Advanced taxation (cfap5) by fawad hassan [lecture 5]

Deciding Business Income CaseHeads of Income

119

Business4. 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 yearb. is likely to lose value as a result of normal wear and tear or obsolescence ANDc. is used wholly or partly by person in deriving income from businessit shall not include any asset whose entire cost is allowed as deduction under Income Tax Ordinance 2001ii. 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.iii. Eligible Depreciable Asset [S-23(5)]:a depreciable asset which is not:a. furniture & fittingsb. road transport vehicle not plying for hirec. plant & machinery previously used in Pakistand. plant & machinery whose entire cost is allowed as deduction under Income Tax Ordinance 2001


120

Business4. Assets:iv. Business Asset [S-75(7)]:Means asset held wholly or partly for use in business, including stock-in-trade and depreciable assetv. Personal Asset [S-75(7)]:Means asset held wholly for personal use


121

Business5. Acquisition & Cost:i. Acquisition [S-75]:when the person begins to own the asset including when the right is granted ORwhen the personal asset is applied to business useii. Cost [S-76]:

Consideration paid / payable in cash XFMV of consideration given in kind XIncidental expenditure for acquisition / disposal of asset XExpenditure to alter or improve asset X

X


122

Business5. Acquisition & Cost:ii. Cost [S-76]:a. Cost of Passenger transport vehicle not plying for hire shall not exceed Rs 2.5 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 versae. 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)]


123

Business5. Acquisition & Cost:ii. Cost [S-76]:g. If asset is produced or constructed by person, then its cost will include following:[Section-76(4)]

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)]

j. If acquisition of an asset is derivation of an amount exempt from tax, then its cost will include following:[Section-76(9)]

Total production/construction cost X+Incidental expenditure for acquisition / disposal of asset X+Expenditure to alter or improve asset X

X

Amount chargeable to tax XAmount paid to acquire asset X

X

Amount exempt from tax XAmount paid to acquire asset X

X


124

Business6. Depreciation [S-22]:Method of tax depreciation : Diminishing/Reducing Balance MethodRate of Depreciation : as per 3rd Schedule Part-I

7. Initial Allowance [S-23]:Allowed for "eligible depreciable asset" used 1st time in Pakistan ORYear in which commercial production is startedRate of Initial Allowance : as per 3rd Schedule Part-II

8. First Year Allowance [S-23A]: (in lieu of initial allowance)Conditions to be fulfilled:• Plant & machinery & equipment installed by Industrial Undertaking in rural or under developed area ORby cell phone manufacturer who qualifies for exemption under clause 126N of part-I of second scheduleAND• Owned and managed by a CompanyRate of First Year Allowance : as per 3rd Schedule Part-II

which ever is later


125

Business9. Accelerated Tax Depreciation to Alternate Energy Projects [S-23B]:Conditions to be fulfilled:

• Plant & machinery & equipment installed by Industrial Undertaking installed any where in Pakistan AND• for generation of alternate energy AND• Owned and managed by a CompanyRate of First Year Allowance : as per 3rd Schedule Part-II


126

Business10. 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 usedGain or loss on disposal shall be calculated as follows: Consideration for disposal X

Less:Cost XInitial Allowance OR (X)First Year Allowance OR (X)Accelerated Tax Depreciation (X)Normal Depreciation (X)

XGain / Loss on disposal X


127

Business10. Disposal and Consideration:ii. Consideration for Disposal [S-77]:

a. If Asset is lost or destroyed, then consideration shall include compensation, indemnity or damages received from:• insurance claim• Settlement• judicial decisionb. If asset applied to personal use from business use or is discarded, then consideration shall be FMV of assetc. If two or more assets disposed off in single transaction and consideration of each asset is not specified, then total consideration received shall be apportioned on basis of FMV of each asset, at time of disposald. 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:

Amount Received XFMV of consideration in kind X

XFMV of asset at time of disposal X

Which ever is higher

Actual consideration received on disposal x 2.5 millionActual cost paid to acquire vehicle

[Section-77(2)][Section-77(3)]

[Section-22(10)]

[Section-77(5)]


128

Business10. Disposal and Consideration:ii. Consideration for Disposal [S-77]:

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.g. If depreciable asset is exported/transferred outside Pakistan, then its cost shall be treated as consideration received.

