Income Tax Notes - Pakistan Tax System & Ethics

CAF – 02 Tax Practices Income Tax Notes for September 2022 attempt Syllabus Chapter 1 – 3 Chapter 4 – 16 10% 5% 5-10% Chapter 17 – 19 60-75% 20% 75% 60% 70 20-30% 80 30 10 30% 35 15 Teaching Hours 2 Table of Contents 1. System of taxation in Pakistan 10. Losses, deductible allowances, tax credits and exemptions 2. Constitutional provisions on taxes 11. Taxation of individual and association of persons 3. Ethics 12. Tax Regimes 4. Basic concepts of taxation 5. Salary 6. Income from property 7. Income from business 8. Capital gains 9. Income from other sources 3 System of Taxation in Pakistan 1. History of tax laws 2. Objectives of tax laws 3. Tools of taxation and Tax strategies 4. Basics of taxation 5. Principles of levy 6. Characteristics of tax laws 4 History of Tax Laws 1. 2. 3. 4. 5. 6. 7. Income Tax Act 1860 Income Tax Act 1886 Income Tax Act 1918 Super Tax Act 1917 Super Tax Act 1920 Income Tax Ordinance 1979 Income Tax Ordinance 2001 repealed in 1865 consolidated into Income Tax Act 1922 5 Objectives of Tax Law Revenue Non revenue Development Tax Law Objective Tax on salary income Revenue Collection Any amount transferred otherwise than banking channel will be deemed as income Documentation of economy Tax on moveable assets of the taxpayers Fair distribution of wealth Higher taxes on import of luxury goods Reduction in imports of unnecessary goods and create good balance of trade Allow ability of expenditure of research & developments Promotion of research & developments Zero rating on Exports Promotion of Exports Tax credit on Donations to approved institutions To promote culture of payment of donation to only organised and regulated institutions Tax credit on investments Promote investments in listed companies Tax exemptions to software exports Promote software Industry 6 Tools of Taxation 1. 2. 3. 4. 5. 6. Tax Structure Exemptions Tax Concessions Deductible Allowances Tax Credits Rebates a) Proportional b) Regressive c) Progressive 7 Basics of Taxation 1. Equality 2. Certainty 3. Convenience of Payment 4. Economy of Collection 8 Principles of Levy 1. Benefit Principle 2. Ability to Pay Principle 3. Equal Distribution Principle 9 Characteristics of Tax Laws 1. Enforced contribution 2. Payable in cash 3. Proportionate in character 4. Levied on income / transaction / property 5. Levied by state having jurisdiction 6. Levied by law making body of state 7. Levied for public purposes 8. Fiscal adequacy 9. Equality >>>ability of citizen to pay 10. Administrative feasibility 11. Consistency with economic goals 10 Constitutional Provisions on Taxes 1. Federal & Provincial Government 2. Annual Budget Statement (ABS) 3. Budget Approval Process 4. Supplementary Budget The Constitution of The Islamic Republic of Pakistan 1973 5. Distribution of Revenues among Provinces 6. Legislative list 11 Federal & Provincial Government Cabinet Prime Minister Minister A Minister B Relevant Department (FBR) Regulations President Federation Rules Parliament Majlis-e-Shora Minister C KPK 35 8 43 Punjab 148 35 183 KPK 14 4 4 1 23 Sindh 61 14 75 Punjab 14 4 4 1 23 ICT 2 2 Sindh 14 4 4 1 23 FATA 12 12 ICT 2 1 1 10 10 FATA 4 10 342 Total 62 Total 272 60 Balochistan 14 4 4 1 23 Total Total 17 Non-Muslim 3 Women 14 Province Technocrats / Ulema Balochistan Province General Women National Assembly (Lower House) Non-Muslim Senate (Upper House) General Act Constitution of Pakistan Law Province Prime Minister Chief Minister Federal Consolidated Fund Provincial Consolidated Fund 4 4 17 17 4 100 12 Capital Receipts Loans & Grants External Receipts Deficit Exchequer Non Tax Receipts Inflows Other Taxes Internal Receipts Custom Duty Indirect Tax Revenue Receipts FED FBR Taxes Tax Receipts Direct Tax Outflows Income Tax CVT WWF Sales Tax (Federal Consolidated Fund) Revenue Collection 13 O Judges of Supreme Court and Islamabad High Court Speaker, Deputy Speaker of National Assembly Chief Eelection Commissioner Chairman, Deputy Chariman of Senate A Any other sum declared by Constitution OR Majlise - shora President Sums required to satisfy any judgement against Pakistan, by any Court or Tribunal Remuneration Office Expenses/Admn Expenses, remuneration of officers and servants Debts Payable by Federal Govt. Expenditure Charged upon Federal Consolidated Fund [Article-81] Outflows (Federal Consolidated Fund) Exchequer Inflows Spending Auditor General of Pakistan 14 Budget Approval Process • A head of expenditure is called “Grant” • Every grant should be recommended by Federal Government National Assembly (NA) - Annual Budget Statement (ABS) placed before NA - ABS is open for discussion - No voting required - After discussion, a Schedule of Expenditure (SOE) will be prepared - SOE will be signed by Prime Minister -Signed SOE will again be presented to NA - This time SOE is not open for discussion - Budget is approved Senate President Finance Bill Finance Act 15 Supplementary Budget National Assembly (NA) - Supplementary Budget Statement (SBS) placed before NA - SBS is open for discussion - No voting required - After discussion, a Schedule of Expenditure (SOE) will be prepared - SOE will be signed by Prime Minister -Signed SOE will again be presented to NA - This time SOE is not open for discussion - Supplementary Budget is approved Senate President Finance Supplementary Bill Finance Supplementary Act 16 Distribution of Revenues among Provinces • Punjab President shall constitute National Finance Commission (NFC) • KPK - Provincial - Provincial Finance Minister Finance Minister + + - Any other person - Any other person with consultation with consultation of Governor Federal of Governor - Provincial Finance Minister + - Any other person with consultation of Governor Finance Minister • Sindh which will finalize NFC Award - Provincial Finance Minister + - Any other person with consultation of Governor • Balochistan 17 Legislative List Federal legislative list: 1. 2. 3. 4. 5. 6. 7. 8. 9. Duties of customs, including export duties. Duties of excise, including salt, but not including alcoholic liquors, opium or other narcotics; Taxes on income other than agricultural income; Taxes on corporations. Taxes on the sales and purchases of goods imported, exported, produced, manufactured or consumed, except sales tax on services. Taxes on the capital value of the assets, not including taxes on immovable property. Taxes on mineral oil, natural gas and minerals for use in generation of nuclear energy. Taxes and duties on the production capacity of any plant, machinery, undertaking, establishment or installation in lieu of any one or more of them. Terminal taxes on goods or passengers carried by railway, sea or air; taxes on their fares and freights. Province can legislate all taxes, other than above, such as: 1. Sales tax on services 2. Taxes on transfer of immoveable property 3. Professional tax 4. Tax on luxury houses 5. Tax on registration of luxury vehicles etc. 6. Property tax 18 Ethics Legislator Canons of Taxation-(by Adam Smith) • Canon of Equity • Canon of Certainity • Canon of Convenience of Payment • Canon of Economy of Collection Additional Canons • Canon of Productivity • Canon of Elasticity • Canon of Flexibility • Canon of Simplicity • Canon of Diversity Administrator • • • • Fairness Transparency Equity Accountability Responsibilites of Tax Administrators • • • • • • • • • • Obey taxation laws, no undue favors to tax payer Honesty and integrity to maintain respect of Govt and Taxpayer Impartial, fair, neutral and consistent in administing tax laws, without any prejudic to to race, social status, economic circumstances Provide prompt, efficient and quality services to taxpayer Refrain from actively participating in political activities Accuracy of records and its confidentiality Refrain from soliciting gifts Make reasonable efforts to collect proper amount of tax at lowest possible cost Diligently respond to valid tax refund claims Educate Taxpayer on their rights and responsibilities Practitioner Tax Payer • Integrity • Utilitarianism • Objectivity • Deontology • Confidentiality • Virtue ethics • Professional Behavior Tax Avoidance vs Tax Evasion • Professional Competence & Due Care ICAP Code of Ethics Whistle Blower 19 Ethics Tax Avoidance vs Tax Evasion - Tax avoidance is generally the legal exploitation of the tax regime to one's own advantage, to attempt to reduce the amount of tax that is payable by means that are within the law whilst making a full disclosure of the material information to the tax authorities. Examples of tax avoidance; (i) using tax deductions (ii) changing one's business structure through incorporation or (iii) establishing an offshore company in a tax haven. - Tax evasion is the general term for efforts by individuals, firms, trusts and other entities to evade the payment of taxes by illegal means. - Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability, and includes, in particular, dishonest tax reporting. Examples of tax evasion; (i) under declaring income, profits or gains; or (ii) overstating deductions. 20 Ethics ICAP Code of Ethics Threats which may arise; - Advocacy Threat - Self Review Threat Factors to evaluate level of threat; - The particular characteristics of the engagement - The level of tax expertise of the client’s employees. - The system by which the tax authorities assess and administer the tax in question and the role of the firm or network firm in that process - The complexity of the relevant tax regime and the degree of judgment necessary in applying it Usually, no threat is created from following work; - Assisting clients with their tax reporting obligations by drafting and compiling information, including the amount of tax due required to be submitted to the applicable tax authorities - Advising on the tax return treatment of past transactions and responding on behalf of the audit client to the tax authorities’ requests for additional information and analysis (for example, providing explanations of and technical support for the approach being taken All Audit Clients Materiality of amounts should be considered. Threats which may arise; - Advocacy Threat - Self Review Threat Audit Clients that are Not Public Interest Entities Safeguards: - Using professionals who are not audit team members - Having an appropriate reviewer who was not involved in providing the service Audit Clients that are Public Interest Entities A firm or a network firm shall not prepare tax calculations of current and deferred tax liabilities (or assets), if it is material. 21 Ethics Whistle Blower Whistle blower means a person who reports - concealment or - evasion of income tax leading to detection / collection of - Taxes - Fraud - corruption or - Misconduct To the competent authority having power to take action against - the person or - an income tax authority committing 22 Basic Concepts of Taxation 1. Tax Year 2. Types of Person 3. Residential Status 4. Tax Regimes 7. Important Definitions a) Public Company b) Private Company c) Non Profit Organization d) Small & Medium Enterprise e) Small Company f) Permanant Establishment g) Women Enterprise 5. Common Rules 6. Geographical Source of Income 23 1. Tax Year [S-74] Time Bracket Time period of 12 months End date is 30th End date is other June than 30th June Time period of less than 12 months Normal Tax Year (NTY) Transitional Tax Year (TTY) Denoted by Calendar Year in which NTY ends Special Tax Year (STY) Denoted by Calendar Year relevant to NTY in which Year end falls FBR has authority to prescribe STY Denoted by Calendar Year relevant to NTY in which Year end falls TTY occurs because of change in TY from NTY to STY or vice versa Industry Special Tax Year Sugar Manufacturing 1st October - 30th September SRO Ref 134(R)/68, July 31,1968 Rice Exporter 1st January - 31st December 367(I) /74, January 14,1974 Insurance 1st January - 31st December 878 (I) /95, August 30,1995 TTY is the period between TY end date of last tax year and commencement date of next TY 24 Change in Tax Year NTY STY STY NTY STY - 1 STY - 2 Tax Payer will give an application in writing to Commissioner of Income Tax (CIT) CIT is convinced that compelling need exists Grant Permission through an order in writing Not Convinced Give tax payer an opportunity of being heard in person Not Convinced 1) issue rejection orders 2) record reasons of rejection in order Tax Payer may file review application to FBR & decision of FBR shall be final 25 Tax Year Practice Determine the tax year in respect of each accounting periods mentioned below: a) 1.09.2015 to 31.08.2016 STY TY 2017 b) 01.04.2016 to 30.06.2016 TTY TY 2016 c) 1.01.2016 to 31.12.2016 STY TY 2017 d) 1.04.2016 to 31.03.2017 STY TY 2017 e) 1.05.2016 to 30.04.2017 STY TY 2017 f) 1.07.2016 to 30.06.2017 NTY TY 2017 26 2. Type of Person a) Tax Payer [S-2(66)] b) Person [S-80] 27 a) Tax Payer [S-2(66)] Any person or representative of person who; i. Derives an amount chargeable to tax ii. Is required to collect/deduct tax iii. is required to furnish return of income iv. is required to pay tax under Income Tax Ordinance 2001 28 b) Person [S-80] Following shall be treated as person; i. Individual ii. Company formed in Pakistan or elsewhere iii. AOP formed in Pakistan or elsewhere iv. Federal government v. Foreign government vi. Political subdivision of foreign government vii. Public International Organization 29 Company means following i. ii. iii. iv. Company as defined in Companies Act 2017 Body Corporate formed by or under any law in force in Pakistan Modaraba body incorporated by or under any law of country outside Pakistan relating to incorporation of companies v. cooperative society, finance society or any other society vi. non-profit organization vii. Trust viii. foreign association declared by FBR to be a company ix. Provincial Government x. Local Government xi. Small company as defined in Section -2 30 Association of Persons includes following i. ii. iii. iv. Firm (means relation between persons who have agreed to share profits of business carried on by all or any one of them acting for all) Hindu Undivided Family Artificial Juridical Person Any body of persons formed under foreign law And does not include “Company” 31 3. Residential Status a) Resident Individual b) Resident