Business Taxation Theory

8/3/2019 Business Taxation Theory

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Tax

General definitions of tax are given below:

Literally: Means burden, strain.

Economist: It is the general compulsory contribution of wealth levied upon persons by

the state, to meet the expenses incurred in providing common benefits to the residents.Income tax ordinance defines tax as, Tax means any tax imposed under chapter II Charge to tax

and includes a penalty, fee or other charge or any sum or amount leviable or payable under thisordinance.

Taxes versus Fees

Taxes Fees

Common Benefits Counter Benefit

Compulsory levy Discretionary.

Taxes An Integral part of Fiscal Policy:

Fiscal Policy: Fiscal policy is a discipline that deals with arrangements which are adopted by

government to collect the revenue and make the expenditures so that social and economic

stability could be attained/ maintained.Objectives of Fiscal Policy:

1. Economic development

2. Raising level of employment (achieving full-employment)3. Influencing consumption patterns.

4. Price stability.

5. Redistribution of income.6. Removal of deficit in Balance of Payments

Instruments (tool) of Fiscal Policy

Ways and means to achieve fiscal policy objectives are as under:

Public Expenditure

Taxes

Deficit Financing

Subsidies

Transfer payments like unemployment allowances, Benazir income support fund

Sources for Revenue Generation for State

Taxes & Tariffs

Internal & External borrowing

Aids and GrantsCanons of Taxation:

Taxes are levied on following principles.

Simplicity and convenience Certainty & Judicious

Capacity/Ability to pay

Benefit principle-Business friendly

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Types of Taxes

Types of taxes based upon various classifications are:

Direct Taxes

Indirect Taxes

Proportional Taxes

Progressive Taxes

Value Added Taxes

Taxation Structure of Pakistan

Federal Taxes: Few are,

Income tax Progressive tax

Corporate tax-One time levy

Customs duties/Tariffs Includes Import, Export Duties based on trade policy

Sales TaxProvincial Taxes: Few are,

Stamps Duty

Court Fee Registration Fee such as Motor vehicle, sales-purchase agreement

Local Government

Different types of taxes on Water, Sanitation, Birth Record, Import and Export Taxes etc.

Taxation ManagementTaxation management is a strategy where by a person manages its business andother transactions/ activities in such a way so as to make maximum use of taxholidays, exemption, concession, rebates, tax credits, deductible allowancesavailable under law and as a result is able to derive the benefit of minimizing his taxliability. To achieve this objective, clear understanding of respective laws andprofessional expertise of their application is of at most importance. Scope oftaxation management is multi-dimension, while making choices among differentopportunities available to a person, the tax factor among others also plays animportant role. Taxation management covers a decision regarding available choicebetween an employment and self- employment or available choice of a business assole proprietorship, partnership, private company or public company. It isprofessional strategy to plan tax affairs of a person. It is of significant importance inbusiness management decision.

Person includes a living person (natural) or artificial person (corporateperson).

Scope of Taxation Management ranges from incorporation of a business tomergers, amalgamation, winding up, liquidation, dissolution etc of business

Essentials of Taxation Management

Understanding and application of updated laws particularly tax laws, rulesand procedures

Application/use of benefits such as Tax credits, rebates, exemptions,reductions etc available under the law.

Maintenance of Records/Books of Accounts as per requirement of law

Disclosure of true facts (no concealment) that is there should be noconcealment with regard to furnishing of information or preparation ofaccounts / data.

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Background Income Tax Act of 1922

Income Tax Ordinance, 1979 (1st July 1979)

Income Tax Ordinance, 2001 (with income tax rules 2002)

o Promulgated on 13th sep 2001

o Effective from 1st July 2002

Why Rules are made?

Rules are made to aid law. For example, income tax ordinance requires a taxpayer to file return

where Income tax rules state the format and procedure for filling return.

Fiscal statues change rapidly. Sometimes, tax rates are increased, exemptions are granted etc.

Income Tax Ordinance 2001

Income tax rules 2002 promulgated on 1st July 2002 by Board in exercise of powersunderSection 237 of the Ordinance.

The ordinance overrides all other laws for the time being in force. (Section 3)

The Federal Government shall place before the National Assembly all amendments madeby it to the Second Schedule (Exemptions & Concessions) in a financial year. (Sec.

53(3))

Board issues administrative instructions explanations/circulars under the powers vestedthrough sec. 206-213.

Decisions and interpretation of Supreme Court are binding on all courts in Pakistan.(Article 189 of constitution)

Case law is an important source of interpretation a precedent.

Scheme of Ordinance

13 Chapters

Chapters divided into

o Parts & Divisions

240 Sections

7 Schedules

Schedules are part of the Ordinance.

Rules of interpretation or Construction of Statues

Interpretation or aids include

1) Internal Aid facilities, references for interpretation of statues

a) Explanation to section

b) Marginal Notesc) Punctuation marks comma, semicolon separates/divides whereas and includes

d) Preamble gives purpose of the law

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e) Title of Chapter signifies interpretation must be in accordance with title of chapter such

as Appeals, Returns, Head of incomef) Non-Obstante clause

g) Proviso

h) Context2) External Aid

a) Dictionaryb) Tax committee reportc) Statement of objects appended to a finance bill

d) Finance ministers budget Speech

e) Circulars issued by Board

f) Definitions from other statues

Types of Definitions

Exclusive or Exhaustive Definitions Exclude ordinary dictionary meanings of word. Usually,start with word mean or means

Inclusive Definitions Include dictionary meanings as well as meanings conveyed by definition.

Start with word include or includesExclusive as well as Inclusive Contain both Statutory and dictionary meanings

Statutory Definitions (about 100 in Sec. 2)

Remember, Legal concepts and technical words are to be understood in the legal and technicalperspective.

Dictionary meaning can be referred in absence of statutory definitions

Some important definitions are,

Board

Means the central board of revenue established under the Central board of Revenue Act, 1924

(IV of 1924), and on the commencement of Federal Board of Revenue Act, 2007, the Federal

Board of Revenue established under section 3 thereofTax Year

Means a period of twelve months ending on the 30th day of June (also referred to asnormal tax year)

Includes a special year or a transitional year that the person is permitted to use under

section 74

Normal Tax Year

A period of 12 months from 1st July to 30 June denoted by the calendar year in which the

normal tax year ends.

Commissioner may allow a taxpayer to change tax year from special tax year uponapplication after providing him with opportunity of being heard

For the year ending 30th June 2003 the tax year shall be 2003Special Tax Year

Any income year ending other than 30th June is special tax year

Denoted by the calendar year relevant to the normal tax year in which the year end falls.

Commissioner may allow a taxpayer to change tax year to special tax year uponapplication after providing him with opportunity of being heard.

