cash of Rs.150,000 per month as support
payment. The fair market rent of the house is Rs.50,000 per month.
(Marks 2)
Question 18
Haider, included in active taxpayers’ list, was carrying on business as a cloth trader. On
28.10.20X7 there was a fire in his shop and the entire stock of clothes costing Rs.1,550,000 was
destroyed. The insurance company refused to pay the claim. Consequently, Haider ceased his
business on 31.1.20X8.
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After cessation of business, Haider filed an appeal against the insurance company and was able to
recover Rs.1,300,000 as full and final settlement from the insurance company in tax year20X9.
Required:
Under the Income Tax Ordinance, 2001:
(1) State the requirements that Haider should comply with, on cessation of his business on
31.1.20X8.(Marks 3)
(2) Briefly discuss the treatment of the recovered amount in the tax year 20X9.
(Marks 2)
Question 19
Abid is the legal representative of his grandfather since his death on 10.7.20X7 and manages his
estate worth Rs.28 million. On 22.1.20X9, he received a notice from the Income Tax Department
requiring him to make payment of Rs.0.8 million against his grandfather’s income for the tax year
20X7. The notice also required him to submit details of his grandfather’s income for the tax year
20X8.
Required:
Advise Abid about his obligations relating to the tax assessment proceedings pending / arising
against his grandfather.
(Marks 5)
Question 20
On 1.7.20X1, Mrs. A separated from her spouse and decided to live apart with her six years old son.
Below are the extracts of clauses from the agreement to live apart:
(1) Mr. A will pay Rs.50,000 in cash every month to his spouse.
(2) Mr. A will continue to pay his son’s monthly school fee of Rs.10,000.
(3) Mr. A will transfer the ownership of a shop in her spouse’s name. The shop was
already in use by a tenant at a monthly rent of Rs.88,000. Mrs. A will be entitled to
receive the rent from the date of transfer of ownership in her name. On 1.9.20X1, the
ownership of the shop was transferred in her name.
Required:
Under the provision of the Income Tax Ordinance, 2001 briefly explain the tax treatment of
the above arrangement in the income tax return of Mrs. A for the tax year 20X2. Also specify
the head of income under which each of the above receipts will be classified. (Computation is
not required). (Marks 4)
Answer 1
“Taxpayer” means any person who derives taxable income, and includes –
i.
Any representative of a person who derives taxable income;
ii.
Any person who is required to deduct or collect tax as withholding agent; or
iii.
Any person required to furnish a return of income or pay tax under the Income Tax Ordinance, 2001.
Answer 2
Total income of a person for a tax year shall be the sum of the –
Person’s income under all heads of income for the year; and
Person’s income exempt from tax under the Income Tax Ordinance
Answer 3
“Income” includes:
- Any amount chargeable to tax;
- Any amount subject to collection or deduction of tax under final tax regime;
- Any amount treated as income; and
- Any loss of income.
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Answer 4
"Principal Officer" used with reference to a company or AOP includes a) A director, a manager, secretary, agent, accountant or any similar officer; and
b) Any person connected with the management or administration of the company or aop upon whom the
commissioner has served a notice of treating him as the principal officer thereof.
Answer 5
Refer to Answer 13
Answer 6
Refer to Answer 11
Answer 7
1. Two persons shall be associates where one may reasonably be expected to act in accordance with the
intentions of the other, or both persons may reasonably be expected to act in accordance with the
intentions of a third person.
2. One person sufficiently influences, either alone or together with associate, the other person i.e. economic
or financial dependency
3. One person enters into a transaction, directly or indirectly, with the other who is a resident of zero tax
area.
4. Two persons shall not be associates solely by reason of employment.
5. Following shall be treated as associates:
a) An individual and his relative
b) Members of AOP
c) A member and his AOP where the individual either alone or together with his associates controls
50% or more share in profit or loss of AOP
d) A trust and its beneficiaries
e) A shareholder and role 50% or more re the shareholder either alone or together with his
associates controls 50% or more voting power or rights to dividend or capital.
f) Two companies where a person either alone or together with his associates controls in both the
companies 50% or more voting power or rights to dividend or capital
Answer 8
Two companies shall be considered as associates where a person either alone or together with his
associates controls in both the companies 50% or more voting power or rights to dividend or
capital
Answer 9
"Legal representative" means a person who in law represents the estate of a deceased person, and includes any
person who intermeddles with the estate of the deceased and where a party sues or is sued in representative
character the person on whom the estate devolves on the death of the party so suing or sued.
Answer 10
Refer to Answer 15
Answer 11
Mr. Hyder is the legal representative of his deceased uncle and is liable for any tax, which would have been
payable by his uncle, if he had not died. However, such liability is limited to the extent of Rs.10 million i.e. value of
his deceased uncle's estate.
Any proceeding taken against his uncle shall be continued against Mr. Hyder from the stage at which it stood on
the date of his uncle's date. Further, any proceeding which could have been taken against the deceased if he had
survived may be taken against the legal representative.
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Answer 12
(i) "Person" the following shall be treated as persons for tax purposes, namely:a. An individual;
b. A company or AOP incorporated, formed, organized or established in Pakistan or elsewhere;
c. The Federal Government, a foreign government, a political sub-division of a foreign government, or public
international organization.
(ii) A shareholder and the company shall be treated as associates where the shareholder either alone or together
with his associates controls 50% or more voting power or rights to dividend or capital.
Answer 13
(a) As a legal representative, Mr. A is liable for any tax, which would have been payable by his deceased uncle.
However such liability is limited to the extent of Rs.7 million i.e. value of his deceased uncle's state.
(b) Any proceedings pending against his uncle shall continue against Mr. A from the stage at which it stood on the
date of his uncle's death. Further, any proceedings which could have been initiated against the deceased if he had
survived, may now be initiated against Mr. A.
Answer 14
Two persons shall be associates where one may reasonably be expected to act in accordance with the intentions of
the other, or both persons may reasonably be expected to act in accordance with the intentions of a third person.
A shareholder and the company shall be treated as associates where the shareholder either alone
or together with his associates controls 50% or more voting power or rights to dividend or capital
Answer 15
(i) The tax authorities would be able to recover the amount of outstanding liability from the legal representative
of Mobeen.
The legal representative is liable for any tax that Mobeen would have become liable for if he had not died.
However, the liability of the legal representative shall be limited to the extent to which Mobeen's estate is capable
of meeting the liability and such liability shall be the first charge on Mobeen's estate, in preference to any other
outstanding liability of the deceased.
(ii) Any proceeding taken against Mobeen before his death shall be treated as taken against the
legal against him from the stage at which the proceeding stood on the date of Mobeen's death
Answer 16
(i) Associate
Two persons are associate where the relationship between the two is such that one may reasonably be expected
to act in accordance with the intentions of the other, or both persons may reasonably be expected to act in
accordance with the intentions of a third person.
(ii) Circumstances in which a member of an association of persons (AOP) and the AOP may be regarded as
associates:
Where the member, either alone or together with an associate or associates under another application of the
Income Tax Ordinance, 2001, controls 50% or more of the rights to income or capital of the AOP.
(iii) Situation in which members of an AOP may not be regarded as associates:
Members of an AOP may not be regarded as associates where the Commissioner is satisfied that
neither person may reasonably be expected to act in accordance with the intentions of the other
Answer 17
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Answer 18.
i.
Haider should give a notice in writing to the Commissioner regarding the discontinuation of business
within 15 days of such discontinuation i.e. by 15.2.20X8.
He is also required to furnish the return of income on his own or on being required by the
Commissioner by notice in writing.
The return should cover the period commencing from 1.7.20X7 to 31.1.20X8
ii.
If any taxable activity has ceased and subsequently any benefit is derived in cash or in kind from this
activity then it shall be taxable in the normal manner and all the provisions of the Ordinance shall apply
accordingly.
Therefore, the receipt of Rs.1,300,000 shall be included in his income from business for the tax
year 20X9, provided that the write off has been allowed in the previous year
Answer 19
As Mr. Abid is the legal representative of his deceased grandfather, any proceedings pending against Abid's
grandfather shall continue against Abid from the stage at which it stood on the date of his grandfather death.
Further, any proceedings which could have been initiated against the deceased if he had survived, may now be
initiated against Abid.
Abid is also liable for any tax, which would have been payable by his deceased grandfather. However, such liability
is limited to the extent of Rs.28 million i.e. value of his deceased grandfather's estate.
Answer 20
Monthly cash allowance and payment of school fees
Any income / asset received by a spouse as support payment under an agreement to live apart shall be exempt
from income tax.
Therefore, monthly cash amount of Rs.50,000 and school fees of Rs.10,000 paid by Mr. A would be considered as
support payment.
Both amounts will be shown as exempt income under the head 'Income from other sources' in Mrs. A's income tax
return.
Rent received from the property
Since the ownership of the shop was transferred to Mrs. A, the rental income from the shop will not be considered
as support payment. Rental income of Rs.88,000 per month with effect from 1st September will be taxable under
the head 'Income from property in Mrs. A's income tax return.
Fair market value of the shop will be considered as support payment under an agreement to live
apart and would not be taxable
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Return of income
Persons required to file Return:
The following persons are required to file return of income:
a) Every company including an approved non-profit organization;
b) A person other than a company whose taxable income exceeds basic exemption.
c) A person whose income for the year is subject to FTR;
d) Who has been charged to tax for any of the two immediately preceding tax years,
e) Who claims a loss carried forward;
f) A person who owns immovable property of 500 square yards or more or a flat in urban areas;
g) A person who owns immovable property of 500 square yards or more in a rating area,
h) A person who owns a flat of 2,000 square feet or more in a rating area;
i) A person who owns a vehicle of above 1,000 cc;
However, the provisions of clauses (f) to (i) are not applicable for: [Not Liable to File the
return][D.O.W.N]
➢ Non-resident person;
➢ Widow;
➢ Orphan below 25 years of age; and
➢ Disabled person.
j) A person who has obtained National Tax Number;
k) A person who holds commercial or industrial connection of electricity where the annual
bills exceed Rs. 500,000.
l) A resident person who is registered with any Chamber of Commerce and Industry or any
trade association or market committee or any professional body including:
➢ Pakistan Engineering Council;
➢ Pakistan Medical and Dental Council;
➢ Bar Council;
➢ Institute of Chartered Accountants of Pakistan; or
➢ Institute of Cost and Management Accountants of Pakistan.
Every resident person required to file foreign income and assets statement as required under
section 116A.
Declaration of business bank account
Every taxpayer is required to declare bank account utilized for business transactions through
original or modified registration form prescribed by the FBR. In case of default, a penalty shall be
imposed. [i.e expenses for business purposes shall be in-admissible in case of not declaration of bank
account]
(1)
Electronic filing of return of income and other documents
Return of income can be filed electronically on the web and by way of magnetic media or any
computer readable media. In the following cases electronic filing is mandatory:
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a)
b)
c)
Returns & Wealth Statement
Company and AOP
A person registered under the Sales
Tax Act
An individual having salary income
Documents to be filed electronically
Return of income and withholding tax statements.
Return of income and withholding tax statements
Return of income along with:
• Proof of tax deduction / payment
• Wealth statement and reconciliation
• Foreign income and assets statement if required
under section 116A.
d)
An individual declaring taxable income of Return of income and withholding tax statements
Rs.1 million and above or
turnover exceeding Rs.50 million
e)
Federal government departments
Withholding tax statements
f)
A non-corporate entity claiming
refund
Return of income
g)
Any person claiming refund
Application for refund
Notice by the Commissioner for filing of return
The Commissioner may give a notice to file return of income within 30 days or any longer or shorter
time from the date of notice to any person who was required to file return in the opinion of the
Commissioner but has failed to do so.
Time limit for issuance of notice by the Commissioner
Such notice may be issued only in respect of any of the last 5 tax years. However, where a, person has
not filed return for any of the last 5 completed tax years, such notice may be issued in respect of one
or more of the last 10 completed tax years.
The above time limit shall not apply if the Commissioner is satisfied that a person who failed to file his return has
foreign source income or owns foreign assets.
Question:
On October 17, 2022 Commissioner issued notice to Mr. Bajwa to file his return of income for the TY 2017. Is the
commissioner justified in issuing the notice?
Answer
Commissioner is not justified in issuing the notice as the above mentioned notice may be issued in respect of any of
the last 5 completed tax years. In the given question, commissioner may issue a notice for tax year 2018, 2019, 2020,
2021 or 2022
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Power to enforce filling of return
1. FBR shall have powers to issue income tax general order in respect of persons
who are not appearing on ATL but are liable to file return of income.
2. The income tax general order issued may entail any or all of the following
consequences for the persons mentioned therein, namely:a) Disabling of mobile phones or mobile phone SIMS;
b) Discontinuance of electricity connection; and
c) Discontinuance of gas connection.
3. FBR or the Commissioner may order restoration of mobile phones, mobile
phone SIMS and connections of electricity and gas, in cases where he is satisfied
that (a) The return has been filed; or
(b) Person was not liable to file return of income
4. No person shall be included in the general order unless following conditions have been met with:
a) Notice to file return of income has been issued;
b) Date of compliance of the notice has elapsed; and
c) The person has not filed the return.
Notice for the return of income for a period less than 12 months
The Commissioner may give notice to any person or his representative to file return of
income for a period less than 12 months where the person
• has died,
• become bankrupt or
• gone into liquidation or
• about to leave Pakistan permanently.
Notice of discontinued business
Any person discontinuing his business shall give a notice in writing to the Commissioner to this
effect within 15 days of the discontinuation along with return of income up to the date of
discontinuance.
If such notice is not given by the person and the Commissioner has reason to believe that a
business has been discontinued then he may give a notice to that person to file return of
income.
In view of the difficulty in filing of return within this short period of 15 days, the requirement of filing
of return has been dispensed with. A notice within this period shall continue to be obligatory.
Due date of filing of return and extension therein
Following are the different dates for tax reporting purposes
Section
Return Filer
118(1)
A return of income of a
company
Tax year ending between
1st January to 30 June
On or before 31 December next
following the end of tax year
118(1)
&(3)
All other cases of person
filing returns
All year ends
On or before 30 September next
following the end of tax year
118(5)
Return in response to notice
under
section
117
(discontinuance of business)
Year end as specified
Due date fixed for
in notice
submission of tax return.
Return in response to notice
under
section
114(5)
(return liable to be filed but
not filed)
Year end as specified
Due date specified in the
in notice
notice for submission of
114(4)
Return Period
Due Date
tax return or thirty days from the
date of issuance of notice.
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Extension of time for filing of return
For the purpose of extension of time for filing of return of income, the taxpayer is required to file
an application to the Commissioner and the Commissioner may grant an extension of time up to 15
days if he is satisfied that the applicant is unable to furnish the return by the due date because of a) Absence from Pakistan;
b) Sickness or other misadventure; or
c) Any other reasonable cause.
Under exceptional circumstances a longer time extension may also be granted by the Commissioner.
Refusal of extension by the Commissioner
If a commissioner refuses to extend the time for filing of return of income then the taxpayer may file
an application to the Chief Commissioner who may allow such extension of time for 15 days and a
longer time under exceptional circumstances.
Return not filed within due date
Where a person fails to file a return of income by the due date or within time extended by the
Commissioner or FBR, such person shall not be:
• Included in the of active taxpayers list (ATL);
• Allowed to carry forward any loss for that tax year;
• Issued refund during the period the person is not included in ATL; and
• Entitled to additional payment for delayed refund during the period the person is
not included in ATL.
However, the person shall be included in ATL on filing return of income after the due date if the
person pays surcharge, in addition to any other liability, as under:
• Rs. 20,000 in case of a company
• Rs. 10,000 in case of an AOP
• Rs. 1,000 in case of an individual.
Revised return of income
If a person discovers any omission or wrong statement in the return of income, he may furnish a
revised return subject to the following conditions:
a) It is accompanied by the revised accounts or revised audited accounts; (The Commissioner may waive this
condition if filing of revised accounts or revised audited accounts is not necessary in his opinion.)
b) The reason of revision of return duly signed is filed therewith;
c) It is accompanied by the Commissioner's approval in writing for revision of return. This
condition is not applicable in the following cases [Means No approval required for revision]
•
•
If the revised return is filed within 60 days of filing of return; or
Where the revised taxable income is more than the taxable income previously
declared or the revised loss is less than the loss previously declared; or
• Where the Commissioner does not give his approval / rejection within 60
days of filing of application for revision of return; and
d) Taxable income is not less than the income, or loss is not more than the loss, determined
by the Commissioner in an order (best judgment, amendment or rectification of assessment)
or by any appellate authority (decision by Commissioner (Appeals), Appellate Tribunal, High
Court).
The Commissioner shall grant approval in case of a bonafide omission or wrong statement.
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Reduction of penalty on revision of return of income
The filing of revised income tax return has been liberalized and an option has been made available
to a taxpayer to file revised return voluntarily, at any stage of the proceedings, along with the
payment of tax involved and default surcharge.
However, penalties shall be reduced as under:
1. A taxpayer can file revised return along with payment of short paid tax and default
surcharge. If such voluntary revision is made before receipt of notice for audit or
amendment of assessment, no penalty shall be imposed.
2. In case a taxpayer revises his return voluntarily and pays tax demand during the
process of audit (before issuance of notice of amendment) along with the default
surcharge, only 25% of the penalty is required to be paid in this case.
3. In case of such voluntary revision of return after issuance of notice of amendment,
along with tax sought to be evaded and the default surcharge, only 50% of the penalty
is required to be paid where he files a revised return at this point.
Wealth statement [Sec 116]
A. Wealth statement is a statement of assets and liabilities, for any year, which a person is required to file,
in the prescribed form and verified in prescribed manner giving particulars of
•
•
•
•
•
the person’s total assets and liabilities as on the date or dates specified in such notice;
the total assets and liabilities of the person’s spouse, minor children, and other dependents as on the
date or dates specified in such notice;
any assets transferred by the person to any other person during the period or periods specified in
such notice and the consideration for the transfer; and
the total expenditures incurred by the person, and the person’s spouse, minor children, and other
dependents during the period or periods specified in the notice and the details of such expenditures;
and
the reconciliation statement of wealth.
B.
Every resident taxpayer being an individual, filing a return of income for any tax year shall furnish a
wealth statement and wealth reconciliation statement for that year along with such return.
C.
Further, every member of an association of persons shall also furnish wealth statement and wealth
reconciliation statement for the year along with return of income of the association.
D.
Where a person, who has furnished a wealth statement, discovers any omission or wrong statement
therein, he may, without prejudice to any liability incurred by him under any provision of this ordinance,
furnish a revised wealth statement along with the revised wealth reconciliation and the reasons for filing
revised wealth statement, under intimation to the commissioner in the prescribed form and manner, at
any time before the receipt of notice for amendment in assessment, for the tax year to which it relates, is
made;
E.
Provided that where the Commissioner is of the opinion that the revision under this sub section is not
for the purpose of correcting a bona fide omission or wrong statement, he may declare such revision as
void through an order in writing after providing opportunity of being heard.
Explanation: For the removal of doubt it is clarified that wealth statement cannot be revised after the expiry
of five years from the due date of filing of return of income for that tax year.
Foreign Income and Assets Statement [Sec 116A]
(i)
Every resident taxpayer being an individual having foreign income of not less than ten thousand United
States dollars or having foreign assets with a value of not less than one hundred thousand United States
dollars shall furnish a statement, hereinafter referred to as the foreign income and assets statement, in
the prescribed form and verified in the prescribed manner giving particulars of
•
the person’s total foreign assets and liabilities as on the last day of the tax year;
•
any foreign assets transferred by the person to any other person during the tax year and
the consideration for the said transfer; and
•
Complete particulars of foreign income, the expenditure derived during the tax year and
the expenditure wholly and necessarily for the purposes of deriving the said income.
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(ii)
Returns & Wealth Statement
The Commissioner may by a notice in writing require any person being an individual who, in the opinion
of the Commissioner on the basis of reasons to be recorded in writing, was required to furnish a foreign
income and assets statement but who has failed to do so to furnish the foreign income and assets
statement on the date specified in the notice.”;
How to prepare a wealth statement
(i)
Preparation of wealth statement is a technical task but familiarity with the method of preparation of
financial statements helps a lot in solving such problems. The manner of preparation of wealth
statements is given hereunder:
(ii)
Wealth statement is primarily a balance sheet of an individual taxpayer where personal assets and
liabilities of a person are reflected on any given date i.e. the date on which the taxpayer closes his accounts
or the date as demanded through a notice in writing. It is worthwhile to mention here that wealth
statement only gives details of personal assets and liabilities held by a person but does not reflect the
status of business assets and liabilities. However, it does show net equity or shareholding of that person
in any business. A wealth statement is incomplete without reconciliation statement showing accretion, no
change or decrease in wealth.
Cash and bank reconciliation statement is derived from the cash and bank account. It starts from taking
opening balance of cash and bank balances and after adding cash inflows and subtracting cash outflows,
the remaining amount portrays closing balances of cash and bank account(s). This closing balance is
included in the assets of the wealth statement. It is important to bear in mind that where expenditure
side is not explained through the cash receipt side, then the difference could be un-explained investment
as income for the year. To avoid this treatment, figures need to be tallied with investments worked out
through wealth reconciliation statement.
(iii)
(iv)
Now after taking the figure of the cash and bank reconciliation, wealth statement for the current year is
complete and a person can easily calculate the figure of increase/decrease in the net wealth by subtracting
the last year’s net wealth figure from the current year’s net wealth figure shown in the current year
wealth statement.
(v)
While preparing wealth statement assets and liabilities are recorded at historical cost irrespective of
their present market value.
Here’s a summary of the key points from the chapter
1. Persons Required to File a Return:
o Every company, including approved non-profit organizations, must file.
o Individuals with taxable income exceeding the basic exemption.
o Individuals subject to final tax regime (FTR).
o Individuals charged tax in the last two years.
o Those claiming a loss carried forward.
o Owners of immovable property (500 sq. yards or more) or vehicles above 1,000 cc.
o Persons with a National Tax Number (NTN).
o Owners of commercial/industrial electricity connections with bills over Rs. 500,000.
2. Exemptions: Non-residents, widows, orphans under 25, and disabled persons are not required to
file.
3. Bank Account Declaration: Taxpayers must declare business bank accounts; penalties apply for
non-compliance.
4. Mandatory Electronic Filing: Companies, registered individuals, and those claiming refunds
must file returns electronically.
5. Notice for Filing: The Commissioner can issue a notice to individuals who haven’t filed returns,
within 5 years from the tax year, or 10 years in special cases (e.g., foreign income/assets).
6. Enforcement: The FBR may issue general orders to disable services (mobile, electricity, gas) for
non-filers.
7. Filing Due Dates:
o For companies: On or before 31st December after the tax year.
o For individuals: On or before 30th September after the tax year.
o Extensions may be granted under specific conditions.
8. Penalties for Late Filing: Non-filers can be removed from the Active Taxpayers List (ATL) and
may be liable for additional fees to regain status.
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9.
Revised Return of Income: If errors are discovered, taxpayers can file a revised return with the
necessary documentation and approval from the Commissioner.
10. Wealth Statement: Required from resident taxpayers, detailing assets and liabilities. It must
include a reconciliation of wealth.
11. Foreign Income and Assets Statement: Required for individuals with foreign income exceeding
$10,000 or foreign assets over $100,000.
12. Notice for Short Filing: The Commissioner may issue a notice to individuals with discontinued
businesses or special circumstances (e.g., death, bankruptcy).
13. Extension of Filing Time: Taxpayers can request up to a 15-day extension, with possible longer
extensions in exceptional cases.
14. Revised Returns and Penalties: Voluntary revised returns filed before audits or assessments can
reduce penalties, with different rates depending on the stage of the process.
15. Wealth Statement Preparation: A wealth statement is a balance sheet for individuals, showing
personal assets and liabilities, with details on cash, bank balances, and investments.
Exercise:
Mr. Nadeem has filled following wealth statement as on 30.06.2023
Plot at DHA, Lahore
Capital in ABC & Co
Jewelry
Shares in XYZ (Pvt.) Ltd
Bank
TOTAL
Personal Loan
TOTAL
Rupees
3,500,000
2,500,000
500,000
1,000,000
3,500,000
11,000,000
1,000,000
10,000,000
During the year following information is provided:
•
He earned salary income of Rs. 1,300,000 and paid tax Rs.100,000. He sold
share of Rs. 200,000 for a consideration of Rs. 350,000.
•
•
•
•
•
•
He settled his personal loan of Rs. 500,000.
His household expenses aggregates to Rs. 850,000.
He has given gift of Rs. 400,000 to his brother Kamran through crossed cheque.
He has earned profit on ABC & Co of Rs.450,000. His drawings from the firm during the year was Rs.
275,000. He paid tax of Rs. 40,000on firm income.
He purchased a new plot at EME society for total consideration Rs. 2,000,000 payable in 20
installments. During the year he paid Rs. 700,000 in installments.
On 30th June 2024, his bank balance was Rs. 475,000.
Required:
Prepare the wealth reconciliation statement and wealth statement as on June 30, 2024
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Answer
MR. NADEEM
Wealth reconciliation statement
Amount
10,000,000
Opening Wealth
Add: Sources
Salary Income
Gain on sale of shares
Profit on ABC & CO
Total
Less:
Gift to brother
Tax deducted from salary
Tax on profit of ABC & Co.
Household expenses
Total (Rs. 11,900,000–1,390,000)
Note 2
Cash and Bank Reconciliation
Opening bank
Add:
Salary
Drawings
Sale of shares
Total
Less:
House hold expenses
Taxes
Gift
Plot instalments
Loan instalment
1,300,000
150,000
450,000
11,900,000
400,000
100,000
40,000
850,000
1,390,000
10,510,000
3,500,000
1,300,000
275,000
350,000
1,925,000
5,425,000
850,000
140,000
400,000
700,000
500,000
Wealth statement 2024
Plot at DHA
Capital in ABC (Note 1)
Advance for plot at EME
Jewellery
Shares in XYZ
Bank
Total
Less:
Loan
Closing wealth
Note 1: Capital
Opening
Profit
Drawings
Total
2,590,000
2,835,000
3,500,000
2,675,000
700,000
500,000
800,000
2,835,000
11,010,000
(500,000)
10,510,000
2,500,000
450,000
2,950,000
275,000
2,675,000
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Chapter
16
Definition of Assessment
"Assessment" includes provisional assessment, re-assessment and amended assessment.
Assessment:
A return of income (other than a revised return) filed by a taxpayer shall be considered as an assessment of taxable
income.
However, if a return of income fled is not complete, the taxpayer shall be required by the Commissioner to
complete the return of income.
A return of income shall be treated as a complete return if the following conditions are fulfilled:
• In the prescribed form
• Duly signed
• State the prescribed information together with a declaration of the records kept
• In the context of business, copy of accounts and any other prescribed documents are furnished
• Accompanied with evidence of payment of due tax as per return of income
• Accompanied with a wealth statement and wealth reconciliation statement; and
• Accompanied with foreign income and assets statement as required under section 116A.
In case of any deficiency, the Commissioner shall issue a notice within 180 days from the end of the financial year
in which the return was furnished to complete the return by the date mentioned in the notice. In the case of noncompliance of the notice, return filed be treated as invalid and the taxpayer shall be treated as not having furnished
a return of income by the due date.
Adjustments to be made in declared respective amounts of the return [Section 120(2A)]
A return of income furnished under sub-section (2) of section 114 shall be processed through automated system to
arrive at correct amounts of total income, taxable income and tax payable by making adjustments for—
•
any arithmetical error in the return;
•
any incorrect claim, if such incorrect claim is apparent from any information in the return;
•
disallowance of any loss, deductible allowance or tax credit as specified; and
• disallowance of carry forward of any loss under clause (b) of sub-section (1) of section 182A.
Provided that no such adjustments shall be made unless a system generated notice is given to the taxpayer
specifying the adjustments intended to be made:
Provided further that the response received from the taxpayer, if any, shall be considered before making any
adjustment, and in a case where no response is received within 30 days of the issue of such notice, adjustments
shall be made.
Provided also that where no such adjustments have been made within 6 month of filing of return, the amounts
specified in the return as declared by the taxpayer shall be deemed to have been taken as adjusted amounts on the
day the return was filed and the taxpayer shall be intimated automatically through IRIS.
Provided also that the provisions of this sub-section shall apply from the date notified by the Federal Board of
Revenue in the official Gazette.
Note: FBR has thus far not notified any date. Resultantly, the concept of self- assessment is still applicable.
For the purposes of this section,—
a.
“arithmetical error” includes any wrong or incorrect calculation of tax payable including any
minimum or final tax payable.
b.
"an incorrect claim apparent from any information in the return" shall mean a claim, on the basis of an
entry, in the return,—
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i.
of an item, which is inconsistent with another entry of the same or some other item in such return;
ii.
regarding any tax payment which is not verified from the collection system; or
iii.
in respect of a deduction, where such deduction exceeds specified statutory limit which may have been
expressed as monetary amount or percentage or ratio or fraction.
However, in addition to above deemed assessment, the Commissioner has powers to conduct audit of
income tax affairs of any person under section 177 and all the provisions of that section shall apply
accordingly.
Example 1: Incomplete Return (Missing Documents)
Scenario: A taxpayer, Mr. Ahmed, files his income tax return but forgets to attach crucial documents like
the Wealth Statement, Evidence of Tax Payments, and Foreign Income & Assets Statement.
• Step 1: Filing the Return
Mr. Ahmed files his income tax return on time but only submits the basic income details without
any supporting documents.
The return is considered incomplete because the following documents are missing:
o Wealth statement and reconciliation
o Foreign income and assets details under Section 116A
o Proof of tax payment
• Step 2: Commissioner's Notice
After processing the return, the Commissioner identifies the missing documents and issues a
notice within 180 days (from the end of the financial year). The notice will:
o Specify the missing documents
o Request Mr. Ahmed to submit the missing documents by a given date
• Step 3: Non-Compliance Consequences
If Mr. Ahmed fails to submit the required documents by the deadline, his return will be treated as
invalid. As a result:
o The return will be considered as not filed on time
o The taxpayer may face penalties or interest charges for late submission
• Outcome: Mr. Ahmed’s return is considered incomplete and invalid, and he is treated as if no
return was filed. He will need to submit a revised return with the necessary documents to avoid
penalties.
Example 2: Arithmetical Error in Tax Calculation
Scenario: Mr. Tariq files his income tax return, stating that his taxable income is PKR 500,000 and the
calculated tax payable is PKR 100,000. However, the correct tax payable should have been PKR 120,000
due to a simple arithmetical error in his calculation.
• Step 1: Return Filing with Error
Mr. Tariq files his tax return with the stated amount of PKR 100,000 as tax payable. The error is
simply an incorrect calculation of the payable tax.
The tax payable is calculated based on tax slabs, but due to a miscalculation, he understates the
tax.
• Step 2: Automated System Review
The automated system processes the return and detects the arithmetical error in the tax
calculation.
• Step 3: System-Generated Notice
The system generates a notice to Mr. Tariq, specifying the error and the necessary adjustment.
o The notice includes the correct tax payable amount (PKR 120,000) and asks Mr. Tariq to
either confirm or explain the mistake.
• Step 4: Adjustment Process
If Mr. Tariq does not respond to the notice within 30 days, the adjustment is made automatically
by the tax authority, and his tax liability is increased to PKR 120,000.
• Outcome: Mr. Tariq’s return is adjusted based on the corrected tax amount, and he is notified via
the IRIS system about the adjustment. He has no choice but to pay the adjusted amount.
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Example 3: Incorrect Claim of Tax Credit
Scenario: Ms. Sara files her return, claiming a tax credit of PKR 50,000 for foreign tax paid on her income,
but the maximum allowable credit under the law is PKR 30,000.
• Step 1: Claiming the Tax Credit
In her return, Ms. Sara claims PKR 50,000 as a foreign tax credit based on her foreign income.
However, the limit for foreign tax credits is PKR 30,000 under Section 63 of the Income Tax
Ordinance.
• Step 2: System Review of the Claim
The automated system identifies the discrepancy between the claimed tax credit and the allowable
limit. It flags this claim as incorrect based on the statutory limit.
• Step 3: Notice of Disallowance
A notice is generated, informing Ms. Sara that her claim exceeds the statutory limit, and the excess
amount (PKR 20,000) will be disallowed.
o She is asked to provide clarification or an explanation within 30 days.
• Step 4: Adjustment for Excess Credit
If Ms. Sara does not respond within the 30-day period, the system automatically disallows the
excess credit, adjusting the taxable income accordingly.
• Outcome: Ms. Sara’s tax payable increases as a result of the disallowed credit, and she is notified
of the adjustment through the IRIS system.
Example 4: Disallowance of Loss Carry-Forward
Scenario: Mr. Usman claims a business loss of PKR 200,000 from the previous year to carry forward and
offset it against the current year's taxable income. However, due to a change in tax laws, such a loss carryforward is not allowed under the current tax regime.
• Step 1: Filing the Return with Loss Claim
Mr. Usman files his return, declaring a business loss carry-forward of PKR 200,000 from the
previous year.
• Step 2: Automated System Review
The automated system flags the claim for loss carry-forward as disallowed because the tax laws
(under Section 182A) no longer permit carrying forward such a loss.
• Step 3: Notice of Disallowance
A system-generated notice is sent to Mr. Usman, informing him that the loss carry-forward is
disallowed and the adjustment will be made to his return.
• Step 4: Adjustment Process
The system automatically adjusts his return, increasing the taxable income by the amount of the
disallowed loss (PKR 200,000).
• Outcome: Mr. Usman’s taxable income increases, leading to an increased tax liability. The
taxpayer is notified via the IRIS system.
Example 5: Finalization of Return After 6 Months
Scenario: Mr. Hassan files his return with all necessary documents, but no adjustments are made by the
tax authority within six months from the filing date.
• Step 1: Filing the Return
Mr. Hassan files his return on time with all required documents, including the wealth statement,
foreign income details, and supporting documents.
• Step 2: No Adjustments Within Six Months
Six months pass, and there are no adjustments or issues raised by the tax authority. According to
the law, if no adjustments are made within six months, the return will be considered as finalized.
• Step 3: Deemed Finalization
Since no adjustments are made, Mr. Hassan’s return is deemed to have been accepted as correct on
the day it was filed. The amounts stated in his return are treated as the final figures for tax
purposes.
• Outcome: Mr. Hassan is notified via IRIS that his return has been finalized, and no further actions
will be taken unless a future audit is conducted.
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‫( تشخیص‬Assessment):
‫جب کسی ٹیکس دہندہ کی جانب سے آمدنی کا ٹرن (جو کہ نظرثانی شدہ نہیں ہو) فائل کیا جاتا ہے تو اسے ٹیکس قابل آمدنی کی تشخیص سمجھا‬
‫جاتا ہے۔‬
‫ اگر آمدنی کا ٹرن مکمل نہیں ہوتا تو کمشنر ٹیکس دہندہ کو ٹرن مکمل کرنے کی درخواست کرے گا۔ ٹرن کو مکمل سمجھا جائے گا اگر‬،‫تاہم‬
‫درج ذیل شرائط پوری ہوں‬:
• ‫فارم کے مطابق ہو۔‬
• ‫دستخط شدہ ہو۔‬
• ‫مطلوبہ معلومات کے ساتھ ریکارڈ کی تصدیق کی گئی ہو۔‬
• ‫کاروبار کے حوالے سے اکاؤنٹس اور دیگر ضروری دستاویزات فراہم کی گئی ہوں۔‬
• ‫ٹیکس کی ادائیگی کے ثبوت کے ساتھ۔‬
• ‫ویلتھ اسٹیٹمنٹ اور ویلتھ ریکنسلی ایشن اسٹیٹمنٹ فراہم کی گئی ہو۔‬
• ‫( غیر ملکی آمدنی اور اثاثوں کی اسٹیٹمنٹ‬116 ‫سیکشن‬A ‫فراہم کی گئی ہو۔ )کے تحت‬
‫ دنوں کے اندر نوٹس جاری کرے گا تاکہ ٹرن کو مکمل کیا جائے۔ اگر نوٹس کے مطابق عمل نہ کیا جائے‬180 ‫اگر ٹرن میں کمی ہو تو کمشنر‬
‫تو ٹرن کو غیر معتبر قرار دیا جائے گا۔‬
‫ایڈجسٹمنٹس‬: ‫دعوی یا کسی نقص کو دیکھتے ہوئے‬
‫ غیر درست‬،‫ٹیکس دہندہ کی فائل کردہ آمدنی کے ٹرن میں اگر کوئی غلط حسابی غلطی‬
ٰ
‫ایڈجسٹمنٹ کی جائے گی تو وہ خودکار نظام کے ذریعے کی جائے گی۔ کمشنر کو نوٹس جاری کرنے کے بعد ایڈجسٹمنٹس کی جائیں گی۔ اگر‬
‫ دن کے اندر جواب نہ ملے تو ایڈجسٹمنٹ کی جائے گی۔‬30
‫سیلف اسیسمنٹ کا تصور‬: ‫ لیکن فی الحال سیلف اسیسمنٹ کا عمل‬،‫ایڈجسٹمنٹس کا عمل وفاقی بورڈ آف ریونیو کے نوٹیفیکیشن کے مطابق ہو گا‬
‫الگو ہے۔‬
Audit by the Commissioner: Section 177
The Conduction of Audit:
✓ The Commissioner may call for any documents including books of account of any of the previous 6 years
for conducting audit of any person.
✓ The Commissioner or any other authorized officer is allowed access to electronic data and use of machine
and software on which such data is kept.
✓ Such machines and duly attested hard copies of data may be taken into possession for the purpose of
investigation.
✓ The Commissioner shall conduct an audit (including examination of accounts and records. Enquiry into
revenues, expenditures, assets and liabilities) and may call for other appropriate information.
✓ After obtaining taxpayer's explanation on all the issues raised in the audit report, the Commissioner may
amend the assessment.
✓ The Commissioner may conduct audit electronically through video links.
✓ Where a taxpayer has not furnished the required documents or sufficient explanation, the Commissioner
shall determine taxable income on the basis of sectoral benchmark ratios prescribed by the FBR.
✓ "Sectoral benchmark ratios" means standard business sector ratios notified by the FBR on the basis of
comparative cases and includes financial ratios, production ratios, gross profit ratio, net profit ratio,
recovery ratio, wastage ratio and such other prescribed ratios.
The FBR may appoint a firm of Chartered Accountants or a firm of Cost and Management Accountants to conduct
an audit of any person selected for audit and the scope of such audit shall be as determined by the FBR on a case to
case basis.
Audit by the Commissioner subject to time limit:
A person may be selected for audit in a year by the Commissioner even if audit has been done in his case in, any
previous year. The Commissioner is not required to get permission of the FBR for the selection of a case for audit.
However, the Commissioner shall take approval of FBR for audit of a taxpayer if income tax audit of the taxpayer
has been done in any of the preceding four tax years.
Special audit panel - Section 177
➢ The FBR may appoint special audit panels, to conduct audit including forensic audit of the income tax
-
affairs, comprising two or more members from the following:
Any officer of Inland Revenue;
A firm of chartered accountants;
A firm of cost and management accountants; or
Any other person including a foreign expert or specialist as directed by the FBR.
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➢
➢
➢
Assessments
Chairman of the panel shall be an officer of Inland Revenue. If any one member of the panel, other than the
chairman, is absent from conducting audit, the proceedings of audit may continue and the audit shall not
be invalid or be called in question merely on the ground of such absence.
The scope of such audit by the panel shall be as determined by the Commissioner or FBR on case-to-case
basis.
In case of a member other than officer of Inland Revenue, an agreement of confidentiality shall be made
between FBR and the person or international tax authority.
Summary of Section 177 of the Income Tax Ordinance (Audit of Income Tax Affairs)
Section 177 of the Income Tax Ordinance, 2001 empowers the Commissioner of Income Tax to audit the
income tax affairs of any taxpayer. This section outlines the process and powers of the Commissioner
regarding income tax audits. Here’s a summary of the process and its key components:
1. Commissioner’s Power to Conduct an Audit
The Commissioner has the authority to conduct an audit of any taxpayer’s income tax affairs to ensure
compliance with tax laws. The audit can be initiated at any time, and it is the Commissioner’s discretion to
decide which returns are subject to audit.
Key Points:
• The audit can be conducted for any taxpayer, and it is not limited to a specific type of return.
• It can cover the entire tax year or any particular part of the taxpayer’s income or transactions.
2. Issuance of Notice
• The taxpayer is informed about the audit through an official notice.
• The notice typically specifies the scope of the audit, including the particular areas of review or
transactions that will be examined.
Key Points:
• The notice will specify the timeframe within which the taxpayer must provide documents or
information.
• The Commissioner can specify the documents, records, or information required from the taxpayer
for the audit.
3. Providing Information and Documents
Once the notice is issued, the taxpayer must submit the requested documents and information related to
their income tax affairs. This could include:
• Income records,
• Tax payments,
• Wealth statements,
• Business accounts, etc.
Key Points:
• The taxpayer is given a reasonable time to provide the necessary documents.
• If the taxpayer fails to provide the documents or respond to the notice, the Commissioner may
make decisions based on available information, which may not be favorable to the taxpayer.
4. Audit Procedure
• During the audit, the Commissioner may scrutinize the documents and records submitted by the
taxpayer to verify the correctness of the filed return.
• The audit may involve checking for discrepancies, errors, or omissions in the return, income, or
tax paid.
• If the Commissioner finds discrepancies, they can make adjustments, issue additional tax
demands, or even initiate penalties if there is evidence of tax evasion or fraud.
Key Points:
• The Commissioner may adjust taxable income based on the audit findings.
• Adjustments can include disallowance of expenses, recalculation of income, or correction of
errors.
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5. Finalization of the Audit
• After reviewing the documents and conducting necessary verifications, the Commissioner will
finalize the audit.
• If there are no issues, the return will be accepted as filed.
• If there are discrepancies, the Commissioner may issue an assessment showing additional tax
liability or disallowances.
Key Points:
• The taxpayer may be asked to pay additional tax if the audit reveals that they have underpaid
taxes.
• The taxpayer can appeal the audit results if they disagree with the audit findings or assessments.
6. Consequences of Non-Compliance
• If a taxpayer fails to comply with the audit notice or does not provide the requested documents,
the Commissioner may impose penalties or reject the return.
• The Commissioner can also proceed with best judgment assessments, where tax liability is
estimated based on available information.
Key Points:
• Non-compliance may lead to penalties under the Income Tax Ordinance.
• Rejection of the return means the taxpayer will be treated as not having filed the return, leading to
additional consequences.
7. Time Limit for Audit
• The Commissioner has a specific timeframe to complete the audit. However, if the audit is not
completed within this period, the taxpayer’s return is typically treated as final.
Key Points:
• The audit should generally be completed within a reasonable time frame, but if delayed, the
taxpayer may benefit from the self-assessment regime.
Example: Application of Section 177
Let’s take an example of Mr. Ali, who filed his income tax return for the year 2023.
1. Notice Issued: The Commissioner issues a notice for an audit of Mr. Ali's tax return.
2. Required Documents: Mr. Ali is asked to submit his business accounts, bank statements, and
proof of expenses.
3. Audit Process: Upon reviewing the documents, the Commissioner finds discrepancies in Mr. Ali's
reported income and claims for business expenses.
4. Adjustment: The Commissioner adjusts Mr. Ali’s taxable income and issues an additional tax
demand for PKR 50,000.
5. Outcome: Mr. Ali has to pay the additional tax. He can appeal the audit results if he disagrees with
the adjustments.
Conclusion
Section 177 gives the Commissioner the authority to audit a taxpayer’s income tax affairs to ensure
proper compliance. The process involves issuing a notice, providing documents, conducting the audit, and
issuing adjustments based on the findings. If discrepancies or errors are found, the taxpayer may be
required to pay additional taxes or face penalties. The taxpayer also has the right to appeal the audit
results if they disagree with the findings.
Best judgement assessment (also called ex-parte assessment): Section 121
The Commissioner is empowered to make an assessment of income and tax based on any available information
and to the best of his judgement in the case of failure by the taxpayer to:
o Furnish return of income in response to a notice issued by a commissioner
o File a wealth statement
o Produce accounts, documents, and records required to be maintained under section 174 or any other
documents that the Commissioner or special audit panel may have required.
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This assessment order shall indicate taxable income, tax due and paid, if any, and the time, manner and place of
appealing the assessment order.
Best judgement assessment can be issued within 6 years after the end of tax year to which it relates. However,
where a person has not filed any return during the last 5 years then the Commissioner may issue notice to file
return of income for any of the last 10 years and in this case best judgment, if required, may be passed within 2
years from the end of the tax year in which such notice is issued.
To easily remember the key points of Best Judgement Assessment (also called ex-parte assessment) under
Section 121, you can use the acronym:
"FIND-TAX"
• F: Failure to file return of income
• I: Incomplete wealth statement or records
• N: Notice issued by the Commissioner
• D: Documents and accounts not provided (Section 174)
• T: Tax assessment based on available info and judgement
• A: Assessment order specifies taxable income, tax due, and appeal
• X: Six years limit for assessment after the tax year
o If no return filed in the last 5 years, Commissioner can issue notice for any of the last 10
years and assess within 2 years of notice.
Example to Understand Best Judgement Assessment (Section 121)
Example 1: Mr. Ahmed’s Failure to File Return
Mr. Ahmed was supposed to file his income tax return for the year 2020, but he failed to do so despite
receiving a notice from the Commissioner. Since Mr. Ahmed did not submit the required return of income,
the Commissioner uses Best Judgement Assessment based on available information (like bank records,
third-party data, etc.) to calculate his taxable income. The Commissioner determines his tax liability to be
PKR 100,000.
Key Takeaways:
• The Commissioner made the assessment based on available information.
• Mr. Ahmed can appeal the assessment order if he disagrees with the calculations.
• The assessment was issued within 6 years from the end of the 2020 tax year.
Example 2: Ms. Sara’s Missing Documents
Ms. Sara has filed her return but failed to provide the required wealth statement and business records
under Section 174. The Commissioner, in the absence of these documents, uses Best Judgement
Assessment to estimate her taxable income and tax liability. The assessment is made based on other
available sources such as her bank transactions and external reports.
Key Takeaways:
• The Best Judgement assessment is based on available data, not the complete documents.
• Ms. Sara has the right to challenge the assessment if she provides the missing records.
• The Commissioner has 6 years to issue this assessment from the tax year.
Example 3: Mr. Ali's Non-Compliance for Multiple Years
Mr. Ali has not filed a return for the last 4 years. The Commissioner issues a Notice for him to file the return
for the last 10 years. If Mr. Ali does not respond or provide the necessary documents, the Commissioner can
issue a Best Judgement Assessment for the years he has missed, calculating the tax due. In this case, the
Commissioner can make the assessment within 2 years of issuing the notice.
Key Takeaways:
• Since Mr. Ali hasn't filed returns for the last 4 years, the Commissioner can issue a notice for him to
file returns for the last 10 years.
• The Commissioner has 2 years from the notice date to issue a Best Judgement Assessment.
Key Concepts to Remember for Best Judgement Assessment (Section 121)
1. Failure to Furnish Return: If the taxpayer doesn’t respond to the notice or file the return, the
Commissioner can make an assessment based on available data.
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2.
3.
Assessments
Documents and Records: Missing documents or incomplete records lead to a Best Judgement
Assessment.
Time Limit:
o 6 years from the tax year to issue the assessment.
o If no returns were filed in the last 5 years, the Commissioner can issue a notice for returns
from the last 10 years, and the Best Judgement Assessment must be completed within 2
years from the notice.
Amendment of assessment: Section 122 (also termed as re-opening of assessment or additional
assessment)
The Commissioner has power to amend an assessment by making such alterations as considered necessary to
ensure that the taxpayer is liable for the correct amount of tax.
An assessment can only be amended within 5 years from the end of the financial year in which the Commissioner
has issued or treated to have issued the original assessment order.
The Commissioner has power to make further amendments, as many times as may be necessary, within the later
of:
a) 5 years from the end of the financial year in which the Commissioner has issued or treated to have issued
the original assessment; and
b) 1 year from the end of the financial year in which the amendment was made.
Before making an amendment or further amendment an opportunity of being heard shall be provided to the
taxpayer.
The Commissioner shall pass amended or further amended order within 180 days of the issuance of show cause
notice (may be extended by maximum 90 days by the Commissioner for the reasons to be recorded in writing). Time
shall be excluded from this limit on account of:
Adjournment of hearing on the request of the taxpayer not exceeding 60 days,
Adjournment on account of stay order;
Adjournment on account of alternative dispute resolution committee proceedings.
Adjournment on account of agreed assessment proceedings.
An assessment can be amended or further amended only where:
i.
The Commissioner is of the view that the assessment order is prejudicial to the interest of revenue or the
income tax ordinance has incorrectly been applied in the original assessment including:
▪ Misclassification of income under a head of income
▪ Incorrect payment of tax with the return of income
▪ Incorrect claim for any tax relief, exemption or refund
ii.
The Commissioner has definite information that income declared is incorrect including concealment of
income or furnishing of inaccurate particulars.
Definite information includes information in respect of:
➢ Taxable sales, purchases, services and other receipts
➢ Acquisition of any asset or investment made
➢ Expenditure incurred
Examples to Understand Amendment of Assessment (Section 122)
Example 1: Missed Income Classification
Mr. Imran, a taxpayer, filed his return and the Commissioner issued an original assessment. However, Mr.
Imran mistakenly classified rental income under business income, which led to an incorrect tax calculation.
The Commissioner, upon reviewing the case, realizes that the income was misclassified.
Action:
• The Commissioner has the power to amend the original assessment under Section 122 to correct
the classification of income.
• The amendment can only be made within 5 years of the original assessment.
• Mr. Imran will be given an opportunity to be heard before the amendment is finalized.
Key Takeaway:
• The amendment ensures the tax is correctly assessed based on the proper classification of income.
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Example 2: Incorrect Claim for Tax Relief
Ms. Sarah filed her return claiming a tax exemption that was not applicable to her case. After the original
assessment, the Commissioner receives information indicating that Sarah incorrectly claimed this relief.
Action:
• The Commissioner can amend the assessment to reflect the correct tax liability.
• This can be done within 5 years of the original assessment date, and the Commissioner must pass
the amended order within 180 days of issuing the show cause notice, unless there are valid
reasons for delay.
• Ms. Sarah will be given the opportunity to explain or correct the mistake before the amendment is
finalized.
Key Takeaway:
• Incorrect claims for exemptions or reliefs are grounds for an amended assessment.
Example 3: Concealed Income
Mr. Zafar, a businessman, filed his return and declared a lower income than actually earned. After
reviewing Mr. Zafar's bank transactions, the Commissioner finds a large deposit that was not declared.
Action:
• The Commissioner uses this definite information to believe that income has been concealed,
which justifies an amended assessment.
• The amendment will be made within 5 years of the original assessment, and the Commissioner
has 180 days to finalize the amended order after issuing the show cause notice.
• Mr. Zafar will be given an opportunity to explain why the income was not declared before the
amendment.
Key Takeaway:
• Concealment of income or providing inaccurate information in the return is a primary reason for
the Commissioner to amend an assessment.
Summary of Key Points for Section 122 (Amendment of Assessment)
1. Time Limit: Amendments can be made within 5 years of the original assessment. In some cases,
this period can be extended up to 1 year from the date of the last amendment.
2. Conditions for Amendment:
o Misclassification of income or incorrect tax payment.
o Concealment of income or incorrect details in the return.
o Incorrect claims for exemptions or relief.
3. Procedure:
o Opportunity to be heard is provided to the taxpayer.
o Amended order must be passed within 180 days, with potential for a 90-day extension.
4. Definite Information: The Commissioner can amend an assessment based on definite
information about undeclared or concealed income, assets, or incorrect claims.
Agreed assessment: Section 122-D
1.
2.
3.
4.
5.
6.
Where a taxpayer, in response to a notice for amendment of assessment, intends to settle his case, he may
file offer of settlement before the assessment oversight committee (Committee), in addition to filing reply
to the Commissioner.
Committee may call for the record of the case and after affording opportunity of being heard to the
taxpayer, may decide to accept or modify the offer of the taxpayer through consensus and communicate
its decision to the taxpayer.
Where the taxpayer is satisfied with the decision of Committee,
a) The taxpayer shall deposit tax, penalty and default surcharge as per decision of Committee;
b) The Commissioner shall amend assessment in accordance with the decision of Committee;
c) The taxpayer shall not file an appeal against such amended assessment.
Where Committee has not been able to arrive at a Consensus or where the taxpayer is not satisfied with
the decision of Committee, the case shall be referred back to the Commissioner for decision on the basis of
reply of the taxpayer in response to notice for amendment of assessment.
Committee shall consist the Chief Commissioner, Commissioner and Additional Commission having
jurisdiction over the taxpayer.
Agreed assessment shall not be made in cases involving concealment of income or where interpretation of
question of law is involved having effect on other cases
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Step-by-Step Process of Agreed Assessment (Section 122-D)
1. Taxpayer's Offer of Settlement:
o If the Commissioner issues a notice for an amendment of assessment, the taxpayer may
choose to settle the matter without going through lengthy litigation.
o The taxpayer files an offer of settlement to the Assessment Oversight Committee in
addition to submitting a reply to the Commissioner.
2. Committee Review and Decision:
o The Assessment Oversight Committee consists of senior tax officials: the Chief
Commissioner, Commissioner, and Additional Commissioner with jurisdiction over
the taxpayer’s case.
o The Committee reviews the case, including the offer of settlement submitted by the
taxpayer, and the supporting documents.
o The taxpayer is given an opportunity to be heard by the Committee.
o After considering the case, the Committee may either accept the taxpayer’s settlement
offer or modify it to reach a mutually agreeable outcome.
3. Taxpayer's Acceptance:
o If the taxpayer agrees with the Committee's decision, the following steps occur:
▪ The taxpayer deposits the tax, penalty, and default surcharge as per the
Committee’s decision.
▪ The Commissioner amends the assessment to reflect the Committee’s decision.
▪ The taxpayer cannot appeal against the amended assessment, as it is based on a
consensual settlement.
4. Disagreement or No Consensus:
o If the Committee fails to reach a consensus or if the taxpayer is not satisfied with the
decision of the Committee, the matter is referred back to the Commissioner for a decision
based on the taxpayer’s reply to the original amendment notice.
5. Exclusion of Certain Cases:
o Agreed assessment cannot be used in cases where:
▪ There is concealment of income, as it is assumed that such issues should be
resolved through a formal assessment and penalty procedure.
▪ There are interpretation issues of law that could have broader implications for
other cases or taxpayers.
Example 1: Taxpayer Agrees to Settle Under Agreed Assessment
Scenario:
Mr. Ali receives a notice from the Commissioner for amendment of his income tax return. The
Commissioner believes Mr. Ali has underreported his income. Instead of proceeding with litigation, Mr. Ali
submits an offer of settlement to the Assessment Oversight Committee.
Process:
• Mr. Ali's offer includes agreeing to pay additional tax along with penalties and surcharge.
• The Committee reviews the case, listens to Mr. Ali, and after discussion, agrees to modify the tax
amount slightly based on new evidence provided.
• Mr. Ali agrees with the Committee’s modified decision, deposits the agreed tax and penalties,
and the assessment is amended accordingly.
• As a result, no appeal is possible because the issue was settled mutually.
Example 2: Committee Fails to Reach Consensus
Scenario:
Ms. Sara receives a similar notice for an amendment of assessment, where she disputes the amount of
income the Commissioner says she has underreported. Ms. Sara offers a settlement to the Committee,
suggesting a smaller tax liability.
Process:
• After reviewing the case, the Committee is unable to agree with Ms. Sara’s offer, as they believe she
should pay more tax.
• They fail to reach a consensus on the offer, and Ms. Sara does not agree with their decision
either.
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•
Assessments
The Committee refers the case back to the Commissioner for a decision based on Sara’s response
to the original amendment notice.
Example 3: Agreed Assessment Excluded Due to Concealment of Income
Scenario:
Mr. John has not disclosed some of his business income in his tax return. The Commissioner issues a notice
for amendment of assessment. Mr. John wishes to settle the matter under agreed assessment by offering to
pay additional tax.
Process:
• The Committee reviews Mr. John’s case and discovers that he has concealed income.
• Since concealment of income is specifically excluded from the scope of agreed assessment, the
Committee rejects the settlement offer.
• Mr. John is informed that he must undergo a formal amendment process and may face penalties
for concealing income.
Key Takeaways of Agreed Assessment:
• Voluntary Settlement: Taxpayers can settle assessment disputes through an offer of settlement
to the Assessment Oversight Committee.
• Final Decision: If both the taxpayer and the Committee agree, the assessment is amended, and the
taxpayer must deposit the due tax and penalties. No appeal is allowed.
• No Consensus: If the Committee fails to reach an agreement, the case is referred back to the
Commissioner for a final decision.
• Exclusions: Agreed assessment is not applicable for cases involving income concealment or
complex legal interpretations.
Revision by the Commissioner: Section 122A
• The Commissioner is empowered to call for the record of any proceedings in which an order was passed
by any authority sub-ordinate to him for making an enquiry on his own motion or on an application made
by the taxpayer for revision.
• The Commissioner may revise any order passed by any Officer of Inland Revenue if the assessment is not
under any appeal.
• The said revision shall not be prejudicial to the person to whom the order relates. It means that
Commissioner does not have power of enhancement of income under this section.
If any order is remanded back to any sub-ordinate by the Commissioner for modification, the revised order shall
be issued within 120 days.
Revision by the Chief Commissioner: Section 122B
Commissioner is empowered to issue a certificate in respect of exemption from withholding tax or a lower rate
certificate subject to certain conditions.
If there is any dispute or hardship faced by a taxpayer then the Chief Commissioner may review the said matter at
his own discretion or on an application made by the taxpayer.
Provisional assessment: Section 123
➢ Where a concealed asset of a person is impounded by any government agency which, in the opinion of the
Commissioner, was acquired from any taxable income, the Commissioner has power to pass a provisional
assessment order before making a final assessment.
➢ Where an offshore asset, not declared earlier, is discovered by the Commissioner or any government
department / agency then the Commissioner may issue a provisional assessment order before making a
final assessment.
➢ The Commissioner shall finalize the provisional assessment as soon as practicable.
➢ "Concealed asset" means any property or asset which, in the opinion of the Commissioner, was acquired from
any taxable income.
concealment of income includes;
• the suppression of any item of receipt liable to tax in whole or in part, or failure to disclose income
chargeable to tax;
• claiming any deduction or any expenditure not actually incurred;
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• any act referred to in sub-section (1) of section 111; and
• claiming of any income or receipt as exempt which is otherwise taxable.
Explanation - For removal of doubt it is clarified that none of the aforementioned acts would constitute concealment
of income unless it is proved that taxpayer has knowingly and willfully committed these acts.
Assessment giving effect to an order by the appellate authority:
a) If an assessment or amendment is to be made on the instructions of any appellate authority then the
Commissioner shall issue the order within 2 years from the end of the financial year in which the
Commissioner is served with the appellate order.
b) Where direct relief is provided in an appellate order, the Commissioner shall issue appeal effect order
within 2 months of the date the Commissioner is served with the appellate order.
Powers of tax authorities to modify orders: Section 124A
Where a question of law has been decided by the Appellate Tribunal or High Court in the case of a taxpayer, the
Commissioner may follow the said decision including in respect of an identical situation in the Subsequent years of
the said taxpayer even if the tax department has filed an appeal against such decision.
If the higher appellate authority reverses such decision of the Appellate Tribunal or High Court, the Commissioner
is empowered to modify the assessment within 1 year from the date of receipt of the decision of the higher
appellate authority and in this case normal time limit for amendment shall not apply.
Assessment in relation to disputed property: Section 125
If the ownership of any property is in dispute in any civil court, income from such property shall be assessed
within one year from the end of the financial year in which the decision of such court is made
Evidence of assessment: Section 126
Production of assessment or its certified copy shall be conclusive evidence of assessment and that the amount and
all particulars of the assessment are correct.
An assessment, notice or other document shall not be quashed / void for want of form or shall not be affected by
reason of mistake or defect if it is, in substance and effect, in conformity with the Ordinance.
However, an order shall be quashed or void:
•
•
if it is in substance and effect, not in conformity with Income Tax Ordinance, 2001; or
the person assessed or intended to be assessed or effected by the document is not designated in it
according to common understanding
National Database and Registration Authority (Sec 175B)
•
The National Database and Registration Authority shall, on its own motion or upon application by the Board,
share its records and any information available or held by it, with the Board, for broadening of the tax base.
•
The National Database and Registration Authority may identify in relation to any person, (whether a taxpayer
or not) income, receipts, assets, properties, liabilities, expenditures, or transactions that have escaped
assessment or are under-assessed or have been assessed at a low rate, or have been subjected to excessive relief
or refund or have been mis declared or misclassified under a particular head of income.
•
The Board may use and utilize any information communicated to it by the National Database and Registration
Authority and forward such information to an income tax authority having jurisdiction.
•
The National Database and Registration Authority may compute indicative income and tax liability of anyone
mentioned above by use of artificial intelligence, mathematical or statistical modelling or any other modern
device or calculation method.
•
The indicative income and tax liability computed by the National Database and Registration Authority shall be
notified by the Board to the person in respect of whom such indicative income and tax liability has been
determined, who shall have the option to pay the determined amount on such terms, conditions, instalments,
discounts, reprieves pertaining to penalty and default surcharge, and time limits that may be prescribed by
the Board.
•
In case the person against whom a liability has been determined, does not pay such liability within the time
prescribed, the Board shall take action under this Ordinance, upon the basis of tax liability computed above.
•
If the person against whom the liability has been determined pays such liability, such payment shall be
construed to be an amended assessment order
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Summary of Section 175B (National Database and Registration Authority)
1. Information Sharing: NADRA shares its data with the FBR to help widen the tax base.
2. Identifying Tax Issues: NADRA identifies discrepancies in income, assets, liabilities, or tax
assessments, such as underreporting or misclassification.
3. Use of Data: The FBR can use this information to take action or forward it to relevant tax
authorities.
4. Computing Tax Liability: NADRA uses AI or statistical methods to calculate an individual’s
indicative tax liability.
5. Notification and Payment: The FBR notifies the individual about the computed tax liability,
offering flexible payment options.
