Principles of Taxation

2014
PRINCIPLES OF
TAXATION
STUDY TEXT
CAF- 06
P
ICAP
Principles of Taxation
First edition published by
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© Emile Woolf International ii The Institute of Chartered Accountants of Pakistan

C
Certificate in Accounting and Finance
Contents
Page
Syllabus objective and learning outcomes v
Chapter
1 System of taxation in Pakistan 1
2 Constitutional Provisions on Taxes 13
3 Ethics 31
4 Basic Concepts of Taxation 45
5 Income from Salary 77
6 Income from Property 105
7 Income from business - part one 117
8 Income from business - part two 139
9 Capital gains 163
10 Income from other sources 179
11 Losses, tax credits and exemptions 191
12 Taxation of individual and association of persons 223
13 Foreign source income of a resident person 235
14 Returns 247
15 Assessment, Records and Audit 263
16 Appeals, references and petitions 283
© Emile Woolf International iii The Institute of Chartered Accountants of Pakistan

Page
17 Scope of sales tax law
and rules for registration and deregistration 301
18 Determination of sales tax liability 333
19 Returns and records 351
Index 363
Note: All practical/scenario based questions have been dealt with in accordance with the
laws applicable for tax year 2015
© Emile Woolf International iv The Institute of Chartered Accountants of Pakistan

S
Syllabus objectives
and learning outcomes
CERTIFICATE IN ACCOUNTING AND FINANCE

PRINCIPLES OF TAXATION
Objective
To provide basic knowledge in the understanding of objectives of taxation and core areas
of Income Tax Ordinance, 2001, Income Tax Rules 2002 and Sales Tax Act 1990 and
Sales Tax Rules.
Learning Outcome
The candidate will be able to:

1 Understand the objective of levy of taxation, and its basic concepts
2 Understand the system of taxation in Pakistan
3 Understand the historical background of taxation in Pakistan
4 Understand constitutional provisions of taxation in Pakistan
5 Understand and explain the basic ethics of taxation
Understand and explain provisions of Income Tax law mainly relevant to
6
individuals and association of persons
7 Understand and explain Sales Tax law relevant to operational level tasks
© Emile Woolf International v The Institute of Chartered Accountants of Pakistan

Grid Weighting
Objective, system and historical background, Constitutional 10
provisions and Ethics
Income tax 65
Sales tax 25
Total 100
Syllabus
Contents Level Learning Outcome
Ref
A Basic concepts of taxation

1 Objectives 1 LO 1.1.1: Comprehend the main
objectives of taxation
LO 1.1.2: Justify Taxation as means of
development
2 Basic concept 1 LO 1 2.1: Understands the implication
of direct and indirect taxation
3 System of taxation in 1 LO 1.3.1: Comprehend different kinds

Pakistan of taxes and their scope
(Income Tax, Sales Tax,
Federal Excise Tax, Capital
Value Tax, Customs)
4 Historical background 1 LO 1.4.1: State the history of taxation in
sub-continent
B Constitutional provisions
1 Federal financial procedures 1 LO 2.1.1: Demonstrate familiarity with
(Article 78 to 88 of the the Federal Consolidated Fund and
Constitution of Pakistan) Public Account
LO 2.1.2: Demonstrate familiarity with
the expenditure that can be charged
upon Federal Consolidated Fund
2 Provincial financial 1 LO 2.2.1: Demonstrate familiarity with
procedures the Provincial Consolidated Fund and
(Article 118 to 127 of the Public Account
Constitution of Pakistan) LO 2.2.2: Demonstrate familiarity with
the expenditure that can be charged
upon Provincial Consolidated Fund
© Emile Woolf International vi The Institute of Chartered Accountants of Pakistan

Syllabus objectives and learning outcomes
Syllabus
Ref
3 Distribution of revenues 1 LO 2.3.1: Demonstrate familiarity with

between Federation and the the formation of National Finance
Provinces Commission and its main function.
(Article 160 to 165A of the LO 2.3.2: Demonstrate familiarity with
Constitution of Pakistan) the taxes that can be raised under the
authority of Parliament
the powers of provincial assemblies in
respect of professional tax
the exemption available to federal and
provincial governments
the tax on corporation owned by federal
and provincial government
4 Federal legislative lists 1 LO 2.4.1: Enlist the revenue collection
relating to revenue mentioned at S. No. 43 to 53 in Fourth
generating measures Schedule attached to the Constitution
(related part of Fourth
Schedule to the Constitution
of Pakistan)
C Ethics
1 Ethics for tax legislation 2 LO 3.1.1: Describe how canons of
taxation developed by economist are
relevant for legislators while formulating
tax policies
2 Ethics for taxpayers 2 LO 3.2.1: Understand the right and
purpose of state to tax its citizen
LO 3.2.2: Understand morality behind
compliance with tax laws
3 Ethics for tax implementing 2 LO 3.3.1: Understand the powers Vs
authorities ethical responsibilities of tax
implementation authorities
LO 3.3.2: Understand pillars of tax
administration, namely, fairness,
transparency, equity and accountability
4 Tax evasion and avoidance 2 LO 3.4.1: Explain with simple examples
the basic difference between evasion
and avoidance of tax
© Emile Woolf International vii The Institute of Chartered Accountants of Pakistan

Syllabus
Ref
D Income Tax
1 Chapter I – Preliminary 1 LO 4.1.1: Describe the definitions given
(concepts of terms defined in section 2 sub-section 1, 5, 5A, 6, 7,
section 2 sub-section 1, 5, 9, 10, 11A, 19, 19C, 20, 21, 22, 23, 29,
29A, 29C, 36, 37, 38, 41, 44A, 46, 47,
5A, 6, 7, 9, 10, 11A, 19,
49, 50, 51, 52, 53, 68
19C, 20, 21, 22, 23, 29, 29A,
LO 4.1.2: Describe other definitions
29C, 36, 37, 38, 41, 44A, 46, covered under relevant sections
47, 49, 50, 51, 52, 53, 68) LO 4.1.3: Apply definitions on simple
scenarios
2 Chapter II – Charge of tax 2 LO 4.2.1: Explain the chargeability of
(excluding section 7) tax with simple examples
3 Chapter III – Tax on Taxable 2 LO 4.3.1: Compute taxable income and
income (Excluding Section tax thereon relating to salary, income
29A, 30 and 31) from property, income from business,
capital gain, dividend, profit on debt,
ground rent, rent from sub-lease,
income from provision of amenities,
utilities or any other services connected
with rented building and consideration
for vacating the possession of building
4 Chapter IV – (Part I, II and 1 LO 4.4.1: Understand and apply on
III) – Common rules simple scenarios provisions for income
(Excluding Sections 78 and of joint owner, apportionment of
79) deductions, fair market value and
receipt of income
LO 4.4.2: Explain using simple
examples the provisions relating to tax
year
LO 4.4.3: Explain with simple examples
the provisions relating to disposal and
acquisition of assets, cost and
consideration received
5 Chapter V Part I – Central 2 LO 4.5.1: Describe with simple
concepts examples the meaning of persons,
resident and non-resident persons and
associates
6 Chapter V Part II Div I and II 2 LO 4.6.1: Describe with simple
– Individuals (Excluding examples the principles of taxation of
Section 88A) individuals
7 Chapter V Part III – 2 LO 4.7.1: Describe with simple
Association of persons examples the principles of taxation of
association of persons
© Emile Woolf International viii The Institute of Chartered Accountants of Pakistan

Syllabus
Ref
8 Chapter VII Part II – 2 LO 4.8.1: Understand the applicability

Taxation of foreign-source of tax on foreign salary income, credit
income of residents against foreign tax and treatment of
foreign loss of a resident on simple
scenarios.
9 Chapter X Part I – Returns 2 LO 4.9.1: Identify persons required to
furnish a return of income
LO 4.9.2: Identify persons not required
to furnish a return of income
LO 4.9.3: Identify persons required to
furnish wealth statements
LO 4.9.4: List the contents of wealth
statement
10 Chapter X Part II – 1 LO 4.10.1: Understand the meaning of
Assessments assessment by Commissioner and
power of Commissioner to conduct
audit
11 Chapter X Part III – Appeals 1 LO 4.11.1: List the appellate bodies
LO 4.11.2: Explain using simple
examples the circumstances when
appeal to the Commissioner (Appeals)
is made and the pre-conditions
applicable
LO 4.11.3: Explain the provisions
relating to decision of appeals by
Commissioner (Appeals) using simple
examples
12 Chapter X Part VIII – 2 LO 4.12.1: Understand the provisions
Records, Information relating to records to be kept by the
Collection and Audit taxpayers
(Section174 and 177) LO 4.12.2: Describe the provisions
relating to audit by Commissioner
13 The Income Tax Rules 1 LO 4.13.1: Apply rules relevant to
related to the above learning outcomes specified against
chapters of the Income Tax each topic on well explained scenarios
Ordinance 2001 shall also
be examined
14 First and Second Schedule 2 LO 4.14.1: Apply clauses relevant to
attached to the Income Tax learning outcomes specified against
Ordinance 2001 each topic on well explained scenario
© Emile Woolf International ix The Institute of Chartered Accountants of Pakistan

Syllabus
Ref
E Sales Tax
Sales Tax Act 1990
1 Chapter I – Preliminary 2 LO 5.1.1: Describe the definitions given
(concepts of terms defined in section 2 sub-section 3, 5AA, 9, 11,
Section 2 sub-sections 3, 14, 16, 17, 20, 21, 22A, 25, 27, 28,
5AA, 9, 11, 14, 16, 17, 20, 29A, 33, 35, 39, 40, 41, 43, 44, 46
21, 22A, 25, 27, 28, 29A, 33, LO 5.1.2: Describe other definitions
35, 39, 40, 41, 43, 44, 46) covered under relevant sections
LO 5.1.3: Apply definitions on simple
scenarios
2 Chapter II – Scope and 2 LO 5.2.1: Understand the application
payment of tax sales tax law on taxable supplies
including zero rated and exempt
supplies
LO 5.2.2: State the determination, time
and manner of sales tax liability and
payment using simple examples
3 Chapter III – Registration LO 5.3.1: State the requirement and
procedure of registration
4 Chapter IV – Book keeping LO 5.4.1: List the record to be kept by a
and invoicing requirements registered person
LO 5.4.2: State the requirements of tax
invoice
LO 5.4.3: Explain the retention period
of record using simple examples.
5 Chapter V – Returns LO 5.5.1: Understand the various types
of returns required to be filed by
registered and un-registered persons.
Sales Tax Rules, 2006
1 Chapter I – Registration, 2 LO 6.1.1: Explain the requirement and
Compulsory registration and procedure of registration, compulsory
De-registration registration and deregistration using
simple examples
2 Chapter II – Filing of return 2 LO 6.2.1: Explain the requirement and
procedure of filing of return using
simple examples
© Emile Woolf International x The Institute of Chartered Accountants of Pakistan

Syllabus
Ref
3 Chapter III – Credit and 2 LO 6.3.1: Explain the requirement and

Debit And Destruction of procedure of issuing debit and credit
Goods notes using simple examples
LO 6.3.2: State the procedure for
destruction of goods
4 Chapter IV – Apportionment 2 LO 6.4.1: Explain the requirement and
of Input Tax procedure of apportionment of input tax
using simple examples
© Emile Woolf International xi The Institute of Chartered Accountants of Pakistan

© Emile Woolf International xii The Institute of Chartered Accountants of Pakistan

1
CHAPTER
System of taxation in Pakistan
Contents
1 Objectives of tax laws
2 Basics of taxation laws
3 Introduction to different taxation laws of Pakistan
4 History of tax laws in Pakistan
5 Chapter review
© Emile Woolf International 1 The Institute of Chartered Accountants of Pakistan

Principles of taxation
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to provide basic knowledge in the understanding of
objectives of taxation and core areas of Income Tax Ordinance, 2001, Income Tax Rules
2002 and Sales Tax Act 1990 and Sales Tax Rules.
Concepts
LO 1.1.1 candidates will be able to comprehend the main objectives of taxation
LO 1.1.2 candidates will be able to justify taxation as means of development
LO 1.2.1 candidates will be able to understand the implication of direct and indirect
taxation
LO 1.3.1 candidates will be able to comprehend different kinds of taxes, Income Tax
Law, sales Tax Law, Capital value tax, customs, Excise and their scope
LO 1.4.1 candidates will be able to state the history of taxation in sub-continent

Chapter 1: System of taxation in Pakistan
1 OBJECTIVES OF TAX LAWS

Section overview
 Definition of taxation and objectives of the taxation laws

 Non-revenue objectives
 Illustration
 Taxes as mean for development
1.1 Definition of taxation and objectives of the taxation laws

Taxation is defined in many ways, common definition is as under:
 It is the process by which the sovereign, through its law making body,
raises revenues in order to use it for expenses of government.
 It is a means for the government in increasing its revenue under the
authority of the law, purposely used to promote welfare and protection of its
citizenry.
 It is the collection of the share of individual and organizational income by a
government under the authority of the law.
1.2 Non-revenue objectives

Taxes are primary revenue yielding tools of the Government of modern ages.
The government levies taxes in order to achieve following objectives:
 For collection of revenue to run and administer the Government;
 To use as a tool for implementation of its policies; and
 For fair distribution of wealth.
Aside from purely financing government operational expenditures, taxation is also
utilized as a tool to carry out the national objective of social and economic
development.
 To strengthen anaemic enterprises by granting them tax exemptions or
other conditions or incentives for growth;
 To protect local industries against foreign competition by increasing local
import taxes;
 As a bargaining tool in trade negotiations with other countries;
 To counter the effects of inflation or depression;
 To reduce inequalities in the distribution of wealth;
 To promote science and invention, finance educational activities or
maintain and improve the efficiency of local forces;
 To implement laws which eliminate discrimination among various elements
in the markets/businesses.
 To discourage certain undesirable sectors and activities.

1.3 Illustration
Illustration: Objectives of Taxation Laws

Explain what are the objectives of following tax laws:
Tax Law Objective

Tax on salary income Revenue Collection
Any amount transferred otherwise than Documentation of economy
banking channel will be deemed as
income
Tax on moveable assets of the taxpayers Fair distribution of wealth
Higher taxes on import of luxury goods Reduction in imports of
unnecessary goods and create
good balance of trade
Allowability of expenditure of research & Promotion of research &
developments developments
Zero rating on Exports, reduced rates of Promotion of Exports
taxes on imports
Tax credit on Donations to approved To promote culture of payment
institutions of donation to only organised
and regulated institutions
Tax credit on investments Promote investments in listed
companies
Tax exemptions to software exports Promote software Industry
1.4 Taxes as means for development

Taxes are one of the main sources for development. This is not because revenue
collected by the state is used on developmental projects. Rather, taxes can be
used in many different ways for development of the country. Some examples are
as under:
 The Government can declare some areas as free zone, industrial zone, and
economic zone and provide tax incentives to such areas.Such incentives
could attract businessman/industrialistwho may opt to establish business
concerns/industrial units that would bring employment, opportunities and
overall prosperity in these under developed areas.
 Taxing the rich at higher rates while taxing the low income groups at lower
tax rates.
 Imposition of high custom duty rates on luxury items or items which are
also manufactured in Pakistan. This promotes local manufacturers and
industry.
 Tax credits on charity/donations to promote welfare activities.
 Tax exemptions to charity organisation/educational institutions to promote
these activities.
 Tax incentives for agro based projects to promote agriculture.

2 BASICS OF TAXATION LAWS

Section overview
 Basics of tax laws

 Principles for levy of tax
 Structure of taxes
 Characteristics of tax laws
 Forms of escape from taxation
 Strategies of taxation management
 Illustration
2.1 Basics of tax laws

Adam Smith’s in his famous book “Wealth of Nations” has elaborated following
canons of Taxation:
 Equality
Tax payments should be proportional to income and applied equally to all
concerned areas
 Certainty
Tax liabilities should be clear and certain
 Convenience of payment
Taxes should be collected at a time and in a manner convenient for
taxpayer
 Economy of collection
Taxes should not be expensive to collect and should not discourage
business.
2.2 Principles for levy of tax

Following are some broad principles for levy of taxes:
 The Benefit Principle.
This principle holds that the individuals should be taxed in proportion to the
benefits they receive from the governments and that taxes should be paid
by those people who receive the direct benefit of government programs and
projects out of the taxes paid.
 The Ability-to-Pay Principle.
This principle holds that taxes should relate with the person’s income or the
ability to pay, that is, those with greater income or wealth who can afford to
pay should be taxed.Similarly, even rate of tax could increase with higher
income.
 The Equal-Distribution Principle.
Income, wealth, and transaction may be taxed at a fixed percentage; that
is, people who earn more and spend more should pay more taxes, but not
pay a higher rate of tax.

2.3 Structure of taxes

 Proportional tax.
A tax system that requires the same percentage of income from all
taxpayers, regardless of their earnings. A proportional tax applies the same
tax rate across low-, middle- and high-income taxpayers. The proportional
tax is in contrast to a progressive tax, where taxpayers with higher incomes
pay higher tax rates than taxpayers with lower incomes.
A proportional tax is also called a flat tax.
 Regressive tax.
A tax that takes a larger percentage from a person’s low-income than from
another person’s high-income. A regressive tax is generally a tax that is
applied uniformly. This means that it hits lower-income individuals harder.
 Progressive tax.
A tax that takes a larger percentage from high-income earners than it does
from low-income earners. In other words, the more one earns, the more tax
he would have to pay. The tax amount is proportionately equal to
someone’s status in the society. A rich man should pay more than a poor
man.
2.4 Characteristics of tax laws

Following are major characteristics of a taxation system:
 It is enforced contribution.
Its payment is not voluntary in nature, and the imposition is not dependent
upon the will of the person taxed.
 It is generally payable in cash.
This means that payment by cheques, promissory notes, or in kind is not
accepted.
 It is proportionate in character.
Payment of taxes should be based on the ability to pay principle; higher
income of the tax payer, the bigger amount of the tax paid.
 It is levied (to impose; collect) on income, , transactions or property.
There are taxes that are imposed or levied on acts, rights or privileges.
 It is levied by the state which has jurisdiction over the person or property.
As a general rule, only persons, properties, acts, right or transaction within
the jurisdiction of the taxing state are subjects for taxation.
 It is levied by the law making body of the state.
This means that law must be enacted first by the Parliament in Pakistan.
 It is levied for public purposes.
Taxes are imposed to support the government in implementation of projects
and programs.

 Fiscal adequacy
Means that the sources of revenue taken as a whole should be sufficient to
meet the expenditures of the government, regardless of business, export
taxes, trade balances, and problems of economic adjustments. Revenues
should be capable of expanding or contracting annually in response to
variations in public expenditures.
 Equality or Theoretical Justice.
Means the taxes levied must be based upon the ability of the citizen to pay.
 Administrative Feasibility.
This principle connotes that in a successful tax system, such tax should be
clear and plain to taxpayers, capable of enforcement by an adequate and
well-trained public officials, convenient as to the time and manner of
payment, and not unduly burdensome to discourage business activity.
 Consistency or Compatibility with Economic Goals.
This refer to the tax laws that should be consistent with economic goals or
programs of the government which pertain to basic services intended for
the masses.
2.5 Forms of escape from taxation

 Shifting
 It is one way of passing the burden of tax from one person to another.
 For example: Taxes paid by the manufacturer may be shifted to the
consumer by adding the amount of the tax paid to the price of the
product.
 Kinds of Shifting
 Forward shifting occurs when the burden of the tax is transferred from
a factor of the production to the factor of distribution.
 Backward shifting occurs when the burden of tax is transferred from
the consumer to the producer or manufacturer.
 Onward shifting occurs when tax is shifted two or more times either
forward or backward.
 Capitalization
 This refers to the reduction in the price of the tax object to the
capitalized value of future taxes which the purchaser expects to be
called upon to pay.
 For example: A reduction made by the seller on the price of the real
estate, in anticipation of the future tax to be shouldered by the future
buyer.
 Transformation occurs when the manufacturer or producer upon whom the
tax has been imposed pays the tax and endeavours to “recoup” (make up
for) himself by improving his process of production.
 Tax Exemption is the granting of immunity or freedom from a financial
charge or obligation or burden to which others are subjected.
 Grounds for tax exemption:
 Contract, wherein the government is the contracting party.

 Public policy
 Reciprocity
2.6 Strategies of taxation management

Tax practitioners and taxpayer normally adopts any of the following technique to
lessen tax burden:
 Tax avoidance is generally the legal exploitation of the tax regime to one's
own advantage, to attempt to reduce the amount of tax that is payable by
means that are within the law whilst making a full disclosure of the material
information to the tax authorities. Examples of tax avoidance involve using
tax deductions, changing one's business structure through incorporation or
establishing an offshore company in a tax haven.
 By contrast tax evasion is the general term for efforts by individuals, firms,
trusts and other entities to evade the payment of taxes by illegal means.
Tax evasion usually entails taxpayers deliberately misrepresenting or
concealing the true state of their affairs to the tax authorities to reduce their
tax liability, and includes, in particular, dishonest tax reporting (such as
under declaring income, profits or gains; or overstating deductions).
2.7 Illustration
Illustration: Basics of Taxation Laws

Explain which type of Tax strategy is being employed by following persons and
what are its legal consequences:
Tax Law Objective

Mr A earned Turnover of Rs 10 M. However, he kept Tax evasion , Criminal
it as cash in his bank locker and hid it from tax Act, He cannot buy any
authorities. He paid all related expenses from this asset or settle liabilities
cash. unless he declares this
income and also pays tax
due on it
Mr B earned income of Rs 10 M. However, he This too is tax evasion, a
declared only so much of income which is verifiable understatement is also
from the banks i.e. 6M, remaining amount he has an offence
hidden in a separate bank account
Mr C earned Rs 10 M. However, he recorded 7M Tax avoidance, which is
expenses employing legal tactics to reduce his net legally permissible.
income and offering the remaining income of Rs 3
Million for Taxes.

3 INTRODUCTION TO DIFFERENT TAXATION LAWS OF PAKISTAN

Section overview
 Brief overview of different direct and indirect taxes

 Tax reliefs in cross border transactions
3.1 Brief overview of different direct and indirect taxes

Federal taxes in Pakistan like most of the taxation systems in the world are
classified into two broad categories, viz., direct and indirect taxes. A broad
description regarding the nature of administration of these taxes is explained
below:
DIRECT TAXES
Income Tax
Direct taxes primarily comprise of Income Tax. In the Income Tax Ordinance,
2001, tax is levied generally on the net income of a taxpayer earned during a tax
year computed by applying the specified tax rates as applicable to respective
taxpayer.
For the purpose of the charge of tax and the computation of total income, all
income is classified under the following heads:
 Salary
 Income from property
 Income from business
 Capital gains; and
 Income from other sources
Capital Value Tax
Capital value tax on different transaction such as transfer of immoveable
property, transfer of rights etc.
INDIRECT TAXES
Following are the indirect taxes under the Pakistani Taxation System.
Custom Duty
Goods imported and exported from Pakistan are liable to rates of customs duties
as prescribed in Pakistan Customs Tariff. Customs duties in the form of import
duties and export duties constitute a major part of the total tax receipts. The rate
structure of customs duty is determined by a large number of socio-economic
factors. However, the general scheme envisages higher rates on luxury items as
well as on less essential goods. The import tariff has been given an industrial
bias by keeping the duties on industrial plants and machinery and raw material
lower than those on consumer goods.
Federal Excise Duty
Federal Excise duties are levied on a limited number of goods produced or
manufactured, and services provided or rendered in Pakistan. On most of the
items Federal Excise duty is charged on the basis of value or retail price. Some
items are, however, chargeable to duty on the basis of weight or quantity.
Classification of goods is done in accordance with the Harmonized Commodity

Description and Coding system which is being used all over the world. All exports
are liable to Zero per cent Federal Excise Duty.
Sales Tax
Sales tax is levied at various stages of economic activity at the rate of 17 per cent
on:
 All goods imported into Pakistan, payable by the importers;
 All supplies made in Pakistan by a registered person in the course of
furtherance of any business carried on by him;
There is an in-built system of input tax adjustment and a registered person can
make adjustment of tax paid at earlier stages against the tax payable by him on
his supplies. Thus, the tax paid at any stage does not exceed 17% of the total
sales price of the supplies.
3.2 Tax reliefs in cross border transactions

In cross border transactions, Pakistan taxation system provides the following
types of reliefs:
Unilateral Relief
A person resident in Pakistan is entitled to a relief in tax on any income earned
abroad, if such income has already been subjected to tax outside Pakistan.
Proportionate relief is allowed on such income at an average rate of tax in
Pakistan or abroad, whichever is lower.
Agreement for avoidance of double taxation and fiscal evasion with respect to Taxes
The Government of Pakistan has so far signed agreements to avoid double
taxation with more than 50 countries including almost all the developed countries
of the world. These agreements lay down the ceilings on tax rates applicable to
different types of income arising in Pakistan. They also lay down some basic
principles of taxation which cannot be modified unilaterally.

4 HISTORY OF TAX LAWS IN PAKISTAN

Section overview
 History of tax laws in Pakistan
4.1 History of tax laws in Pakistan
In Pakistan, Federal Government is empowered to levy and collect tax on the

income of a person from all sources except agriculture. The history of modern
income taxation dates back to the year 1860. The British Empire introduced first
formal Income Tax Act of 1860 in an effort to end the budgetary deficit faced due
to the war of independence of 1857. The tax was not intended to be permanent
and was repealed in 1865.
The Income Tax Act of 1886 was a general income tax that had been imposed on
traders by some of the provinces. This Act of 1886 was a great improvement on
earlier enactments. Its basic scheme, by and large, survives till today. It
introduced the definition of “agricultural income” which is almost the same as in
the Income Tax Ordinance 2001. This Act continued in force for 32 years.
The 1918 Act consolidated a number of wartime amendments. A graduated

super tax on income over Rs.50,000 and on the undistributed profits of the
corporation and other entities was introduced by the Super Tax Act of 1917 and
continued in force through modifications by the Super Tax Act of 1920. The
Income Tax Act and the Super Tax Act were later on consolidated in another act
i.e. the Income Tax Act of 1922, which remained in force in Pakistan till 30th June
1979; when General Mohammad Zia-ul-haq, in his position as President-cum-
Chief Martial Law Administrator, decided to enforce a new law i.e. the Income
Tax Ordinance, 1979 with effect from 1st July 1979.
Income Tax Ordinance 1979 was amended through innumerable presidential

ordinances, annual finance acts/ordinances and statutory regulatory orders
(SROs) and most of its lacunas were removed over a long period of time.
However, after approximately 23 years of its existence when substantive
amendments and judicial pronouncements made it a universally understandable
and acceptable piece of legislation for everybody, a new ordinance i.e. Income
Tax Ordinance, 2001 was promulgated on 13th September 2001. The new
Ordinance underwent more than three hundred amendments through the
Finance Ordinance, 2002 even before its inception practice that still continues to
this day.

5 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know:
 What are the objectives of taxation Laws?
 What are basics of taxation laws?
 What are different types of direct and indirect taxes in Pakistan?
 What are different types of tax reliefs in cross border transactions?
 What are different federal taxation laws of Pakistan?
 What is history of legislation of taxation laws in Pakistan?

2
CHAPTER
Constitutional provisions on taxes
Contents
1 Federal financial procedures
2 Provincial financial procedures
3 Distribution of revenues between federation and
provinces
4 Federal legislative list
5 Chapter review

INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to ensure that candidates can understand the Federal
Financial Procedures, Provincial Financial Procedures, and Distribution of revenues between
Federation and Provinces and an overview of the Federal Legislative list.
Concepts
LO 2.1.1 Demonstrate familiarity with the Federal Consolidated Fund and Public
Account
LO 2.1.2 Demonstrate familiarity with the expenditure that can be charged upon
Federal Consolidated Fund
LO 2.2.1 Demonstrate familiarity with the Provincial Consolidated Fund and Public
Account
LO 2.2.2 Demonstrate familiarity with the expenditure that can be charged upon
Provincial Consolidated Fund
LO 2.3.1 Demonstrate familiarity with the formation of National Finance Commission
and its main function.
LO 2.3.2 Demonstrate familiarity with the taxes that can be raised under the authority of
Parliament
LO 2.3.3 Demonstrate familiarity with the powers of provincial assemblies in respect of
professional tax
LO 2.3.4 Demonstrate familiarity with the exemption available to federal and provincial
governments
LO 2.3.5 Demonstrate familiarity with the tax on corporation owned by federal and
provincial government
LO 2.4.1 Enlist the revenue collection mentioned at S. No. 43 to 53 in Fourth Schedule
attached to the Constitution

Chapter 2: Constitutional provisions on taxes
1 FEDERAL FINANCIAL PROCEDURES

Section overview
 Introduction
 Federal consolidated fund and public account (Article 78)
 Custody of federal consolidated fund and public account (Article 79)
 Annual budget statement (Article 80)
 Expenditure charged upon federal consolidated fund (Article 81)
 Procedure relating to annual budget statement (Article 82)
 Authentication of schedule of authorised expenditure (Article 83)
 Supplementary and excess grants (Article 84)
 Votes on account (Article 85)
 Power to authorise expenditure when assembly stands dissolved Article 86)
 Secretariats of Majlis-e-Shoora (Parliament) (Article 87)
 Finance committees (Article 88)
1.1 Introduction
Constitution of Pakistan is the prime source for all legislations in Pakistan. It
provides that tax shall only be levied by or under the authority of Act of
Parliament (Article 77).The Constitution distributes powers among Federation
and Provinces. It provides procedures for levy and collection of taxes as well as
procedures for use of funds received from taxes or by the Federation from any
other source. This chapter is divided into three main areas which are as follows:
 Federal Financial Procedures
 Provincial Financial Procedures
 Distribution of Revenues between Federation & Provinces
These areas are now explained in detail in the upcoming paragraphs.
1.2 Federal consolidated fund and public account [Article 78]

All revenues received by the Federal Government, all loans raised by that
Government and all monies received by it in repayment of any loan, shall form
part of a consolidated fund, to be known as the Federal Consolidated Fund.
All other monies:
 received by or on behalf of the Federal Government; or
 received by or deposited with the Supreme Court or any other court
established under the authority of the Federation;
shall be credited to the Public Account of the Federation.
1.3 Custody of federal consolidated fund and public account [Article 79]
The custody of the Federal Consolidated Fund, the payment or monies into that
Fund, the withdrawal of monies there from, the custody of other monies received
by or on behalf of the Federal Government, their payment into, and withdrawal

from, the Public Account of the Federation, and all matters connected with or
ancillary to the matters aforesaid shall be regulated by Act of Majlis-e-Shoora
(Parliament) or, until provision in that behalf is so made, by rules made by the
President.
1.4 Annual budget statement [Article 80]

 The Federal Government shall, in respect of every financial year, cause to
be laid before the National Assembly a statement of the estimated receipts
and expenditure of the Federal Government for that year, in this Part
referred to as the Annual Budget Statement.
 The Annual Budget Statement shall show separately:
 the sums required to meet expenditure described by the Constitution
as expenditure charged upon the Federal Consolidated Fund; and
 the sums required to meet other expenditure proposed to be made
from the Federal Consolidated Fund; and
 shall distinguish expenditure on revenue account from other
expenditure.
1.5 Expenditure charged upon federal consolidated fund [Article 81]

The following expenditure shall be expenditure charged upon the Federal
Consolidated Fund:-
 the remuneration payable to the President and other expenditure relating to
his office, and the remuneration payable to-
 the Judges of the Supreme Court and the Islamabad High Court
 the Chief Election Commissioner;
 the Chairman and the Deputy Chairman;
 the Speaker and the Deputy Speaker of the National Assembly;
 the Auditor-General;
 The administrative expenses, including the remuneration payable to officers
and servants, of the Supreme Court, the Islamabad High Court, the
department of the Auditor-General, the Office of the Chief Election
Commissioner and of the Election Commission and the Secretariats of the
Senate and the National Assembly;
 All debt charges for which the Federal Government is liable, including
interest, sinking fund charges, the repayment or amortisation of capital, and
other expenditure in connection with the raising of loans, and the service
and redemption of debt on the security of the Federal Consolidated Fund;
 Any sums required to satisfy any judgment, decree or award against
Pakistan by any court or tribunal; and
 Any other sums declared by the Constitution or by Act of Majlis-e-Shoora
(Parliament) to be so charged.
1.6 Procedure relating to annual budget statement [Article 82]

 So much of the Annual Budget Statement as relates to expenditure
charged upon the Federal Consolidated Fund may be discussed in, but
shall not be submitted to the vote of, the National Assembly.

