Concept of Income &

Tax
Overriding law [S.3]
 Provisions of the Ordinance prevail over other
laws in case of conflict
 S. 234 of the Companies Ordinance, 1984 –
Accounts to be prepared according to IAS’s
 S.35 of the Income Tax Ordinance, 2001 –
Method for valuation of stock-in-trade
 S.22 – No depreciation admissible on assets
acquired on finance lease
 S.139 – Recovery of tax of a company from its
shareholders
 Basis of charge [S.4]
 General form: Tax on taxable income
 “Subject to this Ordinance, income tax shall be
imposed for each tax year, at the rate or rates
specified in Division I, 1B or II of Part I of the
First Schedule, as the case may be, on every
person who has taxable income for the year.”
[S.4(1)]
 Tax is charged on a “person”
 Tax is charged in respect of a tax year
 Tax is charged on taxable income
 Essential ingredients for levy of income tax – Income
+ Person + Period
 Basis of charge [S.4]
 What to pay?
 For which period?
 Who will pay?
 Mr. Khalid (person) earned a profit (income) of
Rs.500,000 from his ice factory during financial year
2013-14 (tax year).
 Will income tax be imposed on him?
 Mr. Arshad, an employee of a bank has received
salary of Rs.80,000 per month from 01.09.2014 to
31.03.2015. Can he be charged to income tax on
10.04.2015?
 Basis of charge [S.4]
 How to determine tax payable?
 Amount of taxable income × Tax rate – Tax
credits [S.4(2)]
 Every tax year is distinct and independent of any
other tax year
 Tax rates – Different for each year
 Taxable income for tax year 2015 will be determined
according to tax rates applicable to tax year 2015
only
 Basis of charge [S.4]
 Tax credits - Amounts to be reduced from tax
payable by a taxpayer [S.4(3)]
 Kinds of tax credits
 Foreign tax credit
 Tax credit on donations, investment etc.
 Tax already paid in advance
 Example:
 Tax payable = 200,000
 Less: Foreign tax paid = 50,000
 Tax credit on donations = 30,000
 Advance tax paid = 60,000 140,000
 Net tax payable = 60,000
 Basis of charge [S.4]
 Other forms [S.4(4)]
 Separate/fixed taxation
Dividend, Royalty & fee for technical services, and
shipping & air transport income [Ss.5,6 & 7]
 Final taxation
 Tax collected at source treated as final tax
 Imports [S.148]
 Tax deducted at source treated as final tax
 Contracts executed [S.153]

Income subject to fixed/final taxation not part of

taxable income [S.4(5)]
INCOME SUBJECT TO FIXED/FINAL
TAXATION [FTR/PTR]
 Pre-requisite – Deduction or collection of tax at
source
 Tax collected/deducted at source – Advance tax
paid before assessment
 Settlement – At the time of assessment/time of
filing of return
 Adjustable – Tax credit to be claimed against
tax payable
 Final tax – Tax payable is the same as tax
already deducted/collected
 Taxable Income
 Taxable income [S.9]:
 Total income – Deductible allowances
 Condition: Taxable income may be zero, but not in
negative figures
 Illustration 1:
TOTAL INCOME 100
Less: Deductible Allowances:
Zakat u/s 60 3
WWF u/s 60A 5
WPPF u/s 60B 2
10
TAXABLE INCOME 90
 Taxable Income
 Illustration 2:
Total income 100
Less: Deductible allowances:
Zakat u/s 60 30
WWF u/s 60A 50
WPPF u/s 60B 20 100
Taxable income 0
 Illustration 3:
Total income 100
Less: Deductible allowances:
Zakat u/s 60 40
WWF u/s 60A 50
WPPF u/s 60B 20 110
Taxable income 0
 Total Income
 Sum of all income under each head of income + income exempt
under the Ordinance [Section 10]
 Heads of income [S.11(1)]
 Salary
 Income from property
 Income from business
 Capital gains
 Income from other sources
 Illustration:
 Income from salary 100,000
 Income from business 150,000
 Income from capital gains 50,000
 Income from other sources 200,000
 TOTAL INCOME 600,000
 Total Income under a head of
income
• How to determine Total Income!