6. Consequences: If the individual doesn’t pay, the FBR takes action. If paid, it’s considered an
amended assessment.
This section allows NADRA and the FBR to efficiently detect and resolve tax discrepancies using modern
technology.
Summary of Assessment Process:
• Assessment Types: Includes provisional, re-assessment, and amended assessment.
• Return Filing: A complete return must be filed with required forms, signatures, supporting
documents, and tax payments. Incomplete returns must be completed on notice by the
Commissioner.
• Adjustments: Adjustments to returns can be made for errors, incorrect claims, or disallowances.
The taxpayer is notified and can respond within 30 days.
• Audit by Commissioner: The Commissioner can audit income tax affairs, reviewing documents
and financial data, including sectoral benchmarks if documents are missing.
• Best Judgment Assessment: If a taxpayer fails to file a return, the Commissioner may issue an
assessment based on available information.
• Amendment of Assessment: Assessments can be amended within 5 years to correct errors or
concealment of income. The taxpayer is given an opportunity to be heard.
• Agreed Assessment: Taxpayers may settle disputes by offering a settlement to a review
committee.
• Provisional Assessment: Can be issued if assets are concealed or undisclosed.
• Revisions and Appeals: The Commissioner may revise orders based on new information or
higher authority decisions.
• Time Limits: Various time limits apply for amendments, audits, and appeals.
• Record Keeping: Taxpayers must maintain records for 6 years, or until proceedings are
completed, and in specific cases, records must be kept at the taxpayer’s business or residence.
Records •
•
•
•
•
•
•
•
•
•
Every taxpayer shall maintain in Pakistan 'such accounts, documents and records as may be prescribed.
The Commissioner may disallow or reduce a taxpayer's claim for a deduction if the taxpayers unable,
without reasonable cause, to provide a receipt or other evidence of the transaction.
The prescribed records shall be maintained for 6 years after the end of the tax year to which they relate.
However, where any proceeding is pending before any authority or court the taxpayer shall maintain the
record till final decision of the proceedings.
The above time limit is not applicable for any record related to asset; income or expenditure outside
Pakistan.
The Commissioner may require any person to install and use a prescribed Electronic Tax Register for the
purpose of storing and accessing information regarding any transaction related to tax liability.
Records to be kept at the specified place
The records required to be maintained by a taxpayer shall be kept at the business place or, where the
business is carried on in more places than one, at the principal place of business or at each of such places if
separate books of account are maintained in respect of each place.
Where a person derives income from sources other than from business, the records shall be kept at the
person's place of residence or such other place as may be so declared by such person.
The place where the records are kept shall be clearly stated on the tax return form.
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Books of accounts, documents and records to be kept at specified place (Rule 33)
1
Income from business
The books of accounts, documents and records required to be
maintained by a taxpayer shall be kept at the place where the
taxpayer is carrying on the business or, where the business is
carried on in more places than one, at the principal place of business
or at each of such places if separate books of accounts are
maintained in respect of each place.
2
Income from sources
other than business
Where a person derives income from sources other than from
business, the books of accounts, documents and records shall be
kept at the person’s place of residence or such other place as may be
so declared by such person.
3
Place
to be clearly
stated on tax returns
The place or places where the books of accounts, documents and
records are kept shall be clearly stated on the tax return form in the
column requiring the details of the records maintained.
Prescribed books of accounts
S.No
Taxpayer required to maintain
proper books of account,
documents and records
1
Every taxpayer deriving income
from business
2
Every taxpayer other than
companies, deriving income
chargeable under the head
Income from business
Taxpayers with business income
upto Rs.500,000 and new
taxpayers deriving income from
business
3
Records to be kept
money received and expended by the tax payer
all sales and purchases of goods
all services provided and obtained by the taxpayer.
all assets of the taxpayer
all liabilities of the taxpayer; and
For Manufacturer all items of cost relating to the utilization of
materials, labor and other inputs.
the books of account, documents and records.
•
Serially numbered and dated cash-memo / invoice/
receipt for each transaction of sale or receipt
containing the following
(a) taxpayer’s name or the name of his business,
address, national tax number or CNIC and sales tax
registration number, if any
(b) the description, quantity and value of goods sold
or services rendered;
•
Where each transaction does not exceed Rs. 100, one
or more cash-memos per day for all such transactions
may be maintained
•
Daily record of receipts, sales, payments, purchases
and expenses a single entry in respect of daily
receipts,
•
Vouchers of purchases and expenses
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4
Taxpayers with business income
exceeding Rs. 500,000 and
wholesalers, distributors, dealers
and commission agents
5
Professionals like medical
practitioners, legal practitioners,
accountants, auditors, architects,
engineers etc.
6
Manufacturers (with turnover
exceeding Rs. 2.5 million): [30(4)]
Serially numbered and dated cash-memo / invoice/ receipt for
each transaction of sale or receipt containing the following
(a) taxpayer’s name or the name of his business, address,
national tax number or CNIC and sales tax registration
number, if any
(b) the description, quantity and value of goods sold or
services rendered; and
(c) in case of a wholesaler, distributor, dealer and commission
agent, where a single transaction exceeds Rs. 10,000, the name
and address of the customer Provided that where each
transaction does not exceed Rs.100, one or more cash-memos
per day for all such transactions may be maintained
Cash book and/or bank book or daily record of receipts, sales,
payments, purchases and expenses; a single entry in respect of
daily receipts, sales, purchases and different heads of expenses
will suffice.
• General ledger or annual summary of receipts, sales,
payments, purchases and expenses under distinctive heads.
• Vouchers of purchases and expenses and where a single
transaction exceeds Rs. 10,000 with the name and address of
the payee; and
• Where the taxpayer deals in purchase and sale of goods,
quarterly inventory of stock-in-trade showing description,
quantity and value
• Serially numbered and dated patient-slip / invoice/receipt
for each transaction of sale or receipt containing the following
(a) taxpayer’s name or the name of his business or profession,
address, national tax number or CNIC and sales tax
registration number, if any
(b) the description, quantity and value of medicines supplied
or details of treatment/ case/ services rendered (confidential
details are not required) and amount charged
(c) the name and address of the patient / client Provided that
the condition of recording address of the patient on the patient
slip under this clause shall not apply to general medical
practitioners
• Daily appointment and engagement diary in respect of
clients and patients provided that this clause shall not apply to
general medical practitioners
• Daily record of receipts, sales, payments ,purchases and
expenses; a single entry in respect of daily receipts, sales,
purchases and different heads of expenses will suffice
• Vouchers of purchases and expenses
Serially numbered and dated cash-memo / invoice /receipt for
each transaction of sale or receipt containing the following
(a) taxpayer’s name or the name of his business address,
national tax number or CNIC and sales tax registration
number, if any
(b) the description, quantity and, value of goods sold
(c) where a single transaction exceeds Rs. 10,000 with the
name and address of the customer
• Cash book and/or bank book
• Sales day book and sales ledger (where applicable)
• Purchases day book and purchase ledger (where applicable)
• General ledger
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Every taxpayer deriving income
chargeable under the head
income from salary, property,
capital gains or other sources
• Vouchers of purchases and expenses and where a single
transaction exceeds Rs. 10,000 with the name and address of
the payee;
• Stock register of stock-in-trade (major raw materials and
finished goods) supported by gate in-ward and outward
records and quarterly inventory of all items of stock-in-trade
including work-in-process showing description, quantity and
value.
Salary
Salary certificate indicating the amount of salary and tax
deducted there from.
Income from property
Tenancy agreement, if executed
Tenancy termination agreement, if executed
Receipt for amount of rent received
Evidence of deductions claimed in respect of premium paid to
insure the building, local rate, tax, charge or cess, ground rent,
profit/interest or share
in rent on money borrowed, expenditure on collecting the
rent, legal services and unpaid rent.
Capital gain
Evidence of cost of acquiring the capital asset
Evidence of deduction for any other costs claimed
Evidence in respect of consideration received on disposal of
the capital asset.
Income from other sources
Dividends (Dividend warrants)
Royalty (Royalty agreement)
Profit on debt
• Evidence and detail of profit yielding debt
• Evidence of profit on debt and tax deducted thereon, like
certificate in the prescribed form or bank account statement;
and
• Evidence of Zakat deducted, if any.
Ground rent, rent from the sub-lease of land or building,
income from the lease of any building together with plant or
machinery and consideration for vacating the
possession of a building or part thereof
(a) Lease agreement
(b) Lease termination agreement.
Annuity or Pension
• Evidence of amount received. Prize money on bond, winning
from a raffle, lottery or cross word puzzle
• Evidence of income and tax deducted thereon, like certificate
in the prescribed form. Provision, use or exploitation of
property
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• Agreement. Loan, advance, deposit or gift
• Evidence of mode of receipt of a loan, advance, deposit or gift
i.e., by a crossed cheque or through a banking channel.
General
• Evidence of deduction for any other expenditure claimed.
Summary of Rule 33: Books of Accounts, Documents & Records
1. Business Income: Books must be kept at the business location, or principal place if there are multiple.
2. Non-Business Income: Records are kept at the person’s residence or declared location.
3. Tax Return: The place where records are maintained must be stated in the tax return.
Required Books for Different Taxpayers:
• Business Income: Keep records of all transactions (sales, purchases, expenses, assets, liabilities).
• Small Businesses (Income ≤ Rs. 500,000): Simple daily records and serially numbered receipts.
• Larger Businesses (Income > Rs. 500,000): Detailed ledgers, invoices, and quarterly stock inventory.
• Professionals: Records of services rendered, receipts, patient/client details (where applicable), and
daily transaction entries.
• Manufacturers (Turnover > Rs. 2.5 million): Similar records as larger businesses with added stock
registers and inventories.
Specific Income:
• Salary/Property/Other Sources: Keep evidence like salary certificates, rental agreements, and
transaction receipts.
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appeals
Chapter
17
Circumstances giving rise to appeal to the Commissioner (Appeal)
Circumstances giving rise to an appeal may include:
➢
➢
➢
➢
➢
➢
A best judgment assessment (ex-parte assessment) based on any available information or material to the
best of the Taxation Officer’s / Commissioner’s judgment.
An amendment of assessment
An order holding an individual personally liable to pay the amount of tax, which was required to be
collected or deducted by him/her or having collected or deducted fails to pay the same as required by the
law
An order declaring or treating a person as a representative of a non-resident person
An order refusing to rectify the mistake, either in full or in part
An order having the effect of enhancing the assessment or reducing a refund or otherwise increasing the
tax liability
No appeal in above cases, shall be made by a taxpayer against an order of assessment unless the taxpayer has paid
the amount of tax due under subsection (1) of section 137 (tax due at time of furnishing the return).
Forums of appeals
Following forums of appeal are available to an aggrieved person:
(i)
Commissioner (Appeals)
(ii)
Appellate Tribunal
(iii)
High Court
(iv)
Supreme Court of Pakistan (against decision of reference to High Court). (Although the Ordinance does
not provide anything on the subject, but any person can prefer to SC under the Constitution); and
(v)
Alternative Dispute Resolution
Types of decision in appeals
The decisions by any appellate authority against additions made by the assessing authorities may be
as under:
• Confirm (i.e. additions made by the assessing officer may be confirmed by an
appellate authority and therefore the taxpayer may file an appeal to the higher
appellate authority)
• Reduce (i.e. additions made by the assessing officer may be reduced by an appellate
authority and therefore the income tax department may file an appeal to the higher
appellate authority)
• Enhance (taxpayer shall be provided reasonable opportunity of being heard)
• Annul the assessment. An assessment may be annulled where:
a) The notice has been issued without jurisdiction i.e. by a wrong officer
b) The notice has not been properly served
c) Assessment has been framed on the wrong person
In the above cases, re-assessment can be made by issue of proper notice, served on the
proper person for the proper tax year subject to time limitation allowed by the Ordinance.
d) Assessment has been made in the wrong tax year.
e) Assessment has been made in respect of a capital receipt or income which is exempt
f) Assessment was time barred.
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Appeals to Commissioner
A. Time limit for filing of appeal
30 days from the date of receipt of order.
Late filing may be admitted by the commissioner (Appeals) on any reasonable ground.
B. Documents to be submitted with appeal
a) Prescribed form of appeal
b) Grounds of appeal (i.e. a brief summary of objections)
c) Notice of demand and copy of order
d) Power of attorney in favor of the authorized representative
e) Challan for appeal fee as under:
• For a company: Rs. 5,000;
• For individual and AOP: Rs. 2,500 for appeal against an assessment order and Rs. 1,000
for appeal against any other order.
C. Condition to be fulfilled before filing of appeal
The appeal shall become invalid if the person has not paid the tax which was required to be paid at
the time of filing of return of income.
D. Procedure in Appeal and Stay of tax demand
o Commissioner (Appeals) shall fix a day for hearing of appeal and shall give a notice to the
appellant and the concerned Commissioner.
o The Commissioner (Appeals) may adjourn the hearing of the appeal from time to time.
o The Commissioner (Appeals) may, before the hearing of an appeal, allow an appellant to file
any new ground of appeal where he is satisfied that the omission of the ground from the form
of the appeal was not willful or unreasonable,
o The Commissioner (Appeals) may, before disposing of an appeal, call for such particulars as
he may require or cause further enquiry to be made by the Commissioner.
o The Commissioner (Appeals) shall not admit any documentary evidence which was not
produced before the Commissioner unless he is satisfied that the appellant was prevented
by sufficient cause from producing such material or evidence before the Commissioner.
E. Automatic stay of tax demand
If a taxpayer has paid 10% of the tax demand and the appeal is pending before Commissioner
(Appeals) then no recovery proceeding shall be initiated by the tax department.
F. Stay of tax demand by the Commissioner (Appeals)
Commissioner (Appeals) has power to grant stay of tax demand for a period up to 30 days after
providing an opportunity of being heard to the tax department.
Another stay of tax demand may also be granted for a further period of 30 days by the Commissioner
(Appeals) after providing an opportunity of being heard to the tax department provided that the
order on appeal shall be passed by the Commissioner (Appeals) within the said period of 30 days.
Time limit for Commissioner (Appeals)
The Commissioner (Appeals) shall decide the appeal within 120 days from the filing of appeal.
This time limit may be extended by 60 days for reasons to be recorded in writing.
A period during which the hearing of an appeal is adjourned at the request of the appellant or is
postponed due to any reason shall be excluded for the purpose of this time limit.
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Chapter-17
Appeals
Appeals to Appellate Tribunal
A. Time limit for filing of appeal
60 days from the date of receipt of decision order of Commissioner (Appeals). Late filing may
be admitted by the Appellate Tribunal on any reasonable ground.
B. Documents to be submitted with appeal
a) Prescribed form of appeal
b) Grounds of appeal (brief summary of objections) including copy of grounds of first appeal
c) Copy of order
d) Copy of Commissioner (Appeals) decision order
e) Power of attorney in favor of the authorized representative
f) Challan for appeal fee of Rs. 5,000 for a company and Rs. 2,500 for others.
C. Procedure in Appeal
o Power of attorney and challan for appeal fee are not required if appeal is filed by the tax department.
o Appellate Tribunal shall decide an appeal within 6 months of its filing.
o Appellate Tribunal may grant stay of tax demand up to 180 days in aggregate after providing an
opportunity of being beard to the tax department.
D. Composition of Tribunal
Appellate Tribunal shall consist of a chairperson and other judicial and accountant members appointed in the
manner as the Prime Minister may prescribe by the rules.
A person may be appointed as judicial member if the person:
• Has been a Judge of a High Court;
• Is or has been District Judge;
• Is an advocate of a High Court with a standing of at least 10 years; or
• Possesses such other qualification as may be prescribed.
A person may be appointed as accountant member if he is:
• An officer of Inland Revenue equivalent to the rank of Chief Commissioner;
• A Commissioner or Commissioner (Appeals) having at least 3 years' experience; or
• A person who has, for a period of not less than 10 years, practiced professionally as a
chartered accountant or as a cost and management accountant.
Question
Under the provisions of the Income Tax Ordinance, 2001 who may be appointed judicial and accountant
member of the Appellate Tribunal?
(Marks 6)
Reference to High Court (HC) -Section 133
(i) An appeal can be filed to HC only in respect of question of law after the decision of the Appellate Tribunal.
Whether a question of law arises or not shall be decided by the HC
(ii) For this purpose, a reference application is required to be filed within 90 days by the taxpayer (along with fee of
Rs.100) or by the tax department.
(iii) This reference application shall be heard by a Bench of not less than two judges of HC and if the bench is
satisfied that a question of law arises, it may proceed to hear the case.
(iv) If a taxpayer files a reference application to HC even then he is required to pay tax in accordance with the
Appellate Tribunal order. However, HC may order for the stay of tax demand for a maximum period of six
months.
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(v) If tax demand is reduced as a result of HC judgment, then the tax paid by the taxpayer is refundable. However,
the Commissioner may postpone the refund subject to the following conditions:
Tax department intends to file an appeal to the Supreme Court
Tax department files an application to the HC within 30 days of the receipt of HC judgment to get permission
from HC to postpone the refund; and
HC makes an order authorizing the Commissioner to postpone the refund till the decision of the Supreme Court.
•
•
•
Alternative Dispute Resolution (ADR) – Section 134A
(a) ADR is a legal forum for resolution of an aggrieved person's grievances related to:
•
Tax liability of Rs. 100 million or above;
•
Admissibility of refund
•
Waiver of default surcharge or penalty; or
•
Any other specific relief
(b) A person may apply to FBR to refer the issue to the committee which is under litigation in an appellate authority
including court of law except where criminal proceedings have been initiated.
The application shall be accompanied by an initial proposition for dispute resolution, including an offer of tax
payment
(c) Composition of the forum
The FBR shall, upon examination of an application, appoint ADRC within 15 days and refer the case to ADRC. The
ADRC shall comprise:
1. A retired judge of a High Court or Supreme Court who shall also be the chairperson of ADRC, to be nominated
by the FBR from a panel notified by the Law and Justice Division
2. Chief Commissioner having jurisdiction over the case.
3. A person to be nominated by the taxpayer from a panel notified by the FBR comprising;
a) Chartered accountants, cost and management accountants and advocates having minimum 10 years of
experience in the field of taxation. The taxpayer shall not nominate a chartered accountant or advocate if the
said person is or has been an auditor or an authorized representative of the taxpayer.
b) Retired officers of the inland revenue service in bs-21 or above; or
c) Reputable businessman as nominated by chamber of commerce and industry.
d) Stay of tax demand
The recovery of tax related to the dispute referred to ADRC shall be stayed upon withdrawal as pending
appeal till the final decision of ADRC or dissolution of ADRC, whichever is earlier.
e) Mode of proceedings and disposal
ADRC shall undertake an examination of the issue and may make enquiry, obtain expert opinion and cause
an audit by any income tax authority or any other person. Based on the findings, ADRC shall decide the issue
by majority within 45 days which may be extended to further 15 days for the reasons to be recorded in
writing
The decision of ADRC shall not be cited or taken as precedent in any other case or in the same case in a
different tax year.
The decision of ADRC shall be binding on the Commissioner when the taxpayer has withdrawn the appeal
pending before the appellate authority including court and the withdrawal is communicated to the
Commissioner within 60 days of the service of decision order of the ADRC.
The Commissioner shall also withdraw his appeal, if any, before the appellate authority including court within
30 days of the order of withdrawal communicated by the taxpayer subject to the condition that the taxpayer
has paid tax as decided by ADRC.
f) Effect of failure to decide the case by ADRC
If ADRC fails to decide the case within the time specified then FBR shall dissolve ADRC and the matter shall
then be decided by the appellate authority including court where the dispute was pending.
FBR shall communicate the order of dissolution of ADRC to the taxpayer, Commissioner and the appellate
authority including court of law which shall decide the appeal within 6 months of the communication of
dissolution order.
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Chapter-17
Appeals
Assessment giving effect to an order [Sec 124]
The various situations and time limitations are tabulated below:
Decision of appellate authority
Time within which the new assessment order has to be made
Direct relief provided to taxpayer
Two months from the date the order is served on the
commissioner
Assessment order wholly or partly set
aside
One year from the end of the financial year in which the commissioner
is served with the order provided no further appeal or reference is
preferred against the order of the appellate authority either by the
commissioner or the taxpayer
Two years from the end of the financial year in which the
commissioner is served with the order
Any other decision
In case of an assessment order is set aside or modified, the proceedings may commence from the stage next
preceding the stage where the setting aside or modification took place. In these cases, Commissioner shall not be
entitled to re-issue any notice which was earlier issued or shall not require refurnishing or re-filing of any return,
statement or other particulars which were earlier furnished or filed.
Where in consequence of an order of any appellate forum or court any income is excluded from the computation:
•
•
of taxable income of a person for any year and included in the computation of taxable income for another
year; or
of taxable income of one person is included in the taxable income of other person.
the assessment or amended assessment made as above shall be treated as assessment in consequence of such
order.
In case of an assessment order passed under section 124 (Appeal effect), the tax payable shall become payable
immediately instead of payment within 30 days.
Burden of Proof [Sec 136]
Section 136 of the Ordinance points to one very important aspect of appeal and states that in any appeal by a
taxpayer, the burden shall be on the taxpayer to prove, on the balance of probabilities:
(ii)
In the case of an assessment order, the extent to which the order does not correctly reflect the
taxpayer’s tax liability for the tax year; or
(iii)
In the case of any other decision, that the decision is erroneous.
Here is a concise summary of the appeal process and key points to help you remember:
Circumstances Giving Rise to Appeal:
• Best Judgment Assessment: Based on available information.
• Amendment of Assessment: Modification of an existing assessment.
• Personal Liability for Tax: When a person is held liable for unpaid tax.
• Representative of Non-Resident: When an individual is declared as a representative.
• Refusal to Rectify: When an order refuses to correct a mistake.
• Enhancing Tax Liability: If tax liability is increased or refund reduced.
• Condition for Appeal: Appeal only possible if the tax due at the time of filing the return is paid.
Forums of Appeal:
1. Commissioner (Appeals)
2. Appellate Tribunal
3. High Court
4. Supreme Court
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5. Alternative Dispute Resolution (ADR)
Types of Appeal Decisions:
• Confirm: The addition made by the assessing officer is upheld.
• Reduce: The addition is reduced.
• Enhance: Taxpayer has a right to be heard.
• Annul: If the assessment was made incorrectly (wrong officer, wrong person, wrong year, etc.).
Appeal to Commissioner:
• Time Limit: 30 days from receipt of the order.
• Documents Needed: Appeal form, grounds, notice, power of attorney, and payment challan.
• Stay of Tax Demand: If 10% of the tax is paid, recovery cannot proceed during the appeal.
• Decision Time: Commissioner must decide within 120 days (extendable by 60 days).
Appeal to Appellate Tribunal:
• Time Limit: 60 days from receipt of the Commissioner’s decision.
• Decision Time: Tribunal must decide within 6 months.
• Stay of Tax Demand: Tribunal can stay tax demand for up to 180 days.
Reference to High Court (HC):
• Eligibility: Only on a question of law.
• Time Limit: 90 days to file a reference.
• Stay of Tax: HC can stay tax demand for up to 6 months.
Alternative Dispute Resolution (ADR):
• Applicability: For disputes involving Rs. 100 million or more.
• Application: To FBR, with initial dispute resolution proposal.
• Decision Time: ADRC has 45 days to decide (extendable by 15 days).
Assessment Effect of Appeal:
• Relief to Taxpayer: New assessment within 2 months.
• Order Set Aside: New assessment within 1 year.
• Other Decisions: New assessment within 2 years.
• Modified Assessment: The process resumes from the stage before modification.
Burden of Proof:
• Taxpayer's Responsibility: The taxpayer must prove that the assessment or decision is incorrect.
This summary breaks down the key points of the appeals process, covering when an appeal is allowed, the
various forums, and the timeframes for decisions.
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SECTION- B SALES TAX
Syllabus Weightage
Syllabus
Grid
Ref.
C
Teaching
Hours
Sales Tax Laws
Syllabus
Ref.
30-35
20-30
Proficiency
levels
Testing
levels
Calculate sales tax (output and input) on taxable supplies
(including zero-rated and exempt supplies).
P2
T2
Discuss the time and manner of sales tax liability and its
paymenT
P2
T2
Calculate apportionment of input tax and carry
forward/refund thereof
P2
T2
P2
T2
List the records to be kept by a registered person and
explain the related retention requirements and
procedures involved in the audit.
P2
T2
State the significance of tax invoice, debit and credit notes
and their related requirements.
P1
T1
Explain the procedure for the destruction of goods
P2
T2
Learning Outcomes
C.
Sales Tax Laws
A
Scope and Payment of Tax
B
Registration
Describe the types, requirements and procedures involved
for registration, de-registration and returns.
C
Weightage
Book Keeping and Invoicing Requirements
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Chapter
18
Sales tax definations
1. History of Sales Tax in Pakistan
Sales Tax was a provincial subject at the time of partition. It was being administered in the provinces of Punjab &
Sindh as provincial levy. Sales tax was declared a federal subject in 1948 vide General Sales Tax Act, 1948 and this
levy was transferred permanently to the Central Government in 1952. Sales tax was levied at the standard rate of
6% at every stage of sales.
Later on, system of licensed manufacturers & wholesalers was instituted through the Sales Tax Act 1951 whereby
they were allowed to purchase goods free of sales tax from each other and pay tax on sales to unlicensed traders.
Imports were chargeable to Sales Tax but the licensed manufacturers & wholesalers were allowed to import goods
without payment of Sales Tax. Later on Sales Tax became chargeable on locally produced & imported goods at the
time of their sales and import, respectively. The sales tax was collected, under the Finance Ordinance 1956, on goods
which were chargeable to Excise Duty, as if it were a duty of Excise. In 1981, by virtue of an amendment in the Sales
Tax Act 1951, the collection of Sales Tax on non-excisable goods was also entrusted to the Excise Department.
In the late eighties Sales Tax was replaced with the Value Added Tax (VAT) in the country and accordingly new
enactment titled Sales Tax Act 1990 replaced Sales Tax Act 1951 with effect from 1.11.1990.
2. Sales Tax Definitions
Sales Tax
Sales tax means
a) The additional text or default surcharge leave under the sales tax act
b) A fine penalty or fee imposed or charged under the sales tax and
c) Any other some payable under the provisions of the sales tax act or the rules.
Output Tax:
Output Tax in relation to a registered person means
a) Tax levied under the sales Tax Act on a supply of goods made by the person
b) Tax levied under the federal excise Act 2005 in sales tax mode as a duty of excise on the manufacture of the
goods or rendering the services by the person
c) Sales tax levied on services rendered by the person under Islamabad capital territory (tax on services),
ordinance 2001
Input Tax
Input tax in relation to a registered person means
a) Tax Levied under sales Tax Act on supply of course to the person
b) Tax levied under sales Tax Act on the import of goods by the person
c) Tax levied under the federal excise Act 2005 in sales tax mode as a duty of excise on manufacture of the
goods rendering the services
d) Tax levied on services provided to the person under sales tax laws of provinces including Islamabad and
e) Tax levied under sales Tax Act as adopted in the state of Azad Jammu and Kashmir on the supply of goods
received by the person
Person
Person means:
• Individual
• A company or association of persons incorporated formed organized or established in Pakistan or
elsewhere;
• The federal government
• A provincial government
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Chapter-18
•
•
Sales Tax Definations
A local authority in Pakistan or
A foreign government, a political subdivision of a foreign government or public international organization
Registered Person:
It means a person who is registered or is liable to be registered under the Sales Tax Act. A person liable to be
registered but not registered shall not be entitled to any benefit available to a registered person.
Note: In view of the above definition, sales tax may be demanded by the sales tax department from an
unregistered person (who was required to be registered) despite the facts that he did not charge sales tax from
his customers and no input tax adjustment is available to him being unregistered
Taxable Activity
Taxable activity means any economic activity carried on by a person whether or not-for-profit and includes
a) An activity carried on in the form of business, trade or manufacture
b) An activity that involves the supply of goods or rendering services or both to another person
c) A one-off adventure or concern in the nature of a trade and
d) Anything done or undertaken during the commencement or termination of the economic activity.
But does not include
a) The activities of an employee providing services in that capacity to an employer
b) An activity carried on by an individual as a private recreational pursuit or hobby and
c) An activity carried on by a person other than an individual which, if carried on by an individual, would fall
within sub clause (b).
In Pakistan, "taxable activity" generally encompasses a wide range of economic activities that generate income
through the sale of goods or services. Here are some examples illustrating how the definition might apply:
1. Manufacturing Business: A factory producing consumer goods, such as textiles, appliances, or
packaged foods, is considered a taxable activity. Since it involves manufacturing goods for sale to
customers, it falls within the scope of an economic activity.
2. Professional Services Firm: A law firm, an accountancy practice, or a consultancy service (e.g., IT or
marketing) is engaged in a taxable activity as it renders services to clients for fees.
3. Retail Store: A clothing store, grocery shop, or any other type of retail outlet engaging in selling goods
to the public is a taxable activity, as it involves the supply of goods to consumers.
4. Real Estate Development: A real estate company involved in buying, developing, and selling property
engages in taxable activities, as it undertakes trade and supply of property to clients.
5. One-off Adventure or Trade Activity: If an individual or business engages in a one-time project, like
an auction for assets or liquidation of a business's assets, it may be considered a taxable activity under a
one-off adventure or trade.
6. Online Sales or E-commerce: An individual or company selling products on e-commerce platforms like
Daraz or their own website is also engaged in a taxable activity, as they supply goods to customers within
or outside Pakistan.
Activities Exempted from Being Taxable
Some activities are specifically excluded:
• Employment Services: If a person works as an employee, their salary income is not considered part of
taxable activity as it’s considered remuneration for employment rather than an independent economic
activity.
• Private Hobby or Recreation: If someone sells paintings as a hobby and not for profit, this would not
qualify as a taxable activity.
Taxable Supply
Taxable supply means a supply of taxable goods made by an importer; manufacturer, wholesaler (including dealer),
distributor or retailer other than a supply of goods which is exempt and includes a supply of goods chargeable to
tax at the rate of zero percent.
Exempt supply
Exempt supply" means a supply which is exempt from tax
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Sales Tax Definations
Zero rated supplies
Zero-rated supply means a taxable supply which is charged to tax at the rate of zero percent
Goods
They include every movable property other than actionable claims, money, stocks and shares and securities.
• Immovable property is not subject to sales tax
• Actionable claim means a claim to a debt, promissory note etc.
Another example of actionable claim is:
A registered person issued discount cards/ coupons to its customer’s @Rs. 400 on the basis of which the
customer can avail discount of 20% on subsequent purchase of a specified quantity.
Discount cards/ coupons are actionable claims and therefore not subject to sales tax and sales tax on goods
shall be charged on discounted sales as the discount is in conformity with normal business practice.
Examples of Goods (Movable Property)
1. Furniture: A sofa, dining table, or bed.
2. Vehicles: Cars, motorcycles, or bicycles.
3. Electronics: Laptops, smartphones, or televisions.
4. Jewelry: Rings, necklaces, or watches.
Examples of Exceptions (Not Subject to Sales Tax)
1. Land: A plot of land in a rural area.
2. Buildings: A residential house or a commercial building.
3. Trees: An orchard or a forest.
4. Permanent Structures: A bridge or a dam.
Examples of Actionable Claims
1. Debt: Money owed by a friend or a business partner.
2. Promissory Note: A written promise to pay a specific amount of money at a future date.
3. Cheque: A cheque issued by someone that you can deposit in your bank account.
4. Insurance Claim: A claim filed with an insurance company for a covered loss.
Examples of Money
1. Cash: Physical currency like dollars, euros, or yen.
2. Banknotes: Paper money issued by a government.
3. Coins: Metal currency like pennies, nickels, or quarters.
4. Digital Currency: Cryptocurrencies like Bitcoin or Ethereum.
Examples of Stocks and Shares
1. Stocks: Shares in a company like Apple Inc. or Microsoft.
2. Mutual Funds: Investment funds that pool money from many investors to purchase securities.
3. Bonds: Debt securities issued by corporations or governments.
4. Exchange-Traded Funds (ETFs): Funds that track an index and trade like stocks on an exchange.
Taxable Goods
All goods other than exempt goods. It means that all goods are subject to sales tax unless specifically exempt. On the
other hand, services are not all inclusive and only specified services are subject to sales tax under provincial
ordinances.
Supply
Supply means a sale or other transfer of the right to dispose of goods as owner including such sale or transfer under
a hire purchase agreement and also includes;
a) Putting to private business or non-business use of goods produced in the course of taxable activity for
purposes other than those of making a taxable supply (For Manufacturer only)
Explanation (Sale = Dispatch to customer),(Transfer of right to dispose = Gift), (Hire Purchase =
Installment basis), (Private Use = Drawing/taken to home), (Business use = use in office admin etc), (Non
Business use = Charity)
b) Auction or disposal of goods to satisfy adept owned by a person and
c) Possession of taxable goods held immediately before a person ceases to be a registered person
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Chapter-18
Sales Tax Definations
Mr. Kamran registered in Jan 2023 and later he got de registered-on 1st Sep 2023, he has 1000 units in
closing stock on 31st Aug 2023, these 1,000 units will be assumed as supply on deregister
d) Manufacture of goods belonging to another person the transfer of the goods to the owner or to a person
nominated by him
Co. A buys white cloth, later they contacted the Co B for printing on behalf of Co. A, this printing by Co. B
will be considered as supply (Toll Manufacturing)
Notes for students:
a) The term supply represents a ‘sale’ or ‘other transfer of right to ownership’. Thus, a person
making a ‘gift’ to his son would be regarded as a ‘supply’ although it will not be subject to
sales tax as there is no ‘taxable activity’ involved.
b) b) Since, under leasing arrangement, the title of goods continues to vest with the lessor,
there is no ‘supply’ unless the asset is transferred to the lessee on termination of lease.
c) Putting to personal use of goods manufactured constitutes a ‘supply’
Example 1:
The employees of the manufacturer of fridge are entitled to take a fridge for their home
consumption. This is putting to personal use of goods manufactured and therefore it is a supply and
subject to sales tax.
On the other hand, if a distributor of fridge provides a fridge to his employee under employment
package it will not constitute supply as the fridge is not being manufactured but procured.
Example 2:
A restaurant, operating on commercial basis, has the practice of supplying food to the needy
individuals free of charge. This constitutes a ‘supply’. On the contrary, if Mr. A purchases food from
a hotel and provides the same free of charge to the needy individuals is a supply but not a taxable
activity and therefore not subject to sales tax on the part of Mr. A.
e) Supply of taxable goods, through auction or otherwise, to satisfy a debt constitute a ‘supply’. A person is
not paying his income tax liability and the Commissioner disposes his taxable goods after attachment to
satisfy his debt. This constitutes a supply and subject to sales tax. Similarly, a bank can dispose of any
taxable goods to recover its loan or interest due by the registered person.
Supply chain
It means the series of transactions between buyers and sellers from the stage of first purchase or import to the stage
of final supply.
Importer
Means any person who imports any goods into Pakistan.
Manufacturer or Producer:
It means a person who engages in the production of goods
• whether or not the raw materials are owned by him and
• includes an assignee or trustee in bankruptcy, liquidator etc. or
• any manufacturer who disposes his assets in any fiduciary capacity.
Any person who holds or uses any patents, proprietary or other right to goods being manufactured shall also be
considered as manufacturer.
Toll Manufacturing
It shall be considered as manufacturing and subject to sales tax i.e. if a person is involved in providing services such
as textile printing, coloring, dying of raw materials of another person is considered as toll manufacturing and sales
tax shall be charged on conversion charges billed by the person as manufacturer. Another common example is
printing of books whether or not paper as raw material is owned by the printer or not. The principal providing raw
material for further processing is also considered as manufacturer.
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Sales Tax Definations
Manufacture or Produce:
It includes:
a) Any process in which an article is converted into another distinct article
b) Any process in which an article, is so changed that it becomes capable of being put to use differently
c) Any process incidental to the completion of a manufactured product
d) Printing, publishing, lithography and engraving
e) Assembling, mixing, cutting, diluting, bottling, packaging, repacking.
Distributor:
Means a person appointed by a manufacturer, importer or any other person for a specified area to purchase goods
from him for further supply and includes a person who is also engaged in supply as a wholesaler or retailer.
Note: It is essential to note that the distributor is ‘purchasing’ the goods and then supplying it. This means
that he is a person who is ‘buying’ and ‘selling’ goods of other persons. It means that if a distributor is
working on commission basis i.e. he is not purchasing goods then he is not liable to sales tax. In this case, the
principal shall directly charge sales tax from the customers
Wholesaler
It includes a dealer and means any person who carries on, whether regularly or otherwise the business of buying
and selling goods by wholesale or of supplying or distributing goods, directly or indirectly, by wholesale for cash or
deferred payment or for commission or other valuable consideration or stores such goods belonging to others as
an agent for the purpose of sale; and includes a person supplying taxable goods to a person who deducts income tax
at source under the Income Tax Ordinance, 2001.
Retail Price:
It means the price fixed by the manufacturer or importer in case of imported goods inclusive of all charges and taxes
excluding sales tax at which a particular variety of items should be sold to the general body of consumers or, if more
than one price is so fixed for the same variety, the highest of such prices.
The FBR may specify areas or zones for determination of highest retail price for any brand or variety of goods.
Note: The definition of retail price is important specially in the case of 3rd Schedule items.
Retailer:
It means a person supplying goods to general public for consumption provided that if he combines the business of
import and retail or manufacture with retail he shall notify and advertise wholesale price and retail price separately
and declare the address of his retail outlets.
Cottage industry
cottage industry” means a manufacturing concern, which fulfils each of following conditions,
(a) does not have an industrial gas or electricity connection;
(b) is located in a residential area;
(c) does not have a total labour force of more than ten workers; and
(d) annual turnover from all supplies does not exceed eight million rupees;
Company
(a) a company as defined in the Companies Act
(b) a body corporate formed by or under any law in force in Pakistan;
(c) a modaraba;
(d) a body incorporated by or under the law of a country outside Pakistan relating to incorporation of companies;
(e) a trust, a co-operative society or a finance society or any other society established or constituted by or under
any law for the time being in force; or
(f) a foreign association, whether incorporated or not, which the Board has, by general or special order, declared to
be a company for the purposes of the Income Tax Ordinance 2001
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Chapter-18
Sales Tax Definations
Tax Fraction (Formula):
% 𝑜𝑓 𝑡𝑎𝑥
𝑥 𝑣𝑎𝑙𝑢𝑒
% 𝑜𝑓 𝑡𝑎𝑥+ 100
Note: Where sales tax is not separately charged then the amount of tax is calculated on the basis of tax fraction
formula e.g. An invoice shows an amount of Rs.2,360 without identifying the amount of sales tax. Sales tax rate is
18% and the amount of sales tax works out to Rs.360 (i.e. 2,360 x 18 / 118).
Tax Fraud
It means doing the following knowingly, dishonestly or fraudulently without any lawful excuse:
• An act or omission to take any action in contravention of law with the intention of:
• Understating tax liability for two consecutive tax periods
• Overstating tax credit or refund to cause loss of Government revenue
• Making taxable supply without getting registration
• Falsifying the sales tax invoices
Tax Invoice
A sales invoice, which includes the following particulars in Urdu or English language:
- Must be gapless serially numbered
- Name, address and registration number of recipient and in case of supplies by a manufacturer or importer
to unregistered distributor, the NIC or NTN of such unregistered distributor.
- Date of issue
- Quantity of goods and description including count, denier and construction in case of textile yarn and fabric
- Value exclusive of tax
- Amount of sales tax
- Value inclusive of tax
- Not more than one tax invoice shall be issued for a taxable supply. A registered person may issue invoices
to another registered person electronically containing the above particulars.
Tax Period:
One month or such other period as the FBR may specify with the approval of Federal Minister-in- charge.
e-intermediary
Means a person appointed for filing of electronic returns and such other documents as may be prescribed by the
FBR on behalf of a registered person.
Open Market Price:
Consideration in money which that supply or similar supply would generally fetch in an open market.
Similar Supply
“Similar supply”, in relation to the open market price of goods, means any other supply of goods which closely or
substantially resembles the characteristics, quantity, components and materials of the aforementioned goods.
Active Taxpayers List (ATL)
“Active taxpayer” means a registered person who does not fall in any of the following categories:
a) Who is blacklisted or whose registration is suspended; and
b) Who fails to file:
- Sales tax return by the due date for two consecutive tax periods;
- Return of income
- Quarterly or annual withholding tax statement
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Chapter-18
Sales Tax Definations
Rules 12A and 12B of the Sales Tax Rules 2006
(1)
A non-active taxpayer shall not be entitled toa) File Goods Declarations for import or export;
b) Issue sales tax invoices;
c) Claim input tax or refund; or
d) Avail any concession under the Act or rules made thereunder.
(2)
(3)
No input tax can be claimed in case of purchase from any non-active taxpayer.
A non-active taxpayer may be restored as active taxpayer, if a) The registered person files the return or statement along with payment of any tax due;
b) The RTO or LTU, on satisfying itself after conducting audit / investigation recommends to FBR for
restoration; and
c) The FBR issues an order to such effect.
Associates / associated persons
(i)Two persons are associate where the relationship between the two is such that one may reasonably be expected
to act in accordance with the intentions of the other, or both persons may reasonably be expected to act in
accordance with the intentions of a third person;
(ii) one person sufficiently influences, either alone or together with an associate, the other person.
Note: Two persons shall be treated as sufficiently influencing each other, where one or both persons are
economically and financially dependent on each other and, decisions are made in accordance with the
directions, instructions or wishes of each other for common economic goal
(i) one person enters into a transaction, directly or indirectly, with the other who is a resident of jurisdiction with
zero taxation regime.
(ii) Two persons shall not be associates solely by reason of the fact that one person is an employee of the
other or both persons are employees of a third person;
(iii) Without limiting the generality of the above provisions the following shall be treated as associates,
namely: –
(a) an individual and a relative of the individual;
(b) members of an association of persons;
(c) a member of an association of persons and the association, where the member, either alone or together
with an associate or associates under another application of this section, controls fifty per cent or more
of the rights to income or capital of the association;
(d) trust and any person who benefits or may benefit under the trust;
(e) a shareholder in a company and the company, where the shareholder, either alone or together with an
associate or associates under another application of this section, controls either directly or through one or
more interposed persons–
− Fifty per cent or more of the voting power in the company;
− Fifty per cent or more of the rights to dividends; or
− Fifty per cent or more of the rights to capital; and
(f) two companies, where a person, either alone or together with an associate or associates under
another application of this section, controls either directly or through one or more interposed persons –
− Fifty per cent or more of the voting power in both companies;
− Fifty per cent or more of the rights to dividends in both companies; or
− Fifty per cent or more of the rights to capital in both companies.
(i) Two persons shall not be associates under sub-clause (a) or (b) of paragraph (iii) above, where the Commissioner
is satisfied that neither person may reasonably be expected to act in accordance with the intentions of the other.
(ii)
In this clause, “relative” in relation to an individual, means:
(a) An ancestor, a descendant of any of the grandparents, or an adopted child, of the individual, or of a spouse of
the individual; or
(b) A spouse of the individual or of any person specified in sub-clause (a).
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Chapter-18
Sales Tax Definations
Associates Examples
Here are examples from Pakistan for each point of the definition of "associates":
1. **One person is expected to act in accordance with another's intentions or under a third person’s
influence**:
- *Example*: A prominent business owner in Pakistan and his close advisor or partner might be expected to act
in line with each other’s intentions, especially in decisions affecting their joint venture. Alternatively, both may
align with the intentions of a larger holding company or family head influencing their actions.
2. **One person sufficiently influences the other, or they are economically dependent**:
- *Example*: A parent company in Pakistan and its subsidiary are economically dependent, with the parent
directing the subsidiary’s financial decisions, resource allocation, and operational strategy for a common goal
(e.g., expansion into new regions).
3. **Transactions between residents and zero-tax jurisdictions**:
- *Example*: A Pakistani company might enter into licensing or royalty agreements with a related entity in the
UAE, a zero-tax jurisdiction. Here, the related entities are associates, with financial flows possibly structured to
take advantage of the UAE’s tax regime.
4. **Employment relationship alone does not make two persons associates**:
- *Example*: An employee at a large Pakistani multinational company and the company’s CEO are not
considered associates solely because of their employment relationship, unless there is another basis for
association (e.g., family relationship or shareholding).
5. **Associates include an individual and their relative**:
- *Example*: A business owner and their sibling, who also holds shares in the business, would be considered
associates due to their familial relationship.
6. **Members of an association of persons (AOP)**:
- *Example*: Partners in a law firm registered as an AOP in Pakistan are associates, as they share rights to the
AOP’s income and are jointly responsible for the firm's economic outcomes.
7. **A member of an AOP and the association if they control 50% or more rights**:
- *Example*: A major investor holding over 50% of the income rights in a housing development association
would be considered an associate of the AOP.
8. **Trust and a person benefiting from it**:
- *Example*: A wealthy family establishes a trust in Pakistan for educational scholarships for family members.
Any family member benefiting from the trust (or eligible to benefit) is considered an associate of the trust.
9. **Shareholder controlling 50% or more of a company’s rights**:
- *Example*: A shareholder holding 60% of the voting power and dividend rights in a Pakistani manufacturing
company is an associate of that company, given their substantial control.
10. **Two companies controlled by the same person with 50% or more rights in both**:
- *Example*: A large industrial group in Pakistan, with a person or family owning over 50% in two companies
within the group (e.g., a textiles company and a steel company), would have these companies considered
associates due to common control.
11. **Two persons not associates if they cannot reasonably be expected to act in accordance**:
- *Example*: Two shareholders in a public company in Pakistan, each holding a small stake, are not associates
if they have no mutual influence or alignment of intentions.
12. **Definition of a “relative”**:
- *Example*: In a Pakistani business, an individual and their son, or an adopted child, or a spouse, would be
considered associates due to their status as relatives.
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Chapter-18
Sales Tax Definations
Question
a) Sarfraz is a sole proprietor. Under the provisions of the Sales Tax Act, 1990, discuss whether each of the
following individuals/entities is an associate of Sarfraz:
(i) Jehanzeb: He has been working as an accountant for the past twenty years and has been responsible for filing
the tax returns of both Sarfraz and his business.
(ii) Falah Limited (FL): Sarfraz owns 20% shares in FL, while his mother owns 30% shares in FL.
(iii) Sarah: She is the adopted daughter of Sarfraz’s wife, Fatima. Sarah was adopted by Fatima before her
marriage to Sarfraz.
(iv) Umeed Trust (UT): Sarfraz is one of the trustees of UT. The trust was established to oversee the operations
of an orphanage.
(06)
Solution
(i)
Two persons cannot be associates solely by reason of the fact that one is employee of
another. Therefore, Jahanzeb is not an associate of Sarfraz.
(ii)
A shareholder in a company and the company can be associates where the shareholder
either alone or together with an associate controls fifty percent or more of the voting
power in the company.
In the given scenario, Sarfraz together with his mother holds 50% shareholding in FL so
FL is the associates of Sarfraz.
(iii)
Adopted child falls under the definition of relative. Therefore. Sarah is the
associates of Sarfraz.
(iv)
Trust and any person who benefits or may benefit under the trust shall be associates. In
the given scenario, although the beneficiaries are orphans, UT may be an associate of
Sarfaraz, if he is deriving any benefit from the trust.
Time of Supply
This definition is very important as it determines as to when the sales tax incidence arises.
Time of supply depends upon different situations as under:
Situation
Normal
Supply through hire purchase agreement
Services
Time of supply
Time at which goods are delivered or made available to the
recipient of the supply or when payment is received whichever
is earlier
Date of agreement
the time at which the services are rendered or provided
If any part payment is received for a supply in a tax period
(a) it shall be accounted for in the return for that tax period; and
(b) In respect of exempt supply, it shall be accounted for in the return for the tax period during which the exemption
is withdrawn from such supply.
1. Supply of Goods (Other than Hire Purchase)
Clause (a): The time of supply is the earlier of when goods are delivered or made available, or when payment is
received.
Example:
A supplier in Pakistan sells 500 mobile phones to a retailer for PKR 1,000,000. The timeline of events is as follows:
• February 1: Supplier delivers the mobile phones.
• February 5: Supplier receives partial payment of PKR 300,000.
• March 1: Supplier receives the remaining balance of PKR 700,000.
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Chapter-18
Sales Tax Definations
Taxable Event: Since goods were delivered on February 1, this is the date of the taxable event, even though part
payment was received on February 5. Thus, the PKR 1,000,000 will be reported in the return for February.
For Part Payment:
If only the PKR 300,000 was received during the tax period (February), it should be recorded as part of the
February tax return.
2. Supply of Goods Under a Hire Purchase Agreement
Clause (b): For goods supplied under a hire purchase agreement, the time of supply is when the agreement is
entered into.
Example:
A furniture store enters a hire purchase agreement with a customer for a sofa set valued at PKR 120,000 on April
10. According to the terms, the customer will pay PKR 10,000 per month over 12 months.
Taxable Event: The full amount of PKR 120,000 becomes taxable at the time the hire purchase agreement is
entered into (April 10), regardless of when payments are received. Therefore, the PKR 120,000 should be
included in the April tax return.
For Part Payment:
In each tax period when the monthly installment is received, that amount should also be accounted for as part
of that period's tax return.
3. Supply of Services
Clause (c): For services, the time of supply is when the services are rendered or provided.
Example:
An accounting firm completes audit services for a client on July 15 with a total fee of PKR 200,000. The client
pays:
• July 20: PKR 80,000 (partial payment).
• August 5: PKR 120,000 (remaining balance).
Taxable Event: The taxable event occurs on July 15, when the audit services are completed. The full PKR 200,000
should be included in the July tax return.
For Part Payment:
The PKR 80,000 payment received in July must be recorded in the July return, while the remaining PKR
120,000 will be recorded in August's tax return as it’s received in that period.
4. Exempt Supply (When Exemption is Withdrawn)
If an initially exempt supply loses its exemption status, it becomes taxable from the period in which the
exemption is withdrawn.
Example:
A healthcare clinic provides medical services, which are initially exempt from tax. On September 1, a policy
change withdraws the exemption. The clinic charges PKR 50,000 for services provided each month.
Taxable Event: Since the exemption was withdrawn on September 1, services provided from September
onwards are taxable. Thus, PKR 50,000 for September services will be included in the September tax return, even
if part payment is received earlier
Question
a) Following are the independent transactions carried out by different enterprises:
(i) In November 2022, an agreement for the acquisition of machine on hire purchase was signed. In December
2022, the machine was acquired under this agreement against 25% down payment of Rs. 30 million. The
remaining balance is to be paid in 24 equal monthly installments of Rs. 4.5 million each.
(ii) In December 2022, an advance of Rs. 12 million was received against delivery of goods to be made in March
2023.
(iii) A machine of Rs. 38 million was purchased in July 2022 but it was put to use in November 2022.
(iv) Goods of Rs. 7 million were sold in September 2022 but due to limited storage capacity at buyer’s premises,
the goods were delivered in January 2023.
Required:
In the light of the provisions of the Sales Tax Act, 1990 and Rules made thereunder, identify and discuss the
time (month) of supply for the chargeability of sales tax in respect of the above transactions. (05)
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Chapter-18
Sales Tax Definations
Solution
Value of Supply
Definition
Value of supply, in respect of taxable supply, is the consideration in money including all Federal and Provincial
duties which the supplier receives in respect of the supply excluding the amount of sales tax.
Normal Rule
The FBR has power to fix the value of any imported goods or taxable supplies.
Actual Value or FBR Value [higher will be value of Supply]
However, if the import or supply is made at a value higher than the value fixed by the FBR then the actual value shall
be considered.
Conditions to Claim Discount
Trade discount shall be excluded provided that
(i)
the tax invoice shows the discounted price; and
(ii)
(ii) the amount of discount is in conformity with the normal business practice.
The different situations are as under
Situation
Normal case
Value of supply
Consideration in money including all Federal and
Provincial duties which the supplier receives in respect of
the supply excluding amount of sales tax.
Mark up on credit sales shall not be taken into value of
supply
Consideration is partly or fully in kind
Open market price excluding sales tax
Sale is made on installment basis where the price
includes mark up or surcharge
Open market price excluding sales tax
[It means that mark up or surcharge included in credit
sales or installment sale is not subject to sales tax]
Supply between associated persons
Value as in the normal case or open market price
excluding sales tax whichever is higher
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Chapter-18
Sales Tax Definations
In case of imported goods excluding 3rd Schedule Value determined under the Customs Act including
items
custom and excise duty levied thereon.
If there is reason to believe that the value is under Value determined by the Valuation Committee comprising
declared in the tax invoice
representatives of trade and the sales tax department
Manufacture of goods belonging to another person Actual consideration for value addition to such goods
i.e. toll manufacturing
Supply of electricity by an independent power Energy purchase price only.
producer or WAPDA
[The amount of capacity purchase price, energy purchase
price premium, excess bonus, supplement charges etc.
shall not be included in the value of
Supply]
Supply of electric and gas by a distribution company Total amount billed including price of electricity or gas
charges, rent, commission and all local, provincial and
federal duties and taxes but excluding:
- late payment surcharge
- sales tax; and
- any subsidy provided by the federal or provincial
government
Supply of used vehicles after value addition on which Difference between sale price and purchase price
sales tax has already been paid at the time of import
or
manufacturing
Taxable Supply with reference to retail tax
The price fixed by the manufacturer or board
Question
Following are the independent transactions carried out by different enterprises during the month of
February 2022:
(i) Taxable goods of Rs. 800,000 were sold to one of the dealers. The amount was net of 20% trade
discount which was in accordance with market norms. The discounted price was not shown on the tax
invoice.
(ii) Taxable goods of Rs. 1,500,000 were used for internal testing and evaluation purposes. 40% of these
goods were locally procured while remaining 60% of these goods were own manufactured.
(iii) Advance of Rs. 600,000 was received for goods to be delivered in April 2022.
(iv) 1,000 units of taxable goods listed in the Third Schedule were sold at a unit price of Rs. 5,000. Retail
price of each unit was Rs. 6,000.
(v) New parts of Rs. 1,200,000 were issued free of cost to replace the defective parts under warranty.
(vi) Taxable goods of Rs. 400,000 were sold at credit terms of 2/10, n/30. Customer paid the amount within
ten days and availed the discount.
Required:
In the light of the provisions of the Sales Tax Act, 1990 and Rules made thereunder, state the value of supply
chargeable to tax for the month of February 2022. Also state the reason for your treatment. (08)
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Chapter-18
Sales Tax Definations
Solution
1
2
3
4
Value of Supply
1,000,000
(800,000 ÷ 80%)
900,000
(1,500,000×60%)
600,000
5
6,000,000
(1000×6,000)
Nil
6
400,000
Reason
Discount can be claimed if it is as per market norms and has been shown on tax
invoice. Since the amount of discount has not been shown on tax invoice, it shall
be chargeable to tax at gross amount.
Use of own manufactured items for in-house consumption will be subject to
sales tax. However, goods locally procured is not deemed to be supply.
Time of supply is the time at which goods are delivered or make available to the
recipient pr date of Payment.
For taxable supplies specified in third schedule, sales tax is charged on the retail
price of goods.
Free replacement of defective parts is considered as original supply and not a
separate supply so this was not chargeable to tax in February return.
Cash discount shall not be deducted while computing value of supply, so gross
amount shall be chargeable to tax.
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Sales tax provisions
Chapter
19
Basic concepts including VAT
Overview of Sales Tax System
Sales tax is a Value Added Tax (VAT) system. It is an indirect tax collectable from the whole supply chain i.e.
importers, manufacturers, wholesalers (including dealers and distributors) and retailers with certain exceptions.
Therefore, the sales tax is a multi-stage tax payable on the value of:
Taxable supplies by a registered person in respect of any taxable activity carried on by him;
Goods imported into Pakistan; and
Specified taxable services
VAT is a percentage tax levied on the price each registered person charges for goods supplied or taxable services
rendered by him.
VAT normally utilizes a system of tax credit (called input tax adjustment) to place the ultimate and real burden of
tax on the final consumer and to relieve the intermediaries (i.e. the persons other than the final consumer) from any
tax burden.
Sales tax rates and who is liable to pay sales tax
Tax Rates
Normal Sales tax rate is 18%, it means when we supply or buy goods 18% tax will be charged
How Sales Tax Mechanism works
It is assumed in this example that every person in the supply chain is a registered person for sales tax purpose and
subject to sales tax @ 18% (restriction on input tax and special provisions for commercial importers and retailers
are not considered for this example):
S.
Input
Output
Pay to
No. Transactions
Tax
Tax
FBR
Importer’s import value Rs.9,200
1
1,656
1,656
Importer sells to a wholesaler of raw materials forRs.11,000
1,980
+ 1,980 sales tax
1,656
324
= margin is Rs.1,800
Wholesaler of raw materials buys at Rs.11,000 + 1,980 input
2
tax and sells to a manufacturer for Rs.11,600 + 2,088 sales tax 1,980
2,088
108
= margin is Rs.600
3
4
Manufacturer buys at Rs.11,600 + 2,088 input tax (his other
manufacturing expenses are Rs.9,000) and sells to a
wholesaler of finished product at Rs.23,600 + 4,248 sales tax 2,088
= margin is Rs.3,000
Wholesaler of finished product buys at Rs.23,600 + 4,248input
tax and sells to a retailer at Rs.24,000 + 4,320 salestax
4,248
= margin is Rs.400
Retailer buys at Rs.24,000 + 4,320 input tax and sells to
4,320
consumer at Rs.24,600 + 4,428 sales tax
= margin is Rs.600
TOTAL
5
4,248
2,160
4,320
72
4,428
108
4,428
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Chapter-19
Sales Tax Provisions
In VAT system every person in a supply chain is supposed to be a registered person but it is very difficult in Pakistan
due to certain problems e.g. chips manufacturer may be a company for which registration, record keeping, inputoutput adjustment etc. are not a big issue but a chips manufacturer may be an individual running a small bakery
who cannot be expected to comply all such legal requirements.
Likewise, every retailer in Pakistan is not expected to comply with all the legal requirements.
Therefore, a structure has been developed in Pakistan whereby two types of exemptions have been given as under:
• Turnover based exemption i.e. small manufacturers termed as cottage industry and retailers (other than
specified retailers i.e. Tier 1 retailers) are exempt from registration and they do not charge sales tax on
their supplies; and
• Items based exemption i.e. certain products are exempt without any turnover limit e.g. books, newspapers,
locally manufactured computers and laptops
The following chart explains the situation
Importer
Registration is required.
Importer shall pay sales tax on import stage and
subsequently charge sales tax on value of taxable supply
However, commercial importers shall pay sales tax as per
relevant provisions
Wholesaler / Distributor
Registration is required and sales tax shall be chargedon
value of taxable supply
Retailer
Only Tier 1 retailers (i.e. specified retailers) are requiredto be
registered.
Manufacturer
Cottage industry
Other than cottage industry
Exempt as per serial 3, Table 2, 6th Schedule
Registration is required and sales tax shall be chargedon
value of taxable supply
Further Tax
Further tax @ 4% shall also be charged when the goods are supplied to unregistered persons or inactive taxpayers.
It means that the tax rate in this case is 18% + 4%.
However, further tax shall not be charged in the following cases [Exceptions]
i.
Supplies to Government, semi-government and statutory regulatory bodies
ii.
Supply of goods directly to end consumers including supplies by a retailer
iii.
Items falling under 3rd Schedule i.e., items on which sales tax is chargeable on retail price
iv.
Electric supplied to domestic and agricultural consumers
v.
Natural gas supplied to domestic consumers and CNG stations
vi.
Supply of second-hand worn clothing and other worn articles
vii.
Goods falling under zero rating;
viii.
Foam products including spring mattresses; and
ix.
White crystalline sugar, fertilizers, jet fuel etc.
Further tax shall not become part of output tax which means that further tax is payable to the FBR as a bottom-line
figure.
“The FBR has power to fix a lower or higher rate on specified items”
Example of higher rate on imports
25% sales tax rate is applicable on import and supply of various items such as:
Juices
Vehicles in CBU condition
Chocolates
Cigarettes
Tissue papers
Shampoos
Jewelry
Example of higher rate on supply of locally manufactured goods
25% sales tax rate is applicable on the following locally manufactured goods:
• Vehicles of 1400 cc and above
• Double cabin picks up vehicles
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Chapter-19
Sales Tax Provisions
Reduced rates
8th Schedule specifies import or supply of certain goods on which sales tax is chargeable at reduced rates subject
to certain conditions. Few examples are:
• 1% on locally manufactured electric vehicles such as electric buses, electric rickshaw and electric
motorcycle
• 12.5% on locally manufactured or assembled cars of up to 850cc
• 8.5% on locally manufactured Hybrid Electric Vehicles up to 1800 cc
• 12.5% on electric vehicle in CBU (completely built unit) condition of up to 50 kwh battery
• 1% on manufacture or import of drugs under the Drugs Act, 1976 including raw materials for the
production of pharmaceutical products.
• 3% on supply of locally manufactured jewelry articles of precious metal
• 5% on import of computers, laptop and notebook in CBU (completely built unit) condition
Capacity Tax
The FBR has authority to levy and collect sales tax on fixed basis or on the basis of capacity of plant in lieu of sales
tax on the basis of value of supply of goods [may also be called as capacity tax].
The tax shall be levied and collected, in the mode and manner specified therein on-:
a. production capacity of plants, machinery, undertaking, establishments or installations producing or
manufacturing such goods; or
b. fixed basis, as it may deem fit, from any person who is in a position to collect such tax due to the nature of the
business.
Tax on steel products/ship plates
In respect of goods, specified in the Thirteenth Schedule, the minimum production for a month shall be determined
on the basis of a single or more inputs as consumed in the production process as per criterion specified in the
Thirteenth Schedule and if minimum production so determined exceeds the actual supplies for the month, such
minimum production shall be treated as quantity supplied during the month and the liability to pay tax shall be
discharged accordingly.
Tax on supply to CNG stations
▪ In case of supply of natural gas to CNG stations, the Gas Transmission and Distribution Company shall
charge sales tax from the CNG stations at the rate of 18% on the value of supply to the CNG consumers.
▪ Value for the purpose of levy of sales tax shall include price of natural gas, charges, rents, commissions and
all local, provincial and Federal duties and taxes but excluding the amount of sales tax
Who is liable to pay sales tax?