 So much of the Annual Budget Statement as relates to other expenditure

shall be submitted to the National Assembly in the form of demands for
grants, and the Assembly shall have power to assent to, or to refuse to
assent to, any demand, or to assent to any demand subject to a reduction
of the amount specified therein;
 Provided that, for a period of ten years from the commencing day or the
holding of the second general election to the National Assembly, whichever
occurs later, a demand shall be deemed to have been assented to without
any reduction of the amount specified therein, unless, by the votes of a
majority of the total membership of the Assembly, it is refused or assented
to subject to a reduction of the amount specified therein.
 No demand for a grant shall be made except on the recommendation of the
Federal Government.
1.7 Authentication of schedule of authorised expenditure [Article 83]

1) The Prime Minister shall authenticate by his signature a schedule
specifying:
a) the grants made or deemed to have been made by the National
Assembly under Article 82, and
b) the several sums required to meet the expenditure charged upon the
Federal Consolidated Fund but not exceeding, in the case of any
sum, the sum shown in the statement previously laid before the
National Assembly.
2) The schedule so authenticated shall be laid before the National Assembly,
but shall not be open to discussion or vote thereon.
3) Subject to the Constitution, no expenditure from the Federal Consolidated
Fund shall be deemed to be duly authorised unless it is specified in the
schedule so authenticated and such schedule is laid before the National
Assembly as required by clause (2).
1.8 Supplementary and excess grants [Article 84]

If in respect of any financial year it is found:
 that the amount authorized to be expended for a particular service for the
current financial year is insufficient, or that a need has arisen for
expenditure upon some new service not included in the Annual Budget
Statement for that year; or
 that any money has been spent on any service during a financial year in
excess of the amount granted for that service for that year;
 the Federal Government shall have power to authorize expenditure from
the Federal Consolidated Fund, whether the expenditure is charged by the
Constitution upon that Fund or not, and shall cause to be laid before the
National Assembly a Supplementary Budget Statement or, as the case may
be, an Excess Budget Statement, setting out the amount of that
expenditure, and the provisions of Articles 80 to 83 shall apply to those
statements as they apply to the Annual Budget Statement.
1.9 Votes on account [article 85]

Notwithstanding anything contained in the foregoing provisions relating to
financial matters, the National Assembly shall have power to make any grant in

advance in respect of the estimated expenditure for a part of any financial year,
not exceeding four months, pending completion of the procedure prescribed in
Article 82 for the voting of such grant and the authentication of the schedule of
authorized expenditure in accordance with the provisions of Article 83 in relation
to the expenditure.
1.10 Power to authorise expenditure when assembly stands dissolved [Article 86]
financial matters, the National Assembly shall have power to make any grant in
not exceeding four months, pending completion of the procedure prescribed in
authorized expenditure in accordance with the provisions of Article 83 in relation
to the expenditure.
1.11 Secretariats of Majlis-e-Shoora (Parliament). [Article 87]

 Each House shall have a separate Secretariat:
 Provided that nothing in this clause shall be construed as preventing the
creation of posts common to both Houses.
 Majlis-e-Shoora (Parliament) may by law regulate the recruitment and the
conditions of service of persons appointed to the Secretarial staff of either
House.
 Until provision is made by Majlis-e-Shoora (Parliament) under clause (2),
the Speaker or, as the case may be, the Chairman may, with the approval
of the President, make rules regulating the recruitment and the conditions
of service, of persons appointed to the secretarial staff of the National
Assembly or the Senate.
1.12 Finance committees [Article 88]

 The expenditure of the National Assembly and the Senate within authorised
appropriations shall be controlled by the National Assembly or, as the case
may be, the Senate acting on the advice of its Finance Committee.
 The Finance Committee shall consist of the Speaker or, as the case may
be, the Chairman, the Minister of Finance and such other members as may
be elected thereto by the National Assembly or, as the case may be, the
Senate.
 The Finance Committee may make rules for regulating its procedure.

2 PROVINCIAL FINANCIAL PROCEDURES

Section overview
 Introduction
 Provincial consolidated fund and public account[Article 118]
 Custody of provincial consolidated fund and public account[Article 119]
 Annual budget statement[Article 120]
 Expenditure charged upon provincial consolidated fund[Article 121]
 Procedure relating to annual budget statement[Article 122]
 Authentication of schedule of authorised expenditure[Article 123]
 Supplementary and excess grants [Article 124]
 Votes on account[Article 125]
 Power to authorise expenditure when assembly stands dissolved[Article 126]
 Provisions relating to provincial assembly, etc., to apply to provincial assembly,
etc.[Article 127]
2.1 Introduction
Provincial Financial Procedures are almost the same as Federal Financial
Procedures. However, these are discussed in detail for clarity on the issue:
2.2 Provincial consolidated fund and public account [Article 118]

All revenues received by the Provincial Government, all loans raised by that
Government, and all revenues received by the Provincial Government, all loans
raised by that Government, and all monies received by it in repayment of any
loan, shall form part of a consolidated fund, to be known as the Provincial
Consolidated Fund.
All other monies:
 received by or on behalf of the Provincial Government; or
 Received by or deposited with the High Court or any other court
established under the authority of the Province;
shall be credited to the Public Account of the Province.
2.3 Custody of provincial consolidated fund and public account [Article 119]
The custody of the Provincial Consolidated Fund, the payment of moneys into
that Fund, the withdrawal of monies therefrom, the custody of other monies
received by or on behalf of the Provincial Government, their payment into, and
withdrawal from, the Public Account of the Province, and all matters connected
with or ancillary to the matters aforesaid, shall be regulated by Act of the
Provincial Assembly or, until provision in that behalf is so made, by rules made by
the Governor.
2.4 Annual budget statement [Article 120]

 The Provincial Government shall, in respect of every financial year, cause
to be laid before the Provincial Assembly a statement of the estimated

receipts and expenditure of the Provincial Government for that year, in this
Chapter referred to as the Annual Budget Statement.
 The Annual Budget Statement shall show separately:
 The sums required to meet expenditure described by the Constitution
as expenditure charged upon the Provincial Consolidated Fund; and
 The sums required to meet other expenditure proposed to be made
from the Provincial Consolidated Fund;
and shall distinguish expenditure on revenue account from other
expenditure.
2.5 Expenditure charged upon provincial consolidated fund. [Article 121]

 The following expenditure shall be expenditure charged upon the Provincial
Consolidated Fund:
 The remuneration payable to the Governor and other expenditure
relating to his office, and the remuneration payable to:
 the Judges of the High Court; and
 the Speaker and Deputy Speaker of the Provincial Assembly;
 the administrative expenses, including the remuneration
payable to officers and servants, of the High Court and the
Secretariat of the Provincial Assembly;
 all debt charges for which the Provincial Government is liable,
including interest, sinking fund charges, the repayment or
amortization of capital, and other expenditure in connection with the
raising of loans, and the service and redemption of debt on the
security of the Provincial Consolidation Fund.
 any sums required to satisfy any judgment, decree or award against
the Province by any court or tribunal; and
 Any other sums declared by the Constitution or by Act of the
Provincial Assembly to be so charged.
2.6 Procedure relating to annual budget statement [Article 122]

 So much of the Annual Budget Statement as relates to expenditure
charged upon the Provincial Consolidated Fund may be discussed in, but
shall not be submitted to the vote of, the Provincial Assembly.
 So much of the Annual Budget Statement as relates to other expenditure
shall be submitted to the Provincial Assembly in the form of demands for
grants, and that Assembly shall have power to assent to, or to refuse to
assent to, any demand, or to assent to any demand subject to a reduction
of the amount specified therein:
 No demand for a grant shall be made except on the recommendation of the
Provincial Government.
2.7 Authentication of schedule of authorised expenditure [Article 123]

1) The Chief Minister shall authenticate by his signature a schedule
specifying:

a) the grants made or deemed to have been made by the

Provincial Assembly under Article 122 and
b) The several sums required to meet the expenditure charged
upon the Provincial Consolidated Fund but not exceeding, in
the case of any sum, the sum shown in the statement
previously laid before the Assembly.
2) The schedule so authenticated shall be laid before the Provincial
Assembly, but shall not be open to discussion or vote thereon.
3) Subject to the Constitution, no expenditure from the Provincial
Consolidated Fund shall be deemed to be duly authorized unless it is
specified in the schedule so authenticated and such schedule is laid
before the Provincial Assembly as required by clause (2).
2.8 Supplementary and excess grants [Article 124]

If in respect of any financial year it is found:
 that the amount authorized to be expended for a particular service for the
current financial year is insufficient, or that a need has arisen for
expenditure upon some new service not included in the Annual Budget
Statement for that year; or
 that any money has been spent on any service during a financial year in
excess of the amount granted for that service for that year;
The Provincial Government shall have power to authorize expenditure from the
Provincial Consolidated Fund, whether the expenditure is charged by the
Constitution upon that Fund or not, and shall cause to be laid before the
Provincial Assembly a Supplementary Budget Statement or, as the case may be,
an Excess Budget Statement, setting out the amount of that expenditure, and the
provisions of Article 120 to 123 shall apply to those statements as they apply to
the Annual Budget Statement.
2.9 Votes on account [Article 125]

financial matters, the Provincial Assembly shall have power to make any grant in
not exceeding three months, pending completion of the procedure prescribed in
expenditure in accordance with the provisions of Article 123 in relation to the
expenditure.
2.10 Power to authorise expenditure when assembly stands dissolved [Article

126]
financial matters, at any time when the Provincial Assembly stands dissolved, the
Provincial Government may authorize expenditure from the Provincial
Consolidated Fund in respect of the estimated expenditure for a period not
exceeding four months in any financial year, pending completion of the procedure
prescribed in Article 122 for the voting of grants and the authentication of the
schedule of authorized expenditure in accordance with the provisions of Article
123 in relation to the expenditure.

2.11 Provisions relating to provincial assembly, etc., to apply to provincial

assembly, etc. [Article 127]
Subject to the Constitution, the provisions of clauses (2) to (8) of Article 53,
clauses (2) and (3) of Article 54, Article 55, Articles 63 to 67, Article 69, Article 77,
Article 87 and Article 88 shall apply to and in relation to a Provincial Assembly or
a committee or members thereof or the Provincial Government, but so that:
 Any reference in those provisions to Majlis-e-Shoora (Parliament), a House
or the National Assembly shall be read as a reference to the Provincial
Assembly;
 Any reference in those provisions to the President shall be read as a
reference to the Governor of the Province;
 any reference in those provisions to the Federal Government shall be, read
as a reference to the Provincial Government;
 any reference in those provisions to the Prime Minister shall be read as a
reference to the Chief Minister.
 any reference in those provisions to a Federal Minister shall be read as a
reference to a Provincial Minister.
 any reference in those provisions to the National Assembly of Pakistan
shall be read as a reference to the Provincial Assembly in existence
immediately before the commencing day.

3 DISTRIBUTION OF REVENUES BETWEEN FEDERATION AND

PROVINCES
Section overview
 Introduction
 National Finance Commission[Article 160]
 Natural gas and hydro-electric power[Article 161]
 Prior sanction of President to Bills affecting taxation in which provinces are
interested[Article 162]
 Provincial taxes in respect of professions, etc.[Article 163]
 Grants out of consolidated fund[Article 164]
 Exemption of certain public property from taxation[Article 165]
 Power of Majlis-e-Shoora (Parliament) to impose tax on the income of certain
corporations, etc.[Article 166]
3.1 Introduction
It is essential to know who authorises which revenues. Federation can only tax to
the extent the Constitution authorises it to legislate for collection of revenues.
Similarly, Provinces can only legislate for levy of taxes to the extent authorised in
the Constitution of Pakistan. This part of the chapter describes the mechanism
for determination of distribution of revenue among Federation and Provinces.
3.2 National Finance Commission [Article 160]

1) Within six months of the commencing day and thereafter at intervals not
exceeding five years, the President shall constitute a National Finance
Commission consisting of the Minister of Finance of the Federal
Government, the Ministers of Finance of the Provincial Governments, and
such other persons as may be appointed by the President after consultation
with the Governors of the Provinces
2) It shall be the duty of the National Finance Commission to make
recommendations to the President as to:
a) the distribution between the Federation and the Provinces of the net
proceeds of the taxes mentioned in clause (3);
b) the making of grants-in-aid by the Federal Government to the
Provincial Governments;
c) the exercise by the Federal Government and the Provincial
Governments of the borrowing powers conferred by the Constitution;
and
d) Any other matter relating to finance referred to the Commission by the
President.
3) The taxes referred to in paragraph (a) of clause (2) are the following taxes
raised under the authority of Majlis-e-Shoora (Parliament), namely:
a) taxes on income, including corporation tax, but not including taxes on
income consisting of remuneration paid out of the Federal
Consolidated Fund;

b) taxes on the sales and purchases of goods imported, exported,

produced, manufactured or consumed;
c) export duties on cotton, and such other export duties as may be
specified by the President;
d) export duties on cotton, and such other export duties as may be
specified by the President;
e) such duties of exercise as may be specified by the President; and
f) Such other taxes as may be specified by the President.
4) The share of the Provinces in each Award of National Finance Commission
shall not be less than the share given to the Provinces in the previous
Award.
5) The Federal Finance Minister and Provincial Finance Ministers shall
monitor the implementation of the Award biannually and lay their reports
before both Houses of Majlis-e-Shoora (Parliament) and the Provincial
Assemblies.
6) As soon as may be after receiving the recommendation, of the National
Finance Commission, the President shall, by Order, specify, in accordance
with the recommendations of the Commission under paragraph (a) of
clause (2), the share of the net proceeds of the taxes mentioned in clause
(3) which is to be allocated to each Province, and that share shall be paid
to the Government of the Province concerned, and, notwithstanding the
provision of Article 78 shall not form part of the Federal Consolidated Fund.
7) The recommendations of the National Finance Commission, together with
an explanatory memorandum as to the action taken thereon, shall be laid
before both Houses and the Provincial Assemblies.
8) At any time before an Order under clause (4) is made, the President may,
by Order, make such amendments or modifications in the law relating to the
distribution of revenues between the Federal Government and the
Provincial Governments as he may deem necessary or expedient.
9) The President may, by Order, make grants-in-aid of the revenues of the
Provinces in need of assistance and such grants shall be charged upon the
Federal Consolidated Fund.
3.3 Natural gas and hydro-electric power [Article 161]

 Notwithstanding the provisions of Article 78:
 the net proceeds of the Federal duty of excise on natural gas levied at
well-head and collected by the Federal Government and of the royalty
collected by the Federal Government, shall not form part of the
Federal Consolidated Fund and shall be paid to the Province in which
the well-head of natural gas is situated;
 the net proceeds of the Federal duty of excise on oil levied at well-
head and collected by the Federal Government, shall not form part of
the Federal Consolidated Fund and shall be paid to the Province in
which the well-head of oil is situated.
 the net profits earned by the Federal Government, or any undertaking
established or administered by the Federal Government from the bulk
generation of power at a hydro-electric station shall be paid to the Province
in which the hydro-electric station is situated.

 Explanation for the purposes of this clause "net profits" shall be computed
by deducting from the revenues accruing from the bulk supply of power
from the bus-bars of a hydro-electric station at a rate to be determined by
the Council of Common Interests, the operating expenses of the station,
which shall include any sums payable as taxes, duties, interest or return on
investment, and depreciations and element of obsolescence, and over-
heads, and provision for reserves.
3.4 Prior sanction of President to Bills affecting taxation in which provinces are
interested [Article 162]
No Bill or amendment which imposes or varies a tax or duty the whole or part of
the net proceeds whereof is assigned to any province, or which varies the
meaning of the expression "agricultural income" as defined for the purpose of the
enactments relating to income-tax, or which affects the principles on which under
any of the foregoing provisions of this chapter monies are or may be distributable
to provinces, shall be introduced or moved in the National Assembly except with
the previous sanction of the President
3.5 Provincial taxes in respect of professions, etc. [Article 163]

A Provincial Assembly may by Act impose taxes, not exceeding such limits as
may from time to time be fixed by Act of Majlis-e-Shoora (Parliament)], on
persons engaged in professions, trades, callings or employments, and no such
Act of the Assembly shall be regarded as imposing a tax on income..
3.6 Grants out of consolidated fund [Article 164]

The Federation or a Province may make grants for any purpose, notwithstanding
that the purpose is not one with respect to which Majlis-e-Shoora (Parliament)]
or, as the case may be, a Provincial Assembly may make laws.
3.7 Exemption of certain public property from taxation [Article 165]

 The Federal Government shall not, in respect of its property or income, be
liable to taxation under any Act of Provincial Assembly and, subject to
clause (2), a Provincial Government shall not, in respect of its property or
income, be liable to taxation under Act of Majlis-e-Shoora (Parliament) or
under Act of the Provincial Assembly of any other Province.
 If a trade or business of any kind is carried on by or on behalf of the
Government of a Province outside that Province, that Government may, in
respect of any property used in connection with that trade or business or
any income arising from that trade or business, be taxed under Act of
Majlis-e-Shoora (Parliament) or under Act of the Provincial Assembly of the
Province in which that trade or business is carried on.
 Nothing in this Article shall prevent the imposition of fees for services
rendered.
3.8 Power of Majlis-e-Shoora (Parliament) to impose tax on the income of certain

corporations, etc. [Article 166]
1) For the removal of doubt, it is hereby declared that Majlis-e-Shoora
(Parliament) has, and shall be deemed always to have had, the power to
make a law to provide for the levy and recovery of a tax on the income of a
corporation, company or other body or institution established by or under a
Federal law or a provincial law or an existing law or a corporation, company

or other body or institution owned or controlled, either directly or indirectly,

by the Federal Government or a Provincial Government, regardless of the
ultimate destination of such income.
2) All orders made, proceedings taken and acts done by any authority or
person, which were made, taken or done, or purported to have been made,
taken or done, before the commencement of the Constitution (Amendment)
Order 1985, in exercise of the powers derived from any law referred to in
clause (1), or in execution of any orders made by any authority in the
exercise or purported exercise of powers as aforesaid, shall,
notwithstanding any judgment of any court or tribunal, including the
Supreme Court and a High Court, be deemed to be and always to have
been validly made, taken or done and-shall not be called in question in any
court, including the Supreme Court and a High Court, on any ground
whatsoever.
3) Every judgment or order of any court or tribunal, including the Supreme
Court and a High Court, which is repugnant to the provisions of clause (1)
or clause (2) shall be, and shall be deemed always to have been, void and
of no effect whatsoever.

4 FEDERAL LEGISLATIVE LIST

Section overview
 Introduction
 Powers of the Federation to legislate on taxes
 Powers of the Provinces to legislate on taxes
4.1 Introduction
Federal Legislative List defines the areas whereby Federal Government can
legislate to collect revenue. This is a long list, however, we herein discuss the
areas which relate to taxation
4.2 Powers of the Federation to legislate on taxes

Following entries in the Federal legislative list as contained in the Constitution of
Pakistan relates to taxes:
Entry No Taxes which can be imposed by the Federation

47. Taxes on income other than agricultural income;
48. Taxes on corporations.
49. Taxes on the sales and purchases of goods imported, exported,
produced, manufactured or consumed, except sales tax on
services.
50. Taxes on the capital value of the assets, not including taxes on
immovable property.
51. Taxes on mineral oil, natural gas and minerals for use in
generation of nuclear energy.
52. Taxes and duties on the production capacity of any plant,
machinery, undertaking, establishment or installation in lieu of any
one or more of them.
53. Terminal taxes on goods or passengers carried by railway, sea or
air; taxes on their fares and freights.

Keeping in view the above provisions, following laws are enacted by the Federal
Government:
Legislative powers of Federation Laws enacted thereunder

Taxes on income other than Income Tax Ordinance,2001
agricultural income;
Taxes on corporations.
Taxes on mineral oil, natural gas and
minerals for use in generation of
nuclear energy.
Taxes on the sales and purchases of Sales Tax Act, 1990, Federal
goods imported, exported, produced, Excise Act, 2005, Customs Act,
manufactured or consumed, except 1969
sales tax on services
Taxes and duties on the production
capacity of any plant, machinery,
undertaking, establishment or
installation in lieu of any one or more of
them.
Taxes on the capital value of the Capital Value Tax levied through
assets, not including taxes on Finance Act, 1989
immovable property.
4.3 Powers of the Provinces to legislate on taxes

All taxes other than the mentioned in above list of Federal legislative list as
contained in the Constitution of Pakistan are covered in the scope of legislation of
Provinces. Accordingly, various types of taxes are introduced by the Provinces:
 Agriculture income tax
 Sales tax on services
 Taxes on transfer of immoveable property
 Professional tax
 Tax on luxury houses
 Tax on registration of luxury vehicles etc.
 Property tax

5 CHAPTER REVIEW
Chapter review
 What are the Federal Financial Procedures
 What are Provincial Financial Procedures?
 Under the constitution, what is the mechanism for distribution of Revenues
among Federation and Provinces?
 Which are the areas whereby Federal Government can legislate to levy taxes?
 Which are the areas whereby Provincial Government can legislate to levy
taxes?


3
CHAPTER
Ethics
Contents
1 Ethics
2 Ethics for tax legislators
3 Ethics for tax administrators
4 Ethics for tax practitioners
5 Ethics for taxpayers
6 Chapter review

INTRODUCTION
This chapter deals with the Ethics. This chapter describes the importance of Ethics in
formation of tax legislation. Moreover, Ethics for the Tax implementing Authorities and
Taxpayers is also addressed.
Learning outcomes
LO 3.1.1 Describe how canons of taxation developed by economist are relevant
for legislators while formulating tax policies
LO 3.2.1 Understand the right and purpose of state to tax its citizen
LO 3.2.2 Understand morality behind compliance with tax laws
LO 3.3.1 Understand the powers vs. ethical responsibilities of tax implementation
authorities
LO 3.3.2 Understand pillars of tax administration, namely, fairness, transparency,
equity and accountability
LO 3.4.1 Explain with simple examples the basic difference between evasion and
avoidance of tax

Chapter 3:Ethics
1 ETHICS
Section overview
 Ethics – meanings and application
1.1 Ethics – meanings and application

The word ethics is derived from the Greek word ethos, which means "character,"
and from the Latin word mores, which means "customs." Aristotle was one of the
first great philosophers to study ethics. To him, ethics was more than a moral,
religious, or legal concept. He believed that the most important element in ethical
behaviour is knowledge that actions are accomplished for the betterment of the
common good. He asked whether actions performed by individuals or groups are
good both for an individual or a group and for society. To determine what is
ethically good for the individual and for society, Aristotle said, it is necessary to
possess three virtues of practical wisdom: temperance, courage, and justice.

2 ETHICS FOR TAX LEGISLATORS

Section overview
 Ethics for tax legislators

 Ethics and canons of taxation
 Canons of taxation
 Responsibilities of the tax legislators
2.1 Ethics for tax legislators

In chapter 1, we discussed the following objectives of taxation:
 For collection of revenue to run and administer the Government;
 To use as a tool for implementation of its fiscal policies; and
 For fair distribution of wealth.
Non-revenue objectives
Apart from purely financing government operational expenditures, taxation is also
utilized as a tool to carry out the national objective of social and economic
development.
 To strengthen anaemic enterprises by granting them tax exemptions or
other conditions or incentives for growth;
 To protect local industries against foreign competition by increasing local
import taxes;
 As a bargaining tool in trade negotiations with other countries;
 To counter the effects of inflation or depression;
 To reduce inequalities in the distribution of wealth;
 To promote science and invention, finance educational activities or maintain
and improve the efficiency of local forces;
 To implement laws which eliminate discrimination among various elements
in the markets/businesses.
In the second chapter, we discussed the provisions of Constitution of Pakistan
which empowers the Parliaments to legislate for levy of taxes. These powers are
not unfettered and should carry some ethical and rational basis. This matter is
further discussed in the ensuing lines:
2.2 Ethics and canons of taxation

According to Hugh Dalton, "a tax is a compulsory contribution imposed by a
public authority, irrespective of the exact amount of service rendered to the
taxpayer in return, and not imposed as penalty for any legal offence."
As per above definition, taxes are compulsory contribution. Secondly, their
compliance is obligatory for a citizen living in that jurisdiction otherwise the state
has the right to enforce its laws including recovery of tax through prescribed
coercive measures. However, the State’s right to tax its people should be based
upon some rational grounds. A good tax system is one which is designed on the
basis of an appropriate set of principles (rules).

Chapter 3:Ethics
The tax system should strike a balance between the interest of the taxpayer and
that of tax authorities. Adam Smith was the first economist to develop a list of
canons of taxation. These canons are still regarded as characteristics or features
of a good tax system.
2.3 Canons of taxation

What are Canons of Taxation? They are the basic principles (i.e. rules) set to
build a 'Good Tax System'. Canons of Taxation were first originally laid down by
economist Adam in his famous book "The Wealth of Nations". These canons of
taxation were discussed in Chapter 1 in a summary. In this book Adam Smith
only gave four canons of taxation, which are now known as the "Original or Main
Canons of Taxation". These are as follows:
1. Canon of Equity: The principle aims at providing economic and social
justice to the people. According to this principle, every person should pay to
the government depending upon his ability to pay. Rich people should pay
higher taxes to the government, because without the protection of the
government authorities (Police, Defence, etc.) they would not have earned
and enjoyed their income. Adam Smith argued that the taxes should be
proportional to income, i.e., citizens should pay taxes in proportion to the
revenue which they respectively enjoy under protection of the State.
2. Canon of Certainty: According to Adam Smith, the tax which an individual
has to pay should be certain, not arbitrary. The tax payer should know in
advance how much tax he has to pay, at what time he has to pay the tax,
and in what form the tax is to be paid to the government. In other words,
every tax should satisfy the canon of certainty. At the same time a good tax
system also ensures that the government is also certain about the amount
that would be collected by way of tax.
3. Canon of Convenience: The mode and timing of tax payment should be
as far as possible, convenient to the tax payers. For example, land revenue
is collected at time of harvest and income tax is deducted at source.
Convenient tax system encourages people to pay tax and increases tax
revenue.
4. Canon of Economy: This principle states that there should be economy in
tax administration. The cost of tax collection should be lower than the
amount of tax collected. It may not serve any purpose, if the taxes imposed
are widespread but are difficult to administer. Therefore, it would make no
sense to impose certain taxes, if they are difficult to administer.
Additional Canons of Taxation Activities and functions of the government have
increased significantly since Adam Smith's time. Governments are expected to
maintain economic stability, full employment, reduce income inequality and
promote growth and development. Tax system should be such that it meets the
requirements of growing state activities. Accordingly, modern economists gave
following additional canons of taxation.
5. Canon of Productivity: It is also known as the canon of fiscal adequacy.
According to this principle, the tax system should be able to yield enough
revenue for the treasury and the government should have no need to resort
to deficit financing. This is a good principle to follow in a developing
economy.
6. Canon of Elasticity: According to this canon, every tax imposed by the
government should be elastic in nature. In other words, the income from tax
should be capable of increasing or decreasing according to the country’s

requirement. For example, if the government needs more income at a time

of crisis, the tax should be capable of yielding more income through
increase in its rate.
7. Canon of Flexibility: It should be easily possible for the authorities to
revise the tax structure both with respect to its coverage and rates, to suit
the changing requirements of the economy. With changing time and
conditions the tax system needs to be changed without much difficulty. The
tax system must be flexible and not rigid.
8. Canon of Simplicity: The tax system should not be complicated. That
makes it difficult to understand and administer and results in problems of
interpretation and disputes. In Pakistan, efforts of the government in recent
years have been to make the system simple.
9. Canon of Diversity: This principle states that the government should
collect taxes from different sources rather than concentrating on a single
source of tax. It is not advisable for the government to depend upon a
single source of tax, it may result in inequity for a certain section of the
society and uncertainty for the government to raise funds. If the tax revenue
comes from diversified sources, then any reduction in tax revenue from one
source for any reason is bound to be small.
2.4 Responsibilities of the tax legislators

The tax structure is a part of economic organisation of a society and therefore fits
in its overall economic environment. No tax system that does not satisfy above
canons of Taxation can be termed a good one. Moreover, the state should pursue
that the primary aim of tax should be to raise revenue for public services.
However, people should be asked to pay taxes according to their ability to pay
and assessment of their taxable capacity should be made primarily on the basis
of income and property. May it be added here that tax should not be
discriminatory in any aspect, either between individuals and also between various
groups.

Chapter 3:Ethics
3 ETHICS FOR TAX ADMINISTRATORS

Section overview
 Ethics for tax administrators – introduction

 Pillars of tax administration
 Responsibilities of the tax implementing authorities
3.1 Ethics for tax administrators – introduction

Federal Board of Revenue is empowered under the law to monitor, assess, levy,
collect taxes as provided in the tax statutes. There are a number of occasions
whereby they possess any of the following powers.
 Assess taxes (including best judgment);
 Collect Revenue;
 Seize Property;
 Attach bank accounts;
 Commence legal (criminal/civil) proceedings against taxpayer
Such powers may be misused and can become abusive powers as exercise of
that power can result in the following against the taxpayer:
 Loss of property and income;
 Imprisonment
So, these powers can result in the loss of some of the fundamental human rights
of the taxpayer. Ethics tend to bring these powers within the principles of
goodness and morality.
Illustration:
Mr Zahid is running a textile unit and tax amounting to Rs 5M is assessed against
him. His bank accounts balance is Rs 10M.However, he has to fulfil his exports
orders. In case he fails to fulfil his orders, he would lose his customers and that
orders. Considering his present critical financial position, Zahid believes that tax
recovery proceedings by recovery from bank account (Attachment of bank
account) would entail an irreparable loss to his organisation. So he files a request
to FBR for allowing him to pay the tax dues in instalments.
FBR staff has the power to allow him relief or recover this tax directly from his
bank account. Justice and equity demands that his request should be entertained
so that his continuation and prosperity of business would eventually result in
payment of better taxes in future whereas recovery of tax could jeopardise his
business operations.
Illustration:
Income Tax Ordinance, sales tax law, Federal excise law empower tax authorities
to select cases for audit. This power can be misused by selecting some cases
while leaving many unaudited. Thus, despite the fact that law provides unfettered
powers, these should be exercised on some ethical and rational basis.

