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Muhammad
Income Tax Law
Definitions
Total income
The total income of a person for a tax year shall be the sum of the person’s income under each of
the heads of income for the year. Following are the heads specified in the law for this purpose:
(a) Salary
(b) Income from property
(c) Income from business
(d) Capital gains
(e) Income from other sources
Income tax ordinance, 2001, has given consideration to the geographical source of income while
taxing any income. In this context the Pakistan-source income includes the income which a
person earns in Pakistan, irrespective of the fact that where it is actually received.
This is a new concept, which has been introduced through the income tax ordinance, 2001.
According to the ordinance, an amount shall be foreign source income to the extent to which it is
not a Pakistan source income.
Tax
Tax means any tax imposed under the income tax law. It also includes any penalty, fee or other
charge or any sum or amount leviable or payable under the income tax ordinance, 2001.
Taxable income
The taxable income of a person for a tax year shall be the total income of the person for the year
as reduced by any deductible allowances. However, the taxable income should not be below
zero.
Taxpayer
Taxpayer means:
Person
Under the income tax ordinance, 2001, a person includes the following:
i. An individual
ii. A company
iii. An association of persons incorporated, formed, organized or established in Pakistan or
elsewhere
iv. The federal government, a foreign government, a political sub-division of a foreign
government, or public international organization.
Company
Public company
i. A company in which at least fifty percent of the shares are held by the federal government or
provincial government.
ii. A company in which at least fifty per cent of the shares are held by a foreign government.
iii. A foreign company owned by a foreign government.
iv. A company whose shares were traded on a registered stock exchange in Pakistan at any time
ins the tax year and which remained listed on that exchange, at the end of that year: or
v. A unit trusts whose units’ arte widely available to the public and any other public trust.
Private company
Private company means a company, which is not a public company.
Banking Company
Banking company has the same meaning as in the banking companies ordinance, 1962 (LVII of
1962) and includes any body corporate which transacts the business of banking in Pakistan.
Business
Speculation business
A speculation business means any business in which a contract for the purchase and sale of any
commodity (including stock and shares) is periodically or ultimately settled otherwise than by the
actual delivery or transfer of the commodity.
Capital Asset
Capital asset means property of any king held be a person. It is immaterial whether the property
is connected with his business or not. However, the following are excluded form the definition:
i. Any stock in trade (not being stocks and shares), consumable stores or raw materials held for
the purpose of business.
ii. Any immovable property
iii. Personal effects of an individual like jewelry, clothes and household furniture.
Charitable purposes
Charitable purpose includes relief of the poor, education, medical relief and the advancement of
any other object of general public utility.
Dividend
Dividend includes:
Intangible
Intangible means any patent, invention, design or model, secret formula or process, copyright and
other properties and rights of the same kind. It also includes any other expenditure-incurred by a
business that provides:
Minor child
Under the income tax ordinance, 2001, minor child means an individual who is under the age of
eighteen years. The age is to be determined at the end of a tax year.
Non-profit organization
Non-profit organization means any person the than an individual which is:
i. Established for religious, educational, charitable, welfare or development purposes or for the
promotion of an amateur sport;
ii. It should be registered under any law as a non-profit organization and the commissioner of
income tax has certified it to be a non-profit organization for a specified period, under the income
tax ordinance.
iii. Any asset of the organization should not be used for the private benefit of any other person.
Principal officer
Income tax ordinance, 2001, does not make any distinction on nationality or domicile basis; rather
tax liability of person is dete4mined on the basis of the fact that whether he is a resident or non-
resident person.
For the purpose of income tax, all the persons are grouped under two categories:
i. Residents
ii. Non-residents
Resident individual
An individual will be a resident in Pakistan in any tax year if he fulfils any one of the following two
conditions:
1. He is in Pakistan for a period or periods amounting, in all, to 183 days or more.
2. He is an employee or official of the federal government or a provincial government posted
abroad in the tax.
Resident company
A company shall be a resident company for a tax year if it fulfills any one of the following
conditions:
An association of persons shall be resident for any tax year if the control and management of the
affairs of the association is situated wholly or partly in Pakistan at any time in the year.
Resident persons
A person shall be a resident person for a tax year if the person is:
i. A resident individual, resident company or resident association of person for the year; or
ii. The federal government.
Non-resident persons
Under the income tax ordinance, 2001, a person shall be a non-resident person for a tax year if
the person is not a resident person for that year.