Liability to pay the sales tax to the sales tax department shall be of the person:
• making the supply, in the case of supply of goods [It means that the purchaser, who pays sales tax, does not
pay sales tax to FBR instead he pays sales tax to the supplier and the supplier pays sales tax to FBR after
making his input tax adjustment];
• importing the goods, in the case of goods imported into Pakistan; and
• providing taxable services.
However, the FBR may specify the goods in respect of which liability to pay sales tax to FBR shall be of the person
receiving the supply.
When to pay sales tax
Sales tax shall be paid at the time of:
payment of custom duty in the case of import of goods; and
filing of sales tax returns in the case of supplies made or services provided in Pakistan
Change in the tax rates
1.Taxable supply in Pakistan shall be charged to tax at such rate as is in force at the time of supply
2.Import of goods shall be charged at such rate as is in force at the time of declaration is presented whether for
home consumption or for clearance from warehouse as the case may be except:
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a) Where goods declaration is presented in advance of the arrival of conveyance, the tax shall be charged at the rate
as is in force on the date of the manifest of the conveyance is delivered.
b) In case of clearance from warehouse if the tax is not paid within 7 days of presenting the declaration, the tax shall
be charged at the rate in force on the date of actual payment.
1. Taxable Supply at the Time of Supply
Rule: Tax on a taxable supply is charged at the rate in force at the time of supply.
Example:
A Pakistani manufacturer sells machinery to a retailer on March 10, 2025, with delivery and payment made on
the same day. As of this date, the tax rate is 17%. However, on March 20, 2025, the tax rate increases to 18%.
• Since the supply occurred on March 10, the applicable tax rate is 17%, even though the rate later
increased. The tax charged on the machinery sale is PKR 850,000 if the sale price is PKR 5,000,000.
• Calculation: 5,000,000×0.17=850,0005,000,000 \times 0.17 = 850,0005,000,000×0.17=850,000
2. Import of Goods at Time of Declaration
Rule: Import tax is based on the rate in force when the import declaration is filed, either for home consumption
or warehouse clearance.
Example A (Home Consumption):
An importer files a goods declaration for medical equipment on April 8, 2025, when the tax rate is 10%. The
equipment arrives and is cleared from customs on April 12, 2025.
• Since the declaration was presented on April 8, the 10% tax rate applies even if the rate changes after
this date.
• Calculation: For a value of PKR 2,000,000, the import tax is PKR 200,000.
• 2,000,000×0.10=200,0002,000,000 \times 0.10 = 200,0002,000,000×0.10=200,000
Example B (Advance Declaration):
The importer files a goods declaration on May 1, 2025, in advance of the goods arriving. The goods arrive on
May 8, 2025, by which time the tax rate has increased to 12%.
• If the goods manifest was delivered on May 8, the 12% tax rate will apply.
• Calculation: For goods valued at PKR 1,000,000, the tax due is PKR 120,000.
• 1,000,000×0.12=120,0001,000,000 \times 0.12 = 120,0001,000,000×0.12=120,000
3. Warehouse Clearance Within 7 Days
Rule: If goods are cleared from a warehouse within 7 days of presenting the declaration, the tax rate at the
declaration date applies.
Example:
An importer presents a declaration on June 1, 2025, for goods valued at PKR 3,000,000, and the tax rate is 15%.
The tax is paid and goods are cleared on June 6, 2025.
• Since tax was paid within 7 days, the rate on June 1 (15%) applies, even if the rate changes later.
• Calculation: Import tax due is PKR 450,000.
• 3,000,000×0.15=450,0003,000,000 \times 0.15 = 450,0003,000,000×0.15=450,000
4. Warehouse Clearance After 7 Days
Rule: If the tax is paid after 7 days of presenting the declaration, the rate in force on the payment date applies.
Example:
An importer presents a declaration on July 1, 2025, when the tax rate is 14%. However, they only pay the tax on
July 10, 2025—more than 7 days later, by which time the rate has increased to 16%.
• Since the payment was delayed, the rate on July 10 (16%) applies.
• Calculation: For goods valued at PKR 4,000,000, the tax is PKR 640,000.
• 4,000,000×0.16=640,0004,000,000 \times 0.16 = 640,0004,000,000×0.16=640,000
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Chapter-19
Sales Tax Provisions
Zero Rated Supplies – [5th schedule]
a) Goods falling under this category are chargeable to sales tax at 0%. It means that their output tax is 0% however,
their corresponding purchases may not necessarily zero rated and therefore, input tax would be suffered which is
reclaimable as input tax.
Export of goods falls under this category other than the following [Exception to Zero Rating]
• Export to any country as notified by the Federal Government [examples are: export to Afghanistan, Iran or
China; and (ii) export to Afghanistan by land route]
• Export intended to be re-imported into Pakistan
• Goods held for export but not exported
Examples of other items under this category:
• Supply to diplomats, diplomatic missions and privileged persons
• Supply of raw materials and components for further manufacture of goods in Export Processing Zone (EPZ)
• Imports or supplies made to Gwadar Special Economic Zone excluding vehicle
• Supply of raw materials and machinery to registered exporters under Export Facilitation Scheme, 2021 or
any other government scheme for this purpose
• Supply of stores and provisions for consumption aboard conveyance proceeding outside Pakistan e.g.
international flight or ship
• Packing materials used for zero rated supplies
• Electric and gas consumed by manufacturer-exporters
• other specified items subject to certain conditions including pencils, pens, milk etc.
b)
Refund of input tax on zero rated supply
Refund of input tax on zero rated supplies shall be made within 45 days of filing of return.
If a registered person is liable to pay any tax, default surcharge or penalty payable under any law
administered by the FBR, the refund of input tax shall be made after adjustment of unpaid outstanding
amount of tax, default surcharge and penalty.
iii.
Where there is reason to believe that a person has claimed incorrect input tax credit or refund, the
proceedings against him shall be completed within 60 days may be extended up to 120 days by an officer
not below the rank of an Additional Commissioner and may be extended by the Board up to 9 months for
reasons to be recorded in written.
iv.
In case of delayed refund, the FBR shall pay an additional amount to the registered person @ Karachi Interbank Offered Rate (KIBOR) per annum if there is no dispute in the claim of the refund.
Note for students:
Additional amount, if any, received on delayed refund from the sales tax department istaxable for income tax
purpose under the head “income from other sources”.
i.
ii.
Exempt Supplies [6th schedule]
a) Certain imports and supplies of goods falling under this category are outside the scope of sales tax and therefore
not subject to sales tax.
b) An example is publication of books and newspapers where paper purchases suffer sales tax but their supply does
not and in this case input tax cannot be reclaimed.
Other important exempt items are:
1) Local supply of live animals
and live poultry [sales tax
shall be paid on import
stage]
4) Goods
imported
by
diplomats,
diplomatic
missions or privileged
persons
2) Agricultural produce not
subject to any further
manufacture
5) Goods,
excluding
electricity and natural
gas, supplied to hospitals
run
by
charitable
hospitals of 50 or more
beds
3) Holy Quran and other
holy books or recorded
in audio or video
cassettes
6) Goods
temporarily
imported into Pakistan
meant for subsequent
export
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7) Goods manufactured and
exported from Pakistan
which are subsequently
imported
in
Pakistan
within one year
10) Local supply of breads,
nans and chapattis
8) Fertilizers
9) Tractors
11) Machinery, equipment
and materials imported
for use in EPZ
12) Import of raw materials
and
machinery
by
registered
exporters
authorized under Export
Facilitation
Scheme,
2021 or any other
government scheme for
this purpose
13) Supply of fixed assets
otherwise than stock in
trade against which input
tax adjustment is not
available e.g. resale of
vehicles, furniture or office
equipment
being
a
depreciable asset
14) Specified
goods
including
locally
manufactured laptops,
computers
and
notebooks and import of
parts for manufacturing
of laptops, computers
and notebooks
c) Difference between zero rated supplies and exempt supplies:
No output tax shall be charged and collected on both zero rated and exempt supplies but input tax, if leviable, can
be reclaimed only in respect of zero rated supplies.
Differences between zero rated supplies and exempt supplies in detail are as under:
Zero rated supply
Exempt supply
Definition
“Zero rated supply” means a taxable supply “Exempt supply” means a supply which is not
which is chargeable to sales tax at 0%.
chargeable to sales tax.
Goods
Goods exported or goods listed in 5th Goods specified by FBR through notifications
Schedule
and goods listed in6th Schedule
Invoice
Tax invoice shall be raised butsales tax No sales tax invoice is required
shall be charged at 0%
Input tax credit
Input tax on zero rated supplies is Input tax on exempt
refundable from FBR
adjustable nor refundable
Registration
Sales tax registration is required where a Sales tax registration is not required where a
person wants to claim refund
person is engaged exclusively in exempt
Supplies
supplies
is not
Third Schedule [Retail Item]
Sales tax is charged @ 18% (or at a reduced rate as specified in 8th Schedule) in respect of goods falling under this
category on the recommended retail price which shall be legibly printed on the label etc along with the amount of
sales tax.
After charging / paying such sales tax, the same amount of sales tax will be charged on subsequent supply.
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Retail Price:
It means the price fixed by the manufacturer or importer in case of imported goods inclusive of all charges and taxes
excluding sales tax at which a particular variety of items should be sold to the general body of consumers or, if more
than one price is so fixed for the same variety, the highest of such prices.
The FBR may specify areas or zones for determination of highest retail price for any brand or variety of goods.
Note: The definition of retail price is important specially in the case of 3rd Schedule items.
Retailer:
It means a person supplying goods to general public for consumption provided that if he combines the business of
import and retail or manufacture with retail he shall notify and advertise wholesale price and retail price separately
and declare the address of his retail outlets.
Retailers are divided into 2 categories
1) Tier -1 Retailer (Specified Retailer)
2) Other than Specified retailers
1.Tier 1 retailers i.e. specified retailers are:
(a)a retailer operating as a unit of a national or international chain of stores;
(b)a retailer operating in an air-conditioned shopping mall, plaza or centre, excluding kiosks;
(c)a retailer whose cumulative electricity bill during the immediately preceding 12 months exceeds Rs.1,200,000;
(d)a wholesaler-cum-retailer, engaged in bulk import and supply of consumer goods on wholesale basis to the
retailers as well as on retail basis to the general body of the consumers;
(e)a retailer who has acquired point of sale accepting payment through debit or credit cards or any other digital
payment service;
(f)a retailer whose deductible withholding tax under sections 236G or 236H of the Income Tax Ordinance, 2001
during the immediately preceding 12 consecutive months has exceeded the threshold as may be specified by the
FBR;
(g)any other person as prescribed by the FBR.
Tier 1 retailers [i.e. specified retailers]
Tier 1 retailers are required to be registered and all the provisions shall apply in the normal manner including
charge of sales tax, filing of monthly return, input tax adjustment / apportionment, debit / credit note, audit and so
on.
All Tier-1 retailers shall integrate their retail outlets with FBR’s computerized system for real time reporting of
sales. In case of default, input tax claim would be reduced by 60%.
Service charges by Tier – 1 retailers
Service charge @ Re.1 per invoice shall be collected by Tier – 1 retailers integrated with the FBR and the said service
charge shall be deposited along with the filing of monthly sales tax return without adjustment of any input tax
against the said service charge.
Retailers other than Tier 1 retailers
Retailers other than Tier 1 retailers are not required to be registered and they shall pay sales tax with their monthly
electric bills as under:
5% where the monthly bill does not exceed Rs.20,000; and
7.5% where the monthly bill exceeds Rs.20,000.
The above sales tax is the final discharge of their sales tax liability and they are not allowed to claim input tax
adjustment. Monthly sales tax return is not required to be filed and they are not subject to audit.
The above sales tax in case of unregistered retailer with electric bill is in addition to the sales tax otherwise
chargeable with electric bills which is 18% normal sales tax + 4% further tax + extra tax at specified rates..
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Items covered under 3rd Schedule are
• Cigarettes
• Juices, ice cream, syrups, aerated water and beverages
• Mineral / bottled water
• Detergents, Shampoo, soap, toothpaste, shaving cream, cosmetics, shoe polish / cream
• Tea, powder drinks, milky drinks
• Toilet paper and tissue paper
• Spices sold in retail packing with brand name and trade mark
• Cement sold in retail packing
• Household electrical goods, including ACs, refrigerators, deep freezers, TV, recorders and players, bulbs,
tube-lights, electric fans and irons, washing machines and telephone sets.
• Household gas appliances, including cooking range, ovens, geysers and gas heaters
• Foam products including spring mattresses.
• Paints, lubricating oils, brake fluids etc. sold in retail packing
• Auto-parts in retail packing, storage batteries, tyres and tubes excluding those sold to automotive
manufacturers or assemblers
• Motorcycles and Auto rickshaws
• Biscuits in retail packing with brand name
• Tiles
Note for students: Further tax is not applicable on 3rd Schedule items, and no discount is allowed
Federal Government has directed to charge sales tax @ 25% on import and subsequent supply of following third
schedule goods
Adjustment of input tax
a) A registered person is entitled to deduct his input tax during the tax period for the purpose of taxable supplies
made or to be made (e.g. stocks not yet sold) from his output tax liability and for this purpose he must hold:
I.
II.
III.
tax invoice in his name bearing his NTN or in case of supply of electricity or gas, a bill bearing his
registration number and the address where the connection is installed;
goods declaration (i.e. bill of entry) in case of goods imported by him; or
in case of goods purchased in auction, treasury challan in his name bearing his NTN
Input tax can be claimed on accrual basis subject to payment within a prescribed period (i.e 6 tax periods)
Input tax paid (not on accrual basis) with electric and gas bills can be claimed by a registered consumer and in this
case the gas or electric bill shall be regarded as tax invoice for sales tax purposes provided the bill contains NTN
and address of the business premises declared to the Commissioner of such consumer.
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Where the electric or gas connection is not in the name of such person, NTN of such person is mentioned on such
bill along with the address of such person as given by him in the application for registration for the purpose of sales
tax.
Question
Please explain whether sales tax can be claimed in respect of sales tax paid on electricity billswhich are not
in the name of the company being a tenant.
(Marks 3)
b) Where a registered person did not deduct input tax within the relevant period, he may claim such input tax in the
return for any of the next 6 tax periods.
Alternatively, the registered person may apply for the refund within one year u/s 66. The Commissioner has power
to grant extension of these time limits in special cases.
Question
Explain the procedure for the admissibility of the input tax which is not claimed by omission inthe relevant
tax period.
(Marks 5)
c) In the following cases a registered person is not entitled to reclaim/ deduct his input tax:
i.
Supply of exempt goods and services
ii.
Goods and services not related to taxable supplies or acquired for personal or non-business use e.g., tissue
papers purchased by a manufacturer for his own use. In this case he will be a direct consumer of such goods who
cannot reclaim input tax.
iii.
Sales tax on services in respect of which input tax adjustment is barred under the respective provincial
sales tax laws.
iv.
Input tax on fake invoices
v.
Goods in respect of which sales tax has not been deposited into the government treasury by the supplier
vi.
Purchases in respect of which a discrepancy is indicated by the CREST or input tax of which is not verifiable
in the supply chain. CREST (i.e. COMPUTERISED RISK-BASED EVALUATION of SALES TAX) is the computerized
program of the sales tax department for analyzing and cross-matching of sales tax returns.
vii.
Goods and services, may be specified by the FBR, which have not been declared by the supplier in his return
at the time of filing of return by the buyer
Note for students:
Input tax is not allowed where a discrepancy is indicated by the automated system of FBR
i.e. computerized system for cross-matching of input tax
However, a discrepancy would be allowed on provisional basis and the registered person would be advised by the
FBR to contact the supplier and persuade him to disclose his relevant output tax.
If the supplier did not declare his relevant output tax in the next tax period then input tax allowed earlier provisionally
would be adjusted or recovered.
Important point: If a registered person does not have tax invoice then provisional adjustment would not be allowed
as existence of tax invoice bearing his name and NTN isa basic condition for claiming input tax.
It means that if a registered person has tax invoice for his purchases and a discrepancy is indicated by the
computerized system then provisional adjustment of input tax would be allowed.
viii.
Input tax paid on purchases if he fails to furnish the information required by the FBR
ix.
Extra tax paid cannot be adjusted as input tax
x.
Vehicles other than stock in trade
[Fork lifting vehicle is treated as machinery as per appellate authorities’ decision and therefore input tax can be
claimed on fork lifting vehicle]
x.
Building material including cement, paints, electric and gas appliances, pipes sanitary fitting etc. otherwise
than stock in trade. However, input tax can be claimed on pre-fabricated buildings.
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xi.
Input tax related to supplies of goods and services to unregistered distributor for which sales invoices do not
bear NIC or NTN of the recipient.
xiii. Any goods which the FBR may specify. The FBR has specified the following goods acquired otherwise than stock
in trade by a registered person in respect of which input tax shall not be reclaimed:
• Food, beverages, garments and consumption on entertainment
• Gifts and giveaways including dairies and calendars
• Supply of electricity and gas to residential colonies
• Office equipment (excluding electronic fiscal cash registers), furniture and fixtures
• Crockery, cutlery etc.
Question
The Sales Tax Act, 1990 specifies the principle for determining the tax liability whereby the eligible
input tax is deducted from the output tax on taxable supplies of a registered person.
Does the law specify any departure from the said principle relating to the levy of tax on taxable supplies?
Please discuss by narrating the relevant provisions of law.
(Marks 6)
Question
A registered person is entitled to deduct input tax paid or payable during the tax period from the output tax
subject to compliance of section 7 and 73 of the Sales Tax Act. Section 8 of the Act however places certain
restrictions on goods on which input tax is not deductible.
You are required to specify those goods on which input tax is not allowable under section 8.(Marks 8)
Payment through banking channel
Payment for a transaction exceeding value of Rs.50,000 (other than utility bills) must be –
• made by a crossed banking instrument
• made within 180 days of the date of the issuance of the tax invoice [this period may be extended by the
Commissioner on any reasonable ground]
• from the business bank account of the buyer to the business bank account of the supplier
If above conditions are not met –
• The buyer would not be allowed any input tax credit, zero rating etc.
• The supplier will not be allowed input tax credit, zero rating etc. if the amount received on account of supply
is not deposited in his business bank account already declared to the sales tax department
Input tax can be claimed on accrual basis. However, payment through banking channel is required within 180 days.
If payment is made in cash or the payment is not made within 180 days then input tax adjustment earlier made
would be reversed.
On-line transfer of payment as well as payments through credit card is also allowed.
Explanation. — “business bank account” shall mean a bank account utilized by the registered person for business
transactions, declared to the concerned Commissioner through Form STR 1 or change of particulars in registration
database.
Note: this section is not applicable on registered person supplying goods to unregistered person. However, supplier is
required to deposit cash in his business bank account to claim input tax.
Adjustment of payment against receivable
If payment is adjusted against any amount receivable from the same party then payment shall be deemed to have
been made subject to the following conditions:
Sales tax shall be charged and paid by both parties, wherever applicable; and
Approval of the Commissioner for such adjustment is required.
Limit on supplies to unregistered person
A registered person shall make all taxable supplies to registered persons excluding supplies not exceeding Rs.100
million in a financial year and Rs.10 million in a month, failing which the supplier shall not be entitled to claim input
tax adjustment as attributable to such excess supplies to unregistered person.
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The provisions of section 73(4) shall not apply to supplies made to:
(a)
Government departments, authorities, etc. not engaged in making of taxable supplies;
(b)
Foreign Missions, diplomats and privileged persons;
(c)
All other persons not engaged in supply of taxable goods.
Moreover, it is clarified by the FBR that the limit of Rs.10 million per month / Rs.100 million per year is applicable
on goods supplied to one specific person.
Apportionment of Input Tax Rules
These rules apply to the registered person supplying taxable and exempt goods simultaneously. Input tax relating
wholly to taxable supplies is fully adjustable / reclaimable. If it relates wholly to exempt supplies it is not admissible.
Sales tax on goods and services including utilities used for both taxable and exempt supplies shall be apportioned
according to the following formula:
Residual input tax credit =
Value of taxable supplies
x Residual input tax
Value of taxable + exempt supplies
Residual input tax is sales tax on goods and services being used for taxable as well as exempt supplies but does not
include sales tax paid related wholly to taxable supplies or wholly to exempt supplies.
Monthly apportionment of input tax shall be treated as provisional adjustment and at the end of each financial year
the registered person shall make final adjustment on the basis of taxable and exempt supplies of that year.
Note for students: According to the above rule, apportionment formula is applied where inputtax is common for
two categories i.e. taxable supplies and exempt supplies.
However, in practice there are three categories i.e. taxable at normal rate, taxable at zero rateand exempt
supplies. Zero rate supplies is a separate category due to the following reasons:
• a separate refund application is processed for zero rated supplies; and
• Restriction on input tax is not applicable for zero rated supplies.
Value of Supply
Input Tax
Input tax on Fixed Asset
Taxable Supplies [Net]
XXX [e]
aaa
bbb
Zero rates Supplies [Net]
XXX [f]
aaa’
bbb’
Exempt Supplies [Net]
XXX [g]
aaa’’
bbb’’
Total
XXX [Y]
AAA [Q]
BBB [W]
Apportionment Table
𝑄
𝑌
∗ 𝑒 = 𝑎𝑎𝑎
𝑄
𝑌
∗ 𝑓 = 𝑎𝑎𝑎’
For Input Tax Against Supplies
𝑄
𝑌
∗ 𝑔 = 𝑎𝑎𝑎’’
𝑊
𝑌
∗ 𝑒 = 𝑏𝑏𝑏
𝑊
𝑌
∗ 𝑓 = 𝑏𝑏𝑏’
𝑊
𝑌
∗ 𝑔 = 𝑏𝑏𝑏’’
For Input Tax Against Fixed Assets
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Chapter-19
Sales Tax Provisions
Restriction on input tax
A registered person other shall not be allowed to adjust input tax in excess of 90% of the output tax for a particular
tax period. Therefore, in case of lower profit margin he is required to pay 10% of his output tax to FBR.
It means that if his input tax during a tax period exceeds his output tax as a result of loss or overbuying (closing
stock), he is not entitled to get refund instead he will pay 10% of his output tax to FBR.
Input tax disallowed due to this restriction shall be carried forward to the next period and shall be treated as input
tax of that period.
Input tax on acquisition of fixed assets or capital goods, if any, is claimable in the same tax period and restriction of
the said 90% is not applicable in this case.
FBR has power to increase the limit from 90% to 95% in any particular case including all Tier-1 retailers who have
integrated all their point of sales (POS) with the FBR.
Exceptions:
This restriction of 90% is not applicable in the following cases i.e. they can adjust input tax from output tax without
any restriction:
1.Persons registered in electrical energy sector and gas distribution companies
2.Oil marketing companies, petroleum refineries and Pakistan Steel Mills
3.Distributors
4.Commercial importers provided the value of imports subjected to 3% value addition tax exceeds 50% of value of
all taxable purchases in a tax period.
5.Persons making zero rated supplies provided value of such supplies exceeds 50% of value of all taxable supplies
during a tax period.
6.Registered persons other than manufacturers, making supplies of 3rd Schedule items on which sales tax has been
paid on retail price, provided the value of such supplies exceeds 80% of all taxable supplies
7.CNG dealers and petroleum dealers
8.Telecommunications
Note for students:
This restriction u/s 8B is not applicable in case of zero-rated supply and commercial imports. The above exceptions
shall apply for the local purchase / supply where the conditions above mentioned are fulfilled.
Excess input tax
Input tax disallowed due to restriction u/s 8B or excess input tax where the said restriction is not applicable may
be carried forward to the next tax period and treated as input tax of that period.
Note for students:
Refund of zero-rated items including exports may be claimed at the time of filing of return and need not be carried
forward.
Debit and Credit Note and Destruction of Goods
(a)
Where a registered person has issued a tax invoice and the tax return or tax invoice needs to be modified
as a result of:
• cancellation of supply;
• return of goods;
• change in the nature of supply;
• change in the value of supply; or
• any other such event
Within 180 days then the registered person may issue a debit / credit note indicating specified information and
adjust accordingly. [Period of 180 days may be extended for any special reason]
Note for students:
Where tax liability increases as a result of issuance of debit note then the time limit of 180 days shall not apply.
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Chapter-19
Sales Tax Provisions
EXAMPLE:
Mr. A, a registered person, supplied goods of Rs.100,000 to Mr. B who is also a registered person and received
Rs.118,000 from Mr. B (including sales tax of Rs.18,000). Goods returned to Mr. A. Mr. B will now issue a debit note.
Mr. A: Mr. A has already received Rs.18,000 from Mr. B and paid to FBR as his output tax. Now he will pay back
Rs.18,000 to Mr. B and reclaim this amount from FBR.
In the case, Mr. A is allowed to deduct Rs.18,000 from his output tax.
Mr. B: Mr. B has already paid Rs.18,000 to Mr. A and reclaimed this amount from FBR as his input tax. Now he will
receive Rs.18,000 from Mr. A and he is required to pay the said amount to FBR.
In this case, Mr. B is required to deduct Rs.18,000 from his input tax.
(b)
The debit / credit note shall show the following particulars:
i.
Name and NTN of the recipient and the supplier
ii.
Number and date of the original sales tax invoice including quantity, value and the amount of sales tax
iii.
The reason of issuance of the note
iv.
Signature and seal of the authorized person issuing the note
v.
Quantity being returned or the supply of which has been cancelled (in case of return of goods or
cancellation of supply)
vi.
Original, revised and difference in the value and sales tax (in case of change of value)
(c)
Where the buyer and supplier both are registered persons and sales tax liability is reduced as a
consequence of credit note then the adjustment is allowed only where the other party accepts the credit note by
issuing corresponding debit note.
However, if a corresponding debit note is not issued by the other party then provisional adjustment would be
allowed to the registered person by the automated system of FBR and he would be advised by the FBR to contact
and persuade the other party to issue corresponding debit note. If it is not done in the next tax period then input
tax allowed earlier provisionally would be adjusted or recovered.
(d)If the other party is unregistered then adjustment shall be made only by the registered person on the basis of
credit / debit note issued by him.
(e)Where such goods are subsequently supplied then sales tax shall be charged in the normal manner.
Goods need to be destroyed:
Where such goods are returned by the buyer on the ground that the same are unfit for consumption and are required
to be destroyed then the same shall be destroyed under the supervision of the sales tax department and the input
tax credit in respect of goods so destroyed shall not be admissible.
However, in case of companies manufacturing perishable food items having an expiry date, if such items are
returned on account of being unfit for consumption and are then destroyed, the credit note may be issued with 15
days of the return of goods and adjustment may be made accordingly.
Supply to unregistered person
The Federal Government has power to specify any goods which cannot be supplied by a registered person to any
unregistered person.
It means that if a registered person makes such supplies then he shall not be allowed to take credit of input tax.
The specified goods that cannot be supplied by a registered person to an unregistered person:
i.
Polypropylene granules;
ii.
Artificial filament tow;
iii.
Filter rods for cigarettes; and
iv.
Air-conditioning, chilling and humidification plants, cranes, propane storage tank, heat exchanger and gas
separator.
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Purchase of Stocks before Registration
Purchaser of stocks who has paid sales tax on such goods is required to apply for registration within 30 days of such
purchases if he wants to take credit of his input tax provided that he holds tax invoice and such goods constitute
verifiable unsold stock on the date of registration.
This period is 90 days in case of imports.
Commercial importers
A commercial importer shall pay sales tax @ 18% on import value in the normal manner.
However, sales tax on account of minimum value addition shall be collected at import stage @ 3% of the value of
goods imported in addition to the sales tax paid in the normal manner.
The above concept of minimum value addition is not applicable on import of raw materials and fixed assets
imported by a manufacturer for in-house consumption and few specified goods.
The commercial importer shall charge sales tax @ 18% from his customers. The value addition tax paid at import
stage shall form part of input tax and claimable against output tax for determining his net liability.
The excess of input tax, if any, over output tax shall be carried forward to the next tax period.
However, the refund of excess input tax over output tax in respect of such commercial imports shall not be allowed
to a registered person.
Excess Tax Collection
If any person collected output tax which was not collectable or collected excess output tax by mistake and the
incidence of such tax has been passed on to the consumer, he shall pay the amount of such tax to the Government
and no claim for refund in respect of such amount shall be admissible.
The burden of proof that the incidence of tax has not been passed to the consumer shall be on the person collecting
the tax.
Here are 3 examples illustrating the situation where output tax was either not collectable or was collected in excess,
but the burden of proof falls on the person collecting the tax, according to the rules you mentioned.
Example 1: Over-collection of Output Tax by Mistake
Scenario: A retailer sells goods worth PKR 10,000 to a customer and mistakenly collects 18% output tax (PKR
1,800) instead of the correct 10% (PKR 1,000). The retailer passes the excess tax amount to the government but is
seeking a refund for the excess tax collected.
• Sale amount: PKR 10,000
• Correct output tax (10%): PKR 1,000
• Incorrectly collected output tax (18%): PKR 1,800
• Excess tax collected: PKR 800 (1,800 - 1,000)
• Burden of proof: The retailer must prove that the excess tax was not passed on to the customer.
Solution:
• The retailer paid the PKR 800 excess tax to the government, but since the retailer cannot claim a refund if
the tax incidence was passed on to the customer, the retailer must prove that the customer did not bear the
excess tax.
• If the retailer can prove that the price paid by the customer did not include the excess PKR 800 (perhaps
through pricing evidence or contractual terms), they may avoid the non-refund condition. If the customer
did bear the excess, no refund can be granted.
Conclusion: If the retailer cannot prove that the tax burden was not passed on, the refund claim for the excess PKR
800 is inadmissible.
Example 2: Tax Not Collectible from the Consumer
Scenario: A company imports machinery and sells it to a local customer for PKR 50,000. The output tax on the sale
should be 18%, amounting to PKR 9,000. However, the company erroneously charges a 0% tax rate because it
believes the sale qualifies as an export, which is zero-rated.
• Sale amount: PKR 50,000
• Correct output tax (18%): PKR 9,000
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• Incorrectly collected output tax (0%): PKR 0
• Mistake: The sale was incorrectly treated as zero-rated when it was taxable.
Solution:
• The company mistakenly did not collect any output tax (0%) on the sale.
• The company is now required to pay the PKR 9,000 tax to the government.
• Since the company did not collect the tax from the customer, the burden of proof lies with the company to
demonstrate that it did not pass the tax burden to the customer.
• If the company can prove that the price quoted to the customer was without tax, and the customer was not
aware of the error, the tax burden may not have been passed on.
Conclusion: If the company cannot prove the tax was not passed on to the consumer, it must pay the tax to the
government, and no refund will be granted.
Example 3: Excess Output Tax Collected and Passed On to the Consumer
Scenario: A restaurant provides catering services and collects an 18% output tax on the total bill. The customer is
charged PKR 15,000, and the restaurant collects PKR 2,700 as output tax. However, the correct output tax should
have been calculated at 12% (PKR 1,800).
• Total sale amount: PKR 15,000
• Correct output tax (12%): PKR 1,800
• Excess output tax collected (18%): PKR 2,700
• Excess tax collected: PKR 900 (2,700 - 1,800)
• Burden of proof: The restaurant must prove that the customer did not pay the excess PKR 900.
Solution:
• The restaurant has collected PKR 900 in excess tax.
• Since the restaurant has collected excess tax from the consumer, the burden of proof is on the restaurant
to demonstrate that the PKR 900 excess was not included in the total amount charged to the customer.
• If the restaurant can prove the customer was charged the correct amount and the excess tax was absorbed
by the restaurant, the refund may be considered.
• However, if the customer paid the excess tax (which is likely in this scenario), the restaurant cannot claim
a refund.
Conclusion: If the restaurant cannot prove that the excess PKR 900 was not passed on to the consumer, it cannot
claim a refund, and must pay the excess tax to the government.
Joint & several liability of registered person in supply chain where tax unpaid.
A registered person receiving taxable supply from another registered person is in the knowledge or has reasonable
grounds to suspect that some or all tax payable in respect of that supply or any previous or subsequent supply of
the goods would remain unpaid [burden to prove this fact is on the tax department], then such person, as well as
the person making the taxable supply shall be jointly and severally liable for payment of such unpaid tax.
However, FBR may exempt any transaction from the provisions of this section.
Here are 3 examples illustrating the situation where a registered person receiving taxable supply from another
registered person is liable for unpaid tax, along with joint and several liability for payment:
Example 1: Supplier Not Paying Output Tax
Scenario: A wholesale distributor (Person A) receives taxable supplies of electronic goods from a manufacturer
(Person B) who is also a registered person. Person A is aware that Person B has a history of late tax payments and
there are reasonable grounds to suspect that Person B might not pay the due tax on the current supply.
• Total supply value: PKR 500,000
• Output tax due on the supply (18%): PKR 90,000
• Person A's suspicion: Person A knows that Person B has not paid tax on several previous supplies and is
aware of outstanding tax liabilities.
Solution:
• As per the rules, if Person A, the recipient, has reasonable grounds to suspect that the tax payable on the
supply (or any previous or subsequent supply) will remain unpaid, both Person A and Person B will be
jointly and severally liable for the unpaid tax.
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•
In this case, the tax department could hold both Person A and Person B liable for the PKR 90,000 of unpaid
tax.
• If Person B fails to pay the tax, Person A could be required to pay the tax, even though Person A is not
directly responsible for collecting it from the customer.
Conclusion: If the tax department proves that Person A knew or had reasonable grounds to suspect that Person B
would not pay the tax, Person A will be jointly liable for the unpaid PKR 90,000.
Example 2: Taxpayer Receiving Supplies from Suspended Registered Person
Scenario: A retailer (Person C) purchases goods from a wholesaler (Person D) who is a registered person. However,
Person C finds out that Person D’s registration is suspended due to non-compliance with tax payment and reporting
requirements. Despite this, Person C proceeds with the purchase of goods worth PKR 200,000, which is subject to
an 18% output tax (PKR 36,000).
• Supply value: PKR 200,000
• Output tax on the supply: PKR 36,000
• Person C's knowledge: Person C knows that Person D’s registration is suspended and that the wholesaler
has unpaid tax liabilities from previous transactions.
Solution:
• Under the law, since Person C is aware that Person D's registration is suspended, Person C may be jointly
and severally liable for the unpaid tax (PKR 36,000) if Person D fails to pay it.
• If Person C continues to receive supplies from Person D, who is non-compliant with tax payment, the tax
authorities may hold Person C accountable for the unpaid tax on this transaction.
• The tax department will require both Person C and Person D to pay the unpaid tax. The burden of proving
this suspicion lies on the tax department.
Conclusion: Person C is jointly liable for the unpaid PKR 36,000 of output tax since they knew about Person D's
suspension and unpaid taxes.
Example 3: Supplier Not Paying Tax on Previous Supplies
Scenario: A construction company (Person E) purchases raw materials from a supplier (Person F) who is a
registered person. Person E knows that Person F has a history of not paying taxes on previous taxable supplies. The
value of the supply is PKR 1,000,000, and the output tax on the supply is 18% (PKR 180,000).
• Supply value: PKR 1,000,000
• Output tax on the supply: PKR 180,000
• Person E's suspicion: Person E is aware that Person F has outstanding tax liabilities and that Person F has
been involved in disputes with the tax authorities regarding tax payments for previous supplies.
Solution:
• Since Person E has reasonable grounds to suspect that Person F may not pay the tax on the current supply
(or any future supply), Person E and Person F are jointly and severally liable for the unpaid tax.
• If the tax department determines that Person F did not pay the tax, they may approach both Person E and
Person F to recover the PKR 180,000 in unpaid taxes.
• Person E is responsible for ensuring that the tax is paid, even though Person E is not directly liable for
collecting it from the customer.
Conclusion: Person E and Person F will be jointly and severally liable for the unpaid PKR 180,000 of output tax due
to Person E’s awareness of Person F's past tax non-payment history.
Supply of parts free of cost under warranty
(a)
Price charged to the customers for the vehicle includes the cost of warranty period related claims.
(b)
The FBR also clarified that in such cases, where the final product is taxable, no sales tax is payable except
on supply of final product.
Therefore, no sales tax should be charged on replacement, free of charge, of the defective parts under warranty.
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Here are illustrative examples based on the scenario you provided where the price charged to the customer for
a vehicle includes the cost of warranty period related claims, and no sales tax is payable on the replacement or
free of charge replacement of defective parts under warranty:
Example 1: Vehicle Sale with Warranty
Scenario: A car dealership sells a vehicle to a customer for PKR 1,000,000. The vehicle comes with a 2-year
warranty covering all major parts. The total price includes a portion that accounts for the expected cost of
warranty-related claims (e.g., defective parts, repairs).
• Vehicle sale price: PKR 1,000,000
• Warranty cost portion included in the price: PKR 50,000 (allocated for warranty claims on defective
parts)
• Sales tax on the vehicle (18%): PKR 180,000
The customer is charged PKR 1,180,000 (including sales tax) at the time of sale.
Solution:
• Since the vehicle price includes the cost of warranty-related claims, the total sales tax is calculated only
on the final sale price of the vehicle, which is PKR 1,000,000.
• If any parts of the vehicle fail within the warranty period, and replacements are provided free of charge,
no additional sales tax will be applied on the replacement parts.
For example, if a defective part like a brake pad is replaced during the warranty period:
• The replacement is free of charge.
• Since this is a warranty-related replacement, no sales tax is due on the cost of the replacement part,
even though it may be a taxable product.
• The sales tax was already accounted for at the time of the initial sale when the customer paid PKR
1,000,000 for the vehicle.
Conclusion: No sales tax is charged on warranty replacements, and only the original sale price of the vehicle is
subject to sales tax.
Example 2: Mobile Phone with Warranty
Scenario: A retailer sells a mobile phone to a customer for PKR 30,000, including a 1-year warranty. The retailer
knows that some phones may require a part replacement during the warranty period. The warranty is included
in the sale price.
• Phone sale price: PKR 30,000
• Warranty cost portion included in the price: PKR 2,000 (estimated cost for warranty claims)
• Sales tax on the phone (18%): PKR 5,400
The customer is charged PKR 35,400 (including sales tax).
Solution:
• The price of the phone already includes a portion for warranty-related claims.
• If, during the warranty period, a part such as the phone screen needs to be replaced, no sales tax will
be levied on the replacement screen because the replacement is provided free of charge under the
warranty.
• The sales tax is only charged on the initial sale of the phone for PKR 30,000, and no further tax is applied
to the warranty claim.
Conclusion: The retailer does not charge additional sales tax on the replacement parts under warranty, as the
sales tax was already paid at the time of the initial sale of the phone.
Example 3: Washing Machine with Warranty
Scenario: An appliance store sells a washing machine for PKR 50,000, which includes a 1-year warranty. The
cost of warranty-related repairs and part replacements is included in the overall price.
• Washing machine sale price: PKR 50,000
• Warranty cost portion included in the price: PKR 3,000
• Sales tax on the washing machine (18%): PKR 9,000
The customer is charged PKR 59,000 (including sales tax).
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Solution:
• The washing machine’s sales price of PKR 50,000 includes an estimate for warranty-related costs (PKR
3,000).
• If a part of the washing machine, such as the motor, fails during the warranty period, the appliance store
will replace the motor at no additional cost to the customer.
• The replacement motor is considered part of the warranty and is provided free of charge.
• No sales tax is charged on the replacement motor, as the sales tax was already applied when the machine
was initially sold.
• The customer does not pay any extra tax during the warranty period for the motor replacement.
Conclusion: Sales tax is only due on the initial sale of the washing machine, and no additional tax is applied on
warranty-related replacements.
Summary:
In all these examples:
• The sales tax is only applied on the initial sale of the product (vehicle, phone, washing machine).
• No sales tax is charged on the replacement of defective parts during the warranty period because
the cost of warranty-related claims is included in the initial sale price.
• No additional tax is applied on warranty services, as the tax was already paid when the final product
was sold to the customer.
These examples should help clarify the application of sales tax on warranty-related claims.
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Sales tax registrations & deregistration
Chapter
20
Registration, Compulsory registration and De-registration (Section 14 & Chapter I – Sales Tax Rules 2006)
Abbreviations used:
LTU
Large Taxpayers Unit
RTO
Regional Tax Office
A)
Requirement of registration – section 14:
The following persons engaged in making taxable supplies in Pakistan (including zero rated supplies) are required
to be registered, namely:
i.
ii.
iii.
iv.
v.
vi.
a manufacturer not being a cottage industry
a Tier 1 retailer;
an importer
a wholesaler, dealer or distributor
An exporter who intends to obtain sales tax refund against his zero-rated supplies
a person who is required under any Federal or Provincial law to be registered for the purpose of any duty
or tax collected or paid as if it were a sales tax under the Act.
Discontinuation of gas and electricity connections
Gas and electricity connection may be discontinued through general order by the FBR in the following cases:
-any person, including tier – 1 retailers, who fails to register for sales tax purpose; or
-notified tier – 1 retailers registered but not integrated with the FBR
Upon registration or integration, the FBR shall notify the restoration of gas or electricity connection.
B)
Application for registration – rule 5:
A person required to be registered shall apply for registration on computerized system before making any taxable
supply in the prescribed form indicating jurisdiction of RTO as per the following criteria:
1
2
3
4
Person
in case of public company
in case of public company
in case of a person not incorporated
in case of a person not
incorporated, having a single
manufacturing unit and whose
business
premises
and
manufacturing unit are located in
different areas
Area where registration required
the place where the registered office is located
(i)
if the company is primarily engaged in manufacture, the
place where the factory is situated; and
(ii)
if the company is primarily engaged in business other than
manufacture, the place where main business activities are
actually carried on;
the jurisdiction where the business is actually carried on
the jurisdiction where the manufacturing unit is located:
The FBR may transfer the registration of any registered person to a jurisdiction where the place of business or
registered office or manufacturing unit is located.
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Attachments to the application:
The applicant having NTN shall, using his login credentials, upload the following information and documents:
(a)
bank account certificate issued by the bank, in the name of business;
(b)
registration or consumer number with gas and electricity supplier;
(c)
particulars of all branches in case of multiple branches at various locations;
(d)
GPS-tagged photographs of the business premises;
(e)
In case of manufacturer, also the GPS-tagged photographs of machinery and industrial electricity or gas
meter installed; and
(f)
Where an applicant has unsold / unused stock of tax-paid inputs on which he desires to claim the benefit
u/s 59, he shall declare such stock in a statement with his application for registration.
The system shall register the applicant on furnishing of the above documents and thereafter the applicant or his
authorized representative shall visit e-Sahulat Centre of NADRA within a month for bio-metric verification. In case
of default the registered person’s name shall be excluded from the active taxpayers’ list.
In case of manufacturer, the FBR may require post-verification. If document is missing or non- genuine the
registered person would be required to provide the same within 15 days. In case of default the registered person’s
name shall be excluded from the active taxpayers’ list.
(C) Temporary registration – rule 5A:
1.
Where a manufacturer applies for registration without having installed machinery, temporary registration
as manufacturer shall be allowed within 72 hours to him for a period of 60 days subject to furnishing of the
complete list of machinery to be imported along with import documents.
2.
After temporary registration, the person is allowed to import machinery, raw materials, etc. as a
manufacturer but he will submit a post-dated cheque (equal to the difference in duties and taxes to be availed
as a manufacturer i.e. 4% value addition tax which is payable by a commercial importer)
3.
If the machinery is not installed within 60 days of issuance of the temporary registration, such temporary
registration shall be disabled and the post-dated cheques submitted shall be en cashed.
4.
A person holding temporary registration shall file monthly return but shall not issue a sales tax invoice and
if such invoice is issued, no input tax credit shall be admissible against such invoice.
5.
No sales tax refund shall be paid to the person during the period of temporary registration and the amount
of input tax may be carried forward to his returns for subsequent tax periods.
The mnemonic for this concept could be "MIRAGE":
• Manufacturer (Temporary Registration)
• Import (Machinery, Raw Materials)
• Registration (Post-Dated Cheque, Return Filing)
• Always (Temporary Registration conditions)
• Guarantee (No Refund During Temporary Registration)
• Expiry (60 days deadline for machinery installation)
(D)
Compulsory registration:
1.
If a person, who is required to be registered, does not apply for registration, a notice shall be issued to such
person, giving an opportunity of being heard. After receiving a written reply, and personal hearing if so
desired by the person, the Commissioner shall pass an order whether or not such person is liable to
compulsory registration.
2.
Where the person does not respond within the time specified in the notice, the Commissioner shall transmit
the particulars to computerized system, which shall compulsorily register the said person.
3.
A compulsory registered person is required to comply with all the provisions of sales tax laws. In the case
of failure to do so, the Commissioner may issue notice for production of records and appearance in person
to assess the amount of sales tax payable and take any other legal action against such person.
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4.
(E)
Sales Tax Registrations & De-Registration
If it is subsequently established that a person was not liable to be registered but was wrongly registered,
computerized system on the recommendation of the Commissioner, shall cancel such registration and such
person shall not be liable to pay any tax, default surcharge or penalty.
Change in the particulars of registration
(1)
In case of a change in any particulars, the registered person shall notify the change within 14 days and the
computerized system shall issue the revised registration certificate.
Where a person is unable to file application directly in computerized system, he may submit the application to the
Commissioner RTO who shall ensure entry of the application in computerized system within 3 days.
(2)
The change of business category from non-manufacturer to a manufacturer shall be allowed after fulfilling
the requirements which are applicable for registration as a manufacturer such as verification of machinery and
confirmation of status as industrial consumer from electric and gas distribution companies.
(F)
Transfer of Registration:
The registration may be transferred from one Commissioner to another or to LTU or RTO. If a registered person
intends to shift his business activities from the jurisdiction of one Commissioner to another or has any other valid
reason, he may apply for the transfer of his registration which is subject to the approval by the sales tax department.
The Commissioner / RTO / LTU in whose jurisdiction the registration is now transferred shall exercise the
jurisdiction over such person in the manner as if it always had such jurisdiction.
G)
Option to file application with Commissioner:
The person applying for registration, change in particulars or transfer of registration may, in exceptional cases, file
an application in the RTO. The Commissioner at RTO will then send such application to the computerized system
within 3 days.
H)
Cancellation of multiple registrations:
In case of multiple registrations, the registered person shall retain only one registration and surrender all other
registrations.
The FBR may, in special cases, allow multiple registrations of manufacturing units located in different LTU or RTO.
I)
De-registration:
Every registered person
• who ceases to carry on his business or
• whose supplies become exempt or
• who sell his business
• who merges his business with another
• failed to file return for 6 tax periods
shall apply to the Commissioner for de-registration
The Commissioner may, on such application or on its own initiative, recommend to the computerized system to
cancel the registration with the later of
• 90 days from the date of application or
• the date all the dues are cleared
• A registered manufacturer who, after registration, is covered by the definition of cottage industry may also
apply for de-registration. Likewise, a retailer may also apply for de-registration on any valid reason.
• After filing the application for de-registration, the obligation to file monthly sales tax return shall remain
suspended until he is de-registered or his application is rejected.
• The Commissioner, after satisfying himself, shall direct the applicant to discharge any outstanding liability,
if any, by filing a Final Return.
• Where the Commissioner desires to conduct audit or inquiry to determine tax liability, he shall require the
applicant to provide the requisite records. On receipt of the complete requisite records, entry to this effect
shall be made in the computerized system which shall automatically de-register the applicant on expiry of
90 days thereof.
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Question 1: Ceasing Business
Scenario:
Ahmed, a registered taxpayer, decides to cease his business operations in Lahore and notifies the Commissioner
accordingly. He has cleared all dues but did not submit his application for de-registration immediately. He
continues to file his monthly sales tax returns for another two months but then stops filing returns.
• What steps must Ahmed take for de-registration?
• When will his de-registration be effective?
• What happens if he fails to submit the final return?
Solution:
• Ahmed must submit an application for de-registration to the Commissioner, stating the cessation of
business.
• Since the Commissioner may initiate de-registration on its own or at the request of the taxpayer, the deregistration will be processed 90 days from the date of application or when all dues are cleared,
whichever is later.
• If Ahmed does not submit his final return or provide requisite documents, the Commissioner may
require him to clear his outstanding tax liabilities, including any pending returns, before proceeding with
de-registration. De-registration will be automatic once the 90-day period expires after the final return
or outstanding tax liabilities are cleared.
Question 2: Supplies Become Exempt
Scenario:
Khadija, a registered supplier of industrial equipment, sells her products, which were previously subject to sales
tax. Recently, due to a change in tax laws, her supplies have become exempt. She has no other business activities.
• Can Khadija apply for de-registration?
• What is the process for her de-registration?
• What happens if she fails to submit her final return after applying for de-registration?
Solution:
• Yes, Khadija can apply for de-registration as her supplies have become exempt, and she no longer carries
on taxable business activities.
• The process involves submitting an application for de-registration to the Commissioner. The deregistration will be effective after 90 days from the date of the application or when all dues are cleared,
whichever is later.
• If Khadija fails to submit the final return, the Commissioner will not process the de-registration. She will
need to discharge any outstanding liabilities by filing the final return and providing the necessary
records before de-registration.
Question 3: Sale of Business
Scenario:
Ali is the owner of a registered business that deals in electronics. He sells his business to another registered
taxpayer, Sarah. Ali notifies the Commissioner about the sale of the business but does not immediately apply for
de-registration. During the next month, Sarah continues to run the business under her own registration.
• What action must Ali take for de-registration?
• When will Ali’s de-registration become effective?
• What is the impact of Ali not submitting his final return?
Solution:
• Ali must apply to the Commissioner for de-registration after selling his business to Sarah.
• The de-registration will be processed 90 days from the date of the application or once all dues are
cleared, whichever is later.
• If Ali fails to submit his final return, the Commissioner will not process his de-registration, and any
outstanding tax liabilities must be settled before the de-registration can proceed. The final return will
need to be filed before de-registration can be completed.
Question 4: Non-filing of Returns for 6 Periods
Scenario:
Zara, a registered taxpayer, has not filed her sales tax returns for the last six consecutive months, although her
business is still operational. The tax authorities have sent her several notices, but Zara has not responded.
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• What action will the Commissioner take in this case?
• What is the timeline for Zara’s de-registration?
• What will happen if Zara fails to file the final return?
Solution:
• Since Zara has failed to file her returns for six consecutive months, the Commissioner can initiate deregistration on its own or upon Zara’s application.
• The Commissioner will process her de-registration 90 days after the application or when any
outstanding liabilities are settled, whichever is later.
• If Zara fails to file her final return, the Commissioner will not process her de-registration. Zara must file
the final return and provide the necessary records for the audit. Only after resolving all outstanding
issues will the de-registration be processed.
Question Mr. Moye Moye applied for de-registration on 05th March 2024. Determine the date by which
commissioner may issue order of de-registration if outstanding:
(a) Tax liability is paid on 15th May 2024;
(b) Tax liability is paid on 12th July 2024.
Solution
(a) The Commissioner may issue order of de-registration within later of following:
• 90 days from the date of application i.e. 3rd June 2024; or
• The date all outstanding liabilities are deposited by him i.e. 15th May 2024.
As 3rd June 2024 is later, the Commissioner may issue order of de-registration by 3rd June 2024.
(b) The Commissioner may issue order of de-registration within later of following:
• 90 days from the date of application i.e. 3rd June 2024; or
• The date all outstanding liabilities are deposited by him i.e. 12th July 2024.
As 12th July 2024 is later, the Commissioner may issue order of de-registration by 12th July 2024.
J)
Blacklisting and suspension of registration –
Where the Commissioner / FBR has reasons to believe that a registered person is involved in tax fraud etc., he may
suspend the registration of such person by an order in writing and initiate such enquiry as deem fit.
Procedure for blacklisting and suspension of registration:
SUSPENSION
1. Where a commissioner is satisfied that a registered person has issued fake invoices, evaded tax or committed
tax fraud, registration of such person may be suspended through the system, without prior notice, pending
further inquiry.
The basis for suspension may inter alia include:
a) Non-availability of the registered person at the given address;
b) Refusal to allow access to business premises or refusal to furnish records to an authorized Inland
Revenue Officer;
c) Abnormal tax profile, such as taking excessive input tax adjustments, continuous carry- forwards, or
sudden increase in turnover;
d) Making substantial purchases from or making supplies to other blacklisted/suspended persons;
e) Non-filing of sales tax returns;
f) On recommendation of a commissioner of any other jurisdiction;
g) Any other reason to be specified by the Commissioner.
2.
The written suspension order shall indicate the reason for suspension and shall be endorsed to the
registered person and all other concerned departments.
3.
A registered person who does not file sales tax return for six consecutive months shall be suspended by the
system without any notice.
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4.
No input tax adjustment/refund shall be admissible to the suspended person during the period of
suspension. Similarly, no input tax adjustment shall be allowed to the buyers on the basis of invoices issued
by such suspended person (whether issued prior to or after such suspension), during the period of
suspension.
5.
The Commissioner shall, within 7 days of issuance of suspension order, issue a show cause notice to afford
an opportunity of hearing within 15 days of the issuance of such notice clearly indicating that he will be
blacklisted in case:
a)there is no response to the notice
b)has not provided the required record
c)has not allowed access to his business record/premises
d)any other reason specified by the Commissioner.
6.
In case show cause notice is not issued within 7 days of the suspension order, the said order shall become
void ab initio.
7.
In case of non-availability of the suspended person at the given address, the notice may be affixed on the
main notice board of the LTU/RTO.
8.
On receipt of the reply to the notice, if the Commissioner is satisfied, he may order for revoking of
suspension of the registered person.
BLACKLISTING
9.
In case the offence is confirmed, the Commissioner shall issue an appealable order for blacklisting and
shall proceed to take legal and penal action.
10.
•
•
•
The order of blacklisting shall contain:
reasons for blacklisting;
time period for which any refund or input tax shall be inadmissible claimed by blacklisted person or by
his buyers on the basis of invoices issued by him;
any recovery to be paid or penalties to be imposed.
11.
The order of blacklisting shall be issued within 90 days of the issuance of the notice of hearing. In case,
the order of blacklisting is not issued within 90 days the suspension of registered person shall become void ab
initio.
12.
Copies of the order shall be endorsed to the registered person and all the concerned departments. Copies
of the order shall also be circulated, along with a computer system- generated list of invoices issued by the
blacklisted persons, to all Officers of Inland Revenue to enable them to disallow the input tax claim on the basis of
invoices issued by the said blacklisted persons.
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Summary of Process
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Sales tax records & misc
1.
Chapter
21
Record keeping and Return filing requirements
a)
Records – Section 22:
A registered person making taxable supplies shall maintain and keep certain records / documents at his registered
office including the following:
1.
Records of purchases/imports and supplies made indicating description, quantity, value of goods, name,
address and NTN of the buyer/ supplier and the amount of sales tax charged or paid;
2.
Records of zero-rated and exempt supplies;
3.
Invoices, credit / debit notes, bank statements, banking instruments, inventory records, utility bills, salary
and labor bills, cash book, agreement in respect of rent, sale and purchase;
4.
gate passes, inward or outward, and transport receipts;
5.
Double entry sales tax accounts;
6.
Business bank accounts should be declared;
7.
Electronic version of records;
8.
Such other records as may be specified by the Board.
The above record shall be retained for 6 years – Section 24.
• Provided that the persons paying retail, tax shall keep such record as may be specified by the Board.
• The Board may also require a registered person or class of registered persons to declare and use only as
many numbers of business bank accounts as may be specified by the Board in such notification to make or
receive payments on account of purchase and sale transactions for the purpose of the Sales Tax Act, 1990
or rules made thereunder and to make payment of due tax from such accounts only.
• The Board may specify to keep such other records for the sales tax law purposes.
• The Board may specify to use such electronic fiscal cash registers as are approved by the Board.
• The registered person shall keep the aforesaid record at his business premises or registered office in
English or Urdu language
• The registered persons, whose accounts are subject to audit under the Companies Act, 2017, shall be
required to submit a copy of the annual audited accounts, along with a certificate by the auditors certifying
the payment of due tax by the registered person
b)
Return filing requirements
Every registered person is required to file monthly return electronically through FBR e-portal by the prescribed
date of filing of return.
A general due date of filing of return is 15th of the next month. However, in case where due date is 15th of a month,
the tax due shall be deposited by 15th and the return shall be submitted electronically by 18th of the same month.
Tax shall be deposited in National bank on the prescribed payment challan or through electronic payment system
devised for this purpose.
The date of payment in case of payment through cash or cheque shall be treated as the date on which the payment
is received by the bank. In case of payment through pay order or bank draft, date on which the pay order or bank
draft is tendered at the bank counter.
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c)
Sales Tax Records & Misc
Electronic filing of sales tax:
A registered person shall enter data electronically of his supplies in Annexure-C (i.e. output tax) and data of Debit
or Credit Notes in Annexure-I by the 10th day of the month next following the tax period. This data shall be
immediately available to the other parties in their “Purchase Data” and “Debit or Credit Note Data” to enable them
to claim input tax.
Data relating to purchases made from unregistered persons or from such registered persons as allowed by the FBR
in this respect shall be entered manually in Annexure-A
If a registered person’s claim reduces his sales tax liability such as:
Input tax on his purchases; or
Credit Note issued by him in respect of sales return or increase in purchase value on account of any mistake
or otherwise in purchase invoice earlier received
And a discrepancy was found by the automated system of the FBR then the said adjustment would be allowed to the
registered person on provisional basis and he would be given an opportunity to contact and persuade the other
party to resolve the discrepancy by declaring output tax.
If the discrepancy is resolved then the objection raised by the automated system shall stand settled and the
registered person shall be informed accordingly.
If the discrepancy is not resolved by the 10th day of the next month, then the adjustment earlier allowed on
provisional basis shall be adjusted or recovered from the registered person.
Quantitative details – rule 14
Registered manufacturers of the specified goods are required to furnish the details of quantities of goods manufactured
and supplied along with the monthly returns. The examples of specified goods include sugar, cigarettes, paper, cement,
refrigerators, ACs, TV, vehicles, ice cream etc.
d)
Annual Return or Special Return
FBR may require a person to file annual statement in the prescribed form.
Every company registered for sales tax shall file annual sales tax return for a financial year by 30th September of
the next financial year.
e)
Extension of time for filing of return
For the purpose of extension of time for filing of return, the registered person is required to file an application to
the Commissioner and the Commissioner may grant an extension of time up to 15 days if he is satisfied that the
applicant is unable to furnish the return by the due date because of –
(i)Absence from Pakistan;
(ii)Sickness or other misadventure; or
(iii)Any other reasonable cause.
Under exceptional circumstances a longer time extension may also be granted by the Commissioner.
Refusal of extension by the Commissioner
If a commissioner refuses to extend the time for filing of return, then the registered person may file an application
to the Chief Commissioner who may allow such extension of time for 15 days and a longer time under exceptional
circumstances.
f)
Revised returns:
A registered person may file a revised return with the approval of Commissioner within 120 days of filing the
original return. However, Commissioner’s approval is not required where the return is revised within 60 days or
where tax payable in the revised return is more than the tax payable declared in the original return.
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When filing a revised return, the following amounts will be paid depending upon the time it is furnished
Time of Furnishing revised return
Amount required to be paid
Before receipt of notice of audit
Amount of short tax paid/ evaded + default
surcharge
During audit and before receipt of show cause
Amount of tax pointed by officer + 25% of penalty
notice
After issuance of show cause notice
Amount of Tax evaded + Default Surcharge + 100%
penalty [If this amount is paid show cause notice
shall stand abated]
g)
Final return:
Before de-registration, if any tax liability is required to be paid, it would be paid through a final return.
Particulars of Return:
i. The return shall indicate; Sales tax registration number (STRN), name and address of the supplier.
ii. name, address and registration, number of the recipient and NIC or NTN of the unregistered person, as the case
may be, excluding supplies made by a retailer where the transaction value inclusive of sales tax amount does not
exceed rupees one hundred thousand, if sale is being made to an ordinary consumer
iii. Explanation—For the purpose of this clause, ordinary consumer means a person who is buying goods for his own
consumption and not for the purpose of resale or processing: Provided that the condition of NIC or NTN shall be
effective from 1st August, 2019;
iv. Date of issue of invoice;
v. description, including count, denier and construction in case of textile yarn and fabric and quantity of goods;
vi. Tax credit carried forward from previous period.
vii. Value of supplies
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viii. Output tax due on supplies as under:
a) Local taxable supplies
b) Exempted supplies
c) Zero rated supplies
ix. Value of purchases;
x. Input tax paid on purchases as under:
a) Local taxed goods
b) Imported taxed goods
c) Exempted purchases
d) Zero rated purchases
e) other purchases
xi. Arrears payable
xii. Amount payable / refundable.
•
•
•
2.
The registered person shall deposit in the banks, the amount of sales tax indicated as “Sales Tax Payable”
in the return at the time of filing of return.
In case no amount of sales tax is payable by the registered person, he shall file “Nil” return without
depositing any amount.
If it is subsequently proved that CNIC provided was by the purchaser was not correct, liability of tax or
penalty shall not arise against the seller, in case of sale made in good faith.
Assessment & Audit
a)
Audit – Section 25
1.
2.
3.
Audit may be conducted by the Commissioner. An inquiry or investigation may also be conducted if the
Commissioner has sufficient evidence that the registered person is involved in tax fraud.
However, an officer of Inland Revenue may also conduct an audit, if the same were earlier conducted by the
office of the Auditor General of Pakistan.
The Commissioner may conduct audit proceedings electronically through video link.
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4.
The Assistant Commissioner (Audit) shall issue his audit observations if he finds any defects during audit.
The registered person is required to submit his point of view within 15 days against such audit
observations. The Assistant Commissioner shall issue an audit report specifying the sales tax demand, if
any.
5. If the registered person makes payment of sales tax evaded or short paid voluntarily before receiving
notice for audit then no penalty shall be imposed. 25% penalty shall be imposed if the same is paid during
audit but before issuance of show cause notice [i.e., audit observations]. Full penalty shall be imposed
after issuance of show cause notice.
