BASIC CONCEPT COMMON RULES AND UNDERSTANDING INCOME TAX STRUCTURE AND OPERATION Presented by: M....

BASIC CONCEPT COMMON RULES AND UNDERSTANDING INCOME TAX STRUCTURE AND

OPERATION

Presented by:

M. Rehan Siddiqui Partner

4th Floor, Central Hotel BuildingCivil Lines, Mereweather RoadKarachi - PakistanPhone: 021 – 35644872-7Fax: 021 – 35694573E-mail: [email protected]

Contact Address:

Karachi Tax Bar AssociationProfessional Development

Program

CHARTERED ACCOUNTANTS

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Objective

The objective of this presentation is to discuss and develop some of the fundamental principles of taxation as applicable both under the direct and indirect taxes in Pakistan

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Contents

Concept of tax Types of taxation Reason for taxation and History and evolution of

taxation Structure of income tax law Returns and rates of Tax Operation of income tax law General provisions Withholding Taxes

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Contents

Penalties Tax Credits Exemptions and Concessions Payment of Refunds Sales Tax and Federal Excise

Duty (FED)

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CONCEPT OF TAX-GENERAL

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TYPES OF TAXATION

CONCEPT OF TAX - GENERAL

* In certain countries these taxes are imposed on the Provincial / State Level.

• PROVINCIAL TAX PROPERTY TAX

PROVINCIAL EXCISEWATER TAX

CUSTOM DUTYUSHER/DHAL/ABIYAN

A & A HOST OF

OTHER TAXES

• FEDERAL TAX INCOME TAX

SALES TAX / VAT*FEDERAL EXCISE*CUSTOM DUTY*WEALTH TAX

ZAKAT

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WHY TAXATION :-

Every country needs funds

• For Running the Government & Establishment

• For Defence

• For Future Developments Programmes

CONCEPT OF TAX - GENERAL

(Contd....)

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CONCEPT OF TAXEVOLUTION OF INCOME TAX - HISTORY

Pakistan adopted the Income tax Act, 1922 when it became Independent in 1947 and this Act was followed upto 1979 when a new Income Tax Ordinance, 1979 was promulgated.

The concept of the Income Tax Ordinance, 1979 was very much the same as the Act of 1922 but was brought into a serial order till a new Law called the Income Tax Ordinance, 2001 was enacted which came into force from 2003.

(Contd....)

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PROGRESSIVE TAX

PROPORIONATE TAX

REGRESSIVE TAX

CONCEPT OF TAXEVOLUTION OF INCOME TAX- HISTORY

SALES TAXEXCISE TAX

CUSTOM DUTY

SHARE OF TAXINCOME TAX

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POWER TO TAX

Entry No. 47 and 48 of the Federal Legislature List as contained in Part- I of the Fourth Schedule to the Constitution of Pakistan, 1973, empowers the Federal Government to impose tax on income and corporations respectively.

Entry No. 49 of the said list also empowers the Federal Government to levy taxes on the sales and purchases of goods imported exported, produced, manufactured or consumed in Pakistan.

(Contd....)

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TERROTORIAL JURISDICTIONOF TAX LAWS

The tax laws extends to whole of Pakistan. The territories of Pakistan under the Constitution means:

The four provinces viz Balochistan, KPK, Sindh and Punjab;

The Federal Capital;

The Federally Administered Tribal Areas; and

Such states or territories as are or may be included in the territories of Pakistan, by accession or otherwise.

However, any Federal law, including tax laws do not automatically apply to FATA and PATA unless the president or the governor with the approval of the president respectively direct that a particular legislature is in force to the

respective Federally or Provincially administered tribal area.

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SPECIAL PROVISIONS OF LAW TO PREVAILOVER GENERAL PROVISIONS Where a law provides for a specific treatment in respect of a particular category of, say, income, person, or class of persons, the same would prevail over the general provisions of the law.

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STRUCTURE OF INCOME TAX

LAW

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The Income Tax Ordinance, 2001 has 240 Sections, Seven Schedules which are govern by 232 Rules.

SECTION

Section guides about the nature of taxable income, charge liability of tax on income.

