Income from Business - List of Adjustments

Sr. No Description of Adjustment Treatment in Question

"Business" includes:
1 What is business - 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.

Income may be recorded using the cash or accrual basis of accounting. Companies are, however, required to follow the accrual system of accounting for its
2 Taxability of Income under this head
business income

By nature there are two types of businesses:

3 Types of business - Speculative business
- Non- Speculative business

Speculation business” means any business in which a contract for the purchase and sale of any commodity (including stocks and shares) is periodically or
ultimately settled otherwise than by the actual delivery or transfer of the commodity.
Following are the exceptions:
4 Speculative business - a contract in respect of raw materials is entered into by a person to guard against loss through future price fluctuations; or
- a contract in respect of stocks and shares is entered into by a dealer or investor therein to guard against loss through price fluctuations; or
- 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 loss which may arise in the ordinary course of the person’s business as such member.

Where a person carries on a speculation business:

▪that business shall be treated as distinct and separate from any other business carried on by the person.
▪this part shall apply separately to the speculation business and the other business of the person.
▪Apportionment of deductions shall apply.
5 Tax implications for speculation business
▪any profits and gains arising from the speculation business shall be included in the person`s income chargeable to tax u/h “IFB”. ▪any loss of the person
arising from the speculation business sustained for a tax year shall be set off only against the income from any other speculation business.
▪if a speculation loss sustained by a person for a tax year is not wholly set off, then the amount of the loss not set off shall be carried forward to the
following tax year and shall be carried forward to six tax years immediately succeeding the tax year for which the loss was first computed.

In computing “Income from Business” a deduction shall be allowed for any expenditure incurred by the person in the year wholly and exclusively for the
purposes of business. Following are the list of deductions that are allowed agsinst IFB:
- In case of animal used in business otherwise than stock-in-trade, difference between actual cost and amount realized in respect of the carcasses or
animals in the TY in which it dies/permenantly becomes useless for business.
- Amortization or depreciation of intangible or tangible assets where useful life is more than 1 year.
- Pre-commencement expenditure at the rate of 20% on straight line basis.
- Scientific research expenditure incurred in Pakistan wholly and exclusively for the purpose of business.
- Employee training facilities expenditure.
- any educational institution or hospital in Pakistan established for the benefit of the person’s employees and their dependents.
- any institute in Pakistan established for the training of industrial workers recognized by the FG/LG/PG.
6 Deductions allowed against IFB
- The training of any person, being a citizen of Pakistan, in connection with a scheme approved by the board
- Profit on debt if related to taxable business income.
- Entertainment expenditure incurred in pakistan.
- Incurred in Pakistan on the entertainment of foreign customers & suppliers.
- Incurred on the entertainment of customer & clients at the person’s business premises
- Incurred on the entertainment at the meeting of shareholders, agents, directors or employees
- Incurred on entertainment at the opening of branches.
- Bad debts write off (Actual bad debt).
- If asset is acquired on lease, then the rental payment is allowed as deduction. In case of vehicle not plying for hire, cost of the asset shall not exceed the
amount of 2.5 Mn.

Lessor:
Asset is treated as property of the lessor therefore depreciation will be allowed to be adjusted only against rental income.
7 Treatment of Leased asset
Lessee:
Lessee gets tax deduction for entire amount of lease rental payment (principal plus markup)
 A person shall be allowed a deduction on satisfaction of the following condition:
The amount of the debt was:
- Previously included in the person’s income from business chargeable to tax; or
- The debt or part of the debt is written off in the accounts of the person in the tax year; and
- There are reasonable grounds for believing that the debt is irrecoverable

Where a deduction is allowed in a tax year for a bad debt written off and in a subsequent tax year the
8 Treatment of Bad debt
person receives in cash or kind any amount in respect of that debt, a computation shall be made as under:
a-b
(a) is amount received against the written off debt; and
(b) is the difference between whole amount of bad debt and bad debt allowed as a deduction by tax authorities.

(If (a) is greater than (b), the difference shall be treated as income of the person. In other case, where (a) is less than (b) the difference shall be treated as
bad debts for the year in which the amount is received.)

Following are the list of deductions that are not allowed to deduct while calculating income from business.
- Any cess, rate or tax paid or payable by the person in Pakistan or a foreign country that is levied on the profits or gains of the business or assessed as a
percentage or otherwise on the basis of such profits or gains;
- Any amount of tax deducted at source from an amount derived by the person.
- Any amount of commission paid or payable to a person in respect of supply of products listed in the 3rd Schedule of the STA exceeds 0.2% of gross
amount of supplies and person is not appearing in ATL.
- Any expenditure paid without dedduction of tax (Withholding tax).
(However, disallowances in respect of purchase of raw materials and finished goods shall not exceed 20% of purchases of raw materials and finished
goods.)
- Contribution to unrecognized /unapproved provident, pension, superannuation or gratuity funds.
- Amount exceeding 50% of contribution made to approved gratuity fund, approved pension fund or an approved superannuation fund.
- Any fine or penalty paid or payable by the person for the violation of any law, rule or regulation.
- Any amount carried to a reserve fund or capitalised in any way.
- Entertainment expenditure in excess of such limits as discussed above.
- Accounting depreciation, Accounting Amortization
- Bad debt provision
- Any profit on debt, brokerage, commission, salary or other remuneration paid by an association of persons to a member of the AOP.
- Any expenditure of a capital nature.
- Payment in cash of monthly salary in excess of 32,000.
- Payment for any expenditure in cash if the sum of account balance 250,000 and individual expense is greater than 25,000 with the following exceptions:
Deductions not Allowed
9 - utility bills;
(Inadmissible Deductions) Sec-21
- freight charges;
- travel fare;
- postage; and
- payment of taxes, duties, fees, fines or any other statutory obligation