1. ‫کمشنر کے ذریعے آڈٹ‬: ‫کمشنر کے پاس یہ اختیار ہے کہ وہ آڈٹ کرائے یا اگر اس کے پاس کافی ثبوت ہوں کہ رجسٹرڈ شخص ٹیکس‬
‫فراڈ میں ملوث ہے تو تحقیقات کرے۔‬
2. ‫ان لینڈ ریونیو افسر کا آڈٹ‬: ‫ تو ان لینڈ ریونیو کا افسر بھی‬،‫اگر آڈٹ پہلے پاکستان کے آڈیٹر جنرل کے دفتر کے ذریعے کرایا گیا ہو‬
‫آڈٹ کر سکتا ہے۔‬
3. ‫کمشنر کا الیکٹرانک آڈٹ‬: ‫کمشنر آڈٹ کے عمل کو ویڈیو لنک کے ذریعے بھی کر سکتا ہے۔‬
4. ‫اسسٹنٹ کمشنر (آڈٹ) کے نوٹس‬: ‫اگر اسسٹنٹ کمشنر (آڈٹ) کو آڈٹ کے دوران کسی قسم کی خامی یا نقص ملے تو وہ آڈٹ کی‬
‫ دن کے اندر جمع کرانے ہوں گے۔ اس کے بعد اسسٹنٹ‬15 ‫مشاہدات جاری کرے گا۔ رجسٹرڈ شخص کو ان مشاہدات پر اپنے خیاالت‬
‫ اگر کوئی ہو۔‬،‫کمشنر ایک آڈٹ رپورٹ جاری کرے گا جس میں سیلز ٹیکس کا مطالبہ بتایا جائے گا‬
5. ‫سیلز ٹیکس کی ادائیگی اور جرمانہ‬: ‫اگر رجسٹرڈ شخص آڈٹ نوٹس ملنے سے پہلے خود سے ٹیکس کی کمی یا فراڈ کی ادائیگی کر‬
‫دیتا ہے تو اس پر کوئی جرمانہ نہیں لگے گا۔ اگر آڈٹ کے دوران لیکن شوکاز نوٹس (آڈٹ مشاہدات) کے جاری ہونے سے پہلے ادائیگی‬
‫ جرمانہ لگے گا۔ اور اگر شوکاز نوٹس جاری ہو چکا ہو تو مکمل جرمانہ لگے گا۔‬%25 ‫کی جائے تو‬
b) Assessment of tax and recovery of tax not levied or short-levied or erroneously refunded. Section 11
An Officer Inland Revenue shall make an assessment of tax including default surcharge and penalty where:
A person fails to file a return of sales tax; or
A person pays tax less than the tax actually payable due to miscalculation; or
A person claimed incorrect input tax or refund; or
The tax due on supplies made by a person has not been paid or short paid; or
Any tax has not been levied or short levied by reason of any inadvertence, error or misconstruction
or deliberately.
For the purpose of audit, a show cause notice may be given within a period of 5 years specifying the ground of
such assessment and an opportunity of being heard shall be provided.
Time limit for said assessment is within 120 days of issuance of show cause notice (may be extended to a further
90 days for reasons to be recorded in writing).
However, any period during which the proceedings are adjourned for any reason including stay order shall be
excluded from the said time limit for completion of assessment.
Where a tax has not been levied, the tax shall be recovered as tax fraction of the value of supply.
Where a person, required to file a return, files the return after the due date and pays the amount of tax along with
default surcharge and penalty, the show cause notice and the order of assessment shall abate.
However, where a registered person has not paid tax payable with return or short paid then tax payable shall be
recovered without notice by:
-Attachment of his business bank account; and
-stopping removal of any goods from business premises
However, show cause notice is required for imposition of any penalty.
‫ان لینڈ ریونیو افسر کا ٹیکس کا تعین‬: ‫جب کوئی شخص درج ذیل میں سے کسی بھی عمل کا مرتکب ہوتا ہے تو ان لینڈ ریونیو افسر اس‬
‫ جس میں ڈیفالٹ سرچارج اور جرمانہ بھی شامل کیا جا سکتا ہے‬،‫کا ٹیکس تعین کرتا ہے‬:
1. ‫ٹیکس ریٹرن نہ جمع کروانا‬: ‫اگر کسی شخص نے سیلز ٹیکس کی ریٹرن جمع نہیں کرائی۔‬
‫مثال‬: ‫ تو ان لینڈ ریونیو افسر اس کا ٹیکس اور جرمانہ تعین کرے گا۔‬،‫ایک دکان دار نے سال بھر کا سیلز ٹیکس ریٹرن نہیں جمع کروایا‬
2.
‫کم ٹیکس ادا کرنا‬: ‫اگر کسی شخص نے غلط حساب کتاب کی وجہ سے ٹیکس کم ادا کیا۔‬
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‫‪Sales Tax Records & Misc‬‬
‫ایک کاروباری شخص نے اپنے کاروبار کی سیلز کا حساب غلط لگایا اور کم ٹیکس ادا کیا‪ ،‬تو ان لینڈ ریونیو افسر اس پر جرمانہ ‪:‬مثال‬
‫لگا سکتا ہے۔‬
‫دعوی کیا۔ ‪:‬غلط انپٹ ٹیکس یا ریفنڈ کا دعوی ‪3.‬‬
‫اگر کسی شخص نے غلط انپٹ ٹیکس یا ریفنڈ کا‬
‫ٰ‬
‫دعوی کیا‪ ،‬جس کے نتیجے میں اس کو زیادہ ریفنڈ مل گیا۔ ‪:‬مثال‬
‫ایک کاروبار نے اپنی خریداری پر غلط انپٹ ٹیکس کا‬
‫ٰ‬
‫اگر کوئی شخص اپنے فراہم کردہ مال پر ٹیکس نہیں ادا کرتا یا کم ادا کرتا ہے۔ ‪:‬سیلز کی ادائیگی نہ کرنا یا کم ادا کرنا ‪4.‬‬
‫ایک کمپنی نے اپنی مصنوعات کی فروخت پر ٹیکس کم ادا کیا یا ادا نہیں کیا۔ ‪:‬مثال‬
‫اگر کسی وجہ سے غلطی یا نادانی کی وجہ سے ٹیکس نہیں لگایا گیا۔ ‪:‬غلطی یا نادانی کی وجہ سے ٹیکس نہ لگانا ‪5.‬‬
‫ایک ٹیکس افسر کی غلطی سے کسی کاروبار پر ٹیکس نہیں لگایا گیا‪ ،‬یا اگر یہ جان بوجھ کر کیا گیا ہو۔ ‪:‬مثال‬
‫آڈٹ کا نوٹس ‪ 5‬سال کے اندر جاری کیا جا سکتا ہے‪ ،‬جس میں اس بات کا ذکر کیا جائے گا کہ یہ ٹیکس کا تعین کس بنیاد ‪:‬آڈٹ کا نوٹس‬
‫پر کیا گیا ہے‪ ،‬اور اس شخص کو اپنی بات سنانے کا موقع بھی دیا جائے گا۔‬
‫آڈٹ کا نوٹس جاری ہونے کے بعد ٹیکس کا تعین کرنے کی آخری تاریخ ‪ 120‬دن ہے‪ ،‬اور اگر ضروری ہو تو یہ ‪ 90‬دن مزید ‪:‬ٹائم لیمیٹ‬
‫بڑھائی جا سکتی ہے۔‬
‫اگر کسی شخص نے ریٹرن کے ساتھ ٹیکس ادا نہیں کیا یا کم ادا کیا تو ٹیکس کو بغیر نوٹس کے وصول کیا جا سکتا ‪:‬ادائیگی کے طریقے‬
‫‪:‬ہے‪ ،‬جیسے کہ‬
‫اگر کسی نے کم ٹیکس ادا کیا‪ ،‬تو اس کے کاروباری بینک اکاؤنٹ کو مہر بند کیا جا ‪:‬کاروباری بینک اکاؤنٹ کی مہر بندی •‬
‫سکتا ہے۔‬
‫اس کے مال کی ترسیل روکی جا سکتی ہے۔ ‪:‬مال کا نکالنا روکنا •‬
‫فرض کریں ایک تاجر نے اپنی دکان سے مال بیچا اور سیلز ٹیکس ادا نہیں کیا‪ ،‬تو ان لینڈ ریونیو افسر اس کا بینک اکاؤنٹ ضبط کر ‪:‬مثال‬
‫سکتا ہے یا مال کی ترسیل روک سکتا ہے۔‬
‫اگر کسی شخص نے اپنی ٹیکس کی ادائیگی بعد میں کردی اور ڈیفالٹ سرچارج اور جرمانہ بھی ادا کیا تو اس کے خالف ‪:‬نوٹس کا معاملہ‬
‫آڈٹ کا نوٹس اور ٹیکس کا تعین منسوخ کر دیا جائے گا۔‬
‫اگر ایک تاجر نے دیر سے ریٹرن فائل کی اور ساتھ میں ٹیکس اور جرمانہ بھی ادا کیا تو اس کے خالف مزید کارروائی نہیں کی ‪:‬یعنی‬
‫جائے گی‪ ،‬لیکن اگر وہ کم ٹیکس ادا کرتا ہے تو اسے نوٹس بھیجا جائے گا۔‬
‫‪Assessment giving effect to an order:‬‬
‫‪Where an assessment order is required to be issued on the instruction of an appellate authority, the‬‬
‫‪Commissioner or an officer of Inland Revenue empowered in this behalf shall issue the order within one year from‬‬
‫‪the end of the financial year in which the appellate order was served.‬‬
‫کرنے کا حکم )‪ (assessment‬جب کوئی اپیلیٹ اتھارٹی (یعنی ٹیکس اپیل کا فیصلہ کرنے واال ادارہ) کسی فیصلے کی بنیاد پر ٹیکس کی تشخیص‬
‫دیتی ہے‪ ،‬تو کمشنر یا ان لینڈ ریونیو کا افسر جسے اس کے لیے اختیار حاصل ہو‪ ،‬اسے اپیلیٹ اتھارٹی کے فیصلے کی خدمت کے بعد ایک سال‬
‫کے اندر اندر تشخیص کا آرڈر جاری کرنا ہوتا ہے۔‬
‫‪:‬مثال‬
‫فرض کریں ایک کاروباری شخص نے اپنے ٹیکس کے معاملے میں اپیلیٹ اتھارٹی کے سامنے اپیل کی اور وہاں پر فیصلہ آیا کہ اس کی ٹیکس کی‬
‫تشخیص دوبارہ کی جائے۔‬
‫اپیلیٹ اتھارٹی نے فیصلہ کیا کہ ٹیکس کی تشخیص میں کچھ غلطی ہوئی تھی‪ ،‬اور اس فیصلے کی بنیاد پر کمشنر ‪:‬موجودہ صورت حال ‪1.‬‬
‫یا ان لینڈ ریونیو کے افسر کو ٹیکس کا دوبارہ حساب لگانا ہوگا۔‬
‫کمشنر یا افسر کو اپیلیٹ اتھارٹی کے فیصلے کے بعد ایک سال کے اندر اندر ٹیکس کی نئی تشخیص کا آرڈر جاری ‪:‬تشخیص کا عمل ‪2.‬‬
‫کرنا ہے۔‬
‫‪:‬مثال کے طور پر‬
‫•‬
‫اگر اپیلیٹ اتھارٹی نے ‪ 2023‬کے دسمبر میں اپنا فیصلہ سنایا‪ ،‬تو کمشنر یا ان لینڈ ریونیو افسر کو ‪ 2024‬کے ‪ 30‬جون تک اس فیصلے‬
‫کے مطابق ٹیکس کی تشخیص کا آرڈر جاری کرنا ہوگا۔‬
‫اس طرح‪ ،‬ایک سال کی مدت اپیل کے فیصلے کے بعد کمشنر کو ٹیکس کی تشخیص کا آرڈر جاری کرنے کے لیے دی جاتی ہے۔‬
‫‪Powers of tax authorities to modify orders:‬‬
‫‪Where a question of law has been decided by the Appellate Tribunal or High Court in the case of a registered‬‬
‫‪person, the Commissioner may follow the said decision including in respect of an identical situation in the‬‬
‫‪subsequent years of the said registered person even if the tax department has filed an appeal against such‬‬
‫‪decision.‬‬
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Chapter-21
Sales Tax Records & Misc
If the higher appellate authority reverses such decision of the Appellate Tribunal or High Court, the Commissioner
is empowered to modify the assessment within 1 year from the date of receipt of the decision of the higher
appellate authority and in this case normal time limit for amendment shall not apply.
c)Access to Records and Documents – Section 25
Officer Inland Revenue is authorized to have access to the records and documents maintained under the Sales Tax
Act or under any other law and use of such machine (e.g. computer) on which data related to sales tax is kept.
d)
Drawing of Samples – Section 25A
An authorized officer of Inland Revenue, if consider it necessary, may take a sample of any goods or raw materials,
for the purpose of:
(i) determining the liability to sales tax of a registered person; or
(ii) for the purpose of establishing value of goods; or
(iii) for any other reason.
➢
➢
➢
➢
The sample drawn shall be a minimum quantity of goods or raw materials sufficient to enable a proper
examination or analysis to be made.
At the time of taking the sample the person in possession of the goods shall be informed and given the
opportunity to sign the representative samples, so drawn, and take
corresponding sample for his own record.
Any sample taken as above shall be taken against a proper receipt a copy each of which shall be kept in
the record by the registered person and the large Taxpayers unit or Regional Tax Officer, as the case may
be.
Recovery of short paid amounts without notice
Where a registered person pays the amount of tax less than the tax due as indicated in his return, the short paid
amount of tax along -with default surcharge shall be recovered from such person by stopping removal of any
goods from his business premises and through attachment of his business bank accounts. Any of these actions
may be taken without giving
him a show cause notice and without prejudice to any other action prescribed under section 48 of this Act or the
rules made there under. Provided that no penalty under section 33 of this Act shall be imposed unless a show
cause notice
is given to such person.
❑ Provisions of this section shall apply notwithstanding any of the provisions of this Act
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SECTION- C BASICS
Syllabus Weightage
Syllabus
Grid
Ref.
A
Teaching
Weightage
Hours
Objective, System and Historical Background,
Constitutional Provisions and Ethics
10-15
5-10
Proficiency
levels
Testin
g
levels
P1
T1
Key Examinable Technical Competencies
Syllabus
Learning Outcomes
Ref.
A.
Objective, System and Historical Background,
Constitutional Provisions and Ethics
1
Basic Concepts of taxation and Constitutional
Provisions
Discuss the implication of direct and indirect taxation.
b
Federal and Provincial Financial Procedures
1
Describe Federal Consolidated Fund and Public Account.
P1
T1
2
Describe Provincial Consolidated Fund and Public Account.
P1
T1
3
Explain the provisions related to the distribution of
revenues between the Federation and Provinces.
P1
T1
4
Discuss taxes that can be raised under the authority of
Parliament.
P1
T1
5
Describe the powers of provincial assemblies in respect of
provincial taxes.
P1
T1
c
Ethics
1
Discuss the objectives and rights of the state to tax its
citizens.
P1
T1
2
Discuss morality behind compliance with tax laws by
taxpayers and tax practitioners.
P2
T1
3
Describe the powers vs ethical responsibilities of tax
implementation authorities
P2
T1
4
Discuss pillars of tax administration, namely; fairness,
transparency, equity and accountability.
P2
T1
5
Explain the basic difference between evasion and avoidance of
tax
P1
T1
a
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Chapter
22
System of taxation in pakistan
DEFINITION OF TAXATION AND OBJECTIVES OF TAXATION LAWS
Definition of tax
Tax is defined as follows:
1. Taxation is collection of share of individual and organization's income by Government under authority of law.
2. Taxation is used by Government for increasing revenue under authority of law to promote welfare and
protection for its citizens.
Non-revenue objectives of taxation
The main purpose of taxation is to collect revenue for the Government. The Government levies tax to achieve
following objectives.
1. To collect revenue to run and administer Government.
2. Tax is a tool for implanting its policies.
3. Tax is used for fair distribution of wealth.
In addition to finance Government expenses, tax is used as a tool to carry out national objective of social and
economic development as follows:
1. Government can encourage the production of certain goods by introducing exemptions.
2. By charging high tax rates on imports the Government can encourage local purchase.
3. Taxes can be used to reduce inequalities in distribution of wealth.
4. Tax prevents wealth being concentrated in a few hands of the rich.
5. Through tax Government can encounter the effect of inflation and depression
6. To promote science and invention, education systems, health care systems, energy system and military defense.
7. It can be used to discourage investment abroad.
8. Tax can be used as a bargaining tool in trade negotiation with other countries.
9. Tax laws can be used for documentation of economy (Any amount transferred otherwise than banking channel
will be deemed as income)
10. Government can discourage use of harmful goods by levying heavy rates of tax on certain sectors.
11. Tax can be used to discourage certain undesirable sectors and activities.
12. Government can encourage research & developments by introducing tax credits.
Question
Explain the objectives of following tax laws?
Solution
Tax Law
Objective
Tax on salary income
Revenue Collection
Money transferred not through banking channel is
Documentation of economy
Documentation of economy considered as income
Tax on moveable assets of taxpayers
Fair distribution of wealth
Higher taxes on import of luxury goods
Reduction in imports of unnecessary goods
Allowing research as an expense
Promotion of research
Making exports exempt from tax
Promotion of Exports
Tax credit on Donations to approved institutions
To promote culture of payment of donation to only
organized and regulated institutions
Tax credit on investments
Promote investments in listed companies
Tax exemptions to software exports
Promote software Industry
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Chapter-22
System of Taxation In Pakistan
BASIC CONCEPTS
Basics of tax laws
Adam Smith's in his famous book "Wealth of Nations" has elaborated following canons of taxation:
Equality
Tax payments should be proportional to income.
Certainty
Tax payable should be clear and certain to taxpayer.
Convenience of payment
Tax should be collected from taxpayer at a convenient time.
Economy of collection
Taxes should not be expensive to collect.
Tax as means for development
Tax is a main source of development. Tax helps in the development of country as follows:
1. Exemption of tax to agriculture sector to promote agriculture.
2. Charities can be encouraged by providing tax credits on them.
3. Imposing high custom duties on import of luxury items will encourage local manufacturing.
4. Taxing rich at higher rate and low income group at lower rate.
5. Government can mark areas as tax free zones, industrial zone and economic zone to provide tax incentives to
such areas. It will encourage business concerns to establish business units that will bring employment
opportunities.
6. Investment in new shares can be encouraged through introducing tax credits.
7. Investment in new plant and machinery can be encouraged through introduction of tax credits.
Kinds of taxes/Structure of taxes
Proportional tax/ Flat tax
It is a tax where the rate of tax is fixed. A fixed rate is applied on person's income whether the income is high or
low. Under this system people who earn more are not charged at a higher percentage as compared to progressive
tax. E.g Sales tax, Corporate Tax
Progressive tax
It is a tax in which the tax rate increases as the income base increases. A progressive tax takes a larger amount of
tax from the high-income group as compared to low-income group. This tax proportionately equal to a person's
status in the society. E.g Income Tax
Regressive tax
It is a tax where tax rate decreases as the amount of income increases. The higher income group pays less in taxes
than the lower income group. Regressive taxes impose greater tax burden on the poor.
Principles for levy of tax
Following are the principles for levy of tax.
The Benefit Principle
This principle says that taxes should be based on the benefits received. It means that those who receive the
greatest benefits from Government projects should pay the most taxes. The benefit principle is commonly used for
highways, libraries, etc.
The Ability-to-Pay principle
The tax should be based on ability to pay. It means that a person who is earning more income should pay more tax.
Progressive tax rates are an example of it.
The Equal Distribution Principle
It says that incomes and transactions should be taxed at a fixed rate. Therefore, people who are earning more
income shall pay more tax but not at higher rate.
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Chapter-22
System of Taxation In Pakistan
Characteristics of tax laws
Following are some of the characteristics of a taxation system:
1. Administration and compliance costs should be low.
2. It should be understandable to the taxpayer.
3. The burden of taxes should be distributed in proportion to the ability of the tax-payer, i.e., it should be
progressive in character.
4. The tax should be payable in cash. It means that payment through cheque should not be accepted.
5. It should be mandatory in nature and payment should not be voluntary in nature.
6. Taxes should be collected at a convenient time for tax payers.
7. Tax should be imposed by state which has the jurisdiction over the person to recover i.e. it should be
imposed by Parliament in Pakistan.
8. It is levied for public purpose i.e. taxes are imposed to support Government to implement projects.
9. Taxes should be charged on incomes, transactions or property.
The principles of a sound tax system
1. Fiscal adequacy
The sources of revenue should be sufficient to meet expenses of government. Revenues of Government should be
capable of expanding or contracting annually in response to variations in public expenditures.
2. Equality or Theoretical Justice
Taxes charged must be based upon the ability of the citizen to pay.
3. Administrative Feasibility
Tax laws should be clear and plain to taxpayers. Capable and well-trained public officers should enforce it. Time of
payment should be convenient.
4. Consistency or Compatibility with Economic Goals
Tax laws should be consistent with economic goals of the government. The goal of Government is to provide basic
services for general public.
TYPES OF TAXES IN PAKISTAN
Federal taxes in Pakistan are classified into 2 broad categories:
1. Direct taxes
2. Indirect taxes
Direct Taxes
Income Tax
Income tax is imposed for each tax year, at specified rates on every person who has taxable income for the year.
Taxable income for charge of tax is divided under the following heads:
a) Salary;
b) Income from Property;
c) Income from Business;
d) Capital Gains; and
e) Income from Other Sources.
Capital Value Tax
Capital value tax on different transaction such as transfer of immoveable property, transfer of rights etc.
Indirect Taxes
Sales Tax
Sales tax is levied at various stages of economic activity:
a) All taxable supplies made by a registered person in the course of any taxable activity carried on by him; and
b) All taxable goods imported into Pakistan.
c) All taxable services provided in Pakistan
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Chapter-22
System of Taxation In Pakistan
For determining tax liability input paid at the time of purchase or import is deducted from output tax charged on
sales. The sales tax is chargeable at the rate of 18%. In Pakistan, the Government has the flexibility to levy sales
taxes at varying rates, which may be higher or lower than 18%.
Customs Duty
Customs Act in Pakistan specifies import and export duties on certain goods. A major portion of Government's
revenue is collected through this tax. The rate of custom duty is determined by
socio-economic factors.
Under this Act high rate is applied on luxury items as well as less essential goods. The import tariff on industrial
plant and machinery is lower than that of consumer goods.
Federal Excise Duty
Under Federal Excise Act tax is charged at specified rate on:
• Goods produced or manufactured in Pakistan
• Goods imported in Pakistan
• Services provided in Pakistan
The base on which tax is charged may be value or retail price or weight. Classification of goods is done as per
Harmonized Commodity Description and Coding system. All exports are charged to tax at the rate of zero percent.
HISTORY OF TAX LAWS IN PAKISTAN
In Pakistan Federal Government has the right to collect tax on the income of a person.
The history of modern tax came from year 1860. Before the partition, income tax was introduced for the first time
in 1860. The British Empire first introduced the Income Tax Act 1860 to fulfill the deficit faced due to war of
independence of 1857. The tax was repealed in 1865.
Thereafter Income Tax Act of 1886 was introduced and it was imposed on traders by some of provinces. Its basic
scheme survives till today. It introduced the definition of agricultural income and it was made exempt from tax
and the exemption is applicable till now.
After the World War, the Government required more funds. So in 1916 for the first time progressive rates of tax
were introduced. Government thought that flat rates of taxes are not justified and the amount of the tax levied
should depend upon the income of the earner. For collecting additional resources, a Super Tax was levied in 1917,
The most comprehensive tax introduced was Income Tax 1922 in which income tax and super tax were
consolidated. Its salient features were:
• Rates to be decided every year through Finance Act.
• In certain cases tax withholding was made mandatory.
• Re-opening of assessment was allowed.
After independence, the Government of Pakistan adopted this Act.
Till 1979, lot of amendments took place in Income Tax Act, 1922. Resultantly, the Act became a complicated law.
Keeping in view the difficulties, the Government promulgated a new income tax law namely "The Income Tax
Ordinance, 1979". This law was amended through number of finance acts and after 23 years of its existence, a new
law was promulgated termed as "Income Tax Ordinance, 2001. The fundamental change introduced was the
introduction of a regime of Universal Self-Assessment Scheme.
This law has also been amended through number of finance acts and changes are still going on.
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Constitutional provisions
Chapter
23
FEDERAL FINANCIAL PROCEDURES
Federal Consolidated Fund and Public Account [78]
• All revenues received/loans raised by the Federal Government and
• Amount received in repayment of loan,
Shall be credited to Federal Consolidated Fund.
All other moneys(a) Received by the Federal Government; or
(b) Deposited with the Supreme Court/any other court;
Shall be credited to the Public Account of the Federation.
Custody, etc., of Federal Consolidated Fund and Public Account [79]
The custody of the Federal Consolidated Fund and Public Account of the Federation, the payment and withdrawal
from the Funds, all other connected matters shall be regulated by Act of Majlis-e-Shoora (Parliament) or rules made
by President.
Annual Budget Statement [80]
1. In each financial year, the Federal Government shall lay before the National Assembly a statement of the
estimated receipts and expenditures of the Government. It will be called as Annual Budget Statement.
2. The Annual Budget Statement shall show separately(a) Amounts required to meet expenses charged by Constitution on Federal Consolidated Fund;
(b) Amounts required to meet other expenses proposed to be made from Federal Consolidated Fund; and
shall distinguish between revenue expenses and other expenses.
Expenditure charged upon Federal Consolidated Fund [81]
The following expenditures shall be charged upon the Federal Consolidated Fund:(a) The remuneration of President and other expenses of his office, and the remuneration ofi.
The Judges of the Supreme Court and the Islamabad High Court;
ii.
The Chief Election Commissioner;
iii.
The Chairman and the Deputy Chairman;
iv.
The Speaker and the Deputy Speaker of the National Assembly;
v.
The Auditor-General;
(b) The admin expenses, including the remuneration of officers and servants of Supreme Court, the Islamabad High
Court, the department of the Auditor-General, the Office of the Chief Election Commissioner and the Secretariats of
the Senate and the National Assembly.
(c) Debt charges of the Federal Government, including interest, the repayment of capital, and other expenses for
raising loans, and redemption of debt on the security of Federal Consolidated Fund;
(d) Amount paid for any judgment/order against Pakistan by any court or tribunal; and
(e) Any other amount declared by the Constitution or by Act of Majlis-e- Shoora (Parliament).
Procedure relating to Annual Budget Statement [82]
(1) Expenses charged on Federal Consolidated Fund in Annual Budget Statement shall be discussed in the National
Assembly. A voting will not be required.
(2) Other expenses in Annual Budget Statement shall be submitted to National Assembly for raising grant. The
Assembly may or may not agree to demand. It may also reduce the demand.
(3) The demand can only be made with recommendation of Federal Government.
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Constitutional Provisions
Authentication of schedule of authorized expenditure [83]
(1) The Prime Minister shall sign a schedule specifying(a) The grants made by the National Assembly and
(b) Amounts required for expenses charged on the Federal Consolidated Fund. It shall not exceed the amount
mentioned in statement previously laid before the National Assembly.
(2) The authenticated schedule shall be laid before National Assembly. It shall not be open for discussion or vote.
(3) An expense from Federal Consolidated Fund shall be considered as authorized when above procedure is
followed
Supplementary and excess grants [84]
If in a financial year it is found(a) That authorized expense for a service is insufficient, or expense for a new service is required which is not
included in the Annual Budget Statement; or
(b) That amount spent on any service exceeds the amount granted;
The Federal Government can authorize expenditure from the Federal Consolidated Fund. For this, Federal
Government shall lay before National Assembly a Supplementary or Excess Budget Statement.
Votes on account [85]
The National Assembly can make grant in advance of estimated expenditure for a part of financial year, not more
than 4 months, if the authentication of schedule is pending
Power to authorize expenditure when Assembly stands dissolved [86]
If National Assembly is dissolved, the Federal Government may authorize expense from the Federal Consolidated
Fund for estimated expenditure for a period of not more than 4 months in financial year, if the authentication of the
schedule of authorized expenditure is pending
Secretariats of Majlis-e-Shoora (Parliament) [87]
(1) Each House shall have a separate Secretariat: However posts common to both Houses can be awarded.
(2) Majlis-e-Shoora (Parliament) may regulate recruitment of persons appointed to the Secretarial staff of both
Houses
(3) The Speaker or the Chairman may, with the approval of the President, make rules regulating the recruitment of
persons appointed to the secretarial staff of both Houses.
Finance Committees [88]
(1) The expenditure of the National Assembly and Senate shall be controlled by the National Assembly or Senate
acting on the advice of its Finance Committee.
(2) The Finance Committee may make rules for regulating its procedure.
(3) The Finance Committee shall consist of the Speaker or the Chairman, the Minister of Finance and other members
elected by the National Assembly or the Senate.
PROVINCIAL FINANCIAL PROCEDURES
Comparison of Financial and Provincial Procedures
Terms
Fund
Public Account
Courts
Authority
Assembly
Head of State/Province
Chief Executive
Annual Budget Statement
Supplementary/ Excess Budget
Approval of Expenditure in
Advance
Approval when Assembly is
dissolved
Federal Financial Procedures
FCF
No Change
Supreme Court/ IHC
Parliament
National Assembly
President
Prime Minister
No Change
No Change
4 Month
Provincial Financial Procedure
PCF
No Change
Provincial Court
Provincial Assembly
Provincial Assembly
Governor
Chief Minister
No Change
No Change
3 Month
4 Month
4 Month
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Chapter-23
Constitutional Provisions
Provincial Consolidated Fund and Public Account [118]
•
All revenues received/loans raised by the Provincial Government and
• amount received by it in repayment of loan, Shall form part of Provincial Consolidated Fund.
(2) All other moneys(a) Received by the Provincial Government; or
(b) Received with the High Court/any other court;
Shall be credited to the Public Account of the Province.
Custody, etc., of Provincial Consolidated Fund and Public Account [119]
•
•
•
•
The custody of the Provincial Consolidated Fund, the payment and withdrawal from the Fund,
The custody of Public Account of the Province, the payment and withdrawal from the Fund and
All other connected matters shall be regulated by Act of the Provincial Assembly or provisions made by
Governor in this behalf.
Annual Budget Statement [120]
(1) In each financial year, the Provincial Government shall lay before the Provincial Assembly a statement of the
estimated receipts and expenditures of the Government. It will be called as Annual Budget Statement.
(2) The Annual Budget Statement shall show separately(a) Amounts required to meet expenses charged by Constitution on Provincial Consolidated Fund;
(b) Amounts required to meet other expenses proposed to be made from Provincial Consolidated Fund; and shall
distinguish expenditure on revenue account from other expenditure.
Expenditure charged upon Provincial Consolidated Fund [121]
The following expenditures shall be charged upon the Provincial Consolidated Fund:(a) The remuneration of Governor and other expenses of his office, and the remuneration of(i) The Judges of the High Court;
(ii) The Speaker and the Deputy Speaker of the Provincial Assembly;
(b) The administrative expenses, including the remuneration of officers and servants of the High Court, and the
Secretariat of the Provincial Assembly.
(c) Debt charges of the Provincial Government, including interest, the repayment or amortization of capital, and
other expenses for raising of loans, and the service and redemption of debt on the security of Provincial
Consolidated Fund;
(d) Amount paid for any judgment/order against Province by any Court or tribunal; and
(e) Any other amount declared by the Constitution or by Act of Provincial Assembly.
Procedure relating to Annual Budget Statement [122]
(1) Expenses charged on Provincial Consolidated Fund in Annual Budget Statement shall be discussed in the
Provincial Assembly. However a voting will not be required.
(2) Other expenses appearing in Annual Budget Statement shall be submitted to the Provincial Assembly for raising
grant. The Assembly may or may not agree to the demand of grant. It may also reduce the demand.
(3) The demand for a grant can only be made with the recommendation of the Provincial Government.
Authentication of schedule of authorized expenditure [123]
(1) The Chief Minister shall sign a schedule specifying(a) The grants made by the Provincial Assembly and
(b) Amounts required to meet the expenses charged on the Provincial Consolidated Fund. It shall not exceed
the amount mentioned in the statement previously laid before the Provincial Assembly.
(2) The authenticated schedule (as above) shall be laid before the Provincial Assembly. It shall not be open for
discussion or vote.
(3) An expense from the Provincial Consolidated Fund shall be considered as authorized when it is specified in the
authenticated schedule and schedule is laid before the Provincial Assembly
Supplementary and excess grant [124]
If in a financial year it is found(a) That authorized expense for a particular service is insufficient, or expense for a new service is required which
is not included in the Annual Budget Statement; or
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Constitutional Provisions
(b) That amount spent on any service exceeds the amount granted;
The Provincial Government has power to authorize expenditure from the Provincial Consolidated Fund. For this,
Provincial Government shall lay before the Provincial Assembly a Supplementary Budget Statement or an Excess
Budget Statement specifying the amount of expenditure.
Votes on account [125]
The Provincial Assembly can make any grant in advance of estimated expenditure for a part of financial year, not
more than 3 months, if the authentication of the schedule of authorized expenditure is pending
Power to authorize expenditure when Assembly stands dissolved [126]
If Provincial Assembly is dissolved, the Provincial Government may authorize expenditure from the Provincial
Consolidated Fund for estimated expenditure for a period of not more than 4 months in the financial year, if the
authentication of the schedule of authorized expenditure is pending
Provisions relating to National Assembly, etc., to apply to Provincial Assembly, etc [127]
The provisions of Article 87 and 88 shall apply to Provincial Assembly or the Provincial Government in a way that:
(a) any reference to Majlis-e-Shoora (Parliament), a House or the National Assembly shall be read as a reference to
the Provincial Assembly;
(b) any reference to the President shall be read as a reference to the Governor of the Province;
(c) any reference to the Federal Government shall be, read as a reference to the Provincial Government;
(d) any reference to the Prime Minister shall be read as a reference to the Chief Minister;
(e) any reference to the National Assembly shall be read as a reference to the Provincial Assembly;
DISTRIBUTION OF REVENUES BETWEEN FEDERATION AND PROVINCES [National Finance
Commission [160]]
(1) Constitution of NFC/who may be member of NFC
The President shall, at intervals not exceeding 5 years, constitute a National Finance Commission consisting of
• The Minister of Finance of the Federal Government, [The Ministers of Finance of the Provincial
Governments, and
• Such persons as appointed by President after consultation with Governors of the Provinces.
(2) Duties of NFC
It shall be the duty of the National Finance Commission to make recommendations to President regarding(a) The distribution of tax receipts between the Federation and the Provinces
(b) The making of grants-in-aid by the Federal Government to the Provincial Governments;
(c) The exercise by the Federal Government and the Provincial Governments of the borrowing powers;
(d) Any other finance matter referred by the President.
(3) Taxes raised by Parliament
The taxes raised under authority of Majlis-e-Shoora (Parliament) are as follows:(1) Taxes on income, including corporation tax, but not including taxes on income consisting of remuneration
paid out of the Federal Consolidated Fund;
(2) Taxes on sales and purchases of goods imported, exported, manufactured or consumed;
(3) Export duties on cotton, and such other export duties as specified by the President;
(4) Such duties as specified by the President; and
(5) Such other taxes as specified by the President.
(3A) The share of the Provinces in each Award (recommendation) of National Finance Commission shall not
be less than the share in the previous Award.
(3B) The Federal Finance Minister and Provincial Finance Ministers shall monitor the implementation of the Award
biannually and lay their reports before both Houses of Majlis-e-Shoora (Parliament) and Provincial Assemblies.
(4) Order by President
On the basis of recommendation of the National Finance Commission, the President shall, specify:
• The share of the tax receipts which is to be allocated to each Province and
• That share shall be paid to the Government of the Province concerned, and,
• Share shall not form part of the Federal Consolidated Fund.
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(5) The recommendations of the National Finance Commission shall be laid before both Houses and the Provincial
Assemblies.
(6) Before any order regarding share of tax receipts the President may, make such amendments in the law relating
to the distribution of revenues between the Federal Government and the Provincial Governments as he considers
necessary.
(7) The President may, by order, make grants-in-aid to the Provinces in need of assistance and such grants shall be
charged upon the Federal Consolidated Fund.
Natural gas and hydro-electric power [161]
1)(a) The net proceeds (receipts) of
• Federal excise duty on natural gas charged at well-head and
• Royalty collected by the Federal Government
Shall not form part of the Federal Consolidated Fund and shall be paid to the Province where well- head is
located;
(b) The net proceeds of Federal excise duty on oil charged at well-head shall not form part of the Federal
Consolidated Fund and shall be paid to the Province where well-head is located.
2) The net profits earned from the bulk generation of power at a hydro-electric station shall be paid to the
Province.
Explanation - "net profit" means revenue from supply of power less operating expenses (including taxes, duties, interest,
and depreciations and element of obsolescence).
Prior sanction of President to Bills affecting taxation in which Provinces are interested [162]
Following bills will not be moved in the National Assembly without sanction of the President. A bill which:
• Imposes/varies a tax, the proceeds of which is allocated to any Province, or
• Varies the meaning of the "agricultural income" for charging income-tax, or
• Affects the principles on which moneys are distributed to Provinces,
Provincial taxes in respect of professions, etc. [163]
A Provincial Assembly may impose taxes, not exceeding limits specified by Majlis-e-Shoora (Parliament), on persons
engaged in professions, trades or employments.
Grants out of Consolidated Fund [164]
The Federation or a Province may make grants for any purpose.
Exemption of certain public property from taxation [165]
(1) The Federal Government is not liable to pay tax on its property or income under any Act of Provincial Assembly
A Provincial Government is not liable to pay tax on its property or income under:
• Act of Majlis-e-Shoora (Parliament) or
• Act of the Provincial Assembly of other Province.
(2) If any trade/business is carried on by a Provincial Government outside Province, that income may be taxed
under Act of Majlis-e-Shoora (Parliament) or Act of the Provincial Assembly where business is carried on.
(3) However fee for services can be imposed.
Power of Majlis-e-Shoora (Parliament) to impose tax on the income of certain corporations, etc [165(A)]
(1) Majlis-e-Shoora (Parliament) can make law for charging of tax on the income of a company established by
or owned or controlled by a Federal or a Provincial Government.
(2) Order of court, including the Supreme/High Court, which conflicts with above provision shall be void.
FEDERAL LEGISLATIVE LIST
Powers of the Federation to legislate on taxes (Areas whereby Federal Government can legislate to levy taxes)
Following entries in the Federal legislative list contained in constitution of Pakistan relates to taxes or the taxes
which can be imposed by the Federation.
(1) Duties of customs, including export duties.
(2) Duties of excise, including salt, but not including alcoholic liquors, opium or other narcotics;
(3) Taxes on income other than agricultural income;
(4) Taxes on corporations.
(5) Taxes on the sales and purchases of goods imported, exported, produced, manufactured or consumed,
except sales tax on services.
(6) Taxes on the capital value of the assets, not including taxes on immovable property.
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(7) Taxes on mineral oil, natural gas and minerals for use in generation of nuclear energy.
(8) Taxes and duties on the production capacity of any plant, machinery, undertaking
(9) Terminal taxes on goods or passengers carried by railway, sea or air; taxes on their fares and freights.
Using above provisions, following laws are enacted by the Federal Government:
Legislative powers of Federation
Laws enacted thereunder
Taxes on income other than agricultural income
Income Tax Ordinance,2001
Taxes on corporations
Taxes on mineral oil, natural gas and minerals for use
in generation of nuclear energy.
Taxes on the sales and purchases of goods imported, Sales Tax Act, 1990, Federal Excise Act, 2005, Customs
exported, produced, manufactured or consumed, Act, 1969
except sales tax on services
Taxes and duties on the production capacity of any
plant, machinery or installation of any one or more of
them.
Taxes on the capital value of the assets, not including Capital Value Tax levied through Finance Act, 1989
taxes on immovable property.
Powers of the Provinces to legislate on taxes (Areas where Provincial Government can legislate to levy taxes)
All taxes other than the mentioned in above list of Federal legislative list as contained in the Constitution of Pakistan
are covered in the scope of legislation of Provinces. Accordingly, various types of taxes are introduced by the
Provinces:
• Sales tax on services
• Taxes on transfer of immoveable property
• Professional tax
• Tax on luxury houses
• Tax on registration of luxury vehicles etc.
• Property tax
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15-Point Summary: Federal and Provincial Financial Procedures
1. Federal Consolidated Fund (FCF)
All federal revenues, loans, and repayments go into the FCF. Other funds are credited to the Public
Account.
Mnemonic: "Funds in the FCF, Public Funds for Courts!"
2. Public Account
Money received by the Federal Government or deposited with courts is credited to the Public Account.
Mnemonic: "Public Accounts for courts and others!"
3. Custody and Regulation
The Federal Consolidated Fund and Public Account are controlled by Parliament or President’s rules.
Mnemonic: "Parliament holds the purse!"
4. Annual Budget Statement
The Federal Government presents the Annual Budget to the National Assembly each year, outlining
receipts and expenditures.
Mnemonic: "Budget’s Annual Statement, Receipts & Spending!"
5. Expenditures Charged on FCF
Key government expenses, such as salaries of high officials and debt payments, are charged directly to
the FCF.
Mnemonic: "High Officials & Debt Paid from FCF!"
6. Procedure for Annual Budget
Certain expenses in the budget are discussed without a vote; others require Assembly approval.
Mnemonic: "Some get approval, some don’t!"
7. Supplementary/Excess Grants
If expenses exceed the budget, Supplementary Grants can be approved by the National Assembly.
Mnemonic: "Extra Funds for Extra Expenses!"
8. Votes on Account
The National Assembly can approve advance payments for up to 4 months if the budget isn’t ready.
Mnemonic: "Votes for 4-months of advance!"
9. Authorization When Assembly Dissolved
The Federal Government can still authorize expenditure for 4 months when the National Assembly is
dissolved.
Mnemonic: "Dissolved Assembly? Gov’t still spends!"
10. Provincial Financial Procedures
Provincial procedures mirror the federal system, with a Provincial Consolidated Fund (PCF) and Public
Account.
Mnemonic: "Provinces follow the Federal path!"
11. Expenditures Charged on PCF
Like at the federal level, expenditures in the PCF include payments for high officials and debt charges.
Mnemonic: "Governor’s pay, debt charges from PCF!"
12. Annual Budget in Provinces
Provinces submit their Annual Budget Statements, which distinguish between revenue and other
expenditures.
Mnemonic: "Provinces budget separately, too!"
13. National Finance Commission (NFC)
The NFC ensures fair revenue distribution between Federation and Provinces.
Mnemonic: "NFC - Fair Share of Revenue!"
14. Taxation Powers
The Federal Government controls taxes like income tax, excise duties, and sales tax. Provinces handle
taxes not in the federal list.
Mnemonic: "Federal taxes cover income & imports, Provinces take the rest!"
15. Revenue Sharing
Based on NFC recommendations, the President allocates tax shares to the provinces, ensuring fairness.
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Mnemonic: "Fair share for each Province!"
Key Mnemonics to Remember:
1. FCF vs. Public Account:
"Funds in the FCF, Public Funds for Courts!"
2. High Official Expenditures:
"High Officials & Debt Paid from FCF!"
3. Approval Procedures:
"Some get approval, some don’t!"
4. Supplementary Grants:
"Extra Funds for Extra Expenses!"
5. Votes on Account:
"Votes for 4-months of advance!"
6. Dissolved Assembly Spending:
"Dissolved Assembly? Gov’t still spends!"
7. NFC Fairness:
"NFC - Fair Share of Revenue!"
8. Tax Powers:
"Federal taxes cover income & imports, Provinces take the rest!"
9. Revenue Allocation:
"Fair share for each Province!"
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Chapter
24
ethics
Ethics - meaning and application
Ethics means characters and customs. Aristotle was the first one to study ethics. He believed that ethical behavior
is knowledge that actions are done for betterment of common good. To determine what is ethically good for the
individual and society, Aristotle said it is necessary to possess 3 virtues of practical wisdom:
1. Temperance,
2. Courage, and
3. Justice.
ETHICS FOR TAX LEGISLATORS
"Legislative office is a public trust, and every effort for personal gain through official conduct is a violation of that
trust"
The constitution requires the legislature:
• To make a code of ethics prohibiting conflicts between the public duty and private interests of members of the
legislature.
• To enact a code of ethics for all officials and employees of the state and its political subdivisions.
Canons of taxation:
Canons of taxation are the basic principles to run a good tax system. Adam Smith was the first economist to develop
a list of canons of taxation. Later on, some new canons were added. These canons help tax legislators in constituting
a good tax system. The canons of taxation are discussed below:
Original and Main Canons of Taxation discussed by Adam Smith in famous books "The Wealth of Nations"
1. Canon of Equity. This principal says that a person who earns more should pay more to the Government as
compared to a person who earns less. As a result the person earning high income should pay tax at higher rate as
compared to a person who is earning less income.
It is one of the fundamental concepts to bring social equality and equal distribution of wealth in a country.
2. Canon of Certainty. The tax that a person is going to pay should be certain. Everything should be made clear
and simple for the taxpayer. It ensures that the taxpayer should have full knowledge about amount of tax payment,
mode of payment and the due-date. If this canon does not exist, it leads to tax evasion.
Another aspect of certainty is that the Government is also certain regarding the amount it will collect from tax.
3. Canon of Convenience. The procedure for tax payment should be easy, convenient and taxpayer-friendly. The
time and manner of payment must be convenient for the tax payer so that he is able to pay his taxes in due time. If
the time and manner of the payment is not convenient, then it may lead to tax evasion and corruption.
4. Canon of Economy. The canon of economy states that the cost of collecting taxes should be as minimum as
possible. The cost of tax collection should be lower than amount of tax received by Government.
The purpose of collecting taxes is to generate revenue for the Government. If the canon of economy isn't applied,
the collected amount will not be sufficient for Government.
Additional Canons of Taxation
Functions of the government increased significantly since Adam Smith's time. Accordingly, modern economists gave
following additional canons of taxation.
5. Canon of Productivity. It says that there should be fewer taxes with large revenues, rather than more taxes
with lesser amounts of revenue. It is better to impose only those taxes that are able to produce larger returns. More
taxes tend to create panic and confusion among the taxpayers.
6. Canon of Elasticity. Taxes imposed should be elastic i.e., they can be increased or decreased, according to the
demands of the Government. If the tax is elastic in nature, Government can easily increase its revenue by increasing
the rate of tax. An example of such tax can be the income tax, which is considered very much ideal in accordance
with the canon of elasticity.
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7. Canon of Flexibility. Flexibility is different from elasticity. A flexible tax quickly adjusts to the new conditions.
If the tax system is not flexible, new areas will remain un-taxed.
8. Canon of Simplicity. The system of taxation should be simple. The entire process should be non-technical and
straightforward. If it is difficult and complicated to understand, then it will lead to corruption.
9. Canon of Diversity. It says that the Government should collect tax from different sources rather than relying
on a single source. If Government relies on a single tax source it can be harmful for the economy. Therefore
Government introduces both direct and indirect taxes.
ETHICS FOR TAX PRACTITIONERS [I.P.P.C.O]
Following are the 5 fundamental principles of ethics for tax practitioners:
1. Integrity. The tax practitioner should be straightforward and honest in all professional and business relations.
He must act honestly and with integrity. All tax laws should be followed properly. He should not misuse the money
given by his client for payment of tax.
2. Objectivity. Practitioner should not allow bias, conflicts of interest or undue influence of others to override
their professional or business judgments.
3. Confidentiality. The tax practitioner should keep all information confidential acquired in professional and
business relationships. The information received from client should not be disclosed to anyone unless it is required
by law. Further the information obtained from client should also not be used for personal benefit or for benefit of a
third party.
4. Professional Competence and due care. Tax practitioner has a duty to maintain professional knowledge
and skill at such level that client receives a competent service. The practitioner should have complete knowledge
and skill of the service provided by him. All tax laws should be applied properly in accordance with the
circumstances. Staff members must also be well trained.
5. Professional Behavior. The practitioner should follow the laws and regulations and should avoid actions
which discredits the profession. He should follow the code of ethics developed for tax practitioners. He should
behave with courtesy with people.
ETHICS FOR TAX ADMINISTRATORS/TAX IMPLEMENTING
Powers of tax administrators
The tax administration is not responsible for tax policy and tax legislation but deals with current tax system. Federal
Board is the main administrative authority under the law to monitor various types of taxes. During administration,
FBR itself or through its staff exercises the following powers:
• Power to collect revenue
• Power to change the method of accounting
• Power to make assessment of tax and
• Power to attach bank accounts
• Power to seize property
The authorities can misuse the above-mentioned powers which can result in following against taxpayer:
• Loss of property and income
• Imprisonment
So above powers if wrongly used can result in loss of fundamental human rights. So there is need for ethics so that
tax authorities can use the powers fairly and with transparency and morality.
Illustration-1
Mr. Zahid is running a textile unit and tax amounting to Rs. 5M is assessed against him. His bank accounts balance is
Rs. 10M. However, he has to fulfil his exports orders. In case he fails to fulfil his orders, he would lose his customers and
that orders. Considering his present critical financial position, Zahid believes that tax recovery proceedings by recovery
from bank account (Attachment of bank account) would cause an irreparable loss. So he files a request to FBR for
allowing him to pay the tax dues in instalments.
FBR staff has the power to allow him relief or recover this tax directly from his bank account. Justice and equity
demands that his request should be entertained so that his continuation and prosperity of business would eventually
result in payment of better taxes in future.
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Illustration-2
Income Tax Ordinance, sales tax law, Federal excise law empower tax authorities to select cases for audit. This power
can be misused by selecting some cases while leaving many unaudited.
Pillars of tax administration
For the benefit of taxpayer and keep check on the misuse of powers by tax authorities, following are the pillars of
tax administration:
➢ Fairness
Tax authorities should try to be fair, neutral and impartial while administering the law. There
should be no discrimination on the basis of race, sect etc.
➢ Transparency
All Proceedings must be transparent and must be seen as transparent.
➢ Accountability
There must be a strong system of accountability for wrong doers which should stop corruption,
nepotism and maladministration.
➢ Equity
Similarly situated taxpayers should be taxed in same way by tax authorities. Due care should be
exercised to ensure that salaried class is not taxed more than business class. Administrators should
not achieve their objectives in an irrational way.
Under 4 pillars, following are the ethical issues which are faced by tax administrating authorities:
1. Corruption
2. Confidentiality/Secrecy
3. Conflict of interest
4. Inconsistency in application of law
5. Lack of autonomy
6. Political influence
7. Acceptance of gifts
8. Discretion
To avoid pitfalls of abusive use of discretion, 7 principles for structuring discretion are as follows:
1. Open plans
2. Open policy statements
3. Open rules
4. Open findings
5. Open reasons
6. Open precedents
7. Fair informal procedure
Responsibilities of tax implementing authorities
Tax Administrators shall:
1. Try to be impartial, fair, neutral and consistent in administration of law ignoring the race or economic
circumstances.
2. Provide efficient and quality service to all stakeholders in an effort to exceed their expectation.
3. Follow the law completely and no exemptions or credit should be provided to the person who is not eligible for
it.
4. Take all measures to collect tax on timely basis in the interest of the Government and at lowest cost.
5. Make the payment of refunds on timely basis.
6. Show the honesty and integrity to gain confidence of the government and taxpayers;
7. Avoid participation in political activity.
8. Educate taxpayers about their rights and obligations so that tax payers voluntarily comply with the requirements
of law.
9. Keep the confidentiality of the information provided by the taxpayer with highest level of security.
10. Refrain from receiving gifts from actions and non-actions.
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ETHICS FOR TAXPAYERS
Morality behind Tax Compliance
There are three approaches to ethics for tax compliance which are as under:
▪ Utilitarianism tells us to aim for greatest happiness across the population. 'Happiness' is the satisfaction of
our desires.
▪ Deontology bases ethics on the idea of duty.
▪ Virtue ethics focus on the virtues we should have. A broad conception must be used here. Virtue is not only
honesty but using one's talents and leading a fulfilled life is also a virtue.
Ethics and morality for tax payers regarding taxation compliance
•
For Taxpayers following utilitarian approach, the important economic goal is to ensure that goods and
services are available to everyone for decent life. Utilitarian compliance level will be better because there
is a great need of resources for general public and country.
• Deontologist approach lay down absolute duties. There is a duty of individuals to pay for social resources
provided by Government. The one who uses a public hospital or a public road, should pay for it. So this
approach says that it is obligation of taxpayer to pay tax for use of public facilities.
• Virtue ethics says one should use one's talents to the full. Financial incentives encourage people to use their
talents but very high tax rates reduce those incentives. Another virtue is charity either in form of cash or
time. The more take-home cash people have, the more charities they can afford; and also find time to
perform charity work. A third virtue is independence. It is good to live on own money. Lower tax rate make
independence easy.
• Tax can be used for all purposes, and it is clear that what ethicists would say about these purposes.
Purpose
Utilitarian
Deontology
Virtue Ethics
Providing law and order, Will approve tax because
Will approve tax because
health
care
and more goods and services
this will enable people to
education service to will be available resulting in
lead prosperous lives and
public
increase
in
happiness
utilize their talents to full.
among people.
Helping the needy and Will approve tax because it Will
approve Will approve tax because
poor with tax money
will
lead
to
equal because it is our taking care of less fortunate
distribution of wealth and duty to take care of is itself a virtue
happiness among society.
the poor.
•
Morality for citizens to pay taxes is justified so that:
❖ State is able to provide proper infrastructure,
❖ State is able to provide level playing field to all.
In recent years, tax avoidance is a considerable public concern. It is compliance with the law, though aggressive or
abusive avoidance, as opposed to simple tax planning which seek to comply with the letter of the law. Tax evasion
occurs when someone acts against the law.
• Tax avoidance is the legal use of the tax law to one's own advantage, to reduce the amount of tax payable.
For example, it is up to tax payer that whether the business is started as a partnership or company. In case
of partnership tax rates is lower than that of company. Another example is starting business in a tax free
zone.
• Tax evasion is an illegal practice where individuals, AOPs and companies unlawfully avoids payment of tax.
In tax evasion taxpayer intentionally conceals the true state of affairs to tax authorities. It is punishable
under the law. For example, concealment of income, misclassifying income under another head, claiming
excess deductions, and claiming wrong tax credits.
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Difference between ‘Tax Avoidance’ & ‘Tax Evasion’
Tax Avoidance
Tax Evasion
Tax payment is avoided by complying with the
provisions of law but defeating the intension of the
law.
It is done by taking advantage of loop holes in law
Tax Avoidance is not done with malafide intention but
to comply with law
Tax Avoidance looks like a tax planning and is done
before the tax liability arises.
Example is:
Donation to approved charity recognized by the FBR
to claim a tax credit.
Tax is avoided through illegal means or fraud.
Situation
Mr. A is in the business of selling shoes. His sales are
Rs. 20 M. He kept all cash in his bank locker to hide it
from tax authorities.
Mr. B earned income of Rs 50 M. However, he declared
only that income which is verifiable from the banks i.e.
36M. Remaining amount has been hidden in a
separate bank account.
Mr. C earned Rs 50 M. However, he recorded 37 M
expenses using legal tactics to reduce his income.
Evasion/Avoidance
It is tax evasion and a Criminal Act. He cannot buy any
asset form this money unless he declares this income
and pays tax on it
This is also a tax evasion. Understatement is also an
offence.
•
It is done by employing unfair means
Tax Evasion is an unlawful way of paying lower taxes
Tax evasion is a fraud and is done after the tax liability
has arisen.
Examples include:
Falsifying income tax return by non-disclosure of offshore accounts e.g. Panama Paper Leaks (Nawaz
Sharif)
Tax avoidance, which is legally permissible.
A utilitarian, concerned with aggregate welfare, might be willing for tax avoidance. If tax is avoided, wealth
is kept in the private sector (means it will not go to Government). The utilitarian says that charging tax will
put more burden on middle class who cannot afford hiring tax lawyers. The dissatisfaction of middle class
will be more as compared to the satisfaction achieved by rich class.
A virtue ethicist would dislike tax avoidance. It is not ethical to exploit rules knowing that one is exploiting
it for oneself.
A deontologist will not favor tax avoidance, but might not condemn it either. Deontologists can easily argue
for a duty to obey the law.
•
•
15-Point Summary on Ethics in Taxation
1.
Ethics: Meaning and Application
Ethics involves character and customs. Aristotle, the father of ethics, believed ethical behavior
contributes to the common good. He emphasized 3 key virtues for ethical actions:
o Temperance
o Courage
o Justice
Mnemonic: "Think Cool, Brave, and Just!"
2. Ethics for Tax Legislators
Legislative office is a public trust. Personal gain through official conduct violates this trust. Legislators
must avoid conflicts between public duty and personal interests.
Mnemonic: "Trust, Duty, No Greed!"
3. Canons of Taxation
Adam Smith introduced basic principles for a good tax system, including the Canon of Equity, which
emphasizes taxing based on income to reduce inequality.
Mnemonic: "Equal tax for equal wealth!"
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4.
Canon of Certainty
Taxes should be clear and predictable. Taxpayers should know how much to pay, how, and when.
Mnemonic: "Clarity = No confusion!"
5. Canon of Convenience
Tax payments should be easy, timely, and convenient for taxpayers.
Mnemonic: "Ease of paying equals less evasion!"
6. Canon of Economy
The cost of tax collection should be minimal compared to the revenue raised.
Mnemonic: "Minimize cost, maximize revenue!"
7. Canon of Productivity
Focus on fewer, larger taxes rather than many small taxes. Larger taxes should bring in more revenue.
Mnemonic: "Big taxes = Big revenue!"
8. Canon of Elasticity
Taxes should be adjustable based on government needs.
Mnemonic: "Flexible taxes, flexible revenue!"
9. Canon of Flexibility
Taxes should quickly adapt to new circumstances.
Mnemonic: "Adapt to new conditions!"
10. Canon of Simplicity
Tax systems should be easy to understand to prevent corruption and confusion.
Mnemonic: "Simple taxes, clear minds!"
11. Canon of Diversity
Taxes should come from multiple sources (direct and indirect taxes) to avoid over-reliance on one
source.
Mnemonic: "Diverse taxes, stable economy!"
12. Ethics for Tax Practitioners
Tax practitioners must follow 5 key principles: Integrity, Objectivity, Confidentiality, Competence,
and Professional Behavior.
Mnemonic: "IOCCP" - Integrity, Objectivity, Confidentiality, Competence, Professionalism!
13. Ethics for Tax Administrators
Administrators must exercise powers like tax collection and assessment fairly and transparently.
Abuse of power can lead to harm.
Mnemonic: "Fair, Transparent, No Abuse!"
14. Pillars of Tax Administration
Tax administrators must uphold Fairness, Transparency, Accountability, and Equity in their actions.
Mnemonic: "FATE" - Fairness, Accountability, Transparency, Equity!
15. Ethics for Taxpayers
Taxpayers have ethical responsibilities:
• Utilitarianism: Maximize public happiness through taxes.
• Deontology: Duty to pay taxes for public services.
• Virtue Ethics: Use resources for the public good.
Mnemonic: "U-D-V" - Utilitarian, Duty, Virtue!
Keynotes and Mnemonics for Remembering the Chapter
• Aristotle’s 3 Virtues: Temperance, Courage, Justice
Mnemonic: "Think Cool, Brave, and Just!"
• Tax Legislators' Ethics: Avoid personal gain and conflicts of interest.
Mnemonic: "Trust, Duty, No Greed!"
• Canons of Taxation:
o Canon of Equity: "Equal tax for equal wealth!"
o Canon of Certainty: "Clarity = No confusion!"
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•
•
•
Ethics
o Canon of Convenience: "Ease of paying equals less evasion!"
o Canon of Economy: "Minimize cost, maximize revenue!"
o Canon of Productivity: "Big taxes = Big revenue!"
o Canon of Elasticity: "Flexible taxes, flexible revenue!"
o Canon of Flexibility: "Adapt to new conditions!"
o Canon of Simplicity: "Simple taxes, clear minds!"
o Canon of Diversity: "Diverse taxes, stable economy!"
Ethics for Tax Practitioners: IOCCP
Mnemonic: "IOCCP" - Integrity, Objectivity, Confidentiality, Competence, Professionalism!
Ethics for Administrators: FATE
Mnemonic: "FATE" - Fairness, Accountability, Transparency, Equity!
Ethics for Taxpayers: "U-D-V" - Utilitarian, Duty, Virtue!
Acronyms for Easy Recall
• IOCCP: Tax Practitioners’ Principles
• FATE: Tax Administrators’ Pillars
• U-D-V: Taxpayer Ethics
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Chapter
25
Code of ethics
CODE OF ETHICS FOR CHARTERED ACCOUNTANTS AS APPLICABLE TO TAX SERVICES
Tax Services
Tax services include preparing tax return, making tax calculations for accounting entries, suggesting tax planning
etc.
Providing tax services to an audit client might create a self-review or advocacy threat.
Code of Ethics includes requirements that prohibit firms (and network firms) from providing certain tax services
to audit clients in some circumstances because the threats cannot be addressed by applying safeguards.
Tax Services to Audit clients
Factors for evaluating level of threats created by providing tax service to an audit client include:
The characteristics of the engagement.
The tax expertise of client's employees.
The system by which tax authorities assess and administer the tax and the role of the firm (or network firm) in
that process.
The complexity of tax regime (and degree of judgment necessary in applying it).
1) Tax return preparation
All Audit Clients
Providing tax return preparation services (to audit client) does not usually create a threat. Tax return preparation
services involve:
• Assisting clients with tax reporting obligations by compiling information, including payment of tax.
• Advising on tax treatment of past transactions and responding on behalf of audit client to tax authorities'
requests for additional information and analysis (for example, providing explanations for approach being
taken).
• Tax return preparation services are usually based on historical information and principally involve
presentation of such information under existing tax law. Further returns are also reviewed by tax
authorities.
2) Tax Calculations for the Purpose of Preparing Accounting Entries
a) All Audit Clients
Preparing calculations of current and deferred tax liabilities (or assets) for an audit client for accounting entries
that will be later on audited by the firm creates a self-review threat.
In addition to the factors discussed above (4 bullets), a factor relevant for evaluating threat is that calculation
might have a material effect on the financial statements on which the firm will express an opinion.
b) Audit Clients that are Not Public Interest Entities
Safeguards to address self-review threat when the audit client is not a public interest entity include:
• Using professionals who are not audit team members to perform the tax service.