• Total of the chargeable amounts derived – Total
deductions allowed [S.11 (2)]
• How to arrive at Chargeable Amounts!
• As per method laid down in the charging section of
relevant head
Charging section of salary: S.12
• How to determine Allowable Deductions!
• As per method laid down in the section dealing with
deductions
Deductions allowed against business income: Ss. 20
to 31
Income [S.2(29)
 Inclusive definition
 Income as per ordinary dictionary meaning
 Any amount chargeable under the Ordinance
 Any amount subjected to tax deduction/tax
collection
 Any amount treated as income
Capital & Revenue Receipt
 Share money received by a company
 Receipt of capital by a firm from its
partners
 Receipt of interest on foreign currency
account of an individual
 Increase in value of foreign currency
deposit due to increase in exchange rate
(Exchange gain)
 Receipt of sale proceeds from sale of a
piece of land
Capital & Revenue Receipt
 Receipt of sale proceeds of shares of a
listed company
 Receipt of franchise fee for right to use
brand name
 Receipt of dividend on shares of a listed
company
 Receipt of sale proceeds from sale of goods
 Receipt of sale proceeds from sale of
business premises
 Compensation on loss of employment
Capital & Revenue Receipt
 Monetary transaction
 An Inflow of Money
 An Outflow of Money
 Inflow - Whether ‘Income’
 Outflow – Whether ‘Expenditure’
 Answer – Nature of transaction in a given
time frame
 Effect of transactions exhausted within an
accounting period - Revenue in nature
 Effect of transactions exhausted over a
longer time frame - Capital in nature
Capital & Revenue Receipt
 Capital – a ‘Tree’
 Proceeds from sale of it’s ‘fruit’ in the
marketplace – yield revenue
 Receipt relatable directly to the Tree – Capital
receipt
 Receipt relatable directly to the Fruit – Revenue
receipt
 Factory – a tree
 Gain on sale of factory – Not revenue receipt
 Profit on sale of manufactured goods –
Revenue receipt
Capital & revenue expenditure
 ‘Income’ & ‘Expenditure’ – Two sides of the
same coin
 Capital expenditure
 Expenditure resulting in acquisition of a ‘permanent’
asset for a business for the purpose of earning
revenue
 Expenditure incurred for increasing the profit earning
capacity or reducing the cost of production
 A new business – all amounts spent [wages, octroi,
carriage inwards, erection/installation charges etc] till
the point that the capital assets acquired [like
machinery] are ready for use
 Has physical existence
Capital & revenue expenditure
 Revenue expenditure
 Expenditure incurred on day to day running of a
business the effect of which is completely
exhausted within the current accounting period
 Expenditure recurring in nature, incurred to
meet the day to day requirements of business
 Expenditure incurred on purchase of raw
material & stores required for manufacturing
saleable goods
 Expenditure incurred to maintain fixed assets in
proper working condition viz repair of machinery,
building, furniture etc
 Has no physical existence.
Fictional (unreal) income
 Amounts treated as income under the Ordinance [Artificial
or fictional income (not real income in the ordinary
sense)]
 Categories of fictional income
 Fiction of income
 Loan, advance or gift received otherwise than through
banking channels [S.39(3)]
 Fiction of person
 Income of a miner child [S.91(1)]
 Fiction of place
 Salary paid outside Pakistan [S.101(1)(a)]
 Fiction of time
 Discontinuance of business or dissolution of a firm [S.