3.2 Pillars of tax administration

In order to safeguard the interest of taxpayers and avoid abuse of powers by the
tax administration, following four pillars of Tax administration are defined:
1. Fairness;
Strive to be impartial, fair, neutral and consistent in administering the law
without regard to race, social or economic circumstances;
2. Transparency
All Proceedings must be transparent and must be seen as transparent.
3. Equity;
Best tax administration is not that which collects most revenue. Rather it
depends on how this revenue generation is actually accomplished. Whether
all stakeholders are taxed fairly or tax is collected from the poor /salaried
class after failing to collect taxes from entrepreneurs/businesses. Thus,
equity demands that tax administrators should not achieve their objectives
in an irrational manner.
4. Accountability.
There must be a strong system of accountability for wrong doers which
should curb corruption, nepotism and maladministration.
Under the four pillars, some of the ethical issues facing tax administration are:
1. Acceptance of gifts;
2. Conflict of Interest;
3. Selective application of the law/ or inconsistency in applying the law;
4. Political influence;
5. Confidentiality/secrecy;
6. Discretion;
7. Corruption;
8. Lack of Autonomy
In order to avoid pitfalls of the abusive use of discretion, seven principles for
structuring discretion are defined which are as under:
 Open plans,
 Open policy statements,
 Open rules,
 Open findings,
 Open reasons,
 Open precedents and
 Fair informal procedure

Chapter 3:Ethics
3.3 Responsibilities of the tax implementing authorities

A concise code which can enlist responsibilities of Tax Administrators can be as
under:
1. Obey all laws relating to taxation and grant no exemptions, credit or
advantage to any taxpayer that is not provided by the law;
2. Be dedicated to the highest ideals of honesty and integrity in all matters in
order to maintain the respect and confidence of the government and
taxpayers;
3. Strive to be impartial, fair, neutral and consistent in administering the law
without regard to race, social status or economic circumstances;
4. Provide prompt, efficient and quality service to all stakeholders in an effort
to exceed their expectations;
5. Refrain from actively participating in partisan political activities;
6. Accurately record proceedings and maintain taxpayer information in the
strictest confidence and highest level of security;
7. Refrain from soliciting gifts for actions and non-actions;
8. Make reasonable effort to collect the proper amount of tax revenue due at
the lowest possible cost to the state, and in a manner that warrants the
highest degree of confidence in our integrity, efficiency, effectiveness and
fairness;
9. Respond to valid taxpayer refund claims with the same diligence as
employed in collection of taxes;
10. Educate taxpayers on their rights and responsibilities to ensure the highest
possible levels of voluntary compliance to the laws.

4 ETHICS FOR TAX PRACTITIONERS

Section overview
 Ethics for tax practitioners
4.1 Ethics for tax practitioners

There are five fundamental principles of ethics for tax practitioners. These are set
out below:
1 Integrity. Tax Practitioners should be straightforward and honest in all
professional and business relationships. Integrity implies not just honesty
but also fair dealing and truthfulness.
2 Objectivity. Tax practitioners should not allow bias, conflicts of interest or
undue influence of others to override their professional or business
judgments.
3 Professional competence and due care. Tax Practitioners have a duty to
maintain their professional knowledge and skill at such a level that a client
or employer receives competent service, based on current developments in
practice, legislation and techniques. Tax practitioners should act diligently
and in accordance with applicable technical and professional standards.
4 Confidentiality. Tax Practitioners should respect the confidentiality of
information acquired as a result of professional and business relationships
and should not disclose such information to third parties without authority or
unless there is a legal or professional right or duty to disclose. Confidential
information acquired as a result of professional and business relationships
should not be used for the personal advantage of tax practitioners or third
parties.
5 Professional behaviour. Tax practitioners should comply with relevant
laws and regulations and should avoid any action which discredits the
profession.
They should behave with courtesy and consideration towards all with whom they
come into contact in their professional capacity.

Chapter 3:Ethics
5 ETHICS FOR TAX PAYERS

Section overview
 Three approaches of tax compliance

 Ethics and morality for taxation compliance
 The conduct of taxpayers
5.1 Three approaches of tax compliance

There are three approaches to ethics for tax compliance which are as under:
 Utilitarianism, which tells us to aim for the greatest total happiness across
the population. In the economic sphere, we can interpret ‘happiness’ as the
satisfaction of our desires; and so utilitarianism as aiming for maximum
satisfaction of desires.
 Deontology, which bases ethics on the idea of duty.
 Virtue ethics, which focus on the virtues we should have, and on what
constitutes a virtuous life. A broad conception of the virtues must be used
here, encompassing not only virtues such as honesty, but also virtues such
as using one’s talents and leading a fulfilled life.
5.2 Ethics and morality for taxation compliance

For Taxpayers following utilitarian approach, the most important economic goals
are to ensure that goods and services are available to allow everyone to have a
decent life, and to ensure that these resources are distributed widely enough for
all or most people to enjoy them. Motivating citizens to pay taxes even at the
highest rate. Moreover, their compliance level would also be better as there is
dire need for availability of resources for the vast majority of masses and the
country.
On the other hand, taxpayers preferring the deontologist ethical approach lay
down absolute duties. Such duty includes respect for other people’s property
rights. This could be interpreted to mean that there should be no tax at all,
because tax is the forcible transfer of property from taxpayers. On the other hand,
the duty to respect property rights could be used to argue that any social
resources one uses should be paid for, even if one did not ask for those
resources to be provided. Thus in order not to be a thief, anyone who uses a
public hospital, or even a public road, should make sure that he or she pays tax
to cover their use. So this approach envisages that taxes are paid as a matter of
obligation by the taxpayer for use of public facilities.
Virtue ethics can be a bit more helpful on the question of the fairness of taxation.
One should use one’s talents to the full. Financial incentives can encourage
people to use their talents, but very high taxation dampens those incentives by
reducing take-home pay. Another virtue is charity, either in the form of cash or
time. The more take-home cash people have, the more likely it is that they would
be able to afford charitable donations; and also find time from paid employment to
perform charity work or other forms of civic service, as school trustees or
Mutawali of Masjid for example. A third virtue is independence. It is good to earn
what one needs rather than to depend on subsidies from others. Lower rates of
taxation make independence more easily achievable.

Tax can be used for all sorts of purposes, and it is often clear what ethicists of
any particular kind would say about these purposes. We can start with the
provision of law and order and the more extensive public services such as
healthcare and education. Utilitarians will approve of taxation for these purposes
because they allow more goods and services to be produced, and they also allow
more non-materialistic desires to be satisfied. Virtue ethicists will approve
because these services enhance people’s opportunities to use their talents and to
lead prosperous lives.
When we turn to aid the poor, utilitarians would be prone to approve because it
means increased transfer of resources from the rich to the poor rendering them in
a happier position. Virtue ethicists will approve because with redistribution the
poor can be helped to flourish and develop virtues, and because looking after the
less fortunate is itself a virtue (although voluntary charity may be a greater virtue
than forced payment).Deontologists can recognize a duty to care for the poor.
Taxation addressing the needs of all these ethical thoughts can attract better
compliance. Morality for citizens to pay taxes is justified as the State is
responsible for providing a proper infrastructure for a decent life. The State is also
obliged to provide endow with a level playing field to all the concerned so that
talent on merit can be best explored and utilized. It therefore becomes necessary
that taxes be paid to the State in return for basic needs benefits peace &
prosperity, infrastructural development and economic growth etc.
5.3 The conduct of taxpayers

Most people pay their taxes, without a doubt not all are willing to part with their
money. So lastly let’s look at whether other forms of behaviour can be ethically
acceptable: tax evasion and tax avoidance. We discussed these strategies in
Chapter 1 in the following manner:
 Tax avoidance is generally the legal exploitation of the tax regime to one's
own advantage, to attempt to reduce the amount of tax that is payable by
means that are within the law whilst making a full disclosure of the material
information to the tax authorities. Examples of tax avoidance involve using
tax deductions, changing one's business structure through incorporation or
establishing an offshore company in a tax haven.
 By contrast tax evasion is the general term for efforts by individuals, firms,
trusts and other entities to evade the payment of taxes by illegal means.
Tax evasion usually entails taxpayers deliberately misrepresenting or
concealing the true state of their affairs to the tax authorities to reduce their
tax liability, and includes, in particular, dishonest tax reporting (such as
under declaring income, profits or gains; or overstating deductions.
A utilitarian, concerned with aggregate welfare, might be quite relaxed about tax
avoidance. After all, when tax is avoided, wealth is not destroyed: it is merely kept
in the private sector instead of being transferred to the public sector. The main
utilitarian concern would probably be that it would result in an unintended
distribution of the tax burden, as some of the burden would be shifted from the
rich onto people with modest incomes who cannot afford clever tax lawyers. That
would reduce their satisfaction more than it would increase the satisfaction of the
better-off people who have succeeded in reducing their tax burdens.
A virtue ethicist would perhaps dislike tax avoidance. It is, after all, hardly virtuous
to exploit rules knowing that one is exploiting them in unintended ways to
redistribute the disadvantage away from oneself. A deontologist would not
positively favour tax avoidance, but might not condemn it either. Deontologists

Chapter 3:Ethics
can easily argue for a duty to obey the law: yet obeying the law is something the
tax planner takes care to do, in his own peculiar way.
6 CHAPTER REVIEW
Chapter review
 What are ethics?
 What are canons of taxation and their impact on tax legislation?
 What are the responsibilities of tax legislators?
 What are 4 pillars of tax administration?
 What are responsibilities of tax administrators?
 What is code of ethics for tax practitioners?
 What is ethical morality for taxpayers to comply with tax law?


4
CHAPTER
Basic concepts of taxation
Contents
1 Scope of tax
2 Tax year
3 Computation of taxable income
4 Person
5 Residential status
6 Determination of tax liability
7 Different types of taxation regimes
8 Income tax authorities
9 Common rules
10 Chapter review

INTRODUCTION
In the Previous chapters, we discussed the basics of Taxation system and Constitutional
provisions of Pakistan pertaining to levy and legislation of tax laws. This chapter deals with
basic concepts contained in the Income Tax Ordinance, 2001, which is the primary source of
legislation for charging income tax. Federal Board of Revenue working under the Ministry of
Finance is responsible to monitor its levy, collection and dealing with all other procedural
matters.
Learning outcomes
2002, Sales Tax Act 1990 and Sales Tax Rules, 2006.
Concepts
LO 4.1.1 Describe the definitions given in section 2 sub-section 6, 7, 14,19,23,25, 26,
29, 31A, 36, 37, 38, 42, 45, 47, 50, 51, 52, 53, 54, 59A, 64, 66, 68, 70, 73
LO 4.1.2 Describe other definitions covered under relevant sections
LO 4.1.3 Apply definitions on simple scenarios
LO 4.2.1 Understand different aspects of Charge of Tax
LO 4.3.1 Compute taxable income and tax thereon relating to salary, income from
property, income from business, capital gain, dividend, profit on debt, ground
rent, rent from sub-lease, income from provision of amenities, utilities or any
other services connected with rented building and consideration for vacating
the possession of building
LO 4.4.2 Explain using simple examples the provision relating to Tax year
LO 4.5.1 Understand meaning of ‘person’, ‘resident’ and ‘non-resident persons’

Chapter 4: Basic concepts of taxation
1 SCOPE OF TAX
Section overview
 Scope of tax
1.1 Scope of tax

Income tax law deals with the levy of tax on the income of a person. The scope of
income tax law is defined in section 4 of the Income Tax Ordinance, 2001 in the
following manner:
“Tax shall be imposed for each tax year on every person who has taxable income, as
per the applicable tax rates”
Perusal of the aforesaid provision of law rises following questions in our minds:
i. What is a tax year?

ii. What is taxable income and how it is computed?
iii. Who is person?
iv. What are applicable rates of tax?
v. What is the procedure for levy of tax?
These primary questions are answered in the upcoming paragraphs.

2 TAX YEAR
Section overview
 Tax year
2.1 Tax year (Sec-74)

There are three kinds of tax years as stipulated in Section 74 of the Income Tax
Ordinance, 2001:
 Normal tax year
 Special tax year
 Transitional tax year
Normal tax year

Normal tax year is a period of twelve months ending on the 30th day of June and
is denoted by the calendar year in which the said date falls.
Special tax year

Where a person’s income year is different from the normal tax year, or where, by
an order, a person has been allowed by the Commissioner Inland Revenue to
use a twelve months’ period different from normal tax year, such income year or
such period shall be that person’s special tax year and shall be denoted by the
calendar year relevant to normal tax year in which the closing date of the special
tax year falls.
The Board has authority to prescribe any special tax year in respect of any
particular class of taxpayer. For example in respect of certain classes of
assesses following special tax years are specified by the Board.
Classes of persons Special tax year Notification No. (SRO)

and Date
Companies 1st October to 134(R)/68,
manufacturing sugar 30th September July 31,1968
All persons exporting 1st January to 367(I) /74,

rice 31st December January 14,1974
All insurance companies 1st January to 878 (I) /95,

31st December August 30,1995
In addition to above, a taxpayer may get permission to adopt special income year
subject to fulfilment of following conditions laid down in section 74 ibid:
A person may apply to the Commissioner for change of tax year from normal tax
year to special tax year or from special tax year to normal tax year and the same
can be granted subject to any conditions that may be imposed by the
Commissioner .

A change of tax year from normal to special or vice versa, granted by the
Commissioner is subject to withdrawal if in his opinion it is no longer feasible but
not unless the person has been provided an opportunity of being heard.
An order of the Commissioner for change of tax year shall take effect from such
date, being the first day of the special tax year or the normal tax year, as the
case may be, as may be specified in the order.
A person dissatisfied with the order may file a review application with the Board
against the decision of the Commissioner at the time of granting permission for a
special tax year or withdrawal of the same and the decision by the Board on such
application shall be final.
Transitional tax year

Where the tax year of a person changes as a result of an order by the
Commissioner of Income tax either from the normal tax year to special tax year or
vice versa, the period between the end of the last tax year prior to change and
the date on which the changed tax year commences shall be treated as a
‘transitional tax year’.
Example
The normal tax year of ABC Limited was the period from 01 July 2012 to 30 June
2013. On an application by ABC Limited, Commissioner granted approval to
adopt special tax year of 30 September each year. The period from 01 July 2013
to 30 September 2013 will be treated as transitional tax year.
Exercise:
Determine the tax year in respect of each accounting periods mentioned below:
a) 1.09. 2012 to 31.08.2013
b) 1.01.2012 to 31.12.2013
c) 1.04.2013 to 31.03.2014
d) 1.05.2012 to 31.04.2013
e) 1.07.2012 to 30.06.2013
Answer
For all the three cases (a), (b) and (c) mentioned above, relevant tax year will be
2014 i.e. calendar year relevant to normal tax year [1.07.2013 to 30.06.2014) in
which the closing date ( 31.08. 2013, 31.12.2013, 31.03.2014) of special year
falls.
For case (d) mentioned above, relevant tax year will be 2013 i.e. calendar year
relevant to normal tax year in which the closing date (31.04.2013) of special tax
year falls.
For case (e) mentioned above, relevant tax year will be 2013 i.e. calendar year in
which the closing date (31.06.2013) of normal tax year falls.

3 COMPUTATION OF TAXABLE INCOME

Section overview
 Definition of income
 Heads of income
 Total income
 Taxable income
 Deductible allowances
3.1 Income (Sec-2(29))

The definition of term “income” uses the word “includes” therefore, it is inclusive
definition and not exhaustive. An inclusive definition is that which not only
extends to those things which are included in it, but also covers all such things
which the term signifies according to its general and natural meaning.
Definition: Income includes

 Any amount chargeable to tax under the Income Tax Ordinance,2001
 Any amount subject to collection or deduction of tax under section 148,
150, 152(1), 153, 154,156,156A,233, 233A, sub section (5) of section
234 and 236M
 Any amount treated as income under any provision of the Ordinance, and
 Any loss of income
3.2 Heads of income (Sec-11)

For the purposes of the imposition of tax and the computation of total income, all
incomes shall be classified under the following heads, namely:
 Salary;
 Income from property;
 Income from business;
 Capital gains; and
 Income from other sources.
The income of a person under a head of income for a tax year shall be the total
of the amounts derived by the person in that tax year that are chargeable to tax
under the head as reduced by the total deductions, if any, allowed under the
Ordinance to the person for that year under that head.
Illustration:
Sum of amounts changeable to tax under any particular head xxx
Less: Deductions (expenses) if allowed in relevant head of
Income (xx)
Income under a particular head of income xxx

If the total deductions allowed to a person for a tax year under a head of income
exceed the total amounts derived by the person in that tax year chargeable under
that head, the person shall be treated as sustaining a loss under that head for
that tax year of an amount equal to the excess.
A loss for a head of income for a tax year shall be dealt with in accordance with
Part VIII of Chapter III of the Income Tax Ordinance,2001 (Chapter 11 of this
study text).
The income of a resident person is computed by taking into account amounts that
are his Pakistan-source income and amounts that are his foreign-source income.
On the other hand, income of a non-resident person is computed by taking into
account only the amounts that are his Pakistan-source income.
In view of aforesaid provisions of law, the equation to determine the taxable
income is a under:
Illustration
Source of Income Resident Non Resident
Pakistan source Chargeable Chargeable
Foreign source Chargeable Not Chargeable
Exercise:
Mr Junaid has following incomes from different heads of income:
Amount
Salary 75,000
Income from Property 35,000
Income from Business 125,000
Capital Gains 37,900
Income from other sources 90,000
Compute his taxable income.
Answer
Taxable income of Mr Junaid is sum of all above sources of income which is
computed at Rs. 362,900
3.3 Total income (Sec-10)
The total income of a person for a tax year shall be the sum of the
 Person’s income under all heads of income for that tax year; and
 Person’s income exempt from tax for that tax year under any of the provisions
of Income Tax Ordinance, 2001.

3.4 Taxable income (Sec-9 )

The taxable income of a person for a tax year shall be the total income other than
exempt income of the person for the year reduced (but not below zero) by the
sum of any deductible allowances of the person for that tax year.
Total Income other than exempt xxxxx

Less: Deductible Allowances (Discussed below) (xxxx)
Taxable Income xxxxx
3.5 Deductible allowances (Sec-60-60B)
Zakat (Sec-60)
 A person is entitled to a deductible allowance for the amount of any Zakat
paid by the person in a tax year under the Zakat and Ushr Ordinance, 1980.
 Where the Zakat has been deducted out of the profit on debt (which is
chargeable under the head “income from other sources”), such Zakat shall
not be deducted out of the total income, rather, it shall be allowed as a
deduction while computing income from other sources.
 Where the amount of Zakat is more than total income, the excess amount
shall not be refunded or carried forward or carried back.
Worker’s welfare fund (Sec-60A)

A person shall be entitled to a deductible allowance for the amount of any
Workers’ Welfare Fund (WWF) paid by the person in the tax year under Workers’
Welfare Fund Ordinance, 1971.
FBR has clarified through Circular No 1 dated 3 January 2004 that WWF payable
expense is also admissible expense in the cases where accrual bases of
accounting is employed as regular method of accounting.
Worker’s participation fund (Sec-60B)

A person shall be entitled to a deductible allowance for the amount of any
Workers’ Participation Fund paid by the person in a tax year in accordance with
the provisions of the Companies Profit (Workers’ Participation) Act, 1968.
Exercise:
Compute Total and Taxable Income of XYZ (Pvt) Limited considering following
data:
Aggregate income from all heads of income 1,000,000
Aggregate exempt income under 2nd 500,000
Schedule of the Income Tax Ordinance,2001
Workers Participation Fund paid under 100,000
Companies Profit (Workers’ Participation)
Act, 1968

Answer
Total income
Aggregate income from all heads 1,000,000
Exempt Income under second schedule 500,000
1,500,000
Taxable income
Aggregate income from all heads 1,000,000
Less: WPPF as per Workers’
Participation Act, 1968 (100,000)
900,000

4 PERSON
Section overview
 Person
 Taxpayer
4.1 Person (Sec-2(42) read with Sec-80)
We learnt from the preceding discussion that tax is chargeable on the taxable
income of a person. As per sub-section (1) of section 80, following are treated as
person:
Definition: Person
 an individual;
 a company or association of persons incorporated, formed, organised
or established in Pakistan or elsewhere;
 The Federal Government, a foreign government, a political subdivision
of a foreign government, or public international organisation.
Definition of person includes different entities so these are defined and discussed
hereunder:
Definition: Association of Persons

“Association of persons” includes a firm, a Hindu undivided family, any artificial
juridical person and anybody of persons formed under a foreign law, but does not
include a company;
“Firm” means the relation between persons who have agreed to share the profits
of a business carried on by all or any of them acting for all.
Definition: Company
“Company” means:
 a company as defined in the Companies Ordinance, 1984
 a small company as defined in section 2 of the Income Tax
Ordinance,2001
 a body corporate formed by or under any law in force in Pakistan;
 a modaraba;
 a body incorporated by or under the law of a country outside
Pakistan relating to incorporation of companies;
 a foreign association, whether incorporated or not, which the
Board has, by general or special order, declared to be a company
for the purposes of this Ordinance;
 a Provincial Government; or
 a local Government in Pakistan; or

 a co-operative society, a Finance society or any other society

 a non-profit organisation
 a trust, an equity or a body of persons established or constituted
by or under any law for the time being in force
“Local Government” shall have the same meaning as in the Punjab Local
Government Ordinance,2001, the Sindh Local Government Ordinance,2001, the
NWFP Local Government Ordinance,2001 and the Balochistan Local Government
Ordinance,2001.
“trust” means an obligation annexed to the ownership of 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; and
Sec 2(47) “Public company” means —
(a) a company in which not less than fifty per cent of the shares are held
by the Federal Government or Provincial Government;
(b) 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;
(c) a company whose shares were traded on a registered stock exchange
in Pakistan at any time in the tax year and which remained listed on
that exchange at the end of that year; or
(d) 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);
“Unit trust” means any trust under which beneficial interests are divided into units
such that the entitlements of the beneficiaries to income or capital are
determined by the number of units held.
Sec 2(45) “Private company” means a company that is not a public company
Sec 2(7) “Banking company” means a banking company as defined in the
Banking Companies Ordinance, 1962 (LVII of 1962) and includes anybody
corporate which transacts the business of banking in Pakistan;
Sec 2(14) “Cooperative society” means a co-operative society registered under
the Co-operative Societies Act, 1925 (VII of 1925) or under any other law for the
time being in force in Pakistan for the registration of co-operative societies;
Sec 2(25) “Finance society” includes a co-operative society which accepts money
on deposit or otherwise for the purposes of advancing loans or making
investments in the ordinary course of business;
Sec 2(36) “Non-profit organization” means any person other than an individual
which is
(i) established for religious, educational, charitable, welfare or development
purposes, or for the promotion of an amateur sport;
(ii) formed and registered under any law as a non- profit organization;
(iii) approved by the Commissioner for specified period, on an application
made by such person in the prescribed form and manner, accompanied by
the prescribed documents and, on requisition, such other documents as
may be required by the Commissioner;

Assets of such organization are not available for private benefit to any other
person.
Sec 2(59A) "Small Company" means a company registered on or after the first
day of July, 2005, under the Companies Ordinance, 1984 which,-
(i) has paid up capital plus undistributed reserves not exceeding twenty-
five million rupees;
(ii) has employees not exceeding two hundred and fifty any time during
the year;
(iii) has annual turnover not exceeding two hundred and fifty million
rupees; and
(iv) is not formed by the splitting up or the reconstitution of a company
already in existence;
Exercise
(a) Briefly state, with reasons, whether or not you consider the below mentioned
companies to be a public company for tax purpose.
(i). PPL is a company incorporated under the Companies Ordinance, 1984 and is
not listed on any stock exchange in Pakistan. 59 per cent of the shares in
PPL are held by BBC Ltd, a company incorporated in United Kingdom. United
Kingdom holds 97% of the shares in BBC Ltd
(ii). XYZ Limited is a public company incorporated under the Companies
Ordinance,1984 whose shares were traded on the Lahore Stock Exchange
from 01 August 2013 until 29 June 2014 on which date the company was
delisted on the exchange.
(iii). The Provincial Government of NWFP holds 50% of the shares in ABC Ltd, a
public company under the Companies Ordinance,1984. ABC Ltd is not listed
on any stock exchange in Pakistan.
(iv). BRR is a public company under the Companies Ordinance, 1984. 41% of the
shares are held by the Federal Government, 50% by the Government of Saudi
Arabia and 9% by the individuals and group companies. BRR is not listed on
any stock exchange in Pakistan.
(b) Anderson Inc, a public company incorporated under the law of the United
Kingdom relating to the incorporation of companies, has been operating in
Pakistan for over 50 years. The control and management of the Pakistan branch
for the accounting year ended 31 December 2012 was situated wholly outside
Pakistan.
Required:
Briefly state, with reasons whether Anderson Inc. will be assessed as a company
for Pakistan tax purposes for the relevant tax year.

Answer(a)
(i). A public company for Pakistan tax purposes, inter alia includes a company in
which not less than 50% of the shares are held by a foreign government or a
foreign company owned by a foreign government. 59% of the shares in PPL
are owned by BBC Ltd, which is a foreign company but BBC Ltd is not wholly
owned by the United Kingdom (foreign government). Therefore PPL is not a
public company for Pakistan tax purpose.
(ii). A company whose shares are traded on a registered stock exchange in

Pakistan at any time in the tax year and which remained listed on that
exchange at the end of that year is a public company for tax purpose.
Though the shares of XYZ Limited were traded on the Lahore stock exchange
during the tax year 2014, XYZ Ltd did not meet the test of being a public
company for tax purpose since its shares were not listed on the Lahore stock
exchange on 30 June 2014. XYZ Ltd is therefore not a public company for tax
purpose.
(iii). A company in which not less than fifty per cent of the shares are held by the
Federal Government or Provincial Government is a public company for tax
purpose. Since the Provincial Government of NWFP holds 50 percent of the
shares in ABC Ltd, ABC Ltd is a public company for tax purpose
(iv). A public company for Pakistan tax purposes, inter alia means a company in
which not less than 50% of the shares are held by a foreign government,
therefore, BRR is a public company as 50% of the shares are held by
Government of Saudi Arabia.
(b)
As per section 80, a company mean a body incorporated by or under the law of a
country outside Pakistan relating to incorporation of companies. Therefore
Anderson Inc, will be treated as company for Pakistan tax purpose.
4.2 Taxpayer (Sec-2(66))
Definition: Taxpayer
Taxpayer means any person who
 derives an amount chargeable to tax under the Income Tax Ordinance,
2001
 may be a representative of a person who derives an amount chargeable to
tax
 is required to deduct or collect tax under Part V of Chapter X and Chapter
XII of the Ordinance; or
 is required to furnish a return of income or pay tax under the Ordinance;

5 RESIDENTIAL STATUS
Section overview
 Resident taxpayer
 Resident and non-resident persons
 Resident individual
 Resident company
 Resident association of persons
5.1 Resident taxpayer

S2(53). Resident taxpayer
Resident taxpayer means a taxpayer who is a resident person.
5.2 Resident and non-resident persons

The determination of residential status of a person is necessary as the law
explicitly provides that a resident is taxable in respect of his / its worldwide
income whereas the non-resident is taxable only in respect of his / its Pakistan
source income. Section 81 of the Ordinance lays down the method for
determination of residential status of a person in the following manner:
S81. Resident and non-resident persons
 A person shall be a resident in Pakistan for a tax year if the person is:
i. a resident individual, resident company or resident association of
persons for the year; or
ii. the Federal Government.
 A person shall be non-resident person for a tax year if the person is not a
resident person for that year.
A very important point to note from the above discussion is that residential and
non-residential status of any person is to be determined in respect of each tax
year as it may vary from year to year. A person can be resident in tax year 2013
(01 July 2012 to 30 June 2013) but may be a non-resident in tax year 2014 (01
July 2013 to 30 June 2014).
5.3 Resident individual

S82. Resident individual
 An individual shall be a resident individual for a tax year if the individual:
a) is present in Pakistan for a period of, or periods amounting in
aggregate to, one hundred and eighty-three days or more in the tax
year; or
b) is an employee or official of the Federal Government or a Provincial
Government posted abroad in the tax year.
It is not essential that the stay should be at the same place. It is equally not
necessary that the stay should be continuous. Rule 14 of the Income tax
Rules 2002 states the method for computing the number of days of stay of
an individual in Pakistan. The said rule read as under:

 The following rules apply for the purposes of section 82, which provides for
the determination of a person as resident individual.
 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:
i. a public holiday;
ii. a day of leave, including sick leave;
iii. a day that the individual’s activity in Pakistan is interrupted
because of a strike, lock-out or delay in receipt of supplies; or
iv. a holiday spent by the individual in Pakistan before, during or
after any activity in Pakistan; and
 A day or part of a day where an individual is in Pakistan solely by
reason of being in transit between two different places outside
Pakistan does not count as a day present in Pakistan.
 Residential status of companies and Association of persons is discussed in
sections 83 and 84 of the Ordinance and the said sections stipulates that:
5.4 Resident company

S83.Resident company
A company shall be a resident company in Pakistan for a tax year if:
i. it is incorporated or formed by or under any law in force in Pakistan
ii. the control and management of its affairs is situated wholly in Pakistan at
any time in the year; or
iii. It’s a Provincial government or local Government in Pakistan.
5.5 Resident association of persons

S84.Resident association of persons
An association of persons shall be a resident association of persons for a 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.
Exercise:
Explain the residential status of the following persons for the tax year 2014:
(i). Mr. Raza is working as Director Operations in the Ministry of Tourism. On 15
July 2013 he was posted to Pakistan Embassy in Italy for two years.
(ii). Anderson LLC was incorporated as limited liability company in UK. The
control and management of its affairs was situated wholly in Pakistan.
However, with effect from 01 November 2013, the entire management and
control was shifted to UK.
(iii). On 01 February 2014, Mr. Sameel was sent to Pakistan by his UK based
company to work on a special project. He left Pakistan on 23 August 2014.