• Having an appropriate reviewer who was not involved in:
the service review
the audit work or
service performed.
c) Audit Clients that are Public Interest Entities
A firm (or a network firm) shall not prepare tax calculations of current and deferred tax liabilities (or assets) for
an audit client (public interest entity) for preparing accounting entries that are material to the financial
statements on which the firm will express an opinion.
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If impact of accounting entries on financial statements is immaterial then above safeguards mentioned in point (b)
will be applied.
Example-1
A Pakistani audit firm is faced with the following situations:
Situation 1
ABC limited an audit client has requested your firm to prepare current and deferred tax working for the purpose
of preparing accounting entries that will be reviewed by your firm at the time of Audit. ABC Ltd is not a public
interest entity.
Situation 2
ABC limited an audit client has requested your firm to prepare current and deferred tax working for the purpose
of preparing accounting entries that will be reviewed by your firm at the time of Audit. ABC Ltd is a public interest
entity.
Required:
With reference to the ICAP Code of Ethics, what are the threats presented by the events described above. Also
comment upon the safeguards to be taken to reduce the said threat (if any)
Answer
Situation 1
Preparing calculations of current and deferred tax liabilities (or assets) for an audit client for preparing
accounting entries that will be subsequently audited by the firm creates a self-review threat. The significance of
the threat will depend on:
The complexity of tax regime (and degree of judgment necessary in applying it)
0
The tax expertise of client's employees
1
The materiality of the amounts to the financial statements.
Safeguards
Safeguards to be applied to eliminate/reduce threat:
0
Using professionals who are not audit team members to perform the tax service.
1
Obtaining advice from an external tax professional
2
Having an appropriate reviewer who was not involved in:
0
the service reviews
1
the audit work or
2
service performed.
Situation 2
Except in emergency situations, a firm (or a network firm) shall not prepare tax calculations of current and
deferred tax liabilities (or assets) for an audit client (public interest entity) for preparing accounting entries that
are material to the financial statements on which the firm will express an opinion.
In emergency or other unusual situations when it is impractical for the audit client to make other arrangements,
we may provide tax service. This may be the case when:
0
only the firm has the resources and knowledge of the client's business to assist client in. timely
preparation of its calculations of current and deferred tax liabilities (or assets), and
1
Stopping firm from providing service will result in significant difficulties for the client (for example,
failure to meet regulatory reporting requirements).
Safeguards
0
Those who provide the services are not members of the audit team;
1
The services are provided for only a short period of time and are not expected to recur; and
2
The situation is discussed with those charged with governance.
Example-2
Bilal Azhar, ACA is Manager Taxation at a large tax consultancy firm and reports to Bader Ali, FCA who is one of
the partners of the firm.
Bilal Azhar is presently engaged in the preparation of the income tax return of Digital Systems Limited (DSL), an
IT company. During the review of the tax workings, he discovers that DSL has charged certain expenses against
which no supporting documents are available. He brings this matter to the attention of Bader Ali who has
responded him that since this is not an audit engagement, it is not our responsibility to highlight such matters.
Required:
Briefly discuss how Bader Ali may be in breach of the fundamental principles of ICAP's Code of Ethics. Also, state
the potential threats that Bilal Azhar may face in the above circumstances and how he should respond.
[ICAP study Text]
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Chapter-25
Code Of Ethics
Answer
Fundamental principles breached:
In the given situation, Bader may be in breach of the following fundamental principles of Code of Ethics for
Chartered Accountants:
Professional behavior
The practitioner should follow the laws and regulations and should avoid actions which discredits the profession.
Bader has breached the fundamental principle of professional behavior as his proposed suggestion in respect of
ignoring the appropriate adjustments to the income tax return would affect the good reputation of the profession.
Integrity
The tax practitioner should be straightforward and honest in all professional and business relations. Bader has
breached the fundamental principle of integrity as he has knowingly ignored the required adjustments to be made
in the income tax return.
Potential threat:
Intimidation threat
Bilal may face intimidation threat from Bader as refusal to obey instruction may risk his job.
Safeguards:
Identified threats are significant as Bilal is being instructed from the highest level of management. In order to
reduce the threat to an acceptable level, one or more of the following safeguards should be applied:
1.
Discuss the matter with Bader and persuade him to follow code of ethics/contact the tax client to make
necessary adjustments.
2.
Consider informing appropriate authorities like a senior partner in the firm.
3.
Refuse to implement the given proposals.
4.
Seek legal advice.
5.
In case threat could not be reduced consider resigning from the job
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Chapter-25
Code Of Ethics
Summary and Key Notes
Definition of Tax Services:
o Includes tax return preparation, tax calculations for accounting, and tax planning.
o Acronym: PCT - Preparing tax returns, Calculations for accounting, Tax planning.
2. Threats in Providing Tax Services to Audit Clients:
o Potential self-review or advocacy threat.
o Mnemonic: SEA - Self-review, Evaluation of threats, Advocacy threats.
3. Factors for Evaluating Threats:
o Engagement characteristics, client’s tax expertise, tax authority systems, tax regime
complexity.
o Acronym: ECTC - Engagement, Client expertise, Tax authority Complexity.
4. Tax Return Preparation:
o Generally does not create a threat.
o Based on historical information and involves tax reporting.
o Mnemonic: HR - Historical Reporting.
5. Tax Calculations for Accounting Entries (Non-Public Interest Entities):
o Creates a self-review threat.
o Safeguards: Use non-audit team members, obtain external advice, and have an appropriate
reviewer.
o Mnemonic: NAR - Non-audit members, Advice, Reviewer.
6. Tax Calculations for Accounting Entries (Public Interest Entities):
o Prohibited if material to financial statements.
o Exception in emergency situations with specific safeguards.
o Acronym: PIE - Public Interest Entity, materiality.
7. Response to ICAP Code of Ethics:
o Discuss the issue, inform authorities, refuse implementation, seek legal advice, or resign.
o Mnemonic: DRESS - Discuss, Report, External advice, Seek legal advice, Stop (Resign).
8. Example Situations:
o Situation 1: Self-review threat for non-public interest entities with safeguards.
o Situation 2: Prohibited for public interest entities unless in emergency.
o Mnemonic: NSP - Non-public safeguard, Self-review, Public prohibition.
9. Fundamental Principles Breached by Ignoring Tax Adjustments:
o Professional behavior and integrity.
o Acronym: PI - Professional Integrity.
10. Potential Intimidation Threat and Safeguards:
o Intimidation threat faced by employees from higher management.
o Safeguards: Discuss, report, refuse, seek legal advice, or resign.
o Mnemonic: DRSRS - Discuss, Report, Seek legal advice, Refuse, Stop (Resign).
Acronyms and Mnemonics for Memory Aids
• PCT: Preparing tax returns, Calculations for accounting, Tax planning.
• SEA: Self-review, Evaluation of threats, Advocacy threats.
• ECTC: Engagement, Client expertise, Tax authority Complexity.
• HR: Historical Reporting.
• NAR: Non-audit members, Advice, Reviewer.
• PIE: Public Interest Entity, materiality.
• DRESS: Discuss, Report, External advice, Seek legal advice, Stop (Resign).
• NSP: Non-public safeguard, Self-review, Public prohibition.
• PI: Professional Integrity.
• DRSRS: Discuss, Report, Seek legal advice, Refuse, Stop (Resign).
1.
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Content-Past Papers
Chapter No.
Page No
Chap#1
Chap#2
Chap#3
Chap#4
Chap#5+6
Chapter Name
Section – A [Income Tax]
Basics of Income Tax & Scope of Income
Income from Salary
Income from Property
Income from Capital Gains
Income from Other Source
Chap#7
Chap#8-11
Chap#10
Deductible allowances & rebates
Income from Business
Income from Business- Depreciation
308
310
317
Chap#12
Chap#13
Association of Persons
Losses & Rebates
320
325
Chap#15-17
Returns and Wealth Statement
328
Chap#18-21
Section – B [Sales Tax]
Sales Tax Theoretical Questions
341
Chap#22
Chap#23
Chap#24
Chap#25
Section – C [Basics, Ethics and Constitution]
System of Taxation in Pakistan
Constitutional Provisions
Ethics
Code of Ethics
352
354
355
356
Income Tax Numericals
357
Income Tax Numericals -Busniess
403
Sales Tax Numericals
428
288
292
295
299
305
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Chapter
1
Basics of income tax & scope of income
Question 1 [Q.2 (b) March 2009]
Briefly discuss the residential status of the following persons under the Income Tax Ordinance, 2001 for the tax year 20X8:
• Asif is an employee of Baluchistan Government, who has been sent to United Kingdom for an official assignment
on 1.12.20X6 for two years.
• Messrs. Akhtar & Co. is a partnership firm, doing business of financial consultancy in Pakistan as well as United
Arab Emirates (UAE). The management and control of its affairs is situated partly in UAE and partly in Pakistan.
Question 2 [Q.5 (a) March 2010]
State the provisions of the Income Tax Ordinance, 2001 regarding the residential status of companies and association of
persons.
Question 3 [Q.4 (a) September 2011]
(a)
Briefly discuss the residential status of the following persons for the tax year 2011 under the Income Tax
Ordinance, 2001.
(i)
Mr. Shah has been working as an Information Analyst in the Ministry of Foreign Affairs. On 1 November 2010,
he was posted to Pakistan Embassy in Canada for three years.
(ii)
Asif Learning Center is a partnership concern, providing IT training to professionals in Pakistan, UAE and
Saudi Arabia. Up to 31 July 2010, the management and control of its affairs was situated partly in Pakistan. However,
with effect from 1 August 2010, the entire management and control of the affairs of the partnership was shifted to Dubai.
(iii)
Mr. Liaquat was sent to Pakistan on a special assignment by his UK-based company on 1 March 2011. He left
Pakistan on 9 September 2011.
(iv)
Farooq Trading LLC was incorporated as a limited liability company in UAE. The management and control of
its affairs are situated wholly in Pakistan. (08)
Question 4 [Q.3 (a) September 2012]
State the provisions of the Income Tax Ordinance, 2001 with regards to the residential status of individuals and companies.
Question 5[Q.3 (b) September 2012]
Margaret, a German national was employed as a Technical Manager of F Chemicals Ltd, a resident company, on 1.10.20X6
for a term of two years. Under the terms of employment, she was allowed to deliver lectures at various professional
organizations. During tax year 20X8, she conducted three workshop sessions, the details of which are as follows:
Workshop Session in Lahore:
• A fee of US$ 15,000 in equivalent Pak Rupees was received from a local event manager. The fee was credited to
her bank account maintained in Karachi.
Workshop Session in Munich:
• A fee of US$ 25,000 was received in Germany in her Munich bank account.
Workshop Session in Dubai:
• A fee of US$ 20,000 was remitted to her bank account in Karachi.
Required:
Discuss the taxability of the amounts received by Margaret for conducting the workshop sessions during tax year 20X8.
Question 6 [Q.3 (a) March 2013)]
State the provisions of the Income Tax Ordinance, 2001 for determining the residential status of an Association of
Persons.
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Question # 7
March 2013 Q. 4(a)
Inspired Pakistan Limited (IPL) wants to change its accounting year from 30 June to 31 December as the income year of
its parent company in USA ends on 31 December.
Required:
Advise IPL about the requirements of the Income Tax Ordinance, 2001 regarding the change of tax year from normal to
special. (03)
Question 8 [Q.4 (b) September 2013]
In view of the provisions of Income Tax Ordinance, 2001 and Rules made thereunder, determine the residential status of
the following persons for the tax year 2013:
(i)
Ramiz proceeded to Saudi Arabia on 24 December 2012 to assume responsibilities on his new job. He visited
Karachi from 20 June 2013 to 24 June 2013 for presenting a paper in a seminar but due to unavoidable circumstances, the
seminar was cancelled.
(ii)
Khalil, an officer working at Ministry of Foreign Affairs, since last three years, was posted to the Pakistan’s
mission in Geneva from 1 August 2012 to 30 June 2013.
(iii)
Ali Associates is a partnership firm and provides consultancy services in Pakistan as well as United Kingdom
(UK). The management and control of its affairs is situated partly in UK and partly in Pakistan.
(iv)
Smith, a Nigerian football coach, came to Pakistan on 28 February 2013. He left the country on 31 August 2013.
(07)
Question # 9
September 2013 Q. 5
(a)
Differentiate between ‘Public company’ and ‘Private company’ within the meaning of Income Tax Ordinance,
2001. (05)
(b)
One of your clients Inqalab Limited wants to change its accounting year.
Required:
Write a brief note to the Finance Manager of the company explaining the requirements of Income Tax Ordinance, 2001 as
regards the following:
Change in tax year.
(03)
Question 10 [Q.3 (a) and (b) March 2016]
Under the provisions of the Income Tax Ordinance, 2001 explain the following:
(a)
Special tax year (03)
(b)
Transitional tax year
(03)
(c)
Order of application of various tax credits while computing the tax liability of the taxpayer
(d)
General provisions/rules which may apply to income subject to final tax.
(06)
(03)
Question 11 [Q.2 (a) September 2017]
Under the provisions of Income Tax Ordinance, 2001 and rules made thereunder:
(a)
Discuss the residential status for tax year 2017 in each of the following situations:
(i)
On 21 September 2016 Asif proceeded to Dubai to join his new job. Due to certain professional issues with his
employer in Dubai, he resigned on 1 May 2017 and came back to Pakistan. On 16 May 2017 he got a new job in Pakistan
which he continued till 30 June 2017.
(02)
(ii)
Sami Associates is an association of persons and provides accounting services in Dubai. On 2 January 2017, the
entire management and control of its affairs was shifted from Karachi to Dubai. (02)
Question 12 [Q.2 (b) September 2017]
Explain the treatment of foreign source income for tax year 2007 under each of the following independent situations:
• Joseph, a South African, is working in Pakistan under a two years' employment contract since 20x6. During the
tax year 20X7, he earned foreign source income from his business established in South Africa and brought 25%
of the income to Pakistan.
• On 15.1.20X6 Farhan returned to Pakistan from London after 10 years and has been living in Pakistan since then.
During the tax year 2007, he received GBP 5,000 as return.
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Question # 13 March 2018 Q. 3(c)
On 1 December 20X7 Bruce Lee was appointed by a Chinese company as a Technical Director for Pakistan. He has
provided you the following details
Arrival in Pakistan
15 December 20X7
Joined office in Pakistan
20 December 20X7
Visit to Dubai on an official trip
21-30 March 20X8
Visit to South Korea for vacations
12-21 April 20X8
Visit to northern areas of Pakistan for personal nip
4-9 June 20X8
In view of the provisions of the Income tax Ordinance, 2001 and related Rules thereunder, comment on the residential
status of Bruce Lee for the tax year 20X8. (03)
Question # 14 September 2018 Q. 2
Kaleem Limited (KL) is a listed company and its accounting year ends on 30 June. KL is now considering to change its
accounting year from 30 June to 30 September.
Under the provisions of the Income Tax Ordinance, 2001:
(a)
briefly describe normal , special and transitional tax year.
(06)
(b)
state the requirements regarding change in tax year from normal to special. (02)
(c)
state the tax year corresponding to the income year ended 30 September 20X8 and the due date for filing the return
of income.
(02)
Question # 15 March 2019 Q. 2
(b)
Mohsin has been working at the head office of Lewis Consulting, Inc. (LCI) situated in New York, USA. On 1
January 20X8, LCI had established its branch office in Pakistan and had sent Mohsin for two years as Country Manager
for looking after the Pakistan operations.
During the tax year 20X9, apart from salary income, Mohsin earned/received the following amounts:
▪ On 15 December 20X8, he conducted a seminar in USA for a fee of USD 18,000. On his request, the event
manager transferred the amount (net of tax) directly to his personal bank account in Islamabad on 10 January
20X9.
▪ On 31 May 20X9, he earned income from his business established in USA and brought 40% of the income to
Pakistan.
Required:
Under the Income Tax Ordinance, 2001:
(i)
state the residential status of Mohsin for the tax year 20X8.
(01)
(ii)
discuss the taxability of his foreign source incomes for the tax year 20X9.
(04)
Question # 16 September 2019 Q. 3(a)
Respond to the following independent scenarios, under the provisions of the Income Tax Ordinance, 2001:
Jean Francois, a French designer, often visits to Pakistan for promotion of his products. During his last visit he stayed in
Pakistan from 10 July 20X8 to 25 February 20X9. Determine the residential status of Jean Francois for tax year 20X9,
assuming that the Commissioner has granted him permission to use calendar year as special tax year.
(02)
Question # 17 March 2021 Q. 1(b)
Dr. Jamal is planning to establish a hospital as a non-profit organization.
Required:
Discuss the conditions that should be complied with by Dr. Jamal, under the Income Tax Ordinance, 2001. (03)
Question # 18 September 2021 Q. 3(a)
(a)
(i)
(ii)
State the provisions of the Income Tax Ordinance, 2001 relating to each of the following:
Change of tax year from special to normal (02)
Change in the method of accounting for income chargeable to tax under the head ‘income from business’ (03)
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Question # 19 September 2023 Q. 5(a)
Akbar, a pakistani citizen, worked at abc pakistan limited, an unlisted public company and a wholly owned subsidiary of
abc international, which is based in the usa. akbar’s engagement was formed through a two-year agreement, with the
provision that at the end of this period, he had the option to continue his employment with abc international in usa. the
two-year period ended on 30 september 2022 and akbar left for usa on 1 october 2022 to continue his employment in usa
as per the agreement.
on 15 february 2023, he resigned from abc international, usa, and joined def limited in the uk under an employment
agreement. however, due to his family problems, he resigned from def limited and returned to pakistan on 30 april 2023.
required:
Under the provisions of the income tax ordinance, 2001, discuss the tax treatment of akbar’s foreign source salary
income earned during the tax year 2023. (06)
Question # 20 March 2024 Q. 3(a)
(a)
under the provisions of the income tax ordinance, 2001 determine the residential status for tax year
2024 in each of the following cases:
(i)
arshad, an emirati gold merchant, arrived in pakistan for the first time on
and departed the country on 30 september 2023.
15 march 2023,
(ii)
chang li, a chinese sugar manufacturer, arrived in pakistan on 1 march 2023. during his stay
until 1 september 2023 in pakistan, he resided in sargodha, punjab until 31 may 2023 and
thereafter until his departure from pakistan, he stayed in ghotki, sindh. assume that a calendar
year serves as his special tax year.
(04)
Question # 21 Autumn 2024 Q. 2(a)
arsalan, a citizen of pakistan, is employed by an international banking organization, based in
united kingdom. the following details outline arsalan’s travel and work assignments across
different countries during the tax year 2024:
Required:
under the provisions of the income tax ordinance, 2001 and the rules made thereunder,
assess the residential status of arsalan for the tax year 2024.
(04)
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Chapter
2
Income from salary
PAST PAPER QUESTIONS
Question # 1
Spring 2015 Q. 3
Munir resigned from his employment with Ali Industries Limited (AIL) with effect from 31 December 2014.
He received following amounts in final settlement:
▪ Rs. 150,000 as Leave Encashment.
▪ Rs. 4,000,000 under a Golden Handshake Scheme.
Munir had received a salary of Rs. 350,000 per month for a period of six months upto December 2014. His
taxable income and tax liability during the preceding five tax years were as under:
Tax year
Total taxable income (Rs)
Total tax paid (Rs)
2010
2,000,000
300,000
2011
2,450,000
392,000
2012
2,700,000
472,500
2013
3,100,000
542,500
2014
3,650,000
650,000
Required:
As a tax consultant, advise Munir about the amount of income tax payable by him for the tax year 2015, under
the Income Tax Ordinance, 2001. (Tax rates are given on the last page) (06)
Question # 2
Autumn 2017 Q. 3(a)
Under the provisions of the Income Tax Ordinance, 2001 compute taxable income or loss, under the correct
head of income for tax year 2017, in each of the following cases:
(a) Under an employee share scheme, 30,000 shares of Dawood Limited were issued to Qamar, on 1 August
2013 for Rs. 30 each. According to the scheme, he was not allowed to sell/transfer the shares before
completion of three years from the date of issue. The face value of each share is Rs. 10 per share. Fair
market value of each share on different dates was as follows:
1 August 2013
Rs. 40
30 June 2016
Rs. 30
He sold 10,000 shares on 31 May 2017 for Rs. 65 per share.
Question # 3
31 July 2016
Rs. 50
(04)
Spring 2018 Q. 2(c)
Hasrat has been working as Director HR in Shakir Limited (SL) for many years. During the tax year 20X8 he
received basic salary of Rs. 6 million. SL also contributed Rs. 50,000 per month towards a recognized provident
fund. An equal amount was contributed by Hasrat. Interest income of Rs. 3,391,000 at the rate of 20% of
accumulated balance of the fund was credited to Hasrat’s account. (04)
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Question # 4
Spring 2020 Q. 5(b)
Sajid retired from Sun Chemicals Limited (SCL) as a marketing manager with effect from 31 December 2019.
He received the following amounts in final settlement from SCL:
(i) Leave encashment of Rs. 600,000.
(ii) Rs. 4,000,000 from unapproved provident fund. 50% of this amount was contributed by Sajid.
(iii) Un-approved gratuity of Rs. 2,500,000.
He also acquired the vehicle, provided to him by SCL, at accounting written down value of Rs. 500,000. The
market value of the vehicle at the time of retirement was Rs. 2,000,000.
Required:
Under the Income Tax Ordinance, 2001 and Rules made thereunder, discuss the tax treatment of the above
benefits received by Sajid on retirement.
(04)
Question # 5
Spring 2021 Q. 1(a)
On 31 December 20X1, Dr. Jamal resigned from his employment with General Hospital Limited. In January
20X2, he received following amounts in final settlement:
▪ Rs. 600,000 as leave encashment.
▪ Rs. 8,510,000 from recognised provident fund.
▪ Rs. 1,300,000 and Rs. 1,700,000 as salary arrears relating to tax year 20W9 and 20X0 respectively.
Dr. Jamal had received a monthly salary of Rs. 500,000 from July 20X1 to December 20X1. His taxable income
and tax liability during the preceding four tax years were as under:
Tax year
Total taxable income (Rs.)
Total tax paid
20W8
2,800,000
359,500
20W9
3,200,000
404,500
20X0
3,800,000
300,000
20X1
4,800,000
630,000
Required:
As a tax consultant, advise Dr. Jamal about the amount of income tax payable by him for the tax year 20X2,
under the Income Tax Ordinance, 2001. (07)
Question # 6
Spring 2021 Q. 4(b)(i)
Briefly explain the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder relating to:
(i) interest free loan provided by an employer to its employee for marriage of his/her daughter. (02)
Question # 7
Spring 2024 Q. 2
Najeeb is a resident individual who had been working at PGA Limited (PGAL) for the past
8 years. On 31 July 2023, he retired from PGAL and received his final settlement on 15
August 2023. Following are the details of his final settlement amount:
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Gross salary for July 2023
Fuel allowance for July 2023
Leave encashment
Provident fund balance – Principal amount
(50% contributed by the employer)
Provident fund balance – Interest amount
Gratuity
Rupees
180,000
27,000
140,000
3,000,000
600,000
900,000
PGAL’s provident fund is recognized and its gratuity fund is approved by the Commissioner
Inland Revenue.
Additional information:
(i)
Najeeb had obtained an interest-free loan amounting to Rs. 2,000,000 from PGAL.
80% of the amount had been recovered by PGAL, and the remaining amount was
waived by PGAL at the time of his retirement.
(ii) As per PGAL’s policy, Najeeb purchased the company-owned laptop, which he had
been using, at a written down value of Rs. 50,000, even though its fair market value
upon purchase stood at Rs. 110,000.
(iii) On 5 August 2023, Najeeb received a watch worth Rs. 80,000 from PGAL as a gift at
his farewell party.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and the Rules made thereunder:
(a)
(b)
compute the taxable income of Najeeb for the tax year 2024.
how would you treat the amount received from the provident and gratuity funds if they
are unrecognized and unapproved, respectively?
(05)
(02)
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Income from property
Chapter
3
PAST PAPER QUESTIONS
Question # 1
What is chargeable to tax under the head 'income from property"?
(Q.3 (a) September 2002
Question # 2
Q.4 September 2002
ABC Associates owns a building which is on rent. The following information is available:
Rent received from tenants
2,300,000
Depreciation on building under the Third Schedule to the Ordinance
400,000
Property Tax
100,000
Municipal/local government taxes (agreements with tenants provide that tenant
should pay the municipal taxes)
100,000
Rent received includes Rs. 600,000 for three years commencing from July 01 of the current year. ABC
Associates follow accrual basis of accounting and its income year is July-June 20X8.
Required: Compute the income from property of ABC Associates.
Question # 3
Q.5 March 2003
Mr. Amir-ud-din has recently constructed an office complex for the purposes of letting out. As per terms and
conditions, Mr. Amir-ud-din is also entitled to signing amount, which is non-refundable.
For the tax year 20X8 following information has been provided to you for the computation of his income from
property:
Rent for the year already received
1,150,000
Rent for the year though due but irrecoverable
50,000
Signing amount (non-adjustable, non-refundable)
100,000
Fire tax paid to the local authority
20,000
Lawyer's fee for suit to recover rent
50,000
Salary of the caretaker who collects monthly rent
46,000
Insurance premium being 1% of market value of the property
200,000
Repair maintenance expenditure
50,000
Calculate his income from property for TY 20X8.
Question # 4
Q.1 (a) September 2006
Discuss the provisions of the Income Tax Ordinance, 2001 regarding non-adjustable amount received from a
tenant by the owner of a building.
Question # 5
Spring 2012 Q. 4(b)
Yaqoot and Loha are joint owners of a bungalow which has been rented out for Rs. 70,000 per month.
Required:
Discuss the taxability of Yaqoot and Loha in respect of above income, in the light of Income Tax Ordinance,
2001. (03)
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Question # 6
Spring 2014 Q. 4
Bashir and Jameel jointly own a house in Karachi. Bashir has 75% share in the house. On 1 September 20X3,
the house was let out at an annual rental value of Rs. 6,500,000. This amount includes Rs. 186,000 per month
for utilities, cleaning and security.
During the tax year 20X4, the owners incurred the following expenditures in relation to the house:
Utilities, cleaning and security
Repair and maintenance
Insurance premium
Collection charges
Mark-up on amount borrowed for extension of the house
Rupees
650,000
810,000
240,000
25,400
840,000
Bashir and Jameel have no other source of income. All the above expenses were incurred by them jointly.
Required:
Calculate taxable income of Bashir and Jameel under appropriate heads of income for the tax year 20X4. (10)
Question # 7
Spring 2015 Q. 4
(a) (i) Explain the term ‘Rent’ in context of ‘Income from property’. (02)
(ii) Specify the head of income under which the following amounts would be chargeable to tax:
▪ rent from sub lease of a building.
▪ amount included in rent for the provision of amenities, utilities and any other service connected
with renting of the building.
(02)
(b) On 1 July 2014, Fahim agreed to rent out a house to Mirza at a monthly rent of Rs. 180,000 with effect
from 1 August 2014 and received one year’s rent in advance. He also received Rs. 800,000 as a security
deposit which was partly used to repay the security deposit amounting to Rs. 400,000 received from the
previous tenant in July 2010 and partly used for renovation of the house.
Fahim also incurred the following expenses in respect of the above house:
(i) property tax of Rs. 15,000.
(ii) payment of interest amounting to Rs. 200,000 to his friend against amount borrowed for renovation
of the house.
(iii) insurance premium of Rs. 110,000.
(iv) Rs. 5,000 per month to Wasif for collection of rent.
Required:
Under the provisions of the Income Tax Ordinance, 2001 compute the taxable income of Fahim for tax
year 2015 assuming he has no other income.
(07)
Question # 8
Autumn 2016 Q. 4
On 1 July 2015 Farrukh borrowed Rs. 8,000,000 from Star Bank Limited and acquired a plot of land in Hub
Industrial Zone for Rs. 6,500,000. He invested the rest of the loan in a business venture with his friend. The
above loan carries mark-up at a rate of 12% per annum and is repayable in eight equal quarterly instalments
starting from 1 July 2016. On 1 August 2015 Farrukh decided to sell the plot of land to Zulfiqar Motors for Rs.
10,000,000 and received a deposit of Rs. 500,000 from them. On 15 August 2015 Farrukh forfeited the deposit
on refusal of Zulfiqar Motors to purchase the plot of land.
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On 1 September 2015 Farrukh let out the plot of land to his friend Atif at a monthly rent of Rs. 150,000. He
received an un-adjustable deposit of Rs. 200,000 from Atif and paid Rs. 80,000 for levelling the ground, Rs.
50,000 as ground rent, Rs. 12,000 as insurance premium against the risk of damage or destruction by water
logging and Rs. 140,000 against rent collection charges. Farrukh had paid Rs. 25,000 to a firm of professional
valuers which determined the annual rental value of the plot of land at Rs. 2,160,000.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute under the
relevant head of income, taxable income of Farrukh for tax year 2016. (12)
Question # 9
Spring 2019 Q. 3(c)
On 1 July 20X8, Zahid rented out his properties as follows:
(i) An apartment was rented to Abdul Qadir at a monthly rent of Rs. 40,000. Zahid received a non-adjustable
security deposit of Rs. 300,000 which was partly used to repay the non-adjustable security deposit
amounting to Rs. 175,000 received from the previous tenant in July 20X3. He also spent Rs. 20,000 on
repairs of the apartment in February 20X9.
(ii) A bungalow was rented to a bank. Zahid and his younger brother are joint owners of the bungalow in the
ratio of 60:40 respectively. The annual rent agreed with the bank was Rs. 6,000,000 which is inclusive of
Rs. 100,000 per month for utilities, cleaning and security. Zahid paid Rs. 35,000 per month for providing
these services.
Required:
Under the provisions of Income Tax Ordinance, 2001 compute total and taxable income of Zahid for the tax
year 20X9 under appropriate heads of income. (07)
Question # 10
(a) Explain the term ‘Rent’ with relation to ‘Income from property’.
Autumn 2019 Q. 2
(02)
(b) During the tax year 20X9, Amjad carried out the following transactions in respect of his properties:
(i) On 1 July 20X8, Amjad purchased a factory building in Sukkur along with the installed machinery
at the price of Rs. 9 million and Rs. 3 million respectively. To manage the shortage of funds of Rs.
2,000,000, he borrowed the same on 1 July 20X8 from his friend Shamshad through a crossed cheque.
The loan carries interest at the rate of 18% per annum.
On 1 January 20X9, he let out this building along with the machinery to Basit at a monthly rent of
Rs. 500,000 payable in advance.
(ii) On 1 July 20X8, Amjad let out his residential property situated in DHA Karachi to Mirza Limited at
a monthly rent of Rs. 300,000. Rent for the two years was received in advance on 1 August 20X8.
(iii) On 1 July 20X8, Amjad also entered into an agreement with Zeeshan for the sale of his plot situated
in Quetta for Rs. 50 million. The plot had been purchased for Rs. 40 million in 20X4. Under the
terms of sale agreement, he received Rs. 5 million at the time of signing the agreement and the
balance was to be received on 30 September 20X8. However, due to financial difficulties, Zeeshan
failed to pay the balance amount on the due date and consequently, Amjad forfeited the advance in
accordance with the terms of the agreement.
On 10 April 20X9, he finally sold the plot to Jamshed for Rs. 65 million.
(iv) Following expenditures were incurred by Amjad in respect of his properties in Sukkur and Karachi:
Details of expenditures
Repair & maintenance - building
- machinery
Ground rent
Insurance - building
Total
Property situated in
Sukkur
Karachi
270,000
70,000
50,000
50,000
10,000
150,000
20,000
520,000
100,000
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Required:
In view of the provisions of the Income Tax Ordinance, 2001 compute under appropriate head of income,
taxable income of Amjad for the tax year 20X9.
(10)
Question # 11
Autumn 2019 Q. 3(e)
Farhan and Imran jointly own a building in Quetta. The building has been rented out to a company. Discuss
the tax treatment of income from such property. (02)
Question # 12
Autumn 2023 Q. 3(e)
Kashif is a resident filer who owns a single-storey bungalow in Karachi, including a basement. He solely uses
the basement portion of the bungalow which constitutes 20% of the total bungalow area, for storing his
personal belongings.
On 1 October 2019, he rented his bungalow, excluding the basement portion, to Ahmed under a three-year
rental agreement. Other details of the rental agreement are given below:
Monthly rent
Non-adjustable security deposit
Monthly security charges
Rupees
300,000
3,500,000
40,000
In addition to the above, Kashif also provides Ahmed with backup electricity from a generator during load
shedding at a fixed monthly charge of Rs. 50,000. The electricity connection of the basement is separate from
the rest of the bungalow.
On 30 September 2022, the rental agreement concluded, and Kashif agreed to sell the entire bungalow to
Ahmed. The non-adjustable security deposit was retained as a down payment for the purchase.
On 25 October 2022, Ahmed backed out of the deal and declined to purchase the bungalow. As per the
agreement, Kashif forfeited the non-adjustable security deposit.
On 1 November 2022, Kashif rented the bungalow to a new tenant, Rashid, under a rental agreement with the
same terms as above.
During the year, Kashif paid salary of Rs. 360,000 to the security guard of the bungalow and incurred Rs.
450,000 for running the electricity generator.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute the total
income of Kashif under appropriate heads of income for the tax year 2023.(08)
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Chapter
4
Income from capital gain
PAST PAPER QUESTIONS
Question # 1
Spring 2010 Q. 6
(a) Explain the term “Capital Assets” as referred to in the Income Tax Ordinance, 2001. (05)
(b) Mr. Shahbaz, a resident individual earned Rs. 700,000 from the sale of assets as shown below:
Purchase
Price
Date
Rupees
Shares of a listed company
Shares of an unlisted
company
Jewellery
Sculpture
Shares of a private limited
company
Sale
Date
Gain/loss (Rs.)
Price
Rupees
10/12/21
15/07/21
350,000 30/06/23
500,000 30/11/22
200,000
900,000
(150,000)
400,000
15/05/21
01/07/21
01/01/23
750,000 20/12/22
400,000 31/01/23
1,300,000 15/02/23
1,400,000
300,000
1,200,000
650,000
(100,000)
(100,000)
Required:
Discuss the treatment and the implications of each of the above transactions under the Income Tax
Ordinance, 2001. Give brief reasons to support your conclusion.
(05)
Question # 2
Autumn 2011 Q. 5
Mr. Feroz has been the CEO of Aziz Foods Pakistan Limited (AFPL) for several years. He was given 2000
shares on 1 June 2009 by Aziz AG, Germany (the parent company of AFPL) at a price of €2.5 per share. The
market price on that date was €8.2 per share. The shares were transferable on completion of one year of service,
from the date of issue of shares.
The market price of the shares as on 1 June 2010 was €12.5 per share. On 10 April 2011, Mr. Feroz sold all
shares at €13 per share. He paid a commission of €50 to the brokerage house.
The relevant exchange rates are as follows:
1 June 2009
€1 = Rs. 118.10
1 June 2010
€1 = Rs. 121.40
10 April 2011
€1 = Rs. 123.90
Required:
Compute the amount to be included in the taxable income of Mr. Feroz for tax years 2009, 2010 and 2011 and
specify the head of income under which the income would be classified. (07)
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Question # 3
Autumn 2012 Q. 5(a)
In May 2023, Ms. Hameeda sold certain personal assets at the following prices:
Rupees
Plot in DHA Karachi
10,000,000
Paintings
2,000,000
Jewellery
5,000,000
Additional information:
Plot in DHA Karachi was inherited by her from her father in May 2012. It was purchased by her father for Rs.
4,000,000 and market value at the time of inheritance was Rs. 5,000,000.
Paintings were inherited from her mother in July 2017. These paintings were purchased by her mother for Rs.
2,350,000 and market value at the time of inheritance was Rs.4,000,000.
Jewellery costing Rs. 3,000,000 was purchased and gifted to her by her husband in March 2015.
Required:
Discuss the taxability of Ms. Hameeda in respect of the above gains/ losses on sale of assets in the context of
Income Tax Ordinance, 2001. (06)
Question # 4
Autumn 2013 Q. 3
(a) Explain the term ‘Capital asset’ as referred to in the Income Tax Ordinance, 2001. (04)
(b) Gulzar is a Pakistani resident and operates various businesses. He disposed of the following assets during
the tax year 2023:
(i) An immovable property was sold for Rs. 50 million. The cost of the immovable property was Rs. 25
million. Tax depreciation of Rs. 4 million had been allowed on the immovable property up to the tax
year 2022. (02)
(ii) A car was disposed of for Rs.1.2 million. The car was acquired on 1 July 2021. The tax written down
value of the car at the beginning of tax year 2023 was Rs. 0.9 million. The car was being used partly
(70%) for business purposes. (02)
(iii) An antique sculpture was purchased for Rs. 350,000 on 30 August 2010. It was sold for Rs. 1,500,000
on 28 February 2023 through auction. The auctioneer was paid a commission of Rs. 150,000. Tax
was deducted and paid by Gulzar from the amount of commission within due date. (02)
(iv) Listed securities were sold as follows:
Securities
Date of Purchase
A
B
C
20 November 2022
05 August 2022
01 June 2022
Purchase cost (Rs.)
Date of sale
Sale proceeds (Rs.)
500,000 17 March 2023
320,000 08 June 2023
650,000 17 June 2023
400,000
600,000
700,000
(03)
Required:
Compute the amount of capital gain/loss arising on the above transactions under the provisions of the
Income Tax Ordinance, 2001.
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Question # 5
Autumn 2014 Q. 3
Zaman is working as the Chief Executive Officer in Yasir Limited (YL). Following are the details of sale and
purchase relating to his capital assets during the tax year 2023.
1. Under an employee share scheme, 25,000 shares of YL were allotted to Zaman, on 1 December 2020 for
Rs. 25 each. According to the scheme, he was not allowed to sell/transfer the shares before completion of
two years from the date of transfer. The face value of each share is Rs. 10 per share. Fair market value of
the shares was as follows:
▪ Rs. 40 per share on 1 December 2020
▪ Rs. 48 per share on 30 June 2021
▪ Rs. 55 per share on 30 November 2022
▪ Rs. 61 per share on 30 June 2023
2. He sold 24,000 shares of HQ (Pvt.) Limited on 30 June 2023 for Rs. 200 per share. He had acquired these
shares as follows:
▪ 18,000 shares were purchased at Rs. 55 per share on 25 June 2022.
▪ 6,000 shares were allotted as bonus shares on 28 February 2023
3. A gain of Rs. 300,000 was realized on the sale of shares of Zeeshan Industries Limited (ZIL), a public
listed company, in June 2023. The shares were acquired on 31 May 2022.
4. Zaman sold a painting to his brother on 23 March 2023 for Rs. 1,800,000. Zaman had purchased this
painting for his residence, in an auction for Rs. 2,000,000 on 10 July 2020
5. He sold his old furniture to Furqan for Rs. 285,000 on 25 June 2023. The furniture was purchased in 2021
for Rs. 250,000.
Required:
Compute the amount to be included in the taxable income of Zaman for the tax year 2023 and specify the head
of income under which the income would be classified. (10)
Question # 6
Autumn 2015 Q. 4
(a) What do you understand by the terms ‘Security’ and ‘Derivative products’ as provided in the Income Tax
Ordinance, 2001 and Rules made thereunder?
(03)
(b) Under the provisions of the Income Tax Ordinance, 2001 compute taxable gain or loss, under the correct
head of income, in each of the following cases. Also identify, giving reasons, whether the company is a
public or private company for tax purposes:
(i) Ashiq has 5,000 shares in Rumi (Pvt.) Limited (RPL). 52% of the shares of RPL are held by Delta
Plc. which is owned by the British Government. Ashiq inherited these shares from his father on 1
January 2014. His father had purchased these shares on 31 May 2012 at a price of Rs. 250 per share.
The market value of these shares at the time of inheritance was Rs. 300 per share.
On 30 June 2015 Ashiq sold 2,500 shares in RPL at a price of Rs. 325 per share when the break-up
value of RPL was Rs. 350 per share. (04)
(ii) What would be your answer in (i) above, if 40% of the shares of RPL were held by the Provincial
Government, 48% by the British Government and 12% by individual investors.
(03)
Question # 7
Spring 2017 Q. 2(b)
Saleha is a resident person. She disposed of the following assets during the tax year 20X7.
(i) A painting which she inherited from her father was sold for Rs. 1,250,000. The market value of the
painting at the time of inheritance was Rs. 1,550,000. The painting was purchased by her father for Rs.
1,000,000. (02)
(ii) She sold jewellery for Rs. 2,300,000 which was purchased by her husband in March 20X5 for Rs.
1,300,000 and gifted to her on the same date.
(02)
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(iii) She disposed of her car for Rs. 1,800,000. The car was being used for the purposes of her business. The
tax written down value of the car at the beginning of tax year 20X7 was Rs. 1,600,000. The rate of
depreciation for tax purposes is 20%.
(02)
(iv) On 20 October 20X6 she sold a dining table to Faheem for Rs. 18,000 which she had purchased on 15
May 20X5 for Rs. 15,000 for her personal use.
(02)
Required:
Under the provisions of the Income Tax Ordinance, 2001, discuss the taxability of each of the above
transactions in the context of capital gain/loss.
Question # 8
Spring 2017 Q. 3(b)
Najam had purchased a house in 20X2 for Rs. 20 million.
On 1 July 20X6, Najam entered into an agreement with Zameer for sale of the house for Rs. 25 million. As per
the terms of the agreement, Najam received Rs. 5 million on the day the contract was signed and balance amount
was to be paid on 30 September 20X6. However, due to financial difficulties, Zameer failed to pay the balance
amount on the due date and consequently, Najam forfeited the advance in accordance with the terms of the
agreement.
On 15 February 20X7 Najam sold the house to Farid for Rs. 30 million.
Required:
Advise Najam about the taxability of the above transaction under the Income Tax Ordinance, 2001.
(04)
Question # 9
Autumn 2017 Q. 3(b)
Under the provisions of the Income Tax Ordinance, 2001 compute taxable income or loss, under the correct
head of income for tax year 2017, in each of the following cases:
(b) Zaheer sold a painting to his brother on 10 April 2017 for Rs. 2,000,000. Zaheer had purchased this
painting for his residence, in an auction on 14 August 2013 for Rs. 1,800,000.
(02)
Question # 10
Autumn 2019 Q. 3(b)
Respond to the following independent scenarios, under the provisions of the Income Tax Ordinance, 2001:
(b) Haris sold two of his personal vehicles during the current year and earned profit of Rs. 550,000. Discuss
the taxability of profit earned by Haris in the context of capital gain/loss.
(02)
Question # 11
Spring 2020 Q. 4(b)
Respond to the following independent situations, under the provisions of the Income Tax Ordinance, 2001:
(b) On 1 July 2014, Ahmed purchased two sculptures for Rs. 410,000 and Rs. 475,000 respectively. On 30
November 2019, during the shifting of his house, he lost both the sculptures. On 15 January 2020, he
received insurance claim of Rs. 940,000 in a single transaction against the loss of two sculptures. The fair
market value of both the sculptures at the time of loss was estimated at Rs. 360,000 and Rs. 540,000
respectively. Compute Ahmed’s taxable income or loss for the above transaction. (04)
Question # 12
Autumn 2022 Q. 3
(a) Nargis is a resident filer. During the tax year 2022, she disposed of various assets. Relevant details of
these assets are as follows
(b)
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Disposal
Cash
Fair market
consideration
value
---- Rs. in million ---Investment in shares
of a public unlisted
company
Investment in shares of
a listed company
Personal car
Painting
Jewelry
Date of
disposal
Purchase
Cost of
Date of
purchase
purchase
Rs. in million
2.8
3.0
01-Apr-22
2.0
01-Jun-20
3.5
3.5
01-Jul-21
2.1
30-Jun-13
5.0
1.2
8.0
6.0
1.2
7.6
31-Dec-21
16-Sep-21
30-Jun-22
3.8
1.7
(see note 1)
01-Jan-19
16-Feb-17
01-May-16
Note 1: She received the jewelry as a gift from her mother in law at the time of her marriage when its fair
market value was Rs. 4.8 million.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder:
(i) compute the amount to be chargeable to tax under the head of capital gain. Also state the reason for
ignoring gain / loss, if any.
(06)
(ii) compute the tax liability of Nargis in respect of the capital gain computed in
(i) above assuming that she has no other source of income. (02)
(b) Shahid is a resident filer and has provided following information pertaining to tax year 2022
(i) On 16 June 2018, he inherited a bungalow having a fair market value of Rs. 50 million from his
father on his death. On 1 January 2022, he decided to sell the bungalow to Zamin for Rs. 60 million
and received a deposit of Rs. 6 million. On 14 February 2022, he forfeited the deposit on refusal of
Zamin to purchase the bungalow in accordance with the terms of the contract.
On 31 March 2022, he sold and transferred the bungalow to Kazim for Rs. 54 million.
(ii) He owns a factory building at Faisalabad. On 1 July 2021, he let out this factory building along with
the plant and machinery at a monthly rent of Rs. 1 million. During the year, he incurred expenses of
Rs. 3.5 million on the repair and maintenance of the factory.
(iii) He owns an agricultural land in Punjab. On 1 January 2022, he rented out the agriculture land at an
annual rent of Rs. 4 million. The fair market value of the annual rent was Rs. 5 million.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute the total
and taxable income of Shahid under appropriate heads of income for the tax year 2022. Also compute his
tax liability for the tax year 2022. (07)
Note: Show all relevant exemptions, exclusions and disallowances.
Question # 13
Spring 2024 Q. 4
Ashfaq is a resident filer who made the following disposals during the tax year 2024.
(i)
On 15 November 2023, he sold a bungalow located in Karachi for Rs. 51 million which was
purchased on 1 January 2019 for Rs. 46 million. The values determined by the
Federal Board of Revenue (FBR) at the time of sale and purchase were Rs. 48 million and
Rs. 44 million respectively.
(ii)
He gifted his coin collection, having a fair market value of Rs. 2.2 million, to his friend. He
had acquired this collection over the years at a cost of Rs. 0.3 million.
(iii) He sold several pieces of antique furniture for a lump sum amount of Rs. 35 million. Details
of the furniture items sold are given below.
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(iv)
Purchase cost
Fair market value
---------- Rs. in million ---------Antique dresser table 8
15
Antique vase
1.2
0.9
Antique clock
20
25
An executive table which Ashfaq used at his residence, was moved to his office for office
use and incurred transportation cost of Rs. 10,000 in this regard. The fair market value
of the table at that time was Rs. 75,000. Ashfaq had purchased this table for Rs. 90,000.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and the Rules made thereunder:
(a)
compute the amount chargeable to tax and related tax liability under the head of capital gain.
Also state the reason for ignoring gain / loss, if any.
(08)
(b)
list the documents which Ashfaq is required to maintain in relation to capital gain.
(03)
Question # 14
Spring 2024 Q. 5 (c)
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Income from other sources
Chapter
5-6
PAST PAPER QUESTIONS
Question # 1
Spring 2014 Q. 4
Bashir and Jameel jointly own a house in Karachi. Bashir has 75% share in the house. On 1 September 20X3,
the house was let out at an annual rental value of Rs. 6,500,000. This amount includes Rs. 186,000 per month
for utilities, cleaning and security.
During the tax year 20X4, the owners incurred the following expenditures in relation to the house:
Rupees
Utilities, cleaning and security
650,000
Repair and maintenance
810,000
Insurance premium
240,000
Collection charges
25,400
Mark-up on amount borrowed for extension of the house
840,000
Bashir and Jameel have no other source of income. All the above expenses were incurred by them jointly.
Required:
Calculate taxable income of Bashir and Jameel under appropriate heads of income for the tax year 20X4. (10)
Question # 2
Spring 2017 Q. 3(a)
On 1 June 20X6 Dawood and Dewan jointly purchased a bungalow for Rs. 35 million. They paid the amount
in the ratio of 65:35 respectively. To arrange funds for the deal, Dawood borrowed Rs. 3,000,000 in cash from Shameem
who is in the business of lending money. The rate of interest is agreed @ 20% per annum.
On 1 July 20X6, the house was let out to a company at annual rent of Rs. 4,500,000 inclusive of an amount of Rs. 75,000
per month for utilities, cleaning and security. For providing these services Dawood and Dewan paid Rs. 35,000 per month.
During the tax year 20X7 they also paid Rs. 10,000 as collection charges and Rs. 230,000 for administering the property.
Required:
Compute taxable income of Dawood and Dewan under appropriate heads of income for the tax year 20X7. (08)
Question # 3
Spring 2019 Q. 3(c)
On 1 July 20X8, Zahid rented out his properties as follows:
(i) An apartment was rented to Abdul Qadir at a monthly rent of Rs. 40,000. Zahid received a non-adjustable
security deposit of Rs. 300,000 which was partly used to repay the non-adjustable security deposit
amounting to Rs. 175,000 received from the previous tenant in July 20X3. He also spent Rs. 20,000 on
repairs of the apartment in February 20X9.
(ii) A bungalow was rented to a bank. Zahid and his younger brother are joint owners of the bungalow in the
ratio of 60:40 respectively. The annual rent agreed with the bank was Rs. 6,000,000 which is inclusive of
Rs. 100,000 per month for utilities, cleaning and security. Zahid paid Rs. 35,000 per month for providing
these services.
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Required:
Under the provisions of Income Tax Ordinance, 2001 compute total and taxable income of Zahid for the tax
year 20X9 under appropriate heads of income. (07)
Question # 4
Autumn 2019 Q. 2(b)
During the tax year 20X9, Amjad carried out the following transactions in respect of his properties:
(i) On 1 July 20X8, Amjad purchased a factory building in Sukkur along with the installed machinery at the
price of Rs. 9 million and Rs. 3 million respectively. To manage the shortage of funds of Rs. 2,000,000,
he borrowed the same on 1 July 20X8 from his friend Shamshad through a crossed cheque. The loan
carries interest at the rate of 18% per annum.
On 1 January 20X9, he let out this building along with the machinery to Basit at a monthly rent of Rs.
500,000 payable in advance.
(ii) On 1 July 20X8, Amjad let out his residential property situated in DHA Karachi to Mirza Limited at a
monthly rent of Rs. 300,000. Rent for the two years was received in advance on 1 August 20X8.
(iii) On 1 July 20X8, Amjad also entered into an agreement with Zeeshan for the sale of his plot situated in
Quetta for Rs. 50 million. The plot had been purchased for Rs. 40 million in 20X4. Under the terms of
sale agreement, he received Rs. 5 million at the time of signing the agreement and the balance was to be
received on 30 September 20X8. However, due to financial difficulties, Zeeshan failed to pay the balance
amount on the due date and consequently, Amjad forfeited the advance in accordance with the terms of
the agreement.
On 10 April 20X9, he finally sold the plot to Jamshed for Rs. 65 million.
(iv) Following expenditures were incurred by Amjad in respect of his properties in Sukkur and Karachi:
Details of expenditures
Repair & maintenance – building
- machinery
Ground rent
Insurance – building
Total
Property situated in
Sukkur
Karachi
270,000
70,000
50,000
50,000
10,000
150,000
20,000
520,000
100,000
Required:
In view of the provisions of the Income Tax Ordinance, 2001 compute under appropriate head of income,
taxable income of Amjad for the tax year 20X9. (10)
Question # 5
Spring 2020 Q. 4(a)
Respond to the following independent situations, under the provisions of the Income Tax Ordinance, 2001:
(a) During the tax year 2020, Sadiq received a flat as gift from his uncle, Mumtaz Alvi. The flat was located
in posh area of Lahore and its fair market value at the time of gift was Rs. 4.5 million. Discuss the tax
treatment of the flat received by Sadiq.
(02)
Question # 6
Autumn 2020 Q. 4(a)
Farheen is a resident filer and has provided following information pertaining to tax year 2020:
(i) She owns a bungalow situated in Multan which was given on rent to Abbas under a rental agreement of
five years which expired on 31 March 2020. Details of payments received as per the rent agreement are
given below.
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Rent
Security guards’ salaries
Non-adjustable security deposit
Rs. 175,000 per month
Rs. 50,000
Rs. 2,500,000
On expiry of the rental agreement, Farheen refunded the security deposit to Abbas and rented out the
bungalow to a new tenant Zafar on the same terms and conditions.
Farheen pays Rs. 40,000 per month to a security services company which provides security guards at the
bungalow.
(ii) She owns a residential plot in Karachi. On 1 March 2020, she decided to sell the plot to Mehreen for Rs.
2,200,000 and received a deposit of Rs. 220,000. On 1 June 2020, she forfeited the deposit on refusal of
Mehreen to purchase the plot.
(iii) On 1 December 2017, she had acquired a furnished office on monthly rent of Rs. 5,000 for her own use
and had paid a non-refundable amount of Rs. 2,000,000 to the previous tenant for vacating the office.
During the year, she received an offer of Rs. 2,400,000 from Shehroz to vacate this office which she
accepted and received the amount on 1 March 2020.
(iv) On 1 October 2019, she inherited a factory with plant and machinery from her father and let it out on 1
December 2019 at a monthly rent of Rs. 500,000.
(v) Legal and professional charges of Rs. 40,000 were paid for preparation of rental agreements.
(vi) On 15 November 2019, she received income tax refund of Rs. 180,000 related to tax year 2017. This
amount included Rs. 30,000 being additional payment on delayed refund.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute the total income
of Farheen under appropriate heads of income for the tax year 2020.
(07)
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Chapter
7
Deductible allownaces & rebates
PAST PAPER QUESTIONS
Question # 1
Autumn 2009 Q. 2(b)
State the provisions of Income Tax Ordinance, 2001 pertaining to foreign tax credit available to a resident
taxpayer. (06)
Question # 2
Spring 2010 Q. 2
Mr. Qamar intends to donate an amount of Rs. 10 million to certain educational and welfare institutions. In
your capacity as his tax consultant, explain the tax relief which may be available in respect of such donation
and the conditions he must fulfill to avail such relief.
(09)
Question # 3
Autumn 2017 Q. 2(b, c)
Determine the amount of deductible allowance that a resident individual can claim on account of education
expenses, if his taxable income for the year was Rs. 800,000 and he paid monthly fee of Rs. 6,000 per child for
his three children.
(02)
Question # 4
Autumn 2020 Q. 3(b)
Differentiate between deductible allowances and admissible deductions. Give three examples of each. (06)
Question # 5
Spring 2021 Q. 4
(b) Briefly explain the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder relating to:
(iii) order of application of various tax credits if a taxpayer is allowed more than one tax credit for a tax
year. (03)
Question # 6
Spring 2023 Q. 2
Taha who has recently joined a tax consultancy firm, prepares the following table with regard to
taxability of interest income earned by various persons during the tax year 2023:
Name of
person
Aatif
Bilal
Seema
Kamal
Status
Resident
Individual
Resident
Individual
Resident
Individual
Nonresident
Individual
Amount of
interest income
(Rs. in million)
1.1
5.5
5.2
*3.3
Mode of
investment
Term Deposit
Receipts of a bank
Term Deposit
Receipts of a bank
Bahbood Savings
Certificate
Securities issued
by the resident
person
Taxability of interest income
Admissibility
Head of
Tax
of related
income
regime
expense
Income from
FTR
Yes
other sources
Income from
NTR
Yes
other sources
Income from
Exempt
No
other sources
Income from
other sources
NTR
Yes
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Loan agreement
Income from
with Association
Sikandar
4.4
NTR
Yes
of Persons being
business
its member
Dream
Resident
Term Finance
Income from
Bank
Banking
Certificates of a
10.1
NTR
Yes
other sources
Limited
Company
company
*Profit was paid outside Pakistan on approved securities which were widely issued outside Pakistan.
Resident
Individual
Required:
Prepare the corrected ‘Taxability of interest income’ columns in the table.
(07)
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Income from business
Chapter
8-11
PAST PAPER QUESTIONS
Question # 1
Autumn 2009 Q. 4
(a) State the conditions which a tangible asset should meet to qualify as a depreciable asset. (04)
(b) During the tax year 2009, Ishaq Enterprise disposed off the following assets:
(i) an immovable property was sold for Rs. 200 million. The cost of immovable property was Rs. 100
million. Up to tax year 2008, tax depreciation of Rs. 10 million had been allowed on the immovable
property.
(ii) a plant was exported to Nepal. The export proceeds amounted to Rs. 28 million. The cost and written
down value of the plant was Rs. 25 million and Rs. 18 million respectively.
(iii) three trucks were disposed off for Rs. 2.5 million. They were acquired in tax year 2008. The tax
written down value of trucks at the beginning of tax year 2009 was Rs. 2.4 million. The trucks were
being used partly i.e. 60% for business purposes. The rate of depreciation for tax purposes is 15%.
Required:
Compute the tax gain or loss on disposal of each of the above assets. (06)
Question # 2
Autumn 2010 Q. 4(b)
You are the tax consultant of Ideal Associates who are engaged in the business of manufacture and sale of
electronic goods for the last twenty years. The firm has requested for your opinion in respect of the following:
(i) Provision for bad debts.
(ii) Payment against a liability which was outstanding since 2006 and had been added back into the taxable
income of the firm in 2009.
(iii) Initial depreciation allowance on a three-year old plant, which has been imported from China. The
remaining useful life of the plant is 7 years.
Required:
Advise the management on the treatment of the above transactions, under the Income Tax Ordinance, 2001.
(07)
Question # 3
Spring 2011 Q. 3
Carrot Ltd (CL) is engaged in the manufacture, import and sale of electronic appliances for the past twenty
years. When reviewing the company’s tax provisions, you noticed the following amounts appearing in the tax
calculation for the year ended June 30, 20X2.
I. Expenditure of Rs. 450,000 on promotion of a product which is expected to generate revenue for twelve
years.
II. Bad debt in respect of a staff loan, Rs. 25,000.
III. Initial allowance of Rs. 4,000,000 on a used equipment acquired locally from MSD Limited.
IV. Financial charges amounting to Rs. 100,000 and depreciation amounting to Rs. 300,000 on a vehicle
acquired on finance lease from Radish Leasing. Lease rentals paid during the year amounted to Rs.
400,000.
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Required:
Under the provisions of Income Tax Ordinance, 2001 discuss the admissibility of the above amounts for tax
purposes.
(15)
Question # 4
Autumn 2012 Q. 6
In the context of Income Tax Ordinance 2001,
(a) state the meaning of “Intangible”. (04)
(b) discuss the rules relating to claiming of amortization deduction on intangibles.
(07)
Question # 5
Spring 2013 Q. 5
(a) Describe the methods of accounting that may be adopted under the Income Tax Ordinance, 2001 by the
following persons deriving income chargeable to tax under the head ‘Income from Business’.
(i) A company
(ii) Any person other than a company (04)
(a) State the provisions of the Income Tax Ordinance, 2001 relating to the change in method of accounting
for income chargeable to tax under the head ‘Income from Business’. (03)
Question # 6
Spring 2014 Q. 4
Bashir and Jameel jointly own a house in Karachi. Bashir has 75% share in the house. On 1 September 20X3,
the house was let out at an annual rental value of Rs. 6,500,000. This amount includes Rs. 186,000 per month
for utilities, cleaning and security.
During the tax year 20X4, the owners incurred the following expenditures in relation to the house:
Utilities, cleaning and security
Repair and maintenance
Insurance premium
Collection charges
Mark-up on amount borrowed for extension of the house
Rupees
650,000
810,000
240,000
25,400
840,000
Bashir and Jameel have no other source of income. All the above expenses were incurred by them jointly.
Required:
Calculate taxable income of Bashir and Jameel under appropriate heads of income for the tax year 20X4. (10)
Question # 7
Autumn 2014 Q. 4
In Income Tax Ordinance, 2001 the term “disposal” has a wider connotation than sale because it includes
exchange, relinquishment, and extinguishment.
List the situations under which an asset owned by a person shall be treated to have been disposed of.
(05)
Question # 8
Autumn 2015 Q. 2
Under the provisions of the Income Tax Ordinance, 2001 what would be the cost of an asset for the purpose of
depreciation deduction in each of the following circumstances?
(a) Mr. Aamir acquired a new machine partly in exchange for an old machine. He paid freight to bring the
old machine to the seller’s location and also purchased cooling equipment which was attached to the new
machine for its smooth functioning.
(04)
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(b) Mr. Saulat acquired production machinery by utilizing a loan repayable in euro. The loan is expressed in
rupees and is repayable in two years’ time. Mr. Saulat also received 20% subsidy on such machinery from
the Provincial Government.
(04)
(c) On 1 July 2015 Mr. Talha started using his personal computer for business purposes. He also had to
upgrade the operating system to comply with his business needs.
(02)
(d) Mr. Rahi constructed a furnace for his factory in Korangi Industrial Area. (02)
Question # 9
Spring 2016 Q. 2
Akram has recently established an advertising agency in the name and style of Azad Advertising. For
introducing his business to both international and local clients, he has allocated considerable chunk of his
marketing budget to entertainment expenditures. Under the Income Tax Ordinance, 2001 and Rules made
thereunder, advise Akram about the prescribed limits/conditions for the deduction of entertainment
expenditure.
(07)
Question # 10 Spring 2017 Q. 3(a)
On 1 June 20X6 Dawood and Dewan jointly purchased a bungalow for Rs. 35 million. They paid the amount
in the ratio of 65:35 respectively. To arrange funds for the deal, Dawood borrowed Rs. 3,000,000 in cash
from Shameem who is in the business of lending money. The rate of interest is agreed @ 20% per annum.
On 1 July 20X6, the house was let out to a company at annual rent of Rs. 4,500,000 inclusive of an amount of
Rs. 75,000 per month for utilities, cleaning and security. For providing these services Dawood and Dewan
paid Rs. 35,000 per month. During the tax year 20X7 they also paid Rs. 10,000 as collection charges and
Rs. 230,000 for administering the property.
Required:
Compute taxable income of Dawood and Dewan under appropriate heads of income for the tax year 20X7. (08)
Question # 11
Spring 2017 Q. 2(a)
(a) Explain the term ‘disposal of assets’ as referred to in the Income Tax Ordinance, 2001.