Special income year 1st January 2003 to 31st December 2003; this year end falls in the

normal tax year 1st July 2003 to 30th June 2004 therefore tax year relevant to the normaltax year i.e. 2004 shall be the tax year for this special year.

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Classes of Taxpayers Special Accounting (Income) Year

All persons carrying on business of manufacturing and dealing in

Shawls

1st April to 31st March

All persons carrying on business of rice husking 1st September to 31st August

All persons carrying on business of oil milling 1st September to 31st August

Companies manufacturing Sugar 1st October to 30th September

All persons exporting rice 1st January to 31st DecemberInsurance companies 1st January to 31st December

Note: A tax year can be a period less than 12 months under special circumstances for example,

Discontinuance of business u/s 117. In such situation, tax payer must notify a commissioner ofincome tax within 15 days of discontinuation.

Transitional Tax year

If a normal tax year or special tax year changes then the period from the day nextfollowing the last full tax year to the date of commencement of new tax year shall be

treated as transitional tax year

Normal tax year 1st July 2002 to 30th June 2003 i.e. Tax year 2003 changes to special year

1st January 2004 to 31st December 2004 i.e. Tax year 2005. In this case, period from 1st

July 2003 to 31st December 2003 shall be treated as transitional tax year i.e. Transitionaltax year 2004

Find Tax year for following Accounting PeriodsAccounting (Income) Period Type of Tax Year Tax Year

1st July 2002 to 30th June 2003 Normal Tax Year 2003

1st July 2003 to 30th June 2004

1st Jan 2003 to 31 Dec 2004 Special Tax Year 2005

1st Jan 2005 to 31 Dec 2005

1st April 2002 to 31st March 2003 Special Tax Year 2003

1st April 2003 to 31st March 2004

1st April 2004 to 31st March 2005

1st October 2003 to 30th September 2004 Special Tax Year 2005

1st

October 2004 to 30th

September 20051st October 2005 to 30th September 2006

Person (clause 42 section 2) read with section 80

The following shall be treated as persons for the purposes of this Ordinance, namely:

o An individual;

o a company or association of persons incorporated, formed, organised or

established in Pakistan or elsewhere;

o The Federal Government, a foreign government, a political sub-division of a

foreign government, or public international organisation.

Association of Person

Includes

o A firm,o A Hindu undivided family

o Any artificial juridical person and

o Any artificial body of persons

o but does not include a company

Company

Means

o A company as defined in Companies ordinance, 1984

o A Small company as defined in Section 2(59A)

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o A body corporate formed by or under any law in force in Pakistan

o A body incorporated by or under the law of a country outside Pakistan, relating to

incorporation of companies

o A trust, a cooperative society or a finance society

A foreign association whether incorporated or not, which the board has, by general orspecial order, declared to be a company for the purpose of this ordinance.

A provincial government

A local government

Small company u/sec. 2(59A)

Means a company which

1) has paid up capital plus undistributed reserves not exceeding 25 million rupees2) has employees not exceeding 250 any time during the year

3) has annual turnover not exceeding 250 million rupees and

4) Is not formed by the splitting up or the reconstitution of company already in existence.

Trust

Means an obligation annexed to the ownership of a property and arising out of the confidence

reposed in and accepted by the owner, or declared and accepted by the owner for the benefit of

another, or of another and the owner, and includes a unit trust

Unit Trust

Means any trust under which beneficial interest are divided into units such that the entitlements

of the beneficiaries to income or capital are determined by the number of units held.

Tax payer

Means any person who derives an amount chargeable to tax under this Ordinance, and

includes

o Any representative of a person who derives an amount chargeable to tax under

this Ordinance;

o Any person who is required to deduct or collect tax under Part V (Collection and

recovery of Tax) of Chapter X(Procedure) [and Chapter XII (Transitional orAdvance Tax] or

o Any person required to furnish a return of income or pay tax under this

Ordinance;

Determination of Legal Status of Persons U/sec 80:ABC University Karachi Company

XYZ Bank Limited Company

A joint family of Mr. H (a Hindu) comprising Mr. H,

His sons Mr. C & Mr. D

AOP

XYZ Modarba Company

XYZ Mills Ltd. CompanyFederal Government A Person, not sub categorized

Government of Sindh Company

Government of Punjab Company

ABC Trust Company

KDs an Unregistered firm of K, and D AOP

Mr. A serving as a Manager in a Textile Company Individual

Mr. Z a Director in Private Company Individual

Mr. Y running his business as Sole Proprietor Individual

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ABC Welfare Trust Company

Mr. A & B Joint Owners in Immovable Property AOP

XYZ Cooperative Housing Society Company

Resident taxpayer

means a taxpayer who is a resident person

Non-resident taxpayer

means a taxpayer who is a non-resident person

Resident Person (u/sec. 81)

A person shall be a resident person for a tax year if the person is:

A resident individual, resident company or resident association of persons for the year; or

The federal government.

Resident Individual (u/sec.82)

An individual shall be a resident individual for a tax year if the individual,

Is present in Pakistan for a period of, or periods amounting in aggregate to, one hundred and

eighty three (183) days or more in the tax year. Or

Is an employee or official of the federal government or a provincial government postedabroad in the tax year

Computation of Number of Days an Individual is present in Pakistan (Income Tax Rule 14)

A day or part of a day where an individual is in Pakistan solely by reason of being in transitbetween two different places outside Pakistan does not count as a day present in Pakistan.

A Part of a day that an individual is present in Pakistan (including the day of arrival in, and the

day of departure from Pakistan) counts as a whole day of such presence.

The following days in which an individual is wholly or partly present in Pakistan count as a

whole day of such presence, namely;

o A Public holiday;

o A day of leave, including sick leave;

o A day that the individuals activity in Pakistan is interrupted because of a strike, lock out

or delay in receipt of supplies oro A holiday spent by the individual in Pakistan before, during or after any activity in

Pakistan.

Resident Company(u/sec.83)

A company shall be a resident company for a tax year if,

It is incorporated or formed by or under any law in force in Pakistan

The control and management of the affairs of the company is situated wholly in Pakistan

at any time in the year; or

It is a provincial government or local government in Pakistan.

Resident Association of Persons (u/sec.84)An association of person shall be a resident association of persons for the tax year if the control& management of the affairs of the association is situated wholly or partly in Pakistan at any

time in the year.

Non-Resident Person (u/sec. 81(2))

A person shall be a non-resident person for a tax year if the person is not a resident person for

that year.

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Exercise: Determination of Residential Status Tax Year -2005

-Mr. Hanif visited Pakistan on 1st August 2004 in connection with a seminar, which continuedfor seven days, and then he left for Singapore. Mr. Hanif again came back to Pakistan on 16th

February 2005 and Stayed in Pakistan till 20th June 2005.