Non-resident taxpayers
There are two basic reasons due to which it is necessary to determine whether a person is a
resident or non-resident during the tax year.
Incidence of taxation
The income of a resident person is calculated by taking into account both the Pakistan-source
income and the foreign-source income.
The income of non-resident person is computed by taking into account only those amounts, which
are Pakistan-source income.
Rates of tax
Salary
Stock in trade
Stock in trade means anything produced, manufactured, purchased, or otherwise acquired for
manufacture, sale or exchange and any materials or supplies to be consumed in the production
or manufacture process, but does not include stock or shares.
Taxation officer
Tax year
The concept of tax year has been introduced in income tax law through income tax ordinance,
2001. Tax year is a period of time for which tax is to be calculated regarding a person.
It is a period of twelve months ending on 30th June and is known by the calendar year in which
the ending date falls. Such a tax year is known as normal tax year.
In case of any person or class of persons or any source of income Federal Board of Revenue
may specify a period of twelve months as their tax year.
For example, in case of all companies manufacturing cotton textiles central board of revenue has
specified that their tax year will commence on 1st October and will end on 30th September
following
This period of 12 months is tax year for all companies engaged in cotton textiles manufacturing.
Such a tax year is called special tax year and is known by the calendar year relevant to normal
tax year in which the ending date falls.
When tax year of any class of persons or a single person is changed as a result of an order by
the Federal Board of Revenue or commissioner of income tax, it results in the emergence of a
changing period which is known as “transitional tax year” and is treated to be a separate tax year.
It consists of the period between the end of last year before change and the start of the changed
tax year.
Associates
This term has been introduced by finance ordinance, 2001. Two persons will be associates where
the relationship between the two is such that one may reasonably be expected to act in
accordance with the instructions of other or both persons may reasonably be expected to act in
accordance with the instructions of a third person, e.g.
Royalties
(a) The use of any patent, invention, design or model, secret formula or process, trademark or
any other property or right of this type;
(b) The use of or right to use any copyrights of a literary, artistic or scientific work including films
or videotapes for use in connection with television or tapes in connection with radio broadcasting.
However, consideration for the sale of cinema autograph films will not be treated as royalty;
(c) The receipt of, or right to receive, any visual images or sounds or both transmitted by satellite
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 subsidiary to any property or right mentioned above;
Industrial undertaking
This definition has been added through finance Act, 2004. An organization fulfilling the following
conditions will be known as industrial “undertaking”:
1. Organization is set up in Pakistan;
2. It uses electrical energy or any other form of mechanical energy and employs ten or more
persons; or
It does not use electrical or any other form of energy but:
(a) Employs twenty or more persons;
(b) Is engaged in a manufacturing process;
(c) Engaged in ship building;
(d) Engaged in generation, conversion, transmission or distribution of electrical energy, or the
supply of hydraulic power,
(e) Engaged in the working of any mine, oil well or any other source of mineral deposits.
Moreover, the central board of revenue can declare any other organization which does not fall in
the orbit of above two types as ‘ INDUSTRIAL UNDERTAKING”
Agricultural income
Thus, any income derived as rent, revenue, or from sale of any produce, which is grown on a
Pakistani land, is agricultural income. However, it is necessary to understand that the land must
be used for agricultural purpo9ses, which means that some human lab our and efforts are
necessary to be employed. If a produce is grown wild or spontaneously on land without any
human efforts or labour, it will not be treated as agricultural income under this definition.
The last category, i.e., income from agricultural building, will be treated as agricultural income
only, if:
(a) Building is in the immediate vicinity of agricultural land.
(b) Building is occupied by the cultivator or the recipient of agricultural income.
(c) The cultivator or recipient by reasons of his connection with the land requires it as a dwelling
house, storeroom or the out-building.
1. Income of a person who grown tea leaves on his own farms in Pakistan and then manufactures
it into tea.
2. Income of a sugar mill, which grows sugarcane and manufactures sugar.
3. Income of a cigarette company growing tobacco on its own land and manufacturing cigarettes.
In all the above cases, growing of crops (tea plants, sugarcane and tobacco respectively) is an
agricultural process fulfilling all the conditions of agricultural income. The second component of
these incomes is a manufacturing process and thus chargeable to tax under the head “Income
from business and profession”. In determining that part6 which is chargeable to tax, the market
value of any agricultural produce which has been raised by the person or received by him as rent
in kind and which has been utilized as raw material in such business, shall be deducted and no
further deduction in respect of any expenditure incurred by the person as a cultivator or receiver
of rent in kind will be allowed.