(iv). BBL is a non listed public company incorporated under the Companies
Ordinance, 1984. All the shareholders of the company are individuals. The
control and management of affairs of the company during the year was
outside Pakistan.
(v). Mr. Salman a property dealer in USA came to Pakistan on 01 February 2013.
During his stay upto 02 August 2013 in Pakistan, he remained in Peshawar
upto 30 June 2013 and thereafter till his departure from Pakistan, in Quetta.
Assume that Commissioner has granted him permission to use calendar year
as special tax year.
Answer
(i). Being an employee of Federal Government, Mr. Raza would be treated as
resident irrespective of number of days he stays in Pakistan.
(ii). A company shall be resident if control and management of the affairs of
the company is situated wholly in Pakistan at any time in the year.
Therefore, company is resident irrespective of the fact that it was
incorporated in UK.
(iii). The stay of Mr. Sameel for the purpose of tax year 2014 is 150 days
(28+31+30+31+30). Since his stay in Pakistan is less than 183 days in
tax year 2014, he is non-resident for tax purposes.
(iv). If a company is incorporated or formed by or under any law in force in
Pakistan, it is treated as a resident company. Such company cannot be
treated as non-resident merely on the basis that the control and
management of the affairs of the company were situated abroad.
Therefore, BBL is a resident company.
(v). It is immaterial where he stayed in Pakistan. No. of days shall be counted
from the day of his arrival in Pakistan to the day of his departure in the
following manner:
Accounting period 01 January 2013 to 31 December 2013 (Tax year
2014)
Month No. of days
February 2013 28
March 2013 31
April 2013 30
May 2013 31
June 2003 30
July 2003 31
August 2013 2
Total 183
Since he was present in Pakistan for 183 days, therefore, he is resident
individual. Mr. Salman would not be resident individual, had the tax year
been a normal financial year ending on 30 June 2013.

6 DETERMINATION OF TAX LIABILITY

Section overview
 Tax computation and rates
6.1 Computation of tax liability and tax rates (Sec-4 read with First Sch.)
Definition: Sec 2(63) Tax means
Any tax imposed under the Ordinance and includes any penalty, fee or other
charge or any sum or amount leviable or payable under this Ordinance.
 Income tax shall be imposed on every person having taxable income for each
tax year at the applicable rates as mentioned in the first schedule to the
Income Tax Ordinance, 2001.
 First Schedule of the Income Tax Ordinance,2001 prescribes different tax
rates for different classes of persons in the following manner:
Tax rates for every individual and association of persons except for salaried taxpayer
Sr. Taxable Income (Rs.)

Rate of Tax
No. From To
1. Up to 400,000 0%
2. 400,001 750,000 10% of the amount exceeding
Rs. 400,000
3. 750,001 1,500,000 Rs.35,000 + 15% of the amount
exceeding Rs.750,000
4. 1,500,001 2,500,000 Rs.147,500 + 20% of the amount
exceeding Rs.1,500,000
5. 2,500,001 4,000,000 Rs.347,500 + 25% of the amount
6. 4,000,001 6,000,000 Rs.722,500 + 30% of the amount
exceeding Rs. 4,000,000
7. Above 6,000,000 Rs.1,322,500 + 35% of the amount
Where the income of an individual chargeable under the head “salary” exceeds fifty
percent of his taxable income, the rates of tax to be applied are as follows:
Sr. Taxable Income (Rs.)

Rate of Tax
No. From To
1. Up to 400,000 0%
2. 400,001 750,000 5% of the amount exceeding
Rs. 400,000
3. 750,001 1,400,000 Rs.17,500 + 10% of the amount
4. 1,400,001 1,500,000 Rs.82,500 +12.50% of the amount

5. 1,500,001 1,800,000 Rs.95,000 + 15% of the amount

6. 1,800,001 2,500,000 Rs.140,000 + 17.5% of the amount
7. 2,500,001 3,000,000 Rs.262,500 + 20% of the amount
8. 3,000,001 3,500,000 Rs.362,500 + 22.5% of the amount
9. 3,500,001 4,000,000 Rs.475,000 + 25% of the amount
10. 4,000,001 7,000,000 Rs.600,000 + 27.5% of the amount
Reduction in tax liability for senior citizen

Where the taxable income other than income on which the deduction of tax is
final does not exceed one million rupees, of a person:
 Holding a National Database Registration Authority’s Computerized
National Identity Card for disabled person; or
 a taxpayer of the age of not less than 60 years on the first day of that tax
year,
his tax liability on such income shall be reduced by 50%.
Rates of tax for companies

The rate of tax imposed on the taxable income of a company (other than a
banking company) for the tax year 2015 is 33%".
Rate of tax for small company

The rate of tax imposed on the taxable income of a small company is 25%:
Computation of income tax payable

 The income tax payable shall be computed as under:
Tax Liability = (Taxable Income x Rate of Tax) – Tax Credits
 If a taxpayer is allowed more than one tax credit for a year, the credits shall
be applied in the following order:
(i). Second Schedule credits e.g. Reduction in tax liability due to full time
teacher allowance etc.
(ii). Any foreign tax credit; then
(iii). Any tax credit allowed for
(a) Charitable donations
(b) Investment in shares and insurance

(c) Contribution to an approved pension fund

(d) Profit on debt
(iv). Any tax credit allowed for advance tax paid u/s 147 and for tax collected /
deducted at source u/s 168
 Any such amount which is taxable as a separate block or under final tax
regime (FTR) shall not be included in the computation of taxable income
under Normal tax regime (NTR) according to the provisions of the Income
Tax Ordinance, 2001.
The computation of income under each head of income and tax credits is
discussed in detail in the ensuing chapters. However, the method for
determination of tax liability on total income is given hereunder:
Computation of tax
1. Gross tax _______________
2. Less: Tax reductions, credits & averaging _______________
3. Net Tax [1 minus 2] _______________
4. Tax already paid including adjustments _______________
5. Balance [3 minus 4] _______________
(a) Tax Refundable or (b) Tax Payable

Tax rebates and reductions available to a person are elaborated in respective
chapters.

7 DIFFERENT TYPES OF TAX REGIMES

Section overview
 Normal tax regime

 Income subject to separate charge
 Final tax regime
 Minimum tax regime
In the foregoing paragraphs, we learnt about the computation of taxable income

and tax liability, however, certain incomes are excluded from the normal method
of taxation as explained above and are subject to tax separately under various
provisions of the Income Tax Ordinance, 2001. The mechanism for determination
of taxable income is categorised under three regimes which are as under:
7.1 Normal tax regime (Net-income basis)

Under the normal tax regime, tax is charged on taxable income of the taxpayer
i.e. gross amounts chargeable reduced by deductions allowed.
7.2 Income subject to separate charge (Sec-5-8)

 Income subject to separate charge are the incomes which do not form part of
total income or taxable income and are subject to tax on the basis of gross
income.
 Section 5, 6, 7 and 8 of the Income Tax Ordinance, 2001 govern the taxation
of such income and these are:
(i). Dividend
(ii). Pakistan-source royalty of non-resident
(iii). Pakistan-source Fee for technical services of non-resident
(iv). Shipping income of non-resident.
(v). Air transport income of non-resident.
 Following rules apply to income subject to separate charge:
(i). Tax imposed is a final tax
(ii). Such income is not chargeable to tax under any head of income in
computing the taxable income of the person
(iii). No deduction is allowed for any expenditure incurred in deriving such
income
(iv). The amount of such income is not reduced by:
(a). Any deductible allowance
(b). The set off of any loss
(v). The final tax payable is not reduced by any tax credit allowed (foreign
tax credit or tax credits on donations, investments etc.)
(vi). The liability of the recipient of such income is discharged to the extent
that:

(a). In the case of shipping and air transport income, the tax is paid in
accordance with section 143 or section 144 of the Ordinance
(b). In any other case, the final tax payable has been deducted at
source
Taxation of dividend, royalty and fee for technical services
Dividend
 Concept and taxation of dividend income is governed by section 2(19), 5 and
8 of the Income Tax Ordinance, 2001.
Definition: Dividend
Section 2(19) “Dividend” includes —
 Any distribution by a company to its shareholders out of accumulated
profit. Dividend may be in the form of:
(i) Distribution of assets of company including money or
(ii) Distribution of debentures or deposit certificates
(iii) Distribution on liquidation of company
(iv) Distribution on reduction of capital by the company
(v) Loan or advance given by a private company as defined in the
Companies Ordinance, 1984 or trust to its shareholders.
(vi) Amount expended by a private company on behalf of or for benefit of
shareholder.
(vii) Any after tax profit of a branch of foreign company operating in
Pakistan.
 All distributions must be up to the extent of accumulated profits
possessed by the company at date of distribution.
 Following payments are not dividends;
(i) Loan or advance by a private company involved in lending business.
(ii) Subsequent dividend if the payment is set off against the loan already
treated as dividend.
(iii) Remittance of after tax profit by a branch of Petroleum Exploration and
Production (E&P) foreign company, operating in Pakistan.
 Tax rates on gross amount of dividend
General tax rate – 10%
Dividend by purchaser of power project – 7.5%
Dividend from a power generation company – 7.5%
Dividend from a stock fund – 12.5%
Dividend received by a company from collective investment scheme / mutual

fund etc. – 25%

 Every person, (including a company from tax year 2014), who receives a
dividend from a company is chargeable to tax on gross receipt basis @ 10%
unless the dividend is exempt from tax.
 Dividend received is subject to deduction of tax at source by the person
making the payment of dividend.
 Tax deducted at source is treated final tax liability of the person receiving the
dividend.
 Where any advance or loan is repaid by the shareholder of a private
company, he shall be entitled to a refund of the tax paid by him as a result of
such loan or advance having been treated as dividend.
Exercise:
(a) Omega (Pvt.) Limited is engaged in the business of trading and sale of
fertilizers. The company has extended loan of Rs 2.5 million to one of its
shareholders on 30 June 2014 when the accumulated profits of the company
were Rs 1.8 million. Determine the amount to be treated as dividend.
(b) Robin Petroleum International (RPI), a company incorporated in Netherlands,

is operating in Pakistan as a branch. RPI has entered into an agreement with the
Government of Pakistan under which RPI has been given the right to explore and
produce crude oil and natural gas in specified areas of Sindh and Balochistan.
Required:
Explain the tax implications on RPI’s branch in Pakistan of the remittance of the
after tax profits of the branch to its head office in the Netherlands.
Answer
(a) The amount of loan to the extent of accumulated profits will be treated as Rs.
1,800,000 [Ref: Sec 2(19)(e)
(b) Remittance of after tax profit of a branch of a foreign company operating in

Pakistan is considered as Dividend as per section 2(19)(f) of the Income Tax
Ordinance, 2001.
However remittance of after tax profit by a branch of Petroleum Exploration and
Production (E&P) foreign company operating in Pakistan is excluded from the
definition of dividend.
The Pakistan branch of RPI is a branch of an E&P foreign company operating in
Pakistan. Therefore the remittance of the after tax profits of RPI’s branch in
Pakistan would not be considered to be dividend income.
Royalty and Fee for technical services of non-residents

 Concept and taxation of royalty and fee for technical services in the hands of
non-residents are governed by section 2(23),2(54),6, 8 and 152 of the

Definition: Sec 2(54) Royalty

Means consideration paid or payable, whether lump sum or periodically, for
(i) the use of, or right to use any patent, invention, design or model, secret
formula or process, trade mark or other like property or right.
(ii) 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 with radio broadcasting, other than sale,
distribution or exhibition of cinematograph films.
(iii) 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
(iv) the supply of any technical, industrial, commercial or scientific
knowledge, experience or skill;
(v) the use of or right to use any industrial, commercial or scientific
equipment
(vi) the supply of any assistance that is ancillary and subsidiary to and is
furnished as a means of enabling the application or enjoyment of, any
such property or right as mentioned above. and
(vii) the disposal of any property or right referred above
Definition: Sec 2(23) Fee for technical services

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 does not include:
(i) Consideration for services rendered in relation to a construction, assembly,
or like project undertaken by the recipient; or
(ii) Consideration which would be the income of the recipient chargeable
under the head salary
 Pakistan source royalty or fee for technical services received by a non-resident

person is subject to final tax @ 15% of the gross receipts.
 The above provision shall not apply to
(i) Any royalty where the property or right giving rise to the royalty is
effectively connected with a permanent establishment in Pakistan of the
non-resident person.
(ii) Any fee for technical services where the services giving rise to the fee are
rendered through a permanent establishment in Pakistan of the non-
resident person.
(iii) Any royalty or fee for technical services which is exempt from tax under
the Income Tax Ordinance, 2001
 Any Pakistani-source royalty or fee for technical services received by a non-
resident person to which this section does not apply shall be treated as income
from business attributable to the permanent establishment in Pakistan of the
person.
Note: Taxation of royalty/fee for technical services in respect of permanent
establishment is not explained as it is out of syllabus of this paper.

7.3 Final tax regime (Goss income basis)

 Income subject to final tax are those which are subject to collection or
deduction of tax at source and the tax so collected or deducted at source is
treated as final tax on the income arising from such transactions.
 The tax collected or deducted on such transactions is commonly known as
non-adjustable tax collected or deducted at source. The taxation of income
subject to final tax is governed by Section 169 of the Income Tax Ordinance,
2001.
 All transactions subject to collection or deduction of tax at source do not fall
under income subject to final tax. Different set of rules apply for each nature of
income
 Where the tax collected or deducted at source is not treated as final tax the
income arising from such transactions is chargeable to tax under the
respective heads of income (Salary, Property, Business, Capital Gains or
Other Sources) and forms part of the taxable income. The tax collected or
deducted on such transactions is commonly known as adjustable tax collected
or deducted at source.
 Following rules apply to the income subject to final tax:
(i). Such income is not chargeable to tax under any head of income in
computing the taxable income;
(ii). No deduction is allowed for any expenditure incurred in deriving the
income
(iii).The amount of the income is not reduced by
(a). Any deductible allowance; or
(b). The set off of any loss
(iv). The tax deducted is not reduced by any tax credit
(v). There is no refund of the non-adjustable tax collected or deducted at
source unless such tax is in excess of the amount of final tax for which
the taxpayer is chargeable and
(vi). An assessment is treated to have been made and the person is not
required to furnish a return of income in respect such income.
 Various incomes which are treated as final tax liability of the person under the
Income Tax Ordinance,2001 are:
(i) Profit on debt u/s 151 except in case of company
(ii) Execution of contract by non-resident u/s 152 subject to exercising the
option
(iii) Sale of goods by individual, AOP and trading companies under section
153
(iv) Services of stitching, dying, printing, washing, sizing and weaving u/s 153
(v) Media services by non-resident u/s 153A
(vi) Exports u/s 154
(vii) Prizes and winnings under section 156
(viii) Commercial importer under section 148(7)

(ix) Person selling petroleum products to petrol pump operator under section
156A
(x) CNG stations under section 234A
(xi) Commission and brokerage under section 233
7.4 Minimum tax regime

 Certain types of incomes are subject to minimum tax under the Income Tax
Ordinance,2001 to assure that certain portion of tax is paid by the taxpayer
irrespective of quantum of income.
 Various incomes which are treated as minimum tax under the Income Tax
Ordinance,2001 are:
(i). Minimum tax under section 113 on turnover
(ii). Minimum tax on builders under section 113A
(iii). Minimum tax on land developers under section 113B
(iv). Tax collected at import stage on import of edible oil and packing
material under section 148(8))
(v). Tax deduction at source @ 10% from gross amount of service
rendered under section 153 for all persons other than a company.
(vi). Tax collected upto the electricity bill amount of Rs.30,000 per month
for a person other than company under section 235

8 INCOME TAX AUTHORITIES

Section overview
 Income tax authorities
The income tax law provides a complete organisational set up for levy and recovery of
income tax which are described in section 207 as under:
(a) Federal Board of Revenue;
(b) Chief Commissioner Inland Revenue;
(c) Commissioner Inland Revenue;
(d) Commissioner Inland Revenue (Appeals);
(e) Officer of Inland Revenue i.e.
(i). Additional Commissioner Inland Revenue;
(ii). Deputy Commissioner Inland Revenue;
(iii). Assistant Commissioner Inland Revenue;
(iv). Inland Revenue Officer;
(v). Inland Revenue Audit Officer or any other Officer;
(h) Superintendent Inland Revenue;
(i) Inspector Inland Revenue; and
(j) Auditor Inland Revenue.
Scope of each Income Tax Authority is not explained as it is out of syllabus of this
paper.

9 COMMON RULES
Section overview
 Income of joint owners (covered in detail in chapter 06)

 Apportionment of deductions
 Fair market value
 Receipt of income
 Recouped expenditure
 Currency conversion
 Cessation of source of income
 Rules to prevent double derivation and double deductions
In addition to foregoing basic concepts, understanding of common rules is necessary

for determination and computation of taxable income and tax liability.
9.1 Apportionment of deductions (S67)

 This concept implies that an expenditure which relates to the following, shall
be apportioned on any reasonable basis taking into account the relative
nature and size of the activities to which the amount relates:
(i) the derivation of more than one head of income; or
(ii) derivation of taxable income and any class of income subject to Final Tax
Regime.
Rules for apportionment of common expenditures (Rule 13)
 Common expenditure means any expenditure that is not clearly allocable to
any particular class or classes of incomes. Rules regarding apportionment of
such expenses are given as follows:
 Any expenditure that is incurred for particular class of income shall be
allocated/apportioned to that class only.
 Any common expenditure (including financial expenses) shall be apportioned
amongst each class of income according to the following formula:
 Amount of expense x Gross receipts for the class of income
Gross receipts for all class of income
Note: Gross receipts means all receipts without deduction of expenditures.
 While allocating common expenditure (particularly selling expenses) the nature
and source of each class of income must be taken into account.
 The basis determined for allocation of expenditure should be certified by a
Chartered Accountant or a Cost and Management Accountant. This certificate
shall be accepted by CIR unless there is significant variations (10% + beyond
the limits) from allocation under the rules.
 Where in case of certain transaction the net gain, brokerage, commission and
other income is taken as turnover, then the gross profit from business shall be
taken as gross receipts for the purpose of apportionment of expenditures.
 For the purpose of these rules a person may have following classes of
incomes:

Pakistan source incomes as well as Foreign source income further

classified as:
(i) Income from property
(ii) Income from business- Non speculation
(iii) Income from business-speculation
(iv) Capital gains
(v) Income from other source
(vi) Income chargeable to tax as separate block
(vii) Income exempt from tax e.g. agriculture income
(viii) Income chargeable to tax under final tax regime.
(iii) the derivation of income chargeable to tax under any head of income and
to some other purpose
9.2 Fair market value (S68)

1) Fair market value (FMV) of any property, or rent, asset, service, benefit or
perquisite at a particular time shall be the price which the property, or rent,
asset, service, benefit or perquisite would ordinarily fetch on sale or supply
in the open market at that time.
2) The fair market value of any property, or rent, asset, service, benefit or
perquisite shall be determined without having regard to any restriction on
transfer or to the fact that it is not otherwise convertible to cash.
3) Where the price referred above is not ordinarily ascertainable, such price
may be determined by the Commissioner.
Exercise:
XYZ purchased a second hand car from M/s ABC Ltd, an associated company. The
cost of that car is Rs.500,000 in the books of ABC Ltd whereas written down
value of the said car is Rs.350,000. One of the car dealers told the company that
the value of the said car in the market is Rs.250,000. Both companies are
interested to know that what would be the fair market value of that car.
Answer
Fair market value of the said car is Rs.250,000.
9.3 Receipt of income (S69)

Method for recognition of receipt of income is elaborated in section 69 of the
Ordinance in the following way:
S69. Receipt of income
A person shall be treated as having received an amount, benefit, or perquisite if it
is:
i. actually received by the person;
ii. applied on behalf of the person, at the instruction of the person or under
any law; or

iii. made available to the person.
Exercise:
Mr. Bashir, an employee of M/s.Honda Atlas Motors Limited visited different
clients for recovery of its bills and he received following response:
a) M/s. Honda Forts Ltd one of the clients paid him a sum of Rs.96,500 after
deducting a tax of Rs.3,500.
b) Modern Motors has stated that it already paid a sum of Rs.35,000 being the
bills of M/s Honda Atlas to M/s Sarhad Motors at the instructions of M/s
Honda Atlas.
c) City Flyers (Pvt) Limited has adjusted a sum of Rs.55,000 against the
travelling tickets purchased byM/s Honda Atlas Motors Limited from their
office and paid the balance amount of Rs 45,000.
d) Hameed Sons said that they recorded their sum payable in its financial
records, however, its settlement will be made in due course.
M/s. Honda Atlas Motors Limited is interested to know the amount of receipts
which are liable to be added to the taxable income.
Answer
M/s HONDA ATLAS MOTORS LIMITED
Name of client Receipts to be Remarks
included in income
Honda Forts limited 100,000 Sum actually received
Modern Motors 35,000 Paid on the instructions of
the person
City Flyers (Private) Ltd 100,000 Sum actually received Rs
45,000 and sum of
Rs.55,000 applied on
behalf of the recipient
Hameed sons 0 No sum received
Total 235,000
9.4 Recouped expenditure (S70)

Any amount received subsequently in respect of deduction previously allowed as
deduction will be added in the income in the year of receipt, as provided in
section 70 below::
S70. Recouped expenditure
Where a person has been allowed a deduction for any expenditure or loss
incurred in a tax year in the computation of the person’s income chargeable to
tax under a head of income and, subsequently, the person has received, in cash
or in kind, any amount in respect of such expenditure or loss, the amount so
received shall be included in the income chargeable under that head for the tax
year in which it is received.

Exercise:
M/s ABC claimed deduction of following finance charges against the income of
preceding years:
Year Amount of finance charges
200W 150,000
200X 75,000
200Y 85,000
The aforesaid mark-up remained payable to the bank and could not be paid due
to adverse liquidity position of ABC. On 15 May 200Z, the bank agreed to waive
off mark up to the extent of Rs.250,000 under a rescheduling agreement. M/s
ABC interested to know that what is the tax exposure on such waiver of mark up
and in case said amount is taxable then how the said sum is added to preceding
years income.
Answer
The aforesaid amount of Rs 250,000 is taxable in the hands of ABC in the year of
Waiver i.e. tax year 200Z and it will not be included in the preceding years.
9.5 Currency conversion (S71)

Every amount taken into account under the Income Tax Ordinance, 2001 shall be
in Rupees.
If an amount is in a currency other than rupees, the amount shall be converted to
the rupee at the State Bank of Pakistan rate applying between the foreign
currency and the Rupee on the date the amount is taken into account for the
purposes of the Income Tax Ordinance, 2001.
Exercise:
Mr. XYZ received a sum of US Dollars 500 from his client on 14 April 200X and he
paid a sum of Euro 250 for expenses incurred in respect of the said assignment
on 15 April 200X. The exchange rate prescribed by the State bank of Pakistan on
the dates of transactions are as under:
Date Currency Dollar/ Euro Pak Rs. Conversion
14 April, 200X Dollar 1 Rs. 90/Dollar
15 April, 200X Euro 1 Rs. 125/Euro
Answer
MR. XYZ
COMPUTATION OF TAXABLE INCOME
TAX YEAR 200X
Description Amount
Receipt $ 500 x Rs.90/Dollar Rs.45,000
Expenses Euro 250 x Rs.125/Euro Rs.31,250
Income Rs.13,750

9.6 Cessation of source of income (S72)

 This section applies where any income is derived by a person in a tax year
from any business, activity, investment or other source that has ceased either
before the commencement of the year or during the year.
 In such a case the income derived before the business, activity, investment or
other source ceased, shall be chargeable to tax .as if the source of such
income had not ceased.
Exercise: Explain the tax treatment in respect of the following:

On 21 March 2008, there was a fire in the shop of Mr. Imran and the entire stock

of honey valued at Rs.100,000 (at cost) was destroyed. Imran’s insurance
company refused to entertain the claim for Rs.100,000 for the loss of the stock-
in-trade. Imran ceased doing business as and from 30 June 2008. In the return of
income furnished for the tax year 2008, Imran claimed the Rs.100,000 as a
deductible business loss in computing his income under the head ‘Income from
business’. The loss was allowed as a deductible charge in that tax year. During the
tax year 2013, the insurance company, on receiving a legal notice from imran,
made a payment of Rs.75,000 against the claim for the loss of stock-in-trade
which Imran accepted in full settlement.
Answer
Law specifically provides that if there is any income that has been derived by a
person in a tax year from a business, activity, investment or other source that has
either ceased before the commencement of that year or during the year and if
that income would have been taxable had there been no
cessation,then the provision of the tax statute would apply as if there was no cess
ation (Ref: Sec 72)
In other words section 72 deems the business, activity, investment or other source
to have been carried on by the person in the tax year in which the income was
derived despite the cessation of the business activity, investment or other source.
The above amount shall be offered for tax in the return under the head “Income
from business”
9.7 Rules to prevent double derivation and double deductions (S73)

 If any amount is chargeable to tax on the basis that it is receivable, the
amount shall not be chargeable again on the basis that it is received.
 If any amount is chargeable to tax on the basis that it is received, the amount
shall not be chargeable again on the basis that it is receivable.
 If any expenditure is allowable as deduction on the basis that it is payable, the
expenditure shall not be allowed as deduction again on the basis that it is
paid.
 If any expenditure is allowable as deduction on the basis that it is paid, the
expenditure shall not be allowed as deduction again on the basis that it is
payable.

10 CHAPTER REVIEW
Chapter review
 What is taxable income and total income?
 What is income and what are various Heads of Income?
 Who is person?
 Who is taxpayer?
 What are the provision relating to determination of residential status of a
person?
 What is meant by tax year, normal tax year, special tax year and transitional
tax year?
 What are tax rates for different types person?
 What are different types of tax regimes?
 What are various common rules?

5
CHAPTER
Income from salary
Contents
1 Salary and its components
2 Determination / valuation of perquisites
3 Determination / computation of other components of
salary income
4 Employee share scheme
5 Computation of income chargeable under the head
‘salary’
6 Chapter review

INTRODUCTION
Salary income primarily emerges from rendering of services by an individual for an employer
under employment arrangements. It plays a vital role in understanding the law relating to
taxation of individuals.
Learning out comes.
Concepts
LO 4.1.1 Describe the definitions given in section 2 sub-section 21 and 22
LO 4.2.1 Explain the chargeability of tax with simple examples
LO 4.3.1 Compute taxable income and tax thereon relating to salary

Chapter 5: Income from salary
1 SALARY
Section overview
 Definition of salary
 Basis of chargeability
 Deductions allowed
 Termination of employment
 Relief where salary is received in arrear
 Tax free salary to employee
 Amount or perquisite when treated received
1.1 Definition and scope of salary

 Salary means any amount received by an employee from any employment,
whether of a revenue or capital nature, and includes:
(i). any pay, wages or other remuneration including leave pay, overtime,
bonus, commission, fees, gratuity, work condition supplements (such
as for the un pleasant or dangerous working conditions):
(ii). any perquisite whether convertible into money or not;
(iii). any allowance provided to employee including cost of living, rent,
utilities, education, entertainment, traveling etc. excluding allowance
solely expended in the performance of duties of employment;
(iv). any personal expenditure reimbursed by employer other than
expenditure incurred solely in the performance of duties of
employment
(v). Profits in lieu of , or in addition to, salary including:
a) consideration received for entering into an employment agreement
or for agreement to any condition of employment or changes to the
employment conditions or to a restrictive covenant to any past,
present or future employment.
b) amount received on the termination of employment, including
golden handshake payments.
c) amount received from provident fund except for a contribution
made by the employee in respect of which the employee was not
entitled to a deduction.
(vi). any pension or annuity or any supplement to a pension or annuity
received / receivable from employer;
(vii). any amount of gain earned under “Employee Share Scheme”;
(viii). amount of tax chargeable on employee’s salary and borne by
employer.
The term employee is defined in section 2(20) of the Income Tax Ordinance,
2001 in the following manner:

Definition: Employee
 “Employee” means any individual engaged in employment.
The term employer is defined in section 2(21) of the Income Tax Ordinance, 2001
in the following manner:
Definition: Employer
 “Employer” means any person who engages and remunerates an employee
Section 2(21) of the Income Tax Ordinance, 2001
The term employment is defined in section 2(22) of the Income Tax Ordinance,
2001 in the following manner:
Definition: Employment
Employment includes:
 a directorship or any other office involved in the management of a company;
 a position entitling the holder to a fixed or ascertainable remuneration; or
 the holding or acting in any public office;
 An employee’s salary income, wherever received is taxed in Pakistan to the

extent it relates to employment exercised in Pakistan. However salary
received by Pakistan Government employee is taxable in Pakistan whether
employment is exercised in Pakistan or abroad.
1.2 Basis of chargeability

Taxable on receipt basis (Section 12(1))
 Salary is taxable on receipt basis i.e. any salary received by an employee in a
tax year shall be chargeable to tax.
 A person shall be treated as having received an amount, benefit, or perquisite
if it is
(i). actually received by the person
(ii). applied on behalf of the person, at the instruction of the person or under
any law
(iii). made available to the person.
Exercise
Mr. Bilal, a citizen of Pakistan, is working with PMX (Pvt.) Limited as their head
of treasury for the last 15 years. He has provided you with the following
information for the year ended June 30, 2014.
(i). His salary was Rs. 300,000 per month (inclusive of all allowances) till June
30, 2013, which was increased to Rs. 400,000 per month effective from 01
July 2013.
(ii). Salary and allowances are deposited into each employee’s bank account
on the 8th working day of the following month.

(iii).On 31 December 2013, Bilal opted for early retirement and final settlement
was also made on that date..
Required:
Compute Mr. Bilal’s taxable income for the tax year 2014.
Answer
Mr. BILAL
INCOME YEAR ENDED ON 30-06-2014
TAX YEAR 2014
Salary for month of June received on 08 July 300,000
Six months salary from July 2013 to December 2013 (400x6) 2,400,000
Total taxable salary 2,700,000
Note:
Salary is taxed on receipt basis. As salary is transferred on the 8th working day
following the end of the month, salary for the month of June 2013 will be taxable
in the tax year 2014.
1.3 Deductions not allowed (Section 12(4))

In computing the income under the head salary, no deduction shall be allowed for
expenses incurred by the employee in earning such income.
1.4 Termination of employment (Section 12(6))

 If an employee has received compensation on the termination of
employment, the employee may, by notice to Commissioner, elect for the
amount to be taxed at the rate computed as:
Total Tax paid or payable for three preceding years
 100
Total taxable income for three preceding years
 The option should be exercised by the due date of furnishing return of income
Exercise:
MFD Ltd paid a sum of Rs. 500,000 under the Golden Hand shake scheme to
Mr X in addition to the taxable salary of Rs. 1,600,000 in the tax year 200Z. The
past three years assessed tax results of his assessment are as under:
Tax year Taxable Income Tax Liability (Say)
20Y 1,450,000 159,500
20X 1,200,000 120,000
20W 800,000 60,000
Total 3,450,000 339,500
Mr. X is interested to know that what are the different options available to him
for taxation of Golden Hand shake scheme for the tax year 20Z.