SCHEDULE

Schedules provides special guidance in respect of tax rates applicable on certain income and talks about special exemptions and reduction in rate of taxes that are available to certain classes of persons or income. Apart from this, schedules are also stipulates special rules for computing the Profits & Gain and other special privileges for banking, insurance, business exploration & production of petroleum and exploration and extraction of mineral deposits (other than petroleum)

RULES

Rules deals in computing taxable income.

STRUCTURE OF INCOEM TAX LAW

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INCOME – GENERAL MEANING

All receipts by a person does not necessarily constitute “income”

Generally, income connotes a periodical monetary return, “coming in” with certain regularity from a definite source [Commissioner Income Tax, Bengal V. Shaw Wallace, (AIR 1932 PC 138)]

Generally, capital receipts are not taxable unless they are specifically provided in the tax law to be taxable.

Revenue receipts are generally almost always taxable (being income) unless they are explicitly provided as not to be taxable.

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Following may be the distinguishing criteria between capital and revenue receipts:-

Receipt from circulating capital versus receipt from fixed capital

Receipt from source of income versus receipt in lieu of source of income

Payer’s motive ignored - receipt in the hands of the recipient is relevant

Lump sum payment is not the determining factor between capital and revenue receipt

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Certain capital receipts deemed as “income” for tax purposes include: -

Golden handshake payments on termination of services

Gain on disposal of capital assets, including jewellery, painting manuscripts etc.

Certain revenue receipts which should otherwise be taxed but not taxed include: -

Agricultural income

Profit and gains derived by electric power generating projects

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INCOME UNDER THE ORDINANCE

As per Section 2(29) of the Ordinance, income has the following scope:

Income as understood in normal parlance

Any amount chargeable to tax under the Ordinance

Any amount subject to collection or deduction of tax under the Ordinance as a final discharge of tax liability

Any amount “treated” as income under the Ordinance

Loss of income is also income

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“NON INCOME” VS. “EXEMPT INCOME”VS “INCOME TAXABLE AT 0%” As discussed above, certain income may not be income and therefore are not taxable.

Other category of receipt may be income but provided to be exempt from tax, as in the case of Second Schedule to the Ordinance

There may be some other receipts which are taxable at 0%

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CLASSES OF INCOME VS HEADS OF INCOME

There are different classes of income, including: -

Salary (Arising out of employment)

Income from property (being rental income from immovable property)

Royalty (on account of use of or right to use intellectual property)

Profit on debt/interest (on funds lended to others)

Dividend (from shares held by the investor)

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CLASSES OF INCOME VS HEADS OF INCOME

There are only five heads of income in which each of such class of income is to be classified. These heads are: -

Salary Income from Property Income from Business Capital Gains Income from Other Sources

Categorization of a particular class of income into a particular head of income is dependent on the person who is deriving such income and therefore may differ from one person to another.

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EXPENDITURE – GENERAL MEANING

The term “expenditure” means “spending” or “paying out or away”, i.e., something that goes out of the coffers of the taxpayer. It means something which is gone irretrievably [B. K. Khanna & Co. (P.) Ltd. V. CIT [2000] 113 Taxman 164 (Delhi)]

Expenditure, not being capital or personal expenditure, is an allowable deduction to the taxpayer in the tax year.

Capital expenditure, in the form of depreciable assets and intangibles, is allowed in the form of depreciation and amortization.

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SCHEMES OF TAXATION

Broadly, there are two schemes of taxation: -

Final Tax RegimeWhereby tax is levied on the gross amount,

withoutallowability of any expense

Normal Tax RegimeWhereby bottom line income, after

allowing for all admissible deductions, are taxed at applicable rates.

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PERSONS LIABLE TO TAX

The Ordinance tends to tax the income derived by a person

Following are the main categories of persons

Federal Government

Foreign Government

Political sub division of a Foreign Government

International Organization

Individuals

Association of persons

Companies

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TAX YEAR

Income derived by a person in tax year is taxable

Normal tax year is from 01 July to 30 June

Adopting any other 12 month period may be allowed which is called as the special tax year.

The Government has prescribed special tax year for certain persons, including: -

Insurance Companies Companies Manufacturing Sugar Companies Manufacturing Jute Goods All Persons Manufacturing Rice

Interim period between the normal tax year and the special tax year is called the transitional tax year.