Solution

Tax Year: 1st July 2004-30th June 2005

Days to CountAugust 2004 -7 days

February 2005 -13 days

March 2005 -31 daysApril 2005 -30 days

May 2005 -31 days

June 2005 -20 daysDuring Tax year, his stay in Pakistan amounted to periods aggregating to a total of 132 days.

Therefore, Mr. Hanif is a Non-Resident Individual for Tax Year 2005.-Mr. Sajjad an employee of Federal Government at London stayed in Pakistan from 1st

September 2003 to 20th November 2003. For rest of period pertaining to tax year 2004 and

2005 his stay was in London.

Solution

Mr. Sajjad is a Non-Resident individual for tax year 2004, 2005 because he is employee ofFederal Government posted abroad during that period.

-Mr. Kalim came to Pakistan on 2nd August 2005 and left the country for Frankfurt on 15th

June, 2006. Determine the residential status; for tax year 2006.

(Total =319)During Tax Year 2006, Mr. Kalim stay in Pakistan is more than 183 days; therefore he is a

Resident Individual.

Scope of Total Income of a Resident Person (u/sec. 11(5))

The income of a resident person under a head of income shall be computed by taking into

account amounts that arePakistan-source incomeandamounts that areforeign-source income.

Scope of Total Income of a Non-Resident Person (u/sec. 11(6))

The income of a non-resident person under a head of income shall be computed by taking intoaccount only amounts that are Pakistan-source income.

Important Points Regarding Income

Incomes Received (Receipts) are chargeable to tax but Remittances are not chargeable to

tax

Cash & Kind: Income is chargeable to tax whether in cash or kind

Income may be on Receipt basis or Accrual Basis

Actual Receipts & Constructive Receipts:

o Actual Receipts are income

o Constructive Receipts are Deemed income e.g. Unexplained expenses.

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Geographical Sources of IncomeForeign Source Income u/sec. 101(16)

An amount shall be foreign-source income to the extent to which it is not Pakistan-Source

Income.

Pakistan-Source Income u/sec. 101

Item/ Head

Salary To the extent to which

Received from any employment exercised in Pakistan, wherever paid. or

Paid by (or on behalf of) Federal Government, Provincial Government or

Local Government in Pakistan, wherever employment is exercised

Business Income

of Resident Person Extent to which the income is derived from any business carried on in

Pakistan.

Business Incomeof Non-Resident

Person

Extent to which it is directly or indirectly attributable to Permanent Establishmentin Pakistan

Sale of same or similar kind of goods as those sold by Person through

Permanent Establishment in Pakistan.

Other business activities carried on in Pakistan of same/similar kind as

those effected by Non-Resident through a Permanent Establishment in

Pakistan. Or

Any Business Connection in Pakistan.

Non-Resident

Person

Where the business comprises of rendering independent services, the Pakistan

source income shall also include any amount derived by the person that is paid by

resident person or borne by a permanent establishment in Pakistan of a non resident

Person.

Gain on Disposalof Asset or

Property

It is a Pakistan source business income of either resident or non-resident person.

Dividend If Paid by a resident Company

Profit on Debt If

Paid by resident person, except when debt is used for the purpose of a

business carried on by resident outside Pakistan through permanent

establishment. Or

Born by a permanent establishment in Pakistan of a non-resident

Royalty If

Paid by resident person, except where the royalty is payable in respect of a

business carried on by resident outside Pakistan through a permanent

establishment. Or Borne by a permanent establishment in Pakistan of a Non-Resident

-Rental Income

-Gain from the

Alienation of

Property, Right or

shares

If

Derived from the lease of immovable property in Pakistan whether

improved or not, or from any other interest in or over immovable property,

including a right to explore for, or exploit, natural resources in Pakistan.

In case of Share of a company the assets of which consist wholly or

principally, directly or indirectly, or property or rights referred above

Pension or

Annuity

If

Paid by a resident or borne by a permanent establishment in Pakistan of a

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non-resident person.

Technical Fee If

paid by a resident person, except where the fee is payable in respect of

services utilized in a business carried on by the resident outside Pakistan

through a permanent establishment

borne by a permanent establishment in Pakistan of a non-resident person

Gain on Disposal

of Share Gain on disposal of shares in a resident Company

Insurance or

Reinsurance

Premium

Any amount paid by an insurance company to an overseas insurance or re-

insurance company shall be deemed to be Pakistan source income

Any other amount if it is paid by a resident person or borne by a permanent

establishment in Pakistan of a non-resident person.

Taxation of Foreign Source Income of Resident Person

Foreign source Salary of Resident Individuals u/sec. 102

Any foreign-source salary received by a resident individual shall be exempt from tax ifthe individual has paid foreign income tax in respect of the salary.

A resident individual shall be treated as having paid foreign income tax in respect of

foreign-source salary if tax has been withheld from the salary by the individualsemployer and paid to the revenue authority of the foreign country in which theemployment was exercised

Taxation of Non-Resident Person

Taxation of Permanent Establishment in Pakistan of Non-resident Person (u/sec. 105)

1. The following principles shall apply in determining the income of a permanent

establishment in Pakistan of a non-resident person chargeable to tax under the headIncome from Business, namely

a. The profit of the permanent establishment shall be computed on the basis that it is

a distinct and separate person engaged in the same or similar activities under the

same or similar conditions and dealing wholly independently with the non-resident person of which it is a permanent establishment

b. subject to this Ordinance, there shall be allowed as deductions any expenses

incurred for the purposes of the business activities of the permanent establishmentincluding executive and administrative expenses so incurred, whether in Pakistan

or elsewhere;

c. no deduction shall be allowed for amounts paid or payable by the permanentestablishment to its head office or to another permanent establishment of the non-

resident person (other than towards reimbursement of actual expenses incurred by

the non-resident person to third parties) by way of:i. royalties, fees or other similar payments for the use of any tangible or

intangible asset by the permanent establishment;ii. compensation for any services including management services performed

for the permanent establishment; oriii. profit on debt on moneys lent to the permanent establishment, except in

connection with a banking business; and

d. no account shall be taken in the determination of the income of a permanentestablishment of amounts charged by the permanent establishment to the head

office or to another permanent establishment of the non-resident person (other

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than towards reimbursement of actual expenses incurred by the permanent

establishment to third parties) by way of:i. royalties, fees or other similar payments for the use of any tangible or

intangible asset

ii. compensation for any services including management services performedby the permanent establishment; or

iii. profit on debt on moneys lent by the permanent establishment, except inconnection with a banking business

2. No deduction shall be allowed in computing the income of a permanent establishment in

Pakistan of a non-resident person chargeable to tax under the head Income from

Business for a tax year for head office expenditure in excess of the amount as bears to

the turnover of the permanent establishment in Pakistan the same proportion as the non-residents total head office expenditure bears to its worldwide turnover.