Answer
Taxation under Normal Manner:
Particulars Amount is Rs
Taxable Salary Rs. 1,600,000
Sum received under Golden Hand shake Scheme Rs. 500,000
Taxable Income Rs. 2,100,000
Total Tax liability of Rs 2,100,000 [Rs.140,000 + 17.5% of Rs. 192,500
amount above Rs. 1,800,000]
Taxation under section 12(6)
Particulars Amount
Taxable income as computed aforesaid 1,600,000
Tax on salary [Rs.95,000 + Rs.100,000x 15%] 110,000
Tax On Rs. 500,000 x 339,500/3,450,000 49,203
Total Tax 159,203
Note: The taxation under Option II is lower than option I, therefore, it is better to
exercise this option under section 12(6) of the Income Tax Ordinance, 2001
1.5 Relief where salary is received in arrears (Section 12(7)(8))

 In case of receipt of amount under salary which is paid in arrears and is
expected to be charged at rate higher than the rate which would have been
charged if the amount was received in its relevant tax year, the employee may
by a notice to the Commissioner elect for tax rate applicable in the tax year in
which such salary was earned.
 The above option shall be exercised by the due date for furnishing employee’s
return of income for the tax year in which the amount was received or such
later date as may be extended by the Commissioner.
1.6 Tax free salary to employee (Section 12(3))

 Where an employer agrees to pay the tax chargeable on an employee‘s
salary, then the amount so paid shall be treated as an additional benefit to the
employee. The salary income of the employee shall be grossed up by the
amount of tax payable by the employer.
Exercise
The employer of Mr. Usman has undertaken to pay the amount of tax on his
salary income of Rs. 2,000,000. Compute tax liability of Mr. Usman for the year.
For the sake of simplicity assume that he is liable to pay tax @ 15% of his taxable
income instead of rate mentioned in the first schedule.
Answer
Salary income 2,000,000
Add tax paid by employer (2,000,000 x 15%) 300,000
Taxable salary 2,300,000
Tax liability for the year @ 15% 345,000
Less tax already paid by employer on Usman’s behalf 300,000
Net tax payable 45,000

In the above example employee is still paying tax of Rs. 45,000. The question
that arises is that whether the extra tax of Rs. 45,000 is recoverable by the
employee from the employer.
It will be a question of fact in each case to determine whether the extra tax, being
the difference of the tax paid by the employer and that calculated on the gross
salary, is recovered or recoverable by the employee from his employer. If it is not
so recoverable, the matter is simple, as the gross income of the employee in that
case will consist of the salary plus the amount paid by the employer as tax, and
will be assessed in the hands of the employee, the extra tax, if any being borne
by the employee himself. (As illustrated in the above exercise).
But if the extra tax is recoverable from the employer the gross salary and the rate
applicable have to be worked out by making addition in two or three or four steps.
This is illustrated in the following exercise:
Illustration:
Particulars Gross taxable Tax Difference

Income
Salary Taxable Income 1,550,000
Tax on the Income 102,500 102,500
[Rs. 95,000+Rs.50,000 x15%]
Salary income after addition u/s 1,652,500
12(3) in income due to payment of
tax of Rs 102,500 by the employer
Tax on the Revised income after 117,875 15,375
including effect of tax @[Rs.95,000 [95,000
+ 15% of amount exceeding +22,875]
Rs.1,500,000]
Salary income after addition u/s 1,667,875
12(3) in income due to payment of
tax of Rs 15,375 by the employer
Tax on the Revised income after 120,181 2,306
including effect of tax @[Rs.95,000 [95,000
+ 15% of amount exceeding +25,181]
Rs.1,500,000]
In the above illustration, tax is being added to the taxable income in 2 steps. Ideal
solution is to keep on adding the differential tax amount until it becomes zero.
1.7 Amount or Perquisite when treated received [Section 12(5)]

An amount or perquisite shall be treated as received by an employee from any
employment regardless of whether the amount or perquisite is paid or provided:
(i). By the employee’s employer, an associate of the employer, or by a third
party under an arrangement with the employer or an associate of the
employer;
(ii). By a past employer or a prospective employer; or
(iii).To the employee or to an associate of the employee or to a third party
under an agreement with the employee or an associate of the employee.

2 DETERMINATION/COMPUTATION OF VALUE OF PERQUISITES

Section overview
 Introduction to valuation of perquisites
 Conveyance
 Accommodation
 Utilities and services of domestic servant
 Interest free / concessional loan
 Obligation waiver / settlement
 Self-hiring of property
 Transfer of property or provision of services to employees
 Any other perquisite
2.1 Introduction to valuation of perquisites

The term ‘perquisites’ refers to the .non-cash benefits’ provided by an employer
to an employee.
Section 13 of the Ordinance contains provisions relating to determination of value
of perquisites. The said provisions describe the methods for determination of
value of perquisites in the following manner:
2.2 Conveyance
In case where motor vehicle is provided by an employer to an employee
(including director), the amount chargeable to tax under the head salary shall be
determined as follows:
Partly for personal If owned: 5% of the cost of vehicle to the employer; or
and official use
If leased: 5% of fair market value (FMV) of motor
vehicle at the commencement of lease
For personal use If owned: 10% of the cost of vehicle to the employer; or
only
If leased: 10% of FMV of motor vehicle at the
commencement of lease
For office use only No addition
2.3 Accommodation
If accommodation or housing is provided by an employer to an employee, the
amount chargeable to tax under the head salary shall include higher of the
following:
 Amount that would have been paid in case if such accommodation was not
provided; and
 45% of the minimum of time scale (MTS) of the basic salary or the basic
salary if there is no MTS.
Minimum of time scale is the amount from where the salary scale of a particular
employee starts e.g. (4,900-800-8,500) means salary of the employee starts with
Rs. 4,900 with increment of Rs. 800 per annum etc. subject to maximum
increased salary upto Rs. 8,500.

Exercise:
Case No I
(1) Minimum time scale 25,000-2,500-45,000
(2) Basic salary 40,000 pm
(3) Bonus 10,000 pa
Free accommodation whose rental value is Rs 100,000
Determine taxable Income
Solution
Value under rule 4= 135,000 [i.e. 25,000 x 12 (= 300,000 x 45%)] or Rs 100,000
whichever is higher.
His taxable income will be:
Basic salary 480,000
Bonus 10,000
Addition under rule 4 135,000
Taxable income 625,000
Case No 2
(i) Basic Salary 60,000 pm
(ii) Accommodation[annual rental value Rs 120,000]
(iii) Bonus 20,000 pa
(iv) Dearness allowance 10,000 pm
Determine taxable income
Solution
Value of perquisite under Rule 4 =
Rs 324,000 [i.e. 60,000 x12 = 720,000 x 45%]
Total income chargeable under section 12
Addition under Rule 4 [higher of Rs.120,000 or Rs.324,000] 324,000
Bonus 20,000
Dearness allowance 120,000
Total 1,184,000
Case No 3
Mr X, an employee of ABC Ltd. was residing in a rented house at monthly rent of
Rs. 20,000/-. On 1st July 20X1 his employer agreed to pay Rs.15,000/- for his
rent and converted it into an accommodation. All his other emoluments
remained same which are as under:
Basic salary 360,000 pa
Bonus 30,000 pa
Conveyance allowance 3,600 pa
What will be his taxable salary
Solution
Value of accommodation
[Rs.360,000 x 45% = 162,000 or Rs 180,000 whichever is higher]
His taxable salary would be as under
Bonus 30,000
Value of accommodation 180,000
Conveyance allowance 3,600
________
Taxable salary 573,600

2.4 Utilities and services of domestic servants (Section 13(5) (6))

Utilities
Definition: Utilities
“Utilities” includes electricity, gas, water and telephone.
Section 13(14) (c) of the Income Tax Ordinance, 2001
The amount chargeable to tax under the head salary shall include the FMV of
utilities as reduced by any payment made to the employer for such utilities.
Domestic servants
In case services of housekeeper, gardener, driver, or other domestic assistant is
provided by an employer to the employee, the amount chargeable to tax under
the head salary shall include the amount of total salary paid to housekeeper,
gardener, driver, or other domestic assistant as reduced by any payment made
by the employee to the employer for such services.
2.5 Interest Free / Concessional Loan (Section 13(7) (8) (14))

 Where a loan is given to an employee after 1.7.2002 (i.e. tax year 2003), then
the amount to be included in salary income of the employee in the following
manner:
 If no interest is payable by the employee - the amount of interest
computed at the benchmark rate,
 If interest is payable at less than benchmark rate - the interest amount
computed at the benchmark rate less the actual amount of interest paid
by the employee,
 The above provision shall not apply
 Where such benefit is extended by the employer due to waiver of interest
by such employee on his accounts maintained with the employer e.g.
Provident Fund etc.
 Loans of Rupees five hundred thousand or less.
 Benchmark rate for tax year 2003 is 5% and increased by 1% for each
successive year but not exceeding 10% per annum for any tax year. Hence for
tax year 2015 onwards, benchmark rate is 10%
 Where an amount has been include in salary of an employee in connection
with above loan, and the employee uses the loan wholly or partly for acquiring
any asset or property producing income chargeable to tax under any head of
income, the amount of interest on such loan shall be allowed as deduction
against income from such asset. In this regard, an amount equal to
benchmark rate shall be allowed as deduction. However, where interest
charged by the employer is higher than the benchmark rate, the whole amount
paid by the employee shall be allowed as deduction.
 Similarly, where an amount has been include in salary of an employee in
connection with above loan, and the employee uses the loan for construction
of a new house or acquisition of a house, the amount of interest on such loan
shall entitle the employee to claim a tax credit under section 64 of the Income
Tax Ordinance, 2001. (Discussed in detail in chapter11)

Exercise
Mr A is granted a loan of Rs. 1,000,000 by his employer ABC Ltd on 1 July 201X.
The loan is subject to interest rate of 2% per annum. Compute the amount of
perquisite relevant to the interest for the tax year 201Y.
Answer
Interest chargeable at Benchmark Rate 1,000,000 x 10% 100,000
Interest charged to the loan by ABC Ltd 1,000,000 x 2% 20,000
Balance perquisite to be added in the income of Mr. A 80,000
(100,000 – 20,000)
2.6 Obligations waiver / settlement

Section 13(9) and 13(10) state that
 Any obligation waived of which an employee owed to the employer shall be
included in the salary income of the employee, equal to the amount waived.
 Any repayment by the employer to another person on account of an obligation
of the employee shall be included in the salary income of the employee equal
to the amount repaid.
2.7 Self hiring of property [Section 15(5)]

 Where an employee or his spouse is the owner of any such building that is
given on rent to the employer and the employer has provided the same
building to the employee against his entitlement for a rent free
accommodation, then it will have following effect
 Receipt of rent of building is chargeable to tax under the head income
from property. Any rent received by the employee or his spouse shall be
property income of the recipient and be treated accordingly. (Chapter 6)
 The building is provided by the employer to his employee as a rent free
accommodation. It will be a perquisite and added in the salary income of
the employee as per the rule stated in paragraph 2.3 above.
Exercise
An employer owns a residential house and has provided the same to one of its
employees for no rent. Explain the tax implications in respect of this transaction.
Answer
The fair market rent or 45% of basic salary whichever is higher will be added to
employee’s taxable salary. The employer will not be considered to have earned
any rental income from this property and accordingly there will be no tax
consequences for him. [Ref: S 15(5) and Rule 4]

2.8 Transfer of property or provision of services to employees (Sec 13(11))

If any property is transferred or any services are rendered by an employer to an
employee, the amount chargeable to tax to the employee under the head salary
for that year shall include the fair market value of the property or services
determined at the time the property is transferred or the services are provided,
less any payment made by the employee for the property or services.
2.9 Any other perquisite (Sec 13(13))

 The amount calculated as below shall be included in the income of the
employee;
Fair market value of the perquisite xxx
Less: Payment made by the employee if any xxx
Amount to be included in salary income xxx

3 DETERMINATION/COMPUTATION OF OTHER COMPONENTS OF

SALARY
Section overview
 Retirement benefit schemes
 Gratuity
 Pension
 Provident fund
 Annuities
 Superannuation fund
 Benevolent fund
 Other benefits
 Reduction in tax liability- Part II of the Second Schedule
 Salary earned outside Pakistan by citizen of Pakistan
 Foreign source salary
3.1 Retirement benefits schemes

Retirement benefits generally include payments on account of gratuity, provident
fund and pension. In some cases employees are encouraged to retire voluntarily
and are offered payments under the Golden handshake schemes.
Gratuity
 Gratuity received from approved gratuity fund is fully exempt. Gratuity
received from approved scheme and unapproved fund or scheme is exempt
upto the following limits:
Gratuity type Tax treatment
Government employees Fully exempt
Gratuity Fund approved by the Fully exempt
Commissioner
Gratuity Scheme approved by the Exempt upto Rs. 200,000
Board
 Unapproved gratuity scheme/fund Exempt upto 75,000 or 50% of the
amount receivable whichever is lower
 Exemption in respect of unapproved gratuity shall not apply in the following

cases:
(i). Any payment not received in Pakistan
(ii). Any payment received by a director of a company who is not a regular
employee of such company
(iii). Any payment received by a non-resident
(iv). Any gratuity received by an employee who has already received any
gratuity from the same or other employer.

Pension
 Pension received by the citizen of Pakistan from the former employee shall be
exempt from tax except where the person continues to work for the same
employer or an associate of the employer. Where a person receives more
than one pension, the exemption shall apply to higher of such pensions.
 For a person over 60 years of age, all such pensions are exempt irrespective
of the above mentioned conditions (Circular 28 of 1991)
 Pension received in respect of services rendered by a member of Armed
Forces of Pakistan or Federal Government or a Provincial Government is
exempt from tax.
Provident fund
Provident fund is categorized into the following three categories:
(i). Government provident fund
(ii). Recognized provident fund
(iii).Unrecognized provident fund
Provisions regarding taxability in respect of employer/employee contribution,

interest credited and accumulated balance thereon is as follows:
Event Government Recognized PF Unrecognized PF
PF
Employee’s No treatment No treatment No treatment
Contribution
Employer’s Exempt Limit on employer’s yearly No treatment
Contribution contribution is Rs.100,000
or 1/10th of (basic salary +
dearness allowance)
whichever is lower
Interest Exempt Yearly interest is exempt No treatment
credited upto lower of:
during the
 16% interest rate on
year
accumulated balance;
or
 1/3rd of (basics salary
+ dearness allowance).
Payment of Exempt Exempt Totally exempt if
accumulate the fund is formed
d balances under the
Provident Fund
Act, 1925.
Otherwise, only
the employer’s
contribution and
interest thereon is
taxable in the year
of receipt.

 Salary for the purpose of provident fund includes basic salary + dearness
allowance. All other allowances are excluded.
 There is no treatment of employee contribution as the amount is paid from
salary and employer has already deducted tax on gross amount of salary.
Exercise:
Mr Asad and Mr Alamgir are close friends and working in two reputed companies.
During the year, the detail of their income is as under:
Particulars Mr Asad Mr Alamgir
Salary 240,000 320,000
Recognised Provident Fund Contribution 35,000 36,000
by The Employer
Interest Credited to P Fund 100,000 45,000
Interest rate for the income credited to the Provident Fund is 16% in case of Mr.
Asad and 20% in case of Mr Alamgir. Mr Asad is expecting his retirement in 2015
whereas Mr Alamgiris expecting his retirement in 2016.
Compute the taxable income of the employees for the year 2014
Answer
Computation of Taxable Income
Particulars Mr Asad Mr Alamgir
Salary 240,000 320,000
Provident Fund Contribution By The Employer
[35,000 – 24,000 (i.e. 240,000 x 10% ) 11,000
[36,000 – 32,000 (i.e. 320,000 x 10% ) 4,000
Interest Credited to P Fund [35,000 – lower of - -
of Rs.100,000or Rs. 80,000 (i.e. 240,000 x1/3)
and in case of Mr Alamgir [45,000 – lower of
Rs.36,000 (i.e. 45,000/20% x 16%) or Rs.
106,667 (i.e. 320,000 x 1/3)]
Taxable income 251,000 324,000
 Provident Fund Contribution exceeding one tenth of the salary is taxable.
 Interest credited is exempt upto 16% interest rate on accumulated balance or
1/3rd of salary (basic salary + dearness allowance) whichever is lower.
Annuities
Annuities or any supplement to annuity are taxable as salary even it is paid
voluntarily without any contractual obligation of the present or ex-employer. All
the annuities are taxable in the normal manner except for the specifically
exempted annuities. It is worth mentioning that clause No. (20) Part I Second
Schedule to the Ordinance specifies the annuities which are exempt from levy of
tax. The said clauses state that:

Any income received by a person from an annuity issued under the Pakistan
Postal Annuity Certificate Scheme on or after the 27th July, 1977, not exceeding
ten thousand rupees per annum.
Another aspect of the annuities is discussed in section 63 of the Ordinance
wherein tax credit has been allowed on the contribution or premium paid on a
contract of annuities. The said tax credit is discussed in detail in the chapter 11 of
this study text.
Superannuation fund
Definition: Approved superannuation fund

Means a superannuation fund, or any part of the superannuation fund approved
by the Commissioner in accordance with Part II of the Sixth Schedule.
Section 2(4) of the Income Tax Ordinance, 2001
The tax treatment of any contribution to and from the approved superannuation
fund is as under:
 Employer’s contribution is exempt from tax.
 Interest on accumulated balance is exempt from tax.
 Payment from an approved superannuation fund on death of a beneficiary
or in lieu of or in commutation of any annuity or by way of refund of
contribution on the death of a beneficiary is exempt from tax.(Clause 25
Part I of the Second Schedule)
 Where any contribution made by an employer (including interest) is repaid
to an employee during his life-time in circumstances other than those
referred to in clause 25 of Part I of the Second Schedule, tax on the
amount so repaid shall be deducted by the trustees at the rate applicable
to the year of withdrawal.
Benevolent fund
Any benevolent grant paid from a Benevolent Fund to employees or members of
their families in accordance with the provisions of the Central Employee
Benevolent Fund and Group Insurance Act, 1969 is exempt from tax.(Clause 24
Part I of the Second Schedule)
3.2 Other benefits

Special Allowance (Clause 39 Part I of 2nd Sch.)
Any special allowance or benefit (not being entertainment or conveyance
allowance) or other perquisite within the meaning of section 12 specially granted
to meet expenses wholly and necessarily incurred in the performance of the
duties of an office or employment of profit is exempt from tax.
Certain Perquisites without by virtue of employment: (Clause 53APart I of 2nd Sch.)
The following perquisites received by an employee by virtue of his employment
are exempt from tax.
(i). Free or subsidized food provided by hotels and restaurants to its
employees during duty hours

(ii). Free or subsidized education provided by an educational institution to the

children of employees
(iii).Free or subsidized medical treatment provided by a hospital or clinic to its
employees
(iv). Any other perquisite for which the employer does not have to bear any
marginal cost
Medical allowance and reimbursement (Clause 139 Part I of 2nd Sch.)
 Medical facility or the reimbursement received by an employee is exempt
where such provision or reimbursement is in accordance with the terms of
employment provided that the NTN of the hospital or clinic is provided and
employer also certifies and attests the medical bills.
 Medical allowance is exempt upto 10% of basic salary (The same is fully
taxable if it is provided in addition to the exempt medical facility provided by
the employer, whether availed by the employee or not)
Leave Encashment (Clause 19 Part I of 2nd Sch.)

Any amount received on encashment of leave preparatory to retirement is
exempt, if it is received by a Government employee.
Worker’s Profit Participation Fund (WPPF) (Clause 26Part I of 2nd Sch.)

Amount received from WPPF as worker is fully exempt.
Salary income of Seafarer (Clause 4 Part I of 2nd Sch.)

Salary income shall be exempt if received by:
(i). a Pakistani seafarer, working on Pakistan flag vessels for one hundred
and eighty three days or more during a tax year; or
(ii). a Pakistani seafarer working on a foreign vessel provided that such
income is remitted to Pakistan, not later than two months of the relevant
income year, through normal banking channels.
Allowances etc., to person working outside Pakistan (Clause 5)

Any allowance or perquisite paid or allowed as such outside Pakistan by the
Government to a citizen of Pakistan for rendering service outside Pakistan
Commutation of pension (Clause 12)

Commutation of pension received from government or any pension scheme
approved by the Board

3.3 Reduction in tax liability- Part II of the Second Schedule

Full time teacher or researcher
The tax payable by a full time teacher or a researcher, employed in a non profit
education or research institution duly recognized by Higher Education
Commission, a Board of Education or a University recognized by the Higher
Education Commission, including government training and research institution,
shall be reduced by an amount equal to 40% of tax payable on his income from
salary.
3.4 Salary earned outside Pakistan by citizen of Pakistan (Section 51 (2))

Where a citizen of Pakistan leaves Pakistan during a tax year and remains
abroad during that tax year, any salary income earned by him outside Pakistan
(only during that tax year) shall be exempt from tax.
3.5 Foreign source salary (Section 102)

Foreign source salary received by a resident shall be exempt if the individual has
paid foreign income tax in respect of that salary i.e. the employer has withheld
income tax in respect of foreign source salary and has paid the same to the
revenue authority of that foreign country in which the employment was exercised.
(Section 102)
Exercise
Being a tax consultant, you are required to explain the tax implications/taxable
income under the appropriate head in respect of each of the following
independent situations:
(i). As part of remuneration package, a company provides for reimbursement of
telephone costs on actual basis to its employees.
(ii). Actual expenditure incurred by an employee in relation to travelling and daily
allowances is less than the amount of allowances paid by the employer.
(iii). Mr. Hamid, a citizen of Pakistan was working with Zee (Pvt.) Ltd for last 15
years when he opted for early retirement on 31 October 2012. He was due
Rs. 5 million as a gratuity under the gratuity scheme of Zee (Pvt.) Limited.
The scheme was not approved by the FBR. Due to cash constraints, the
gratuity though due to Hamid on 31 October 2012 was not paid to Hamid.
0n 30 April 2013 at the request of Zee (Pvt.) Limited, Kee (Pvt.) Ltd- an
associated company of Zee (Pvt.) Ltd transferred the equivalent of Rs.
5million in US Dollars into Hamid's US dollar account in UAE in lieu of
gratuity due from Zee (Pvt.) Limited.
(iv). A company has taken health insurance cover for its employees. The
insurance company reimburses employees for actual cost of medical
services for themselves and their dependents.
(v). ABC Ltd has provided scholarship to one of his employees for higher studies
abroad.

(vi). Mr. A has leased a car and pays for its lease rentals from his own sources.
He uses the car for business purpose. What will be the treatment of lease
rentals paid and expenditure incurred on vehicle running and maintenance?
(vii). A partner in a firm is entitled to a fixed remuneration each month. Would
this constitute his salary income?
(viii). Mr. Azhar is 65 years old and his taxable salary for the tax year is Rs.
943,000. Mr. Azhar has obtained a housing loan from a local bank. How the
tax reduction for senior citizenship and markup paid on loan will be
calculated.
(ix). Mr. Aslam is 67 year old and employed as research scholar in a recognized
nonprofit institution. His taxable salary for the tax year is Rs. 654,000. Azhar
is of the view that he is entitled to both tax credits in respect of senior citizen
allowance and full time teacher allowance.
(x). Mr. Sarmad has purchased a generator amounting to Rs. 1,000,000 from an
interest free loan taken from his employer. He rented the generator at an
annual rental value of Rs. 250,000. Total expense of Rs. 25,000 was
expanded on repair, transport and maintenance of the generator.
Answer
(i). Reimbursements of telephone expenses by the company will be treated
as taxable benefits of employees in case the facility is used for private
purposes. There will be no tax consequences to the extent the facility is
used for official purpose. [Ref: S13 and 2st Sch. Part I : Cl. (39)]
(ii). Travelling and daily allowance payments are tax exempt irrespective of
the actual amount of expenditure incurred by an employee (Ref: 2st Sch.
Part I : Cl. (39)
(iii). Since gratuity scheme is not approved, amount exempt from tax should be
50% of the amount received or Rs. 75,000 whichever is less. However
since the payment is received outside Pakistan, the said exemption is not
available. The whole amount is chargeable to tax. ( Ref. Proviso to Clause
13(iv) of part 1)
(iv). Reimbursement of actual medical expenditure by an employer is tax

exempt (Clause 139 Part I of 2nd Schedule). On a similar basis, there will
be no tax implications on reimbursement by the insurance company on
behalf of the employer, or any tax consequences for the employees on
payment of health insurance premium by the employer.
(v). Scholarship granted to the employee will be exempt from tax provided the
employer and the employee are not associates (Ref: Sec 47, discussed in
chapter 11 as well)
(vi). Expenditure incurred by an employee to earn salary income including

travelling expenses and lease rental payments is not tax deductible. (Ref:
Sec 12(4)).

(vii). The remuneration paid by a firm to a partner is considered his share in the
firm’s profit as partner is not an employee of the firm.
(viii).
(ix). Mr. Azhar is entitled to both the tax credits. His gross tax liability will be
first reduced by 50% on account of being a senior citizen and thereafter,
the amount of tax credit relating to housing loan shall be
allowed.(Calculation is explained in detail in chapter 11 of study text).
(x). Yes, Mr. Aslam will be entitled to both the tax reductions. The 50% tax
reduction for senior citizen will be applied on his gross tax liability. The
40% tax reduction for full time teacher or researcher will be applied on the
amount of gross tax liability as reduced by the amount of first tax
reduction of 50%.
Annual rental 250,000
Interest on loan-allowed 100,000
Repair, transport and maintenance 25,000
125,000
Taxable income from other source (Rs.250,000-
Rs.125,000) 125,000
Note
N-1 In case of no interest, interest @ benchmark rate will be allowed as expense

4 EMPLOYEE SHARE SCHEME

Section overview
 Definition
 Taxability at grant of right or option
 Taxability at issue of shares
 Taxability at issue of shares subject to restriction on transfer
 Taxability at disposal of right or option
 Cost of shares
4.1 Definition
Employee share scheme means any agreement under which a company may
issue shares to:
(i). an employee of the company
(ii). an employer of an associated company
(iii).the trustee of a trust and under the trust deed the trustee may transfer the
shares to an employee of the company or employer of an associated
company
4.2 Taxability at grant of right or option

When an employee is granted an option or right to acquire shares under an
employee share scheme, no amount is chargeable to tax. It is so for the reason
that no benefit is derived by the employee by a mere grant of option.
4.3 Taxability at issue of shares

When an employee is issued with shares as a result of exercise of option under
an employee share scheme, the amount chargeable to tax to the employee under
the head salary shall be computed in the following manner:
(i) Fair market value of shares xxx

Less:
(ii) Consideration paid for the grant of right or option
to acquire shares (xxx)
(iii) Consideration paid for the purchase of shares (xxx)
Taxable salary ( (i)-(ii)-(iii)) xxx

4.4 Taxability at issue of shares subject to restriction on transfer

 If the shares issued to an employee under an employee share scheme, are
subject to a restriction on transfer, no amount shall be chargeable to tax until
the earlier of the time the employee:
(i). has free right to transfer the shares; or
(ii). disposes off the shares; and
 The amount chargeable to tax shall be computed as follows:
Fair market value of shares at the time the employee
has free right to transfer or dispose of the shares xxx
Less:
Any consideration paid for shares (xxx)
Any consideration paid for grant of right
or option to acquire the shares (xxx)
Taxable salary __xxx
4.5 Taxability at disposal of right or option

As stated in para 4.2 above, when an employee is granted an option or right to
acquire shares under an employee share scheme, no amount is chargeable to
tax. However if, instead of exercising, such right or option is disposed off by the
employee, amount chargeable to tax under the head salary shall be worked out
as under:-
Consideration received for the disposal of right or option xxx
Less: Employees cost in respect of the right or option (xxx)
Taxable salary xxx
4.6 Cost of shares

After an amount has been charged to tax under the head salary as a result of
situations mentioned in para 4.3 and 4.4 above, the cost of shares acquired
under the employees share scheme, shall be computed in the following manner:
Consideration paid for shares xxx
Add:
Consideration paid for the grant of any right or option xxx
Taxable amount representing gain calculated on the
Issue of shares by company to employee under
employees share scheme.(para 4.3 / 4.4) xxx
Cost of shares (generally for the purpose of computing
Tax credit / capital gain at the time of onward disposal) xxx

Exercise
Mr. Ahsan has been the Chief Financial Officer of XYZ Limited for the last 5
years. He was offered 5,000 shares on 01 June 2012 by XYZ Limited at a price
of $ 1 per share. The market value on that date was $5 per share. The shares
were transferrable on completion of one year of service, from the date of issue
of shares.
The market price of the shares as on 01 June 2013 was $8 per share. On 17
September 2013, Mr. Ahsan sold all shares at $9. He also paid a commission of
$10 to the brokerage house.
The relevant exchange rates are as follows:
01 June 2012 $1=100

01 June 2013 $1=101
17 September 2013 $1=102
Required:
Calculate the amount to be included in the taxable income of Mr. Ahsan for tax
years 2012, 2013 and 2014. Also specify the head of income under which the
income would be classified.
Answer
Tax Year 2011:
As Mr. Ahsan did not have any right to transfer the shares in tax year 2012,
therefore, nothing will be included in the income of Mr. Ahsan under the head
Salary.
Tax Year 2012:
Following will be included in the income of the Mr.Ahsan under the head
Salary
Market value on removal of restriction on transfer of
shares ( 5000x8x101) 4,040,000
Less cost of shares: amount paid by Mr. Ahsan
(5,000x 1x100) 500,000
Amount to be included under the head salary 3,540,000
Tax Year 2013:

Following will be included in the income of Mr. Ahsan under the
head capital gain
Consideration received on sale of shares (5,000x102x9) 4,590,000
Less cost of shares (500,000 + 3,540,000) (4,040,000)
Less commission (10x102) (1,020)
Capital gain 548,980

5 COMPUTATION OF TAXABLE INCOME IN THE CASE OF SALARIED

INDIVIDUALS
The method for determination of taxable income under the head “Salary” is exemplified
in the following exercise:
Exercise:
Mr.Mobeen is a chartered accountant and working as finance manager of XYZ
(PVT) Limited. During the financial year 2013-14, his emolument package
includes followings:
 Pay Rs. 50,000 p.m.
 Bonus Rs. 100,000.
 Leave encashment Rs. 50,000.
 Mr.Mobeen is provided with a car of 1,300 cc. The said car was purchased in
the last year for a consideration of Rs. 500,000. Running and maintenance
cost of the said vehicle is borne by employer. The said vehicle is being used
partly for the private and partly for business use.
 Mr.Mobeen is provided with a furnished accommodation of 1000 sq. yards in
Lahore and company bears rent of Rs. 20,000 pm of the said accommodation.
 The company also bears the cost of utility bills of Mr.Mobeen home. The sum
of total bills of electricity, gas and water aggregates to Rs. 85,000.
 The salary paid in respect of the cook and guard appointed on the residence of
Mr.Mobeen aggregates to Rs. 10,000 p.m.
 According to the terms of employment, the company bears all the medical
expenses of Mr.Mobeen. Total expenses incurred on this account aggregates to
Rs. 75,000.
 The company also provided air tickets & other expenses worth Rs. 85,000 for
Mr.Mobeen and his family trip to UAE for summer leaves.
 During the year, Mr.Mobeen was deputed to Islamabad for the month of
December, 2013 in order to resolve certain administrative issues. He was paid
a relocation allowance of Rs. 35,000 in addition to his normal salary.
 The company granted Mr.Mobeen an interest free loan for a sum of Rs.
800,000 on 1 January, 2014.
 In July 2010, Mobeen was granted an option to acquire 1000 shares of Alpa
(Pvt.) Limited (Parent Company of his employer). The option was exercisable
on completion of three years’ employment with the Company. He paid an
amount equivalent of Rs. 100,000 to acquire the option whereas the fair
market value of such option at that time was Rs. 150,000. On July 4, 2013 he
paid a sum equivalent of Rs. 200,000 to acquire the said shares which were
issued to him on July 21, 2013 when the market value of the shares was
equivalent of Rs. 350 per share. Mobeen disposedoff the shares on June 21,
2014. The sales proceeds received amounted to Rs. 375,000.
 Mr.Mobeen tendered his resignation to the company on June 29, 2014 and he
was paid a sum of Rs. 120,000 on account of gratuity from the unapproved
gratuity fund on the said date.
 Mr.Mobeen accepted the offer of M/S ABC (Pvt) Limited to join that
organisation and he received a sum of Rs. 75,000 as inducement allowance
on account of leaving the past employer.