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PERSON LIABLE TO

FILE RETURN OF INCOME

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Salaried person, income exceeding Rs. 300,000

Business individual person, income exceeding

Rs. 300,000

Association of person, income exceeding No Slab of income

Resident companies, income exceeding No Slab of income

PERSON LIABLE TO FILE RETURN OF INCOME

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RATE OF TAX ON INCOME

CHARGEABLE TO TAX

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The rate of taxes are provided in the First Schedule of the Income Tax Ordinance, 2001.

Head Of Income MinimumRate

HighestRate

Salary Income 0.75% 20%

Business Income of an Individual

7.50% 25%

Income of an Association of Person

0% 25%

Companies 0% 35%

RATE OF TAX ON INCOME CHARGEABLE TO TAX

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OPEATION OF INCOME TAX LAW

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Filing of Income Tax Return Under Section 114

Return Filled is Deemed Assessment Under Section 120

Selection of return for audit Under Section 177

Amendment of assessment Under Section 122(5A)

Provisional assessment for non-filling of return

Under Section 122 (C)

OPEATION OF INCOME TAX LAW

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As per the provision of section 114 a person shall declare his annual income in the prescribed form which shall be accompanied by such annexure, statement or documents.

An individual having salary, business income and association of person are require to file their return of income on or before September 30th after closing of financial year which was ended on June 30th.

A company shall file its return of income on or before December 31st after closing of financial year which was ended on June 30th.

FILILG OF INCOME TAX RETURN SECTION 114

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DEEMED ASSESSMENT SECTION 120

120. Assessments

Return filed by a taxpayer under section 114 is deem to be an order.

Selection of case for Audit under section 177 may be conducted by the Commissioner of Income Tax.

The return filed can be disqualify under section 120 if the deficiencies has not been removed which were pointed out by the Commissioner of Income Tax.

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SELECTION OF RETURN FOR AUDITSECTION 177177. Audit

The Commissioner of Inland Revenue may call for any record or documents including books of accounts maintained by taxpayer person for conducting audit of the income tax affairs of the person.

The Officer Inland Revenue subordinate officer of Commissioner of Inland Revenue who delegated his power to him in order to verify records. (Books of accounts)

The Officer Inland Revenue after conducting audit confront the taxpayer those additions which were came to surface during audit proceedings.

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REVISION BY THE COMMISSIONERSECTION 122(5A)

The Commissioner may call any record in respect of return filed under section 120.

Verification of records the Commissioner may amend the basis of computing income for the purpose filing return adopted by the taxpayer.

The Commissioner has the power to amend the return for five years from the financial year in which the return was filed.

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PROVISIONAL ASSESSMENT SECTION 122(C)

The Commissioner may require any person to file the return of Income.

In case the return not file by the person the Commissioner may issue provisional order on the basis of information available on records.

After issuing provisional order the taxpayer has sixty days to file the return in case to annulled the provisional order.

In case sixty days time elapsed the provisional order becomes the order and the tax liability work out by the Commissioner becomes payable to a taxpayer.

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GENERAL PROVISIONS

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The section 57 of the Income Tax Ordinance, 2001 allow taxpayer to carry forward its business loss to next tax year after setting off against the person’s income chargeable under the head income from business for that year.

A person cannot set off or carry forward speculation business losses against the income, which is other than speculation business income chargeable to tax for that year.

A person also cannot set off or carry forward capital losses against the income, which is other than capital gains chargeable to tax for that year.

CARRY FORWARD OF BUSINESS LOSSES

(Contd....)

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Every taxpayer whose income was chargeable to tax for the latest tax year is require to pay advance tax under section 147 of the Income Tax Ordinance, 2001.

Where a taxpayer is an Association of Persons & Company shall pay advance tax on the basis of following formula.

(A x B / C) - D

A is the taxpayer’s turnover for the quarter

B is the tax assessed to the taxpayer for the latest tax year;

C is the taxpayer’s turnover for the latest tax year; and

D is the tax paid in the quarter for which a tax credit is allowed under section 168, other than tax deducted under section 155.

ADVANCE TAX UNDER SECTION 147

(Contd....)

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An individual taxpayer shall pay advance tax for a tax year on the basis of the following formula.