Company c) Resident AOP 32 a) Resident Individual [S-82] i. Not based on Nationality, based on Physical Presence in Pakistan 0 – 182 days 183 days or more Non Resident Resident ii. Government servant posted abroad will be treated as resident, irrespective of his physical stay in Pakistan iii. Citizen of Pakistan, present in one foreign country 0 – 182 days Resident iv. Citizen of Pakistan, who is not resident taxpayer of any other country, will be treated as resident v. Counting of days shall be made in accordance with Rule-14 of Income Tax Rules, 2002 33 Rule-14 of Income Tax Rules, 2002 Days not to be counted i. Day or part of day in Pakistan solely by reason of being in transit between two different places outside Pakistan Days to be counted Part of a day shall be counted as a whole day in following cases; i. Day of arrival in Pakistan ii. Day of departure from Pakistan iii. Public Holiday iv. Leave, including sick leave v. Holiday spent in Pakistan before, during or after activity in Pakistan vi. Day when activity was interrupted due to Strike, lockout, delay in receipt of supplies 34 b) Resident Company [S-83] i. ii. iii. Company incorporated in Pakistan Provincial Government Local Government iv. Company incorporated outside Pakistan Resident No further condition required Resident if, Control and Management of affairs situated wholly in Pakistan at any time in a Tax Year 35 b) Resident AOP [S-84] Resident if, Control and Management of affairs situated wholly or partly in Pakistan at any time in a Tax Year 36 Residential Status Practice i. Mr. Raza is working as Director Operations in the Ministry of Tourism. On 15 July 2017 he was posted to Pakistan Embassy in Federal Govt Employee Italy for two years. Resident ii. Anderson LLC was incorporated as limited liability Company in UK. The control and management of its affairs was situated Control & Mngt in wholly in wholly in Pakistan. However, with effect from 01 November 2017, the entire management and control was shifted to UK. Pak any time in TY Resident iii. On 01 February 2018, Mr. Sameel was sent to Pakistan by his UK based company to work on a special project. He left Pakistan Stay less than 183 days on 23 August 2018. Non Resident iv. BBL is a non-listed public company incorporated under the Companies Act 2017. All the shareholders of the company are Company incorporated in individuals. The control and management of affairs of the company during the year was outside Pakistan. Pak Resident v. Mr. Salman a property dealer in USA came to Pakistan on 01 February 2017. During his stay upto 02 August 2017 in Pakistan, he remained in Peshawar upto 30 June 2017 and thereafter till his departure from Pakistan, in Quetta. Assume that Commissioner has granted him permission to use calendar year as special tax year. Total stay 183 days Resident vi. Peshawar LLC (PLLC) was incorporated as a limited liability company in UAE. PLLC has 5 directors out of which 2 are involved in management, the rest of them were situated in UAE. The 2 directors control the affairs of the company from Pakistan. Control & Mngt in wholly in Pak any time in TY Resident 37 4. Tax Regimes 1) Normal Tax Regime 2) Separate Block of Income 3) Final Tax Regime a) Separate Taxation b) Presumptive Tax Regime 4) Minimum Tax Regime 38 1. Normal Tax Regime Revenue – Allowable Deductions = Taxable Income Taxable Income x Tax Rate = Tax Imposed Tax Imposed – Tax Credits = Tax Payable 39 2. Separate Block of Income i. Tax rates defined for some specific incomes, which are not final tax ii. These are income specific rates and “type of person” does not affect it. iii. eg. Tax on Capital Gain on Immovable Property, Tax on Capital Gain on Securities etc 40 3(a). Final Tax Regime – Separate Taxation i. Tax Imposed is final tax ii. Income is not chargeable to tax under any Head of Income iii. No deduction is allowed for expenditure incurred in deriving such income iv. Not Allowed : Set off of Losses, Deductible Allowances, Tax Credits v. e.g., Dividend, Profit on Debt, Royalty, FFTS, FFOSDS etc 41 3(b). Final Tax Regime – Presumptive Taxation i. Tax deducted/collected is final tax ii. Tax deducted/collected is not refundable iii. Income is not chargeable to tax under any Head of Income iv. No deduction is allowed for expenditure incurred in deriving such income v. Not Allowed : Set off of Losses, Deductible Allowances, Tax Credits vi. e.g., Exports & Prizes and Winnings etc 42 4. Minimum Tax Regime i. Tax already collected/deducted is minimum tax. eg. Advance tax on commercial imports, Tax at source under section 153 etc ii. Tax on turnover is minimum tax. eg. Minimum tax under section 113 43 5. Common Rules a) Apportionment of Deduction b) Recouped Expenditure [S-70] c) Currency Conversion [S-71] d) Cessation of a Source of Income [S-72] e) Fair Market Value [S-68] f) Receipt of Income [S-69] g) Rule to prevent Double Derivation and Double Deduction [S-73] 44 a) Apportionment of Deductions [S-67 & Rule 13] Apportionment of Deductions [S-67] Any expenditure/deduction/allowance that relates with following shall be apportioned on reasonable basis: a) derivation of income under more than one head of income b) derivation of taxable income and income under Final Tax Regime c) derivation of income under any head of income and for any other purpose continued …….. 45 a. Apportionment of Deductions [S-67 & Rule 13] Apportionment of Expenditures Deductions and Allowances [Rule-13] Clearly Allocable to an Income Not clearly Allocable to an Income deductible/chargeable against that particular income Apportion on basis of following formula: Common Exp x Gross Receipts of a class of income/Gross Receipts of all classes of income Class of Income may include following: Salary Income Income from Property Income from Business (Speculative/Non Speculative) Capital Gains Other Sources Separate Block of Income Exempt Income Income under FTR Pakistan Source Income Foreign Source Income continued …….. 46 a. Apportionment of Deductions [Rule 13] a) Gross receipts are net of Sales Tax & Federal Excise Duty b) Nature and source of each class of income shall be considered for allocation c) Above allocation shall be certified by CA or CMA, in case accounts are required to be audited. The certificate shall be accepted by CIR only if variation in allocation from these rules is not more than 10% d) In case accounts are not required to be audited then apportionment shall be accepted by CIR only if variation in allocation from these rules is not more than 10% e) In certain transactions where net gains, brokerage, commission or other income is taken, than Gross Profits shall be taken as Gross Receipts 47 b) Recouped Expenditure [S-70] • will be treated as Income in the year of receipt. c) Currency Conversion [S-71] • all amounts shall be taken in Pak Rupee. • In case of foreign currency, it will be converted to Pak Rupee at SBP conversion rate on date when amount is taken into account for the purpose of Income Tax d) Cessation of Source of Income [S-72] • income derived before cessation of a source of income shall be chargeable to tax as if the source of income has not ceased f) Receipt of Income [S-69] – Income shall be treated as received, if: • amount actually received by person, • applied on behalf of person on his instructions ar under any law • made available to the person g) Rule to prevent double derivation and double deduction [S-73] • Any income taxed on accrual basis shall not be taxed again on receipt basis and vice versa • Any expenditure deducted on accrual basis shall not be taxed on payment basis and vice versa 48 e) Fair Market Value Immovable Property • FBR shall, from time to time, determine FMV of immovable property of an area, through notification in official gazette • If value not determined by FBR then following shall determine FMV o District Officer (Revenue) o Provincial or Other Authority authorized in this behalf for stamp duty Others In case of • Property • Rent • Asset • Service • Benefit • Perquisite • price it would ordinarily fetch on sale or supply in the open market • FMV shall be determined without considering • following: o restriction on transfer o convertablility to cash • If price not Ascertainable as above, then CIT will determine FMV 49 6. Geographical Source of Income a) Pakistan Source Income [S-2(40) & 101] b) Foreign Source Income [S-2(27) & 101(16)] Resident Non Resident Pakistan Source Income Taxable Taxable Foreign Source Income Taxable Not Taxable Section 11(5) & (6) 50 7. Important Definitions Public Company [S-2(47)] means • a company in which 50% or more shares are held by o Faderal Government OR o Provincial Government OR o Foreign Government OR o Foreign Company owned by Foreign Government OR • a company whoes shares are traded on a stock exchange registered in Pakistan and remained listed at end of the year • a unit trust a unit trust whose units are widely available to the public AND • any other trust as defined in the Trusts Act, 1882 51 7. Important Definitions Private Company [S-2(45)] • means a company that is not a Public Company Non Profit Organization [S-2(36)] means any person other than Individual which is any of the following; • established for religious, educational, charitable, welfare or development purposes OR • promotion of amature sport • formed and registered under any law as non-profit organization • approved by the Commissioner for specified period AND • none of the assets of such person are available for private benefit to any other person 52 7. Important Definitions Small & Medium Enterprise (SME) [S-2(59A)] means a person; • engaged in manufacturing u/s 153(7)(iv) AND • turnover in a TY does not exceed Rs 250 million If turnover in TY exceeds Rs 250 million Then it will not be an SME in that TY and in any subsequent TYs 53 7. Important Definitions Small Company [S-2(59AB)] means a company which fulfills all of following conditions: • registered under Companies Act 2017, on or after 01.07.2015 • (Paid up Capital + Undistributed Reserves) =< Rs 50 million AND • Number of employees =< 250 (at any time during tax year) AND • Annual Turnover =< Rs 250 million AND • not formed by splitting up OR reconstitution of a company already in existence AND • is not a small and medium enterprise 54 Permanent Establishment [S-2(41)] means a fixed place of business through which the business of the person is wholly or partly carried on Place of management, branch, office, factory, workshop, premises for soliciting orders, warehouse, permanent sales exhibition or sales outlet, other than Liaison Office Liaison Office [S-2(30C)] Yes Sales Contract Purchase Contract Negotiates Contracts? mine, oil or gas well, quarry or any other place of extraction of natural resources Includes an agricultural, pastoral or forestry property Construction / Installation Project Activities continued for more than 90 days in past 12 months Furnishing Services through employees Agent in Pakistan Dependent Agent Substantial equipment installed to generate income Independent Agent Fixed Place of business, used or maintained by person No PE Not a PE 55 56 7. Important Definitions Woman enterprise means • a start-up established on or after 01 July 2021 as o sole proprietorship concern owned by a woman or o an AOP all of whose members are women or o a company whose 100% shareholding is held by women Taxation • Tax payable shall be reduced by 25% • This benefit will not be available to business that is formed by o transfer or o reconstitution or o splitting up of an existing business. 57 Income from Salary Employee Employment Employer Means any individual engaged in employment Includes: i. Directorship or any other office involved in management of company OR ii. a position entitling the holder to a fixed or ascertainable remuneration OR iii. holding or acting in any public office Means any person who engages and remunerates an employee 3 Important Questions: 1. Geographical Source of Income 2. Basis of Taxation 3. Residential Status recently changed Deciding a Salary case 58 Income from Salary 1. Geographical Source of Income [S-101(1), (11) & (16)] Employment Exercised Payment of Salary made In Pakistan Outside Pakistan In Pakistan PSI FSI Outside Pakistan PSI FSI By or on behalf of FG/PG/LG in Pakistan PSI wherever employment is exercised Pension/Annuity Paid by Resident Born by PENR PSI FSI 59 Income from Salary 2. Basis of Taxation Accrual Amount OR Perquisite treated as received [S-12(5)]: Cash Basis [S-12(7)] Arrears of salary received in tax year caused higher taxation, then tax payer by notice in writing to commissioner tax salary on accrual basis All Other Cases Receipt of Income [S-69]: Amount/benefit/perquisite treated as received when: (i) Actually received (ii) Applied on behalf/instruction of person OR under any law (iii) Made available to person as and when it is paid or provided; By (i) Employer (ii) Associate of employer (iii) Any 3rd party under agreement with employer or its associate By (i) Past employer (ii) Perspective employer To (i) (ii) (iii) Employee Associate of employee Any 3rd party under agreement with employee or its associate 60 Income from Salary 3. Residential Status Recently Changed Citizen of Pakistan leaves Pakistan [S-51(2)]: Residential Status Resident FSI of Resident Non Resident PSI FSI Geographical Source of Income Returning Expatriate [S51(1)]: If resident in a Tax Year but was Non-Resident in preceding 4 Tax Years Then all foreign source income will be exempt in tax year in which tax payer becomes resident and the following tax year If a citizen of Pakistan leaves Pakistan in a Tax Year and remains abroad during that tax year then Salary earned outside Pakistan shall be exempt Foreign Source Salary of Resident [S-102]: Exempt if; - Foreign tax on salary is paid by individual OR - withheld by employer and paid to revenue authority of foreign country Short term Resident [S-50]: FSI will be exempt Conditions: (i) Resident solely by reason of employment (ii) Present in Pakistan for 3 years or less Exceptions: (i) Income from business established in Pakistan (ii) Foreign Source Income brought into or received in Pakistan 61 Income from Salary Deciding a Salary case: 1. Salary Definition 2. Deductions 3. Perquisites/Facilities/Benefits 