3. In this section, head office expenditure means any executive or general administration expenditure incurred by the non-resident person outside Pakistan for the purposes of thebusiness of the Pakistan permanent establishment of the person, including

a. any rent, local rates and taxes excluding any foreign income tax, current repairs,

or insurance against risks of damage or destruction outside Pakistan;b. any salary paid to an employee employed by the head office outside Pakistan;

c. any traveling expenditures of such employee; and

d. Any other expenditure which may be prescribed.

4. No deduction shall be allowed in computing the income of a permanent establishment inPakistan of a non-resident person chargeable under the head Income from Businessfor

a. any profit paid or payable by the non-resident person on debt to finance theoperations of the permanent establishment; or

b. Any insurance premium paid or payable by the non-resident person in respect of

such debt.

Exercise 1: determination of Gross Total IncomeFor the tax year 2006, Mr. A employed in Pakistan, received Rs.400, 000 as Salary. His income

from other sources is given under:a. Dividends received in Tokyo on 20th August 2005 from a Pakistani resident company:

amounting Rs.10,000

b. Share of profit received in Tokyo on 10th May 2006 from a business situated in Kuwait

but controlled through Permanent Establishment in Pakistan: amounting Rs. 60,000c. Remittance from Tokyo on March 10, 2006 out of past profits earned and received there

amounting Rs.600,000

d. Profit on Debt received and earned in Pakistan on 1st August 2006 Rs.50,000Calculate his gross total income if he is:

Resident Non-Resident

Solution (refer: lecture-18 42.50)

Tax Year: 2006

Tax Period: 1st July 2005-30th June 2006

Exercise 2: determination of Gross Total Income of Mr. Athar (Refer Lecture 19 -41.55)

Royalty earned in Pakistan but received in April 01, 2006 in Sydney Rs.140,000

Dividend form a foreign company received in London on May 10, 2006 Rs.150,000

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Share of Profit of business situated in Sydney, received in Paris on August 14, 2005 butfrom Permanent Establishment in Pakistan Rs.250,000; and

Rent for tax year 2006 of a house property situated in Sydney and received ther on 01-01-

2006 Rs.1,000,000

Assumes Mr. Athar to be

Resident Individual

Non Resident Person

Exercise 3: Determination of Gross Income of Mr. A for Tax Year 2006

Relevant information is given below:

Interest on Australian Bonds (1/3rd is received in Pakistan) Rs.24, 000.

Income from Agriculture in Australia received there but later on remitted to Pakistan Rs.

50,000.

Income from Property in London received outside Pakistan Rs. 20,000. Income earned from business in London which is controlled through a Permanent

Establishment in Pakistan (Rs.10,000 is received in Pakistan) Rs.30,000.

Dividend paid by a resident company but received outside Pakistan Rs. 40,000

Remittance (not in the nature of income) brought to Pakistan Rs.50,000.

Profits from a business in Karachi and managed from outside Pakistan Rs.20,000.

Profits on sale of an asset in Pakistan but received in Sydney Rs.5000.

Pension from Pakistan Government but received in Sydney Rs.20,000.

Find out gross total income of Mr.Tahir, if he is:(Refer Lecture_20 10.33)

Resident

Non-Resident

Permanent establishment u/sec. 2(41)

In relation to a person, means a fixed place of business through which the business of the person

is wholly or partly carried on, and includes

a) a place of management, branch, office, factory or workshop, premises for solicitingorders, warehouse, permanent sales exhibition or sales outlet, other than a liaison office

except where the office engages in the negotiation of contracts (other than contracts of

purchase);b) a mine, oil or gas well, quarry or any other place of extraction of natural resources;

c) an agricultural, pastoral or forestry property;

d) a building site, a construction, assembly or installation project or supervisory activitiesconnected with such site or project but only where such site, project and its connectedsupervisory activities continue for a period or periods aggregating more than ninety days

within any twelve-months period] ;

e) the furnishing of services, including consultancy services, by any person throughemployees or other personnel engaged by the person for such purpose;

f) a person acting in Pakistan on behalf of the person (hereinafter referred to as the agent,

other than an agent of independent status acting in the ordinary course of business assuch, if the agent

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i has and habitually exercises an authority to conclude contracts on behalf of the

other person;ii has no such authority, but habitually maintains a stock-in-trade or other

merchandise from which the agent regularly delivers goods or merchandise on

behalf of the other person; org) any substantial equipment installed, or other asset or property capable of activity giving

rise to income;

Private Company u/sec. 2(45)

Means a company that is not a public company

Public Company u/sec.2 (47)

Means

a company in which not less than fifty per cent of the shares are held by the Federal

Government or Provincial Government; a company in which not less than fifty per cent of the shares are held by a foreign

Government, or a foreign company owned by a foreign Government;

a company whose shares were traded on a registered stock exchange in Pakistan at anytime in the tax year and which remained listed on that exchange at the end of that year; or

a unit trust whose units are widely available to the public and any other trust as defined in

the Trusts Act, 1882 (II of 1882);

Royalty u/sec.2 (54)

Means any amount paid or payable, however described or computed, whether periodical or a

lump sum, as consideration for

a. the use of, or right to use any patent, invention, design or model, secret formula or

process, trademark or other like property or right;b. the use of, or right to use any copyright of a literary, artistic or scientific work, including

films or video tapes for use in connection with television or tapes in connection withradio broadcasting, but shall not include consideration for the sale, distribution or

exhibition of cinematograph films;

c. the receipt of, or right to receive, any visual images or sounds, or both, transmitted bysatellite, cable, optic fiber or similar technology in connection with television, radio or

internet broadcasting;

d. the supply of any technical, industrial, commercial or scientific knowledge, experience or

skill;e. the use of or right to use any industrial, commercial or scientific equipment;

f. the supply of any assistance that is ancillary and subsidiary to, and is furnished as ameans of enabling the application or enjoyment of, any such property or right asmentioned in sub-clauses (a) through (e); and

g. the disposal of any property or right referred to in sub-clauses (a) through (e);

Profit on a debt U/sec. 2(46)

Whether payable or receivable, means

any profit, yield, interest, discount, premium or other amount , owing under a debt, other

than a return of capital; or

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any service fee or other charge in respect of a debt, including any fee or charge incurredin respect of a credit facility which has not been utilized;

Debt U/sec.2 (15)

Means any amount owing, including accounts payable and the amounts owing under promissory

notes, bills of exchange, debentures, securities, bonds or other financial instruments;

Speculation Business U/sec. 19(2)

Means any business in which a contract for the purchase and sale of any commodity (includingstocks and shares is periodically or ultimately settled otherwise than by the actual delivery ortransfer of the commodity, but does not include a business in which

a. a contract in respect of raw materials or merchandise is entered into by a person in the

course of a manufacturing or mercantile business to guard against loss through futureprice fluctuations for the purpose of fulfilling the persons other contracts for the actual

delivery of the goods to be manufactured or merchandise to be sold;

b. a contract in respect of stocks and shares is entered into by a dealer or investor therein toguard against loss in the persons holding of stocks and shares through price fluctuations;

or

c. a contract is entered into by a member of a forward market or stock exchange in the

course of any transaction in the nature of jobbing arbitrage to guard against any losswhich may arise in the ordinary course of the persons business as such member.