[Section-22(13d)][Section-78]

[Section-22(14)]


129

Business11. 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.

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.iv. On disposal of such asset, following shall be deducted from consideration

[Section-22(3)]

[Section-22(6)]

Total cost of asset XLess:Initial Allowance-if any (X)First Year Allowance-if any (X)Accelerated Tax Depreciation-if any (X)Normal Depreciation allowed as deduction (proportionate basis) (X)

X


130

Business12. Leasing business:Leasing Co., Investment Bank, Modaraba, Scheduled Bank, Development Finance Institution

i. Initial Allowance/First Year Allowance/Accelerated Tax Depreciation or Normal Depreciation is allowed as deduction only against lease rental incomeii. Asset shall be treated as used in the business of lessoriii. 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 residual value received by leasing companyiv. The cost of assed realized through lease rentals + residual value should not be less than cost of the asset

[Sections-22(12), 23(4), 23A(2), 23B(2)][Section-22(13c)]

[Section-77(4)][Section-77(4)]


131

Business13. 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 yearother than expenditure incurred to acquire a depreciable asset or unimproved land

i. Cost of Intangibles:Means expenditure incurred in acquiring or creating intangibleIncludes expenditure for improving or renewing intangibleii. Conditions for amortization:a. intangible is wholly or partly used for businessb. normal useful life is more than 1 yeariii. 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


132

Business13. Intangibles [S-24]:iv. Rate of amortization:

v. 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

CostUseful life in whole years Note:

if useful life is more than 10 years then it will be treated as 10 yearsif useful life is not ascertainable, then it will be treated as 10 years

Consideration XWritten Down Value X

X


133

Business14. Pre-commencement Expenditure [S-25]:Means, expenditure incurred before commencement of business wholly and exclusively to derive taxable incomeIncludes,

• cost of feasibility studies• construction of prototypes• trail productionDoes not include,• expenditure to acquire land• depreciable assets• Intangibles

i. Method: Straight line basisii. Rate: as per 3rd Schedule, Part-IIINo deduction shall be allowed for expense which allowed as deduction under any other provision of Income Tax Ordinance 2001


134

Business15. Scientific Research Expenditure [S-26]:Expenditure for scientific researchContribution to Scientific Research Institution to do research wholly and exclusively to derive income from businessshall 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 businessIncludes contribution to scientific research institution to do research for business

not include expense incurred foro acquisition of depreciable asset or intangibleo acquisition of immovable propertyo ascertaining existance/location/extent/quality of natural deposits

• Scientific Research Institution:Means any institution certified by FBR to do scientific research in Pakistan


135

Business16. Bad Debts [S-29]:i. Conditions to claim bad debts as expensea. Amount was previoulsy included in taxable incomeb. In case of a financial institution, the amount was lent to derive taxable incomec. amount is written off as bad debts in accountsd. resonable grounds exist that debt is irrecoverable

ii. Subsequent recovery of bad debts written off:Following shall be included in taxable income

(10,000)40,000

Deduction from income from businessIncluded in income from business

(20,000)10,000

(20,000)60,000

Less: amount previously not allowedSubsequent recovery

Case (b)Case (a)20,000

(80,000)100,000

amount previously allowed as deductionWhole amount of debt


136

Business17. Employee Training & Facilities [S-27]:

Expenditure in respect of following is allowed:a. Educational institution/hospital for benefit of employees/dependentsb. Institute for training of industrial workersrecognized/aided/funded byFederal Govt / Proviscial Govt / Local Govtc. Training of Pakistani citizen under scheme approved by FBR

established in Pakistan


137

Business17. Profit on debt, Financial costs and Lease Payments [S-28]:Following shall be allowed as expense: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

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

Advanced taxation (cfap5) by fawad hassan [lecture 5]

Law

Transcript of Advanced taxation (cfap5) by fawad hassan [lecture 5]