4. Exemptions 62 Income from Salary Salary [S-12(2)] Means: any amount received by employee from employment whether capital or revenue nature Includes: -Pay -Wages -Other remuneration -Leave pay -Overtime -Bonus -Commission -Fee -Gratuity -Work condition Supplements - Leave encashment Perquisites [Section-13] means -items provided by employer in kind OR -cash reimbursed for expenses other than office purpose includes -Services of house keeper, driver, gardener, domestic assistant -Utilities -Any obligation of employee to employer, waived off by employer -Any obligation of employee to another person paid by employer -FMV of property transferred to employee reduced by any payment made by employee -Vehicle wholly or partly for private use -Accommodation -Medical Facility -Interest free loan Allowances Others Expenditure incurred by -Pension, employee but Annuity -Cost of Living paid by employer, Allowance -Subsistance Allowance other than official purposes -Rent -Utilities -Education -Entertainment -Travel Allowance; except for official tours - Medical Allowance -Profits in lieu of salary -Employee Share Scheme 63 Income from Salary Leave Encashment [2nd Schedule, Part-I, Clause-19]: Encashment of Leave Preparatory to Retirement Of (i) Government Employee (ii) Member of Armed Forces Exempt from Tax 64 Valuation of Conveyance [Rule-5]: Income from Salary Usage Vehicle owned by employer Vehicle leased by employer Personal Use only 10% of cost of vehicle 10% of FMV at commencement of lease Taxable Official & Personal use Official Use only 5% of cost of vehicle 5% of FMV at commencement of lease Not Taxable 65 Valuation of Accommodation [Rule-4]: Income from Salary Amount that would have been paid if accommodation was not provided 45% of MTS/Basic Salary Higher Taxable Accommodation provided in mufasal areas shall be taxable at 30% of MTS/Basic Salary 66 Medical Allowance [2nd Sched, P-I, Clause 139]: Medical Allowance Income from Salary Exempt upto 10% of Basic Salary Medical Facility/Reimbursement In accordance with terms of employment Not in accordance with terms of employment Totally exempt if following conditions are met: (i) Provide NTN of medical practitioner (ii) Attestation of expense by employer Both Medical Allowance >>>>Totally Taxable Medical Facility>>>>>>totally exempt if following conditions are met (i) Provide NTN of medical practitioner (ii) Attestation of expense by employer Medical Allowance >>>>exempt upto 10% of Basic Salary Taxable Medical Facility>>>>>>totally taxable 67 Income from Salary Interest Free Loan [S-13(7) (8) & (14)]: Loan from employer Benchmark Rate = 10% Yes Nothing Taxable Yes If loan is utilized by employee to acquire an asset Markup charged? @ benchmark rate or more No (generating income under any head of income) Then employee shall be treated as having been paid markup @ benchmark rate or actual markup paid, which ever is higher. Markup @ benchmark rate X – Markup charged by employer (X) Included in Taxable Income X No Markup @ benchmark rate Included in Taxable Income Above is not applicable on loan upto Rs 1,000,000/OR Where such benefit is extended by the employer due to waiver of interest by such employee on his accounts maintained with the employer. 68 Profits in lieu of salary [S-12(2)(e)] Income from Salary Includes: (i) (ii) (iii) (iv) Payment of Employer's Contribution from provident fund Amount on termination of employment, whether voluntary basis or under an agreement Compensation for redundancy or loss of employment (e.g., Golden Hand Shake) Consideration for employee's agreement to : • enter into employment agreement • accept changes to conditions of employment • a restrictive covenant to any past, present or future employment [S-12(6)] Tax payer has option to get it taxed @ last 3 years average rate of tax Average rate of tax = Last 3 year’s tax liability Last 3 year’s taxable income 69 Income from Salary Employee Share Scheme [S-14] Option/Right Acquired Option/Right Disposed Off Nothing Taxable Consideration - Cost Paid Exercised Option/Right & Shares received X (X) X Shares acquired with restriction on transfer Taxable under salary Nothing Taxable Shares acquired without any restriction on transfer OR restriction removed afterwards - FMV Consideration paid to acquire option & shares X (X) X Taxable under salary Shares disposed off Disposal value - Consideration paid to acquire option & share - Amount previously included in Taxable income X (X) (X) X Taxable under Capital Gains 70 Income from Salary Deductions: Section 12(4): No deduction shall be allowed for any expense incurred by employee in deriving salary income. 71 Income from Salary Perquisites/Facilities/Benefits: 1. Pension 2. Commutation of Pension 3. Gratuity & Commutation of Pension 4. Provident Fund 5. Tax on Salary Born by Employer 6. Services provided by employer to employee 7. Utilities 8. Obligation of employee waived by employer 9. Obligation of employee to 3rd party, paid by employer 10. Property or service provided to employee 11. Any other perquisite 12. Self Hiring of Property 13. Superannuation Fund 14. Benevolent Fund 72 Income from Salary Perquisites/Facilities/Benefits: Member of Armed Force Employee of FG/PG 1. Pension [2nd Sched, Pt-I, Cl (8)&(9)] Totally Exempt Others No No More than 1 pension Works for same employer or its associate Yes Age>60 Yes Yes Totally Exempt Taxable Higher amount is exempt No Totally Exempt 73 Perquisites/Facilities/Benefits: Income from Salary 2. Commutation of Pension [2nd Sched, Pt-I, Cl (12)] Received from Government OR Received from Scheme approved by FBR Totally Exempt 74 Income from Salary Perquisites/Facilities/Benefits: 3. Gratuity and Commutation of Pension [2nd Sched, Pt-I, Cl (13)] Government Employee OR Approved Gratuity Fund by CIT under 6th Schedule Totally Exempt Gratuity & Commutation Scheme Approved by FBR Un-approved Gratuity OR Un-approved Commutation Exempt upto Rs 300,000/- Rs 75,000/OR 50% of amount (Which ever is less is exempt) Exemption not available to following: (i) Payment not received in Pakistan (ii) Payment received by Director of Company who is not employee of company (iii) Payment received by Non Resident (iv) Gratuity received by employee who has already received gratuity from same or another employer 75 Income from Salary Perquisites/Facilities/Benefits: 4. Provident Fund [2nd Sched, Pt-I, Cl (23)] & [6th Sched, Pt-I, Cl (3), (4) & (5)] Govt. PF Recognized PF Un-recognized PF Already taxed in salary, therefore no treatment Already taxed in salary, therefore no treatment Already taxed in salary, therefore no treatment Exempt Rs 150,000 OR 10% of (Basic Salary + Dearness Allowance) (Lesser is exempt) No treatment when contribution is made Returns credited during year Exempt Return @ 16% OR 1/3rd of (Basic Salary + Dearness Allowance) (Higher is exempt) No treatment when returns are credited Accumulated Balance Paid Exempt Exempt Only employee’s contribution is exempt All other sums are taxable Employee Contribution Employer Contribution Note: Dearness Allowance is a type of Cost of Living Allowance 76 Income from Salary Perquisites/Facilities/Benefits: 5. Tax on Salary Born by Employer [S-12(3)] Amount of salary income shall be grossed up by amount of tax payable by employer. Q. Mr. A has received taxable salary and allowances amounting to Rs 1,810,000 during tax year 2023. You are required to calculate his taxable income and tax payable under each of following situations: (i) (ii) (iii) (iv) 100% tax is to be borne by employer 40% of tax is to be borne by employer and balance to be borne by Mr. A Rs 50,000 is to be borne by employer and balance to be borne by Mr. A Mr. A shall pay only Rs 50,000 as tax and balance tax to be borne by employer 77 Perquisites/Facilities/Benefits: Income from Salary 5. Tax on Salary Born by Employer [S-12(3)] 78 Perquisites/Facilities/Benefits: Income from Salary 5. Tax on Salary Born by Employer [S-12(3)] 79 Perquisites/Facilities/Benefits: Income from Salary 5. Tax on Salary Born by Employer [S-12(3)] 80 Perquisites/Facilities/Benefits: Income from Salary 5. Tax on Salary Born by Employer [S-12(3)] 81 Perquisites/Facilities/Benefits: Income from Salary 6. Services provided by employer to employee [S-13(5)] House keeper Gardner Driver Other domestic assistant Salary paid to them by employer X Less: payment by employee to employer for these services (X) X Taxable 82 Perquisites/Facilities/Benefits: Income from Salary 7. Utilities [S-13(6)] Electricity Gas Water Telephone Fair Market Value of utilities X Less: payment by employee to employer for these utilities (X) X Taxable 83 Perquisites/Facilities/Benefits: Income from Salary 8. Obligation of employee waived by employer [S-13(9)] Waived Amount Taxable 9. Obligation of employee payable to 3rd party paid by employer [S-13(10)] Paid Amount Taxable 10. Property or service provided to employee [S-13(11)] Fair Market Value X Less: payment by employee to employer (X) X Taxable 84 Perquisites/Facilities/Benefits: Income from Salary 11. Any other perquisite [S-13(13)] Fair MV of perquisite X Less: payment by employee to employer for perquisite (X) X Taxable 85 Perquisites/Facilities/Benefits: Income from Salary 12. Self Hiring of Property [S-15(5)] "Income from Salary" shall include value of accommodation in accordance with Rule-4 "Income from Property" shall include rent income in accordance with Section-15(4)&(5) 86 Income from Salary Perquisites/Facilities/Benefits: 13. Superannuation Fund approved by Commissioner in accordance with Part-II of 6th Schedule [Cl-4-6] & 2nd Sched, P-I, Cl-25 : Employer’s Contribution Interest Credited Payment out of fund: Exempt On death In lieu of annuity During life time other than above Taxable 87 Income from Salary Perquisites/Facilities/Benefits: 14. Benevolent Fund [2nd Sched, P-I, Cl-24] Any payment in accordance with "Central Employee Benevolent Fund & Group Insurance Act 1969" Exempt 88 Income from Salary Exemptions: 1. Foreign Government Officials 2. Diplomatic & United Nations Exemptions 3. International Agreements 4. Perquisites without Marginal Cost to Employer 5. Special Allowance 6. Workers’ Participation Fund 7. Salary income of seafarer 8. Allowances to persons working outside Pakistan 9. Full Time teacher/researcher 89 Income from Salary Exemptions: 1. Foreign Government Officials [S-43] Salary of foreign government employee shall be exempt from tax if: (i) employee is citizen of foreign country and not citizen of Pakistan (ii) services performed are similar to those performed by employees of Federal Government in foreign countries (iii) foreign government grants similar exemption to employees of the Federal Government performing similar services in such foreign country 90 Income from Salary Exemptions: 2. Diplomatic & United Nations Exemptions [S-42] Following shall be exempt from tax: (i) Individuals entitled to privileges under the Diplomatic and Consular Privileges Act, 1972 (ii) Individuals entitled to privileges under the United Nations (Privileges and Immunities) Act, 1948 (iii) Pension received by citizen of Pakistan due to former employment in the United Nations or its specialized agencies, if the person’s salary from such employment was exempt under this Ordinance 91 Income from Salary Exemptions: 3. Exemption under International Agreements [S-44] Salary received under an AID AGREEMENT is exempt from tax subject to following conditions: Any income under a bilateral or multilateral technical assistance AGREEMENT is exempt from tax subject to following conditions:: (i) (i) Salary received by individual, who is not citizen of Pakistan (ii) Exemption will be to the extent provided in AID AGREEMENT Income is received by any person (ii) Person is engaged as a contractor, consultant, or expert on a project in Pakistan (iii) Exemption will be to the extent provided in AGREEMENT (iii) AID AGREEMENT is between FG≈Fr.G FG ≈PIO (iv) AGREEMENT is between FG≈Fr.G FG ≈PIO If Pakistan is not permitted to tax an income under TAX TREATY, it will be exempt from tax FG can exempt income of any person, for any official development assistance financed loans and grants-in-aid (iv) Individual is not resident OR Is resident solely for performance of service under AID AGREEMENT (v) In case AID AGREEMENT is with Foreign Govt. then individual should be citizen of that country (vi) Salary is paid out of funds released to Pakistan under AID AGREEMENT (v) Project is financed out of funds released in accordance with AGREEMENT (vi) Person is not resident OR Is resident solely for performance of service under AGREEMENT (vii) Income is paid out of funds under AGREEMENT 92 Income from Salary Exemptions: 4. Perquisites without Marginal Cost to Employer [2nd Sched, P-I, Cl-53A] Hotel/Restaurant Free/subsidized food during duty hours Educational Institution Free/subsidized education Hospital/Clinic Free/subsidized Medical Treatment Any other notified by FBR Totally Exempt 93 Income from Salary Exemptions: 5. Special Allowance [2nd Sched, P-I, Cl-39] Any allowance, other than Conveyance and Entertainment Allowance, specially granted to meet expenses wholly and necessarily incurred in performance of office duties Exempt Clarification: The allowance solely expended in the performance of employee’s duty does not include; (i) allowance which is paid in monthly salary on fixed basis or percentage of salary; or (ii) allowance which is not wholly, exclusively, necessarily or actually spent on behalf of the employer 94 Income from Salary Exemptions: 6. Workers’ Participation Fund [2nd Sched, P-I, Cl-26] Amount received as worker, out of Workers' Participation Fund Exempt 95 Income from Salary Exemptions: 7. Salary Income of Seafarer [2nd Sched, P-I, Cl-4] Salary income shall be exempt if Pakistani seafarer is on Pakistan flag vessel for 183 days or more on vessel Foreign vessel No limit of number of days Following conditions required for exemption: (i) Income remitted to Pakistan (ii) through normal banking channel (iii) within 2 months of relevant tax year 96 Income from Salary Exemptions: 8. Allowance to person working outside Pakistan [2nd Sched, P-I, Cl-5] Allowance from Govt of Pakistan to a citizen of Pakistan for rendering services outside Pakistan Exempt 97 Income from