Dividend U/sec. 2(19)

Includes a. any distribution by a company of accumulated profits to its shareholders, whether

capitalised or not, if such distribution entails the release by the company to its

shareholders of all or any part of the assets including money of the company;b. any distribution by a company, to its shareholders of debentures, debenture-stock or

deposit certificate in any form, whether with or without profit, to the extent to which the

company possesses accumulated profits whether capitalised or not;

c. any distribution made to the shareholders of a company on its liquidation, to the extent to

which the distribution is attributable to the accumulated profits of the companyimmediately before its liquidation, whether capitalised or not;

d. any distribution by a company to its shareholders on the reduction of its capital, to theextent to which the company possesses accumulated profits, whether such accumulated

profits have been capitalised or not;

e. any payment by a private company as defined in the Companies Ordinance, 1984 (XLVIIof 1984)] or trust of any sum (whether as representing a part of the assets of the company

or trust, or otherwise) by way of advance or loan to a shareholder or any payment by any

such company or trust on behalf, or for the individual benefit, of any such shareholder, tothe extent to which the company or trust, in either case, possesses accumulated profits; or

f. remittance of after tax profit of a branch of a foreign company operating in Pakistan;

But does not include a distribution made in accordance with sub-clause (c) or (d) in respect of any

share for full cash consideration, or redemption of debentures or debenture stock,

where the holder of the share or debenture is not entitled in the event of

liquidation to participate in the surplus assets;

any advance or loan made to a shareholder by a company in the ordinary course

of its business, where the lending of money is a substantial part of the business of

the company;

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any dividend paid by a company which is set off by the company against thewhole or any part of any sum previously paid by it and treated as a dividend

within the meaning of sub-clause (e) to the extent to which it is so set off; and

Remittance of after tax profit by a branch of Petroleum Exploration and

Production (E&P) foreign company, operating in Pakistan.]

Fee for Technical Services U/sec. 2(23)

means any consideration, whether periodical or lump sum, for the rendering of any managerial,technical or consultancy services including the services of technical or other personnel, but doesnot include

a. Consideration for services rendered in relation to a construction, assembly or like project

undertaken by the recipient; or

b. Consideration which would be income of the recipient chargeable under the headSalary;

Business

Includes any trade, commerce, manufacture, profession, vocation or adventure or concern in the

nature of trade, commerce, manufacture, profession or vocation, but does not include

employment. U/sec. 2(9)

Tax on Income u/Sec. 4 Income tax is a tax on a person in respect of his income during a tax year.

Income of a tax year as computed under the provisions of this ordinance is Taxableincome, it is total income reduced by total of any deductible allowances. It is charged to

tax in a tax year according to prescribed rules

Deductible Allowances:

Zakat

Workers Welfare Fund

Workers Participation Fund

Also if deductions are allowed, these can also be deducted from total income to arrive at taxableincome. Deductions allowed are expenses allowed by board

Income

Any amount chargeable to tax under this ordinance

Any amount subject to collection or deduction under various provisions of this ordinance

Any amount treated as income under any provision of this ordinance.

Any loss of income but does no include, in case of a shareholder of a company, the

amount representing the face value of any bonus share or the amount of any bonus

declared, issued or paid by the company to the shareholders with a view to increasing itspaid up share capital.

Concepts of Income

1. Receipt of Income U/sec. 69A person shall be treated as having received an amount, benefit, or perquisite if it is

a. actually received by the person;

b. applied on behalf of the person, at the instruction of the person or under any law; or

c. Made available to the person.Note:

It may be in form of cash or kind

The perquisites are valued in accordance with rules prescribed by the board.

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2. Deemed income at par with real income ( this is a case of legal fiction). For arriving at Tax

income from accounting income deductions not allowed will be added back and considereddeemed income.

3. Cash Basis vs. Accrual Basis

A person accounting for income chargeable to tax under the head Income fromBusiness on a cash basis shall derive income when it is received and shall incur

expenditure when it is paid.u/sec. 33 A person accounting for income chargeable to tax under the head Income from

Business on an accrual basis shall derive income when it is due to the person and shall

incur expenditure when it is payable by the person.U/sec. 34(1)4. Illegal Income: will be charged to tax. Illegal income is an offence will be taken in accordance

to relevant law.5. Lump Sum Receipts: Taxpayer may opt to be taxed at either average rate of tax or normal

procedure.

6. Tax-free Income: When an employee has an agreement with the employer that employees taxwill be borne by employer then that amount will be added back to the income of the employee.

7. Income Can not be taxed twice if not expressly mentioned otherwise. For example, the

income of the company is taxed, but when that company announces dividends to its shareholders, dividend income of shareholders is taxed again

8. Charge of Tax on person Person may be a resident person or non resident person

9. Certain Incomes excluded from Taxable Income (Exemptions)10 Heads income U/sec. 11

Salary U/sec 12

Income from Property U/sec. 15

Income from business U/Sec. 18

Capital Gains U/Sec. 37

Income from other Sources U/sec. 39

Total Income U/sec. 10

The total income of a person for a tax year shall be the sum of the persons income under each of

the heads of income for the yearHeads of Income Rs. Rs.

1. Head of Income Salary

Salary (sec. 12)

Taxable salary income by way of allowances and perquisites

(sec. 12-13 & IT rules 3-7

Basic Salary xxx

Medical Allowances xxx

House Rent Allowance xxx

Head of income from Salary xxx

2. Income from Property

Rent received/ Receivable u/sec. 15 &16 xxxDeductions u/sec. 17 (xxx)

Net Income from Property xxx

3. Head of Income: Business

Income from business excluding incomes to which section

169 applies and which are taxed as a separate block of

income sections 18 & 19

xxx

Gross profit as per profit & loss xxx

Less deductions allowed in sec. 20,22-31 xxx

Add: Deductions which are inadmissible in sec. 21 xxx

Net income from business xxx

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4. Income from Capital gain

Amount of Capital Gain u/sec. 37 xxx

Less :deductions u/sec. 38 (xxx)

Net Income from Capital Gains xxx

5. Income from other sources excluding incomes to which

section 169 applies and which are taxed as a separate

block of income U/sec. 39

Gross income xxxLess: Deductions u/sec. 40 (xxx)

Net income from other sources xxx

Total Income xxx

Less Deductible Allowances U/sec.60A-63 & Exemptions

Under Second Schedule

(xxx)

Taxable Income xxx

Tax Rate xxx

Tax Liability xxx

Methods of Accounting u/sec. 32Two Methods of Accounting

It is the choice of person to decide between following two methods of accounting

o Cash Basis

o Accrual Basis

For Companies Accrual basis of accounting is compulsory. U/sec.32(2)

Change of Method of Accounting (u/sec. 32(4)) A person may apply, in writing, for a

change in the persons method of accounting and the Commissioner may, by [order] inwriting, approve such an application but only if satisfied that the change is necessary to

clearly reflect the persons income chargeable to tax under the head Income from

Business

Rules to Prevent Double Derivation of Income and Double

Deductions (u/sec. 73): -(1) For the purposes of this Ordinance, where

(a) any amount is chargeable to tax under this Ordinance on the basis that it is receivable,

the amount shall not be chargeable again on the basis that it is received; or

(b) Any amount is chargeable to tax under this Ordinance on the basis that it is received;the amount shall not be chargeable again on the basis that it is receivable.