Question # 12
(05)
Autumn 2017 Q. 3(c,d)
Under the provisions of the Income Tax Ordinance, 2001 compute taxable income or loss, under the correct
head of income for tax year 2017, in each of the following cases:
(c) Sarwar Enterprises sold an immovable property for Rs. 50 million. The cost of the immovable property
was Rs. 30 million. Tax depreciation of Rs. 6 million had been allowed on the immovable property up to
the tax year 2016. (2.5)
(d) Shams Industries Limited (SIL) sold and exported one of its plants to a Nigerian Company. The sale
proceeds received in SIL’s account amounted to Rs. 25 million. The cost and tax written down value of
the plant was Rs. 20 million and Rs. 7 million respectively. (2.5)
Question # 13
Autumn 2017 Q. 5
Under the Income Tax Ordinance, 2001 certain persons are required to pay minimum tax amounting to 1% of
their turnover from all sources.
(a) Explain the term ‘Turnover’ for the purpose of determining the minimum tax.
(05)
(b) List the persons who are required to pay minimum tax.
(03)
(c) Discuss the provisions relating to carry forward of minimum tax paid to the subsequent years.
(02)
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Question # 14
Autumn 2018 Q. 3
(a) Hirani & Company (HC), a resident AOP, is engaged in the manufacturing of various consumer products
and is assessed under normal tax regime. During the year ended 30 June 20X8, HC’s sales was Rs.
140,000,000. It includes sales tax of Rs. 10,000,000 and excise duty of Rs. 5,000,000. The taxable income
for the year is Rs. 6,170,000.
Compute HC’s tax liability for tax year 20X8, under the provisions of the Income Tax Ordinance, 2001.
(Tax rates are given on the last page) (03)
(b) The accounting profit before tax of Bashir Associates (BA) for the year ended 30 June 20X8 is Rs.
1,200,000.
Last year, BA had written off balances outstanding from two of its debtors namely Pulse International (PI)
and Hussain Global (HG) which were partly allowed by the tax authorities. Details are as follows:
Amounts written off
Allowed by tax authorities
PI
HG
---------Rupees -------1,150,000
925,000
825,000
240,000
During the current tax year, BA received Rs. 652,000 from PI and Rs. 346,000 from HG, in full settlement
of their debts.
In the light of the Income Tax Ordinance, 2001 compute BA’s taxable income for the tax year 20X8. (05)
Question # 15
Spring 2019 Q. 3(b)
Following transactions pertain to Salam Limited (SL) which took place during the tax year 20X9:
(i) A machine costing Rs. 1,800,000, being used in SL’s Karachi factory was transferred to its subsidiary in
Ghana. The fair market value and tax written down value of the machine on the date of transfer were Rs.
2,500,000 and Rs. 600,000 respectively. (02)
(ii) On 1 January 20X9, SL entered into a forward contract for the purchase of raw materials to be used in its
business to guard against loss through price fluctuations. On the date of maturity of the forward contract,
SL did not take the delivery of the raw materials but the contract was settled by making a payment of Rs.
500,000. (03)
Required:
Explain the taxability of the above transactions.
Question # 16 Spring 2019 Q. 3(c)
On 1 July 20X8, Zahid rented out his properties as follows:
(i) An apartment was rented to Abdul Qadir at a monthly rent of Rs. 40,000. Zahid received a non-adjustable
security deposit of Rs. 300,000 which was partly used to repay the non-adjustable security deposit
amounting to Rs. 175,000 received from the previous tenant in July 20X3. He also spent Rs. 20,000 on
repairs of the apartment in February 20X9.
(ii) A bungalow was rented to a bank. Zahid and his younger brother are joint owners of the bungalow in the
ratio of 60:40 respectively. The annual rent agreed with the bank was Rs. 6,000,000 which is inclusive of
Rs. 100,000 per month for utilities, cleaning and security. Zahid paid Rs. 35,000 per month for providing
these services.
Required:
Under the provisions of Income Tax Ordinance, 2001 compute total and taxable income of Zahid for the tax
year 20X9 under appropriate heads of income.
(07)
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Question # 17 Autumn 2019 Q. 2(b)
During the tax year 20X9, Amjad carried out the following transactions in respect of his properties:
(i) On 1 July 20X8, Amjad purchased a factory building in Sukkur along with the installed machinery at the
price of Rs. 9 million and Rs. 3 million respectively. To manage the shortage of funds of Rs. 2,000,000,
he borrowed the same on 1 July 20X8 from his friend Shamshad through a crossed cheque. The loan
carries interest at the rate of 18% per annum.
On 1 January 20X9, he let out this building along with the machinery to Basit at a monthly rent of Rs.
500,000 payable in advance.
(ii) On 1 July 20X8, Amjad let out his residential property situated in DHA Karachi to Mirza Limited at a
monthly rent of Rs. 300,000. Rent for the two years was received in advance on 1 August 20X8.
(iii) On 1 July 20X8, Amjad also entered into an agreement with Zeeshan for the sale of his plot situated in
Quetta for Rs. 50 million. The plot had been purchased for Rs. 40 million in 20X4. Under the terms of
sale agreement, he received Rs. 5 million at the time of signing the agreement and the balance was to be
received on 30 September 20X8. However, due to financial difficulties, Zeeshan failed to pay the balance
amount on the due date and consequently, Amjad forfeited the advance in accordance with the terms of
the agreement.
On 10 April 20X9, he finally sold the plot to Jamshed for Rs. 65 million.
(iv) Following expenditures were incurred by Amjad in respect of his properties in Sukkur and Karachi:
Details of expenditures
Repair & maintenance - building
- machinery
Ground rent
Insurance - building
Total
Property situated in
Sukkur
Karachi
270,000
70,000
50,000
50,000
10,000
150,000
20,000
520,000
100,000
Required:
In view of the provisions of the Income Tax Ordinance, 2001 compute under appropriate head of income,
taxable income of Amjad for the tax year 20X9.
(10)
Question # 18
Autumn 2019 Q. 5
(a) Identify any three situations in which the fair market value of the assets shall be treated to be the cost of
the asset. (03)
(b) During the tax year 20X9, Salman Shahid sold the following assets:
(i) A vehicle used by manager-in-charge of his garment factory for Rs. 7.8 million. The vehicle was
purchased for Rs. 8.1 million in tax year 20X6.
(03)
Required:
Under the provisions of the Income Tax Ordinance, 2001 compute under the appropriate head of income,
the amount to be included in the taxable income of Salman Shahid for the tax year 20X9.
Question # 19
Spring 2020 Q. 3(a)
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, discuss:
(a) the prescribed limits/conditions for the deduction of entertainment expenditure.
(06)
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Question # 20 Spring 2020 Q. 4(a)
Respond to the following independent situations, under the provisions of the Income Tax Ordinance, 2001:
(a) During the tax year 2020, Sadiq received a flat as gift from his uncle, Mumtaz Alvi. The flat was located
in posh area of Lahore and its fair market value at the time of gift was Rs. 4.5 million. Discuss the tax
treatment of the flat received by Sadiq.
(02)
Question # 21 Autumn 2020 Q. 4(a)
Farheen is a resident filer and has provided following information pertaining to tax year 2020:
(i) She owns a bungalow situated in Multan which was given on rent to Abbas under a rental agreement of
five years which expired on 31 March 2020. Details of payments received as per the rent agreement are
given below.
Rent
Security guards’ salaries
Non-adjustable security deposit
Rs. 175,000 per month
Rs. 50,000
Rs. 2,500,000
On expiry of the rental agreement, Farheen refunded the security deposit to Abbas and rented out the
bungalow to a new tenant Zafar on the same terms and conditions.
Farheen pays Rs. 40,000 per month to a security services company which provides security guards at the
bungalow.
(ii) She owns a residential plot in Karachi. On 1 March 2020, she decided to sell the plot to Mehreen for Rs.
2,200,000 and received a deposit of Rs. 220,000. On 1 June 2020, she forfeited the deposit on refusal of
Mehreen to purchase the plot.
(iii) On 1 December 2017, she had acquired a furnished office on monthly rent of Rs. 5,000 for her own use
and had paid a non-refundable amount of Rs. 2,000,000 to the previous tenant for vacating the office.
During the year, she received an offer of Rs. 2,400,000 from Shehroz to vacate this office which she
accepted and received the amount on 1 March 2020.
(iv) On 1 October 2019, she inherited a factory with plant and machinery from her father and let it out on 1
December 2019 at a monthly rent of Rs. 500,000.
(v) Legal and professional charges of Rs. 40,000 were paid for preparation of rental agreements.
(vi) On 15 November 2019, she received income tax refund of Rs. 180,000 related to tax year 2017. This
amount included Rs. 30,000 being additional payment on delayed refund.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute the total income
of Farheen under appropriate heads of income for the tax year 2020.
(07)
Question # 22
Spring 2021 Q. 2(b)
Gillani and Company (GC), a sole proprietor, is dealing in various consumer products in Pakistan. During the
year ended 30 June 20X2, GC’s taxable income for the year was Rs. 1.6 million.
Required:
Under the provisions of the Income Tax Ordinance, 2001 compute the amount of net income tax payable by
GC and amount of income tax to be carried forward, if any, for the tax year 20X2, in each of the following
situations:
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(i) GC’s sales were Rs. 120,500,000 inclusive of sales tax.
(ii) GC’s sales were Rs. 110,000,000 inclusive of sales tax. (05)
Question # 23
Autumn 2021 Q. 3(a)(ii)
State the provisions of the Income Tax Ordinance, 2001 relating to each of the following:
(ii) Change in the method of accounting for income chargeable to tax under the head ‘income from business’
(03)
Question # 24
Spring 2022 Q. 2
(a) Under the provisions of the Income Tax Ordinance, 2001 discuss the tax implication/treatment in each of
the following independent matters:
(i) Purchase of immovable property in cash.
(03)
(b) For the purpose of this part of the question, assume that the date today is 31 August 2022. During the year
ended 30 June 2022, Faster & Co. (FC) started a new project. Following information is available:
Incurred Rs. 5 million on feasibility study of the project.
Obtained a 3% loan of AED 2 million from a UAE bank on 1 January 2022 for the purchase of plant and
machinery. The interest is payable annually and principal amount is repayable at the end of third year.
Installed the plant and machinery at a cost of Rs. 150 million on 14 March 2022.
The exchange rates of 1 AED to PKR on different dates are as follows:
1-Jan-2022
Rs. 50
30-Jun-2022
Rs. 55
Average between
1-Jan-2022 to 30-Jun-2022
Rs. 53
Required:
Compute the amount of allowable deduction in determining the taxable income of FC for tax year 2022.
(04)
Question # 25
Spring 2021 Q. 2
(a) What do you understand by the term ‘Turnover’ as provided in section 113 of the Income Tax Ordinance,
2001? List the persons who are required to pay minimum tax on the basis of turnover. (08)
(b) Gillani and Company (GC), a sole proprietor, is dealing in various consumer products in Pakistan. During
the year ended 30 June 20X2, GC’s taxable income for the year was Rs. 1.6 million.
Required:
Under the provisions of the Income Tax Ordinance, 2001 compute the amount of net income tax payable
by GC and amount of income tax to be carried forward, if any, for the tax year 20X2, in each of the
following situations:
(i) GC’s sales were Rs. 120,500,000 inclusive of sales tax.
(ii) GC’s sales were Rs. 110,000,000 inclusive of sales tax. (05)
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Income from business depreciation
Chapter
10
PAST PAPER QUESTIONS
Question 1
Define the term 'Intangibles'.
Question 2
Sun & Moon have recently registered as partnership. They have incurred the following expenditure:
•
Fees paid to consultants for preparation of registration deed Rs.50,000
•
Preparation of feasibility report Rs.100,000
•
Purchase of office equipment Rs.150,000
•
Purchase of machinery Rs.1,000,000
•
Trial run cost Rs.200,000
•
Installation cost Rs.50,000
Required:
You are required to explain the tax treatment by computing the amount allowable as deduction in accordance
with the provisions of Income Tax Ordinance 2001.
Question 3
Define the term 'Pre-commencement expenditure' in the light of Income Tax Ordinance, 2001.
Question 4
List down the assets on which 'Initial allowance' cannot be claimed.
Question 5
What are the prescribed rates of normal depreciation on the following assets as per the Third Schedule to the
Income Tax Ordinance, 2001?
i.
Factory building.
ii.
Residential quarter for labor.
iii.
Furniture.
iv.
Plant and machinery.
v.
Computer and hardware.
vi.
Technical books.
vii.
New ships.
viii.
Motor vehicle.
Question 6
Discuss the common rules with regard to 'Non-arms' length transactions of disposal of asset under the Income
Tax Ordinance, 2001.
Question 7
Define the term 'Depreciable Assets' with reference to the Income Tax Ordinance, 2001.
Question 8
During the tax year 20X9, AA Enterprise disposed of the following assets:
i.An immovable property was sold for Rs.200 million. The cost of immovable property was Rs.100 million.
Up to tax year 20X8, tax depreciation of Rs.10 million had been allowed on the immovable property.
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ii.A plant was exported to Nepal. The export proceeds amounted to Rs.28 million. The cost and written down
value of the plant was Rs.25 million and Rs.18 million respectively.
iii.Three trucks were disposed of for Rs.2.5 million. They were acquired in tax year 20X8. The tax written
down value of trucks at the beginning of tax year 20X9 was Rs.2.4 million. The trucks were being used partly
i.e. 60% for business purposes. Assume that the rate depreciation for tax purposes is 20% [ignore initial
allowance].
Required:
Compute the tax gain or loss on disposal of each of the above assets.
Question 9
In the context of Income Tax Ordinance 2001, discuss the rules relating to claiming of amortization deduction
on intangibles.
Question 10
Gulzar is a Pakistani resident and operates various businesses.
He disposed of the following assets during the tax year 20X4:
a)An immovable property was sold for Rs.50 million. The cost of the immovable property was Rs. 25 million.
Tax depreciation of Rs. 4 million had been allowed on the immovable property up to the tax year 20X3.
b) A car was disposed of for Rs.1.2 million. The car was acquired on 1.7.20X2. The tax written down value of
the car at the beginning of tax year 20X4 was Rs.0.9 million. The car was being used partly (70%) for
business purposes. Assume that the rate of depreciation for tax purposes is 20%.
c) An antique sculpture was purchased for Rs.350,000 on 30.8.20X1. It was sold for Rs.1,500,000 on
28.2.20X4 through auction. The auctioneer was paid a commission Rs.150,000. Tax was deducted and paid by
Gulzar from the amount of commission within due date.
Required:
Compute capital gain or loss on the disposal of the specified transactions.
Question 11
Sarwar Enterprises sold an immovable property for Rs.50 million. The cost of the immovable property was
Rs.30 million. Tax depreciation of Rs.6 million had been allowed on the immovable property up to the tax
year 20X6.Under the provisions of the Income Tax Ordinance, 2001 compute taxable income or loss, under
the correct head of income for tax year 20X7.
Question 12
Shams Industries Ltd (SIL) sold and exported one of its plants to a Nigerian Company. The sa proceeds
received in SIL's account amounted to Rs.25 million. The cost and tax WDV of the plant was Rs.20 million
and Rs.7 million respectively.
Under the provisions of the Income Tax Ordinance, 2001 compute taxable income or loss, under the correct
head of income for tax year 20X7.
Question 13
Under the provisions of the Income Tax Ordinance, 2001 compute taxable income or loss under correct head
of income for tax year 20X8, in the following case:
•Shaoor is the sole proprietor of Shaoor Enterprises (SE). On 31.1.20X8 SE sold a factory building including
land for Rs.10 million. At the time of disposal, the fair market values of the land and building were Rs.3
million and Rs.5 million respectively.
•The land and building were acquired on 1.7.20X6 at a cost of Rs.2 million and Rs.6 million respectively. The
tax WDV of the building on 1.7.20X7 was Rs.5.4 million.
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Question 14
Following transaction pertains to S Ltd (SL) which took place during the tax year 20X9: A machine costing
Rs.1,800,000, being used in SL's Karachi factory was transferred to its subsidiary in Ghana. The fair market
value and tax written down value of the machine on the date of transfer were Rs.2,500,000 and Rs.600,000
respectively.
Required:
Explain the taxability of the above transaction.
Question 15
Sikandar has revalued his factory building in accordance with International Financial Reporting Standards and
consequently charged depreciation on the revalued amount.
Explain the tax implication of the revaluation.
Question 16
Shahbaz has acquired machinery for his new factory against a loan repayable in USD.
Discuss what would be the cost of machinery for the purpose of depreciation deduction.
Question 17
During the tax year 20X9, Salman Shahid sold the following assets:
a)A vehicle used by manager-in-charge of his garment factory for Rs.2.8 million. The vehicle was purchased
for Rs.3.1 million in tax year 20X6 (maximum allowable cost was Rs.2.5 million.
b)A machine for Rs.350,000 on 1.6.20X9, which he had imported from Malaysia for Rs.1,900,000 on
1.5.20X9, to start a new business. The machine was badly damaged during the shipment from Malaysia,
rendering it unfit for use. He received insurance claim of Rs.1,840,000 as damages on 15.5.20X9. Charges
incurred in connection with the submission of claim with insurance company were Rs.38,000.
Required:
Under the provisions of the Income Tax Ordinance, 2001 compute under the appropriate head of income, the
amount to be included in the taxable income of Salman Shahid for the tax year 20X9.
Question 18
For the purpose of this part of the question, assume that the date today is 31.8.2024.During the year ended
30.6.2024, Faster & Co. (FC) started a new project.
Following information is available:
•
Incurred Rs.5 million on feasibility study of the project.
•Obtained a 3% loan of AED 2 million from a UAE bank on 1.1.2024 for the purchase of plant and
machinery. The interest is payable annually and principal amount is repayable at the end of third year.
•Installed the plant and machinery at a cost of Rs.150 million on 14.3.2024.
The exchange rates of 1 AED to PKR on different dates are as follows:
•Rs.50 on 1.1.2024
•Rs.55 on 30.6.2024
•Rs.53 average between 1.1.2024 to 30.6.2024
Required:
Compute the amount of allowable deduction in determining the taxable income of FC for tax year 2024.
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Chapter
12
Associations of persons
Question # 1
Spring 2010 Q. 1
Sohail, Khaled and Qazi are members of an association of persons (AOP) and share profit and loss the ratio of
2:2:1. The principal activity of the AOP is trading of various products.
Following are the details of the annual income / (loss) of the AOP and its members for the tax year 20X8:
(i)
The AOP suffered loss before tax amounting to Rs.1,500,000. The loss has been arrived at after adjusting
rental income earned by the AOP, the details of which are as follows:
Rental income
Related Expenses:
Property tax
Depreciation
Net rental Income
RS.
2,000,000
40,000
475,000
497,500
1,502,500
No tax was withheld on the rental income or on trading activity.
(ii) The expenses debited to profit and loss account include the following amounts paid to the members of the
AOP:
Sohail
Khaled
Qazi
Salary (Rs.)
900,000
600,000
Interest on capital (Rs.)
300,000
300,000
500,000
(iii) Sohail earned Rs. 1,800,000 from another business, of which he is the sole proprietor.
(iv) Khaled received an amount of Rs.255,000 as share of income after tax from another AOP. He also earned
income of Rs.1,900,000 from a sole proprietorship concern owned by him.
(v) Qazi runs a part time business. His gross revenue is Rs.1 million whereas total business expenses are
Rs.150,000. He also paid taxes in advance amounting to Rs.100,000.
Required:
Compute the taxable income and tax liability of the AOP and each of its members.
(19)
Question # 2
Spring 2015 Q. 5
(a) Under the provisions of the Income Tax Ordinance, 2001 state the rules relating to residential status of an
Association of Person (AOP). Also explain the taxability of income of AOP, in the hands of the firm and
its members.
(05)
(b) State the rules relating to set-off and carry-forward of losses of AOP and its members.
Question # 3
(02)
Spring 2016 Q. 8
Baqir, Asad and Rahi are members of an association of persons (BAR) and share profits and losses in the ratio
of 5:3:2 respectively. BAR is engaged in the business of trading consumer electronics and has two independent
branches one each in Tehran and Dubai. Following information has been extracted from BAR’s profit and loss
account for the year ended 31 December 2015:
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Sales
Cost of sales
Gross profit
Administrative and selling expenses
Financial charges
Other income
Profit before taxation
Rupees
30,000,000
(20,500,000)
9,500,000
(4,732,000)
(980,000)
1,700,000
5,488,000
Additional information:
Cost of sales includes:
(i) Closing stock which has been valued at net realizable value of Rs. 1,820,000. The cost of closing stock
under absorption costing was Rs. 1,950,000.
(ii) Provision of Rs. 75,000 against slow moving stores and spares.
(iii) Freight charges of Rs. 260,000. These were paid in cash to Momin Goods Transport for transporting goods
to customers in Multan.
Administrative and selling expenses include:
(i) Commission of Rs. 290,000 paid to Baqir, annual performance award of Rs. 310,000 paid to Rahi and Rs.
455,000 paid to AB Bank Limited in final settlement of a loan obtained by Asad for the construction of
his house in Muree.
(ii) Provision for bad debts of Rs. 735,000. The opening and closing balances of provision for bad debts
amounted to Rs. 1,100,000 and Rs. 1,435,000 respectively. Bad debts written off include a loan of Rs.
285,000 provided to a supplier.
(iii) Sales promotion expenses of Rs. 275,000. These expenses were paid by Rahi through his personal credit
card.
(iv) Rs. 86,000 paid to an institution operated by Federal Government for the training of industrial workers in
Punjab.
Further information:
For the year ended 31 December 2015 Dubai branch made a profit of Rs. 1,500,000 and Tehran branch made
a loss of Rs. 1,800,000. These figures are not included in the above profit and loss account.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute the taxable
income, net tax payable by BAR and the amount to be carried forward, if any, for tax year 2016. Assume tax
and accounting depreciation is same. (12)
Note: Your computation should commence with the profit before tax figure of Rs. 5,488,000.
Show all relevant exemptions, exclusions and disallowances.
Question # 4
Spring 2017 Q. 3(a)
On 1 June 20X6 Dawood and Dewan jointly purchased a bungalow for Rs. 35 million. They paid the amount
in the ratio of 65:35 respectively. To arrange funds for the deal, Dawood borrowed Rs. 3,000,000 in cash from
Shameem who is in the business of lending money. The rate of interest is agreed @ 20% per annum.
On 1 July 20X6, the house was let out to a company at annual rent of Rs. 4,500,000 inclusive of an amount of
Rs. 75,000 per month for utilities, cleaning and security. For providing these services Dawood and Dewan paid
Rs. 35,000 per month. During the tax year 20X7 they also paid Rs. 10,000 as collection charges and Rs. 230,000
for administering the property.
Required:
Compute taxable income of Dawood and Dewan under appropriate heads of income for the tax year 20X7. (08)
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Question # 5
Spring 2019 Q. 1
Mustafa, Ali and Zain are partners of a resident firm in Pakistan, under the name and style MAZ Enterprises
(MAZE) which is engaged in manufacturing and local supply of auto spare parts. All partners have equal share
of profits and losses in the firm.
Following information has been extracted from accounting records of MAZE for the tax year 20X9:
Sales
Cost of goods sold
Gross profit
Administrative and selling expenses
Financial charges
Other income
Profit before tax
Rs. in '000
140,400
(91,260)
49,140
(21,430)
(15,740)
(37,170)
1,900
13,870
Additional information:
(i) The above accounts have been prepared on cash basis and stock-in-trade has been valued on the primecost method. However, the partners want to change the method of accounting from cash basis to accrual
basis. In this respect, following information has been gathered:
Stock-iii-trade using prime-cost method
Stock-in-trade using absorption-cost method
Opening balances Closing balances
-------------- Rs. in ‘000 ------------5,200
7,500
5,900
8,800
(ii) Cost of goods sold includes cost of used machinery imported from China on 31 July 20X8 amounting to
Rs. 2,110,000. The cost includes payment of custom duty of Rs. 90,000 and income tax of Rs. 110,000 to
the Collector of Customs.
(iii) Administrative and selling expenses include:
▪ payment of Rs. 380,000 to a local hotel for holding annual eid-milan party for the employees, key
customers and their families.
▪ payment of a fixed monthly remuneration of Rs. 150,000 to each partner.
▪ payment of Rs. 180,000 for purchase of accounting software on 1 January 20X9. The software is
expected to be used for fifteen years.
(iv) Financial charges are net of interest income of Rs. 360,000 (net of tax @ 10% deducted by the bank),
earned by the firm on its savings accounts.
Required:
Under the provisions of Income Tax Ordinance, 2001 and Rules made thereunder, compute the total income,
taxable income and tax payable by MAZE using accrual basis of accounting. (10)
Note: Show all the relevant exemptions, exclusions and disallowances.
Question # 6
Spring 2020 Q. 2
Farhan, Kamran and Rehan are members of an association of persons (AOP) and share its profit and loss in
the ratio of 2:2:1 respectively.
Following information is available with regard to AOP and its members for the tax year 2020:
▪ During the year, AOP earned a profit before tax of Rs. 2,000,000 after making following payment to its
members:
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Salary
Interest on capital
▪
▪
▪
Farhan
Kamran
Rehan
------------------- Rupees ------------------1,666,666
800,000
600,000
566,666
400,000
300,00
0
Kamran is running a business as a sole proprietor from which he earned Rs. 800,000. Kamran is also a
member of another AOP where his share of profit or loss is 60%. During the year, the other AOP incurred
a loss after tax of Rs. 350,000 and paid Rs. 150,000 on account of income tax.
Rehan received net dividend of Rs. 102,000 from a listed company after deduction of withholding tax @
15%.
Farhan has no other source of income.
Required:
Under the provisions of the Income Tax Ordinance, 2001 compute taxable income and tax liability of AOP
and each of its members for the tax year 2020. (11)
Question # 7
Autumn 2020 Q. 2
Libas & Co. is an association of persons (AOP) with three members, Saba, Junaid and Akram, sharing profit
and loss in the ratio of 1:1:2 respectively.
During the year, AOP earned profit before tax of Rs. 8,500,000 from its principal business i.e. trading of
garments. In addition, AOP is also involved in purchase and sale of following securities listed on the Pakistan
Stock Exchange:
Name of investee
company
XOK Limited
PBB Limited
OOI Limited
Details of purchase
Details of sale
No. of
Price per
Date
No. of
shares
share (Rs.)
shares
1 Oct 2016
200,000
200 29 June 2020
200,000
[Note A]
18 Aug 2017
55,000
145 20 Dec 2019
100,000
10 Jan 2018
100,000
150
15 Feb 2020
150,000
86 15 March 2020
150,000
[Note B]
Date
Price per
share (Rs.)
225
180
78
Note A: Sale proceed from disposal of these shares was credited to the AOP’s bank account on 2 July 2020.
Note B: Due to shortage of funds for making this purchase, AOP borrowed Rs. 5,000,000 in cash from Imran,
who is in the business of lending money at 15% per annum.
Other information related to Saba:
▪ During the year, she earned Rs. 1,500,000 by working as a freelance photographer.
▪ On 1 April 2020, Saba received Rs. 1,100,000 from Zafar in full settlement of a loan. The loan was provided
on 1 April 2019 at 10% per annum interest through proper banking channel.
Required:
Under the provisions of the Income Tax Ordinance, 2001, compute taxable income and tax liability of AOP and
Saba for the tax year 2020.
(13)
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Question # 8
Autumn 2021 Q. 5
Kamkaj & Co. is an association of persons (AOP) with three members namely Baqir, Omer and Sadabahar
(Pvt.) Limited (SPL), sharing profit and loss in the ratio of 20:30:50 respectively.
Following information is available with regard to AOP and its members for the tax years 2020 and 2021:
(i) AOP’s income for tax years 2020 and 2021:
2020
2,021
------------------ Rupees --------------Income from business*
(18,000,000)
25,000,000
Dividend income
4,000,000
*Net of annual fixed commission of Rs. 7,000,000 to SPL
(ii) On 1 February 2021, Baqir earned capital gain of Rs. 5,200,000 on sale of his property which was
purchased on 1 January 2018.
(iii) Omer also operates a sole proprietor business from which he earned profits of Rs. 6,000,000 and Rs.
2,500,000 in tax years 2020 and 2021 respectively.
Required:
Under the provisions of the Income Tax Ordinance, 2001 compute the following for the tax years 2020 and
2021:
▪ Taxable income of AOP
▪ Taxable income and tax liability of Baqir and Omer (10)
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Chapter
13
Losses & rebates
PAST PAPER QUESTIONS
Question # 1
Spring 2015 Q. 6
Aslam is a resident taxpayer who operates his business from Lahore (LHR) and Paris (PAR). In August 2014,
he established a new branch in Berlin (BER).
Following information is available in respect of his business operations for tax year 2015:
Income / (loss) from business
Advance taxes paid in respective countries during the year
Income from capital gain (net of income tax of Rs. 3 million)
Carried forward losses:
Loss from business
Capital loss
LHR
PAR
BER
-----Rs. in million----29
40
(15)
10
5
3
27
-
55
6
-
The following amounts paid by Aslam in respect of BER have been charged to LHR:
(i) salaries for the first three months amounting to Rs. 5 million.
(ii) rent expense for the year amounting to Rs. 7 million.
Required:
Under the provisions of the Income Tax Ordinance, 2001 calculate the tax payable by Aslam in the tax year
2015 and foreign tax losses to be carried forward to next year, if any.
(09)
Question # 2
Autumn 2016 Q. 8
On 1 July 2015 Mehreen joined a local newspaper as an investigative journalist at a salary of Rs. 300,000 per
month. Tax deducted u/s 149 from her salary amounted to Rs. 40,000 per month.
Following are the details of her income received from Germany; tax paid thereon and brought forward foreign
losses for tax year 2016:
Foreign income/
(loss)
Heads of income
Speculation business
Non-speculation business
Other sources
Capital gain
600,000
1,480,000
(1,500,000)
950,000
Foreign tax paid
Foreign losses
brought forward
110,000
187,600
76,000
(380,000)
(1,800,000)
On 1 May 2016 Mehreen resigned from her current job and joined Akhbar Merhaba (AM), an Arabic newspaper
in Dubai, as editor-in-chief on a monthly salary equivalent to PKR 1,200,000. AM paid 50% of her salary in
Dubai and remitted the remaining 50% to her bank account in Pakistan through normal banking channel.
Mehreen remained in Dubai during the rest of the tax year 2016.
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Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute the taxable
income, net tax payable by or refundable to Mehreen for tax year 2016 and the amount of foreign losses or
foreign tax credit, if any, to be carried forward. (10)
Question # 3
Autumn 2020 Q. 4(b)
Ahmed has completed his MBA from a university in USA. He had been living there since August 2013 for his
education and came to Pakistan only once in 2017 i.e. from 10 March 2017 to 30 September 2017 and then
went back to USA to complete his MBA. Along with his studies, he was also doing a part time job at a restaurant
in USA till November 2019. He returned to Pakistan on 1 December 2019 and commenced a trading business
from 1 January 2020.
Below is the computation for taxable income/loss for the tax year 2020:
Income from Salary
Salary from restaurant in USA
Income from business
Revenue
Less: Deductions
Cost of goods sold
Selling and administrative expenses
[Note A]
Donation
[Note B]
Taxable income/(loss)
Pakistan source
Foreign source
Total
income
income
-------------------Rupees------------------840,000
840,000
4,000,000
4,000,000
(2,200,000)
(2,820,000)
(600,000)
(1,620,000)
(2,200,000)
(2,820,000)
(850,000)
(1,030,000)
(250,000)
590,000
Note A: Selling and administrative expenses include the following:
(i) Salaries of Rs. 840,000 paid to two employees equally in cash. Withholding income tax was deducted as
required under Income Tax Ordinance, 2001.
(ii) Rs. 600,000 in respect of the feasibility study which was conducted before commencement of the business.
Note B: Donation of Rs. 600,000 was paid to a charitable hospital in Pakistan and Rs. 250,000 was paid to a
non-profit organization in USA.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, comment on the above
tax computation for tax year 2020. Give suggestion(s) wherever required.
(08)
Question # 4
Spring 2012 Q. 2(c)
List the persons or incomes that are allowed a tax credit equal to 100% of the tax payable. Also specify the
conditions/limitations which are required to be fulfilled for availing the said tax credit. (Ignore tax credit
available to charitable organization)
(04)
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Question # 5
Autumn 2021 Q. 2(b)
Following information pertains to Ms. Ayesha for the tax year 2021:
Income from non-speculation business
Income from property
Gain on sale of jewellery
Gain on sale of listed securities
Loss from speculation business
Loss on sale of shares of a private company
Loss on sale of antique
Loss on sale of listed securities
Loss from agriculture Loss from other sources
Rs. in million
15.0
3.0
2.5
4.0
(4.5)
(3.6)
(3.6)
(6.0)
(19.0)
Required:
Under the Income Tax Ordinance, 2001, discuss how the above losses can be set off against her aforesaid
incomes. Also discuss the amount of losses that can be carried forward for adjustment against her future
incomes. (08)
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Return Assessment & Appeals
Chapter
15-17
Question # 1
[Q.6 May 1994]
State different provisions under which assessment can be framed.
(Marks: 07)
Question # 2
[Q.7 May 1994] Marks 08 [Q.2 March 1999] Marks 05 [Q.6 March 2000]Marks 10
What are the various options available to a taxpayer who is not satisfied with the assessment
order framed by the income tax assessing officer?
Question # 3
[Q.6 (a) April 1995]
What are the appeal forums available to an aggrieved person?
(Marks: 03)
Question # 4
[Q.6 (b) April 1995]
Marks 07 [Q.8 September 2003]
Marks 05
What are the conditions to be fulfilled before filing of appeals?
Question # 5
[Q.6 (ii) May 1997]
Write short note on Appellate Authorities.
(Marks: 04)
Question # 6 [Q.4 October 1997]
Marks 09 [Q.3 September 1999]
Marks 10 [Q.1 March 2001]
Marks 09 [Q.3 (a) March 2003]
Marks 05 [Q.7 September 2005]
Marks 06 [Q.2 (a) September 2008]
Marks 06 [Q.2 (a) March 2015]
Marks 06 [Q.5 (a) March 2017]
Marks 06
Who is required to file a return of income? What are the dates of filing the return? And
Extension in date for filing return.
Question # 7 [Q.2 (ii) April 1998]
Marks 04 [Q.6 (a) September 1999] Marks 08
What are the powers of the Commissioner for revision of the assessment order? Also explain
the conditions for revision applications.
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Question # 8 [Q.5 March 2000] Marks 10 [Q.6 (b) September 2006] Marks 05 [Q.2 (b) September 2010]
Marks 05 [Q.4 (b) September 2017] Marks 07
Can assessment once finalized be re-opened or modified or further modified? Discuss with
basis and reasons.
Question # 9 [Q.8 September 2000]
An assessing officer has completed the assessment proceedings by making the following
additions in the income of a taxpayer:
•
•
•
Depreciation disallowed as claimed by the taxpayer;
Disallowance of printing and stationery expenses to the extent of 10% of the claim;
Non-acceptance of trading results by estimating sales from Rs.1 million to Rs.1.1 million and
enhancing gross profit rate from 12% to 15%.
The aggrieved taxpayer has approached you and requested to let him know his rights available
under the law to protect his interest.
You are required to address him a reply including stating the deadlines within which such legal
rights can be availed.
Question 10 [Q.6 September 2001]
Marks 10 [O.8 March 2003]
(Marks: 05)
Marks 10
Describe briefly the provisions relating to re-opening (i.e. amendment and further amendment)
of a completed assessment, including period of limitation, if any?
Question 11 [Q.9 March 2002]
You have received a letter from Mr. ZA who is seeking your advice regarding the mode and
procedure of filing an income tax appeal. Please draft a suitable reply briefly describing the
appellate procedure and incorporate the following chart in your reply:
Filing
Decision in
Name of
Authority whose
Limitation
Fee
appeal
Appellate
order may be
period for
authority
appealed against
filing appeal
Limitation
Period for
decision
(Marks; 12)
Question 12 [Q.3 (b) March 2003]
Can the commissioner order a "person" to file a return of Income? Please explain.
(Marks: 05)
Question 13 [Q.7 September 2003]
Briefly state the time frame for filing the return of income by:
1. a company;
2. Persons other than a company.
For more information contact at 03340405073
(Marks: 05)
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Question 14 [Q.9 September 2003]
Briefly describe the minimum books of accounts, documents, and records that are required to
be maintained by the following taxpayers:
1.
Taxpayer (other than a company) deriving business income up to Rs. 500,000. (Marks: 04)
2.
Taxpayer (other than a company) deriving business income exceeding Rs. 500,000.(Marks: 04)
Question 15 [Q.7 (b) March 2004]
For how many years the tax payer is required to maintain accounts and documents under the
relevant provision of the Income Tax Ordinance, 2001.(Marks: 02)
Question 16 [Q.8 March 2004]
2022]
Marks 02
Marks 05 [Q.2(c) March 2014] Marks 05 [Q.5 (a) (ii) September
Describe the requirements of Income Tax Ordinance, 2001 for persons who are about to
discontinue their business.
Question 17 [Q.9 (a) September 2004]
Briefly state the time limit within which the Commissioner is permitted to further amend an assessment.
(Marks: 02)
Question 18 [Q.9 (b) September 2004]
Briefly state the time limit within which the Commissioner is required to pass an order to
give effect to the finding or directions of the Commissioner (Appeals).
(Marks: 02)
Question 19 [Q.10 September 2004]
Briefly state the time limit for filing an Appeal/Reference before the following forums:
1. Commissioner (Appeals)
(Marks: 01)
2. Appellate Tribunal
(Marks: 01)
3. Reference to the High Court
(Marks: 01)
Question 20 [Q.8 March 2005]
What is the status of a complete return of income filed under the Income Tax Ordinance, 2001? (Marks: 05)
Question 21 [Q.6 March 2006]
Marks 03
Marks 04 [Q.3(c) March 2008] Marks 04 [Q.5 (b) (i) March 2017]
Describe the circumstances under which the Commissioner is empowered to issue a notice
requiring a person to furnish a return of income for a period of less than twelve months.
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Question 22 [Q.8 March 2006]
What are the time limits prescribed by the Income Tax Ordinance 2001, within which the
Commissioner is required to pass an order to give effect to the decision of Appellate Tribunal
under the following circumstances?
1. The Appellate Tribunal has set aside the assessment and order of the Appellate
Tribunal was received by the Commissioner on 30.11.20X4.
(Marks: 03)
2. The Appellate Tribunal has deleted the additions made by the assessing officer and
the order of the Appellate Tribunal was received by the Commissioner on
15.112.20X4.(Marks: 03)
Question 23 [Q.6 (a) September 2006]
One of your client has received a notice from the Taxation officer demanding payment of tax in
respect of an order issued by the Commissioner against which your client intends to file an
appeal before the Appellate Tribunal.
You are required to explain the provisions contained in the Income Tax Ordinance, 2001
regarding stay of demand by the Appellate Tribunal. (Marks: 06)
Question # 24 Spring 2015 Q. 2
(a)
List the persons who are required to furnish a return of income for a tax year under the Income
Tax Ordinance, 2001. (06)
(b)
Specify the circumstances under which the Commissioner has powers to issue notice
demanding a return of income from certain person(s) for less than one year. (03)
(c)
State the powers of the Commissioner if a taxpayer fails to furnish return as required under part
(b) above, within the specified time. (04)
Question # 25 Autumn 2016 Q. 3 (c)
List the persons who may be granted immunity from filing of tax return u/s 114 of the Income
Tax Ordinance, 2001 solely by reason of owning immovable property with a land area of two
hundred and fifty square yards or more or any flat located in areas falling within the municipal
limits. (03)
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Question # 26 Spring 2017 Q. 5
(a)List the persons who are required to file a tax return under the provisions of the Income Tax
Ordinance, 2001. (06)
(b)In the light of the provisions of the Income Tax Ordinance, 2001
(i) Identify the circumstances under which the Commissioner of Income Tax may require a
person to furnish a return of income for a period of less than twelve months. (03)
(ii) State the consequences if a person fails to furnish the return as required in (i) above. (03)
Question # 27 Spring 2017 Q. 6
Zahid, the sole proprietor of FG and company, is a resident individual and is in the process of
filing his wealth statement for the tax year 20X7. The relevant information is as under:
(i)Assets and liabilities disclosed in the wealth statement for the tax year 20X6 were as follows:
Rupees
Assets
Agriculture land in Hyderabad
5,000,000
Residential property in DHA
Karachi
3,000,000
Investment in shares of listed
companies
1,100,000
Business capital - FG & Co.
4,000,000
Motor vehicle
1,540,000
Cash at bank
600,000
Cash in hand
300,000
15,540,000
Liabilities
Bank loan
(1,500,000)
Net assets
14,040,000
(ii)Details relating to FG & Co. are as follows:
Rupees
Income from business for the tax year 20X7
2,540,000
Drawings during the year
450,000
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(iii) Balance of cash in hand and at bank, as on 30 June 20X7 amounted to Rs. 157,500 and Rs.
730,000 respectively.
(iv) Transactions carried out by Zahid during the year were as follows:
▪
Paid an advance of Rs. 1,000,000 against purchase of a bungalow for Rs. 10,000,000.
▪
Sold shares of a listed company for Rs. 350,000. The shares were purchased on 1 May
20X6 for Rs. 50,000. Capital gain tax collected by NCCPL amounted to Rs. 37,500.
▪
Gifted shares of a listed company to his brother. The shares were purchased by Zahid in
20X2 at a cost of Rs. 100,000 whereas market value of the shares at the time of gift was
Rs. 150,000.
▪
Paid Rs. 200,000 towards principal amount of the bank loan.
▪
Personal expenses amounted to Rs. 2,075,000.
▪
Net receipts against agricultural income amounted to Rs. 2,500,000.
Required:
Prepare Zahid’s wealth statement and wealth reconciliation statement for the tax year 20X7.
(07)
Question # 28 Spring 2018 Q. 4(b)
Identify due date of filing of tax return in each of the following cases, under the provisions of
the Income Tax Ordinance, 2001:
(i) An individual who’s entire income falls under final tax regime (0.5)
(ii) An individual who derives his income from business which falls under normal tax regime.
(0.5)
(iii)An individual filing return in response to a notice received from the Commissioner who
believes that he is likely to discontinue his business. (01)
(iv) An individual filing return in response to a notice received from the Commissioner for not
filing return of income of the previous tax year. (01)
(v) A company. (01)
Question # 29 Spring 2019 Q. 3(a)
Imran, a resident person, is filing the return of his business income for the first time.
He has been informed by his friend that he will also be required to file a wealth statement. In
this respect, he seeks your advice about the particulars which he should disclose in his wealth
statement. (04)
Question # 30 Spring 2020 Q. 3(b)
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, discuss:
(b) Who is required to file the foreign income and assets statement? Also state the
particulars to be included in such statement. (05)
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Question # 31 Autumn 2021 Q. 2(a)
(a) Mukhtar, a resident individual, is in process of finalization of his wealth statement for the
tax year 2021. He has provided you the following information:
(i) During the tax year 2021, Mukhtar received share of profit of Rs. 1,400,000 from an AOP.
As on 30 June 2020, his total investment in the AOP was Rs. 5,300,000. He was also provided a
car worth Rs. 2,500,000 by the AOP for office use only.
(ii) In 2014, he had purchased 10 tola gold for Rs. 500,000. At 30 June 2021, the market value
of the gold was Rs. 107,000 per tola.
(iii) During the tax year 2021, he sold his personal car for Rs. 1,876,000. The car was purchased
in 2019 for Rs. 1,700,000.
(iv) During the tax year 2021, he paid Rs. 600,000 against outstanding interest free loan of Rs.
1,000,000. The loan was obtained in tax year 2020.
Required:
Under the provisions of the Income Tax Ordinance, 2001 advise Mukhtar that how the above
matters would be dealt with in his wealth statement and its reconciliation for the tax year 2021.
(04)
Question # 32 Autumn 2021 Q. 3(b)
(b) Aoun has discovered an error in his annual income tax return which was submitted on the
due date. Now he intends to file a revised return voluntarily.
Required:
Under the provisions of Income Tax Ordinance, 2001 state the conditions which Aoun must
comply with for filing valid revised return. (04)
Question # 33 Autumn 2016 Q. 2
Maroof filed his return of income for tax year 2015 on 30 September 2015. On 15 August 2016
he received a show cause notice from the Commissioner Inland Revenue u/s 122 for
amendment of the assessment order issued on self-assessment basis.
Required:
Under the provisions of the Income Tax Ordinance, 2001 briefly describe:
(a) the circumstances under which an assessment order treated as issued on self-assessment
basis may be amended by the Commissioner. (04)
(b) the situations in which the Commissioner may be barred from amending the original
assessment order. (04)
Question # 34 Autumn 2017 Q. 4(b)
(b) List the situations under which an original assessment can be amended or an amended
assessment can be further amended by the Commissioner of Income Tax. Also state the time
period within which the original or the previously amended assessment order can further be
amended. (07)
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Question # 35 Spring 2018 Q. 3 (a, b, d)
(a) Under the provisions of the Income Tax Ordinance, 2001 briefly discuss the following:
(i) The term ‘Concealed assets’. (02)
(ii) The powers of Commissioner relating to the concealed assets of any person when these are
impounded by the Federal Government. (03)
(b) Anwar had filed his return of income for the tax year 2013 on 31 August 2013. Discuss the
following in the light of provisions of the Income Tax Ordinance, 2001:
(i) By which date the Commissioner of Income Tax could make the first amendment of the
assessment, if required. (02)
(ii) By which date any further amendment can be made if the first amendment was made on 15
February 2017. (02)
(d) Under the provisions of the Income Tax Rules, 2002 list the records to be kept by a taxpayer
in respect of his income from:
(i) Salary (01)
(ii) Property (1.5)
(iii) Capital gain (1.5)
Question 36 [Q.4 (b) September 2018]
Specify the circumstances under which the Commissioner of Income Tax has powers to issue
notice demanding a return of income from certain person(s) for a period of less than twelve
months.
Also state the powers of the Commissioner if such person fails to furnish the return as required,
within the specified time (Marks: 06)
Question 37 [Q.4 (a) March 2019
Under the Income Tax Ordinance, 2001 identify four situations under which an appeal may be
filed with the Commissioner (Appeals).
(Marks: 04)
Question 38 [Q.4 (b) March 2019]
Mr. SA has received an ex-parte assessment order from the income tax department under which
he is required to pay Rs.5.2 million on account of tax not withheld from certain payments. He
does not agree with the contention of the income tax department and would like to file an
appeal to the Commissioner (Appeals).
Required:
State the procedure that he should follow for fling of appeal to the Commissioner (Appeals). (Marks: 03)
Question 39 [Q.4 (a) September 2019]
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, briefly
explain the following:
(a)Requirement of books of account to be maintained by a taxpayer who has business income
upto Rs. 500,000. (04)
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(b) General provisions/rules which may apply to income subject to Final Tax Regime. (06)
(c) Provisions regarding Special Audit Panel. (05)
Question 40 [Q.4(c) September 2019]
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, briefly
explain the provisions regarding Special Audit Panel.
(Marks: 05)
Question # 41 Spring 2020 Q. 3(c)
(c) the concept of ‘Concealed asset’ and state the powers of the Commissioner relating to
concealed asset of any person when it is impounded by the Federal Government. (05)
Question 42 [Q.3 (a) September 2020]
On 2.7.2019, Rubina received a show cause notice u/s 122 from the Commissioner Inland Revenue (CIR) for
amendment of the assessment order for tax year 2018. Due to lack of knowledge about tax matters, she did not
respond to it.
On 1.8.2019, she received a demand notice under which she was required to pay Rs. 610,00 within 30 days on
account of undeclared income and an amended assessment order for tax year 2018 under section 122 from the
CIR.
Rubina is dissatisfied with the order issued by the CIR and wants to file an appeal to the Commissioner
(Appeals) because payment of this amount will cause hardship to her.
Required:
Under the provisions of the Income Tax Ordinance, 2001:
1.
State the time period within which an appeal may be filed by Rubina to the Commissioner
(Appeals).(Marks: 01)
2.
Discuss different types of orders that the Commissioner (Appeals) may make for disposing of an
appeal.(Marks: 02)
3.
Explain what action(s) the Commissioner (Appeals) may take for ensuring that no undue
hardship will caused to Rubina because of the payment of this demand.(Marks: 03)
4.
Discuss the option(s) available to Rubina for defending her case, if the Commissioner (Appeals)
issues an order confirming the amended assessment order issued by the CR.
(Marks: 02)
Question 23 [Q.4 (b)(i) March 2021]
Briefly explain the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder
relating to requirement of books of account to be maintained by a manufacturer having
turnover exceeding Rs.2.5 million.
(Marks: 04)
Question 44 (Q.5 March 2021]
Star Garments Ltd (SGL) had filed its tax return for the tax year 2015 on 30.9.2015.
On 25.2.2021, the Commissioner, on the basis of definite information, issued a notice under section 122(5) to
SGL for the audit of books of account for the tax year 2015.
The accountant informed the chief executive officer that tax audit for the tax year 2015 had
already been conducted in 2019 and an amended assessment order under section 122(5A) was
issued by the Commissioner on 24.2.2020.
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Required:
Under the provisions of the Income Tax Ordinance, 2001:
1. Explain the term ‘Definite information'.
(Marks: 02)
2. Discuss whether the Commissioner is empowered to make further amendment in the
assessment order issued on 24.2.2020.
(Marks: 07)
Question 45 [Q.4 (a) March 2022]
Briefly explain the term 'Sectoral benchmark ratios'. Also, explain the circumstances in which a
Commissioner shall determine taxable income on the basis of sectoral benchmark ratios.
(Marks: 03)
Question 46 [Q.4 (b) (i) March 2022]
Riaasat Ltd (RL) is a manufacturing company. With effect from 1.7.2022, RL İs considering to
change its tax year from the normal to the special tax year ending on 31 December.
Required:
1.
Identify the due/last date of filing of RL's tax return in respect of the following:
1. Filing of tax return for the year ended 30 June 2022.
2. Filing of tax return for the transitional period,
3. Filing of first tax return for the special tax year.
Assume that RL has changed its tax year from normal to special and filed its tax returns for
relevant tax years, as discussed above.
2.
(Marks: 03)
Identify the due/last date of amendment of assessment related to;
1. Normal tax year for the year ended 30.06.2022
2. First special tax year.
(Marks: 02)
Question 47 [Q.5 (a) (i) September 2022]
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, briefly
discuss the terms 'Normal assessment' and 'Best judgement assessment'.(Marks: 03)
Question 48 [Q.5 (a) (iii) September 2022]
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder
additional records which are required to be kept by a sole proprietor whose business income
exceeds Rs. 500,000 as compared to a sole proprietor whose business income is up to Rs.
500,000.
(Marks: 02)
Question 49 [Q.4 (b) March 2023]
On 1.7.20X2, Kulsoom, a widow, established an online garment retail business and employs
various ecommerce platforms to market a diverse range of garments to customers through
Pakistan. She operates the business from her residential house.
During the year, the sales from online business were Rs. 6,000,000 and total expenditure
including her personal expenses were Rs. 5,800,000.
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At the year end, her sole assets consisted of a 1300cc personal car and Rs. 800,000 as cash on hand.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, advice
the requirement of filing of return of income and tax treatment of the above to Kulsoom.
(Calculation of taxable income and tax liability is not required) (Marks: 05)
Question 50 [Q.5 (a) March 2023]
Assurance & Co., a partnership firm, has filed an appeal against the order of the Commissioner
(Appeals) to the Appellate Tribunal Inland Revenue (ATIR) which is pending before ATIR.
Recently, the firm has appointed a new tax adviser who proposed seeking relief through
Alternative Dispute Resolution (ADR) mechanism provided by the Income Tax Ordinance,
2001.
Under the provisions of the Income Tax Ordinance, 2001, advise Assurance & Co. in respect of
the following matters:
Cases eligible for settlement through ADR mechanism.
(Marks: 02)
Composition of the ADR committee.
(Marks: 03)
Question 51 [Q.5 (b) March 2023]
State the provisions of the Income Tax Ordinance, 2001 relating to the filing of revised return
of income by a taxpayer.
(Marks: 04)
Question 52 [Q.3 (b) March 2024]
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Question 52 [Q.2 (b) Autumn 2024]
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SECTION- B SALES TAX
Syllabus Weightage
Syllabus
Grid
Ref.
C
Syllabus
Ref.
Teaching
Hours
Sales Tax Laws
30-35
20-30
Proficiency
levels
Testing
levels
Calculate sales tax (output and input) on taxable supplies
(including zero-rated and exempt supplies).
P2
T2
Discuss the time and manner of sales tax liability and its
paymenT
P2
T2
Calculate apportionment of input tax and carry
forward/refund thereof
P2
T2
P2
T2
List the records to be kept by a registered person and explain
the related retention requirements and procedures involved in
the audit.
P2
T2
State the significance of tax invoice, debit and credit notes
and their related requirements.
P1
T1
Explain the procedure for the destruction of goods
P2
T2
Learning Outcomes
C.
Sales Tax Laws
A
Scope and Payment of Tax
B
Registration
Describe the types, requirements and procedures involved for
registration, de-registration and returns.
C
Weightage
Book Keeping and Invoicing Requirements
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Chapter
18-21
Sales tax theoratical questions
Question # 1
Autumn 2009 Q. 7
(a) Identify the situations under which a person registered under the Sales Tax Act, 1990 is liable to be deregistered? (4)
(b) Briefly explain the procedure for de-registration as specified by Sales Tax Rules, 2006? (3)
(c) Comment whether the following persons are required to be registered under Sales Tax Act, 1990: (6)
(i) Mr. Yahya is a wholesaler and his annual business turnover is Rs. 4.9 million.
(ii) Mr. Ishaq is planning to import raw materials for business use. The annual imports are estimated at Rs. 3
million.
(iii) Mr. Pervaz is a commercial exporter. All his business purchases are either exempt supplies or from
unregistered suppliers.
(iv) Mr. Farooq is a distributor of consumer goods and his annual turnover is Rs. 15 million.
(v) Mr. Rafiq is a manufacturer of candles. His annual turnover in last twelve tax periods was below Rs. 10
million.
Question # 2
Autumn 2009 Q. 8(a)
Where for any valid reasons the value of supply or the amount of sales tax mentioned in the sales tax invoice
issued was changed, the supplier shall issue a Debit Note or a Credit Note.
Required:
Discuss the rules relating to adjustment of input and output tax on the issuance of Debit or Credit Note, as
specified in the Sales Tax Rules.
Question # 3 Spring 2010 Q. 7
(a) State the provisions of Sales Tax Act, 1990 relating to maintenance and retention of records by a registered
person making taxable supplies. (9)
(b) List the type of exports which are outside the purview of zero rating. (3)
Question # 4
Autumn 2010 Q. 7
(a) State the situations when a registered person shall not be entitled to claim or deduct input tax under the
Sales Tax Act, 1990. (6)
(b) Mr. Rizwan, a sales tax registered person, is carrying on business in the name of Rizwan Enterprises. On
February 15, 2010, he sold certain goods to his customer against which he intends to issue a credit note in
the month of September 2010.
Required:
Explain whether Mr. Rizwan can issue the credit note in the month of September 2010, under the Sales
Tax Rules, 2006. (4)
(c) Explain the provisions of Sales Tax Act, 1990 with regard to the following:
(i) Change the rate of tax during the tax period
(4)
(ii) Excess tax collected from the customer
(3)
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Question # 5
Spring 2011 Q. 2
(a) Samad Corporation (SC) supplies specialized material to various industrial concerns. The company has
entered into following transactions during the month of February 2011.
(i) Supply of material costing Rs. 3 million to AB Limited (ABL). It has been agreed that ABL would settle
the transaction by paying Rs. 1.5 million in cash and the balance amount by way of allowing SC to use
ABL’s import quota. The market price of supply is Rs. 3.5 million.
(ii) Supply of material to DM Limited (DML) at discounted of price of Rs. 6.8 million. Due to particular
relationship, DML has been allowed a special discount of 15% as against the normal business practice of
8%.
(iii) Supply of 20 tons of material, falling under third schedule, to BML at a wholesale price of Rs. 138,000
per ton. The retail price of the material is Rs. 150,000 per ton.
Required:
In each of the above situation, advise the management about the value of supply on which sales tax would
be levied under the provisions of Sales Tax Act, 1990. (7)
(b) List down the particulars to be mentioned on the debit note issued by the supplier in the event of change
in the value of supply, under the Sales Tax Rules, 2006. (4)
Question # 6
Autumn 2011 Q. 7
(a) Under what circumstances, a registered person becomes liable to be de-registered under the Sales Tax Act,
1990. Also state the procedures for de-registration as enumerated in the Sales Tax Act, 1990. (7)
(b) Mr. Gohar has recently been registered under Sales Tax Act, 1990. He is engaged in the export and
distribution of consumer products. Before filing the first return, he wishes to obtain advice on the
following matter:
(i) Eligibility for a refund if input tax paid is in excess of the output tax payable for the month.
(ii) Consequences of non-payment of the entire amount of tax due as indicated in the return.
(iii) Concept of provisional and final adjustment.
Required:
Comment on each of the above matters. (8)
Question # 7
Spring 2012 Q. 8
Ms. Zamarrud is engaged in the manufacture and sale of taxable as well as zero-rated products.
Required:
As a tax consultant, advice Ms. Zamarrud on the following matters:
(a) The conditions that need to be satisfied for the adjustment of input tax against the output tax liability. (05)
(b) Any seven situations in which input tax is not allowed to be adjusted against the output tax liability. (07)
(c) The remedy available to her if she fails to adjust input tax in the period in which it is paid. (02)
Question # 8
Autumn 2012 Q. 7
(a) Identify the goods that shall be charged at the rate of zero per cent under the Sales Tax Act, 1990. (03)
(b) List the situations in which the type of goods identified in (a) above would not be eligible for zero rating.
(03)
Question # 9
Autumn 2012 Q. 8
(a) Under the provisions of Sales Tax Act, 1990 and the Rules made thereunder, identify the last date for filing
the sales tax return in each of the following cases:
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(i) On 1 August 2012, Sara registered herself under the Sales Tax Act, 1990.
(ii) Fatima filed the return for the month on July 2012 on 10 August 2012. She wants to revise her return to
correct certain errors.
(iii) Amna Engineering Limited (AEL) is registered under the Sales Tax Act, 1990. AEL wants to file annual
sales tax return for the financial year ended 30 June 2012.
(iv) Abida wants to deregister herself with effect from 30 September 2012. (03)
(b) While carrying out the sales tax audit of Haleema, the Officer of Inland Revenue identified the deficiency
in the amount of sales tax deposited by her. She acknowledged her deficiency but failed to deposit the
balance amount. A show cause notice was issued to her for the payment of the balance amount.
Determine Haleema’s liability in the above situation. Also explain whether it would have been to her
advantage if she had paid the amount before issuance of show cause notice. (03)
Question # 10 Spring 2013 Q. 7(a)
Identify the persons who are considered as manufacturers under the Sales Tax Act, 1990. (6)
Question # 11 Spring 2013 Q. 8
Under the Sales Tax Rules, 2006:
(a) Identify the situation in which a registered person is liable to be unregistered. (4)
(b) State the steps involved in case of de-registration of a person on his own initiative. (3)
Question # 12 Autumn 2013 Q. 8
(a) State the provisions of Sales Tax Act, 1990 relating to maintenance and retention of records by a registered
person making taxable supplies. (9)
(b) Discuss the rules relating to filing of electronic return under Sales Tax Rules, 2006. (3)
Question # 13 Spring 2014 Q. 10
Under the provisions of Sales Tax Act, 1990:
(a) Identify the situations under which a debit or credit note may be issued by a registered person. (3)
(b) Discuss the conditions under which a registered person may file a revised return. (3)
Question # 14 Spring 2014 Q. 11
Under the Sales Tax Act, 1990, ‘Taxable activity’ means any economic activity carried on by a person whether
or not for profit. You are required to specify the activities that are specifically included or excluded from
the above definition. (6)
Question # 15
Autumn 2014 Q. 5
(a) Under the Sales Tax Act, 1990 and Rules made thereunder:
(i) List the persons who are required to be registered. (05)
(ii) Change in rate of tax during a tax period (04)
(b) There are certain food items in the inventory of XY Limited (XYL) which were returned by the customers
after the expiry date. Specify the procedure which must be followed under the Sales Tax Rules, 2006 if
XYL wishes to destroy these items. (03)
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Question # 16
Spring 2015 Q. 8
Saleem is registered under the Sales Tax Act, 1990 and is engaged in the business of export and distribution of
electronic appliances.
Required:
Under the provisions of the Sales Tax Act, 1990 and Rules made thereunder, advise Saleem on the following
matters:
(a) any six situations in which input tax is not allowed to be adjusted against the output tax liability. (06)
(b) exports which are outside the purview of zero rating. (03)
(c) eligibility for a refund if input tax is paid in excess of the output tax payable for the month. (02)
(d) concept of provisional and final adjustment in relation to ‘Apportionment of input tax’. (02)
Question # 17
Autumn 2015 Q. 6
(a) Under the provisions of the Sales Tax Act, 1990 explain the following:
(i) Input tax in relation to a registered person
(03)
(ii) Supply
(04)
(b) Baber Associates, who is registered with the Inland Revenue Department for sales tax purposes, has
supplied a heavy duty motor to Mubarak Enterprises on one month’s credit. However, due to sharp decline
in petroleum prices, the price of the motor has reduced by 10% in the local market. Upon request from
Mubarak Enterprises, Baber Associates has finally agreed to reduce the price of motor by 8%.
In view of the Sales Tax Rules, 2006 describe the procedure which may be followed by both the parties to
give effect to the above price change.
(03)
Question # 18
Spring 2016 Q. 6
Under the provisions of the Sales Tax Act, 1990 and Rules made thereunder, briefly describe the following:
(a) How and under what circumstances the Inland Revenue Department may recover the amount of sales tax
from a person without issuing him a show cause notice.
(04)
(b) Rule relating to change in the particulars of registration other than the change of business category. (05)
(c) What evidence(s) a person may be required to submit if he is applying for registration as a manufacturer
on shared premises.
(02)
Question # 19
Autumn 2016 Q. 6
(a) Under the Sales Tax Act, 1990 and Rules made thereunder, briefly describe the concept of ‘Residual input
tax’. How it differs from ‘Residual input tax credit’?
(03)
(b) Under the provisions of the Sales Tax Act, 1990 enumerate any four features distinguishing the concept
of ‘Zero rating’ from ‘Exempt supply’.