Salary Exemptions: 9. Full Time teacher/researcher [2nd Sched, P-III, Cl-1(2)] Tax payable in salary shall be reduced by 25% if following conditions are fulfilled: (i) The individual is Full time teacher/researcher (ii) in non-profit education/research institution, duly recognized by a. Higher Education Commission (HEC) b. Board of Education c. University recognized by HEC (iii) including in any Government research institute Above shall not apply to teacher of medical profession who (i) derive income from private medical practice or (ii) receive share of consideration received from patients 98 Income from Property Property Land/Building Owner/Landlord Tenant Rent means: Amount received/receivable Accrual Basis By owner of land/building As consideration to use/occupy OR right to use/occupy the land/building Rent includes: Forfeited deposit on contract for sale of land/building 2 Important Questions: 1. Geographical Source of Income 2. Basis of Taxation [S-15(1)&(2)] Deciding a Property Income case 99 Income from Property 1. Geographical Source of Income [S-101(9) & (10)] Immovable Property situated in Pakistan Right to explore natural resources in Pakistan Rental Income shall be Pakistan Source Income Gain on disposal of above property or right shall also be Pakistan Source Income 100 Income from Property Deciding Income from Property Case: Income from Property derived by a person shall be taxable under "Normal Tax Regime” Rental income shall be reduced by allowable expenses, detailed in Section-15A, and remaining amount shall by included in taxable income under Normal Tax Regime Rent 101 Deciding Income from Property Case: Income from Property Rent Rent Advance ADJUSTABLE against Rent Taxable on accrual basis automatically included in taxable income because of accrual basis of taxation NON-ADJUSTABLE Advance (Building) [S-16] i. 1/10th of advance will be treated as Rent in • TY of receipt & • 9 subsequent TYs ii. Nothing will be included in taxable income, in the tax year in which such advance is refunded iii. If tenancy is terminated before 10 years and previous advance is returned and new advance is received then: Amount of new advance - Amount charged to tax earlier X (X) X 1/10th of advance will be treated as Rent in • TY of receipt & • 9 subsequent Tys 102 Deciding Income from Property Case: Income from Property Rent [S-15], [S-39] & [S-66] Important !! (i) Rent received/receivable OR Fair Market Rent, which ever is higher, is taxable [S-15(4)] (ii) Above is not applicable if Fair Market Rent has already been included in salary income due to self hiring of property [S-15(5)] (iii) Following amounts shall be included in taxable income under the heads of income mentioned thereagainst; • • • • • Ground Rent Rental income from sub-lease of land or building Rental income from lease of building, together with Plant & Machinery Amount of amenities, utilities, other services connected with renting Amount received as consideration for vacating possession of building [S-39(1)(d)] [S-39(1)(e)] [S-39(1)(f)] & [S-15(3)] [S-39(1)(fa)] & [S-15(3A)] [S-39(1)(k)] Income from Other sources (iv) When a property is owned by two or more persons & their share is definite and ascertainable then Persons shall not be treated as AOP Share of each person's income from property shall be taxed separately 103 Income from Property Deciding Income from Property Case: Allowable Deductions [S-15A] i. Building Repair Allowance 1/5th of rent chargeable to tax ii. Insurance Premium-Building Paid/Payable iii. Rates, tax, charge, cess not being Income Tax Paid/Payable iv. Ground Rent Paid/Payable v. Markup on loan to acquire, construct, renovate, extend, reconstruct property Paid/Payable vi. HBFC Loan / Scheduled Bank Loan on scheme based on sharing rent (share in rent+share in appreciation in value) vii. Markup on mortgages/charges Paid/Payable Paid 104 Income from Property Deciding Income from Property Case: Allowable Deductions [S-15A] viii. Expenses wholly & exclusively for deriving rent including administrative and collection charges • • • • • Paid/Payable maximum upto 4% of rent chargeable to tax must be paid within 3 subsequent tax years otherwise will be included in taxable income in 4th subsequent tax year if unpaid amount which is included in taxable income, as above, is subsequently paid, then it will be allowed as deduction in tax year in which it is paid ix. Legal Charges Paid/Payable (to defend title of property or defend any suit connected with property in a court) x. Irrecoverable Rent Conditions: i. Tenancy was bonafide ii. defaulting tenant has vacated property OR steps have been taken to compel tenant to vacate property iii. defaulting tenant is not occupying any other property of same person iv. person has taken all legal steps for recovery OR reasonable grounds exist that legal proceedings will be useless v. rent was previously included in taxable income and tax was duly paid (if irrecoverable rent is subsequently recovered, then it will be included in taxable income in tax year of recovery) xi. Inadmissible deductions [S-21] will be studied in "Income from Business" 105 Income From Business Business [S-2(10)]: Includes; • Trade • Commerce • Manufacture • Profession • Vocation OR adventure/concern in nature of above But does not include EMPLOYMENT Income from Business [S-18]: Following incomes shall be chargeable to tax under head "Income from Business" • Profits & gains • Income derived by trade/profession/similar association • Income from hire/lease • FMV of any benefit* OR perquisite • Management Fee Skip Definition >>> Of any business carried on by person from sale of goods OR provision of services to members of tangible movable property from any past, present or perspective business relationship • benefit includes debt or profit on debt waived off under SBP(Banking Policy Deptt.) circular 29 of 2002 derived by a management company including Modaraba Management Company Clarification: Income of co-operative societies from the sale of goods, immoveable property or provision of services to its members is and has always been chargeable to tax Profit on debt : If person's business is to derive such income then it's "Income from business" otherwise it's "Income from Other Sources” Lease rentals from lease of any asset shall be "Income from business" if Lessor is scheduled bank, investment bank, DFI, Modaraba, Leasing Co., "Profit on debt" earned by Mutual fund OR Pvt Equity & venture capital fund & distributed to Banking Co. or NBFC this distributed share shall be "Income from Business" and not "Income from Other Sources" for Income subject to taxation under sections 5A, 5AA, 6, 7 and 7A shall not be chargeable to tax under section 18 106 Income From Business Important Question: 1. Basis of Taxation Deciding a Business Income case 107 Basis of Taxation Value of benefit, from trading liability for which deduction was allowed, will be business income Cash Basis of Accounting [S-33] Accrual Basis of Accounting [S-34] Derive income When received When due to person (amount is due to person when he is entitled to receive it) Incur expense When paid When payable by person (amount is payable by person when - all events determining liability have occurred - amount of liability can be ascertained with reasonable accuracy) Un-paid Liability: • if deduction allowed in a tax year for an expense which is neither paid in same tax year nor paid in 3 subsequent tax years then it will be included in taxable income in 4th subsequent tax year 1. 2. 3. 4. 5. 6. Method of Accounting [S-32] The method of accounting should be regularly employed Company must employ accrual basis of accounting. Other persons may apply cash basis of accounting OR accrual basis of accounting FBR can prescribe a class of persons to follow cash or accrual basis of accounting Change in method of accounting: a. Application to Commissioner in writing b. Satisfy commissioner that the change in method of accounting is necessary to clearly reflect taxable income c. Commissioner, if satisfied may approve, by an order in writing, that the method of accounting be changed While applying change in method of accounting, it must be ensured that no item of income or expense is omitted or accounted for more than once. • if amount included in taxable income as stated above is paid in any later year then it will be allowed as deduction in tax year in which it is paid Stock in trade [S-35] Opening Stock Starting/1st period Subsequent Period Cost Closing Stock Lesser of NRV FMV when stock ventured in business Cash Accounting Accrual Accounting Any of Marginal OR Absorption Costing Absorption Costing 108 Deciding Business Income Case 1. Speculation Business 2. Deductions Allowed 3. Deductions not allowed 4. Assets 5. Acquisition & Cost 6. Depreciation 7. Initial Allowance 8. Disposal & Consideration 9. Depreciation on asset partly used in business 10. Leasing Business 11. Intangibles 12. Pre-commencement Expenditure 13. Scientific Research Expenditure 14. Bad Debts 15. Employee Training & Facilities 16. Profit on Debt, Financial Cost and Lease Payments 109 Deciding Business Income Case 1. Speculation Business [S-19]: Means: business in which, contract for purchase or sale of commodity is settled, otherwise than by actual delivery of commodity does not include following contracts to guard against future price fluctuations i. contract in respect of materials to fulfill another contract of actual delivery of goods ii. contract in respect of shares & stocks entered into by dealer or investor iii. contract entered into by member of stock exchange or forward market to guard against jobbing or arbitrage transaction in ordinary course of business Taxation of Speculation business: i. It shall be treated as a separate business from any other business under head "Income from Business“ ii. Principles of apportionment of deductions under section 67 shall apply as if it is a separate head of income iii. Loss from Speculation Business shall be treated under section 58 110 Deciding Business Income Case 2. Deductions Allowed [S-20]: i. Any expenditure incurred wholly and exclusively for purpose of business ii. Depreciation of tangible assets, amortization of intangible assets & pre-commencement expenditures iii. Legal & financial advisory services & administrative cost incurred by amalgamated company for it's amalgamation iv. Animal used for business & profession becomes permanently disable or is dead then following deduction shall be allowed: Actual Cost Less:Amount realized from animal carcass X (X) X (Above is not applicable in case of animals which are stock-in-trade) 111 Deciding Business Income Case 3. Deductions not Allowed [S-21]: i. Cess, rate, tax on profits of business whether payable in Pakistan or outside Pakistan ii. Tax deducted at source from amounts received iii. All such payments shall not be allowed as deduction, if applicable tax at source, is not deducted while making payment Except: in case of purchase of Raw Material & Finished Goods, the disallowed expense shall be limited to 20% of total purchases iv. Amount of commission paid or payable in excess of 0.2% of Sales of items listed in 3rd Sched of Sales Tax Act, 1990 to a person who is not appearing on ATL under ITO v. Entertainment expenses exceeding prescribed limits. Rule-10 specifies the prescribed limits as follows: Expense has been incurred a. wholly & exclusively for business b. outside Pakistan for business transaction OR allocated as Head Office Expenses Note: All these people c. inside Pakistan, for foreign customers & suppliers (who are entertained) d. at business premises for customers & clients should be related directly e. on meetings of shareholders, directors, agents or employees to the person’s business. f. on opening of a new branch g. on entertainment of persons related directly to business Entertainment means meals, refreshment, reasonable leisure facility in accordance with traditions of business & subject to overall norms of business 112 Deciding Business Income Case 3. Deductions not Allowed [S-21]: vi. Contributions to following funds: Un-recognized Provident Fund / Un-approved Pension Fund / Un-approved Superannuation Fund / Un-approved Gratuity Fund vii. 50% of contribution to following funds: Approved Gratuity Fund / Approved Pension Fund / Approved superannuation fund viii. Contribution to Provident Fund OR any other fund for benefit of employees, in respect of which, arrangements have not been made for deduction of tax at source at the time of making payments from the fund to employees ix. Penalty / fine for violation of any law x. Personal expenditure xi. Amount transferred to Reserve OR capitalization of profits in any way xii. Profit on debt / Brokerage / commission / Salary / remuneration paid by an AOP to its members 113 Deciding Business Income Case 3. Deductions not Allowed [S-21]: xiii. Expenditure under single head of account exceeding Rs 250,000/- paid other than by : a. crossed cheque b. crossed bank draft c. crossed pay order d. other crossed banking instrument e. online transfer f. payment through credit card Above is not applicable to following: a. Company [from date notified by FBR] b. expenditure not exceeding Rs 25,000/c. expenditure on account of: • Utility bills • Freight charges • Travel fare • Postage • Taxes/duties/fees/fines 114 Deciding Business Income Case 3. Deductions not Allowed [S-21]: xiv. Expenditure (paid/payable) by a Company, under single head of account exceeding Rs 250,000/- other than by Digital Means from business bank account of the taxpayer notified to the Commissioner under section 114A Above is not applicable to following: a. expenditure not exceeding Rs 25,000/b. expenditure on account of: • Utility bills • Freight charges • Travel fare • Postage • Taxes/duties/fees/fines This clause will be applicable from date notified by FBR Means digital payments and financial services including but not limited to • online portals or platforms for digital payments/receipts; • online interbank fund transfer services; • online bill or invoice presentment and payment services; • over the Counter digital payment services or facilities; • card payments using o Point of Sale terminals, o QR codes, o mobile devices, o ATMs, o Kiosk or • any other digital payments enabled devices or • any other digital or online payment modes. 