(2) For the purposes of this Ordinance, where

(a) Any expenditure is deductible under this Ordinance on the basis that it is payable, theexpenditure shall not be deductible again on the basis that it is paid; or

(b) Any expenditure is deductible under this Ordinance on the basis that it is paid, the

expenditure shall not be deductible again on the basis that it is payable.

Exemptions and Tax ConcessionsSection 41 to 53, Section 102 and various clauses of second schedule to the ordinance deal with

exemptions available to

Incomes,Persons or

Class of incomes or

Class of persons Shall be:a. Exempt from tax under this ordinance, subject to the conditions and to the extent

specified therein; Or

b. Liable to tax at such rates, which are less than the rates specified in the first schedule; Or

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b) Where a citizen of Pakistan leaves Pakistan during a tax year and remains abroad during

that tax year, any income chargeable under the head Salary earned by him outsidePakistan during that year shall be exempt from tax under this Ordinance.]

Exemptions and tax concessions in the Second Schedule u/sec. 53

Lecture 14 ReviewAgricultural income (u/sec. 41(2))

Means,a) any rent or revenue derived by a person from land which is situated in Pakistan and is

used for agricultural purposes;

b) any income derived by a person from land situated in Pakistan fromi agriculture;

ii the performance by a cultivator or receiver of rent-in-kind of any processordinarily employed by such person to render the produce raised or received by

the person fit to be taken to market; or

iii the sale by a cultivator or receiver of rent-in-kind of the produce raised orreceived by such person, in respect of which no process has been performed other

than a process of the nature described in sub-clause (ii); or

c) any income derived by a person fromi any building owned and occupied by the receiver of the rent or revenue of any

land described in clause (a) or (b);

ii any building occupied by the cultivator, or the receiver of rent-in-kind, of any

land in respect of which, or the produce of which, any operation specified in sub-clauses (ii) or (iii) of clause (b) is carried on,

but only where the building is on, or in the immediate vicinity of the land and is a building which

the receiver of the rent or revenue, or the cultivator, or the receiver of the rent-in-kind by reasonof the persons connection with the land, requires as a dwelling-house, a store-house, or other

out-building.

Non-Agriculture Income

Following incomes are held to be Non-Agricultural Incomes Income from Spontaneous forest

Income from sale of fruits and flowers growing on land naturally, spontaneously, andwithout the intervention of human agency

Interest on arrears of rent payable in respect of agricultural land as it is neither rent nor

revenue derived from land.

Interest accrued on promissory notes obtained by a landlord (zamindar) from defaulting

tenants.

Income from sale of wild grass and weeds of spontaneous growth.

Profit accruing from the purchase of standing crops and resale of it after harvest by amerchant having no interest inland except a mere license to enter upon the land and

gather upon the produce, land is not direct, immediate or effective source of income.

Interest received by a money-lender in the form of agriculture produce.

Income from sale of agricultural produce received by way of price for water supplied to

land.

Commission earned by the landlord for selling agricultural produce of his tenant.

Income from fisheries

Royalty income of mines

Dividend received from company engaged agriculture activity

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Income received for land let out for storing crops.

Income from poultry farm

Income from butter and cheese making

Maintenance of agricultural land allowance.

Agriculture Incomes

Following incomes are held to be agriculture Income

If denuded parts of the forest are replanted and subsequent operations in forestry iscarried out the income arising from the sale of replanted trees.

The fees collected from owners of cattle (normally used for agricultural purpose) for

allowing them to graze on forest lands covered by jungle and grass grown spontaneously.

Profit on sale of standing crops or the produce after harvest by a cultivating owner or

tenant of land.

Compensation received from an insurance company for danger caused by hailstorm oranother natural calamity to crops or agricultural produce.

Income from growing flowers and creepers

Share of profit received including salary by a partner from a firm engaged in agricultureoperations

Interest on capital received by partner from a firm engaged in agricultural operation.

Computation of Income Which Is Partly Agricultural and Partly From Business Or

Agricultural Produce Is Used As Raw Material (Rule 11)1) This rule applies to a person who is a cultivator or receiver of agricultural produce as rent-in-

kind and who uses agricultural produce raised or received as raw materials in a business theincome from which is chargeable to tax under the head Income from Business.

2) In determining the amount of income of a person to whom this section applies, the market

value of any agricultural produce raised or received as rent-in-kind by the person and used as

raw materials in the persons business shall be allowed as a deduction.

3) For the purposes of sub rule 2 the market value of agricultural produce shall bea) Where the agricultural produce is ordinarily sold in the market in its raw state or after

application of any process ordinarily employed by a cultivator or receiver of agriculturalproduce as rent-in-kind to render it fit to be taken to market, the market price for the

produce at the time it is used as raw materials in the persons business; or

b) In any other case, the sum of the following amounts, namely:-i) The expense of cultivation; and

ii) The land revenue rent paid for the area in which the produce is grown.

4) No deduction shall be allowed for any expenditure incurred by a person as cultivator orreceiver of agricultural produce as rent-in-kind, other than as specified in sub-rule (2).

Exercise 1 Computation of taxable income where agricultural income is to be clubbed forrate purposes

Mr. Aslam is running a rice husking mill and he used agricultural produce grown

on his land. During the tax year 2011 he got 9,000 kg of raw rice from his land and

used it in his mill for husking. He would get Rs. 400 per 40 kg if he had sold it

directly to the market. Declared particulars of said business are given hereunder:

Rs. Rs.

Sale 300,000

Operating Expenses

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Salaries and Wages 50,000

Rent 36,000

Utilities 50,000

136,000

Net Profit 164,000

Compute Taxable Income [Ans: 164,000-90,000 =74,000]

For the tax year 2011, agricultural income of Mr. Akram is declared as Rs. 120,000.

His income form business for the said tax year is Rs. 500,000. Calculate taxable

Income and Tax liability thereon.

