Business taxation
Week 7
Income from Business
The following incomes of a person for a tax year, other than
income exempt from tax under this Ordinance, shall be
chargeable to tax under the head “Income from Business” —
Incomes
chargeable
under
business
(a) the profits and gains of any business carried on by a
person at any time in the year;
b. any income from the hire or lease of tangible movable
property;
c. the fair market value of any benefit or perquisite, arising
from any past, present and prospective business
relationships. whether convertible into money or not,
d. any management fee derived by a management company
any income from sale of goods
, or provision of services to its
members by any trade,
professional association.
example: Lahore chamber of
commerce, ICMA,ICAP
Any profit on debt, in case of a
person whose business is to
lend moneys and earn profit
on debt (banks, financial
institutions,
Amount received
against lease:
Income
from
mutual
funds
Any amount received by a banking company or a nonbanking finance company, shall be chargeable to tax
under the head “Income from Business” and not under
the head “Income from Other Sources”, if the following
conditions are satisfied :
Amount has been distributed by a mutual fund or
private equity and venture capital fund
It is distributed by such funds out of their income on
account of profit on debt
(1) Where a person carries on a speculation business –
(a) it shall be treated as distinct and separate from any other business
carried on by the taxpayer;
Speculation
Business:
any income, gain or losses from the speculation business sustained for a
tax year shall be kept separate from other business income. incomes
from business are dealt with separately under the following heads
Income from non-speculation business
Income from speculation business
• A business in which a contract for the purchase and
sale of any commodity(including stocks and shares)
is periodically or ultimately settled otherwise than
by actual delivery or transfer of the commodity
• Speculation refers to the act of conducting a financial
transaction that has substantial risk of losing value but also
holds the expectation of a significant gain. Without the
prospect of substantial gains, there would be little motivation to
engage in speculation.
Section 58: Speculation Loss
• The loss sustained in a tax year in respect of speculation
business (speculation loss), the loss shall only be set
off(adjusted ) against the income of the person from any
other speculation business of the person
• If the speculation loss is not fully set off for a tax year , the
amount of loss remaining shall be carried forward to the
following tax year
• No speculation loss shall be carried forward to more than 6
years.
• The loss of the earliest year should be set off first
Deductions
allowed
Expenses
Animals
Depreciation
&
Amortization
expenses
Amalgamation
Expenses
Expenses
• Any expense incurred by a person during the tax year wholly and exclusively for the
purpose of generating taxable income as deduction.
• Examples:
-Rent for premises used for business
-Any tax , charge, paid (other than income tax)in connection with business
-Insurance premium for insuring assets
-Any expenditure incurred by an employer or any educational institution or hospital for the
benefits of the employees or their dependents
- Any sum paid to employees as bonus or commission for services rendered(should be
reasonable as per the employee’s salary, conditions of the service, profit in tax year & the
general practices among similar business)
• Actual amount of bad debt
• Annual subscription paid to a registered trade organization
• Any expenses incurred wholly and exclusively for the business.
• NOTE: while computing income, the deductions and allowances shall be allowed
according to the method of accounting regularly used by the taxpayer , where incomes
are recognized on accrual basis,the expenses shall also pe paid accordingly
Animals used for business
• Animals used for the purpose of business (other than stock in-trade)and the animals have
died or become permanently useless for business then the person is allowed a deduction
against business income. The deduction shall be equal to an amount calculated as below:
• Actual cost of the animal
xxx
• Less: Amount realized in respect of carcass or animal
(xxx)
• Amount to be allowed as deduction
xxx
Depreciation
and
Amortization
on assets
A person is allowed a deduction on
account of depreciation or amortization in
respect of following assets used for the
business
1. Depreciable Assets
Intangibles with useful life
of more than one year; and
Pre-commencement
expenditures
Amalgamation expenses
Deductions not admissible:
• Any tax, cess or rate(including income tax) levied on profits or gains of
business.
• If any amount has been deducted as tax deducted at source by a
withholding agent
• If the person is a withholding agent and has forgotten to deduct or collect
tax at source. Or has deducted but not paid to government
• Any commission paid in respect of supply products listed in third schedule
of sales tax act 1990to any person who is not appearing in the active
taxpayers list under ITO
• In case of pharmaceutical manufacturers, any
sales expense not exceeding 10% of the turnover
• Any payment made by association of persons to
its partners on account of profit on debt,
brokerage, commission , salary
• Entertainment expenditure incurred which does
not fall under the tradition of the Pakistan and
within the norms and customs of overall Pakistan
• Any contribution to such provident fund which is
not recognized
• Any expenditure in nature of a fine as a violation
of law
• Any personal expense incurred
• Any expenditure of capital assets(purchase of
assets)
• Any donation to unapproved institution
• ABC & company is a partnership firm. For the tax year ended on 30th
June , the firm declared a net profit of Rs. 400,000. the scrutiny of the
profit and loss account revealed that the following deductions were
also made while preparing the financial statements:
Income tax for previous
year
30,000
Salary p.m paid to employee, tax
deduducted at source
20,000
Tax at source deducted by
the customers
15,000
Contribution to unrecognized provident
fund
30,000
Salary paid to employee
without deduction of tax
200,000
Donations to unapproved institutions
10,000
Salary paid to partner A
Interest paid to partner B
60,000
5,000
Donations to approved institutions
20,000
5,000
Accounting depreciation
55,000
Amounts subsequently recovered:
• If a taxpayer receives an amount of expenditure or loss in a subsequent year , which was
allowed as deductions against income from the business in any tax year. Such amount
shall be deemed as income from business in the year of receipt
Bad Debts
• A person is allowed a deduction of bad debts if:
• The debt was previously included in his income,
• The mount of debt is written off during the tax year
• There are reasonable grounds to believe that the debt
cannot be recovered.
• Note: the amount allowed to be deducted should not be
more than the actual amount written off as bad debt. The
amount allowed may be less than actual bad debts
Subsequent
recovery of
bad debts:
If any person who has been
allowed a deduction on account
of bad debts and in subsequent
tax year , he receives any
amount in respect of that debt
or loan , the amount so received
shall be dealt in the year of
receipt as below
Where recovered amount is more
than the difference between the
actual bad debt and bad debt
allowed as deduction, then the
excess amount shall be included in
the business income for the year.
Where recovered amount is
less than the difference
between the actual bad debt
and bad debt allowed as
deduction, then the shortfall
shall be allowed as deduction
against the business income for
the year.