115 Deciding Business Income Case 3. Deductions not Allowed [S-21]: xv. Salary exceeding Rs 25,000/- per month, paid other than by: a. crossed cheque OR b. direct transfer to employee bank account OR c. Digital Means xvi. Capital expenditure xvii. In case of pharmaceutical manufacturer any advertisement/publicity/sales promotion expense > 10% of turnover xviii. Utility bills in violation of prescribed conditions and limits xix. With effect from 1st October 2020, any expenditure attributable to sales made by industrial undertaking, to person required to be registered but not registered under Sales Tax Act 1990. The attributable expense shall be calculated as follows: (A/B) x C Disallowed expense shall not Where; exceed 10% of claimed A = Total deductions claimed deductions B = Turnover for the Tax Year C = Sales to one un-registered person upto Rs 100 million or above FBR may exempt a person from this clause 116 Deciding Business Income Case 3. Deductions not Allowed [S-21]: xx. any expenditure attributable to sales claimed by any person who is required to integrate but fails to integrate his business with FBR through approved fiscal electronic device and software Provided that disallowance of expenditure under this clause shall not exceed 8% of the allowable deduction. 117 Deciding Business Income Case 4. Assets: i. Depreciable Asset [S-22(15)]: Means any tangible movable property, immovable property or structural improvement to immovable property owned by a person that : a. has normal useful life exceeding one year b. is likely to lose value as a result of normal wear and tear or obsolescence AND c. is used wholly or partly by person in deriving income from business it shall not include any asset whose entire cost is allowed as deduction under Income Tax Ordinance 2001 ii. Structural Improvement [S-22(15)]: Includes building, road, driveway, car park, railway line, pipeline, bridge, tunnel, airport runway, canal, dock, wharf, retaining wall, fence, power lines, water or sewage pipes, drainage, landscaping or dam. Where any asset is jointly owned by Tax Payer and Islamic Financial Institution under Musharika Financing or Diminishing Musharika Financing, such asset shall be treated to be owned by “Tax Payer” [Proviso to S-22(15)] iii. Eligible Depreciable Asset [S-23(5)]: a depreciable asset which is not: a. furniture & fittings b. road transport vehicle not plying for hire c. plant & machinery previously used in Pakistan d. plant & machinery whose entire cost is allowed as deduction under Income Tax Ordinance 2001 e. immovable property OR structural improvement to immovable property 118 Deciding Business Income Case 4. Assets: iv. Business Asset [S-75(7)]: Means asset held wholly or partly for use in business, including stock-in-trade and depreciable asset v. Personal Asset [S-75(7)]: Means asset held wholly for personal use 119 Deciding Business Income Case 5. Acquisition & Cost: i. Acquisition [S-75]: when the person begins to own the asset including when the right is granted OR when the personal asset is applied to business use ii. Purchase of Asset through Banking Channel [S-75A]: Immovable property having FMV > PKR 5 million OR Any other asset having FMV > PKR 1 million If not purchased through banking channel; Then amount shall not be considered as cost i. for calculating depreciation/ amortization and ii. for calculating gain on disposal. Penalty @ 5% of higher of FBR value or DC rate will be payable iii. Cost [S-76]: Consideration paid / payable in cash FMV of consideration given in kind Incidental expenditure for acquisition / disposal of asset Expenditure to alter or improve asset X X X X X 120 Deciding Business Income Case 5. Acquisition & Cost: ii. Cost [S-76]: a. Cost of Passenger transport vehicle not plying for hire shall not exceed Rs 7.5 million. [Section-22(13a)] b. Cost of immovable property shall not include cost of land [Section-22(13b)] c. Forex Gain/loss to be adjusted in cost of asset [Section-76(5 & 6)] • if asset has been acquired with a foreign currency loan, then increase or decrease in liability due to foreign currency rate shall be adjusted in cost of asset • while determining above forex gain / loss the person's position under hedging agreement relating to foreign currency loan shall also be considered d. Grant, subsidy, rebate, commission or any other assistance in relation to acquisition of asset [Section-76(10)] if chargeable to tax then it will be included in cost of asset and vice versa e. If asset acquired in a non-arm's length transaction, then FMV of asset shall be treated as its cost [Section-78] f. If personal asset is applied to business use, then its FMV shall be treated as its cost [Section-76(3)] 121 Deciding Business Income Case 5. Acquisition & Cost: ii. Cost [S-76]: g. If asset is produced or constructed by person, then its cost will include following:[Section-76(4)] Total production/construction cost +Incidental expenditure for acquisition / disposal of asset +Expenditure to alter or improve asset X X X X h. If an asset is partly disposed off, then its cost shall be apportioned between the part disposed off and part retained on basis of respective FMV at time of acquisition of asset [Section-76(7)] i. If acquisition of an asset is derivation of an amount chargeable to tax, then its cost will include following:[Section-76(8)] Amount chargeable to tax Amount paid to acquire asset j. X X X If acquisition of an asset is derivation of an amount exempt from tax, then its cost will include following:[Section-76(9)] Amount exempt from tax Amount paid to acquire asset X X X 122 Deciding Business Income Case 6. Depreciation [S-22]: Method of tax depreciation : Diminishing/Reducing Balance Method Rate of Depreciation : as per 3rd Schedule Part-I Full Year depreciation in year of acquisition No Depreciation in year of disposal 7. Initial Allowance [S-23]: Allowed for "eligible depreciable asset" used 1st time in Pakistan OR Year in which commercial production is started Rate of Initial Allowance : as per 3rd Schedule Part-II which ever is later 123 Deciding Business Income Case 8. Disposal and Consideration: i. Disposal [S-75]: Asset is treated as disposed off when: • person parts with its ownership • sold, exchanged, transferred, distributed, destroyed or lost • cancelled, redeemed, relinquished • Transmitted • put wholly to private use from business use • discarded or ceased to be used Gain or loss on disposal shall be calculated as follows: Consideration for disposal Less: Cost X X Initial Allowance OR First Year Allowance OR Accelerated Tax Depreciation (X) (X) (X) Normal Depreciation (X) X X Gain / Loss on disposal 124 Deciding Business Income Case 8. Disposal and Consideration: ii. Consideration for Disposal [S-77]: Amount Received FMV of consideration in kind X X X Which ever is higher FMV of asset at time of disposal X a. If Asset is lost or destroyed, then consideration shall include compensation, indemnity or damages received from: • insurance claim • Settlement [Section-77(2)] • judicial decision b. If asset applied to personal use from business use or is discarded, then consideration shall be FMV of asset [Section-77(3)] c. If two or more assets disposed off in single transaction and consideration of each asset is not specified, then total consideration received shall be [Section-77(5)] apportioned on basis of FMV of each asset, at time of disposal d. If actual cost of passenger transport vehicle not plying for hire was more than Rs 2.5 million, then consideration shall be calculated as follows: Actual consideration received on disposal x 2.5 million Actual cost paid to acquire vehicle [Section-22(10)] 125 Deciding Business Income Case 8. Disposal and Consideration: ii. Consideration for Disposal [S-77]: [Section-22(13d)] e. If consideration for immovable property exceeds its cost, then it's consideration received shall be treated as cost. f. If asset disposed off in a non-arm's length transaction, then FMV of asset shall be treated as consideration. [Section-78] g. If depreciable asset is exported/transferred outside Pakistan, then its cost shall be treated as consideration received. [Section-22(14)] 126 Deciding Business Income Case 9. Depreciation on asset partly used in business: i. Where asset is used partly for business purposes and partly for any other use, the depreciation expense shall be restricted to fair proportional part which is used for business. [Section-22(3)] ii. Initial Allowance/First Year Allowance/Accelerated Tax Depreciation shall be allowed on total cost of asset. The fact that asset was partly used for business is irrelevant here. iii. Written Down Value of such assets shall be calculated, as if the asset was wholly used for business purposes. [Section-22(6)] iv. Asset shall be treated to be wholly owned by the taxpayer if asset is jointly owned by a taxpayer and an Islamic financial institution licensed by SBP or SECP under Musharika or diminishing Musharika arrangement [Proviso to Section-22(15)] v. On disposal of such asset, following shall be deducted from consideration Total cost of asset Less: Initial Allowance-if any First Year Allowance-if any Accelerated Tax Depreciation-if any Normal Depreciation allowed as deduction (proportionate basis) X (X) (X) (X) OR Tax WDV Add: Depreciation Expense disallowed X X X (X) X 127 Deciding Business Income Case 10. Leasing business: Leasing Co., Investment Bank, Modaraba, Scheduled Bank, Development Finance Institution i. ii. Initial Allowance/First Year Allowance/Accelerated Tax Depreciation or Normal Depreciation is allowed as deduction only against lease rental income [Sections-22(12), 23(4), 23A(2), 23B(2)] [Section-22(13c)] Asset shall be treated as used in the business of lessor iii. On completion of lease term, asset shall be transferred to lesee and treated as disposed off by leasing company and the consideration received shall be [Section-77(4)] residual value received by leasing company iv. The cost of asset realized through lease rentals + residual value should not be less than cost of the asset [Section-77(4)] 128 Deciding Business Income Case 11. Intangibles [S-24]: Means : patent, invention, design or model, secret formula or process, copyright, trade mark, scientific or technical knowledge, computer software, motion picture film, export quotas, franchise, license, intellectual property, or other like property or right, contractual rights and any expenditure that provides an advantage or benefit for a period of more than one year other than expenditure incurred to acquire a depreciable asset or unimproved land i. Cost of Intangibles: Means expenditure incurred in acquiring or creating intangible Includes expenditure for improving or renewing intangible ii. Conditions for amortization: a. intangible is wholly or partly used for business b. normal useful life is more than 1 year iii. Rules for amortization: a. Year of acquisition; Number of days basis (An intangible available for use on a day shall be treated as used on that day) b. Year of disposal; No amortization 129 Deciding Business Income Case 11. Intangibles [S-24]: iv. Rate of amortization: Cost Useful life in whole years v. Note: if useful life is not ascertainable, then it will be treated as 25 years Intangible partly used for business and partly for any other use: Amortization expenses shall be restricted to fair proportion of intangible used for business. vi. Disposal: Upon disposal, following shall be included in income from business Consideration Written Down Value X X X 130 Deciding Business Income Case 12. Pre-commencement Expenditure [S-25]: Means, expenditure incurred before commencement of business wholly and exclusively to derive taxable income Includes, • cost of feasibility studies • construction of prototypes • trail production Does not include, • expenditure to acquire land • depreciable assets • Intangibles i. ii. Method: Rate: Straight line basis as per 3rd Schedule, Part-III No deduction shall be allowed for expense which allowed as deduction under any other provision of Income Tax Ordinance 2001 131 Deciding Business Income Case 13. Scientific Research Expenditure [S-26]: Expenditure for scientific research Contribution to Scientific Research Institution to do research wholly and exclusively to derive income from business shall be allowed as deduction. • Scientific Research: Means activity in Pakistan in the field of natural or applied science for development of human knowledge • Scientific Research Expenditure: Means expenditure on scientific research, for development of business Includes contribution to scientific research institution to do research for business not include expense incurred for o acquisition of depreciable asset or intangible o acquisition of immovable property o ascertaining existance/location/extent/quality of natural deposits • Scientific Research Institution: Means any institution certified by FBR to do scientific research in Pakistan 132 Deciding Business Income Case 14. Bad Debts [S-29]: i. Conditions to claim bad debts as expense a. Amount was previoulsy included in taxable income b. In case of a financial institution, the amount was lent to derive taxable income c. amount is written off as bad debts in accounts d. resonable grounds exist that debt is irrecoverable ii. Subsequent recovery of bad debts written off: Following shall be included in taxable income Whole amount of debt amount previously allowed as deduction 100,000 (80,000) 20,000 Subsequent recovery Less: amount previously not allowed Included in income from business Deduction from income from business Case (a) 60,000 (20,000) 40,000 Case (b) 10,000 (20,000) (10,000) 133 Deciding Business Income Case 15. Employee Training & Facilities [S-27]: Expenditure in respect of following is allowed: a. Educational institution/hospital for benefit of employees/dependents b. Institute for training of industrial workers recognized/aided/funded by Federal Govt / Proviscial Govt / Local Govt c. Training of Pakistani citizen under scheme approved by FBR established in Pakistan 134 Deciding Business Income Case 16. Profit on debt, Financial costs and Lease Payments [S-28]: i. Profit on debt: • on loan