Required:
Compute the taxable income and tax liability of Mr.Mobeen.
Answer
MR. MOBEEN
COMPUTATION OF TAXABLE INCOME & TAX LIABILITY
Resident Individual
Tax year 2014
Particulars Gross Exempt Taxable Remarks
Pay 600,000 0 600,000
Bonus 100,000 0 100,000
Leave encashment 50,000 0 50,000
Car 1,300cc 25,000 0 25,000 5% of 500,000
Accommodation 270,000 0 270,000 240,000 or 45%
of the basic salary
whichever is
higher
Utilities 85,000 0 85,000
Cook and Guard 120,000 0 120,000
Medical 75,000 75,000 0
Leave fare 85,000 0 85,000
assistance
Relocation 35,000 35,000 - Clause 39 2nd
Allowance Sch.
Mark up on interest 40,000 0 40,000 10% x 6/12 x
free loan 800,000
Employee share 50,000 0 50,000 350,000-

scheme 200,000-100,000
Gratuity 120,000 60,000 60,000 Lesser of 75,000
or 50% is exempt
Inducement 75,000 0 75,000
Allowance
Taxable Salary 1,730,000 170,000 1,560,00
income 0
Capital gain 25,000 25,000
(Rs.375,000-
350,000)
Total taxable 1,585,00
income 0
Tax on Rs 1,585,000 107,750
[Rs. 95,000 + 85,000 x 15%]

Exercise
Mr Arshad is an employee of a public listed company. He submitted the following
data for computation of his taxable income for the tax year 2014:
Basic pay per annum 480,000
Bonus 240,000
Dearness allowance 50,000
Rent Free unfurnished accommodation 75,000
Watchman wages paid by employer 36,000
Gardner wages paid by employer 24,000
Sweeper wages paid by employer 6,000
Employer’s contribution towards recognised provident fund 24,000
Interest on Provident fund balance @18% 18,000
Company maintained car for official and private use 1300CC. The said car was
acquired three years earlier. The cost of acquisition of vehicle was Rs 850,000
Reimbursement of medical expenditure 50,000
Utilities bills paid by the company
Telephone 12,000
Electricity bills paid by employer 15,000
Gas Bills paid by employer 6,000
Water bills paid by employer 9,000
Leave fare assistance (for the first time) 50,000
Commission income for securing a contract paid by the 30,000
employer
Due to some health issue, he resigned from the job and following further sums
were paid to him:
Provident Fund recognised 150,000
Gratuity Fund unrecognised 70,000
Another company car has also been handed over to Mr. Arshad for a
consideration of Rs.285,000 whereas the book value of the said car was
Rs.435,200. He immediately sold the car at Rs.600,000.
Required:
Compute the taxable income of Mr Arshad

Answer
MR ARSHAD
TAX YEAR 2014
Nature of Receipt Notes Gross Exempt/ Taxable
amount Not
taxable
Income from Salary
Basic Pay Sec. 12 480,000 0 480,000
Bonus Sec. 12 240,000 0 240,000
Dearness allowance Sec. 12 50,000 0 50,000
Rent Free unfurnished Rule 4 216,000 0 216,000
Accommodation [actual
rent is lowed than 45% of
basic so higher value of
45% of basic is adopted]
Watchman salary Sec 13(5) 36,000 0 36,000
Gardner salary 24,000 0 24,000
Sweeper salary 6,000 0 6,000
Employer contribution To Exempt upto 24,000 24,000 0
PF lower of
100,000 or
1/10th of
salary
Interest on PF Rule 3(b) of 18,000 16,000 2,000
6th Schedule
Company maintained car Rule 9 (5)(b) 42,500 0 42,500
(850,000 x 5%)
Re-imbursement of Cl. 139 Pat I, 50,000 50,000 0
medical expenses Ist Sch.
Utilities bills [electricity, gas Sec 13(6) 30,000 30,000
and water]
Telephone bills 12,000 12,000
Leave fare assistance 50,000 0 50,000
Commission 30,000 0 30,000
Provident fund Recognised Cl. 23 II sch. 150,000 150,000 0
Gratuity fund Cl.13 II sch. 70,000 35,000 35,000
Sale of car(600,000- Sec 13(11) 315,000 315,000
285,000)
Total Salary income 1,568,500

6 CHAPTER REVIEW
Chapter review
 What is salary and its components?
 What is mechanism for valuation of perquisites especially conveyance,
accommodation, loans, obligation settlement etc.?
 What are retirement benefits i.e. gratuity, provident fund, pension,
superannuation fund, benevolent fund and their treatment?
 What is employee share scheme and what is its taxability?

6
CHAPTER
Income from property
Contents
1 Income from property
2 Deductions admissible in computing income
chargeable under the head income from property
3 Treatment of non-adjustable amounts
4 Chapter review

INTRODUCTION
Learning outcomes
Concepts
LO 4.1.1 Describe the definition given in section 2 sub-section 49 and other definitions
covered under relevant sections
LO 4.3.1 Compute taxable income and tax thereon relating to income from property,
rent from sub-lease, income from provision of amenities, utilities or any other
services connected with rented building and consideration for vacating the
possession of building

Chapter 6: Income from property
1 INCOME FROM PROPERTY

Section overview
 Principles of taxation
1.1 Principles of taxation

 The chargeability of income under the head “Income from Property” is
elaborated in section 15 of the Ordinance. The said section states that:
“The rent received or receivable by a person for a tax year, other than rent
exempt from tax shall be chargeable to tax in that year under the head
“Income from Property”.
Definition: Rent
“Rent” means any amount received or receivable by the owner of land or a
building as consideration for the use or occupation of, or the right to use or
occupy, the land or building, and includes any forfeited deposit paid under a
contract for the sale of land or a building.
 Where rent received or receivable is less than fair market rent for the property,
the owner shall be treated as having received the fair market rent for the
period the property is let on rent in the tax year. However, this shall not apply
in the case of self hiring where fair market rent is already included in the
income of the lessee, chargeable to tax under the head “Salary”.
 Exclusions from section 15 (Chargeable to tax under the head Income from
Other Sources):
(i). Rent in respect of lease of building together with plant and machinery
(ii). Amount included in rent for the provision of amenities, utilities and any
other service connected with renting of the building
(iii).Rent from sub-lease of land or a building
(iv). Amount received as consideration for vacating the possession of a
building
Where property is owned by two or more persons jointly with definite and
ascertainable share of each person in the property,
 The person shall not be assessed as an association of persons in
respect of the property; and
 The share of each person in the income from property for a tax year
shall be taken into account in the computation of the person’ (Sec-66)
 The amount of forfeited deposit under a contract for sale of land or building is
also treated as rental income under the head income from property.15(2)

 A resident individual is liable to tax for his worldwide income. Hence in case of
any foreign source property income, the same principles will apply as are
applicable in the case of Pakistan-source property income. However, in case
tax has been paid abroad, the person will be entitled to claim tax credit to the
extent of lower of such tax paid abroad or Pakistan tax payable in relation to
such foreign sourced property income. Calculation of foreign tax credit on
foreign source income is explained in detail in Chapter 13 of this study text.
 Withholding tax rates on income from property

Section 155 of the Income Tax Ordinance, 2001 contains provisions relating to
deduction of tax out of payment of rent. However, the same is outside the
ambit of syllabus.
 A person sustaining a loss in any head of income cannot set off such loss
against income under the head income from property however, any loss under
the head “income from property” can be set-off against income chargeable
under any other head except for salary.(Sec-56(1))
Exercise:
In respect of each of the independent situations mentioned below, Calculate
the amount which will be treated as rent chargeable to tax under the head
“Income from Property” for the tax year 2014.
(i). Mr. Bilal received rent of Rs.50,000 per month during the tax year 2014
when the fair market rent of the property was Rs.35,000 per month.
(ii). 0n August 2013 Mr. Islam received Rs. 345,000 as rent for leasing out
factory, land, building and machinery
(iii). Mr. Khalid received Rs.500,000 as rent in tax year 2014 for his house let
out to a bank. The fair market rent of property was Rs.750,000.
(iv). ABC Limited owns a residential house and has provided the same to one
of its employees for no rent. Fair market value of the rent was
Rs.1,000,000.
(v). On 01 July 2013 Mr. Hamza received two years advance rent of
Rs.1,500,000
(vi). Mr. Usman owns 75 acres of agriculture land in Mirpur. He did not
cultivate the land himself and during the tax year 2014 received annual
rent of Rs.2,500,000 from the tenant cultivating the land.
Answer
(i). Where rent received or receivable is less than fair market rent for the
property, the owner shall be treated as having received the fair market
rent (FMR) for the period the property is let on rent in the tax year.
However in the above case rent received is greater than FMR,
therefore, actual amount of Rs. 600,000 (Rs.50, 000x12) will be
treated as rent.
(ii). It will be chargeable to tax under the head “income from other source”
(iii). Since actual amount received is less than FMR, therefore, FMR of Rs.
750,000 will be treated as rent.

(iv). Employee
The fair market rent or 45% of basic salary whichever is higher will be
added to employee’s taxable salary.
Employer (ABC Ltd)
The employer will not be considered to have earned any rental income
from this property and accordingly there will be no tax consequences
for him. [Ref: S 15(5) and Rule 4]
(v). Rent is not chargeable to tax on receipt basis. Rent relating to a tax
year, whether received or receivable, is chargeable to tax in that tax
year. Therefore, rent received in advance amounting to Rs.750,000
(Rs.1,500,000/2) will be charged to tax in the tax year (TY 2015) to
which it relates.
(vi). Land is used for agriculture purpose. Any rent received by the owner of
such land is treated as agriculture income and exempt from tax. To
claim the exemption, it is not essential that the land should be used for
agriculture purpose by the owner himself. Refer Chapter 11 for more
detail.

2 DEDUCTIONS ADMISSIBLE IN COMPUTING INCOME CHARGEABLE

UNDER THE HEAD INCOME FROM PROPERTY
Section overview
 Admissible deductions
2.1 Admissible deductions

 As discussed above, income from property is chargeable to tax under the
“Normal Tax Regime”. Section 15A of the Ordinance provides following
deductions that are allowed for computing the income under this head:
(a) An allowance equal to 1/5th of the rent chargeable to tax as repair
allowance computed before any deduction allowed under this section
Note: Repair allowance upto 1/5th of gross rent is allowable as expense
irrespective of the fact that owner actually incurred such expenses or the
actual expenses incurred by him are greater/lesser than 1/5th of the gross
rent. Further the said statutory allowance is calculated on rent chargeable
to tax and not on the rent received. Rent chargeable to tax also includes
one tenth portion of non-adjustable deposit received in relation to a
building.
(b) Premium paid or payable in the year to insure the building.
(c) Any local rate, taxes, charge or cess paid or payable by a person to any
Local Authority or Government in the year, not being any tax payable
under the ordinance.
(d) Ground rent paid or payable in the year in respect of the property
(e) Profit or mark-up paid in the year on money borrowed .including by way of
mortgage, to acquire, construct, renovate, extend or reconstruct the
property.
(f) Share in rent and share in appreciation in the value of property (excluding
the return of capital if any) where the property has been acquired with
capital contributed by the House Building Finance Corporation or a
scheduled bank under a scheme of investment in property for acquisition,
construction, renovation or reconstruction of property from such borrowed
capital.
(g) Amount of profit or interest paid on such mortgage or charge, where the
property is subject to a mortgage or other capital charge.
(h) Rent collection charges in respect of the property, paid or payable, in the
year not exceeding 6% of the rent chargeable to tax before any deduction
allowed .
(i) Expenditures paid or payable in the tax year for legal services to defend
the person’s title to the property or any suit connected with the property in
a court.
(j) An Allowance equal to the unpaid rent, where there are reasonable
grounds to believe that the unpaid rent is irrecoverable, subject to the
conditions that:

(i). The tenancy was bonafide.

(ii). The defaulting tenant has vacated the property or steps have been
taken to compel the tenant to vacate the property.
(iii). The defaulting tenant is not in occupation of any other property of the
landlord.
(iv). All reasonable steps have been taken to institute legal proceedings
for the recovery of the unpaid rent or there exist reasonable grounds
to believe that legal proceedings would be useless and
(v). Unpaid rent has been included in the income chargeable to tax under
the head income from property for the tax year in which the rent was
due and tax has been duly paid on such income.
 In case where any unpaid rent allowed as a deduction is wholly or partly
recovered, the amount recovered shall be chargeable to tax in the tax year in
which it is recovered.
 If any of the above deductions are allowed in a tax year on ‘payable basis’, its
payment must be made within three years from the end o f the tax year in
which the deduction was allowed and if not paid, shall be added back to the
income in the first tax year following the end of those three years.
 If an unpaid liability which is charged to tax as above, is subsequently paid in
full or in part, the person shall be allowed a deduction for the amount paid in
the tax year in which the payment is made.
 Deduction allowed under income from property shall not be allowed in
computing income chargeable to tax under any other head of income.
 Provisions of section 21 (Deductions not allowed in computing income from
business) shall also apply in the same manner in determining the deductions
allowed to a person under the head income from property.
Exercise:
Zia
 and Imtiaz jointly own a commercial property in the ratio of 70:30. During the
tax year 2014, the total rent earned by them was Rs. 3,000,000. Insurance
premium and collection charges of Rs. 300,000 and Rs. 240,000 respectively
were also paid by them jointly. Neither Mr. Zia nor Mr. Imtiaz has any other source
of income.
Required
Explain whether the income from the property will be assessed in the hands of
Mr. Zia and Mr. Imtiaz jointly or separately and calculate their tax liability for tax
year 2014.
Answer
Particulars Mr. Zia Mr. Imtiaz Total
Share- N-1 70% 30% 100%
Gross rent 2,100,000 900,000 3,000,000
Less deductions allowed:
1/5th allowed as repair 420,000 180,000 600,000
allowance- N-2

6% collection chargesN-3 126,000 54,000 180,000

Insurance premium 210,000 90,000 300,000
Net income 1,344,000 576,000 1,920,000
Tax liability:
Upto Rs.750,000/400,000 35,000 Nil
Balance Rs.594,000 & 89,100 17,600
594,000) x 15% & 10%
respectively
Total tax liability 124,100 17,600
Notes:
N-1If any property is owned by two or more persons and their respective shares are
definite and can be ascertained, in such case:
(i). the persons shall not be assessed as an association of persons in respect
of the property; and
(ii). the share of each person in the income from the property for a tax year
shall be taken into account in computation of the person’s taxable income
for that year.
N- 2Repair allowance upto 1/5th of gross rent is allowable as expense irrespective
of the fact that owner actually incurred such expenses or the actual expenses
incurred by him are greater/less than 1/5th of gross rent.
N-3 Collection charges must not exceed 6% of gross rent. In case of excess they
must be reduced to 6% of gross rent. In case of less, actual expenses incurred will
be allowed as expense.

3 TREATMENT OF NON-ADJUSTABLE AMOUNTS

Section overview
 The treatment of non-adjustable amounts against income from property
3.1 The treatment of non-adjustable amounts against income from property

The treatment of non- adjustable advances received in relation to buildings is
explained in section 16 of the Ordinance in the following manner:
 Where the owner of building receives an advance which is not adjustable

against rent, the whole of advance shall be treated as rent chargeable to tax
under the head income from property in the year of receipt and following nine
tax years in equal proportion i.e. 1/10th of such un-adjustable advance shall
be included in the income of the taxpayer under the head “income from
property” in 10 tax years commencing from the tax year in which the advance
is received.
Note: No treatment is required in case of adjustable advance against rent
because the same will be automatically included in the computation of rent.
 If advance is refunded in any year before the expiry of 10 years such advance
shall not be included in the income from the tax year in which it is refunded or
thereafter.
 After vacancy, if the property is let out again against another non-adjustable
advance, new advance less the portion of previous advance already charged
to tax shall be chageable equally in 10 tax years, commencing from the tax
year in which the advance is received from the succeeding tenant.
Exercise:
Mr A had let out the property to Mr B for a sum of Rs 150,000 per month in July
2011. MR B has paid a sum of Rs 500,000 as non-adjustable advance. Compute
the income for tax year 2012. After the expiry of two years, Mr B vacated the
premises and Mr A returned the advance to Mr B. Thereafter, Mr C acquired the
possession on the same rental amount. However, the amount of non-adjustable
advance was increased to Rs 600,000. Compute the gross income from the said
property for the years 2012 and 2014 before allowing the admissible deductions.
Answer
Income from Property for tax year 2012
Particulars Amount
Rent 150,000 x 12 1,800,000
Add Un adjustable Advance 500,000/10 50,000
Total Gross rental Income without deductions 1,850,000
Income from Property for the year 2014

Particulars Amount
Rent 150,000 x 12 1,800,000
Add Un adjustable Advance 600,000
Less Already recognised income in the 100,000
last two years
Balance Chargeable advance in 10 years 500,000/10 50,000
Total Gross rental Income without deductions 1,850,000
Exercise:
Mr Mobeen owns a property at Gulberg, Lahore. The said property was rented out
to Mr Asad at a rent of Rs175,000 per month. Mr Asad left the premises on 31
January 2014. Mr Asad had paid a sum of Rs 300,000 as un-adjustable advance
in tax year 2012. Mr Mobeen returned the said advance on his departure. The
said property remained vacant in the month of February, 2014. Thereafter, Mr
Gulzar has taken the possession of the said property at a monthly rent of Rs.
220,000. New tenant has paid a sum of Rs 350,000 as security. Mr Mobeen
incurred following expenses in connection with the said rented property.
Description Amount in Pak Rs
Insurance premium paid 180,000
Property tax paid 80,000
Salary of employee appointed for collection of rent 60,000
Bank charges in connection with collection of rent 24,000
Fee to lawyer for the execution of rent agreements 50,000
His income from salary is Rs 500,000 and from business is Rs. 100,000. He paid
Zakat of Rs 45,000 during the year under Zakat Ordinance.
You are required to compute the taxable income of Mr Mobeen for tax year 2014.
Answer
MR. MOBEEN
COMPUTATION OF TAXABLE INCOME AND TAX LIABILITY
TAX YEAR 2014
Particulars Gross Remarks

amount
Income from property 1,313,200 See Note No. 1 below
Income from salary 500,000
Income from Business 100,000
Total Income 1,913,200

Less: Deductible Allowance Zakat 45,000
Taxable Income 1,868,200

Tax on Income RS 1,868,200 221,140 Rs 147,500+ 20% on
amount exceeding
Rs 1.5 M
Note 1
Computation of gross rental Income
Particulars Mr Asad Mr Gulzar Total Remarks
Rent 1,225,000 880,000 2,105,000 Advance of Rs 30,000

Un-adjustable 29,000 29,000 per year for two years
Advance rent has already been
(350,000- declared by
60,000)/10 Mr Mobeen, hence new
proportion is worked for
Total 1,225,000 909,000 2,134,000 the next 10 years after
adjusting the
Rs60,000.
Less:
Repair Allowance 1/5th 426,800
Insurance Premium Paid 180,000
Property tax Paid 80,000
Collection Expenses being less than 6% 60,000
Bank charges for collection of rent 24,000
Legal Charges 50,000
Total Admissible Expenses 820,800
Total 1,313,200

4 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know how to:
 Describe what is meant by income from property and tax implications on
income from property and also understanding of the concepts:
 Rent received and receivable
 Exclusions from income from property relating to income from sub-lease,
lease of a building together with plant & machinery and amounts included
in rent in respect of provision for amenities, utilities and other services
 Income from joint ownership
 Deductions allowed in computing income under the head income from
property
 Treatment of non-adjustable amounts

7
CHAPTER
Income from business – part one
Contents
1 Income from business
2 Method of accounting
3 Deductions against business income
4 Chapter review

INTRODUCTION
Learning outcomes
2002and Sales Tax Act 1990 and Sales Tax Rules.
Concepts
LO 4.3.1 Compute taxable income and tax thereon relating to income from business

Chapter 7: Income from business – part one
1 INCOME FROM BUSINESS

Section overview
 Income from business

 Important aspects of income from business
 Speculation business
1.1 Income from business
Definitions “Business” (Sec 2(9))

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;
Section 18 of the Income Tax Ordinance, 2001 outlines the scope of income
under this head in the following manner:
Income from business
The following incomes of a person for a tax year shall be chargeable to tax under
the head “Income from Business”:
 The profits and gains of any business carried on by a person at any time in the
year;
 Any income derived by any trade, professional or similar association from the
sale of goods or provision of services to its members;
 Any income from the hire or lease of tangible movable property;
 The fair market value of any benefit or perquisite, whether convertible into
money or not, derived by a person in the course of, or by virtue of, a past,
present, or prospective business relationship. The word benefit includes any
benefit derived by way of waiver of profit on debt or the debt itself under
circular/scheme issued by the State Bank of Pakistan.
 Any management fee derived by a management company (including a
modaraba management company).
 Profit on debt where the person’s business is to derive such income (e.g.
banks and financial institutions). In other cases it will be chargeable to tax
under the head “Income from other sources”)
 Lease rentals derived by a scheduled bank, investment bank, development
finance institution, modaraba or a leasing company.
 Any amount distributed by a mutual fund or a private equity and venture
capital fund, out of its income from profit on debt, to a banking company or a
non-banking finance company shall be chargeable to tax under the head
income from business and not under the head income from other source.

1.2 Important aspects of income from business

General principles relating to taxation of business income are summarized below:
 A resident person is taxed on his worldwide business income whereas a non-
resident liable to tax in respect of his income to the extent it is Pakistan-
sourced.
 Income may be recorded using the cash or accrual basis of accounting.
Companies are, however, required to follow the accrual system of accounting.
 Expenditure incurred wholly and exclusively for the purpose of business is
generally allowable in tax except for certain specific provisions of law which
are discussed later in the chapter.
 The profits which are taxed under section 18 are the real profits and not
notional profits. Therefore, gain arising from revaluation / impairment of fixed
assets / investments or unrealized gain or loss arising from revaluation of
foreign currency related debtors and creditors is not taxable as these are not
real profits and can only be taxed when these are actually realised.
 Profits can arise only out of the trading (revenue) receipts. Capital receipts are
not taxable unless expressly made taxable under the Income Tax Ordinance,
2001.
 Those profits and gains of a business are chargeable to tax which are carried
on by the taxpayer at any time during the tax year. However following receipts
are taxable even if the taxpayer does not carry on business during the tax
year:
 Recovery in cash or kind against a deduction/loss allowed previously
against business income [section 70]
 Gain on sale of depreciable assets [Section 22(8)]
 Recovery of bad debts allowed in preceding years [Section 29(3)]
 Trading liabilities or any portion thereof which is found not to have been
paid within the expiration of three years of the end of the tax year in
which it was allowed [Section 34(5)]
 Sum received after discontinuance of a business [Section 72(a) & (b)]
1.3 Speculation business

Speculation business is defined in section 19(2) of the Ordinance in the following
manner:
 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, but does not include a business in which:
 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 future price fluctuations for the purpose
of fulfilling the person’s other contracts for the actual delivery of the
goods to be manufactured or merchandise to be sold;
 a contract in respect of stocks and shares is entered into by a dealer
or investor therein to guard against loss in the person’s holding of
stocks and shares 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.
Tax implications for speculation business

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;
 section 67- Apportionment of deductions shall apply as if the profits
and gains arising from a speculation business were a separate head
of income;
 any profits and gains arising from the speculation business for a tax
year computed in accordance with this part shall be included in the
person`s income chargeable to tax under the heading “Income from
Business”
 any loss of the person arising from the speculation business
sustained for a tax year shall be set off only against the income of the
person from any other speculation business of the person chargeable
to tax for that year;
 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 applied against the income of any
speculation business of the person in that year and so on, but no
speculation loss shall be carried forward to more than six tax years
immediately succeeding the tax year for which the loss was first
computed.
Exercise: Speculation Business

M/s XYZ Enterprises deals in cloth trading. Total revenue from cloth trading was
Rs 10,000,000 during the year 20YY. The gross profit from the trading business
was amounting to Rs 2,000,000. During the year, the price fluctuations were very
high in cloth market. Considering this trend, M/s XYZ (Pvt) Limited also made
forward purchasing of cloth to reap the benefit of price fluctuations. In April
20YY, The Company agreed to purchase Bengali cloth of 20,000 bundles at the
rate of 100 per bundle, the delivery of which was expected in June 20YY. The
seller agreed to purchase the same goods at the rate ruling at the date of sale.
In June the price of Bengali cloth has been increased to Rs 120 per bundle. M/s
XYZ Enterprises disposed of that cloth of 20,000 bundles to the seller at the
market prevailing rate without taking any delivery of stocks, Total revenue from
sale of cloth aggregates to Rs 2,400,000, Therefore, the company earned income
of Rs.400,000. Total administrative and general expenses of Rs 1,000,000 were
incurred during the year 20YY. Compute the taxable income and tax liability. It is
worth mentioning that carry forward loss of the company was Rs 1,000,000 in
respect of business. Whereas speculation loss was Rs 250,000.

Answer
Particulars Speculation Trading Total

Business
Gross Income 2,400,000 10,000,000 12,400,000
Earning 400,000 2,000,000 2,400,000
Expenditure
(1,000,000 x 193,548 806,452 1,000,000
2,400,000/12,400,000)
Net income 206,452 1,193,548 1,400,000
Carry forward loss 250,000 1,000,000 1,250,000
Taxable Income / (loss) for the
*(43,548) 193,548
year
*Speculation loss carried forward
** Loss of speculation business cannot be set off with trading business.
(Discussed in detail in chapter 11 of Study Text)

2 DEDUCTIONS AGAINST BUSINESS INCOME

Section overview
 Deductions admissible – general provisions

 Inadmissible deductions
 Deductions-special provisions
2.1 Claim of deductions against income from business

Section 20 of the Ordinance prescribes general principles with respect to
admissibility of deductions the said section states that:
20. Deductions in computing income chargeable under the head “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
 Deduction equal to the difference of the amount of actual cost of animals used
for the purposes of business or profession (otherwise than as stock in trade)
and the amount realized in respect of carcasses or animals shall be allowed
where the animals have died or become permanently useless for such
purposes.
2.2 Inadmissible Deductions

Section 21 of the Ordinance provides that no deduction shall be allowed in
computing the income of a person under the head “Income from Business” for:
 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;
Note: In case where sales tax/federal excise duty paid by a taxpayer is not
charged by him to his customer, such sales tax/federal excise duty paid
shall be allowed as deduction.
 Any amount of tax deducted at source under the provisions of the Income Tax
Ordinance, 2001 from an amount derived by the person;
 Any sum paid on account of salary, rent, brokerage or commission, profit on
debt, payment to non-resident, payment for services or fee paid by the person
from which the person is required to deduct tax, unless the person has paid or
deducted and paid the tax.
 any entertainment expenditure in excess of such limits or in violation of such
conditions as may be prescribed;

Limits prescribed for allowing any expenditure on entertainment

are as under (Rule 10).
Expenditure should be incurred in deriving income from business
chargeable to tax and should not be in excess of following limits or in
violation of condition specified:
(a) Such expenditure is:
(i). Incurred outside Pakistan on entertainment in connection with
business transactions: or
(ii). Allocated as head office expenditure; or
(b) Incurred in Pakistan on the entertainment of foreign customers &
suppliers;
(c) Incurred on the entertainment of customer & clients at the
person’s business premises
(d) Incurred on the entertainment at the meeting of shareholders,
agents, directors or employees
(e) Incurred on entertainment at the opening of branches.
Note: All these people (who are entertained) should be related directly
to the person’s business.
 Any contribution made by the person to a fund that is not a recognized

provident fund, approved superannuation fund, or approved gratuity fund or
approved pension fund;
 Any contribution made by the person to any provident or other fund
established for the benefit of employees of the person, unless the person has
made effective arrangements to secure that tax is deducted under section 149
from any payments made by the fund in respect of which the recipient is
chargeable to tax under the head "Salary";
 Any fine or penalty paid or payable by the person for the violation of any law,
rule or regulation;
 Any personal expenditures incurred by the person;
 Any amount carried to a reserve fund or capitalised in any way;
 Any profit on debt, brokerage, commission, salary or other remuneration paid
by an association of persons to a member of the association
 Any expenditure for a transaction, paid or payable under a single account
head which, in aggregate, exceeds fifty thousand rupees, made other than by
a crossed cheque drawn on a bank or by crossed bank draft or crossed pay
order or any other crossed banking instrument showing transfer of amount
from the business bank account of the taxpayer:
However, online transfer of payment from the business account of the payer
to the business account of payee as well as payments through credit card
shall be treated as transactions through the banking channel, subject to the
condition that such transactions are verifiable from the bank statements of the
respective payer and the payee:

It is important to note that the above provisions shall not apply in the case
of:
 expenditures not exceeding ten thousand rupees;
 expenditures on account of:
 utility bills;
 freight charges;
 travel fare;
 postage; and
 payment of taxes, duties, fee, fines or any other statutory
obligation;
Exercise:
Following payments of expenses are made otherwise than through crossed
cheque.
Head Of Account Amount
Rent Paid To Mr X for Lahore office rented premises 12,000
Air Tickets purchased 22,000
Payment of wages of Mr Ali 12,500
Bill paid for repair of car 12,000
Electricity bill paid 15,000
Telephone bill paid 14,000
Paid professional tax 20,000
Paid audit fee 35,000
Paid to tax consultant 15,000
Compute the addition under Section 21(l) of the Income Tax Ordinance, 2001
No addition is required on account of payments relating to Air Ticketing, wages,
Electricity, Telephone and Professional Tax. The balance addition under section
21(l) is computed as under:
Nature of payment Amount
Rent paid to Mr X for Lahore office rented premises 12,000
Bill paid for repair of car 12,000
Paid audit fee 35,000
Paid tax consultant 15,000
Addition under Section 21(l) 74,000
 any salary paid or payable exceeding fifteen thousand rupees per month other
than by a crossed cheque or direct transfer of funds to the employee’s bank
account; and
 Any expenditure paid or payable of a capital nature. However, depreciation or
amortization shall be allowed in respect of a depreciable asset, intangible or
pre-commencement expenditure.