(A / 4) - B

A is the tax assessed to the taxpayer for the latest tax year or latest assessment year under the repealed Ordinance; and

B is the tax paid in the quarter for which a tax credit is allowed under section 168 other than tax deducted under section 149 or 155.


(Contd....)

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The Finance Act, 2010 has introduced advance tax on Capital Gains earn by a taxpayer on sale of securities.

Where holding period of a security is less than six months.

2% of the capital gains derived during the quarter

Where holding period of a security is more than six months but less than twelve months.

1.5% of the capital gains derived during the quarter.


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WITHHOLDING TAX

PROVISIONS

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Determine nature of payment / receipt

Determine applicable withholding tax provision including applicable rate and double tax treaty provisions (if applicable)

Determine status of payer as ‘withholding agent’ (prescribed person)

Determination of status of recipient – liable or exempt from withholding tax

Payment, deduction / collection (or non-deduction/collection) of tax

Timing of deduction / collection

Deposit of tax and issuance of certificate Reporting

Monitoring of withholding taxes.

DETERMINE WITHHOLDING TAXPROVISION FOR MAKING PAYMENT

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PENALTIES FOR NON

DEDUCTION OF TAX

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Disallowance of expense - Section 21(c )

Recovery of tax not deducted from payer - Section 161

Recovery of tax not deducted from recipient - Section 162

Default surcharge for delayed deposit of tax deducted / collected

KIBOR + 3% - Section 205(3)

19% 161(1A)

Penalty - Section 182(1)

Entry 5 - 5% additional 25% & 50% for second & third default

Entry 15 - 25,000 or 10% of tax, whichever is higher

REPERCUSSIONS FOR DEFAULTIN WITHHOLDING TAXES

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Offences Penalties Section to which offences has

reference

Non furnishing of return/statements

0.1% of the tax payable for each day of default

114, 115, 116, and 165

Failure to pay tax due 5% of the amount of tax for first default, additional penalty of 25% for the second default and 50% of the amount of tax for third default.

137

Fails to maintain records under the Ordinance, 2001

10,000/- Rupees or 5% of the amount of tax on income which ever is higher

174

Fails to produce records or documents

5,000/- Rupees 177

Fails to furnished the information required or comply with

5,000/- Rupees for first default and 10,000/- Rupees for subsequent default

176

Makes a false statement Penalty 25,000/- Rupees or 100% of the amount of tax short paid which ever is higher

114, 115, 116, 174, 176 & 177

The Income Tax Ordinance, 2001 penalized a taxpayer for non compliance of

statutory obligation as under: -

PENALTY PROVISIONS

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TAX CREDIT

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Section 61 of the Income Tax Ordinance, 2001 has allowed a taxpayer to claim tax credit against the total tax liability for a tax year.

Charitable Donation

A person shall be entitled to a tax credit in respect of any sum paid or any property given as donation to an approved institution under section 2(36)(c).

Where a person is an individual or Association of Persons can claim tax credit up to 30% of the taxable income and 20% in case of companies.

Formula

A/B x C

A is the amount of tax assessed to the person for the tax year before allowance of any tax credit under this part;

B is the person’s taxable income for the tax year; and

C Total amount of person’s donations including the fair market value of property

TAX CREDIT

(Contd....)

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Investment In Shares

A person other than company shall be entitled to claim tax credit in respect of the cost of acquiring new shares offer to the public by a public limited company or share acquired from the privatization commission of Pakistan with the condition that the buyer is the original allottee of the shares.

A person can claim cost of shares up to 10% of the taxable income or 300,000/- Rupees or actual cost which ever is lower.

Formula

A/B x C



C Total amount of person’s investment

TAX CREDIT

(Contd....)

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Contribution To An Approved Pension Fund

An eligible person deriving income chargeable to tax under the head salary shall be entitled to a tax credit in respect of any contribution or premium paid in a tax year in approved pension fund under the Voluntary Pension System Rules, 2005.

Formula

A/B x C



C Total contribution or premium paid in a year

TAX CREDIT

(Contd....)

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Profit On Debt

A personal shall be entitled to claim a tax credit in respect of any profit or share in rent and share in appreciation for value of house paid by a person on a loan from a financial institution regulated by S. E. C. P. or utilizes the loan for the construction of new house or acquisition.