- Expenditure up to 8%, claimed by a person who fails to integrate his business with the FBR through approved fiscal electronic device and software.
- Any withholding tax to be borne by company itself is also not allowed as expense except in case of salary.
- Any expenditure attributable to sales made to persons required to be registered but not registered under the STA, 1990.
Computation shall be made according to the following formula, namely:
(A/B) × C
• A is the total amount of deductions claimed under this Part;
• B is the turnover for the tax year; and
• C is the total amount of sales exclusive of sales tax and federal excise duty to persons required to be registered but not registered.
(However, disallowance of expenditure under this clause shall not exceed 10% of total deductions claimed).

- Interest Expense and depreciation of leased asset.

- Any deduction for which taxpayer fails to provide documentary evidence.
- Any personal expenditure incurred by the person.
- Provision of stock in trade
 A person accounting for income chargeable to tax under the head "Income from Business" on a cash basis may compute the person’s cost of stock-in-trade
10 Strock in trade on the prime-cost method or absorption-cost method, and a person accounting for such income on an accrual basis shall compute the person’s cost of
stock-in-trade on the absorption-cost method.

A person who places an eligible depreciable asset into service in Pakistan for the first time in a tax year shall be allowed an initial allowance provided the
asset is used by the person for the purposes of his business for the first time or the tax year in which commercial production is commenced, whichever is
later.
“Eligible depreciable asset” means a depreciable asset other than:
a. any road transport vehicle unless the vehicle is plying for hire;
11 Initial allowance b. any furniture, including fittings;
c. any plant or machinery that has been used previously in Pakistan; or
d. plant or machinery for which full cost of asset is allowed as deduction in the year of purchase; or.
e. Immoveable property or structural improvements to the immoveable property

(The amount of initial allowance of a person shall be computed at the rate of 25% for plant and machinery)

12 Summary of Depreciation, Initial Allowance

The amortization deduction of a person for a tax year shall be computed according to the following formula, namely:
A/B
13 Amortization of Intangibles A is the cost of the intangible; and
B is the normal useful life of the intangible in whole years.
(An intangible which does not have an ascertainable useful life, shall be treated as if it had a normal useful life of 25 years.)

WDV of the asset, in case asset is used partly for business and partly for non-business purpose, shall be computed on the basis that the asset has been
Treatment if the asset used partly in solely used to derive business income. It means that depreciation allowed as well as disallowed shall be deducted from the cost of the asset in arriving at
14
business and partly for non business use the WDV. However, the WDV of the asset shall be increased by the amount of depreciation disallowed on account of non-business use at the time of
disposal.

- The cost of a passenger transport vehicle (not plying for hire) shall not exceed Rs. 7.5 Mn.
- Where the cost of passenger transport vehicle (Not plying for hire) is restricted to
7,500,000, sale consideration shall be calculated as follows:
Considerations in case of Passenger
15 A x B/C
Transport Vehicle not plying for hire
A is the amount received on disposal
B Rs. 7,500,000
C is the actual cost of acquiring the vehicle.

- If the consideration received on disposal of immovable property exceeds its cost, the consideration received shall be treated as the cost.
16 Other considerations in case of disposal - Where a depreciable asset that has been used by a person in Pakistan is exported or transferred out of Pakistan, the person shall be treated as having
disposed of the asset at the consideration equal to the cost of the asset.
 This section shall apply to:
• a resident company
• permanent establishment of a non-resident company
• an individual having turnover of 100 million rupees or above (in the tax year 2017 or in any subsequent tax year) and
• an association of persons having turnover of 100 million rupees or above (in the tax year 2017 or in any subsequent tax year)

Reason of its application:

This section shall apply where due to following reasons:
(a) loss for the year;
(b) the setting off of a loss of an earlier year;
(c) exemption from tax;
(d) the application of credits or rebates; or
17 Minimum Tax Regime @ 1.25% of Turnover
(e) the claiming of allowances or deductions (including dep. and amort. deductions)

“Turnover” means:
(a) the gross receipts from sale of goods, exclusive of:
• Sales Tax and
• Federal Excise duty or
• any trade discounts shown on invoices or bills and
• The gross receipts from income falling under FTR will not be taken into account.
(b) the gross fees for the rendering of services except receipts falling under final taxation;
(c) the gross receipts from the execution of contracts except receipts falling under final taxation; and
(d) the company’s share of the above amounts received as share of profit from an AOP
In minimum tax exceeds the actual tax payable then the excess amount shall be carried forward for the period of 3 subsequent tax years.

AOP - List of Adjustments

18 Key points for solving AOP Numerical

Talib E Dua

Abdullah Maqsood Chaudhry

Mirza Haris