utilized for business purposes • paid by bank on deposit accounts ii. Financial costs: • by originator on securitization of receivables in respect of special purpose vehicle (SPV) iii. Lease rentals • paid to scheduled bank, financial institution or approved modaraba, leasing company, SPV • The principal amount in above rental for the cost of passenger transport vehicle not plying for hire shall not exceed Rs 2.5 million iv. Share of profit • under musharika scheme paid to a bank • under musharika scheme paid to certificate holders. Such scheme should be approved by SECP and Religious Board under Modaraba Ordinance 1980 • paid on funds borrowed from modaraba or participation term certificates v. State Bank of Pakistan (SBPs) share of profit paid by • House Building Finance Corporation (HBFC) • National Development Leasing Corporation • Small & Medium Enterprises Bank on investment/credit line provided by SBP 135 Capital Gains 2 Important Questions: 1. Geographical Source of Income 2. Basis of Taxation Deciding a Capital Gains case 136 Geographical Source of Income [S-101(13)] & [S-101A] 1. Gain on disposal of shares of Resident Company shall be Pakistan Source Income 2. Gain on disposal of Assets outside Pakistan [S-101A] 137 Basis of Taxation Accrual basis, as Gain / Loss is to be taxed in year of disposal [S-37(1)] 138 Deciding a Capital Gains Case 1. Capital Gains [S-37] 2. Capital Gain on disposal of Securities [S-37A] 3. Special provisions relating to Capital Gains tax [S-100B] 4. Deduction of Losses from Capital Gains [S-38] 5. Rule 13A – 13P 6. Bonus Shares 7. Exemptions 8. Chapter Summary 139 1. Capital Gains [S-37] Deciding a Capital Gains Case Capital Asset: Means “property of any kind held by person whether or not connected with business” Capital Gain from disposal of immovable property shall be taxable as separate block of income @ 1st Sched, P-I, Div-VIII Does not include i. Stock in trade ii. Depreciable asset iii. Intangibles iv. movable property held for personal use by person or dependents excluding following: a. painting, sculpture, drawing or other work of art Capital Loss from disposal b. Jewelry of these assets shall not be c. rare manuscript, folio or book recognized, only capital d. postage stamp or first day cover gains will be recognized. e. coin or medallion [S-38(5)] f. Antique [S-37(5)] 140 Deciding a Capital Gains Case 1. Capital Gains [S-37] Gain on Capital Asset [S-37(2)]: Consideration - Cost Gain/Loss X (X) X Cost shall not include: • expenses deductible under any other provision of Income Tax Ordinance • inadmissible deductions under section 21 [S-37(4)] Gain or Loss on disposal shall be recognized in year of disposal even if cash basis of accounting is being adopted. [S-37(1)] No loss on disposal shall be recognized if gain from such asset is not taxable [S-38(2)] 141 Deciding a Capital Gains Case 1. Capital Gains [S-37] Advance Tax on Shares [S-37(6-10)]: Shares Furnish prescribed information to CIT within 30 days of sale CIT may also demand information through notice Seller Buyer Application of CIT requesting payment without deduction of Adv. Tax OR deduction at reduced rate Payment Deduct Advance Tax @ 10% of S-68 FMV Pay to FBR With 15 days S-101A(4) Without reduction of liabilities Pay without deducting Advance Tax CIT agreed (after inquiry) 142 2. Capital Gains on Securities [S-37A] Security [S-37A(3)] : Means: • share of a public company • voucher of PTC • Modaraba Certificate • an instrument of redeemable capital • debt Securities • derivative products • Unit of exchange traded fund Deciding a Capital Gains Case This section is not applicable on • disposal of shares of a listed company, made otherwise than through stock exchange & are not settled through NCCPL. The provisions of section 37 shall apply on such disposal of shares • Banking Co & Insurance Co [S-37A(1)] Capital Gain from disposal of security shall be taxed as a separate block of income @ 1st Schedule, Part I, Division VII [S-37A(1)&(4)] Loss from securities shall be setoff only against gains from securities & can be c/f upto 3 subsequent TYs. This c/f is allowed only for loss arising during TY 2019 & onwards. [S-37A(5)] shares will be treated as security, if at time of disposal, the company was a public company Corporate debt security Term Finance Certificates (TFCs), Sukuk Certificates (Sharia Compliant Bonds), Registered Bonds, Commercial Papers, Participation Term Certificates (PTCs) and all kinds of debt instruments issued by any Pakistani or foreign company or corporation registered in Pakistan [S-37A(3A)(a)] Government debt security Treasury Bills (T-bills), Federal Investment Bonds (FIBs), Pakistan Investment Bonds (PIBs), Foreign Currency Bonds, Government Papers, Municipal Bonds, Infrastructure Bonds and all kinds of debt instruments issued by Federal Government, Provincial Governments, Local Authorities and other statutory bodies [S-37A(3A)(b)] 143 3. Deciding a Capital Gains Case Special provisions relating to Capital Gains tax [S-100B] Capital gains on disposal of listed securities and tax thereon, subject to section 37A, shall be determined in accordance with Eighth Schedule This section is not applicable on following: • mutual fund • banking company • NBFC • insurance company • modaraba • company, in respect of debt securities only and • any other person notified by FBR 144 4. Deduction of Losses from Capital Gains [S-38] Deciding a Capital Gains Case If Gains from capital asset are not taxable Then Losses from same asset shall not be allowed for setoff [S-38(2)] Loss on following assets shall not be recognized: (a) A painting, sculpture, drawing or other work of art; (b) jewelry; (c) a rare manuscript, folio or book; (d) a postage stamp or first day cover; (e) a coin or medallion; or (f) an antique. [S-38(5)] 145 Deciding a Capital Gains Case Capital loss shall not be recoginzed in case of following transactions [Rule-13F] • Gain/loss computation shall be made on basis of FIFO inventory accounting method Wash Sales : Sold security repurchased, within 1 month, to maintain portfolio • FIFO not applicable in case of same day purchases, instead Average Method to be used [R-13N(5)] Tax Swap Sale : Repurchase of security in same industry sector to maintain risk of portfolio • NCCPL shall add 0.5% of trade (as incidental expenses) to transaction cost and consideration [R-13N(8)] Cross Sale : Transaction made between two accounts of one investor. No sale made to any outsider. • Capital loss shall be adjusted only against capital gain of security 146 Deciding a Capital Gains Case Bonus Shares • Cost of Bonus shares would be computed by spreading the cost of old shares over the old shares plus the bonus shares taken together. • Thereafter, this new cost of a share would be the same for old and new shares. • When bonus shares are disposed of, new cost will be taken for computation of capital gain. • Similarly, when the old shares are disposed of, new cost will be taken for computation of capital gain. Old Shares Bonus Shares No. of shares 100 10 Price per share 11 0 110 New Cost Total Investment 1,100 0 1,100 = 10 147 Deciding a Capital Gains Case Following Capital Gains are exempt from tax: 1. Transfer of a stock exchange membership rights 2. Capital gain on sale of shares of industrial undertaking set up in Export Processing Zones 3. Capital gain on sale of immovable property, earned by dependent of Shaheed belonging to Pakistan Armed Forces or a person who dies during service of armed forces or Federal or Provincial Governments 4. Capital Gain Tax rates shall be reduced by a. 50%, on first sale of immovable property allotted to employee of Armed forces OR FG OR PG (serving or retired) b. 75% on sale of above immovable property, after 3 years of acquisition 148 Capital Gains Asset Stock in trade Depreciable asset Intangibles Moveable Property Personal Use Under section 38(5) No loss to be recognized, only gains will be recognized Un-listed Security Security [S-37A] Others Banking Co Listed Security Insurance Co Gain/loss calculation Others Other than following: mutual fund, banking company, NBFC, insurance company, modaraba, company, in respect of debt securities only and any other person notified by FBR Immoveable Property Separate Block Tax @ 1st Sched, P-I, D-VIII Separate Block Tax @ 1st Sched, P-I, D-VII As per 8th Sched Disposal Gain Loss Fully taxable Refer losses 149 Income from Other Sources 1. What is it ? [Section-39] 2. Basis of Taxation 3. Deductions Allowed 150 Income from Other Sources What is it ? [S-39] Income Loan/Advance/Deposit for issuance of shares/Gift Arrears of Profit on Debt 151 Income from Other Sources Income of every kind RECEIVED in a tax year, which is not included in any other Head of Income and is not exempt from tax and is not subject to tax under section 5, 6 & 7 Income Includes: i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. Dividend Royalty Profit on Debt Additional payments on tax refunds under tax laws Ground Rent Rent from sub-lease of land or building Income from lease of building, together with Plant & Machinery Income from amenities/utilitites connected with renting of building Annuity/Pension Prize bond, lottery, raffle winnings, cross word puzzles, sale promotion prizes offered by a company Consideration for provision, use or exploitation of property or natural resources S-85(5) “relative” means: (a) an ancestor, a descendant of any of the grandparents, or an adopted child, of the individual, or of a spouse of the individual; or (b) a spouse of the individual or of any person specified in clause (a). xii. FMV of benefit for provision, use or exploitation of property or natural resources xiii. Consideration for vacating possession of building, reduced by amount paid to acquire possession of building {to be included in taxable income of current tax year and 9 succeeding tax years in equal proportion.} xiv. Amount received from Approved Income Payment Plan OR Approved Annuity Plan xv. Amount/FMV of property received without consideration [except gift from relative as defined in S-85(5)] 152 Income from Other Sources Loan/Advance/Deposit for issuance of shares/Gift Loan/Advance/Deposit for issuance of shares/Gift shall be treated as "Income from Other Sources" if: received from a tax payer other than a Banking Company OR Financial Institution AND is received otherwise than by a Crossed Cheque or Banking Channel Above is not applicable to advance payments for sale of goods or supply of services 153 Income from Other Sources Arrears of Profit on Debt from investment in: - National Saving Deposit Certificate - Defense Saving Certificate Which has resulted in income chargeable to tax at a higher rate of tax then taxpayer may elect for profit to be taxed in the tax year to which it relates. Taxpayer can elect this option by notice in writing to Commissioner before due date of filing return of income OR such later date as may be allowed by Commissioner in writing 154 Income from Other Sources Basis of Taxation [S-39(1)] Income of every kind RECEIVED in a tax year 155 Income from Other Sources Deductions Allowed [S-40] 1. Expenditure paid to derive income from other sources, other than expenditure of Capital nature. An expenditure is of Capital Nature if it has a useful life of more than 1 year 2. Zakat under Zakat & Ushr Ordinance 1980, paid by the person, at the time when profit on debt is paid to the person 3. Depreciation on Plant & Machinery and building is allowed as deduction in case where Building is leased together with Plant & Machinery. 4. Initial Allowance on Plant & Machinery is allowed as deduction in case where Building is leased together with Plant & Machinery Deductions not allowed: 1. Expenditure allowed as deduction under any other head of income 2. Inadmissible Expenses under section 21 156 Losses 1. Set Off of Losses [Section-56, 58 & 59] 2. Carry Forward of Losses [Section-57, 58 & 59] 3. Limitation on Setoff & Carry Forward of Losses [S-59A] 4. Foreign Losses [S-104] 157 1. Set Off of Losses [Section-56, 58 & 59] Set off against Loss arising from Salary Property Capital Gains Business Spec. Non Spec. Salary Capital Gains Immovable Others Loss not Possible Property Business Security Other Sources Spec. Non Spec. Security Immovables Others Other Sources Not Allowed [S-56(1)] P O O O O P P O P O O P O P O O O O O P O O P O O O O P P O P P O P P P P O P O O O O O P O P O O • In case of losses from multiple heads of income, the loss from Business shall be set off last [S-56(3)] • Losses from income which is exempt from tax shall not be treated • Losses not set off shall be carried forward only against same head of income 158 2. Carry Forward of Losses [Section-57, 58 & 59] Salary Loss not possible Property C/f Not Allowed Spec. Carry forward allowed upto 6 subsequent tax years Loss from earliest tax year shall be set off first Non Spec. Carry forward allowed upto 6 subsequent tax years Loss from earliest tax year shall be set off first Un-absorbed depreciation could be carried forward to unlimited time; • Adjustment of un-absorbed depreciation in subsequent tax years shall be limited to 50% of business income of subsequent year • Above limit shall not apply if taxable income is less than Rs 10 million Un-absorbed depreciation shall be considered last Business Capital Gains Security Immovables Others Other Sources Loss sustained from 1st July 2020 & onwards by a Resident Company managing hotel can be c/f upto 8 years Carry forward allowed upto 3 subsequent tax years only if loss pertains to TY 2019 and onwards C/f Not Allowed Carry forward allowed upto 6 subsequent tax years Loss from earliest tax year shall be set off first C/f Not Allowed 159 3. Limitation on Setoff & Carry Forward of Losses [S-59A] i. In case of AOP, the loss shall be set off and carry forward only against income of AOP and in no case be utilized by its Member against their taxable income ii. In case of business loss, it shall be available to successor only by way of inheritance and shall not be available to any other successor iii. Loss due to depreciation, initial allowance and amortization etc shall be carried forward to unlimited periods • Adjustment of un-absorbed depreciation in subsequent tax years shall be limited to 