2.3 Deductions-Specific provisions

 Depreciation of tangible fixed assets where they have a useful life of more
than 1 year.
 Initial allowance on eligible depreciable assets.
 Amortization of intangibles where they have a useful life of more than 1 year.
 Pre-commencement expenditure at the rate of 20% on straight line basis
 Expenditure incurred by an amalgamated company on legal and financial
advisory services and other administrative cost relating to planning and
implementation of amalgamation.
 Scientific research expenditures
 Employee training facilities expenditure
 Profit on debt if related to taxable business income
 Entertainment expenditures in the limits as prescribed
 Bad debts written off in the accounts subject to fulfilment of certain conditions
Deductions in respect of depreciation, initial allowance, amortization and, pre-
commencement expenditures are discussed in detail in chapter 8 of the study
text whereas deductions on account of scientific research expenditure, employee
training, profit on debt and bad debts are discussed below:.
S26. Scientific research expenditure

 A person shall be allowed a deduction for scientific research expenditure
incurred in Pakistan in a tax year wholly and exclusively for the purpose of
deriving income from business chargeable to tax.
Definitions
 “Scientific research” means any activity undertaken in Pakistan in the
fields of natural or applied science for the development of human
knowledge;
 “Scientific research expenditure” means any expenditure incurred by a
person on scientific research undertaken in Pakistan for the purposes of
developing the person’s business, including any contribution to a scientific
research institution to undertake scientific research for the purposes of the
person’s business, other than expenditure incurred:
 in the acquisition of any depreciable asset or intangible;
 in the acquisition of immovable property; or
 for the purpose of ascertaining the existence, location, extent or
quality of a natural deposit; and
 “Scientific research institution” means any institution certified by the
Board as conducting scientific research in Pakistan.
S27. Employee training and facilities.

 A person shall be allowed a deduction for any expenditure (other than capital
expenditure) incurred in a tax year in respect of:

 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, aided, or run by the Federal Government or a
Provincial Government or a Local Government ; or
 The training of any person, being a citizen of Pakistan, in connection
with a scheme approved by the Board for the purposes of this
section.
S28. Profit on debt, financial costs and lease payments
 Following amounts incurred in a tax year shall be allowed as deduction in
computing income under the head Income from Business:
 Profit on debt if and to the extent the proceeds of debt are utilized for
business purpose.
 Lease rentals of an asset to a scheduled bank, financial institution, an
approved modaraba or leasing company or a Special Purpose
Vehicle (SPV) on behalf of the Originator.
 Financial cost of securitization of receivables by an originator in
respect of SPV
 Share of profit under musharika scheme to a bank
 Share of profit to a certificate holder under a musharika scheme
approved by SECP and Religious Board under Modaraba Ordinance
 On funds borrowed from a modaraba or participation term certificate
holders
 By a bank to a person maintaining PLS account or a deposit with the
bank
 SBP‟s share of profit by House Building Finance Corporation,
National Development Leasing Corporation or Small and Medium
Enterprises Bank on any investment or credit line provided by the
SBP.
Exercise:
XYZ Limited engaged in the business of manufacturing and sale of chemicals has
incurred the following expenditures for tax year 2014:
(i). Rs. 150,000 given as a scholarship to Mr Sameel, a citizen of Pakistan,

for his technical training in connection with a scheme approved by the
Federal Board of Revenue under the relevant provision of the law. Mr.
Sameel is not an employee of XYZ Ltd.
(ii). Maintenance of XYZ’s shares records has been outsourced. The total
expenditure incurred was Rs. 400,000, including the fee paid of Rs.
245,000 to increase the company’s authorized capital.
(iii). Contribution of Rs. 200,000 to unrecognized provident fund. XYZ Ltd, in
its accounting system, has ensured that when any payment is made from
the fund to an employee, tax would be deducted at source from the
amount of the payment, if the amount is chargeable to tax as the salary
income of the employee.

(iv). Rs. 50,000 paid as motor vehicle tax on the company’s vehicles.
(v). Rs. 500,000 paid for the valuation of the assets of another company
which XYZ Ltd intended to acquire.
(vi). Rs. 45,000 paid as a penalty imposed by the Commissioner for late filing
of the annual return of income for the tax year 2013.
(vii). New computer purchased for Rs. 300,000 on 20 June 2014 for which
installation could not be made until 15 July 2014.
(viii). Compulsory annual fee of Rs. 200,000 paid in cash, to the Engineering
Development Board established by the Federal Government.
(ix). Donation in kind to a relief fund runs by the Government of Sindh.
(x). Rs. 1,530,000 out of travelling expenses, being the travel and hotel
expenses for XYZ’s technical manager’s visit to Japan. The travel to Japan
was entirely for business purposes. It was necessary for the firm’s
technical manager to travel to Japan for the purpose of selecting a
second-hand mixing machine, so as to ensure that the machine was
compatible with the company’s existing plant.
(xi). XYZ Ltd has claimed tax deduction under section 231A (Cash withdrawal
from bank) of the Income Tax Ordinance, 2001 to the tune of Rs.75,000,
meaning thereby that company has made cash withdrawal amounting to
Rs. 25 million.
(xii). Cash flow statement shows that an amount of Rs. 2 million has been
paid as legal and professional charges to one of the company
consultants. The said amount was overdue since tax year 2007. XYZ Ltd
has claimed this amount as an expense in tax year 2014 also.
(xiii). XYZ Limited entered into a forward contract for the purchase of raw
materials used in its business of manufacturing edible oils to guard
against loss through price fluctuations. On the date of maturity of the
forward contract, XYZ Ltd did not take delivery of the raw materials but
the contract was settled by a payment of Rs. 950,000.
Required
Being tax consultant of the company you are required to explain the
admissibility/inadmissibility of the above along with reason keeping in view the
provisions of the Income Tax Ordinance, 2001
Answer
(i). Since the scholarship has been granted to a Pakistani citizen for his
technical training under a scheme approved by the Federal Board of
Revenue, the expenditure is admissible. The beneficiary of the scholarship
does not need to be an employee of the taxpayer. [S.27(c)]
(ii). The fee paid (Rs. 245,000) to increase in XYZ’s authorized capital is
capital expenditure in nature, hence not allowable. The remaining
expenditure being of revenue in nature is admissible.
(iii). A contribution to a recognized provident fund is an allowable deduction. A

contribution made to an unrecognized provident fund is also deductible

provided the employer has made effective arrangements to ensure that

tax would be deducted from any payments made by the fund in respect of
which the recipient is chargeable to tax under the head ‘Salary’ [S.21 (f)].
As XYZ Ltd has made the aforesaid effective arrangements for deduction
of tax from any payments made by the fund to an employee which is
chargeable to tax as the employee’s salary income, the contribution of Rs.
200,000 made to the fund is a deductible expenditure.
(iv). Motor vehicle tax is for the purposes of business and revenue in nature.
Further, it does not fall in the list of inadmissible deductions. [S.20(1) read
with S.21(a)]
(v). Expenses incurred at Rs. 500,000 relate to the acquisition of another

company. The expense, therefore, being capital in nature, is disallowed.
[S.21(n)]
(vi). A penalty of Rs. 45,000 paid for the late filing of a return of income is an
inadmissible expense on either of the following two grounds:
(a) A penalty for the late filing of a return of income is included in tax
as defined in the Income Tax Ordinance, 2001 (the ‘Ordinance’).
Tax is an inadmissible deduction under the law. [S.21(a)]
(b) It was imposed for violation of the provisions of the Ordinance,
hence not admissible. [S.21(g)]
(vii). A computer costing Rs. 300,000 was not put to use during the year ended
30 June 2014 hence is not entitled to any Depreciation / initial allowance.
(viii). Any expenditure, in aggregate, under a single accounting heading in

excess of Rs. 50,000 other than by crossed bank cheque or crossed bank
draft or any other banking instrument is not deductible with certain
exceptions. One of the exceptions is any fee expenditure. Hence, the Rs.
200,000 paid, in cash, to the Engineering Development Board established
by the Federal Government is allowable and no adjustment is required.
[2nd proviso to S.21(l)]
(ix). A donation in kind to a relief fund run by the Government of Sindh is not
for the purpose of business, hence not allowable as expenditure. However,
it is eligible for tax credit under the law. [S.20(1)]
(x). The expenditure of Rs. 1,530,000 incurred solely to secure the purchase
of a mixing machine, is capital expenditure and is not deductible. Rs.
1,530,000 should be added to the cost of the mixing machine for tax
purposes.
(xi). A mere existence of cash withdrawals does not lead to inadmissibility of

expense. As per section 21(l)/(m) of the Income Tax Ordinance, 2001
following expenses are allowed in cash.
(a) Expenditures not exceeding ten thousand rupees;

(b) expenditures on account of
(c) utility bills;
(d) freight charges;
(e) travel fare;
(f) postage; and

(g) payment of taxes, duties, fee, fines or any other statutory

obligation
(h) any salary paid or payable exceeding fifteen thousand
rupees per month other than by a crossed cheque or
direct transfer of funds to the employee‘s bank account;
In view of the foregoing, cash expenses other than above will be
disallowed, whereas the remaining will be allowable as an expense.
(xii). Where a person has been allowed a deduction for any expenditure
incurred in deriving income chargeable to tax under the head Income from
Business and the person has not paid the liability or a part of the liability
to which the deduction relates within three years from the end of the tax
year in which the deduction was allowed, the unpaid amount of the
liability shall become chargeable to tax under the head Income from
Business in the first tax year following the end of those three years.
However, if the person subsequently pays the liability or a part of the
liability, the person shall be allowed a deduction for the amount paid in
the tax year in which the payment is made. [Ref: S 34(5) and 34(6)]
Therefore, amount will be added back to the taxable income of the

taxpayer in tax year 2011, whereas it will be again allowed as an expense
in tax year 2014.
(xiii). The forward contract entered into by XYZ Ltd for the purchase of raw
materials used in its business of manufacturing edible oils is in the nature
of a hedging contract which was entered into to guard against loss from
future price fluctuations. Such contracts have specifically been excluded
from the definition of speculative business [s.19(2)]. Therefore, the Rs.
950,000 paid to settle the forward contract is an expenditure incurred in
(xiv).
the normal course of business and is a deductible expenditure
S29. Bad debts.

 A person shall be allowed a deduction for a bad debt in a tax year if the
following conditions are satisfied, namely:
 The amount of the debt was:
 previously included in the person’s income from business
chargeable to tax; or
 in respect of money lent by a financial institution in deriving
income from business chargeable to tax;
 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.
 The amount of the deduction allowed to a person for a tax year shall not
exceed the amount of the debt written off in the accounts of the person in the
tax year.
 Where a deduction is allowed in a tax year for a bad debt written off and in a
subsequent tax year the person receives in cash or kind any amount in
respect of that debt, a computation shall be made as under:
a- b

Here
(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 under Income Tax Ordinance, 2001.
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.
Exercise:
Ms. Shagufta is running a business in the name of Al Nafay Business Solutions. In
the tax year 2013, she claimed bad debts of RS 1,000,000 and RS 1,500,000
from its clients Mr Junaid and Mr Nawaz. She was allowed deduction of bad debts
of RS 750,000 and RS 800,000 with respect of receivable from Mr Junaid and Mr
Nawaz in Tax year 2013. During 2014, she received following sums from these
two debtors:
Mr Junaid Rs 900,000
Mr Nawaz Rs 500,000
Work out the amount to be added/allowed on account of bad debts in the tax
year 2014
Solution
Mr Junaid
Amount Received RS 900,000
Less:
Difference between:
Actual Bad debts Rs 1,000,000
Less: Bad Debts Actually allowed as
Deduction Rs 750,000
-----------------------
RS 250,000
-----------------------
Excess income to be added in the income for the tax year 2014 RS 650,000
-----------------------
MR Nawaz
Mr Junaid
Amount Received RS 500,000
Less:
Difference between:
Actual Bad debts Rs 1,500,000
Less: Bad Debts previously allowed as
Deduction Rs 800,000
-----------------------
RS 700 000
-----------------------
Less amount received will be allowed deduction
for the tax year 2014 (RS 200,000)
------------------------

3 TAX ACCOUNTING
Section overview
 General accounting
 Method of accounting
 Cash basis accounting
 Accrual basis accounting
 Stock in trade
 Long term contract
3.1 General accounting

The question arises how to compute the income under this head of income.
Therefore, it is essential to know the method of accounting required by the law in
order to ascertain the actual income of a taxpayer:
3.2 Method of accounting

 A person’s income chargeable to tax shall be computed in accordance with
the method of accounting regularly employed by such person.
 A company shall account for income chargeable to tax under the head
“Income from Business” on an accrual basis, while other persons may account
for such income on cash or accrual basis.
 The Board may prescribe that any class of persons shall account for income
chargeable to tax under the head “Income from Business” on a cash or
accrual basis.
 An application may be made by a person, in writing, for a change in the
person’s method of accounting to the Commissioner. The Commissioner may
by an order, in writing approve such an application but only if he is satisfied
that the change is necessary to clearly reflect the person’s income chargeable
under the head “Income from Business”.
 If a person’s method of accounting has changed, the person shall make
adjustments to items of income, deduction, or credit or to any other items
affected by the change so that no item is omitted and no item is taken into
account more than once.
3.3 Cash Basis Accounting (Sec-33)

A person accounting for income chargeable to tax under the head “Income from
Business” on a cash basis shall derive income when it is received and shall incur
expenditure when it is paid.
3.4 Accrual Basis Accounting (Sec-34)

 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.
 An amount shall become due to the person when the person becomes entitled
to receive it or is liable to pay it even if the time for receipt / payment is
postponed or the amount is payable by instalments.

 An amount shall become payable by a person when all the events, that
determine liability, have occurred and the amount of the liability can be
determined with reasonable accuracy.
 If the liability or a part of the liability for which the deduction claimed is not paid
within three years from the end of the tax year in which the deduction was
allowed, the unpaid amount of the liability shall be chargeable to tax under the
head “Income from Business” in the first tax year following the end of the three
years.
 If an unpaid liability which is charged to tax as above is subsequently paid in
full or in part, the person shall be allowed a deduction for the amount paid in
the tax year in which the payment is made.
 Where a person has been allowed a deduction in respect of a trading liability
and such person has derived any benefit in respect of such trading liability, the
value of such benefit shall be chargeable to tax under head “Income from
Business” for the tax year in which such benefit is received.
3.5 Valuation of stock in trade (Sec 35)

 The cost of stock-in-trade disposed of by the person in the year shall be
computed in accordance with the following formula, namely:
(A + B) – C
Where:
A is the opening value of the person’s stock-in-trade for the year;
B is cost of stock-in-trade acquired by the person in the year; and
C is the closing value of stock-in-trade for the year.
 The opening value of stock-in-trade of a person for a tax year shall be:
(i). the closing value of the person’s stock-in-trade at the end of the
previous year; or
(ii). Where the person commenced to carry on business in the year, the fair
market value of any stock-in-trade acquired by the person prior to the
commencement of the business. This fair market value shall be
determined at the time the stock is ventured in the business.
 The closing value of a person’s stock-in-trade for a tax year shall be the lower
of cost or net realisable value of the person’s stock-in-trade on hand at the
end of the year.
 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 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.
 Where particular items of stock-in-trade are not readily identifiable, a person
may account for that stock on the first-in-first-out method or the average-cost
method but, once chosen, a stock valuation method may be changed only with
the written permission of the Commissioner and in accordance with any
conditions that the Commissioner may impose.
 In this section:

Definitions
 “Absorption-cost method” means the generally accepted accounting
principle under which the cost of an item of stock-in-trade is the sum of
direct material costs, direct labour costs, and factory overhead costs;
 Prime-cost method” means the generally accepted accounting principle
under which the cost of stock-in-trade is the sum of direct material costs,
direct labour costs, and variable factory overhead costs;
 “Direct labour costs” means labour costs directly related to the
manufacture or production of stock-in-trade;
 “Direct material costs” means the cost of materials that become an integral
part of the stock-in-trade manufactured or produced, or which are
consumed in the manufacturing or production process;
 “Factory overhead costs” means the total costs of manufacturing or
producing stock-in-trade, other than direct labour and direct material costs;
 “First-in-first-out method” means the generally accepted accounting
principle under which the valuation of stock-in-trade is based on the
assumption that stock is sold in the order of its acquisition;
 “Average-cost method” means the generally accepted accounting principle
under which the valuation of stock-in-trade is based on a weighted average
cost of units on hand;
 “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 manufacturing process, but
does not include stocks or shares; and
 “Variable factory overhead costs” means those factory overhead costs
which vary directly with changes in volume of stock-in-trade manufactured
or produced.
3.6 Long Term Contracts (Sec. 36)

 A person accounting for income from business, on an accrual basis, under a
long-term contract shall compute income for a tax year on the basis of the
percentage of completion method.
 The percentage of completion of a long-term contract in a tax year shall be
determined by comparing the total cost incurred before the end of the year
with the estimated total contract costs as determined at the commencement of
the contract.
 Definition of terms used:
“long-term contract” means a contract for manufacture, installation, or
construction, or in their relation, the performance of related services, which is
not completed within the tax year in which work under the contract
commenced. However, long term contracts shall not include a contract
estimated to be completed within six months of the date on which work under
the contract commenced.
“percentage of completion method” means the generally accepted accounting
principle under which revenues and expenses arising under a long-term
contract are recognized with reference to the stage of completion of the
contract.

Key points for solving construction contract numerical

Income derived from construction contract is either taxed under the
presumptive mode of taxation or on the basis of net taxable income (normal tax
regime).
Public company listed on registered stock exchange in Pakistan
Income of the public contractor company listed on registered stock exchange in
Pakistan is calculated under the normal tax regime and any withholding tax
deducted at source is adjustable against the final tax liability.
Other taxpayers
In case of all other taxpayers, tax deductible at source on gross amount of
payments (including mobilization advance and retention money) is treated final
tax liability of the contractor. Construction costs and other expenditure are not
tax deductible.
Application of section 36
Section 36 (Accounting for long term contracts) becomes applicable only when
income of the contractor is assessed under the normal tax regime.
In order to solve a construction contract question under the normal tax regime,
it is very important to firstly determine whether the contract is short term or
long term.
Short term construction contract
A Short term construction contract is a contract that:
(i). Commences and is completed within one tax year or
(ii). Does not last for a period of more than six months even though spread
over two tax years.
Taxation of short term contracts in case of resident taxpayers
Net taxable profit or loss from a short term contract is computed by deducting
the contract costs from contract revenues. Contract revenue will be determined
under the generally accepted accounting principles.
Long term contracts
A long term contract is defined to mean a contract which is not completed
within the tax year in which work under the contract is commenced. However, a
contract which is estimated to be completed within six months from the date on
which work under the contract commences is not considered a long term
contract even though its execution is spread over two tax years.
Taxation of long term construction contracts
Net profit or loss for a tax year is computed by using a percentage of completion
method.
Under the generally accepted accounting principles, contract cost estimates are
revised and taken cognizance of to determine the percentage of completion and
net contract income at the end of each accounting year. However the Income
Tax Ordinance, 2001 states that contracts costs estimated at the
commencement of the contract are to be used from year to year to determine
net contract income.

Exercise:
Umar Gul Limited (UGL) a public company registered on Karachi Stock Exchange
is engaged in the construction business for the past many years. In July 2012,
KPK Government awarded a contract of Rs. 9 million to UGL for construction of 3
dams in Peshawar over a period of three years. The company expects to earn a
profit of 25% of the contract value. The project was scheduled to start in July
2012 and be completed on 30 June 2015.
The amount received and costs incurred by UGL on the contract over the period of
three years were as under:
Tax year Receipts Costs

2013 3,000,000 3,105,000
2014 3,000,000 2,632,500
2015 3,000,000 1,012,500
Required:
Under the provisions of the Income Tax Ordinance, 2001 calculate the taxable
income for each of the above three tax years.
Answer
Tax year Revenue Percentage of Taxable income
Completion
W-1 & W-2
2013 2,250,000 46% 1,035,000
2014 2,250,000 39% 877,500
2015 2,250,000 15% 337,500
Workings:
W-1
Estimated profit (Total contract price- total costs) (9,000,000- 6,750,000)
2,250,000
W-2
Percentage of completion method = Contract costs incurred
Total contract costs
Tax year Percentage of completion

2013 3,105,000/6,750,000 x 100 = 46%
2014 2,632,500/6,750,000 x 100 = 39%
2015 1,012,500/6,750,000 x 100 = 15%

4 CHAPTER REVIEW
Chapter review
 Meanings assigned to term “Business” and what incomes are covered with in
the heading of income” income from Business” under the Income Tax Law?
 List down deductions which are not admissible under the head income from
business.
 Specific deductions against the business income.
 Different prescribed methods of Accounting and what is the procedure for
change of a method of accounting?


8
CHAPTER
Income from business – part two
Contents
1 Depreciable assets and depreciation
2 Intangibles
3 Pre-commencement expenditures
4 Assets
5 Chapter review

INTRODUCTION
Concepts
LO 4.4.3 Explain with simple examples the provisions relating to depreciation, disposal
and acquisition of assets, cost and consideration received

Chapter 8: Income from business – part two
1 DEPRECIABLE ASSET AND DEPRECIATION

Section overview
 Depreciable assets and general principles relating to depreciation

 Initial allowance
 First year allowance
 Accelerated depreciation to alternate energy projects
1.1 Depreciable assets

Section 22 of the Ordinance deals with the depreciation in the following manner:
S22. Depreciation:
 A person is allowed a deduction for the depreciation of the person’s
depreciable assets used in the person’s business in the tax year.
 The term depreciable asset is defined in sub-section (15) of section 22 of
the Ordinance ibid in the following manner:
Definition: Depreciable Asset

“Depreciable asset” means any tangible movable property, immovable property
(other than unimproved land), or structural improvement to immovable property,
owned by a person that:
 has a normal useful life exceeding one year;
 is likely to lose value as a result of normal wear and tear, or obsolescence;
and
 is used wholly or partly by the person in deriving income from business
chargeable to tax,
but shall not include any tangible movable property, immovable property, or
structural improvement to immovable property in relation to which a deduction
has been allowed under another section of this Ordinance for the entire cost of
the property or improvement in the tax year in which the property is acquired or
improvement made by the person; and
“Structural improvement” in relation to immovable property, includes any
building, road, driveway, car park, railway line, pipeline, bridge, tunnel, airport
runway, canal, dock, wharf, retaining wall, fence, power lines, water or sewerage
pipes, drainage, landscaping or dam.
 Depreciation shall be allowed on the written down value (WDV) of the

asset at the beginning of the year at the rates specified in Third Schedule,
as given below:
Sr. No Type of Asset Rate
I. Building (all types). 10%
Furniture (including fittings) and machinery and plant
II. (not otherwise specified), Motor vehicles (all types), 15%
ships, technical or professional books.

Computer hardware including printer, monitor and allied

III. items, Machinery & Equipment used in manufacture of 30%
IT Products, aircrafts and aero engines.
In case of mineral oil concerns the income of which is
liable to be computed in accordance with the rules in
Part-I of the Fifth Schedule.
IV. (a) Below ground installations 100%
(b) Offshore platform and production
Installations. 20%
A ramp built to provide access to persons with
V. 100%
disabilities not exceeding Rs. 250,000 each.
 Depreciation is allowed on proportional basis if the asset was also used

for the purpose other than deriving business income in a tax year.
 The written down value of a depreciable asset of a person at the
beginning of the tax year shall be:
(i). where the asset was acquired in the tax year, the cost of asset to the
person as reduced by any initial allowance in respect of the asset
under section 23; or
(ii). in any other case, the cost of the asset to the person as reduced by the
total depreciation deductions (including any initial allowance under
section 23) allowed to the person in respect of the asset in previous tax
years.
Example
First year Rupees

Cost of building 500,000
Initial allowance @ 25% 125,000
Depreciation on Rs. 375,000 37,500
(Rs. 500,000-125,000) @ 10%
Written down value carried forward 337,500
Second year Rupees
WDV Brought forward 337,500
Depreciation @ 10% 33,750
WDV carried forward 303,750
Third year Rupees
Depreciation @ 10% 30,375
WDV carried forward 273,375
 WDV of the asset, in case asset is used partly for business and party for
non-business purpose, shall be computed on the basis that the asset has
been 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 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.
Example
Computer equipment partly for business use Rupees

and partly for non-business
Used for business purpose 80%
Used for private purpose 20%
Annual depreciation @ 30% (100,000 x 30%) 30,000
Fair proportional depreciation deduction for business 24,000

purpose (80% of Rs. 30,000)
WDV carried forward (WDV minus annual depreciation i.e. 70,000

100,000- 30,000)
 The total deductions allowed to a person on account of depreciation and

initial allowance during the period of ownership of a depreciable asset
shall not exceed the cost of the asset.
 Where a person disposes of a depreciable asset in any tax year,, no
depreciation deduction shall be allowed in that year. Further, on disposal
(i). if the consideration received exceeds the written down value of the
asset at the time of disposal, the excess shall be chargeable to tax
in that year under the head “Income from Business”;
(ii). If the consideration received is less than the written down value of
the asset at the time of disposal, the difference shall be allowed as a
deduction in computing the person’s income chargeable under the
head “Income from Business” for that year.
 The provisions contained in Part-III of Chapter-IV of Income Tax
Ordinance shall apply in determining the cost and consideration received
in respect of a depreciable asset. These provisions are discussed in detail
later in this chapter.
 An asset owned by a financial institution or leasing company and leased
to another person is treated as used in the financial institution or leasing
company’s business and the depreciation deductions allowed to a leasing
company, investment bank, a modaraba, a scheduled bank or a
development financial institution in respect of assets owned by them and
leased to another person shall be deductible only against the lease rental
income derived in respect of such assets.
 The cost of a depreciable asset being a passenger transport vehicle not
plying for hire shall not exceed two and half million rupees.

 In case of disposal of such vehicle, sale consideration of the passenger

transport vehicle shall be computed according to the following formula:-
Cost of vehicle on which
depreciation is allowed
 Amount received on disposal of vehicle
Actual cost of vehicle
 The cost of immovable property or a structural improvement to immovable

property shall not include the cost of the land.
 For computing gain on disposal of immoveable property, the consideration
received shall be treated as the cost of the property if the consideration
exceeds its cost (Gain on disposal shall be equal to the depreciation
previously allowed)
 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 time of the export or transfer for a
consideration received equal to the cost of the asset. (Gain on disposal
shall be equal to the depreciation allowed).
Example:
During the tax year 2014, CFG (Pvt.) Limited disposed off the following assets:
(a) Immoveable property was sold for Rs. 150 million. The cost of the
property was Rs. 100 million. Upto tax year 2013, tax depreciation of
Rs. 30 million had been allowed on the immoveable property.
(b) A machinery used in the business in Pakistan, was exported to USA. The
export proceeds amounted to Rs. 45 million. The cost and written down
value of the machinery was Rs. 35 million and 28 million respectively.
(c) Two buses were disposed off for Rs. 2.5 million. They were acquired in
tax year 2013. The tax written down value of buses at the beginning of
the tax year 2014 was Rs. 2.4 million. The trucks were being used partly
i.e. 60% for business purpose. Tax rate of depreciation is 20%.
Required
Calculate tax gain on loss on disposal of above assets
Answer
(a)
Rs. In Million
Sale proceed 150
Cost 100
Consideration received treated as equal to cost 100
Depreciation allowed 30
Written down value 70
Gain on disposal 30

For computing gain on disposal of immoveable property, the consideration

received shall be treated as the cost of property if the consideration exceeds its
cost (Gain on disposal shall be equal to the depreciation allowed).
(b)
Rs. In Million
Consideration received equal to actual cost 35
WDV at the time of disposal 28
Gain on disposal 07
For computing gain on disposal of depreciable asset by way of export that has
been used previously in Pakistan, the consideration received shall be treated as
the cost of asset (Gain on disposal shall be equal to depreciation allowed)
(c)
Rs. In Million
Sale proceed 2.5
Less WDV at beginning of the year (2.4)
Depreciation not allowed
(2.4/0.85 x 0.15 x 0.40 (0.17)
Loss on disposal (0.07)
WDV of the asset, in case asset is used partly for business and party for non-
business purpose, shall be computed on the basis that the asset has been 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 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.
1.2 Initial allowance

The aforesaid provision elucidates that the written down value shall be computed
after deduction of initial allowance. The provision regarding initial allowance is
contained in section 23 of the Ordinance and the said section states that:
S23. Initial allowance [S 23]
1) 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.
Definition: Eligible Depreciable Asset

“Eligible depreciable asset” means a depreciable asset other than:
a. any road transport vehicle unless the vehicle is plying for hire;
b. any furniture, including fittings;
c. any plant or machinery that has been used previously in Pakistan; or
d. any plant or machinery in relation to which a deduction has been allowed
under another section of the Ordinance for the entire cost of the asset in
the tax year in which the asset is acquired.

2) The amount of initial allowance of a person shall be computed at the rate of

25% for plant and machinery and building.
3) The rules contained in section 76 shall apply in determining the cost of an
eligible depreciable asset. .
4) An initial allowance allowed to a lessor in respect of assets owned by lhim
and leased to another person shall be deductible only against the lease
rental income derived in respect of such assets.
1.3 First year allowance [S23A]

1) Plant, machinery and equipment installed by an industrial undertaking set
up in specified rural and under developed areas, and owned and managed
by a company shall be allowed first year allowance in lieu of initial
allowance under section 23 of Ordinance at the rate of 90% against the
cost of the “eligible depreciable assets” put to use after July1, 2008.
2) The Federal Government may notify “specified areas” for this purpose.
Definition: Industrial Undertaking

“Industrial undertaking” means —
a) an undertaking which is set up in Pakistan and which employs,—
i. ten or more persons in Pakistan and involves the use of electrical
energy or any other form of energy which is mechanically transmitted
and is not generated by human or animal energy; or
ii. twenty or more persons in Pakistan and does not involve the use of
electrical energy or any other form of energy which is mechanically
transmitted and is not generated by human or animal energy:
and which is engaged in,—
i. the manufacture of goods or materials or the subjection of goods or
materials to any process which substantially changes their original
condition; or
ii. ship-building; or
iii. generation, conversion, transmission or distribution of electrical
energy, or the supply of hydraulic power; or
iv. the working of any mine, oil-well or any other source of mineral
deposits; and
b) any other industrial undertaking which the Board may by notification in the
official gazette, specify.
Section 2(29C) of the Ordinance
1.4 Accelerated depreciation to alternate energy projects [S23B]

1) Any plant, machinery and equipment installed for generation of alternate
energy by an industrial undertaking set up anywhere in Pakistan and owned
and managed by a company shall be allowed first year allowance in lieu of
initial allowance under section 23 of Ordinance, at the rate of 90% against
the cost of eligible depreciation assets put to use after first day of July,
2009.