(98B)]
 Fiction of event
 Property income in case of revocable transfer of property
[S.90(1)]
Exempt income
 Kinds of income NOT chargeable under the
Ordinance
 Agricultural income [section 41]
 Persons associated with United Nations &
Diplomatic Missions [section 42]
 Foreign Govt. Officials [section 43]
 Exemptions under International Agreements
[section 44]
 Allowances attached to any Honour, Award, or
Medal awarded to a person by the President of
Pakistan [section 45]
Exempt income
 Educational scholarships [section 47]
 Support payments under an agreement to
live apart [section 48]
 Federal and Provincial Government, and
local government income [section 49]
 Foreign-source income of short-term
resident individuals [section 50]
 Foreign-source income of returning
expatriates [section 51]
Exemptions under 2ND
SCHEDULE
 Part I
 Exemption from tax on income
 Part II
 Reduction in standard tax rates
 Part III
 Reduction in tax liability
 Part IV
 Exemption from application of provisions of the
Ordinance
Heads vs sources of income
 Sources of income
 Income from employment
 Income from trading
 Income from sale of manufactured goods
 Income from exports
 Income from sale of a capital asset
 Income of a leasing company
 Income of a doctor from private practice
 Dividend income
Heads vs sources of income
 Sources of income
 Income from rent of immovable property
 Income from lease of factory
 Prize on prize bond
 Interest income (profit on debt)
 Income from execution of a contract
 Income from imports
 Income from rent of a generator
Heads of income
 Income from employment - Salary
 Income from trading - Business
 Income from sale of manufactured goods –
Business
 Income from exports – Business
 Income from sale of a capital asset – Capital
gain
 Income of a leasing company – Business
 Income of a doctor from private practice -
Business
 Dividend income – Other sources
Heads of income (contd…)

 Income from rent of immovable property –

Property income
 Income from lease of factory – Other sources
 Prize on prize bond – Other sources
 Interest income (profit on debt) – Other sources
 Income from execution of a contract - Business
 Income from imports - Business
 Income from rent of a generator - Business
Heads vs Sources of income
 Head of income – Business
 Income from business A – Source 1
 Income from business B – Source 2
 Head of income – Property
 Income from property A – Source 1
 Income from property B – Source 2
 Income from property C – Source 2
 Head of income – Capital gain
 Gain from disposal of Asset A – Source 1
 Gain from disposal of Asset A – Source 1
 Gain from disposal of Asset A – Source 1
Heads of income – S. 11
 Income under a head of income
 Total chargeable receipts minus total
admissible deductions [S. 11(2)]
 Receipts minus expenses
 Income under the head Business
 Sales – Direct & indirect expenses
 Income under the head capital gains
 Sale proceeds of capital asset – Cost of
asset
Heads of income – S. 11
 Loss under a head of income
 Total admissible deductions are > Total
chargeable receipts [S. 11(3)]
 Expenses are > receipts
 How to deal with loss under a head of
income [S.11(4)]
 According to procedure laid down under Part
VIII
 Set off & carry forward of losses
Tax year [S.74]
 Period during which income is earned
 Normal tax year
 Period of 12 months
 Ending on 30th June
 Denoted by calendar year in which 30th June falls
 Normally a financial year
Illustration
 Period from 01.07.2014 to 30.06.2015
 Relevant calendar year – 2015
 Tax year 2015
 Period from 01.07.2015 to 30.06.2016
 Relevant calendar year – 2016
 Tax year 2016
Tax year [S.74]
 Special tax year
 Income year under the repealed Ordinance different
from normal tax year
 Commissioner allows an applicant to use a different
period
 Board has notified a special tax year for a class of
persons
 How to denote special tax year
 Find out normal tax year in which closing date of the
period falls
 Find out the calendar year relevant to said tax year
 Assign the said calendar year
Special tax year
 Illustrations
 Period from 01.10.2014 to 30.09.2015
 Relevant 30th June – 30.06.2016
 Relevant calendar year – 2016
 Tax year – 2016
 Period from 01.01.2014 to 31.12.2014
 Relevant 30th June – 30.06.2015
 Relevant calendar year – 2015
 Tax year – 2015
 Person
 Relevant provision – Section 80
 Two main categories
 Natural person
 Legal/ artificial person
 Natural person – An individual
 Legal person
 Association of persons [AOP]
 Company
 Federal Government; a Foreign Government; a
Political Sub-division of a Foreign Government; Public
International Organization
Person
 AoP – Inclusive definition [S.80(2)(a)]
 A firm
 A Hindu undivided family
 Any artificial juridical person – Mazaars, Darbaars,
Dargaah, trade unions, ethnic or religious groups etc.