Accumulated Profits
3. These profits kept in whatever shape, whethe4r capitalized or not, will be treated as
accumulated profits until their distribution to shareholders.
Appellate Tribunal
In case of any dispute between the taxpayers and tax department an appeal can be made to
appellate Tribunal. This is the highest judicial authority in the matters of tax. It consists of judicial
as well as accountant members. The members are appointed by the Federal Government. The
decision of the tribunal on point of facts is final. However, in case of point of law the matter may
be referred to high court.
Approved Gratuity Fund
The government and private organizations maintain gratuity funds for the benefit of their
employees. The amounts in these funds continue to accumulate from year to year and normally
are paid to employees at the time of retirement. In case of death of an employee during service,
the amount is paid to his family. The employer gets a lot of benefits if the gratuity fund is
approved by the income tax authorities under the income tax ordinance, 2001, the Commissioner
of income tax grants such an approval.
Any employment related retirement scheme which makes pension or annuity payments to its
beneficiaries and is approved under income tax ordinance, 2001, are known as approved
employment pension or annuity scheme. Examples of such schemes include an approved
superannuation fund, a public sector pension scheme, employees old age benefit scheme, etc.
Superannuation funds are also maintained by the organizations to provide benefit to their
employees after retirement. The amount in this fund is continuously contributed by the employer.
These amounts are paid to the employees as annuities or pensions after their retirement or if they
become invalid before retirement, or to their families in case of death. The present government
has adopted a reasonable and liberal policy for the pension of widows and orphans of the
deceased employees. This amount is also paid out of the superanmnuation funds. under the
income tax ordinance, 2001, the commissioner of income tax approves such funds in which case
the amount contributed by an employer is treated as business expenditure, resulting in a
decrease in the tax payable.
Assessment
Assessment includes re-assessment and amended assessment and the cognate expressions
shall be construed accordingly.
Assessment Year
Assessment year means the period of 12 months beginning on the first day of July next following
the income year and includes any such period that is deemed under the provision of this
ordinance, to be the assessment year in respect of tax year.
Association of Persons
Association of persons includes a firm, a Hindu undivided family, and artificial judicial person and
any body of persons formed under a foreign law. However it does not include a company.
Two or three incomes are given and you are required to provide details.
Pension
b) Pension received from United Nation and its specialized agencies like WHO, UNESCO etc is
totally exempt.
e) Pension is taxable if the person is re-employed by the same employer in any capacity under
any remuneration.
f) If a person is receiving pension from two different sources then the higher pension is exempt
and lower pension is taxable.
Salary of employees of foreign government is totally exempt subject to the following conditions:
a) The person concerned should be a national of that country and not a citizen of Pakistan.
b) His nature of duties should be similar to those of Pakistanis working in his country.
Agricultural Income
Scholarships
Any scholarship given to a person to meet the cost of person’s education is exempt from tax.
However, the scholarship should not be paid directly or indirectly by the associates.
Salary received by a person by virtue of his employment with the British Council is exempt from
tax provided that the recipient is not a citizen of Pakistan.
Facility of Accommodation
The facility of rent-free accommodation provided to the following persons is not taxable:
President of Pakistan
Provincial Governors
Chief of Staff of Pakistan Army, Navy and Air Force
Corpse Commanders
Federal Government Ministers
Judges of Supreme and High Courts
Special Allowance
a) Such income is wholly spent or set apart to be spent on religious or charitable purposes.
b) Such amount is to be spent within Pakistan.
The facility of conveyance and entertainment allowance provided by the Government of Pakistan
to the following person is exempt from tax.
a) Provincial Governors
b) Chief of Staff of Armed Forces.
c) Corps Commanders
d) Ministers of Federal Government
b) If the amount is received from government, local authority, statutory body or corporation then
whole of the amount is exempt.
c) If the amount is received from gratuity fund approved by Commissioner of Income Tax then
whole of the amount is exempt.
d) If the amount is given by an organization which give the facility of gratuity to all its employees
then the gratuity is exempt up to Rs. 200,000/-
e) If the amount is received from an organization where (a), (b) and, (c) does not apply then Rs.
75000/- or 50% of the amount received whichever is lower, is exempt.
Income of Governments
(b) The income of provincial government or a local authority will also be exempt from tax provided
that the income is not derived from a business carried on outside its jurisdictional area.