(04)
(c) Identify the records which a registered person making taxable/exempt supplies is required to maintain at
his business premises or registered office under the Sales Tax Act, 1990. (Note: details of contents not
required) (04)
Question # 20
Spring 2017 Q. 8
(a) Under the provisions of Sales Tax Act, 1990 and Rules made thereunder, identify the circumstances in
which:
(i) a registered person is not allowed to reclaim or deduct input tax paid. (06)
(ii) a registered person may be liable for deregistration. (03)
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(b) On 2 June 2016, Abid Limited inadvertently issued a tax invoice with an incidence of sales tax amounting
to Rs. 25,000 as against the applicable tax of Rs. 45,000. The error was detected on 15 February 2017 i.e.
after expiry of 180 days.
Advise Abid Limited in the light of Sales Tax Rules, 2006. (04)
Question # 21
Autumn 2017 Q. 7
Zubair has recently been registered under the Sales Tax Act, 1990. You are required to advise him on the
following matters:
(a) Type of exports which are outside the purview of zero rating.
(03)
(b) Eligibility for a refund if input tax is paid in excess of output tax payable for the month.
(03)
(c) The conditions required to be fulfilled for filing a revised return.
(02)
(d) Concept of provisional and final adjustment in relation to ‘Apportionment of input tax’. (02)
(e) How to deal with change in rate of tax during a tax period. (04)
Question # 22
Spring 2018 Q. 6
Under the provisions of the Sales Tax Act, 1990:
(a) List the exceptions to the following general rule:
(i) Where the taxable supplies are made to a person who has not obtained registration number, there
shall be charged, levied and paid a further tax at the rate of 4% of the value in addition to the normal
rate of 18%. (03)
(ii) Goods exported shall be charged to tax at the rate of zero percent.
(03)
(b) Explain the term ‘Temporary registration’. Briefly discuss the rights, obligations and responsibilities of a
person who has obtained temporary registration.
(06)
Question # 23
Autumn 2018 Q. 6
(a) Under the Sales Tax Act, 1990 and Rules made thereunder, briefly describe:
(i) temporary sales tax registration and rights, obligations and responsibilities of a person holding
temporary registration.
(05)
(ii) differences between rules applicable to exempt and zero rated supplies.
(04)
(iii) the provisions related to excess/additional amount of sales tax collected by a registered person. (03)
(b) Where a Commissioner of Inland Revenue, having jurisdiction, is satisfied that a registered person has
issued fake invoices, evaded tax or committed tax fraud, he may suspend the registration of such person
without prior notice, pending further inquiry.
Under the Sales Tax Act, 1990 and Rules made thereunder, state any four basis of such satisfaction which
allow the Commissioner to suspend the registration as described above.
(03)
Question # 24
Spring 2019 Q. 6
(a) Briefly discuss the situations under which the following are required to be registered under the Sales Tax
Act, 1990 and Rules made thereunder:
(i) Cottage industry
(02)
(ii) Retailer
(01)
(b) Under the provisions of Sales Tax Act, 1990 and Rules made thereunder, identify the circumstances in
which a registered person may be liable for deregistration.
(03)
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(c) Bashir (Private) Limited (BPL) was incorporated on 1 January 2019 and registered with sales tax
department on 1 February 2019. BPL is in process of submitting its first sales tax return for the month
ended 28 February 2019. The finance department has identified following transactions which took place
before registration:
(i) Goods costing Rs. 5 million were purchased from a registered supplier. 80% of the goods remained
unsold as at 1 February 2019. The supplier charged sales tax at the rate of 18%.
(03)
(ii) Advance payment of Rs. 2.5 million was received on 15 January 2019 for the supply of taxable
goods to a registered person. The goods were delivered in February 2019. (02)
Required:
Advise the finance department about the sales tax implications of the above transactions on BPL’s first sales
tax return.
Question # 25
Autumn 2019 Q. 6
(a) Under the provisions of the Sales Tax Act, 1990 and Rules made thereunder, briefly describe the treatment
of the following:
(i) Recording of partial payments received in advance during a tax period in respect of both taxable and
exempt supplies.
(02)
(ii) Change in rate of tax during a tax period.
(04)
(b) There are certain goods returned by the customer as they are unfit for consumption and the seller has no
option but to destroy them.
Specify the procedure which must be followed by a registered person under the Sales Tax Rules, 2006 for
the destruction of such goods.
(02)
(c) Who is required to file the following sales tax returns? Also mention the due date of filing of these returns.
(i) Monthly return
(ii) Special return
(iii) Final return
(iv) Annual return
(04)
Question # 26
Spring 2020 Q. 7
(a) Raheel, an unregistered person, runs a garment shop in the posh area of Karachi. He has received a notice
from the Commissioner Inland Revenue requiring him to register with the sales tax authorities within 30
days.
Under the provisions of the Sales Tax Act, 1990 and Rules made thereunder, advise Raheel regarding the
following:
(i) Whether the Commissioner is justified in issuing the notice to him.
(03)
(ii) Would it be necessary for him to respond to the notice.
(04)
(b) Under the provisions of the Sales Tax Act, 1990 and Rules made thereunder, discuss the following:
(i) Difference between zero rated supplies and exempt supplies. (04)
(ii) How and under what circumstances the Inland Revenue Department may recover the amount of sales
tax from a person without issuing him a show cause notice.
(04)
(iii) Concept of provisional and final adjustments in relation to ‘Apportionment of input tax’.
(02)
Question # 27
Autumn 2020 Q. 5
Sun Associates (SA) has recently been registered with the Inland Revenue Department under the Sales Tax Act,
1990.
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Required:
Under the Sales Tax Act, 1990 and Rules made thereunder,
(a) identify the documents which SA may require for claiming/adjusting the input tax relating to the following
activities:
(i) supply of taxable goods
(01)
(ii) import of goods into Pakistan (02)
(iii) goods purchased in an auction (02)
(b) state the requirements relating to retention of records and documents that SA should comply with. (02)
Question # 28
Autumn 2020 Q. 6
Rapid Associates (RA) has been registered under the Sales Tax Act, 1990 since 2014. During the month of June
2020, RA issued fake sales tax invoices amounting to Rs. 5 million to one of its customers. Apart from this, RA
has always been in compliance with all the regulations of the Sales Tax Act, 1990.
Required:
Under the provisions of the Sales Tax Act, 1990 and Rules made thereunder, discuss the consequences which
RA may have to face due to issuance of fake invoices. (06)
Question # 29
Spring 2021 Q. 7
(a) In the light of the provisions of Sales Tax Act, 1990 and Rules made thereunder, briefly explain as to the
chargeability/adjustment of sales tax in respect of each of the following independent matters:
(i) Free provision of taxable goods to the company’s CEO as per the terms of his employment.
(ii) Free replacement of defective parts in the case of taxable goods, sold under warranty.
(iii) Payment of machine fuel by one of the directors using his own credit card. The machine is used to
manufacture taxable goods.
(iv) Taxable goods sold on instalment to a customer at a price inclusive of mark up.
(v) Advance payment received against taxable goods to be supplied to a registered person in next month.
(vi) Local supplies of goods manufactured by a cottage industry.
(vii) Material purchased for the construction of office building.
(viii) Electronic cash register purchased for retail outlet.
(08)
(b) Under the Sales Tax Act, 1990 and Rules made thereunder, briefly describe temporary sale tax registration.
Also state the rights, obligations and responsibilities of a person holding temporary registration. (05)
Question # 30
Autumn 2021 Q. 8
(a) Under the provisions of the Sales Tax Act, 1990 and Rules made thereunder, briefly explain the following:
(i) how and under what situations the Inland Revenue Department may recover the amount of sales tax
from a person without issuing him a show cause notice.
(04)
(ii) extra tax and capacity tax.
(05)
(b) On 4 February 2021, it was revealed to Fahad that he inadvertently reported an output sales tax of Rs
27,000 in a tax invoice, issued on 5 July 2020, to a customer instead of Rs. 72,000 in his sales tax return
for July 2020.
Required:
In the light of the Sales Tax Act, 1990 and Rules made thereunder, advise how Fahad can rectify this error
after the expiry of 180 days. (03)
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Question # 31
Spring 2022 Q. 5(a)
Following are the independent transactions carried out by different enterprises during the month of February
2022:
(i) Taxable goods of Rs. 800,000 were sold to one of the dealers. The amount was net of 20% trade discount
which was in accordance with market norms. The discounted price was not shown on the tax invoice.
(ii) Taxable goods of Rs. 1,500,000 were used for internal testing and evaluation purposes. 40% of these goods
were locally procured while remaining 60% of these goods were own manufactured.
(iii) Advance of Rs. 600,000 was received for goods to be delivered in April 2022.
(iv) 1,000 units of taxable goods listed in the Third Schedule were sold at a unit price of Rs. 5,000. Retail price
of each unit was Rs. 6,000.
(v) New parts of Rs. 1,200,000 were issued free of cost to replace the defective parts under warranty.
(vi) Taxable goods of Rs. 400,000 were sold at credit terms of 2/10, n/30. Customer paid the amount within
ten days and availed the discount.
Required:
In the light of the provisions of the Sales Tax Act, 1990 and Rules made thereunder, state the value of supply
chargeable to tax for the month of February 2022. Also state the reason for your treatment. (08)
Question # 32
Spring 2022 Q. 6
(a) Under the Sales Tax Act, 1990 and Rules made thereunder, briefly discuss the chargeability of sales tax in
case of a retailer. (05)
(b) Shajee Limited (SL) purchases cosmetic products from Tajee (Private) Limited (TPL). In the month of
October 2021, SL received a consignment of 5000 units from TPL. On delivery, SL found that 50% of the
items were expired and decided to return them. Both SL and TPL are registered under the Sales Tax Act,
1990 and file sales tax return on regular basis.
Required:
Under the Sales Tax Rules, 2006 specify the document which must be issued by SL on return of goods to TPL.
Also state the particulars that should be mentioned on the document to be issued. (04)
Question # 33
Autumn 2022 Q. 6
(a) Under the provisions of the Sales Tax Act, 1990 and Rules made thereunder, explain whether the following
persons are required to be registered with the Inland Revenue Department:
(i) A manufacturer of taxable supplies located in the residential area of Korangi, Karachi.
(ii) A retailer whose annual turnover is Rs. 20 million.
(iii) A distributor of exempt supplies.
(iv) An exporter of taxable goods. (04)
(b) Goods exported shall be charged to tax at the rate of zero percent. What are the exceptions to this
general rule? (03)
Question # 34
Spring 2023 Q. 6
(a) Following are the independent transactions carried out by different enterprises:
(i) In November 2022, an agreement for the acquisition of machine on hire purchase was signed. In December
2022, the machine was acquired under this agreement against 25% down payment of Rs. 30 million. The
remaining balance is to be paid in 24 equal monthly installments of Rs. 4.5 million each.
(ii) In December 2022, an advance of Rs. 12 million was received against delivery of goods to be made in
March 2023.
(iii) A machine of Rs. 38 million was purchased in July 2022 but it was put to use in November 2022.
(iv) Goods of Rs. 7 million were sold in September 2022 but due to limited storage capacity at buyer’s premises,
the goods were delivered in January 2023.
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Required:
In the light of the provisions of the Sales Tax Act, 1990 and Rules made thereunder, identify and discuss the
time (month) of supply for the chargeability of sales tax in respect of the above transactions. (05)
(b) In the light of the Sales Tax Act, 1990 and Rules made thereunder, identify the situation(s) under which the
Inland Revenue Department may recover the amount of sales tax from a person without issuing him a show
cause notice. Also state the procedure for the recovery of the said amount. (04)
Question # 35
Autumn 2023 Q. 6
(a) Sarfraz is a sole proprietor. Under the provisions of the Sales Tax Act, 1990, discuss whether each of the
following individuals/entities is an associate of Sarfraz:
(i) Jehanzeb: He has been working as an accountant for the past twenty years and has been responsible for filing
the tax returns of both Sarfraz and his business.
(ii) Falah Limited (FL): Sarfraz owns 20% shares in FL, while his mother owns 30% shares in FL.
(iii) Sarah: She is the adopted daughter of Sarfraz’s wife, Fatima. Sarah was adopted by Fatima before her
marriage to Sarfraz.
(iv) Umeed Trust (UT): Sarfraz is one of the trustees of UT. The trust was established to oversee the operations
of an orphanage.
(06)
(b) Under the provisions of the Sales Tax Act, 1990 and the Rules made thereunder, list different types of
returns alongwith the due dates for filing of such returns.
(05)
Question # 36
(a)
Spring 2024 Q. 6
Under the Sales Tax Act, 1990, briefly explain whether the following are considered taxable
activities:
(i)
Nadeem received a salary of Rs. 250,000 for the month of February 2024 from his
employer.
(ii)
Zahab provided consultancy services to his brother for his start-up business for an
agreed amount of consideration.
Shahzeb played the piano, an instrument he has played since childhood, at his parents’
anniversary party.
Furqan, who works as an accountant for Beenish Enterprises owned by Miss
Beenish, gives Maths tuitions to Beenish’s daughter, Irham, for a monthly fee of Rs.
20,000.
Quratulain, a homemaker with a hobby of baking cakes and pastries, rented a stall at
the Karachi Food Festival and sold her baked items.
(05)
(iii)
(iv)
(v)
b) Consider the following independent situations:
• In February 2024, Baqir Associates (BA) acquired packaging materials worth Rs. 600,000 from Raheel
Enterprises (RE) for its product. RE did not deposit the related sales tax with the authorities on time
due to financial difficulties.
(02)
• Goods worth Rs. 12 million, falling under the Third Schedule, were supplied to an unregistered person
during the tax period of February 2024. (03)
Required:
Under the provisions of the Sales Tax Act, 1990, and the Rules made thereunder, briefly explain the
chargeability/adjustment of sales tax.
(c)
‘A Commissioner, having jurisdiction, if satisfied that a registered person has issued fake
invoices, evaded tax or committed tax fraud, may suspend the registration of such person
through the system, without prior notice, pending further inquiry’.
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Required:
Under the Sales Tax Rules, 2006, list any four bases for such satisfaction of the
Commissioner.
(04)
Question # 37
Q.7
(a)
Autumn 2024 Q. 7
Asim Mir planned to start a manufacturing business and obtained sales tax registration in
March 2024. However, due to unforeseen circumstances, he was unable to start his
business as planned. Consequently, no sales tax returns were filed from March to August
2024, as he did not engage in any taxable activity.
Required:
Under the provisions of the Sales Tax Act, 1990 and the Rules made thereunder, discuss the
following:
(i)
The requirement to file the sales tax return and the consequences, if any, for the nonfiling of such returns.
(02)
(ii) Power of the Commissioner in abovementioned scenario.
(02)
(c) Waseem and Sons (WS), a registered person under the Sales Tax Act, 1990 (STA), sold taxable goods
to Haleem and Sons (HS) in February 2024.
Required:
Under the provisions of the Sales Tax Act, 1990 and the Rules made thereunder, for each of the following
independent cases, specify the document that WS and HS are required to issue, if any, and state the effect
(increase, decrease or no effect) on the sales tax liability of WS and HS:
• HS is registered under the STA and returned 25% of the goods in July 2024.
• HS is not registered under the STA and returned 25% of the goods in May 2024.
• HS is registered under the STA and returned 25% of the goods in September 2024.
• The value of supply and corresponding sales tax were erroneously understated by WS.
The error was rectified in June 2024.
• The value of supply and corresponding sales tax were erroneously overstated by
WS. The error was rectified in June 2024.
(05)
You should answer this part in the following format:
Case
Document to be issued by
WS
HS
Impact on sales tax liability of
WS
HS
(i)
(ii)
(iii)
(iv)
(v)
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SECTION- C BASICS
Syllabus Weightage
Syllabus
Grid
Ref.
A
Objective, System and Historical Background, Constitutional
Provisions and Ethics
Teaching
Hours
Weightage
10-15
5-10
Proficiency
levels
Testin
g
levels
P1
T1
Key Examinable Technical Competencies
Syllabus
Learning Outcomes
Ref.
A.
Objective, System and Historical Background,
Constitutional Provisions and Ethics
a
Basic Concepts of taxation and Constitutional Provisions
1
Discuss the implication of direct and indirect taxation.
b
Federal and Provincial Financial Procedures
1
Describe Federal Consolidated Fund and Public Account.
P1
T1
2
Describe Provincial Consolidated Fund and Public Account.
P1
T1
3
Explain the provisions related to the distribution of
revenues between the Federation and Provinces.
P1
T1
4
Discuss taxes that can be raised under the authority of
Parliament.
P1
T1
5
Describe the powers of provincial assemblies in respect of
provincial taxes.
P1
T1
c
Ethics
1
Discuss the objectives and rights of the state to tax its
citizens.
P1
T1
2
Discuss morality behind compliance with tax laws by
taxpayers and tax practitioners.
P2
T1
3
Describe the powers vs ethical responsibilities of tax
implementation authorities
P2
T1
4
Discuss pillars of tax administration, namely; fairness,
transparency, equity and accountability.
P2
T1
P1
T1
5
Explain the basic difference between evasion and avoidance of tax
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Chapter
22
System of taxation in pakistan
ICAP PAST PAPER QUESTIONS
Question # 1
Autumn 2014 Q. 7
The primary objective of a taxation system is to collect revenue. You are required to list the other objectives
(non-revenue) which a taxation system can achieve. (10)
Question # 2
State any five ways through which taxes can be used for development of the country. (5)
Spring 2015 Q. 9
Question # 3
Briefly explain any three indirect taxes applicable in Pakistan. (5)
Spring 2015 Q. 10
Question # 4
Spring 2016 Q. 7(b)
Besides financing government operational expenditures, taxation is also utilized as a tool to carry out the
national objective of social and economic development.’ List any five non-revenue objectives of taxation. (5)
Question # 5
Spring 2018 Q. 5(a)
Taxes are primary revenue yielding tools of the Government of modern ages. You are required to state any three
non-revenue objectives which the Government achieves by imposing taxation. (3)
Question # 6
(a) Briefly explain indirect taxes applicable in Pakistan. (4)
(b) State one objective of tax laws in each of the following cases:
(i) High tax rate on high income
(ii) Higher taxes on import of luxury goods
(iii) Tax credit on donations to approved institutions
(iv) Tax credit on investments
(v) Creation of tax free zones
(vi) Tax on income of individuals and companies
(vii) Tax on transactions not made through normal banking channel
(viii) Zero rating under the Sales Tax Act, 1990
(06)
Autumn 2018 Q. 7
Question # 7
(a) Briefly discuss three broad principles for levy of taxes. (04)
(b) Briefly explain any three indirect taxes applicable in Pakistan.
Autumn 2019 Q. 8
(05)
Question # 8
Spring 2021 Q. 8(a)
Taxes are primary revenue yielding tools of the Government of modern ages. State any five ways by which
taxes can be used for the development of the country. (05)
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Question # 9
State one objective of tax laws in each of the following independent cases:
i) High tax rate on import of goods
ii) Zero rating under the Sales Tax Act, 1990
iii) Decrease in sales tax rate
iv) Tax on cash deposit/withdrawal by non-filer
v) Introduction of tax holiday period for construction related industries
vi) High tax rate on interest income
vii) Decrease in tax rate for online sales
viii) Tax credit to persons employing fresh graduates
ix) High tax rates on luxury items
x) Allow expenditure on research and development (05)
Autumn 2021 Q. 8(a)
Question # 10
Spring 2022 Q. 7
(a) State any four non-revenue objectives which the government achieves by imposing taxation. (03)
(b) Discuss any three principles of a sound tax system. (03)
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Constitutional provisions
Chapter
23
PAST PAPER QUESTIONS
Question # 1
Autumn 2014 Q. 9
(a) List the taxes which can be imposed by the Federal Government. (06)
(b) Briefly describe the duties of National Finance Commission. (04)
Question # 2
Autumn 2015 Q. 8
What do you understand by ‘Federal consolidated fund’? Enumerate the expenditures which are charged upon
the Federal consolidated fund. (08)
Question # 3
Spring 2016 Q. 7(a)
Under the provisions of Article 160 of the Constitution of Pakistan, briefly describe the formation of National
Finance Commission. Who may be the member(s) of such Commission? (03)
Question # 4
Autumn 2016 Q. 7(b)
List any five types of taxes which can be imposed by the Federation as provided in the Federal legislative list
under the Constitution of Pakistan. (05)
Question # 5 Spring 2018 Q. 5(b)
List any five taxes which can be imposed by the Federal Government. (05)
Question # 6
Spring 2019 Q. 8
(a) National Finance Commission has the duty to make recommendations to the President with regard to finance
related matters. You are required to list such recommendations. (04)
(b) State the taxes and duties which may be raised under the authority of Parliament.
Also state four types of taxes which are covered:
(i) under the scope of legislation of the Federation
(ii) under the scope of legislation of the Provinces. (06)
Question # 7
Autumn 2022 Q. 8(b)
Following is the list of various types of taxes/duties:
(i)
Agriculture income tax
(ii)
Custom duty
(iii)
Tax on transfer of immovable property
(iv)
Capital value tax
(v)
Property tax
(vi)
Sales tax on services
Required:
In respect of each of the above mentioned taxes/duties, identify whether they are covered under the scope of
legislation of the Federation or the Provinces. (03)
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Chapter
24
Ethics
ICAP PAST PAPER QUESTIONS
Question # 1
Autumn 2014 Q. 8
Briefly explain the ethical responsibilities of the tax implementing authorities. (10)
Question # 2
Autumn 2015 Q. 7
Briefly describe any three main canons of taxation which can be helpful in formulating a good tax system. (03)
Question # 3
Spring 2016 Q. 7(c)
List any six ethical issues which may be faced by tax administration authorities while discharging their duties
under the four pillars of tax administration. (03)
Question # 4
Autumn 2016 Q. 7(a)
List any seven responsibilities of tax administrators emanating from best ethical practices. (07)
Question # 5
Autumn 2017 Q. 8
(a) Briefly describe the pillars/principles of tax administration which are meant to safeguard the interest of
taxpayers and avoid abuse of powers by the tax administrators. (04)
(b) Differentiate between the terms ‘Tax evasion’ and ‘Tax avoidance’. Give one example in each case. (03)
(c) List any six ethical issues that which administrators may face while discharging their duties. (03)
Question # 6
Spring 2020 Q. 8
(a) List any seven responsibilities of tax administrators arising from best ethical practices. (07)
(b) State any six ethical issues which the administrators may face while discharging their duties. (03)
Question # 7
Autumn 2020 Q. 8
(a) Identify any four powers of the Federal Board of Revenue (FBR) with respect to collection of tax. What
consequences may be faced by taxpayer if such powers are misused by any officer(s) of FBR? (03)
(b) Briefly explain any two pillars of tax administration which may be helpful in safeguarding the interest of
taxpayers and avoiding the abuse of powers by the tax administration. (02)
(c) List any six ethical issues which may be faced by tax administration authorities while discharging their duties
under the four pillars of tax administration. (03)
Question # 8
Spring 2021 Q. 8(b)
List six types of taxes which are covered within the legislative powers of Provinces. (03)
Question # 9
Autumn 2021 Q. 8(b)
List the fundamental principles of ethics for tax practitioners. Also describe any one of the principles. (03)
Question # 10
Spring 2023 Q. 8
Give two examples, each of tax avoidance and tax evasion. Also suggest the appropriate tax measures to prevent
that tax evasion. (06)
Question # 11
Autumn 2023 Q. 8(b)
List the fundamental principles of ethics for tax practitioners. Also, describe any two of the principles. (04)
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Chapter
25
Code of ethics
ICAP PAST PAPER QUESTIONS
Question # 1
Autumn 2022 Q. 8(a)
Discuss whether the following tax services can be provided to an audit client which is not a public interest entity:
(i)
Preparation of tax returns
(ii)
Tax calculation for the purpose of preparing accounting entries (05)
ICAP PAST PAPER SOLUTIONS
Answer # 1
Autumn 2022 Q. 8(a)
(i)
(ii)
Providing tax return preparation services does not usually create a threat so this service can be provided to audit client.
Preparing calculations of current and deferred tax liabilities (or assets) for an audit client for the purpose of preparing
accounting entries that will be subsequently audited by the firm creates a self-review threat. The significance of the threat
will depend on:
• The complexity of the relevant tax law and regulation and the degree of judgment necessary in applying them;
• The level of tax expertise of the client's personnel; and
• The materiality of the amounts to the financial statements.
Safeguards
Safeguards shall be applied, when necessary, to eliminate the threat or reduce it to an acceptable level. Examples of such
safeguards include:
• Using professionals who are not members of the audit team to perform the service;
• If the service is performed by a member of the audit team, using a partner or senior staff member with appropriate
expertise who is not a member of the audit team to review the tax calculations; or
• Obtaining advice on the service from an external tax professional.
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Chapter
Income tax numericals
Notes for students:
1. Certain dates and information have been changed to solve the questions based on the tax year 2024
2. An ambiguity exists as to whether income under separate block of income should be considered for
rebate purposes and to decide salaried or non-salaried case.
In this case two opinions may be formed as under:
• Separate block of income should be considered for rebate purposes and so on as there is no
negative provision in the Ordinance as compared to income taxable under Final Tax Regime
(FTR)
• Separate block of income should not be considered for rebate purposes and so on as the rates on
separate block of income are charged normally on gross income such as tax on gross interest or
charged on income after considering specific expenses such as capital gain on disposal of
immovable property and capital gain u/s 37A.
• ICAP does not consider separate block of income for rebate purposes and so on and therefore
we are also not considering the same in our solutions.
3. Basic knowledge and features of Final Tax Regime (FTR) are included in the syllabus. Detailed
knowledge, items covered under FTR and their rates are not included in the syllabus.
Therefore, the students are supposed to have basic knowledge of FTR before attempting the practical
questions of individuals. We are explaining FTR's features in this chapter to facilitate the solution of
practical questions of individuals
Salient features of FTR Section 8 and Section 169
a) Tax deductible or collectible at source related to the items of FTR shall become full and final
discharge of tax liability and normal slab rates do not apply in this case. However, any incorrect tax
deduction shall be adjusted accordingly.
b) No expense, deduction or allowance against presumed income is allowed.
c) Losses cannot be adjusted against presumed income.
d) Tax liability under FTR shall not be reduced by any tax credit / rebate.
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Income Tax Numerical Format
Mr. Name
Resident Individual
Tax year 20XX
Sr.
No
Particulars
Rs.
Taxable
Rs
Calculation of Taxable Income and Tax Payable
1.
2
3
4
5
Income from Salary
Allowances
Perquisites
Terminal Benefits
Employee Share Scheme
Total Income from Salary
X
X
X
X
Income from Property
S.U.R.F
Less: Allowable deduction
Total Income from Property
X
(X)
Income from Business
Revenue
Less: Expenditure
Total Income from Business
X
(X)
Income from Capital Gain
Gain U/S 37
Gain U/S 38
Gain U/S 37-A (SBOI)
Gain immovable property (SBOI)
Total Income from Capital Gain (Including SBOI)
X
X
X
X
Income from Other Source
Other source income under FTR
Other Source income under NTR
Income from other source (Including FTR)
X
X
Total Income (NTR,FTR & SBOI only)
Less : Separate Block of Income & FTR
Golden Handshake
Capital Gain U/S 37-A
Capital Gain on immovable property
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XXX
XXX
XXX
XXX
XXX
XXX
(X)
(X)
(X)
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FTR Income
Total Income Excluding (SBOI and FTR)
Less: Deductible allowances
Zakat Paid under Zakat & Ushr Ordinance (Sec-60)
Worker’s Welfare Fund (WWF) (Sec-60A)
Worker’s Profit Participation Fund (WPPF) (Sec-60B)
Deductible allowance for educational expense (Sec-60D)
➢ 5% of tuition fee paid by the individual
➢ 25% of Taxable Income
➢ Rs. 60,000 multiplied by the number of children of the
individual lower one will be allowed
Total Taxable Income (NTR Only)
(X)
(XXX)
XXX
(X)
(X)
(X)
(X)
XXX
Taxation [ Sal/Non Sal]
(Income x Rate )
XXX
Total Tax Liability
XXX
Less: Full time Teacher Allowance
(XXX)
XXX
(XXX)
XXX
Less: Foreign tax credit
Less: Rebates
➢ Charitable Donation U/S 61
➢ Approved Pension fund
X
X
Add: Tax on FTR + SBOI
XXX
Total Tax liability
XXX
Less : Tax Deducted at source
Less: FTR
Less: All WHT
Add: Tax Credit disallowed (If any)
(XXX)
(XXX)
(XXX)
XXX
(X)
Tax Payable
XXX
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Key Concepts Tested in Numerical ICAP CAF
Q. No.
Reference
Marks
Remarks i.e. special features in the question
1
2
Q.15 Sept 2004
Q.2 Sept 2005
17
16
3
4
5
Q.1 March 2006
Q.2(a) March 2007
Q.1 March 2009
15
12
18
6
Q.1 Sept 2009
21
7
Autumn 2010 Q. 1
21
8
9
Spring 2011 Q. 1
Autumn 2011 Q. 1
20
19
10
11
Spring 2013 Q. 1
Autumn 2013 Q. 1
20
21
12
13
Autumn 2014 Q. 1
Autumn 2015 Q. 1
20
20
14
Spring 2016 Q. 1
16
15
Q.1 Sept 2016
15
16
17
18
19
Q.1 Sept 2017
Q.1 Sept 2018
Q.1 Sept 2019
Q.1 Sept 2020
16
16
17
19
20
21
Q.1 Sept 2021
Q.1 March 2022
19
17
22
Q.2 Sept 2022
16
23
Q.1 March 2023
19
24
Q.1 September 2024
14
Fee for attending BOD meetings
Foreign source salary
TV and VCR provided for use
Quiz Prize, Profit in Lieu of Salary
Forfeited deposit Foreign source salary
Foreign source salary
Tax borne by the employer
Specified amount of tax borne by the company & Two
pensions
Leave Encashment, Profit on Debt, Employee share
scheme
Commission, gratuity, employment switching
Medical Facility not under the contract, Final
Settlement
Employee Share Scheme, Mutual Units
Tax borne by the employer
Employee share scheme
Best employee award
B.O.D Meeting fee, literary work, winning Prize
Car given for use and transfer, Appliances given for
use, Agriculture Income
Provident Fund, Dividend, Contribution to Approved
fund
Employment bond
Employee share scheme
Termination benefit taxable at last 3 years' average
rate of tax
Effect of annual increment, Loan from Employer
Specified amount of tax borne by the employer
Foreign source salary income
Full time teacher allowance
Interest free loan with the waiver of interest on
provident fund balance
Foreign tax credit
Relocation allowance
Allowance for office duties as a % of salary
Foreign source salary of a resident person
Expenses for work from home
Gifts received in kind and in cash
Employment bond
Deemed interest expense
Free Food, Insurance, Provident fund, Employee
training
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ICAP CFAP Q. No. [For Advance Practice ] for jazbati Students
Q. No
25
Reference
Q.1 Dec 2009
Marks
18
26
Q.1 June 2011
20
27
Q.1 Dec 2012
25
28
29
Q.1 Dec 2013
Q.6 June 2015
22
8
Question # 1
Remarks i.e. special features in the question
Specific amount of tax to be borne by the employer
Forfeited deposit
Loan received in cash
Compensation under the redundancy scheme taxable @last 3
years' average rate of tax
Returning expatriate
Refrigerator, cooking range and washing machine provided
by the employer for use Rent of agricultural land
Dividend in specie
Compensation for delayed refund
Voluntary waiver of leave encashment by the employee
Royalty income
Q.15 September 2004
Mr. A is the Chief Executive of a multinational company (unlisted).
Details of his emoluments are as follows:
(a) Basic salary
4,004,520
(b) Bonus
1,980,642
(c) Utility allowance
400,452
(d) Leave encashment
538,083
(e) Other allowance
90,000
(f) House rent allowance
1,802,040
Apart from the above, he is eligible to receive gross Director's Fee of Rs.52,000. The company has paid
the amount after deduction of tax @ 20%. During the year he has sold shares that were acquired
through exercise of a 'Stock Option' three years ago, The gain on sale amounts to Rs.4,206,000.
He also owns a property which has been let out on rent. The details of rent received and expenses
incurred are as follows:
(a) Rent Rs.40,000 per month. The property was let out on rent for the whole year. The annual
letting value of the house is Rs.450,000. No income tax was deducted by the tenant.
(b) He has paid property tax amounting to Rs.11,500.
(c) During the year he has paid Rs.6,000 for repairs and maintenance.
He has also earned gross amount of profit of Rs.6,500 on PLS (profit and loss sharing) Account.
During the year the following amounts were withheld at source towards income tax.
(a) From salary income Rs.1,200,000 other than director's fee
(b) From profit on PLS Account Rs.650
You are required to compute the taxable income and tax liability for the tax year 20X8.
Question # 2
(Marks 17)
Q.2 September 2005
Mr. Imran is a citizen of Pakistan. During the first nine months of the tax year, he worked as financial
controller of a Pakistan based unlisted subsidiary company of a multinational group.
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After that he was transferred and employed as Head of Finance of the UAE based subsidiary of the
Group. Mr. Imran's family stayed in Dubai throughout the year.
The detail of income earned by him during the year is given below:
From the UAE company
• Mr. Imran earned US $ 30,000 during the three-month's employment in the UAE. No tax is
deducted from salary earned and paid in the UAE.
• To relocate Mr. Imran in UAE, the UAE Company incurred one time miscellaneous cost of
Rs.100,000 to move the household items of Mr. Imran from Pakistan to Dubai.
From Pakistan subsidiary
(a) Basic salary Rs.500,000 p.m.
(b) Medical allowance Rs.45,000 per month (no free medical or hospitalization facility is given to Mr.
Imran under the terms of employment).
(c) The company has provided Mr. Imran a TV and VCR costing Rs.40,000 on which the company
charges depreciation @ 20% in its books of accounts.
(d) Company has provided interest free loan to Mr. Imran amounting to Rs.5 million which remained
outstanding throughout his employment with the company (Pakistan subsidiary). Mr. Imran acquired a
flat from the amount of loan and rented it out @ Rs.100,000 per month with effect from 1st July. He also
paid Rs.35,000 as property tax during the period.
(e) *His family's housing cost in Dubai, borne by the company amounts to Rs.30,000 per month.
(f) Mr. Imran's travelling and related cost borne by the Pakistan subsidiary to meet his family, amounts
to Rs.30,000 p.m.
(g) During the employment with the Pakistan subsidiary, Mr. Imran had exercised option to acquire 300
shares of the parent company @ US $8 per share.
At the time when the option was exercised, the value of the share was US $ 10 (Rs.580) per share.
Furthermore, during the year Mr. Imran sold 200 options previously received by him at a price of US $3
per option (Rs.171) after holding it for more than a year.
Neither the Pakistan subsidiary nor Mr. Imran incurred any cost in this regard.
Required:
Compute the taxable income of Mr. Imran for the tax year 20X8 based on the data provided above.
(Marks 16)
Question # 3
Q.1 March 2006
Ms. FH was working as a Marketing Head with Consumer Products Ltd. (CPL) at following emoluments:
(i) Basic salary
Rs. 100,000 per month
(ii) House rent allowance
Rs.40,000 per month
(ii) Utilities allowance
Rs.15,000 per month
In addition to the above cash emoluments, she was provided with a Honda Civic car, exclusively for
official use. The cost of car to the Company was Rs.1,000,000. As per Company's policy, the car was sold
to Ms. FH during the year at the WDV of Rs.100,000 whereas the FMV of the same at the time of sale was
Rs.300,000.
In May 20X8, Ms. FH was approached by Pharma Industries (Pvt.) Ltd (PIL). They offered her
employment at a higher salary and some extra benefits, along with a onetime payment of Rs.200,000 as
an inducement to accept their offer. Ms. FH accepted PIL's offer by resigning from CPL with effect from
1.6.20X8. She joined PIL from 1.7.20X8. The amount of Rs.200,000 was, however, paid to her on
29.6.20X8..
During the year, Ms. FH has also undertaken the following transactions:
i.
Shares in Queens Pakistan (Pvt.) Ltd were sold for Rs.500,000. These shares were acquired in
the year 20X3 at a cost of Rs.200,000.
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ii.
A residential plot inherited on 30.4.20X7 was sold for Rs.1,000,000 on 15.6.20X8. The FMV of
the plot at the time of inheritance was Rs.300,000 (original purchase cost was Rs.200,000).
iii.
A painting purchased at a cost of Rs.100,000 was sold for Rs.75,000.
iv.
She had won a cash prize of Rs.250,000 in a quiz show. Tax of Rs.50,000 was deducted from the
prize money under section 156.
v.
Gross dividend income of Rs.50,000 from a listed company. Dividend was received after
deduction of tax of Rs.7,500 under section 150.
vi.
An amount of Rs.50,000 was donated to an approved charitable institution.
In the light of above information, compute the taxable income of Ms. FH for the tax year 20X8 by giving
brief explanation for the items not included in the taxable income. (Marks 15)
Question # 4
Q.2(a) March 2007
Explain the correct tax treatment in the tax year 20X8 in each of the following situations:
i.
In 20X1, Mr. H inherited a rare sculpture of Buddha which had a FMV of Rs.300,000 on the date
of inheritance (original purchase cost Rs.200,000).
In February 20X8, the sculpture was sold by him at Rs.500,000.
ii.
In July 20X7, Mr. Y entered into an agreement for sale of his residential plot to Mr. M, who paid
an advance of Rs.500,000.
According to the agreement, Mr. M was required to pay the balance by 28.8.20X7.
However, instead of paying the balance amount, he terminated the sale agreement. Mr. Y
forfeited the advance of Rs.500,000 in accordance with the terms of the agreement.
iii.
In September 20X7, Mr. S sold his personal car, Toyota Corolla, to one of his cousins at a price of
Rs.50,000 whereas the FMV of the car was Rs.200,000. The car was purchased by him in the
year 20X4 at a cost of Rs.300,000.
iv.
Mr. I was working as a Chief Financial Officer in DW Pakistan (Pvt) Ltd, which is a wholly owned
subsidiary of DW AG, Germany.
According to the Company's policy, Mr. I was sent on secondment to Germany on 1.1.20X8 for a
period of five years.
During this period, half of his salary will be credited to his bank account in Pakistan, whereas the
remaining portion will be received by him in Germany.
(Marks 12)
Question # 5
Q.1 March 2009
Mr. Manto worked as an employee in Berlin Hotel, Germany for a period of five years. During the said
period he did not visit Pakistan for a single day.
He returned to Pakistan on 1.7.20X7 and immediately joined as a General Manager in a well- reputed
hotel, based in Karachi.
Assume that the details of his income for the tax year 20X8 are as follows:
i.
Basic salary (per month)
Rs.100,000
House rent allowance (per month)
Rs.30,000
Medical allowance (per month)
Rs.10,000
Bonus for the year
Rs.600,000
ii.
Besides medical allowance, he is also entitled to free medical treatment at approved hospitals.
iii.
He has been provided a company maintained 1600cc car which was used partly for official and
partly for personal purposes.
The hotel has leased the car from a bank. The gross lease rentals payable over the period of
lease amount to Rs.2,700,000.
The fair market value of the car at the time of lease was Rs.1,600,000.
The total lease rentals paid by the hotel during the year amounted to Rs.800,000.
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iv.
He is entitled to lunch at the hotel's restaurants where the usual charges are Rs.400 per person.
He is entitled to concessional rate of Rs.40 per day which is deducted from his salary. Assume
that there are 300 working days in the year.
v.
He went for a training course to Islamabad where boarding and lodging cost amounting to
Rs.150,000 was borne by the hotel. He incurred a further expense of Rs.125,000 which was
reimbursed by the hotel.
vi.
Provident fund was deducted @10% of his basic salary. An equal amount was contributed by
the hotel. Interest credited to his provident fund account amounted to Rs.48,000.
vii.
As per terms of employment agreed with Mr. Manto, tax payable on salary will be borne by the
hotel.
viii.
On 15.7.20X7, he received a lump sum amount of Rs.4,000,000 through a normal banking
channel as final settlement from Berlin Hotel.
ix.
On 1.8.20X7, he inherited 25,000 shares of a private limited company. The original cost in the
hands of transferor of the shares, on the date of inheritance, was Rs.42 per share.
x.
He sold all the shares on 28.2.20X8 at Rs.62 per share.
Required:
(a) Compute Mr. Manto's taxable income and tax payable.
(b) Briefly explain the treatment of items which are not considered in the above computation. (Marks
18)
Question # 6
Autumn 2009 Q. 1
Mr. Zulfiqar, a senior executive of Mirza Petroleum Ltd (MPL), retired on 31" March after completion of
19 years of dedicated service.
The details of Mr. Zulfiqar's income for the year ended 30.6.20X8 are given below:
Income from MPL
Rupees
Basic salary
280,000
Medical allowance
45,000
Utilities allowance
45,000
Cost of living allowance
25,000
Total monthly salary
395,000
Market value of rent free accommodation provided
120,000
(ii) As per terms of employment, tax liability of Mr. Zulfiqar to the extent of Rs. 200,000 is to be borne
by MPL.
(iii) On his retirement, he received gratuity of Rs. 2,660,000 from an unapproved gratuity fund
maintained by MPL.
(iv) He is receiving pension amounting to Rs.50,000 per month from the date of his retirement.
Other Information
(v) He is also receiving pension amounting to Rs.12,000 per month from a multinational company
where he worked from 1975 to 1995.
(vi) A plot inherited from his father was sold for Rs.5,000,000. Fair market value of the plot at the time
of inheritance in the year 20X1 was Rs.1,000,000.
(vii) On 1st January, he rented out one of his residential bungalows for Rs.100,000 per month and
received advance rent for two years.
(viii) Rs.500,000 were invested in new shares offered by a listed company.
(ix) He paid mark up amounting to Rs.250,000 on a house loan obtained from a scheduled bank. The
house is being used for his residence.
(x) He incurred a loss of Rs.20,000 On sale of a painting.
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Required:
(a) Compute taxable income and tax liability of Mr. Zulfiqar.
(b) Briefly comment on the items which are not considered in the above computation. (Marks 21)
Question # 7 Spring 2010 Q. 1
Sohail, Khaled and Qazi are members of an association of persons (AOP) and share profit and loss the
ratio of 2:2:1. The principal activity of the AOP is trading of various products.
Following are the details of the annual income / (loss) of the AOP and its members for the tax year 20X8:
(i)
The AOP suffered loss before tax amounting to Rs.1,500,000. The loss has been arrived at after
adjusting rental income earned by the AOP, the details of which are as follows:
Rental income
Related Expenses:
Property tax
Depreciation
Net rental Income
RS.
2,000,000
40,000
475,000
497,500
1,502,500
No tax was withheld on the rental income or on trading activity.
(ii) The expenses debited to profit and loss account include the following amounts paid to the members
of the AOP:
Sohail
Khaled
Qazi
Salary (Rs.)
900,000
600,000
Interest on capital (Rs.)
300,000
300,000
500,000
(iii) Sohail earned Rs. 1,800,000 from another business, of which he is the sole proprietor.
(iv) Khaled received an amount of Rs.255,000 as share of income after tax from another AOP. He also
earned income of Rs.1,900,000 from a sole proprietorship concern owned by him.
(v) Qazi runs a part time business. His gross revenue is Rs.1 million whereas total business expenses
are Rs.150,000. He also paid taxes in advance amounting to Rs.100,000.
Required:
Compute the taxable income and tax liability of the AOP and each of its members.
Question # 8
(19)
Autumn 2010 Q. 1
Mr. Zameer Ansari is working as a Chief Executive Officer in Wimpy (Private) Limited (WPL). Following
are the details of his income / receipts during the tax year 2023:
(a) His monthly cash remuneration in WPL is as follows:
Basic salary
Medical allowance
Utilities allowance
Rupees
200,000
30,000
10,000
(b) In addition to the above, he was also provided the following benefits in accordance with his terms
of employment:
(i) Medical insurance for hospitalization and surgery, limited to Rs. 1,500,000 per annum.
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(ii) Payment of his children’s school fees of Rs. 15,000 per month. The fee is deposited directly into
the school’s bank account.
(iii) Rent free furnished accommodation on 1000 square yards. The accommodation is located
within the municipal limits of Karachi.
(iv) Two company-maintained cars. One of the cars was purchased by WPL for Rs. 3,000,000 and
is exclusively for his business use. The second car was obtained on lease on February 1, 2017
and is used partly for official and partly for personal purposes. The fair market value of the
leased vehicle at the time of lease was Rs. 1,800,000.
(v) Leave encashment amounting to Rs. 100,000 was paid to Mr. Zameer on July 5, 2023.
(vi) An amount equal to one basic salary was paid by WPL to an approved pension fund.
(c) Mr. Zameer had received 15,000 shares of WPL on December 1, 2020 under an employee share
scheme. He had the option to transfer the shares on or after January 1, 2022. However, he sold all
the shares on April 1, 2010.
Fair value of the shares were as follows:
▪ Rs. 35 per share on December 1, 2020
▪ Rs. 42 per share on January 1, 2022
▪ Rs. 48 per share on April 1, 2023
(d) An apartment owned by Mr. Zameer was rented on July 1, 2021 to Mr. Abdul Ghaffar at a monthly
rent of Rs. 22,000. He received a non-adjustable security deposit of Rs. 150,000 which was partly
used to repay the non-adjustable security deposit amounting to Rs. 90,000 received from the
previous tenant in July 2020. He also incurred Rs. 20,000 on account of repairs to the apartment.
(e) He earned profit amounting to Rs. 750,000 on fixed deposit account maintained with a bank. The
bank withheld income tax amounting to Rs. 75,000 and Zakat amounting to Rs. 250,000.
(f) Tax deducted at source from his salary, amounted to Rs. 650,000.
Required:
Compute the taxable income, tax liability and tax payable by Mr. Zameer Ansari for the tax year 2023.
(21)
Question # 9
Spring 2011 Q. 1
Mateen was employed with Melody Ltd (ML) as an event organizer. On 30.6.2022 he resigned from his
employment without completion of notice period. On 1.7.2022 he joined another company Rock Star Ltd
(RSL) as a senior event organizer.
Following information is available relating to his assessment for the tax year 2023:
(a) On 1.7.2022 RSL paid Rs.280,000 to ML as compensation in lieu of un-served notice period by
Mateen.
(b) On 15.7.2022 Mateen received a gratuity of Rs.350,000 from an unrecognized gratuity fund
maintained by ML. He also received Rs.150,000 as leave encashment.
(c) In accordance with the terms of his employment with RSL, Mateen was provided with the following
emoluments / benefits during the tax year 2023:
(i) Basic salary of Rs.245,000 per month and utility allowance of Rs 21,000 per month.
(ii) A reimbursement of personal medical expenses up to 15% of the annual basic salary and
Rs.250,000 on account of hospitalization charges of his daughter were made after procuring
hospital bills showing the national tax number of the hospital. These bills were also attested
and certified by RSL.
(iii) For the first two months of his employment, a pick and drop facility was provided to Mateen at
a monthly rent of Rs.25,000. On 1.9.2022 RSL provided a company maintained 1300 cc car
which was partly used for private purposes. The cost of the car was Rs.2,500,000.
(iv) Monthly salary of Rs.6,000 was paid to Mateen's house keeper. Mateen however, reimbursed
20% of the house keeper's salary to RSL.
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(d)
(e)
(f)
(g)
(h)
(v) A special allowance of Rs.50,000 was paid to meet expenses necessarily to be incurred in the
performance of his official duties. Actual expenditure was Rs.40,000.
(vi) On 1.1.2023, he was provided an interest free loan of Rs.1,500,000. The prescribed benchmark
rate is 10%per annum.
(vii) A commission of Rs.500,000 for introducing new clients to the company. Withholding tax was
deducted by RSL @ 12% from such payments.
(viii) The tax deducted at source from his salary by RSL for the tax year 2023 amounted to
Rs.550,000 (other than tax deducted on commission).
Apart from his employment with RSL, Mateen also organized events for private clients. He received
a total of Rs.1,000,000 from such clients. No tax was deducted from such receipts. However, he
incurred an overall loss of Rs.350,000 on organizing these events.
On 31.5.2023 he received Rs.180,000 from Mr. Ali as consideration for vacating his bungalow.
He also received a share of profit from a business in Malaysia equivalent to Pak. Rs.535,000. He paid
Rs.130,000 in taxes in Malaysia on such income.
Mateen acquired 10,000 shares of a listed company from the Privatization Commission of Pakistan
at a price of Rs.100 per share on 31.5.2022. He was allowed a tax credit of Rs.100,000 in tax year
2022 against this investment. On 20.5.2023 he sold all the shares for Rs.1,000,000.
He paid Zakat of Rs. 250,000 to an approved institution by cross cheque
Required:
Compute the taxable income, mix liability and tax payable / refundable, if any, by Mateen for the tax year
2023. (Marks 20)
Question # 10
Autumn 2011 Q. 1
Mr. Khursheed, Pakistani national, was employed as the chief financial officer in Zulfiqar Gas Company
(ZGC), since 2012. Following information pertains to his income for the tax year 2023. Assume that he
has provided the following information on 25.9.2023 to his tax consultant for the purpose of
computation of taxable income and tax liability:
(I) Income from ZGC
Khursheed was employed with ZGC up to 31.12.2022. During this period he received the following
emoluments:
▪ Basic salary of Rs.400,000 per month, medical allowance of Rs.75,000 per month and utility
allowance equivalent to 10% of basic salary.
▪ A company-maintained car for official and private use. The car was purchased two years ago at
a cost of Rs.5 million. According to the company's policy, ZGC deducted Rs.10,000 per month
from his salary, for private use of the car.
Khursheed had undergone a major surgery during the year and incurred an expenditure of
ks,1,500,000. ZGC reimbursed the entire amount as a special case as it was not covered under the
terms of employment.
Due to Poor health, Khursheed opted for early retirement on 31.12.2022 under the company's
voluntary retirement scheme.
He received the following benefits on his retirement:
▪ Rs.7,500,000 as a golden handshake under the voluntary retirement scheme.
▪ Rs.9,100,000 from an unapproved gratuity fund maintained by ZGC.
▪ Transfer of company's car for Rs.2,600,000. The amount was deducted from his final settlement.
The fair market value of the car as of 31.12.2022 was Rs.2,800,000.
The tax deducted at source from the salary amounted to Rs.2,500,000.
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(II) Other Information
▪ On 1.1.2023, Khursheed commenced business of marketing of horticultural plants and related
items. However, due to intense competition, he had to wind-up this venture on 31.5.2023.
During this period, he had incurred a loss of Rs.750,000.
▪ He purchased 5,000 shares for Rs.500,000 from initial public offering of a new listed company
before 1.7.2013. He claimed a tax credit of Rs.60,000 on such investment, against the tax payable
for the tax year 2013. On 15.7.2022, he sold these shares for Rs.700,000. Incidental expenses
are included in these figures.
▪ He incurred a loss of Rs.500,000 on the sale of his shareholdings in a private company.
▪ He sold his personal car at a profit of Rs.300,000.
▪ On 1.3.2023, he purchased an apartment for Rs.5,000,000. 60% of this amount was financed by
a scheduled bank under housing finance scheme. During the tax year 2023, he paid markup
amounting to Rs.127,500. On 1.4.2023, he rented out the flat to Mr. AS at a monthly rent of
Rs.100,000 and received advance rent for eight months.
▪ His average tax rate for the preceding three years is 12%.
Required:
(a) Compute the amount of taxable income, tax liability and tax payable / (refundable), if any, for the
tax year 2023.
(13)
(b) Briefly comment on the items which are not considered by you in the above computation. (6)
Question # 11
Spring 2012 Q. 1
Dr. Sona is a Leading Eye Specialist and is listed on the panels of two hospitals. He also manages a private
clinic. Summary of his receipts and payments for the latest tax year is as follows:
Receipts
Consultation fees
- Hospitals
- Clinic
Income from surgery
- Hospitals
- Clinic
Property income
Other income
Payments
Rent of clinic
Household expenses
Purchase of car
Purchase of surgical equipment
Salary to assistant
Clinic running expenses
Car expenses
Donation
Note
Rs.
(i)
1,800,000
4,400,000
(i)
(ii)
(iii)
1,440,000
4,350,000
1,012,000
75,000
(iv)
(v)
300,000
1,960,000
640,000
500,000
180,000
240,000
200,000
300,000
Notes to the receipts and payments are presented below:
(i) The amount received from hospitals is net of withholding tax @ 10% being independent service
provider.
(ii) Dr. Sona owns a commercial building which he has has rented out. Detail of net receipts is
followings:
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Rent for the year
Non-adjustable security deposit:
- received from.a new tenant
- paid to old tenant (received three years ago)
Income Tax withheld
Property tax on building
Net receipts
Rs.
870,000
700,000
(500,000)
(50,000)
(8,000)
1,012,000
(iii) The amount was received for writing an article in a magazine on World Health Day.
(iv) 60% of the motor car expenses were incurred in connection with his personal use.
(v) Donation was given to a Government medical college for upgrading its library.
(vi) Tax Depreciation on motor car and surgical equipment is Rs 96,000 and Rs 75,000 respectively
Required:
Compute the taxable income, tax liability and tax payable by Dr. Sona for the latest tax year. Provide
appropriate comments on the items which are not relevant for your computations. (Marks 20)
Question # 12
Autumn 2012 Q. 1
Beena is a lawyer and owns a law firm under the name Beena & Co. She is also Director Legal Affairs at
AY Foods Ltd. Details of her income for the tax year 20X8 are as follows:
(A) INCOME FROM BEENA & CO.
Income Statement
Revenue
Less: Expenses
Salaries
Gifts and donations
Lease charges
Professional fee
Property expenses
Travel expenses
Other expenses
Net profit
Note
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
Rs.
8,500,000
2,000,000
400,000
900,000
400,000
350,000
150,000
800,000
5,000,000
3,500,000
Notes to the Income Statement
(i) Revenue includes Rs.750,000 recovered from Rafia in respect of bad debts that had been written off
while calculating the taxable income for the tax year 20X6. The amount was receivable against
professional services rendered to Rafia
(ii) Salary expenses include amounts of Rs.50,000 and Rs.75,000 per month paid to Beena and her
brother respectively. Her brother looks after administration and financial matters of the firm.
(iii) Gift and donations include gift to client, gift to her son and donation to Edhi Foundation amounting
to Rs.100,000, Rs.50,000 and Rs.250,000 respectively.
(iv) A vehicle was obtained solely for official purpose on operating lease, from a bank. The lease
commenced on 1.3.20X8. Lease charges include Rs.500,000 paid as security deposit to the bank.
(v) The professional fee includes an amount of Rs.150,000 paid to a legal firm for defending a law suit
filed against Beena, in a family court.
(vi) Beena lives in an apartment situated above her office, and 2/5" of the total property expenses
relates to this apartment.
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(vii) Other expenses include an amount of Rs.150,000 paid for Beena’s Golf Club membership which she
exclusively used to promote her business interests. The payment to the club was made in cash. It also
includes Rs 200,000 tax deducted by the clients
(B) DIRECTOR'S REMUNERATION FROM AY FOODS LTD (AFL)
(i) Beena received monthly remuneration of Rs.100,000 from AFL.
(ii) During the year, she also received two bonus payments of Rs.100,000 each. One of the bonus
payments pertains to tax year 20X7. It was announced last year but disbursed to her in current year.
(iii) Beena has also been provided a vehicle, by AFL, for her personal as well as business use.The car was
acquired by AFL in May 20X5 at a cost of Rs.2,000,000. The fair market value of the car as at 30.6.20X8
was RS.1,500,000.
(iv) She received a fee of Rs.150,000 from AFL for attending the meetings of the Board of Directors
(BOD).
(v) Tax deducted by AFL from salary is Rs.390,000 and BOD meeting fee 9,000
Required:
Compute the taxable income, tax liability and tax payable by Beena for the tax year 20X8. Provide
appropriate comments on the items appearing in the notes which are not considered by you in your
computations. (17)
Question # 13
Autumn 2012 Q. 5(b)
On 1 July 2021, Ms. Kashmala and Ms.Shumaila formed an Association of Persons (AOP) with the
objective of providing information technology support services to corporate clients. They contributed
Rs. 1.2 million and Rs. 0.8 million respectively in their capital accounts and agreed to share profits and
losses in the ratio of their capitals.
For the year ended 30 June 2022, business loss and unabsorbed depreciation of Rs. 0.4 million and Rs.
0.3 million respectively were assessed and carried forward. The total turnover of the AOP in 2022 was
Rs. 40 million.
During the year ended 30 June 2023, the AOP incurred a net loss of Rs. 0.8 million on a turnover of Rs.
50 million. The loss for the year was arrived after adjustment of the following:
▪ Salaries amounting to Rs. 0.5 million and Rs. 0.3 million were paid to Ms.Kashmala and
Ms.Shumaila respectively.
▪ Accounting depreciation on office assets amounted to Rs. 0.3 million
▪ The taxes withheld by the clients, for the year ended 30 June 2023 amounted to Rs. 0.55
million. AOP is entitled to claim tax depreciation of Rs. 0.25 million in respect of the office
assets.
Required:
Calculate the taxable income, net tax payable and unabsorbed losses (including unabsorbed
depreciation), if any, to be carried forward by the AOP for the year ended 30 June 2023. Ignore any
working of minimum tax. (08)
Question # 14
Spring 2013 Q. 1
Mr. Creative is working as Director Human Resources at Artistic Technologies Ltd (ATL). Following are
the details of his income/receipts during the latest tax year:
(a) Monthly cash remuneration from ATL:
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Basic salary
Utilities allowance
Medical allowance
Rs. 300,000
15% of basic
salary
12% of basic
salary
(b) In addition to above, he was also provided the following benefits in accordance with his terms of
employment:
(i) Rent-free furnished accommodation in a bungalow situated on a 500 square yard plot of land.
Rent for a comparable accommodation facility in the vicinity is Rs.150,000 per month.
(ii) An 1800cc company-maintained car. The car was purchased two years ago at a cost of
Rs.1,600,000 and is used both for official and personal purposes.
(c) A house owned by Mr. Creative had been leased-out by him at a monthly rent of Rs.50,000. The lease
expired on 31 December. Mr. Creative refused to renew the lease in spite of the tenant's offer to
renew the lease after increasing the rent by 10%. He returned the non-adjustable deposit of
Rs.300,000 to the tenant, which was received two years ago.
The house was immediately leased to his cousin without any security deposit on a monthly rent of
Rs.48,000.
(d) Five years ago, Mr. Creative had purchased 20,000 shares of Rs.10 each, of an unlisted public
company @ Rs.140 per share. After one year of acquisition, he received 8,000 bonus shares from
the company. No tax was paid at the time of issuance of bonus shares. During the latest tax year, he
sold 75% of the bonus shares at a price of Rs.145 per share.
(e) During the latest tax year, following investments were made: Rs. Approved voluntary pension fund
600,000 Open-end mutual fund 1,100,000
(f) During the latest tax year, he redeemed 4,000 units of mutual fund [other than stock fund] at Rs.58.6
per unit. These units were purchased at the beginning of the previous tax year at Rs.50 per unit and
Mr. Creative had claimed a tax credit of Rs.40,000 on this investment. The given figures include
incidental expense.
(g) Donations of Rs.50,000 were paid to approved charitable institutions.
(h) Tax deducted at source from his salary was Rs.400,000.
Required:
Compute the taxable income, tax liability and tax payable for the latest tax year.
(Marks 20)
Question # 15
Autumn 2013 Q. 1
Mrs. Aslam was employed with Sahal Ltd (SL) as a Marketing Manager. On 30.6.2022 she resigned from
her employment with SL On 1.7.2022, she joined H Pakistan Ltd (HPL), a quoted company, as a Marketing
Director.
She has provided you the following information in respect of the tax year 2023:
(i)
In July 2022, she received following amounts from SL in final settlement:
▪ Leave encashment amounting to Rs.95,000.
▪ Gratuity of Rs.500,000 from an unrecognized gratuity fund maintained by SL.
▪ Reimbursement of Rs.100,000 against a health insurance policy. The insurance claim was
lodged by SL on behalf of Mrs. Aslam in January 2022.
(ii) In accordance with the terms of her employment, income tax related to her salary and benefits is to
be borne by HPL. Her emoluments/benefits during the tax year were as follows:
▪ Basic salary of Rs.200,000 per month.
▪ Meckal allowance of Rs.60,000 per month.
▪ Rent free accommodation with annual letting value of Rs.480,000.
▪ Traveling allowance of Rs.50,000 per month. 60% of the amount was spent in the performance
of official duties.
▪ Provident fund @ 10% of basic salary. An equal amount was contributed by HPL.
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(iii) Under an employee share scheme, Mrs. Aslam was awarded 5,000 shares in HPL on 1.1.2023. Under
the scheme she was not allowed to sell the shares up to 31.3.2023. She sold all the shares in HR. on
1.5.2023.
Fair value of the shares on the above dates was as follows:
▪ Rs.20 per share on 1.1.2023
▪ Rs.28 per share on 31.3.2023
▪ Its.32 per share on 1.5.2023
(iv) On 31-12-2022, she received a loan of Rs.400,000 from HPL. The loan carries a mark-up of MO per
arum The prescribed benchmark rate is 10%.
(v) She won the best executive employee award of HPL and received a laptop having a fair market value
of Rs.100,000.
(vi) An amount of Rs.355,000 was received from her spouse as support payment, under an agreement
to live apart.
(vii) She paid Rs.105,000 as zakat under the Zakat and Ushr Ordinance, 1980.
(viii)Donation of Rs.70,000 was paid to an approved organization
Required:
Compute the taxable income, tax liability and tax payable for the tax year 2023.
Note: Show all relevant exemptions, exclusions and disallowances.