 Any body of persons formed under a foreign law
Person
 Company – Exhaustive definition [S.80(2)(b)]
 Company under the Companies Ordinance
 Body corporate formed by or under a law in force in
Pakistan
 Modaraba
 Foreign company
 Trust
 Cooperative society
 A provincial government
 A local government
 A small company
Income of Resident & Non-
resident person – S. 11
 Income of a resident person [S.11(5)]
 Pakistan source income + Foreign source
income
 Income of a non-resident person
[S.11(6)]
 Pakistan source income only
RESIDENT & NON-RESIDENT
PERSONS
 Definition – S.81
 Residential status with reference to a
particular Tax Year only
 Significance
 S.11(5) & 11(6)
 Categories of residents
 Resident Individual
 Resident AOP
 Resident Company
RESIDENT & NON-RESIDENT
PERSONS
 Resident individual – S.82 & Rule 14
 Total stay in Pakistan – 183 days or more – Resident
 Total stay in Pakistan less than 183 days – Non-
Resident
 Exception
 A Govt. employee posted abroad in tax year
 Illustration 1
 Mr. A, a foreign national stayed in Pakistan as under:
 16.08.20014 to 15.12.2014
 10.03.2015 to 08.05.2015
 Determine his residential status for tax year 2015
RESIDENT & NON-RESIDENT
PERSONS
 Illustration 2
 Mr. B is an employee of the Govt. of Punjab posted in
Pakistan Embassy, London. He left Pakistan on 01.09.2008
and remained in London till 31.12.2009.
 Determine his residential status for tax year 2009
 Illustration 3
 Mr. C, a US citizen stayed in Pakistan as per following
detail
 31.01.2007 to 31.07.2007
 01.09.2007 to 30.03.2008
 Determine his residential status for tax year 2007 and
2008
RESIDENT & NON-RESIDENT
PERSONS
 Resident company – S.83
 Three categories:
 A Pakistani company irrespective of place of its
control & management
 Control & management of affairs wholly situated
in Pakistan at any time in tax year
 Provincial Govt./ Local Govt.
 Resident AoP – S.84
 Control & management of affairs wholly situated
in Pakistan at any time in tax year
INCOME SUBJECT TO FIXED/FINAL
TAXATION [FTR/PTR]
 Tax collected/deducted at source – Advance tax paid before
assessment
 Settlement – At the time of assessment/time of filing of
return
 Final tax to the extent of that source of income
 Adjustable – Tax credit to be claimed against tax payable
 Provisions relevant to final taxation – Ss.8 & 169
 Income not part of taxable income
 No deduction (expense) or loss allowable – No
computation of ‘net income’
 Tax charged on ‘gross receipts’
 No deductible allowance (zakat, WWF,WPPF)
 Tax paid not adjustable against other tax liability
 No refund if tax deducted correctly
 Filing of return of income not required
 Deemed assessment u/s 120
ILLUSTRATION – S.153
 Treatment of tax deducted:
 In the case of contracts – Final tax
 Exception: A listed company
 In the case of sale of goods – Final tax
 Exceptions:
 A listed company [S.153(6) – Proviso]
 A manufacturer [S.153(6A)]
 In the case of services rendered
 Final tax up to tax year 2009
 Minimum tax for tax year 2010 onwards
 Exception:
 Services rendered by companies
 Advertisement services by owners of newspapers &
magazines