(c) Any payment received by the federal government, or provincial Government or local authority
shall not be liable to any collection or deduction of advance tax.
The foreign source income of a resident individual will be exempt provided that:
(a) He is not a citizen of Pakistan;
(b) He has become a resident only due to his employment;
(c) His total stay in Pakistan does not exceed three years;
(d) The income is not derived by a business established by the person in Pakistan.
(e) The foreign source income brought into or received in Pakistan by the person will be taxable.
The foreign source income earned by a citizen of Pakistan who was not resident in any of the
preceding four years shall be exempt from tax. This income will exempt in the tax year in which
he became the resident and in the following tax year.
Moreover, when a citizen of Pakistan leaves the country during a tax year and starts an
employment abroad, the salary which he will earn during the year will be exempt from tax
provided that he remains abroad during the tax year.
The amount paid as compensatory allowance to the locally recruited employees in Pakistan
missions abroad is not taxable subject to fulfillment of following conditions:
(a) The employee is a citizen of Pakistan.
(b) Allowance up to 75% of gross salary of such an employee will be exempt.
Capital Gains
Capital gains received by the person from the sale of modarba certificates, any instrument of
redeemable capital as defined in the companies ordinance, 1984 (XLVII of 1984), listed on any
stock exchange in Pakistan, shares of public company or insurance company or the Pakistan
Telecommunication Corporation Vouchers issued by the Government are non-taxable up to tax
year 2010.
Income from export of computer software or IT services or IT enabled services up to the period
ending on 30th day of June 2016 is exempt from tax.
Explanation
For the purpose of this clause:
(a) “IT enabled services” include software development, software maintenance, system
integration, web design, web development, web hosting and network design, and
(b) “IT enabled services” include inbound or outbound call centers, medical transcription, remote
monitoring, graphics design, accounting services, HR services, telemedicine centers, data entry
operations, locally produced television programmes and insurance claims processing.
Business Taxation
Guidelines
I will introduce the subject first. It is Business Taxation. The course includes Income Tax Law and
Sales Tax. The income tax law is 60% of the course whereas Sales tax is 40% of the course. The
course can be divided into theory and practical problems. Approximately 60% of the course is on
theory and 40% of the course is on practical problems. What are these practical problems? They
are application of theory, When you know how to do something and you do it accordingly you are
applying the knowledge you have in a practical situation.
There will be two practical problems in your annual examination, one will be from Income Tax
Law and other will be from Sales Tax. The practical problem of Income Tax Law is compulsory
which means you have to attempt this question and four other questions as well. The practical
problem from sales tax is very simple and I am sure you would love to do it though it is not
compulsory.
One thing we must remember that we are discussing Business Taxation keeping in view the
requirements of B.Com-11 examination and are focusing on Tax Year 2009.
Definitions/Terminologies
There are 74 terms in this chapter. Normally three or four terms are required by the examiner to
be explained and there will certainly one question from this topic. The question would be like this
i) Dividend
ii) Tax Payer
iii) Accumulated Balance of Provident Fund
iv) Principal Officer
In this chapter those incomes are discussed which are either totally exempt from tax or partially
exempt from tax or exempt from tax subject to some conditions.
Normally there is one question from this topic and you are required to explain principles
governing the exemption in respect of two or three incomes. The question would be like this
What are the legal provisions governing the exemption in respect of the following
Heads of Income
There are five heads of income. Salary, Income from property, Capital Gains, Business Income
and Income from Other Sources. From this section there will be one question in your annual
examination. This section has added importance. If this section is quite clear to you only then you
can solve the compulsory income tax practical problem.
ii) What is Income from Property and what are the allowable deductions under the head “Income
from Property”
iii) What are capital gains and how they are taxed.
vi) What are various types of depreciation and what are the conditions for allowability of
depreciation?
There will one questions from this section. These questions are very simple and you will
understand these question if you simply attend the class and read these questions afterward.
Explain the legal provisions governing the filing of Return of Total Income.
Explain assessment procedure in detail.
What are various types of Assessment
What are the salient features of Self Assessment Scheme.
Set off and Carry Forward of Losses /Fines and Penalties /Tax Accounting
Write short note on the following
i) Set off of losses
ii) Carry Forward of losses
Practical Problem
Sales Tax
Definitions
Normally one question from this chapter is set in the examination. So do all the definitions The
question from this topic would be like this.
Define and explain the following terms with reference to sales tax Act
i) Arrears
ii) Manufacturer
iii) Supply
iv) Tax Invoice