Hint: Exempt income is clubbed for tax rate purposesAssociates u/sec. 85

1) Two persons shall not be associates solely by reason of the fact that one person is an

employee of the other or both persons are employees of a third person.2) Two persons shall be associates where the relationship between the two is such that one may

reasonably be expected to act in accordance with the intentions of the other, or both personsmay reasonably be expected to act in accordance with the intentions of a third person.

3) The following shall be treated as associates

a) an individual and a relative of the individual;

b) members of an association of persons;c) a member of an association of persons and the association, where the member, either

alone or together with an associate or associates under another application of this section,

controls fifty per cent or more of the rights to income or capital of the association;

d) a trust and any person who benefits or may benefit under the trust;e) a shareholder in a company and the company, where the shareholder, either alone or

together with an associate or associates under another application of this section, controls

either directly or through one or more interposed persons i) fifty per cent or more of the voting power in the company;

ii) fifty per cent or more of the rights to dividends; or

iii) fifty per cent or more of the rights to capital; andf) two companies, where a person, either alone or together with an associate or associates

under another application of this section, controls either directly or through one or more

interposed persons

i) fifty per cent or more of the voting power in both companies;ii) fifty per cent or more of the rights to dividends in both companies; or

iii) fifty per cent or more of the rights to capital in both companies.

4) Two persons shall not be associates under clause (a) or (b) of sub-section (3) where the

Commissioner is satisfied that neither person may reasonably be expected to act inaccordance with the intentions of the other.

Security (Securities & Exchange Ordinance)Security includes-

1. any stock, transferable share, scrip, Modaraba Certificate, note, debenture, debenture

stock, participation term certificate, bond, investment contract, and pre-organizationcertificate or subscription, and, in general, any interest or instrument commonly known as

a security and, any certificate of deposit for, certificate of interest or participation in,

temporary or interim certificate for, receipt for , or any warrant or right to subscribe to or

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purchase, any of the foregoing but does not include currency or any note, draft, bill of

exchange or bankers acceptance or any note which has a maturity at the time of issuanceof not more than twelve months, exclusive of days of grace, or any renewal thereof

whose maturity is likewise limited;

2. any Government security as defined in the Securities Act, 1920 (X of 1920); and3. any bonus entitlement voucher issued by the State Bank of Pakistan in accordance with

any scheme announced by the Commission;

Losses Set off, Carry forward & Set offLosses:

Where the total deductions allowed under Income tax ordinance 2002 to a person for a tax year

under a head of income exceed the total of the amounts derived by the person in that year that are

chargeable to tax under that head, the person shall be treated as sustaining a loss for that head for

that year of an amount equal to the excess. U/sec. 11(3)

For the purposes of set off of losses the heads of income may be split into the following three categories:

Category A Category B Category CSalary

Income from Property

Income from non-speculation

business

Income from other sources

Income from speculation

business

Income from capital Assets

(excluding Securities

u/sec.37A(3)

Rules for Set off of Losses1. Where a tax payer sustains a loss from any head specified under category A, it may be

set-off against income from any other head of income during the tax year. The income

may be from any head specified under category A, B or C.

2. The loss from a peculation business may be set off only against the income from anyother speculation business carried on by the tax payer during the same tax year.

3. The capital losses may be set off only against the capital gains during the same tax year

4. Any loss sustained by a person on disposal of securities in a tax year shall be set offonly against any gain of the person from any other security disposed off during that tax

year.

Remember,

A taxpayer cannot sustain a loss under the head salary.

The business loss shall be set off last.

The depreciation allowance admissible under the Third Schedule shall be chargedup to that portion only which can be absorbed by the incomes. The general rules

relating to set off and carry forward of losses shall not apply to unabsorbeddepreciation. Amount of such depreciation shall not be taken as a normal businessloss rather, shall be treated separately.

If an income form a source is exempt from tax, the loss, if any , from such source

cannot be set off or carried forward.

There can be loss under head of income property.

Where a loss cannot be set off it can be carried forward to six succeeding tax year

for following heads only:

i. Non-Speculation business

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ii. Speculation business

iii. Capital gains.

Speculation Business Loss: U/sec.58

A loss sustained by a person for a tax year in respect of a speculation business

Set off only against any other Income from speculation business of the person for the tax year.

Amount of loss no set off shall be carried forward to following tax year & applied against

income of any speculation business of the person. No speculation loss shall be carried forward to more than six tax years.

Only the loss of earliest tax year shall be set off first.

Capital Loss: U/sec.59

Capital loss is a loss sustained by the person for a tax year in respect of Capital Gains

Set off only against any other income from head of Income Capital Gains

Amount of loss not set off shall be carried forward to the following tax year and then set

off against Head of Income Capital Gains.

A loss, shall not be carried forward to more than six tax years immediately succeeding

The loss of the earliest tax year shall be set off first

Loss on Disposal of Securities: U/sec.37A (5)Notwithstanding anything contained in this ordinance, where a person sustains a loss on disposalof securities in a tax year, the loss shall be set off only agains the gain of the rperson from any

other securities chargeable to tax under this section and no loss shall be carried forward to the

subsequent tax year.

Set off of Losses: U/sec.56 (1) & (3)

Subject to sections 58 and 59, where a person sustains a loss for any tax year under any

head of income specified in section 11, the person shall be entitled to have the amount ofthe loss set off against the persons income, if any, chargeable to tax under any other head

of income for the year

Where, 1[in a tax year,] a person sustains a loss under the head Income from Business

and a loss under another head of income, the loss under the head Income fromBusiness shall be set off last.

Set off, Carry forward & Set off of Business Losses other than Speculation Business:

U/sec.57

Set off against persons income chargeable to tax under any other Head of Income for the

year. U/sec. 56(1).

Loss under the head Income from businesses shall be set off last. u/sec.56(3)

Loss not wholly set off shall be carried forward to following tax year & set off against

persons income chargeable under the Head Income from Business.

No loss shall be carried forward to more than six tax years immediately succeeding thetax year for which the loss was first computed.

Loss of earliest tax year shall be set off first.Losses in case of Industrial Undertakings: Clause 2, Part IV 2nd Schedule

In the case of losses referred to in section 57 in respect of an industrial undertaking set up in an

area declared by the Federal Government to be a "Zone" within the meaning of Export

Processing Zones Authority Ordinance, 1980 (IV of 1980), the period of six tax years specifiedin the said section shall not apply.

Setting off Deductions Allowed: U/sec.57(4)&(5), 59A(5)&(6)

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In case of Business losses other than speculation, if loss includes deductions allowedunder sections 22 (Depreciation), 23 (Initial Allowance), 23A (First year allowance), 23B

(Accelerated Depreciation to alternate energy projects & 24 (Intangibles).