(Marks 21)
Question # 16
Spring 2014 Q. 1
Qamar is engaged in the business of manufacturing and repair of electric motors. His accountant has
prepared the following tax computation for the tax year 20X4:
Rs.000
45,000
Sale of manufactured motors
Less: Cost of sales and administrative expenses
(excluding depreciation for the year)
Income before depreciation
Less: Tax depreciation for the year
Less: Brought forward business loss from tax year 20X3
(Total business loss was Rs.4 million)
Business income after adjusting business loss
Add: Interest income received from a commercial bank
* Income from other sources
Taxable income
33,000
12,000
9,000
3,000
3,000
500
850
Computation of tax
Tax liability
Less: Tax deducted by bank on interest income (500,000 x 10%)
Tax payable
1350
1,350
125
50
75
Following expenses are included in the cost of sales and administrative expenses:
Description
Travelling expenses include travel and hotel expenses of Qamar’s visit to Malaysia
for attending a trade fair
Electricity c charges paid for Qamar’s residence
Damages paid to a distributor for delayed supplies
Donations to a non-profit organization
Salary paid to Bari who is Qamar’s brother. Advance tax has been deducted from
the salary
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Rs.000
100
150
200
300
720
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Fine paid to the Ministry of Environment for infringement of environmental safety
laws
Unabsorbed depreciation brought forward from previous tax year
200
500
Qamar is not satisfied with the tax return prepared by his accountant and has requested you to review
the return.
Required:
Compute the revised taxable income of Qamar, and tax payable by or refundable to him for the tax year
20X4. Briefly comment on treatment of the above items of expenses in your tax computation. (15)
Question # 17
Autumn 2014 Q. 1
Sultan is working as electronic engineer with Ansari Electrical Company Limited (AECL).
He has provided you with the following information for the tax year ended 30 June 2023:
(a) His monthly cash remuneration in AECL is as follows:
Basic salary
Medical allowance
Utilities allowance
Market value of rent free accommodation
Rupees
480,000
48,000
55,000
75,000
(b) He was also provided the following benefits in accordance with the terms of his employment:
(i) Leave encashment amounting to Rs. 300,000.
(ii) Hospitalization cost is covered by an insurance policy upto the amount of Rs. 1.5 million. The
insurance premium relating to this benefit amounted to Rs. 55,000.
(iii) He is allowed to use his personal car for office use. Reimbursement of car running and
maintenance expenses amounted to Rs. 550,000. 15% of these expenses pertain to personal
use.
(c) Rs. 200,000 were received from a private limited company for attending board meetings.
(d) A lump sum amount of Rs. 1.2 million was received as the author of a literary work. Sultan took
three years to complete this literary work.
(e) Sultan is also a part time singer and owns a studio. He sold the premises in which the studio was
situated for Rs. 10 million and shifted his musical instruments to new premises which he purchased
for Rs. 15 million. He received Rs. 2.5 million from his father in cash as loan to pay for his new studio.
The previous premises was purchased several years ago for Rs. 1.4 million and had a tax written
down value of Rs. 600,000 at the time of disposal.
(f) The net income from the studio for tax year 2023 was Rs. 990,000. The expenses include salaries of
two workers at Rs. 15,000 and Rs. 18,000 per month and utility bills amounting to Rs. 110,000. All
expenses were paid in cash.
(g) He won a car, in a competition held by Star Motor Limited for promotion of its sales. The fair market
value of the car was Rs. 850,000.
(h) He gifted 40 fans having a fair market value of Rs. 100,000 to an approved charitable organisation.
(i) An amount of Rs. 500,000 was paid by him as contribution to an approved pension fund.
Required:
Under the provisions of the Income Tax Ordinance, 2001 compute the taxable income and tax thereon
for the tax year 2023. Tax rates are given on the last page.
(20)
Question # 18
Spring 2015 Q. 1
On 1 July 20X4, Tahir commenced business of manufacturing garments. Income statement of the
business for the year ended 30 June 20X5 is as follows:
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Notes
Sales
Less: Cost of sales
Rs. in 000
49,330
(i)
Gross profit
(39,150)
10,180
Less: Administrative and selling expenses
(ii)
(9,140)
Financial charges
(iii)
(2,500)
Other charges
(iv)
(1,358)
(2,818)
Add: Other income
3,875
Profit before taxation
1,057
Notes to the income statement:
(i)
On 15 July 20X4, used machinery was imported from China valuing Rs. 1,500,000. Depreciation
@ 15% was charged on machinery for the whole year and is included in cost of sales.
(ii)
Administrative and selling expenses include:
▪
Rs. 975,000 paid for the purchase of computer software. The software is likely to be used for
twelve years.
▪
Cost of preparation of a feasibility study amounting to Rs. 250,000 which was issued prior to the
commencement of business.
▪
Salary of Rs. 50,000 per month was paid to Tahir’s brother who handles the financial matters of
the business.
(iii) Financial charges include Rs. 80,000 pertaining to a vehicle obtained on lease from a leasing
company. The cost of vehicle was Rs. 1,300,000. Depreciation of Rs. 260,000 has been included in
administrative and selling expenses. Lease rentals paid during the year amounted to Rs. 300,000.
(iv) Other charges include:
▪
running and maintenance expenses of vehicle amounting to Rs. 295,450. Use of vehicle for
personal purposes was approximately 20%.
▪
provision for bad debts amounting to Rs. 25,000.
Other information:
(i) Tahir was working in UAE for the past five years and had come back to Pakistan in April 20X4. He
received an amount equivalent to Rs. 150,000 from his ex-employer as differential amount on his final
settlement in August 20X4.
(ii) He sold a plot for Rs. 3,500,000 which was inherited from his father in 20W9. Fair market value of
the plot at the time of inheritance was Rs. 1,500,000.
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(iii)
5,000 shares were purchased for Rs. 600,000 from initial public offering of a new listed
company.
(iv) Premium of Rs. 300,000 was paid on Tahir’s life insurance policy.
Required:
Under the provisions of the Income Tax Ordinance, 2001 compute the taxable income and tax liability of
Tahir for the tax year 20X5. Provide comments in respect of items which do not appear in your
computation. (18)
Question # 19
Autumn 2015 Q. 1
Mukarram is working as a Commercial Manager in Airmen Engineering Limited (AEL), an unlisted public
company, for the past many years. He derived following emoluments during the tax year ended 30 June
2023:
Basic salary (per month)
Medical allowance (per month)
Housing allowance (per month)
Travel allowance (per month)
Rupees
250,000
37,500
25,000
11,500
In addition to above, Mukarram was also provided the following:
(i) A used company maintained car for both business and personal use. This car was provided to him on
1 July 2022 in replacement of his previous car. This car was purchased three years ago at a price of
Rs. 1,000,000. However, the fair market value of the car on 1 July 2022 was Rs. 800,000. On 1
September 2022, in accordance with the terms of his employment, AEL transferred the previous car
to Mukarram free of cost. The market value of the car at the time of transfer was Rs. 400,000
whereas its book value was Rs. 200,000. On 1 June 2023, Mukarram sold this car to his neighbor at
a price of Rs. 350,000.
(ii) Performance related bonus of Rs. 500,000. The bonus was however, paid to him on 5 July 2023.
(iii) Two free buffet dinner coupons per month, one each for Mukarram and his wife in a five star hotel.
The coupons were provided in line with AEL’s policy for its management employees. The dinner
costs AEL Rs. 2,000 per person.
(iv) Reimbursement of Rs. 20,000 in respect of telephone and internet charges. 20% of this amount was
spent by Mukarram in performance of his official duties.
(v) Two air-conditioners and a washing machine for use at home. The combined book value of these
appliances was Rs. 300,000. The appliances are returnable to AEL after three years’ time. AEL
charged 10% depreciation on these appliances.
(vi) An option to purchase 20,000 shares in AEL on 1 May 2023 at Rs. 25 per share. The break-up value
of AEL on that date was Rs. 85 per share.
Other information relevant to tax year 2023 is as under:
(i) On 1 April 2023, Mukarram sold a diamond ring to his brother Zohaib for Rs. 250,000. The ring was
purchased on 1 January 20X3 at a price of Rs. 280,000.
(ii) Mukarram has 65 acres of agricultural land in Badin and a building in immediate vicinity of the land.
Mukarram rented out 30 acres of his land along with the building to Dino who is a cultivator. Dino
uses the building as a store house. Mukarram received annual rents of Rs. 750,000 and Rs. 325,000
in respect of the land and building respectively.
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Mukarram is also running a small rice husking unit in Badin. He uses entire agricultural produce in
the husking unit which is grown on the remaining portion of his land. During the year he brought
5,000 kilograms of raw rice from his land to the unit for husking. He would have earned Rs. 2,500
per 40 kilogram of raw rice had he sold it directly to the market. His sales from rice husking unit
stood at Rs. 850,000 whereas other operating expenses were of Rs. 400,000.
(iii) On 31 May 2023 a painting was destroyed by heavy rains. Mukarram had purchased the painting on
30 June 2020 for Rs. 100,000. However, due to constant increase in the value of the painting, he had
insured it at a premium of Rs. 15,000. He received insurance claim of Rs. 275,000 on 15 June 2023.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute the
taxable income of Mukarram for tax year 2023. (20)
Question # 20
Spring 2016 Q. 1
Wajahat, aged 48 years, is a marketing manager in Nayaab (Pvt.) Limited (NPL), a company engaged in
the manufacture and supply of tissue papers. The details of his monthly emoluments during the year
ended 30 June 2023 are as under:
Rupees
Basic salary
70,000
Dearness allowance
10,000
Conveyance allowance
8,000
In addition to the above, Wajahat was also provided the following:
(i) Provident fund (PF) contribution of Rs. 8,400 per month. An equal amount per month was
contributed by Wajahat to the fund. Interest income of Rs. 391,000 at the rate of 20% of
accumulated balance of PF was credited to his PF account.
(ii) Reimbursement of electricity bills during the year amounting to Rs. 60,000.
Following further information is also available:
(i) Wajahat received net dividend of Rs. 78,200 from BEE Limited, a company listed on Pakistan Stock
Exchange Limited. Withholding tax and zakat deducted from dividend amounted to Rs. 9,200 and
Rs. 4,600 respectively. He also received dividend of Rs. 65,000 from a company in U.A.E through
normal banking channels. However, no tax was withheld either in Pakistan or U.A.E.
(ii) Wajahat contributed Rs. 890,000 in an approved pension fund under the Voluntary Pension System
Rules, 2005.
(iii) On 1 September 2022, Wajahat started a tuition centre for the students of finance in a posh locality.
He received tuition fees of Rs. 2,198,000 and incurred following expenses:
▪ Monthly salary of Rs. 50,000 paid to himself and Rs. 35,000 to his friend Yousuf who taught
financial accounting at the centre.
▪ Travelling, boarding and lodging expenses of Rs. 300,000. These expenses were incurred by
Wajahat in Sri Lanka for attending teachers training workshop.
▪ Rs. 250,000 against purchase of used computers for the centre.
▪ Other miscellaneous expenses amounting to Rs. 195,000.
(iv) Wajahat’s total taxable income during the previous tax year was Rs. 1,850,000.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute the total
income, taxable income and net tax payable by/refundable to Wajahat during the tax year 2023.
(16)
Note: Show all relevant exemptions, exclusions and disallowances.
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Question # 21
Spring 2016 Q. 4
Lone Traders (LT), a sole proprietorship, is engaged in the business of buying and selling of Maize and
Wheat in bulk quantities. Following information has been extracted from LT’s records for the year ended
31 December 2015:
(i) Wheat sold to food companies in Punjab amounted to Rs. 13,000,000. The sale was made after
allowing discount of Rs. 680,000 to some of the new customers. The gross profit margin was 25% on
gross sales.
(ii) LT paid Rs. 600,000 to a research institute for the development of a formula which is likely to
improve the quality of wheat it purchases from the growers.
(iii) In August 2015, LT signed a future contract with Mubarak Enterprises (ME) for the purchase of 500
metric tons of maize at Rs. 15,800 per metric ton. The delivery was expected to be made in October 2015.
ME also agreed to repurchase the entire lot at the price prevailing on the date of sale.
(iv) In October 2015 price of maize increased to Rs. 18,240 per metric ton and LT sold the entire lot to
ME without taking delivery.
(v) LT incurred expenditure of Rs. 25,000 in respect of above future contract.
(vi) Administrative, selling and distribution expenses amounted to Rs. 2,500,000. These included a
penalty of Rs. 45,000 which was imposed due to late payment of sales tax on wheat.
(vii) Assessed losses brought forward from previous year were as follows:
Trading business loss
Speculation business loss
Capital loss
Rupees
550,000
300,000
250,000
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute LT’s
taxable income/(loss) and the amount of loss to be carried forward, if any, for tax year 2016. (10)
Question # 22
Spring 2016 Q. 8
Baqir, Asad and Rahi are members of an association of persons (BAR) and share profits and losses in the
ratio of 5:3:2 respectively. BAR is engaged in the business of trading consumer electronics and has two
independent branches one each in Tehran and Dubai. Following information has been extracted from
BAR’s profit and loss account for the year ended 31 December 2015:
Sales
Cost of sales
Gross profit
Administrative and selling expenses
Financial charges
Other income
Profit before taxation
Rupees
30,000,000
(20,500,000)
9,500,000
(4,732,000)
(980,000)
1,700,000
5,488,000
Additional information:
Cost of sales includes:
(i) Closing stock which has been valued at net realizable value of Rs. 1,820,000. The cost of closing
stock under absorption costing was Rs. 1,950,000.
(ii) Provision of Rs. 75,000 against slow moving stores and spares.
(iii) Freight charges of Rs. 260,000. These were paid in cash to Momin Goods Transport for transporting
goods to customers in Multan.
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Administrative and selling expenses include:
(i) Commission of Rs. 290,000 paid to Baqir, annual performance award of Rs. 310,000 paid to Rahi
and Rs. 455,000 paid to AB Bank Limited in final settlement of a loan obtained by Asad for the
construction of his house in Muree.
(ii) Provision for bad debts of Rs. 735,000. The opening and closing balances of provision for bad debts
amounted to Rs. 1,100,000 and Rs. 1,435,000 respectively. Bad debts written off include a loan of Rs.
285,000 provided to a supplier.
(iii) Sales promotion expenses of Rs. 275,000. These expenses were paid by Rahi through his personal
credit card.
(iv) Rs. 86,000 paid to an institution operated by Federal Government for the training of industrial
workers in Punjab.
Further information:
For the year ended 31 December 2015 Dubai branch made a profit of Rs. 1,500,000 and Tehran branch
made a loss of Rs. 1,800,000. These figures are not included in the above profit and loss account.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute the
taxable income, net tax payable by BAR and the amount to be carried forward, if any, for tax year 2016.
Assume tax and accounting depreciation is same. (12)
Note: Your computation should commence with the profit before tax figure of Rs. 5,488,000.
Show all relevant exemptions, exclusions and disallowances.
Question # 23
Autumn 2016 Q. 1
Bader is working as General Manager Finance with HiFi Limited (HFL) for the past two years. The details
of his monthly emoluments during the year ended 30 June 2023 are as under:
Basic salary
Medical allowance
House rent allowance
Rupees
250,000
28,000
120,000
In addition to above, Bader was also provided the following:
(i) Rs. 900,000 for signing a bond with HFL. According to the bond Bader would not resign from his
employment before the expiry of 30 June 2025.
(ii) Company maintained car for both official and private use. The car was purchased on 1 August 2022
at a fair market value of Rs. 1,500,000.
(iii) On 1 January 2023 HFL sold an item of inventory to Bader for Rs. 12,000. The net realizable value
of the item of inventory at the end of 31 December 2022 and 30 June 2023 was Rs. 22,000 and Rs.
24,000 respectively. HFL had acquired it in July 2014 at a cost of Rs. 35,000.
(iv) An option was granted to Bader in August 2021 to acquire 2,500 shares in HFL’s parent company,
Mamoo plc. (MP), listed on Hong Kong stock exchange. However, the option was exercisable after
completion of one year of service with HFL. Bader paid an amount equivalent to PKR 200,000 to
acquire the option when the fair market value of the option was PKR 250,000. On 1 September 2015
he paid an amount equivalent to PKR 300,000 to acquire the shares in MP. The shares were issued
to him on 15 September 2022 when the market value of each share was equivalent to PKR 375.
On 15 June 2023 Bader sold 2,000 shares in MP and received net proceeds equivalent to PKR
875,000 in his bank account in Pakistan. This amount was received after deduction of bank charges
of PKR 5,000 and brokerage commission equivalent to PKR 10,000.
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Other information relevant to tax year 2023 is as under:
(i) On 1 July 2015 Bader received following payments from his previous employer Sultan Hospital
Limited:
▪ Rs. 600,000 in respect of termination benefits under an agreement.
▪ Rs. 485,000 against gratuity under an unapproved scheme.
(ii) On 1 November 2022 Bader fell ill and was admitted to Sultan Hospital Limited. The hospital
incurred Rs. 65,000 on his treatment but did not charge anything to Bader.
(iii) On 1 December 2022 he paid a premium of Rs. 300,000 on a life insurance policy.
(iv) On 1 January 2023 Bader purchased 35,000 listed shares in Muft Limited (ML) at a price of Rs. 25
per share. On 20 March 2023 he fully subscribed 15% right shares offered by ML to its existing
shareholders at a price of Rs. 20 per share.
(v) Withholding tax deducted from Bader’s salary during tax year 2023 amounted to Rs. 1,105,000.
(vi) His total assessed taxable income and total taxes paid thereon during the three preceding tax years
amounted to Rs. 10,500,000 and Rs. 1,260,000 respectively.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute the
taxable income and net tax payable by or refundable to Bader for tax year 2023.
(15)
Question # 24
Spring 2017 Q. 1
Mushtaq is a sole proprietor of Mushtaq Enterprises (ME) engaged in the business of manufacturing of
different products. ME’s profit and loss account shows profit before taxation of Rs. 1.8 million for the
year ended 30 June 20X7. A review of ME’s records has revealed the following information.
(i) ME employs five salesmen. Rs. 22,000 per month were paid to each salesman in cash which includes
reimbursement of Rs. 6,000 per month incurred on entertainment of customers at the business premises.
(ii) Administrative expenses include Rs. 150,000 which were paid to a research institute in China for
the purpose of developing a new product.
(iii) Accounting loss on the sale of patents was Rs. 65,000. The tax written down value of these patents
at the beginning of the year was Rs. 430,000 and these were sold for Rs. 524,000. Amortization charged
to the profit and loss account on these patents for the current year was Rs. 25,000.
(iv) Receivables from Atif and Aslam which had been written off in the previous year were recovered.
Details are as follows:
Atif
Aslam
----------- Rupees -----------Claimed bad debts in last tax return
800,000
1,200,000
Allowed by tax authorities last year
550,000
600,000
Amount recovered during the year
700,000
400,000
(v) ME has opened a sales office in Dubai. In this respect, furniture costing Rs. 850,000 with written
down value (WDV) of Rs. 650,000 was shifted to Dubai office. The tax WDV of the furniture at the
beginning of the year was Rs. 610,000.
(vi) Accounting depreciation for the year is Rs. 580,450. However, no depreciation has been provided
on the following fixed assets purchased on 1 March 20X7:
Furniture
Used machinery imported from Germany
Rupees
200,000
500,000
(vii) Tax depreciation for the year, prior to the adjustments mentioned in (vi) above, amounted to Rs.
456,400.
(viii) Advance tax paid u/s 147 was Rs. 200,000.
(ix) The assessed business losses of tax year 20X1 brought forward in year 20X7 are Rs. 830,000. These
include unabsorbed tax depreciation amounting to Rs. 705,000.
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Other transaction of Mushtaq
On 1 June 20X7, he sold 6,000 shares for Rs. 432,000 out of 15,000 shares which he received on 1 May
20X4, on the death of his father. The fair market value of shares on the date of transfer to Mushtaq was
Rs. 25 per share.
Required:
Under the provisions of Income Tax Ordinance, 2001 and rules made thereunder, compute taxable
income and net tax payable by or refundable to Mushtaq for the year ended 30 June 20X7.
Question # 25
Autumn 2017 Q. 1
Taqi Ahmed is working as Director Marketing with Zee Textiles Limited (ZTL) for the last twenty five
years. Details of his monthly emoluments during the year ended 30 June 2023 are as under:
Basic salary
Conveyance allowance
Medical allowance
Rupees
440,000
44,000
44,000
In addition to the above, Taqi Ahmed has provided the following information:
(i) He and his family members are covered under the health insurance policy in accordance with the
terms of employment. The amount of annual premium paid by ZTL was Rs. 200,000.
(ii) During the year, daily allowance of Rs. 400,000 was received to meet the expenses for working on
assignments at ZTL’s factories located in Lahore and Multan.
(iii) On 31 July 2023, the HR Committee approved a performance bonus for all employees for the year
ended 30 June 2023. Taqi received Rs. 1,200,000 as performance bonus on 15 August 2023.
(iv) On 31 March 2023, in recognition of completion of twenty five years of his service with ZTL, the
board of directors approved to waive the outstanding amount of loan taken by Taqi Ahmed. This
interest free loan of Rs. 2,500,000 was taken on 1 January 2021 and was repayable in fifty equal
monthly instalments commencing from May 20X5. The prescribed benchmark rate is 10% per
annum.
(v) During the year, he received Rs. 100,000 for attending board meetings of ZTL. No tax was withheld
from this amount.
(vi) Amount of tax withheld by ZTL from his salary amounted to Rs. 2,000,000.
Other information relevant to tax year 2023 is as under:
(i) Salary is transferred to the bank account on 10th of the following month.
(ii) 10% annual increase was given to him effective 1st July in each of the last three years.
(iii) Taqi has given his house on rent to his cousin at annual rent of Rs. 1,500,000. The rent was inclusive
of amenities and utilities of Rs. 25,000 per month. However, annual rent for a similar house with
same amenities and utilities, in the vicinity, is Rs. 1,800,000.
(iv) He acquired 15,000 shares of a listed company from Privatization Commission of Pakistan at a price
of Rs. 60 per share on 15 January 2022. He claimed tax credit of Rs.90,000 on such investment,
against the tax payable for the tax year 2022. On 15 June 2023 he sold all the shares at the rate of
Rs. 85 each.
(v) On 31 August 2022, he was entitled to receive 5,000 interim bonus shares from Arian Limited (AL)
a listed company. The market value of these shares on that date was Rs. 22 per share.
(vi) He also received Rs. 150,000 as cash dividend declared by AL. The share registrar incorrectly
treated Taqi as non-filer and deducted withholding tax accordingly.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute under
correct head of income, the total income, the taxable income and net tax payable by or refundable to Taqi
Ahmed for the year ended 30 June 2023. (16)
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Question # 26
Spring 2018 Q. 1
Mr. Qateel, a resident individual, is engaged in the manufacture of various consumer goods under the
name and style ‘Qateel Enterprises (QE)’. The following information has been extracted from the records
of QE for the financial year ended 30 June 20X8.
Rupees
Total turnover
28,500,000
Cost of sales
(26,155,000)
Gross profit
2,345,000
Operating expenses
(4,500,000)
Operating loss
(2,155,000)
Finance charges on lease of machinery
(35,703)
Other income
5,000,000
Profit before tax
2,809,297
Additional information:
(i) Cost of sales includes:
▪ Rs. 45,000 paid as fine for violation of contract with a customer for delay in supply of goods.
▪ accounting depreciation of Rs. 1,900,000 (including depreciation on leased assets).
(ii) Operating expenses include:
▪ Rs. 450,000 paid for renewal of a manufacturing licence for fifteen years.
▪ vehicle tax paid in cash amounting to Rs. 55,000 for eight office cars.
▪ Rs. 200,000 paid as security deposit to K-Electric (KE) for replacement of transformer at the
factory.
▪ Rs. 300,000 collected by KE as advance tax through monthly electricity bills.
▪ cash donation to poor families amounting to Rs. 64,600 and donation of Rs. 2,000,000 paid
through cheque to Edhi Foundation, which is listed in Part 1 of the Second Schedule of the Income
Tax Ordinance, 2001.
▪ penalty of Rs. 25,000 imposed by the Commissioner Inland Revenue for late filing of
▪ annual return of income for the tax year 20X7.
▪ entertainment expenditure of Rs. 128,000 incurred on arrival of foreign customers for business
purposes.
(iii) Other income includes:
▪ dividend of Rs. 580,000 received from listed companies. The amount is net of income tax at the
rate of 15% and Zakat of Rs. 100,000 deducted under the Zakat and Usher Ordinance, 1980.
▪ Capital gain of Rs. 1,200,000 from sale of shares of a private limited company.
▪ Shares were acquired on 1 August 20X3.
(iv) On 30 June 20X8, leased machinery was transferred to Qateel on maturity of lease. The leasing
company was asked to adjust the amount of security deposit against the residual value of Rs. 100,000.
The date of commencement of lease was 1 July 20X3.
Lease rentals paid during the year amounted to Rs. 270,000.
On the date of maturity, the accounting written down value and market value of the machinery was
Rs. 590,490 and Rs. 800,000 respectively.
(v) During the year, a warehouse was constructed for storage of goods at a cost of Rs. 1,040,000. No
accounting depreciation has been recorded on it.
(vi) Tax depreciation for the tax year 20X8 without considering the effect of para (iv) and (v) above,
amounted to Rs. 1,560,000.
(vii) Advance income tax paid during the year amounted to Rs. 480,000.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute the total
income, taxable income and net tax payable by or refundable to QE for the year ended 30 June 20X8. (18)
Note: Ignore minimum tax under section 113.
Show all the relevant exemptions, exclusions and disallowances.
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Question # 27
Autumn 2018 Q. 1
Ahmer Ghazi has been working as director production in Delta Pakistan Limited (DPL) for last three
years. He received following monthly emoluments from DPL during the year ended 30 June 2023:
Basic salary
House rent allowance
Medical allowance
Rupees
650,000
95,000
70,000
In addition to the above, the employer also provided following to Ahmer Ghazi:
(i) Health insurance for him and his family members. The amount of annual premium paid by DPL was
Rs. 50,000.
(ii) Return air ticket for Dubai worth Rs. 180,000 for him and his family as a reward for achieving the
production target.
(iii) Loan of Rs. 5 million was given to him on 1 August 20X7 at 6% per annum.
(iv) Withholding tax of Rs. 1,500,000 deducted from his salary was reimbursed to him.
Other information relevant to the tax year 2023 is as under:
(i) Under an employee share scheme 10,000 shares of DPL were allotted to Ahmer Ghazi on 1 January
2021. According to the scheme, he was not allowed to sell/transfer the shares up to 31 December
2021. On 1 April 2023, he sold 6,000 shares of DPL for Rs. 33 per share. The face value of each share
is Rs. 10. Fair market values of each share on different dates were as follows:
▪ Rs. 20 per share on 1 January 2021
▪ Rs. 23 per share on 1 January 2022
▪ Rs. 29 per share on 30 June 2023
(ii) On 30 October 2022 Ahmer Ghazi let out his apartment at a monthly rent of Rs. 30,000 to his friend.
The fair market rent of the apartment is Rs. 40,000 per month.
(iii) He is a part time singer and earned Rs. 225,000 by allowing a private TV channel to use his song in
a TV drama.
(iv) He purchased Sukuks of a listed company amounting to Rs. 1,400,000 as an original allottee, on 30
June 2023.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute the
following for the year ended 30 June 2023:
(a) Total income
(10)
(b) Taxable income (01)
(c) Net tax payable or refundable
(05)
Note: Ignore minimum tax under section 113
Question # 23 Autumn 2018 Q. 5
Saleem is a resident taxpayer and runs a fitness centre in DHA Karachi. He files his return of income
regularly. Following information pertains to his business for the tax year 2026:
i.
Accounting profit before tax amounted to Rs. 2162500
ii. Administrative expenses include annual rent of the premises used for fitness centre amounting to
Rs. 1,560,000. Withholding tax of Rs. 144,000 was deducted from the rent payment but was not
deposited in the government treasury.
iii. A passenger transport vehicle used for pick and drop of employees of fitness centre was disposed
of for Rs. 8,000,000. The vehicle was purchased for Rs. 8,500,000 in tax year 2025. No accounting
depreciation was provided during the year 2026. Accounting gain of Rs. 400,000 has been recorded
in the profit or loss account
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iv.
v.
On 1 July 2025, a car was acquired on finance lease for Rs. 3,000,000. Advance tax paid at the time
of acquisition and registration of vehicle aggregated Rs. 85,000. The vehicle has been used 70% for
business purposes and 30% for Saleem’s personal use.
Accounting depreciation of Rs. 600,000 and financial charges of Rs. 462,000 were recorded in the
profit or loss account. Lease rentals paid during the year amounted to Rs. 857,000.
During the year, Saleem recorded gain of Rs. 50,000 on disposal of shares. Details are as under:
Name of investee company
Sun (Private) Limited
Moon Limited - a listed company
Planet Limited - a listed company
Sold on
1 Aug 2025
15 Sep 2025
1 Feb 2026
Purchased on
1 Sep 2020
1 Jan 2023
1 Jan 2023
Gain/(loss) on disposal (Rs.)
500,000
(700,000)
250,000
50,000
Required:
Compute Saleem’s taxable income under appropriate head of income and tax liability for the tax year
2026. (12)
Question # 29
Spring 2019 Q. 1
Mustafa, Ali and Zain are partners of a resident firm in Pakistan, under the name and style MAZ
Enterprises (MAZE) which is engaged in manufacturing and local supply of auto spare parts. All
partners have equal share of profits and losses in the firm.
Following information has been extracted from accounting records of MAZE for the tax year 20X9:
Sales
Cost of goods sold
Gross profit
Administrative and selling expenses
Financial charges
Other income
Profit before tax
Rs. in '000
140,400
(91,260)
49,140
(21,430)
(15,740)
(37,170)
1,900
13,870
Additional information:
(i) The above accounts have been prepared on cash basis and stock-in-trade has been valued on the
prime-cost method. However, the partners want to change the method of accounting from cash basis
to accrual basis. In this respect, following information has been gathered:
Stock-iii-trade using prime-cost method
Stock-in-trade using absorption-cost method
Opening balances Closing balances
-------------- Rs. in ‘000 ------------5,200
7,500
5,900
8,800
(ii) Cost of goods sold includes cost of used machinery imported from China on 31 July 20X8 amounting
to Rs. 2,110,000. The cost includes payment of custom duty of Rs. 90,000 and income tax of Rs.
110,000 to the Collector of Customs.
(iii) Administrative and selling expenses include:
▪ payment of Rs. 380,000 to a local hotel for holding annual eid-milan party for the employees, key
customers and their families.
▪ payment of a fixed monthly remuneration of Rs. 150,000 to each partner.
▪ payment of Rs. 180,000 for purchase of accounting software on 1 January 20X9. The software is
expected to be used for fifteen years.
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(iv) Financial charges are net of interest income of Rs. 360,000 (net of tax @ 10% deducted by the bank),
earned by the firm on its savings accounts.
Required:
Under the provisions of Income Tax Ordinance, 2001 and Rules made thereunder, compute the total
income, taxable income and tax payable by MAZE using accrual basis of accounting. (10)
Note: Show all the relevant exemptions, exclusions and disallowances.
Question # 30
Autumn 2019 Q. 1
Saeed, a citizen of Pakistan, was working on a foreign vessel belonging to Delta Shipping Company (DSL)
based in Spain for the past three years. His monthly salary was USD 15,000 which was remitted to his
Pakistani bank account through normal banking channel. The amount received during the tax year 2023
was converted to Pak Rupees at an average exchange rate of USD 1 = PKR 131.
On 1 October 2022, he resigned from DSL and joined Haris Pharma Limited (HPL) in Pakistan as a
General Manager. He was offered following monthly salary and allowance in HPL:
Basic salary
Medical allowance
Rupees
600,000
66,000
In addition to the above, he was also provided the following:
(i) Bonus equal to two monthly basic salaries. However, bonus amount was adjusted in proportion to
the duration of his stay in the company. The bonus amount was paid to him on 5 July 2023.
(ii) Two company maintained cars. Both cars were purchased on 1 October 2022. The car costing Rs.
3,500,000 was used for official purposes whereas the car costing Rs. 1,900,000 was used for
personal purposes.
(iii) Free lunch from the restaurant owned by one of HPL’s directors. The fair market value of food
provided to him during the year was Rs. 125,000.
(iv) A special allowance of Rs. 20,000 per month to meet expenses wholly and necessarily incurred in
the performance of his official duties. Actual expenses incurred by him during the year were Rs.
150,000.
(v) Provident fund contribution of Rs. 60,000 per month. An equal amount per month was also
contributed by Saeed to the fund.
Other information relevant to tax year 2023 is as under:
(i) On 1 December 2022, Saeed obtained a loan of Rs. 25 million from a scheduled bank at 15% markup per annum to acquire a residential house.
(ii) During the year, he received dividends of Rs. 575,000 from a listed company. The amount was net
of withholding income tax at the rate of 15% and Zakat of Rs. 62,500 deducted under the Zakat and
Usher Ordinance, 1980.
(iii) Withholding tax deducted by HPL from Saeed’s salary during the tax year 2023 amounted to Rs.
1,300,000.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute under
the appropriate head of income, the total income, taxable income and net tax payable by or refundable
to Saeed for the tax year 2023. (17)
Question # 31
Autumn 2019 Q. 2(b)
During the tax year 2023 Amjad carried out the following transactions in respect of following properties:
On 1 July 2022, Amjad purchased a factory building in Sukkur along with the installed machinery at the
price of Rs. 9 million and Rs. 3 million respectively. To manage the shortage of funds of Rs. 2,000,000, he
borrowed the same on
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(i) 1 July 2022 from his friend Shamshad through a crossed cheque. The loan carries interest at the rate
of 18% per annum.
On 1 January 2023, he let out this building along with the machinery to Basit at a monthly rent of Rs.
500,000 payable in advance.
(ii) On 1 July 2022, Amjad let out his residential property situated in DHA Karachi to Mirza Limited at a
monthly rent of Rs. 300,000. Rent for the two years was received in advance on 1 August 2022.
(iii) On 1 July 2022, Amjad also entered into an agreement with Zeeshan for the sale of his plot situated
in Quetta for Rs. 50 million. The plot had been purchased for Rs. 40 million in 2015. Under the terms of
sale agreement, he received Rs. 5 million at the time of signing the agreement and the balance was to be
received on 30 September 2022. However, due to financial difficulties, Zeeshan failed to pay the balance
amount on the due date and consequently, Amjad forfeited the advance in accordance with the terms of
the agreement. On 10 April 2023, he finally sold the plot to Jamshed for Rs. 65 million.
(iv) Following expenditures were incurred by Amjad in respect of his properties in Sukkur and Karachi:
Details of expenditures
Repair & maintenance - building
- machinery
Ground rent
Insurance - building
Total
Property situated in
Sukkur
Karachi
270,000
70,000
50,000
50,000
10,000
150,000
20,000
520,000
100,000
Required:
In view of the provisions of the Income Tax Ordinance, 2001 compute under appropriate head of income,
taxable income of Amjad for the tax year 2023. (10)
Question # 32
Spring 2020 Q. 1
For the purpose of this question, assume that the date today is 31 August 2020.
Shahid is engaged in the business of manufacturing and supplying of auto parts. Following is the extract
of his profit or loss statement for the tax year 2020:
Rs. in ’000
Sales
29,058
Cost of goods sold
(18,724)
Gross profit
10,334
Operating expenses
(3,137)
Financial charges
(2,030)
Other income
1,260
Profit before tax
6,427
Additional information:
(i) The above accounts have been prepared on cash basis and stock-in-trade has been valued on prime
cost method. However, Shahid wants to change the method of accounting from cash basis to accrual basis.
In this respect, following information has been gathered:
Opening balances Closing balances
---------Rs. in ’000--------Stock-in-trade using prime cost method
1,800
2,800
Stock-in-trade using absorption cost method 2,300
3,200
(ii) Cost of goods sold includes:
▪ purchase of packing material of Rs. 440,000 from Nasir Traders. No withholding tax was
deducted at the time of payment.
▪ freight charges of Rs. 85,000. These were paid in cash for transporting goods from suppliers.
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(iii) Operating expenses include:
▪ salary of Rs. 80,000 per month paid to Shahid’s brother who handles administrative matters of
the business.
▪ expenditure of Rs. 950,000 incurred on the development of a product which is expected to
generate revenue for five years.
▪ penalty of Rs. 15,000 for late filing of income tax return.
(iv) Financial charges include profit on debt of Rs. 450,000 earned on fixed deposit account maintained
with a bank. The bank withheld income tax and Zakat amounting to Rs. 45,000 and Rs. 93,750
respectively.
(v) Other income includes:
▪ capital gain of Rs. 45,000 received, net of withholding tax of Rs. 6,750, on sale of 20,000 shares
in Metal Limited (ML) in November 2019. ML is listed on PSX. On 1 January 2018, Shahid
purchased these shares for Rs. 200,000 at initial public offering. He had claimed a tax credit of
Rs. 15,000 on such investment in tax year 2018.
▪ rent of Rs. 980,000 received from an agriculture land in Badin. No withholding tax was deducted
at the time of receipt.
(vi) Tax depreciation for the year amounts to Rs. 680,000.
(vii) Tax deducted at source by customers amounts to Rs. 875,000.
(viii) The unabsorbed tax depreciation brought forward from tax year 2019 amounts to Rs. 568,000.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute total
income, taxable income and net tax payable by or refundable to Shahid for the tax year 2020. (Use accrual
basis of accounting) (18)
Note: Your computation should commence with profit before tax figure.
Ignore minimum tax under section 113.
Show all relevant exemptions, exclusions and disallowances.
Question # 33
Autumn 2020 Q. 1
Sageer, a resident individual, is working as a full time professor at Knowledge Institute (KI) which is a
non-profit education and research institution and is duly recognized by Higher Education Commission.
KI is entirely owned and funded by Zinger Limited (ZL), a company listed on the Pakistan Stock Exchange.
Details of his monthly remuneration during the year ended 30 June 2023 are given below:
Basic salary
Medical allowance
Fair market rent of accommodation
Rupees
200,000
20,000
100,000
In addition to the above, he was also provided the following:
▪ Health insurance for Sageer and his dependents as per the terms of employment. For this purpose,
KI is paying annual insurance premium of Rs. 40,000.
▪ Provident fund contribution of Rs. 15,000 per month to a recognized provident fund.
▪ An equal amount was also contributed by Sageer to the fund.
Additional information
(i) On 1 July 2022, Sageer was granted an option to acquire 10,000 shares in ZL at a price of Rs. 105
per share under an employee share scheme. Sageer bought the option on the same date by paying
Rs. 175,000 to KI when the fair market value of the option was Rs. 200,000. He exercised the option
on 30 September 2022 when the fair market value was Rs. 130 per share.
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As per the scheme, he was not allowed to sell or transfer the shares before 31 December 2022. On
31 December 2022, the fair market value of ZL’s shares was Rs. 142. On 30 May 2023, he sold 5,000
of these shares at Rs. 135 per share.
(ii) On 1 July 2022, Sageer obtained an interest free loan of Rs. 1,500,000 from KI in exchange for which
he agreed to waive the interest receivable on his provident fund balance maintained with KI.
Interest provided on provident fund balance for the year was 8%. The prescribed benchmark rate
is 10%.
(iii) On 31 August 2022, he received leave encashment of Rs. 100,000 relating to previous year.
(iv) During the year, tax of Rs. 160,000 was deducted at source by KI.
Other information relevant to tax year 2023:
(i) On 15 January 2023, he sold a shop situated in Karachi for Rs. 15,000,000. He had purchased this
shop in 2021 for Rs. 19,000,000 out of which Rs. 5,000,000 was paid in cash.
(ii) On 1 March 2023, he sold a residential plot situated in Faisalabad for Rs. 18,000,000. The plot was
inherited from his father in 2014. Fair market value of the plot at the time of inheritance was Rs.
7,000,000.
(iii) In June 2023, Sageer independently developed learning courses for sale through a web based
marketplace managed by a company situated outside Pakistan. On 25 June 2023, he received USD
4,260 into his dollar account from sale of these courses. Withholding income tax @ 8% was
deducted from the receipt as per the income tax laws of the foreign country.
Relevant exchange rates were as follows:
25 June 2023
30 June 2023
Average exchange rate for June
2023
USD 1 = PKR 168
USD 1 = PKR 169
USD 1 = PKR 168.5
(iv) On 1 June 2023, Sageer paid Rs. 2,500,000 as donation to a non-profit organization listed in the
Second Schedule of the Income Tax Ordinance, 2001.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute the
taxable income and net tax payable by or refundable to Sageer for the year ended 30 June 2023. Show all
relevant exemptions, exclusions and disallowances. (19)
Question # 34
Autumn 2020 Q. 4
(a) Farheen is a resident filer and has provided following information pertaining to tax year 2020:
(i) She owns a bungalow situated in Multan which was given on rent to Abbas under a rental agreement
of five years which expired on 31 March 2020. Details of payments received as per the rent
agreement are given below.
Rent
Security guards’ salaries
Non-adjustable security deposit
Rs. 175,000 per month
Rs. 50,000
Rs. 2,500,000
On expiry of the rental agreement, Farheen refunded the security deposit to Abbas and rented out
the bungalow to a new tenant Zafar on the same terms and conditions.
Farheen pays Rs. 40,000 per month to a security services company which provides security guards
at the bungalow.
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(ii) She owns a residential plot in Karachi. On 1 March 2020, she decided to sell the plot to Mehreen for
Rs. 2,200,000 and received a deposit of Rs. 220,000. On 1 June 2020, she forfeited the deposit on
refusal of Mehreen to purchase the plot.
(iii) On 1 December 2017, she had acquired a furnished office on monthly rent of Rs. 5,000 for her own
use and had paid a non-refundable amount of Rs. 2,000,000 to the previous tenant for vacating the
office. During the year, she received an offer of Rs. 2,400,000 from Shehroz to vacate this office
which she accepted and received the amount on 1 March 2020.
(iv) On 1 October 2019, she inherited a factory with plant and machinery from her father and let it out
on 1 December 2019 at a monthly rent of Rs. 500,000.
(v) Legal and professional charges of Rs. 40,000 were paid for preparation of rental agreements.
(vi) On 15 November 2019, she received income tax refund of Rs. 180,000 related to tax year 2017. This
amount included Rs. 30,000 being additional payment on delayed refund.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute the total
income of Farheen under appropriate heads of income for the tax year 2020. (07)
(b) Ahmed has completed his MBA from a university in USA. He had been living there since August 2013
for his education and came to Pakistan only once in 2017 i.e. from 10 March 2017 to 30 September
2017 and then went back to USA to complete his MBA. Along with his studies, he was also doing a
part time job at a restaurant in USA till November 2019. He returned to Pakistan on 1 December
2019 and commenced a trading business from 1 January 2020.
Below is the computation for taxable income/loss for the tax year 2020:
Income from Salary
Salary from restaurant in USA
Income from business
Revenue
Less: Deductions
Cost of goods sold
Selling and administrative expenses [Note A]
Donation
[Note B]
Taxable income/(loss)
Pakistan
Foreign
source
source
Total
income
income
-------------------Rupees------------------840,000
840,000
4,000,000
4,000,000
(2,200,000)
(2,820,000)
(600,000)
(1,620,000)
(2,200,000)
(2,820,000)
(850,000)
(1,030,000)
(250,000)
590,000
Note A: Selling and administrative expenses include the following:
(i) Salaries of Rs. 840,000 paid to two employees equally in cash. Withholding income tax was deducted
as required under Income Tax Ordinance, 2001.
(ii) Rs. 600,000 in respect of the feasibility study which was conducted before commencement of the
business.
Note B: Donation of Rs. 600,000 was paid to a charitable hospital in Pakistan and Rs. 250,000 was paid
to a non-profit organization in USA.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, comment on the
above tax computation for tax year 2020. Give suggestion(s) wherever required. (08)
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Question # 35
Spring 2021 Q. 3
Muhammad Asghar owns an industrial undertaking under the name and style of Asghar & Company (AC)
which is engaged in the business of manufacturing pharmaceutical products. Following information
is available for the year ended 31 December 20X1:
Rs. in '000
Turnover
324,850
Cost of goods sold
(217,197)
Gross profit
107,653
Administrative and distribution expenses
(88,980)
Marketing expenses
(19,765)
Other income
3,560
Profit before tax
2,468
Additional information:
(i) Cost of goods sold includes:
▪ Raw materials of Rs. 7,800,000. No withholding tax was deducted at the time of payment.
▪ accounting depreciation of Rs. 2,100,000 on plant and machinery.
▪ provision for slow moving inventory of Rs. 1,800,000.
(ii) Administrative and distribution expenses include:
▪ Rs. 676,500 paid to a local hotel for holding annual Eid-Milan party for the employees and their
families.
▪ Rs. 1,235,000 paid as penalty to a customer in settlement of his claim for damages under a
contract for the supply of a batch of vaccines. Laboratory tests and in-house investigations
revealed that the level of impurities in the vaccines exceeded the acceptable level as agreed in
the contract.
▪ Rs. 2,300,000 paid as donation to a hospital established by the local government.
(iii) Marketing expenses include a reward of Rs 500,000. The reward was paid in cash to one of the
salesmen for exceeding his sales target.
(iv) Other income includes:
▪ dividend of Rs. 174,000. This amount was received from a listed company after deduction of
income tax at the rate of 15% and Zakat of Rs. 30,000 deducted under the Zakat and Usher
Ordinance, 1980.
▪ gain of Rs. 660,000 on sale of shares in Akash (Pvt) Limited (APL) in November 20X1. 60% of
the shares in APL are owned by the Federal Government. AC purchased these shares in June
20X0.
Other information:
(i) A second hand plant was imported from France at a cost of Rs. 2,500,000. Withholding tax of Rs.
150,000 was deducted at import stage. The plant was installed in the month of September 20X1. AC
incurred Rs. 375,000 on the installation of plant which is included in administrative and distribution
expenses.
(ii) Pre-commencement expenditures of Rs. 3,400,000 were charged to accounting profit and loss for
the year ended 31 December 20X0. However, for tax purposes, it has to be amortized over the period
of five years.
(iii) Tax depreciation other than imported plant amounted to Rs. 1,900,000.
(iv) Income tax deducted by the customers u/s 153 and advance income tax paid u/s 147 during the
year amounted to Rs. 1,400,000 and Rs. 200,000 respectively.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute total
income, taxable income and net income tax payable by or refundable to AC for the tax year 20X2.
(19)
Note: Your computation should commence with profit before tax figure of Rs. 2,468K.
Ignore minimum tax under section 113.
Show all relevant exemptions, exclusions and disallowances.
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Question # 36
Autumn 2021 Q. 1
Nauman has been working as manager finance in Dua Limited (DL), a public listed company, for many
years. He received following monthly emoluments from DL during the year ended 30 June 2023:
Basic salary
Medical allowance
House rent allowance
Rupees
120,000
20,000
60,000
In addition to the above, the employer also provided him the following benefits:
(i) Company maintained car for both official and personal use. The car was purchased on 1 July 2018
at the cost of Rs. 1,400,000. As per company policy, Nauman purchased this car at its book value of
Rs. 450,000 on completion of five years i.e. 30 June 2023. Fair market value of this car on the date
of sale to Nauman was Rs. 1,000,000.
(ii) Provident fund contribution of Rs. 18,000 per month to a recognized provident fund. An equal
amount was also contributed by Nauman to the fund. Interest income of Rs. 540,000 at the rate of
18% of accumulated balance of the fund was credited to Nauman’s account.
(iii) On 1 July 2022, he was transferred to Lahore and was paid relocation allowance of Rs. 300,000.
(iv) HR Committee approved a performance bonus for the year ended 30 June 2023 for all employees.
Nauman received Rs. 400,000 as performance bonus on 15 July 2023.
(v) On 1 April 2023, Nauman obtained a loan of Rs. 5,000,000 @ 6% per annum from DL to purchase a
new house for his own use. First instalment of the loan was paid on 30 June 2023. He incurred legal
expenses of Rs. 20,000 for obtaining the loan.
Other information relevant to tax year 2023:
a) During the year, Nauman received interest income of Rs. 510,000 on his investments in defence
savings certificates. The amount was net of withholding income tax at the rate of 15% and Zakat of
Rs. 200,000 was deducted under the Zakat and Usher Ordinance, 1980.
b) On 1 October 2022, Nauman received advance rent of Rs. 1,200,000 for 12 months for renting office
premises. This amount includes Rs. 400,000 for utilities, cleaning and security. During the tax year
2023, Nauman incurred following expenditures in relation to the premises:
Repair and maintenance
Insurance premium
Administration and collection charges of rent
Utility, cleaning and security
Rupees
70,000
50,000
30,000
250,000
Nauman has opted normal tax regime for chargeability of tax on income from property.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute total
income and taxable income of Nauman for the tax year 2023. Show all relevant exemptions, exclusions
and disallowances. (13)
Question # 37
Autumn 2021 Q. 4
Abbas, a resident individual, is engaged in the business of manufacturing various consumer goods
under the name and style of ‘Kamyab Enterprises (KE)’. Following information has been extracted from
KE’s records for the year ended 30 June 2021:
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Rupees
Sales
43,089,000
Cost of Sales
(26,042,000)
Gross Profit
17,047,000
Administrative & Selling Expense
(7,800,000)
Financial charges
(2,100,000)
Other income
5,560,000
Profit before tax
12,707,000
Additional information:
Cost of sales includes:
(i)
accounting depreciation of Rs. 1,200,000. The tax written down values of KE’s fixed assets on 1
July 2022 were:
Rupees
Plant & Machinery
6,860,000
Computer & related products
800,000
Motor Vehicles (80% for the business purpose)
3,000,000
A new computer was purchased on 1 April 2023 for Rs. 150,000.
Motor vehicle which was purchased on 15 June 2021 at the cost of Rs. 1,000,000 was sold for Rs.
750,000 on 31 May 2023. Carrying value of this motor vehicle was equal to sale proceeds
(ii)
an amount of Rs. 40,000 paid to factory supervisor on 23 March 2023 as advance salary for the
month of April. Since he was in urgent need of the amount and the banks were closed on 23 March 2023
due to the Pakistan Day, he was paid in cash.
Administrative and selling expenses include:
(i)
expenditure on ‘In-house scientific research’ related to KE’s business. It includes salaries of Rs.
880,000 paid to scientists, material of Rs. 230,000 used in the research and Rs. 700,000 paid to a
company in China for supporting KE’s scientists in the research work. This expenditure was not
recorded as intangible asset as it could not provide an advantage for a period of more than one year.
(ii)
plot.
An expense of Rs. 650,000 paid as an instalment towards the purchase price of an industrial
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(iii)
purchase of goats worth Rs. 225,000 for sacrifice on Eid-ul-Azha. The payment was made
through cross cheque.
(iv)
Donations of Rs. 1,000,000 to approved non-profit organisations. 40% of this amount was
donated to organisations listed on the Thirteenth Schedule of the Income TaxOrdinance, 2001. All
donations were made through crossed cheques.
(v)
an insurance premium of Rs. 200,000 paid to a registered insurance company for health
insurance of Abbas and his dependents.
Other income includes:
(i)
An amount of Rs. 720,000 received from income tax department on account of tax refund
related to tax year 2020. This amount includes an additional payment of Rs. 80,000 due to delay in tax
refund.
(ii)
capital gains of Rs. 430,000 and Rs. 250,000 on sale of investments in shares of Manzil Limited, a
public unlisted company and Himmat Limited, a public listed company respectively on 20 June 2023.
Both investments were made on 1 January 2021.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute total
income, taxable income and net income tax payable by or refundable to Abbas for the tax year 2023.
(18)
Note: Your computation should commence with profit before tax figure of Rs. 12.707 million.
Ignore minimum tax under section 113.
Show all relevant exemptions, exclusions and disallowances.
Question # 38
Spring 2022 Q. 1
For the purpose of this question, assume that the date today is 31 August 2023. Basit, a senior manager
at Master Limited (ML), resigned on 31 January 2023 after completion of three and a half year of service.
During the tax year 2023, he received the following emoluments from ML:
(i) Salary of Rs. 610,000 per month.
(ii) Allowance of Rs. 60,000 per month for services of domestic servant. Out of which, he paid Rs. 36,000
per month in respect of these services.
(iii) Allowance equal to 5% of salary solely expended in the performance of his duties of employment.
Additional information:
(i) On 1 July 2022, he leased a car having fair market value of Rs. 4,800,000 at a monthly rental of Rs.
120,000. He pays lease rentals from his own sources but has used this vehicle for both official and
personal purposes.
(ii) On 1 July 2022, 13000 shares of ML were allotted to Basit under an employee share scheme, against
the payment of Rs. 30 per share. According to the scheme, he was not allowed to sell transfer the
shares upto 31 December 2022. On 31 May 2023, he sold 5000 shares of ML at its fair market value
(FMV). FMV of each share on different dates are as follows:
1 July 2021
Rs. 50
31 December 2021
Rs. 90
31 May 2022
Rs. 80
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(iii) On 15 February 2023, he received the following payments from ML as final settlement:
▪ Rs. 320,000 on account of leave encashment.
▪ Rs. 2,200,000 under gratuity scheme approved by the board.
▪ Rs. 700,000 salary arrears related to tax year 2022.
(iv) Withholding tax deducted by ML from Basit’s salary during the tax year 2023 amounted to
Rs.1,400,000.
Other information:
(i) On 31 January 2023, he received gold worth Rs. 200,000 as a gift from his old friend.
(ii) On 1 February 2023, he purchased mutual fund units of Rs. 2,500,000.
(iii) On 1 April 2023, he left for United Kingdom and joined Oliver Limited (OL) as an employee at a
monthly salary of GBP 3,200. He remained abroad till end of the tax year 2023. No withholding tax
was deducted by OL from his salary.
(iv) While residing in UK, Basit served as a visiting faculty member at a University. He earned GBP 1,500
from the university and incurred an expenditure of GBP 500 for providing services at the university.
Withholding tax deducted by the university amounted to GBP 225.
(v) Average exchange rate during 1 April 2023 to 30 June 2023 was GBP 1 = Rs. 250.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder:
(a) compute the total income, taxable income and net tax payable by or refundable to Basit for the tax
year 2023. (Show all relevant exemptions, exclusions and disallowances) (16)
(b) what other option is available to Basit for the taxation of salary arrears of Rs. 700,000 received from
ML as part of final settlement. (Revised computation is not required) (01)
(c) identify the additional statement that Basit needs to file in respect of his foreign source income. Also
briefly discuss the particulars to be mentioned in the additional statement. (02)
Question # 39
Spring 2022 Q. 3
For the purpose of this question, assume that the date today is 31 August 2023.
Aakash Kumar owns an industrial undertaking under the name and style of Premjee & Co. (PJC) which is
engaged in the business of manufacturing fast moving consumer goods. Following information is
available from PJC’s records for the year ended 30 June 2023:
Loss before tax for the year was Rs. 87 million.
i.
Operating expenses include:
▪ a penalty of Rs. 2 million for late delivery of goods to a customer.
▪ commission of Rs. 2.5 million which was paid to a distributor, Liaquat Bashir, on sale of
PJC’s products of Rs. 50 million. These products are covered in the Third Schedule of the
Sales Tax Act, 1990. Name of Liaquat Bashir is not appearing in the active taxpayers’ list
under the Income Tax Ordinance, 2001
▪ freight charges of Rs. 1.2 million which were paid in cash to a freight forwarding company
in Karachi
▪ accounting depreciation of Rs. 40 million
ii.
Other income includes:
▪ an insurance claim of Rs. 6 million, equivalent to accounting book value, received on 8
November 2022 in respect of a vehicle which was completely destroyed by fire. The cost
and fair market value of the vehicle before fire incident were Rs. 10 million and Rs. 8
million respectively. This vehicle was purchased on 1 October 2020
▪ amounts recovered during the year from two debtors i.e. Shameem and Faheem. These
amounts had been written off in the last year. Details are as follows:
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Bad debts claimed in the last tax return
Bad debts allowed by tax authorities last
year
Amounts recovered during the year
▪
iii.
iv.
Shameem Faheem
---- Rs. in million ---19.2
28.8
13.2
14.8
16.8
10.6
Rent of Rs. 21.6 million. On 1 July 2022, Aakash leased one of its factory buildings along
with the plant to Kamran at a monthly rent of Rs. 1.8 million, payable in advance. The
building was purchased for Rs. 85 million on 16 August 2020 whereas a second hand
locally purchased plant was installed at a cost of Rs. 34 million on 1 July 2022. During the
year, Aakash incurred Rs. 3.2 million on repair and maintenance of the factory building.
PJC’s liabilities include amounts of Rs. 14 million and Rs. 17 million in respect of purchases made on
18 March 2020 and 1 August 2020 respectively. These purchases were allowed as admissible
deductions while computing income from business in their relevant tax years.
During the year, outstanding financial charges of Rs. 2.8 million were waived by the bank on
rescheduling the loan. These charges were claimed as admissible deduction in the tax year 2021.
Tax depreciation for the year on all fixed assets, other than factory building and plant which were
leased out to Kamran, amounted to Rs. 48 million.
Other information:
1) On 15 August 2021, Aakash entered into a derivative contract for the purchase of gold. The contract
was to be expired on 15 November 2022. Aakash sold the contract before the settlement date and
earned a net gain of Rs. 23 million on the contract.
2) On 30 June 2023, Aakash earned capital gains of:
▪ Rs. 20 million on sale of his immovable property which was purchased on 1 June 2020.
▪ Rs. 3.6 million on sale of shares in a private company. These were acquired on 1 June
2022
3) During the year, Aakash received his share of profit from an AOP of Rs. 70 million.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute total
income, taxable income and net income tax payable by or refundable to Aakash for the tax year
2023. (18)
Note: Ignore minimum tax under section 113.
Show all relevant exemptions, exclusions and disallowances.
Question # 40
Autumn 2022 Q. 1
Azaadi & Co. (AC) is an association of persons engaged in the business of manufacturing disposable
products. Following information has been extracted from AC’s records for the year ended 30 June 2022:
Sales
Less: Sales Tax
Less: Trade Discount
Net Sales
Less Cost of Sales
Gross Profit
Less: Operating Expenses
Loss before tax
Rs. in million
380
(45)
(15)
320
(240)
80
(146)
(66)
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Additional information:
Cost of sales includes:
▪ payment of Rs. 12 million (including sales tax of Rs. 2 million) to Hashim Limited (HL) for
the purchase of a new machine for making plastic container in exchange of an old
machine having a book value and a fair market value of Rs. 5 million and Rs. 4 million
respectively on exchange date. The transaction was carried out on 1 July 2021.
▪ Old machine was purchased on 1 January 2020. Disposal of old machine and depreciation
of new machine were not recorded in AC’s books of accounts. Tax WDV of old machine
was the same as accounting WDV on the disposal date.
▪ purchase of raw materials of Rs. 40 million against which no withholding tax was
deducted at the time of payment. During the year, AC purchased total raw material of Rs.
120 million.
▪ Closing inventory of damaged finished goods of Rs. 18 million. Due to heavy rain, these
goods were damaged and it is expected to fetch Rs. 12 million only.
Operating expenses include:
▪ salary of Rs. 0.275 million paid to office boy in cash. He was paid a monthly salary of Rs.
25,000 for eleven months.
▪ warehouse rent of Rs. 1.6 million paid through credit card linked to notified business
bank account.
▪ bad debt of Rs. 2.8 million written off against receivable from a customer on his
insolvency.
▪ commission of Rs. 3.2 million paid to one of the members of AC, by crediting the amount
to his bank account.
▪ scholarship of Rs. 4.5 million paid to Sara, one of AC’s staff members, for higher studies
in accordance with the terms of the employment
▪ payment of Rs. 6.4 million for the purchase of a specialized software for AC’s
manufacturing department on 1 April 2022. The software is expected to be used for five
years. Although the software is available for use from the date of purchase, AC’s members
have decided to implement this software from 1 July 2022.
▪ depreciation and financial charges of Rs. 2.1 million and Rs. 1.5 million respectively in
respect of a car which was acquired on financial lease
▪ On 1 July 2021, AC entered into a lease agreement with a bank for a car of Rs. 10.5 million
against the annual lease rentals of Rs. 3.0 million, payable in arrears. The car has been
used 80% for business purposes and 20% for personal use of members.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder:
(a) compute the total income, taxable income and tax liability of Azaadi & Co. for the tax year 2022 (15)
(b) discuss the tax implication in respect of scholarship received by Sara in her return of income for tax
year 2022. (02)
Note: Show all relevant exemptions, exclusions and disallowances
Question # 41
Autumn 2022 Q. 2
Nasir has been working as head of finance in Asaaish (Private) Limited (APL). He received following
monthly emoluments from APL during the year ended 30 June 2023:
Basic salary
Medical allowance
Cost of living allowance
Rupees
800,000
100,000
200,000
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In addition to the above, APL also provided him the following benefits:
(i) Residential house owned by APL for no rent. The fair market value of the rent was Rs. 300,000 per
month.
(ii) Company maintained car. The car was acquired on lease by APL on 1 July 2021 at an annual rental
of Rs. 1,100,000. The fair market value of the car as on 1 July 2021 and 30 June 2023 were Rs.
4,000,000 and Rs. 6,000,000 respectively. 70% of the car is used for office purpose while 30% is
used for personal purposes.
(iii) 250 liter of fuel every month. The average petrol price during the year was Rs. 180 per liter.
(iv) Reimbursement of car maintenance expenses upto Rs. 20,000 per month. During the year, APL
reimbursed Rs. 150,000 to him in this respect.
(v) Health insurance for Nasir and his dependents as per the terms of employment. For this purpose,
APL is paying annual insurance premium of Rs. 100,000. The insurance company incurred expenses
of Rs. 500,000 on hospitalization of his dependents.
(vi) Ad-hoc relief allowance equal to one month’s basic salary keeping in view the increase in inflation.
Nasir incurred a monthly expenditure of Rs. 20,000 from July 2022 to November 2022 while working
from home under the COVID guidelines issued by APL’s management.
Withholding tax deducted by APL from his salary during the tax year 2023 amounted to Rs. 4,500,000.
Other information:
(i) During the year, he got married and received Rs. 1,000,000 in cash as gifts from various relatives
and friends including Rs. 400,000 from his parents. In addition, his parents gifted him a car worth
Rs. 5,000,000.
(ii) During the year, he paid a cash donation of Rs. 480,000 to a non-profit organization listed in the
Thirteenth Schedule.
(iii) During the year, Nasir contributed Rs. 4,700,000 to an approved pension fund under the Voluntary
Pension System Rules, 2005.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder:
(a) compute the total income, taxable income and net tax payable by or refundable to Nasir for the tax
year 2023. (Show all relevant exemptions, e