A person can claim 50% of the taxable income or 700,000/- Rupees or actual amount of profit which ever is lower.

Formula

A/B x C



C Total amount of interest against loan

TAX CREDIT

(Contd....)

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EXEMPTION &

TAX CONCESSIONS

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The Income Tax Ordinance, 2001 provide exemptions and tax concessions

in Second Schedule.

The Second Schedule constitutes four parts.

Part-I Exemption from Total Income

Part-II Reduction in Tax Rates

Part-III Reduction in Tax Liability

Part-IV Exemption from specific provisions

THE SECOND SCHEDULE

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Part-I of the Second Schedule provides exemption from total income of

the following categories of income.

Salary & Allowances (Perquisites)

Pension

Funds (Pension, Benevolent, Super Annuation

Trust, NGO & Non Profit Organization

Mutual Funds

Donation

PART-I EXEMPTION FROM TOTAL INCOME

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Part-II of the Second Schedule provides reduction in tax liability calculated

for a year by a taxpayer.

- Services Rendered Out Side Pakistan

- Shipping Business

- Dividend of Power Companies

- Import of Zero Rated Goods

- Import of Capital Goods

- Payments to Non Residents

PART-II REDUCTION IN TAX RATES

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Part-III of the Second Schedule provides reduction in tax liability of a taxpayer.

- Flying Allowance

- Income from National Saving Center

- Senior Citizen & Teacher etc.,

- Pharmaceutical, Fertilizer and oil marking refineries

- Flour Mills

- Manufacturer of Cigarettes

PART-III REDUCTION IN TAX LIABILITY

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Part-IV of the Second Schedule provides exemption to certain business

transactions as exempt from tax, which are taxable under the various

Provisions of the law.

- Donation to Agha Khan

- Presumptive tax for non resident

- Sale of Air Tickets

- Payment to NIT, REIT

- Foreign Exchange Account

- Companies Operating Trading House

PART-IV EXEMPTION FROM SPECIFIC PROVISIONS

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PAYMENTS OF TAX & REFUND

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A taxpayer can claim credit of tax which has been paid in advance during a financial year

against its normal tax liability at the time of filing the return.

Any tax which covered under Final Tax Regime the adjustment of tax deducted or paid

in advance not adjustable against the income covered under normal tax regime.

- Income from Supplies

- Income from Imports

- Income from Exports

- Profit on debt other than companies

- Prize Winning

- Income from CNG Filling Station

- Contract Income & Commission Income

PAYMENTS OF TAX AND REFUND

(Contd....)

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Taxpayer can claim credit of tax against normal tax liability other than taxes

deducted on account of income covered under Final Tax Regime.

- Tax Deduction on Utilities

- Tax on Imports in case of manufacturer

- Tax Paid along with return under section 137

- Tax Paid under section 147

- Income Tax Paid on Motor Vehicle

- Income Tax Paid on Mobile

PAYMENTS OF TAX AND REFUND

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SALES TAX AND

FEDERAL EXCISE DUTY

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POWER TO LEVY SALES TAX ANDFEDERAL EXCISE DUTY

- Sales Tax on goods in a federal levy

- Sales Tax on services is a provincial levy

- FED on specified goods and services is a federal levy.

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BASIC OF LEVING SALES TAX ANDFEDERAL EXCISE DUTY- Income tax is charged on Income derived by a person

- Sales tax and Federal Excise Duty are charged on the transaction executed by the person

- Federal Excise Duty is levied on import, manufacturing and supply of excisable goods and services

- Sales Tax is charged on;

Import of taxable goods

Supply of taxable goods

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RATE OF SALES TAX

- The general rate of Sales Tax is 17%

- The rate of Federal Excise Duty varies depending on the category of goods and services

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INPUT AND OUTPUT TAX

- When a person supplies good, sales tax is charged. This is called the Output Tax.

- Generally, Sales Tax paid at import stage or purchases of goods is an Input tax.

- The output tax is adjusted against input tax to arrive at the balance tax payable or refundable

- Generally, the period in Sales Tax and Federal Excise Duty is one month

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Thank

You

BASIC CONCEPT COMMON RULES AND UNDERSTANDING INCOME TAX STRUCTURE AND OPERATION Presented by: M....

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