50% of business income of subsequent year • Above limit shall not apply if taxable income is less than Rs 10 million iv. Business loss, speculation loss and capital loss cannot be carried forward unless determined by an order made under sections 120, 121 or 122 160 4. Foreign Losses [S-104] 1. Expenses incurred to derive foreign income are deductible only against that income 2. Foreign loss from a head of income, if not adjusted in relevant tax year, could be carried forward upto 6 subsequent tax years 3. In case there is brought forward loss of more than one tax year, the loss of earliest tax year shall be set off first Above provisions narrate that : i. loss from Foreign Source Income cannot be setoff against Pakistan Source Income ii. loss from Foreign Source Income cannot be setoff against any other head of income under Foreign Source Income iii. loss from Foreign Source Income can only be carried forward to 6 subsequent tax years against same head of income from foreign source 161 Deductible Allowances 1. Zakat [S-60] 2. Workers’ Welfare Fund [S-60A] 3. Workers’ Participation Fund [S-60B] 4. Education Expenses [S-60D] 162 Deductible Allowances 1. Zakat [S-60] Zakat under Zakat and Ushr Ordinance 1980 Profit on Debt Any other paid Allowed as deduction from “Income from Other Sources” Allowed as deductible allowance If total income is less than amount of Zakat then: • Refund • Carry forward Not allowed • Carry back 163 Deductible Allowances 2. Workers’ Welfare Fund [S-60A] • Amount paid under "Workers' Welfare Fund Ordinance 1971" will be allowed as deductible allowance • If accrual basis of accounting is followed for "Income from Business" then deductible allowance will be allowed for this payable expense 164 Deductible Allowances 3. Workers’ Participation Fund [S-60B] • Amount paid under "Companies' Profit (Workers' Participation) Act 1968" will be allowed as deductible allowance 165 Deductible Allowances 4. Education Expenses [S-60D] Allowed to Purpose Other Details Individual having taxable income less than Rs 1,500,000/Allowed only to one of the parents in respect of fees of their children Parent have to provide NTN or Name of educational institution Deductible Allowance for Tuition Fees paid in a Tax Year 1. Deductible allowance shall not exceed lower of following: • 5% of tuition fee paid • 25% of taxable income • 60,000 x Number of children 2. Deductible allowance, if not utilized fully against taxable income shall not be carried forward to subsequent tax year 3. Employer is not allowed to deduct these expenses while withholding tax from salary under section 149 166 Tax Credits 1. Tax payable by a tax payer shall be reduced by the amount of Tax Credits allowed to the tax payer. [Section-4(2)] 2. Tax credits allowed to the tax payer will be categorized under following: a) Foreign Tax Credits [Section-103] b) Tax Credits under Part X of Chapter III c) Tax Credit for Advance Tax and Tax deducted at source [Section 147 & Section 168] 3. Where more than one tax credits are allowed to a tax payer in a tax year then tax credits shall be applied in above mentioned order [Section-4(3)] 167 Foreign Tax Credits [S-103] 1. Needless to mention that Foreign Tax Credit is available to “Resident Person” in respect of “Foreign Source Income” taxable Including “Withholding Tax” in Pakistan (Average rate of Pakistan Income Tax) 2. Foreign Tax Credit shall be: a) Foreign Tax paid b) Pakistan Tax Payable in respect of income Which ever is Less x (Net Foreign Source Income) Tax Imposed ÷ Taxable Income FSI after deducting directly relatable expenses & Expenses apportioned in accordance with S-67 3. Where tax payer has FSI under more than one Head of Income, this section shall be applied separately to each Head of Income 4. Unadjusted foreign tax credit shall not be refunded, carried back or carried forward 5. To avail this tax credit, foreign taxes must be paid with in two years after end of tax year in which foreign income was derived 168 Tax Credits under Part X of Chapter III 1. Tax Credits of each item under Part X of Chapter III [Section 61 & 63] shall be calculated using following formula: Tax Credit = 2. A B x C Where: A = Tax Assessed before any Tax Credit under Part X of Chapter III B = Taxable Income C = This amount will be calculated for each type of tax credit under section 61 to 63 Where individual is member of AOP, component "B" shall include share of profit from AOP, even if tax on income of AOP has been paid by the AOP [Section-65(1)(b)] 3. Component "A" shall be computed after including the share of profit from AOP [Section-65(1)(a)] 169 Tax Credits under Part X of Chapter III 61. 63. 64D. 65F. 65G. Charitable donations Contribution to an Approved Pension Fund Tax credit for point of sale machine Tax credit for certain persons Tax credit for specified industrial undertakings 170 1. Charitable Donations [S-61] Eligible Person Any Person Value “C” of formula Lesser of: i. Amount of Donation ii. Tax Credits under Part X of Chapter III Remarks Amount paid or Property given to: i. Board of education or University in Pakistan established under Federal or Provincial Law ii. Educational Institution, hospital or relief fund established in Pakistan by Federal, Provincial or Local Govt. iii. Any non profit organization or any person eligible for tax credit under section 100C iv. Entities mentioned in 13th Schedule. 30% of Taxable Income in case of Individual and AOP In case of donation to associate, 15% of Taxable Income If any property is given as donation, its FMV at the time it is given as donation shall be treated as donation. Valuation of property shall be carried out in accordance with Rule-228(4) & valuation of vehicles shall be carried out in accordance with iii. 20% of Taxable income in case Rule-228(2) of Company If donation is given in Cash, then it must be paid by a Crossed Cheque In case of donation to associate, 10% of Taxable Income 171 Tax Credits under Part X of Chapter III 4. Contribution to approved pension fund [S-63] Eligible Person Eligible Person under section 2(19A) having "Salary" or "Income from Business" Value “C” of formula Lesser of: i. Contribution to Approved Pension Fund under Voluntary Pension System Rules 2005 ii. Remarks Tax Credit under this section is not available to transfer of balance: 20% of Taxable Income From: i. approved employment pension scheme ii. annuity scheme Additional 2% of taxable income for each year above 40 years of age shall be allowed to person iii. approved occupational saving scheme who fulfills following conditions; a) Joined pension fund after 01.07.2006 To: b) Joined pension fund at 41 years or above individual pension account with any pension fund c) Additional 2% will be allowed in first 10 years manager d) Total contribution after addition of 2% should not exceed 50% of Taxable Income of preceding tax year e) Additional 2% is allowed only upto 30.06.2019 Limit: Above 20% and additional 2% combined, should not exceed 30% of taxable income of preceding tax year 172 Tax Credits under Part X of Chapter III 5. Tax credit for point of sale machines [S-64D] Eligible Person Amount of tax credit Any person who is required to integrate with Board’s Lesser of: computerized system for real time reporting of sale or i. Amount invested for purchase of machine receipt ii. Rs 150,000/- per machine Remarks 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 cards - debit cards - online payments in an internet enabled environment. 173 6. Tax Credit for Certain Persons [S-65F] Tax Credits under Part X of Chapter III Eligible Person Amount of Tax Credit Following persons / Income: 1. persons engaged in coal mining projects in Sindh, supplying coal exclusively to power generation projects 2. a startup as defined in Section 2(62A) for the tax year in which the startup is certified by the Pakistan Software Export Board and the next following two TYs 100% of tax payable including - minimum - alternate corporate tax and final tax Remarks Conditions for tax credit: 1. Return has been filed 2. In case of withholding agent, withholding tax statement filed 3. Sales tax returns (Federal/provincial) for the TY filled 174 Tax Credits under Part X of Chapter III 7. Tax Credit for specified industrial undertaking [S-65G] Eligible Person Amount of Tax Credit Remarks 1. Green field industrial undertaking as defined in Section 2(27A) 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: 25% of eligible investment, against - Tax payable - Minimum tax and - Final taxes. Eligible Capital Investments: Investment made in purchase and installation of new machinery, buildings, equipment, hardware and software, except self-created software and used capital goods Provided that: a) the person incorporated between the 30.06.2019 and 30.06.2024 b) the person is not - formed by the splitting up or reconstitution of an undertaking already in existence OR - formed 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 2. Industrial undertaking set up by 30.06.2023 and engaged in the manufacture of plant, machinery, equipment and items with dedicated use (no multiple uses) for generation of renewable energy from sources like solar and wind, for 5 years, from the date such industrial undertaking is set up Excess tax credit can be c/f upto 2 subsequent Tys 175 Tax Credits under Part X of Chapter III Important Definitions 176 Tax Credits under Part X of Chapter III Important Definitions 177 Tax Credits under Part X of Chapter III Important Definitions 178 Tax Credit for Advance Tax and Tax deducted at source [S-147 & S-168] 179 Exemptions 1. Income Tax Ordinance [Section 41 – 55 & 102] 2. The Second Schedule i. Part I : Exemption from Total Income ii. Part II : Reduction in Tax Rates iii. Part III : Reduction in Tax Liability iv. Part IV : Exemption from Specific Provisions 41. Agricultural Income [S-41] 42. Diplomatic & United Nations Exemptions [S-42] Refer 43. Foreign Government Officials [S-43] Salary 44. Exemption under International Agreements [S-44] Exemptions 45. President's Honours [S-45] 46. Profit on Debt [S-46] 47. Scholarships [S-47] 48. Support payments under an agreement to live apart [S-48] 49. Income of Federal, Provicial or Local Government [S-49] 50. Foreign-source income of short-term resident individuals [S-50] 51. Foreign-source income of returning expatriates [S-51] 52. Deleted 53. Exemptions and tax concessions in Second Schedule [S-53] 54. Exemptions and tax provisions in other laws [S-54] 55. Limitation of Exemption [S-55] 180 Exemptions – Agricultural Income [S-41] Agricultural income shall be exempt from tax Agricultural income means : Rent/Revenue from Land situated in Pakistan & used for agricultural purposes Cultivator Receiver of rent in kind Any income from land situated in Pakistan and used for Agriculture OR Performance of process ordinarily employed to render produce fit to be taken to market OR Sale of produce on which only above process has been performed Any income from Building owned and occupied by receiver of rent of land OR occupied by used for AND building is in immediate vicinity of Land AND building is required as a dewelling house, store house or out building 181 Exemptions – Agricultural Income [S-41] Agriculture Produce used as Raw Material [Rule-11] If a cultivator or receiver of agricultural produce as rent in kind uses agriculture produce as raw materials in his business, then: Total Income X - MV of Agricultural Produce X Income Chargeable to tax X • Only MV is allowed as deduction • No deduction shall be allowed for any expenditure incurred as cultivator or as a receiver of rent in kind • if it is ordinarily sold in the market then MV = market price for the produce at the time it is used as raw material • Otherwise; cultivation expense + land rent 182 Exemptions President's Honors [S-45]: Following awarded by President of Pakistan shall be exempt from tax: • Allowance attached to any honor, award, medal • Any monetary award Profit on Debt [S-46]: Profit on debt will be exempt from tax subject to following conditions: i. Received by Non Resident ii. on security issued by resident person iii. persons are not associates iv. security was widely issued by the resident person outside Pakistan v. security was issued for the purposes of raising a loan outside Pakistan vi. loan is to be used for business carried on by the person in Pakistan vii. profit on debt is paid outside Pakistan viii. security is approved by FBR for purpose of this section Scholarships [S-47]: Scholarship granted to meet cost of person’s education shall be exempt Except: where scholarship is paid directly or indirectly by an associate Support payments under an agreement to live apart [S-48]: Income received by spouse as support payment under an agreement to live apart shall be exempt 183 Exemptions Income of Federal, Provicial or Local Government [S-49]: Income of following is exempt from tax: • Faderal Govt. • Provicial Govt. except its income from business outside its jurisdiction area • Local Govt. corporation company Deduction/collection of Advance tax not applicable on amount received by above. regulatory authority All exemptions under this section is not available to development authority owned/controlled directly/indirectly by above other body Income from sale of spectrum licenses & renewal thereof by PTA on behalf of the Federal Govt. after 01.03.2014 institution shall be treated as income of the Federal Government and not of the PTA 184 Exemptions Exemptions and tax provisions in other laws [S-54] Any exemption provided in any other law shall not have effect unless it is also provided for in the Income Tax Ordinance 2001 Limitation of Exemption [S-55] If any income is exempt from tax it 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. 