The amount of deductions not set off against Income, shall be added to deductions

allowed under those sections in the following tax year, and so on until completely set off.

While calculating the amount of calculating the amount of loss to be carried forward, the

total business loss is split into the following two categories:o Loss due to the business transactions

o Loss due to the depreciation allowance as per Third Schedule

Whenever taxpayer earns a profit form his business, it shall be utilized in the followingmanner:

o Set off the current losses from any other head of Income which can be set-off, if

any;

o Set of the carried forward business losses; and

o Utilize the residual amount of profits, it any, for setting-off the unabsorbed

depreciation.

Set-Off and Carry Forward of Losses of AOPs: U/Sec. 59A & 56(2)

Sections 59A deals with the provision relating to set off and carry forward of losses by AOPs.But after omission of sub sections 2 to 5 of section 92 and section 92 by the Finance Act, 2007,

provisions of section 59A become non-operative. Under such a case the general provisions

regarding set-off and carry forward of losses shall be applicable.An AOP, being taxable independent of its members, is entitled to set-off and carry forward its

losses as other persons (i.e., individuals and companies) are entitled. As the share received by a

member out of the incomes of an AOP is exempt from tax, the member is not allowed to set-off

and carry forward his respective share in losses of the AOP. Only AOP can set-off and carryforward its losses in accordance with the rules specified in sections 56 to 59 of the Income Tax

Ordinance.

Limitations as to Set-off, Carry forward & Set off of Losses: U/sec. 92(1), 56(2), 59A(4)

1. A member of a non-professional association of persons (AOP) is not entitled to set off or

carry forward any share in losses sustained by AOP against his other incomes. This is due

to the reason that the share in the income of such an AOP is exempt from tax.2. Where there is a change in the constitution of an AOP then it will not be entitled to carry

forward and set off that part of its losses which represents the share of a retired or

deceased member.3. Where a person has succeeded the business of any other person, he will not be entitled to

carry forward and set off against his income any loss sustained by the other person.

However, if the succession is by inheritance, then he is allowed to carry forward and setoff losses.

Set-off of Losses of Companies Operating Hotels: U/sec. 56A

A company shall be entitled to set-off its loss under the head Income from Business against its

income in Pakistan or Azad Jammu and Kashmir (AJ&K), as the case may be, from the tax year2007 onwards, if following conditions are satisfied:

1. the company is registered in Pakistan or AJ&K;

2. It is operating hotels in Pakistan or AJ&K; and

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3. It sustains a loss in Pakistan or AJ&K for any tax year under the head Income from

Business.

Foreign Losses: U/sec.104

1. Deductible expenditures incurred by a person in deriving foreign-source income

chargeable to tax under a head of income shall be deductible only against that income.2. If the total deductible expenditures referred to in sub-section (1) exceed the total foreign

source income for a tax year chargeable to tax under a head of income (hereinafterreferred to as a foreign loss), the foreign loss shall be carried forward to the followingtax year and set off against the foreign source income chargeable to tax under that head in

that year, and so on, but no foreign loss shall be carried forward to more than six tax

years immediately succeeding the tax year for which the loss was computed.

3. Where a taxpayer has a foreign loss carried forward for more than one tax year, the lossfor the earliest year shall be set off first.

4. Section 67 shall apply for the purposes of this section on the basis that

a. income from carrying on a speculation business is a separate head of income; andb. Foreign source income chargeable under a head of income (including the head

specified in clause (a)) shall be a separate head of income.

Carry Forward of Losses of Exempt Business:The business income may be exempt from tax permanently or for a specific period (commonly

known as tax holiday). A question arises that if a business has sustained a loss, then how it will

be dealt with in taxation. Legal provisions in this regard are discussed in following paragraphs:a. Business Permanently exempt from Tax: Where a business is permanently exempt from

tax, then there will be no need to determine the incomes under the Income Tax

Ordinance. The taxpayer will ignore the provisions regarding the set off & Carry forward

of losses. Such a person will maintain books of accounts and prepare financial statement

as per his own requirements.b. Business Exempt from Tax for a specific Period: A loss sustained during the exemption

period may also be carried forward & set off after the expiry of exemption period. Wherea business is enjoying tax holiday, its losses whether within or after the exemption period

can be carried forward as per normal procedure i.e., up to 6 tax years.

Change in Control of an Entity (Sec.98)

Where there is a change of fifty percent or more in the underlying ownership of an entity then

any loss incurred for a tax year before the change shall not be allowed as deduction (set off) in

the tax year after change.However, the above provision shall not apply if the following conditions are fulfilled:

1) the entity continues to conduct the same business until the loss has been fully set off; and

2) The entity does not engage in any new business or investment after the change until the losshas been fully set off.

From above it is evident that an entity may set off it losses incurred prior to the change in

underlying ownership if it continues to conduct the same business and if it does not engage in

any anew business or investment.

Losses of a Subsidiary Company (56, 57&59B)

The losses of a subsidiary company may be set off in any of the following ways;

1) setting off and carrying forward its losses by the subsidiary; or2) Surrendering of losses by the subsidiary to its holding company for set off.

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Setting off the losses by the subsidiary: A subsidiary is a separate legal person distinct from

its holding company. It may set off and carry forward its losses in the like manner as otherpersons are entitled (i.e., it may set off the loss in the year of its occurrence and carry forward

the unadjusted loss upto a period of 6 tax years.

Heads of Income -U/sec.11 (1)

For the purposes of the imposition of tax and the computation of total income, all income shallbe classified under the following heads, namely

a. Salary

b. Income from Property

c. Income from Business

d. Capital Gains ande. Income from other Sources

Salary and its Computation

Significant Points:

Relationship between Payer and Payee should be that of an Employer and Employee.

Salary means any amount received by an employee from any employment, whether of a

revenue or capital nature.(u/sec.12(2))

Employee means any individual engaged in employment. u/sec. 2(20)

Employer means any person who engages and remunerates an employee. u/sec.2(21)

Employment (u/sec. 2(22)) includes,

o A directorship or any other office involved in the management of a company;

o A position entitling the holder to a fixed or ascertainable remuneration.

o Holding or acting in any public office

Salary from more than one source during a tax year is taxable Income.

Salary may be from former employer, present employer or prospective employer.

Group taxation

u/sec. 59AA

Set off of

business losses

consequent toamalgamation

u/sec. 57A

Refund & Tax

Credit

Provident Fund Assessment &

Returns

ITO pp.72 ITO pp.70 316-318 143-147 291-306

Method of

Accounting

Offences &

Penalties

Appeals Taxation of

Person

Income tax

Authorities

203-211 307-315 319-332 105-118 41-56

Scope of Tax FTR Miscellaneous Anti-avoidance

57-70 338-349 333-337

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ITO Income Tax Ordinance

Business Taxation Theory

Documents

Transcript of Business Taxation Theory