185 Taxation of Individual 1. Principle of Taxation of Individual [S-86] 2. Deceased Individual [S-87] 3. Income of Minor Child [S-91] 4. Author [S-89] 186 1. Principle of Taxation of Individual [S-86] Taxable income of each individual shall be determined separately 187 2. Deceased Individual [S-87] Legal representative of deceased individual shall be responsible for following: tax payable, if individual had not died tax payable on income from estates of deceased individual Legal Representative means: a person who in law represents the estate of a deceased person 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 Above liability shall be limited to the capability of estates of deceased. Proceedings against deceased, before death shall be treated as taken against Legal Representative AND continued against Legal Representative Proceedings against deceased, after death could be taken as if deceased would have servived 188 3. Income of Minor Child [S-91] Income of Minor Child under head "Income from Business" shall be treated as income of parent with highest taxable income Above not applicable on "Income from Business" acquired through inheritance Minor Child [S-2(33)] means an individual who is under the age of eighteen years at the end of a tax year 189 4. Author [S-89] Author has an option that the amount received by him on account of royalties be taxed in that tax year and the preceding two tax years in equal proportions if time taken by author of his literary or artistic work exceeds twenty-four months 190 Taxation of Association of Persons 1. Principles of taxation of AOP [S-92] 2. Individual as member of AOP [S-88] 3. Change in control of an entity [S-98] 4. Change in the constitution of an association of persons [S-98A] 5. Discontinuance of business or dissolution of an association of persons [S-98B] 6. Succession to business, otherwise than on death [S-98C] 191 1. Principles of Taxation of AOP [S-92] • AOP shall be taxed separately from its members. • If AOP has paid tax on its profits, then share of profit of member shall be exempt from tax. • If member(s) of AOP is a Company, then AOP shall pay tax on its profits excluding the share of company. That share will be included in taxable income of company and shall be taxable @ applicable on company Explanation : if income of AOP is exempt and no tax is payable, then share received by member shall remain exempt 192 2. Individual as Member of AOP [S-88] Share of profit from AOP* , of individual member, shall be included in taxable income of individual member for rate purposes Tax Payable = (A/B) x C * excluding share in profit from income under FTR [S-4(4) & S-169(2)] A= B= C= is the amount of tax that would be assessed to the individual if share of profit from AOP were chargeable to tax taxable income if share of AOP was chargeable to tax actual taxable income 193 1. Change in control of an entity [S-98] If there is a change of 50% or more in the underlying ownership of an entity, any loss incurred before the change shall not be allowed as a deduction after the change, unless the entity fulfills following conditions: • it continues same business after the change, until the loss has been fully set off OR • until the loss has been fully set off, it does not engage in any new business or investment (where the principal purpose of the entity or the beneficial owners of the entity is to utilize the loss so as to reduce tax payable on the income from the new business or investment) "Entity" means Company or AOP "Underlying ownership" means an ownership interest in the entity held, directly or indirectly through an interposed entity or entities, by an individual or by a person not ultimately owned by individuals 194 2. Change in the constitution of an association of persons [S-98A] If a change occurs in constitution of AOP then; 1. liability of filing the return of AOP shall be on those persons who were members of AOP at the time of filing of return 2. income of AOP shall be apportioned among the members on time basis 3. if tax assessed on a member cannot be recovered from him it shall be recovered from the association of persons as constituted at the time of filing the return 195 3. Discontinuance of business or dissolution of an association of persons [S-98B] 1. If AOP is dissolved or discontinues its business, then any tax payable by AOP is recoverable from any person who was a member at the time of dissolution or discontinuance 2. In case of death of member of AOP, the tax payable can be recovered from legal heirs of the deceased 196 4. Succession to business, otherwise than on death [S-98C] 1. If successor carries on the same business, then following shall apply: • predecessor shall be liable to pay tax on income before date of succession and • successor shall be liable to pay tax on the income after the date of succession 2. If predecessor cannot be found, then successor shall be liable to pay tax on income before date of succession 3. Where any tax payable under this section in respect of such business or profession cannot be recovered from the predecessor, it shall be recoverable from the successor, who shall be entitled to recover it from the predecessor. 197 12. Tax Regimes Heads of Income Losses Salary Income Property Income Business Income Capital Gains Income from Other Sources Total Income - Deductible Allowances Taxable Income 10 10 10 10 10 50 (10) 40 Rate from 1st Schedule Tax Imposed/Chargeable - Tax Credits Tax Payable - Withholding Tax/Adv Tax Income Tax Demand/Refund 10% 4 (1) 3 (2) 1 Minimum Tax Reg Exemptions Presumptive Tax Regime Final Tax Regime Normal Tax Reg. Separate Taxation Tax Collected/deducted is final tax Final Tax Final Tax 198 Tax Collected/Deducted is Final Tax Section 169 Tax at Source [S-154] Exports [S-156] Prizes & Winnings 199 Separate Taxation Separate Taxation Section 8 [S-5] Tax on Dividends [S-5A Tax on undistributed profits Separate Block of Income • To be discussed in relevant Head of Income [S-5AA] Tax on Investment in Sukuks [S-6] Tax on certain payments to Non Residents [S-7] Tax on shipping and air transport income of a non-resident person [S-7A] Tax on shipping of Resident Person [S-7B] Tax on Profit on Debt [S-7E] Tax on deemed income 200 Dividend [Definition] Company Shareholder Deduct tax on gross amount @ 1st Sched, Part-III, Div-I Pay tax on gross amount @ 1st Sched, Part-I, Div-III Cash Dividend [S-150] Dividend in specie [S-236S] Tax deducted will be Adjustable Tax Imposed will be Final Tax [S-5] Shareholder shall pay Final Tax after adjustment of tax deducted at source 201 Dividend – Definition Following distributions by a Company to its Shareholders to the extent of its Accumulated Profits whether capitalized or not i. Any distribution which entails release of assets including money of the company ii. Any distribution of Debentures, Debenture Stock or Deposit Certificate iii. Any distribution on liquidation of company iv. Any distribution on reduction of capital v. Loan or advance to shareholder or payment for the benefit of shareholder, made by a private company (as defined in Companies Act 2017) or trust (when loan will be repaid, then taxpayer can claim refund of tax paid by him because of loan amount being treated as dividend) is included in definition of Dividend Except, such distributions which were made in cash AND where shareholder was not entitled to participate in surplus assets in the event of liquidation Except, where lending money is substantial part of business of company in its ordinary course of business Except, where dividend is paid and set off by company against the loan or advance treated as dividend Except, remittance by branch of Petroleum Exploration and Production Foreign Company Remittance of after tax profits by branch of a foreign company to the foreign company is also included in definition of Dividend 202 Return on Sukuk Special Purpose Vehicle OR Company Sukuk Holder Deduct tax on gross amount @ 1st Sched, Part-III, Div-IB Pay tax on gross amount @ 1st Sched, Part-I, Div-IIIB Return on Sukuk [S-150A] Tax Imposed will be Final Tax [S-5AA] Tax deducted will be Adjustable Receiver of return shall pay Final Tax after adjustment of tax deducted at source 203 Special Purpose Vehicle Sukuk Certificate Funds for Purchase of Turbines Title to Turbines Wapda Lease Turbines Lease Rental Pay Exercise Price Purchase Turbines Get Title of Turbines Funds Wapda First Sukuk Company Ltd Return to Sukuk Holder Sukuk Holder Redeem Sukuk Return Sukuk 204 Payments to Non Residents Payment to Non Resident for Pakistan Source Royalty , Fee For Offshore Digital Services OR FFTS Non-Resident Deduct tax on gross amount @ 1st Sched, Part-I, Div-IV Pay tax on gross amount @ 1st Sched, Part-I, Div-IV Payment to Non Resident [S-152(1)] Tax Imposed will be Final Tax [S-6] Tax deducted will be Adjustable This section shall not apply on following: 1. Royalty: where property or right giving rise to royalty is effectively connected with PE of Non Resident. Such royalty shall be treated as business income of PE of Non Resident. 2. FFTS & FFODS: where services giving rise to fee are rendered through PE of Non Resident. Such fee shall be treated as business income of PE of Non Resident. 3. Royalty or FFTS exempt from tax. 205 [S-2(54)] Royalty Royalty means any amount (i) Use or right to use Paid Periodical or lumpsum Payable Patent Invention Design Model as consideration for following Secret formula Process Trade mark Other like property/right (ii) Use or right to use copyright or a literary, artistic or scientific work including films or video tapes for use in connection with television or tapes in connection with radio broadcasting (iii) receive or right to receive visual image or sound transmitted by Satellite/Cable Optic Fiber Similar technology (iv) Supply of (v) Use or right to use (vi) supply of any assistance ancillary and subsidiary to any property or right mentioned above (vii) disposal of any right or property mentioned above in connection with Technical/industrial/commercial/scientific Industrial/commercial/scientific but shall not include consideration for sale, distribution or exhibition of cinematograph films Television Radio Internet broadcasting Knowledge/skill equipment Business Income 206 [S-2(23)] FFTS means any consideration, whether periodical or lump sum, for rendering : Managerial Technical Consultancy Services Provision of Service vs Know-how Business Income FFTS Including services of technical or other personnel It does not include following (a) consideration for services in connection with construction, assembly or like project (b) consideration chargeable under head "Salary" 207 [S-2(22B)] Fee for Offshore Digital Services means any consideration for providing following services by Non-Resident • online advertising including • digital advertising space, • designing, creating, hosting or maintenance of websites, • digital or cyber space for websites, • advertising, e-mails, online computing, blogs, online content and online data, • providing any facility or service for uploading, storing or distribution of digital content including • digital text, digital audio or digital video, online collection or processing of data related to users in Pakistan, • any facility for online sale of goods or services or any other online facility 208 TY 2022 onwards [S-7E] Tax on deemed income 1. One Capital Asset 3. Self-owned agriculture land excluding; • Farmhouse & land annexed to it 2. Self-owned business premises Resident Person 4. Capital Asset allotted to Shaheed or his dependents of Armed Forces Excluding Person or his dependents who dies during service of armed forces, FG/PG 8. Capital assets owned by; • provincial government, local government, local authority, development authority • builders and developers for land development and construction, registered with Directorate General of Designated Non-Financial Businesses and Professions War wounded person in service of armed forces, FG/PG Capital Asset Ex-serviceman or serving personal of armed forces, FG/PG Deemed Income 5% of FMV on last day of TY Tax on Deemed Income 20% 5. Any property from which income is chargeable to tax and tax is paid 6. Capital asset in 1st TY of acquisition where tax under S-236K has been paid 7. All other Capital Assets having aggregate FMV =< PKR 25 million 209 [S-7E] Tax on deemed income Federal Government may include or exclude any person or property for the purpose of this section Capital Asset means • property of any kind, • held by a person, • whether or not connected with a business, does not include (i) any stock-in-trade (ii) any shares, stocks or securities (iii) depreciable asset (iv) Intangible (v) any other movable asset 2. Self-owned business premises • from where the business is carried out • was on ATL at any time during TY Ex-serviceman or serving personal of armed forces, FG/PG • being original allottees • duly certified by the allotment authority Farmhouse means • a house constructed • on atleast 2000 sq.yrds • covered area of atleast 5000 sq.fts • used as single dwelling unit • with or without an annex In case of more than one dwelling units in a compound and average area of the compound is more than 2000 square yards for a dwelling unit, each one of such dwelling units shall be treated as a separate farmhouse 210 [S-113] Minimum Tax Specific Conditions General Conditions Tax Payable shall not include: (i) (ii) Final Tax Tax Payable u/s 4B & 4C Company AOP Individual Resident Turnover 100 million or above In TY 2017 or after Tax payable is less than [%age given in column (3) of Table in 1st Sched, P-I, Div-IX] x [Turnover] Due to: (i) Loss of the year (ii) Set off of loss of earlier year (iii) Exemption from tax (iv) Tax Credits OR Rebates (v) Allowances/Deductions (including Depreciation & Amortization) ✓ Turnover shall be treated as income ✓ Pay tax on basis of turnover @ 1st Sched, Part-I, Div-IX ✓ The excess tax paid due to minimum tax, shall be carried forward for adjustment against tax liability upto 3 subsequent tax years Turnover means: Gross Sales Excluding Including Sales Tax FED Trade Discount (mentioned on Commission invoice) Deemed income on which Final Tax has been paid Gross Fees Gross Fees (Services) Gross Fees Gross Fees (Contracts) Share of profit from AOP Share of Company in AOP in above amounts Deemed income on which Final Tax has been paid Deemed income on which Final Tax has been paid Explanation: Turnover will include receipts from sale of immoveable property, taxable as business income. 211 212 213 214 215 216 Rates – Capital Gain on Immovable Property 217 Rates – Capital Gain on Securities 218 219 220 221 222 223

Income Tax Notes - Pakistan Tax System & Ethics

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