Example: Depreciation
Opening tax WDV of plant and machinery 1,000,000
Purchase of plant during the year eligible for initial allowance 500,000
Tax WDV of disposals during the year 200,000
Compute the tax depreciation and initial allowance on the above assets for the
tax year 2014.
Answer
Particulars WDV Depreciation
Opening WDV 1,000,000
Less: Tax WDV on disposal of P& M
as no depreciation is charged in 200,000
the year of disposal
Balance WDV--- A 800,000
Additions during the year 500,000
Initial Allowance @ 25% 125,000 125,000
Balance WDV--- B 375,000
WDV for Normal Depreciation A+B 1,175,000
Normal Depreciation 1,175,000 @15% 176,250
Total Depreciation 301,250

2 INTANGIBLES
Section overview
 Introduction
 Intangibles eligible for amortisation
 Method for computation of amortisation on intangibles
 Gain / loss on disposal of intangibles
2.1 Introduction
The nomenclature of this term gives the impression that it only includes the cost
of non-physical assets. However, definition of this term under the tax law is far
wider than this general impression. The definition of intangible is given in section
24 of the Ordinance in the following manner:
Definition: Intangibles [Section 24]

“Intangible” means any patent, invention, design or model, secret formula or
process, copyright, trade mark, scientific or technical knowledge, computer
software, motion picture film, export quotas, franchise, licence, intellectual
property, or other like property or right, contractual rights and any
expenditure that provides an advantage or benefit for a period of more than
one year (other than expenditure incurred to acquire a depreciable asset or
unimproved land).
The above definition reveals that it also includes any expenditure that provides an
advantage or benefit for a period of more than one year. Therefore, amortisation
of any cost which has useful life of a period exceeding one year is allowed.
Section 24 of the Ordinance explains the provision regarding intangibles and the
said section states that:
2.2 Intangibles eligible for amortisation [Section 24]

 A person shall be allowed an amortisation deduction in a tax year for the
cost of the person’s intangibles:
(i). that are wholly or partly used by the person in the tax year in deriving
income from business chargeable to tax; and
(ii). That has a normal useful life exceeding one year.
 The terms cost as used in the aforesaid provision is defined in the following
manner in the Ordinance:
Definition: Cost of Intangible Asset

“cost” in relation to an intangible, means any expenditure incurred in acquiring or
creating the intangible, including any expenditure incurred in improving or
renewing the intangible

 The total deductions allowed to a person in the current tax year and all
previous tax years in respect of an intangible shall not exceed the cost of
the intangible.
2.3 Method for computation of amortisation charge on intangibles:

 The amortization deduction of a person for a tax year shall be computed
according to the following formula, namely:
A/B
Where:
A is the cost of the intangible; and
B is the normal useful life of the intangible in whole years.
 An intangible which:
(i). has a normal useful life of more than ten years; or
(ii). does not have an ascertainable useful life,
shall be treated as if it had a normal useful life of ten years.
 If an intangible is used in a tax year partly in deriving income from business
chargeable to tax and partly for another use, the deduction allowed for that
year shall be restricted to the fair proportional part of the amount that would
be allowed if the intangible were wholly used to derive income from
business chargeable to tax.
 Where an intangible is not used for the whole of the tax year in deriving
income from business chargeable to tax, the deduction allowed under this
section shall be computed according to the following formula, namely:
A x B/C
Where:
A is the amount of amortization computed in accordance with the above
provisions
B is the number of days in the tax year the intangible is used in deriving
income from business chargeable to tax; and
C is the number of days in the tax year.
2.4 Gain / loss on disposal of intangibles

 Where, in any tax year, a person disposes of an intangible, no amortisation
deduction shall be allowed for that year and:
(i). if the consideration received by the person exceeds the written
down value of the intangible at the time of disposal, the excess shall
be income of the person chargeable to tax in that year under the
head “Income from Business”; or
(ii). If the consideration received is less than the written down value of
the intangible at the time of disposal, the difference shall be allowed
as a deduction in computing the person’s income chargeable under
the head “Income from Business” in that year.

 For the purpose of calculating any gain or loss on disposal of intangible:

(i). the written down value of an intangible at the time of disposal shall
be the cost of the intangible reduced by the total deductions
allowed to the person under this section in respect of the intangible
or, where the intangible is not wholly used to derive income
chargeable to tax, the amount that would be allowed under this
section if the intangible were wholly so used; and
(ii). The consideration received on disposal of an intangible shall be
determined in accordance with section 77 of the Ordinance
(explained later in this chapter).
 An intangible that is available for use on a day (including a non-working
day) is treated as used on that day.

Exercise:
Briefly explain the tax treatment in respect of each of the following independent
situations:
(i). Aiza (Pvt.) Ltd has revalued its Building in accordance with International
Accounting Standards and consequently charged depreciation on the
revalued amount.
(ii). Aiza (Pvt.) Ltd during the year has opened an overseas office in France
and has claimed initial allowance and depreciation on eligible
depreciable assets purchased by the office.
(iii). Uzair Limited has charged impairment in respect of one of its depreciable
assets. The Commissioner is of the view that impairment expense will not
be allowed as an expense.
(iv). Uzair Limited has discontinued a major product line of its business and
envisages selling off the machinery related to this product line over a
period of one to two years to get the right price. Uzair Ltd wants to claim
depreciation on the idle machinery until disposed of.
(v). Ms. Sana sells a number of personal vehicles in a tax year and makes a
significant amount of profit in the process. She is of the view that the said
income is exempt from tax.
(vi). XYZ Ltd has recorded a gain on revaluation of its foreign currency
balances at the year end. The gain comprises of both realized and
unrealized amount.
(vii). On May 2014, Ms. Sana purchased a vehicle not plying for hire
amounting to Rs. 4,210,000 to be used solely for the purpose of her
business. While preparing the tax return she has claimed initial allowance
and depreciation as per the prescribed rates given in the Income Tax
Ordinance, 2001 for the full year on Rs. 4,210,000.
(viii). In April 01, 2013 Mr. Azhar purchased accounting software amounting to
Rs. 5 million for his business. The software has a useful life of 13 years.
Mr. Azhar has charged full year amortization on straight line basis over
the useful life of the software.
(ix). Entertainment expense payable amounting to Rs. 210,000 has been
debited to profit & loss account of ABC Ltd. The company has not
deducted any tax on the said expense.
(x). ABC (Pvt.) Ltd has charged depreciation according to the rates admissible
under the tax law amounting to Rs. 125,000 on machinery taken on a

finance lease from a scheduled bank in August 2008. Lease rentals paid
during the tax year 2014 amounted to Rs. 220,000. The leased
machinery was transferred to owned assets on maturity on 30 April
2014. On maturity the accounting WDV of the assets was Rs. 500,000,
market value was Rs. 800,000 whereas residual value of the asset was
Rs. 50,000.
Answer
(i). Deduction for depreciation is associated with tax written down values of
assets calculated with reference to specific provisions. Accounting
revaluation of assets has no bearing on tax written down value of assets.
Consequently, depreciation will be allowed on tax written down values of
building without taking into account the effect of revaluation. [Ref: S
22(5)]
(ii). Initial allowance is only available on assets used in Pakistan. Accordingly,
the company will not be entitled to deduction on account of initial
allowance on assets purchased by the branch for use in business outside
Pakistan. The company will however be allowed to claim normal
depreciation on all depreciable assets. [Ref: S 23 (1) and S 22]
(iii). The contention of the Commissioner is correct. Charge for impairment of
fixed assets is not a tax deductible expense. As the impairment charge
will be ignored for tax purpose, the written down value of assets will not
be reduced by the charge and depreciation will be calculated as if no
impairment has taken place
(iv). One of the criteria for an asset to qualify as ‘depreciable asset’ is that it
should be used partly or wholly for deriving business income. As the
product line has been discontinued and the machinery is no more in use,
therefore, it ceases to qualify as a ‘depreciable asset’. Accordingly, no
deduction will be allowed for depreciation. [Ref: S 22 and S75(3A)]
(v). Income from sale of personal motor vehicles is not taxable under the
head Capital Gains. If the vehicles are bought and sold with the motive of
trade, the resultant gain will constitute business income. However, vehicle
intended for personal use are excluded from the definition of capital
assets. [Ref: S 37(5) (d)]
(vi). Unrealized gain on revaluation of foreign currency balances is notional
income in nature and is not liable to tax. Foreign exchange gains will be
included in the taxable income for the tax year in which realized.

(vii). Full year depreciation should be charged on restricted value of Rs.

2,500,000. As vehicle is not an eligible depreciable asset, therefore,
initial allowance cannot be claimed.
(viii). Amortization should be allowed for 91 days over the useful life of 10
years only. (S. 24(4),24(6))
(ix). Tax is required to be deducted only at the time of payment. Since the
expense is still payable, therefore, company has rightly claimed the said
expense.
(x). In case of assets taken on finance lease, lease rentals are an admissible
deduction instead of depreciation. Further, as the asset was transferred
during the tax year 2014, therefore, full year depreciation will be allowed
on the residual value of the asset. No initial allowance will be allowed as
the asset was already in use. (S. 22, S.28 (1) (B) S 23).

3 PRE-COMMENCEMENT EXPENDITURE
Section overview
 Definition and tax treatment of Pre commencement expenditure
3.1 Pre commencement expenditure

Section 25 of the Ordinance deals with the admissibility of pre- commencement
expenditure and the said section states that:
25. Pre-commencement expenditure
 A person shall be allowed a deduction for any pre-commencement
expenditure @ 20% per annum on straight line basis.
 The term pre-commencement expenditure is defined in section 25 of the
Ordinance in the following manner:
Definition: Pre Commencement Expenditure

“pre-commencement expenditure” means any expenditure incurred before the
commencement of a business wholly and exclusively to derive income chargeable
to tax, including the cost of feasibility studies, construction of prototypes, and trial
production activities, but shall not include any expenditure which is incurred in
acquiring land, or which is depreciated or amortised under section 22 or 24 of the
Ordinance.
 The total deductions allowed under this section in the current tax year and
all previous tax years in respect of an amount of pre-commencement
expenditure shall not exceed the amount of the expenditure.
 No deduction shall be allowed under this section where a deduction has
been allowed under another section of this Ordinance for the entire
amount of the pre-commencement expenditure in the tax year in which it
is incurred.

4 ASSETS
SECTION OVERVIEW
 Disposal of assets
 Acquisition of assets
 Cost
 Consideration received
4.1 Disposal of assets (Sec-75)

 An asset shall be treated to have been disposed off at the time the owner
parts with the ownership of the asset. This shall include when the asset is
(i). sold, exchanged, transferred or distributed; or
(ii). cancelled, redeemed, relinquished, destroyed, lost, expired or
surrendered.
 The transmission of an asset by succession or under a will shall be treated
as a disposal of the. asset by the deceased at the time asset is transmitted.
 The application of business assets (including stock or depreciable asset) to
personal use shall be treated as a disposal of the asset by the owner of the
asset at the time the asset is so applied.
 Where a business asset is discarded or ceases to be used in business, it
shall be treated to have been disposed off
 A disposal shall include the disposal of a part of an asset.
4.2 Acquisition of assets (Sec-75)

 A person shall be treated as having acquired an asset at the time the
person begins to own the asset, including at the time the person is granted
any right.
 The application of a personal asset to business use shall be treated as an
acquisition of the asset by the owner at the time the asset is so applied
4.3 Cost (Sec-76)

The cost of acquisition under different situations is explained in section 76 of the
Ordinance in the following manner:
 The cost of an asset purchased by a person shall be the sum of the
following amounts, namely:-
(i). consideration given for the asset, which shall include:
(a) fair market value of any consideration given in kind; plus
(b) any cash or cash equivalent paid as consideration.
(ii). any incidental expenditure incurred by the person in acquiring and
disposing of the asset; and
(iii). any expenditure incurred by the person to alter or improve the asset

Example: Cost
Example – Purchase of a moulding machine in exchange for old machine
Particulars Amount
(Rupees)
Purchase price paid – Cheque drawn on business bank account 100,000
+Bringing to present location – Transportation freight paid in cash 5,000
+Making fit for intended use – Installation expenditure paid 10,000
+Non-cash benefit given – Fair market value of old moulding 25,000
Machine
+Debt incurred – Bank paid to the supplier against loan repayable
in ten monthly instalments 75,000
Cost of the moulding machine for the purposes of depreciation 215,000
deduction
 The cost of a personal asset treated as acquired by the business shall be

the fair market value of the asset determined at the date it is applied to
business use.
 The cost of an asset produced or constructed by a person shall be the total
costs incurred by the person in producing or constructing the asset plus any
expenditure incurred by the person on the alteration, improvement or
disposal of such asset.
Example: Cost
Example – Boiler Produced in house by the entity for its factory Amount
(Rupees)
Cost incurred to produce
Material 50,000
Wage 7,500
Consumables (Welding rods etc.) 3,000
Fuel and power (electricity, gas, etc.) 2,000
Factory overheads 1,500
Cost of the boiler for the purposes of depreciation deduction 64,000
 Cost of depreciable asset acquired by the lessee on maturity or pre-mature

termination of finance lease agreement is the residual value or bargain
purchase price as the case may be.

Example: Cost
Motor vehicle Amount
Cost at the time acquired 1,000,000
Finance obtained under finance lease 1,000,000
Bargain purchase price:
Before payment of 7th installment 1,000,000
After payment of 7th but before payment of 11th 750,000
installment
installment
installment
Residual value on maturity of lease 70,000
Monthly lease rentals 60,000
No. of installments 22
Answer
Cost of motor vehicle for the purpose of depreciation
deduction
Before payment of 7 installment 1,000,000
After paying 7 installment 750,000
On maturity of lease i.e. after paying 22 installments 70,000
 If an asset has been acquired by a person with a loan denominated in a

foreign currency and, before full and final repayment of the loan, there is an
increase or decrease in the liability of the person under the loan as
expressed in rupees, the amount by which the liability is increased or
reduced shall be added to or deducted from the cost of the asset, as the case
may be.
Explanation: Difference, if any, on account of foreign currency fluctuation,
shall be taken into account in the year of occurrence for the purposes of
depreciation.
In determining whether the liability of a person has increased or decreased,
account shall be taken of the person’s position under any hedging agreement
relating to the loan.
 Where a part of an asset is disposed of by a person, the cost of the asset
shall be apportioned between the part of the asset retained and the part
disposed of in accordance with their respective fair market values determined
at the time the person acquired the asset.

 Where the acquisition of an asset by a person is the derivation of an amount

chargeable to tax, the cost of the asset shall be the amount so charged plus
any amount paid by the person for the asset.
 Where the acquisition of an asset by a person is the derivation of an amount
exempt from tax, the cost of the asset shall be the exempt amount plus any
amount paid by the person for the asset.
 The cost of an asset does not include the amount of any grant, subsidy,
rebate, commission or any other assistance (other than a loan repayable with
or without profit) received or receivable by a person in respect of the
acquisition of the asset, except to the extent to which the amount is
chargeable to tax under this Ordinance.
 The Board may prescribe rules for determination of cost for any asset.
Example:
Burewala Express Limited (BEL) is in the business of manufacturing and sale of
component parts for automobile assembly industry. On 1 January 2012, BEL took
a loan of US$ 1,000,000 from GHI Bank, USA, which was utilized for purchasing
the plant. The loan is repayable in 10 equal instalments in US Dollars. The rate of
exchange on 1 January 2012 was US$ 1 equal to Rs.98 and the loan liability was
recorded in the books of account of BEL atRs.98,000,000. Other information:
(1). The Project was completed in June 2013, but was only commissioned for
use on 31 July 2013. The total amount spent by BEL on the plant was
Rs.200,000,000
(2). On 1 July 2013, the Government of Pakistan (GOP) voluntarily paid BEL
Rs.10,000,000 as a subsidy in respect of the plant installed in the Project.
(3). The first instalment of US$ 100,000 towards repayment of the US Dollar
loan was paid to GHI Bank on 30 June 2014. The rupee equivalent of US$
100,000 at the then rate of exchange was Rs.10,000,000 (US$ 1= Rs.100).
Required:
Calculate the initial allowance, depreciation and written down value of the plant
on 30 June 2014 for preparing the tax return for tax year 2014.
Answer
Description Note Amount
Cost of the plant 200,000,000
Subsidy 1 (10,000,000)
Exchange fluctuation 2 200,000
Cost of the plant 190,200,000
Initial allowance @ 25% 47,550,000
Written down value 142,650,000
Depreciation @ 15% 21,397,500
Written down value 121,252,500

Notes:
N-1:
In determining the cost of an asset for tax purposes the actual amount spent by
a person in acquiring an asset is required to be reduced by the amount of any
grant, subsidy, rebate, commission or any other assistance received or receivable
by the person in respect of the acquisition of the asset except where the said
amount received is chargeable to tax [S.76 (10)]. Further the amount of Rs. 10
million is not income for tax purpose but is a capital receipt on the grounds that
a) The amount was voluntarily paid by GOP without any consideration

b) The company did not ask for the subsidy
c) Amount received did not arise out of any legal or contractual obligation
d) The amount is not traceable nor even remotely connected to any source
of income
N-2:
where a person has acquired an asset with a foreign currency loan (repayable in
foreign currency) and before the loan is fully repaid, there is an increase or
decrease in the loan liability of the person in terms of Pakistan rupees, due to a
change in the rate of exchange of the foreign currency, the amount by which the
liability has increased or decreased is to be added to or reduced from the cost of
the asset. In other words, the cost of the asset acquired with the foreign currency
loan is recomputed for tax purposes [S.76(5)].
4.4 Consideration received (Sec-77)

Section 77 contains provisions relating to ‘consideration received’ in connection
with disposal of assets. These are described below:
 The consideration received by a person on disposal of an asset shall be the
aggregate of:
(i). amount received by the person for asset or the fair market value thereof,
whichever is higher; plus
(ii). the fair market value of any consideration received in kind determined at
the time of disposal.
 If an asset has been lost or destroyed by a person, the consideration
received for the asset shall include any compensation, indemnity or damages
received by the person under:
(i). an insurance policy, indemnity or other agreement;
(ii). a settlement; or
(iii). a judicial decision.
 The consideration received for an asset treated as disposed of when applied
to personal use or is discarded or ceased to be used shall be the fair market
value of the asset determined at the time it is applied to personal use or
discarded or ceased to be used in business, as the case may be.

Example: Consideration
Example – Personal computer applied to business use Amount
(Rupees)
Purchase price paid – At the time it was acquired in June 200X 50,000
Fair market value today when applied to business use 35,000
Cost of computer for the purposes of depreciation deduction 35,000
Example – Structural improvement to immovable property Amount
(building) applied to business use (Rupees)
Purchase price paid – At the time it was acquired in June 2005 500,000
Fair market value today when applied to business use 700,000
Cost of Structural improvement to immovable property
(building) for the purposes of depreciation deduction 700,000
 The consideration received by a scheduled bank, financial institution,

modaraba, or leasing company approved by the Commissioner in respect
of an asset leased by the company to another person shall be the residual
value received by the leasing company on maturity of the lease agreement
subject to the condition that the residual value plus the amount realized
during the term of the lease towards the cost of the asset is not less than
the original cost of the asset.
 Where two or more assets are disposed of by a person in a single
transaction and the consideration received for each asset is not specified,
the total consideration received by the person shall be apportioned among
the assets disposed of in proportion to their respective fair market values
determined at the time of the transaction.
 The Board may prescribe rules for determination of consideration received
for any asset.

5 CHAPTER REVIEW
Chapter review
 What is depreciable asset, how the depreciation on a depreciable asset can be
worked out?
 How the gain or loss on disposal of depreciable can be computed and what is
the treatment of said gains or losses for the purposes of tax law?
 What is eligible depreciable asset and how the initial allowance can be
computed?
 What are intangibles and the method of computing amortisation deduction on
intangibles.
 What are pre-commencement expenditures and what are the provisions for
admissibility of amortisation deduction on such expenditures?
 How to calculate cost and consideration received for asset
 When a person is treated to have acquired / disposed of an asset


9
CHAPTER
Capital gains
Contents
1 Capital asset and capital gains
2 Computation of capital gain
3 Loss on disposal of capital asset
4 Taxability of capital gain on disposal of immoveable
property and securities
5 Chapter review

INTRODUCTION
This chapter deals with the fourth head of income i.e. capital gain. The gain arising from the
disposal of capital assets is taxable under this head of income. This head of income is
equally important in order to understand the scope and manner of taxation of a person’s
income.
Learning outcomes
Concepts
LO 4.1.1 Describe the definitions given in section 2 sub-section 10
LO 4.3.1 Compute taxable income and tax thereon relating to capital gains
LO 4.4.3 Explain with simple examples the provisions relating to disposal and
acquisition of assets, cost and consideration received

Chapter 9: Capital gains
1 CAPITAL ASSET AND CAPITAL GAINS

Section overview
 Capital Gain and Basis of Chargeability

 Definition of Capital Asset
1.1 Capital Gain and Basis of Chargeability

As per Section 37 of the Income Tax Ordinance 2001 a gain arising on the
disposal of a capital asset by a person in a tax year, other than a gain that is
exempt from tax shall be chargeable to tax in that year under the head “Capital
Gains”.
A person maintaining his books of accounts on cash basis will generally calculate
capital gain when he will receive cash but section 37 categorically says that such
income shall be added in the taxable income of the tax year in which disposal
arises (takes place). For example if disposal takes place in the tax year 2013 and
cash is received in tax year 2014, taxpayer will have to include the gain in the tax
year 2013 although cash is received in tax year 2014 .
The understanding of aforesaid provision of law is very much linked with the
knowledge of the following two terms:
 Capital Asset
 Disposal
1.2 Capital Asset

This term is defined in sub-section (5) of section 37 of the Ordinance in the
following manner:
Definition: Capital Asset

Capital asset means property of every kind held by a person, whether or not
connected with a business, but does not include:
 any stock-in-trade, consumable stores or raw materials held for the purpose
of business;
 any property with respect to which the person is entitled to a depreciation
deduction under section 22 or amortization deduction under section 24; or
 any movable property held for personal use by the person or any member
of person’s family dependent on the person excluding capital assets
mentioned under section 38(5)) i.e. painting, sculpture, drawing or other
work of art, jewellery, rare manuscript, folio, book, postage stamp, first day
cover, coin, medallion or an antique.
Common examples of capital assets are shares, Modaraba Certificates,

Participation Term Certificates, Term Finance Certificates, Musharika
Certificates, PTC Vouchers, goodwill, patent, copyrights etc.

1.3 Disposal of Asset

The legislature intentionally used the word “disposal” and avoided using the
words “sale”. The reason to use this term is that the term “disposal” has a wider
connotation than sale. The term “disposal” has been defined in section 2(18) read
with section 75.
Section 75 says that a person who holds an asset shall be treated as having
made a disposal of the asset at the time the person parts with the ownership of
the asset, including when the asset is:
 sold, exchanged, transferred or distributed; or
 Cancelled, redeemed, relinquished, destroyed, lost, expired or surrendered.
The transmission of an asset by succession or under a will shall be treated as a
disposal of the asset by the deceased at the time asset is transmitted.
The application of a business asset to personal use shall be treated as a disposal
of the asset by the owner of the asset at the time the asset is so applied.
Where a business asset is discarded or ceases to be used in business, it shall be
treated to have been disposed of.
A disposal shall include the disposal of a part of an asset.
It is important to note that a:
 “Business asset” means an asset held wholly or partly for use in a
business, including stock-in-trade and a depreciable asset; and
 “Personal asset” means an asset held wholly for personal use.

2 COMPUTATION OF CAPITAL GAINS

Section overview
 Computation of gain / loss

 Determination of cost
 Capital gain exempt from tax
2.1 Computation of gain/loss on disposal of capital asset

 Capital gain arising on the disposal of a capital asset by a person shall be
computed by the formula:
Capital Gain = A – B
Where:
A is the consideration received on disposal of the asset; and
B is the cost of the asset.
 Where a capital asset has been held by a person for more than one year,
other than shares of public companies including the vouches of Pakistan
Telecommunication Corporation, Modaraba Certificates or any instrument
of redeemable capital as defined in the Companies Ordinance, 1984, only
3/4th of the capital gain shall be taxable and balance 1/4th shall be exempt
from tax.
2.2 Determination of cost of capital asset

Sub sections (4) and (4A) of section 37 the Ordinance explicate the cost of
capital asset in two situations in the following manner:
 No amount shall be included in the cost of a capital asset for any
expenditure incurred by a person:
 that is deductible from income earned under any other head of income;
or
 any expenditure which is not a deductible expense under section 21-
‘Deductions not allowed’.
 In case the capital asset becomes the property of the person:
 under a gift, bequest or will;
 by succession, inheritance or devolution;
 a distribution of assets on dissolution of an association of persons; or
 on distribution of assets on liquidation of a company,
the fair market value of the asset, on the date of its transfer or acquisition
by the person shall be treated to be the cost of the asset.

2.3 Capital gains exempt from levy of tax

Following gains are exempt from levy of income tax under Part I Second
Schedule of the Income Tax Ordinance, 2001:
Illustration:
Clause of Part I Exemption granted to
Second Schedule
110B Transfer of a stock exchange membership rights
(113) Capital gain on sale of shares of public company set up in
special Industrial zones derived by a person for a period
of five years from date of commencement of its
commercial production
(114) Capital gain on sale of shares of industrial undertaking
set up in an area declared by the Federal Government to
be a “Zone” within the meaning of the Export Processing
Zones Authority Ordinance, 1980 (IV of 1980)

3 DEDUCTION OF LOSSES IN COMPUTING INCOME CHARGEABLE

UNDER THE HEAD CAPITAL GAINS
Section overview
 Deduction of losses
 Treatment of capital loss
3.1 Deduction of losses

Section 38 of the Ordinance stipulates the provisions regarding deduction of
losses in computing the amount chargeable to tax under the head “Capital
Gains”:
 Loss sustained on the disposal of another capital asset (capital loss) shall
be deducted from capital gain.
 No loss shall be deducted on the disposal of a capital asset where a gain
on the disposal of such asset would not be chargeable to tax.
 The loss arising on the disposal of a capital asset by a person shall be
computed in accordance with the following formula, namely:
Capital Loss = A – B
Where:
A is the cost of the asset; and
B is the consideration received by the person on disposal of the asset.
 Loss on the disposal of following capital assets shall not be deductible from
capital gain:
 A painting, sculpture, drawing or other work of art;
 Jewellery;
 A rare manuscript, folio or book;
 A postage stamp or first day cover;
 A coin or medallion; or
 An antique.
3.2 Treatment of capital loss

Treatment of ‘adjustment’ and ‘carry forward’ of capital losses is explained in
section 59 of the Income Tax Ordinance, 2001 in the following manner:
A capital loss sustained by a person during a tax year shall not be setoff against
income of same person under any other head of income for the same tax year.
The amount of capital loss which cannot be set-off shall be carried forward upto
six tax years immediately succeeding the tax year for which the loss was first
computed.
In the subsequent years, this loss can only be set-off against the capital gain for
that tax year.
Where a person has a loss carried forward for more than one tax year, the loss of
earliest tax year shall be set-off first. (Treatment for capital loss been discussed
in detail in chapter 11).

4 CAPITAL GAIN ON IMMOVEABLE PROPERTY AND SECURITIES

Section overview
 Capital gain on immoveable property

 Capital gain on securities
 Special provision relating to capital gain tax
4.1 Capital gain on immovable property (Section 37(1A))
A gain arising on the disposal of immoveable property by a person in a tax year

shall be chargeable to tax in that year under the head capital gains at the
following rates:
Illustration:
S. No Holding Period Rate of Tax
1. Where holding period of Immovable Property is up
10%
to one year
2. Where holding period of Immovable Property is
more than one year but not more than two years 5%
3. Where holding period of Immovable Property is

more than two years 0%
4.2 Capital gain on sale of securities

Section 37A of the Income Tax Ordinance, 2001 and Rules 13A-13N of the
Income Tax Rules, 2002 contain provisions regarding taxation of capital gain on
sale of securities.
Definitions:
Security
Security means share of a public company, voucher of Pakistan
Telecommunication Corporation, Modaraba Certificate, an instrument of
redeemable capital and derivative products.
Derivative Products
Derivative products means a financial product which derives its value from the
underlying security or other asset, may be traded on stock exchange of Pakistan
and includes deliverable future contracts, cash settled future contracts, contracts
of rights and options.
The gain arising on the disposal of a security by a person shall be computed in

accordance with the following formula:
Gain = A-B
Where-
A is the consideration received by the person on disposal of the security; and
B is the cost of acquisition of the security.

Capital gain arising on disposal of securities shall be chargeable to tax at the

following rates:
S. No. Holding Period and Tax Year Rate of

Tax
1 Where holding period of a security is less than six
months.
2011 10%
2012 10%
2013 10%
2014 10%
2 Where holding period of a security is more than six
Months but less than twelve months
2013 8%
2014 8%
Tax Rates for Tax Year 2015
3 Where holding period of a security is less than twelve 12.5%
months
4 Where holding period of a security is twelve months or 10%
more but less than twenty four months
5 Where holding period of a security is twenty four months 0%
or more
Gain on disposal of immovable property and securities shall be treated as a

separate block of income and taxable at above respective prescribed tax rates.
On the other hand, gain on disposal of capital assets will be added to the normal
income of the taxpayer and taxable on the basis of the tax rates applicable to
such person.
The holding period shall reckon from the date of acquisition to the date of
disposal.
Securities held for a period upto a maximum of one eighty two days and for a
period upto a maximum of three sixty five days shall be taken as held for six
months and one year respectively.
Capital gain arising on the disposal of any security shall be computed on the
basis of First in First out (FIFO) inventory accounting method. However, FIFO
method shall not apply in respect of sale of shares purchased on the same
trading day. In that case gain or loss shall be computed by applying the average
method.
Loss sustained by a person on disposal of securities shall be set off only against
the gain of the person from any other securities chargeable to tax and no loss
shall be carried forward to the subsequent tax year
Capital loss adjustment disallowed (Rule 13 F)

Capital loss adjustment as mentioned above shall not be admissible in the
following cases, namely
Wash Sale
Where capital loss realized on disposal of a specific security by an investor is
preceded or followed in one month’s period by purchase of the same security by

the same investor, thus maintaining his portfolio.

Cross Trade
Where coordinated reshuffle of securities between two related accounts of the
same investor or between two related brokerage houses is undertaken and
securities accumulating unrealized losses are sold to related accounts to
artificially realize capital losses in one account without actually selling the
securities to an outsider.
Tax Swap sale
Where the investor having realized loss on a particular security does not
repurchase the same security but chooses another similar security in the same
sector thus not only minimizing or eliminating altogether liability on account of tax
on capital gain, but also maintaining the portfolio broadly at the same risk return
profile.
The above provisions shall not apply to a banking company or an insurance

company.
Payment of tax on capital gain (Rule 13H)

Every investor shall calculate tax on capital gain arising on securities held for a
period upto six months, and above six months to one year, after the end of each
tax year at the prescribed rates.
Every investor other than individual shall e-file statement of advance tax on
capital gain on the prescribed format within seven days after the end of each
quarter with the tax authority.
The liability to pay the due tax on capital gain shall lie on the investor who held
the securities during the period for which tax on capital gain is to be paid.
4.3 Special provision relating to capital gain tax

100B Special provision relating to capital gain tax:
 Capital gains on disposal of listed securities and tax thereon shall be
computed, determined, collected and deposited in accordance with the
provisions of section 37A read with rules laid down in the Eighth Schedule.
 Provisions of section 37A and Eight Schedule of the Income Tax
Ordinance,2001 shall not apply to the following persons or class of
persons, namely:
 a mutual fund;
 a banking company, a non-banking finance company, and an insurance
company subject to tax under the Fourth Schedule;
 a modaraba;
 a “foreign institutional investor” being a person registered with NCCPL
as a foreign institutional investor; and any other person or class of
persons notified by the Board.

Exercise
Briefly explain the income tax implications in respect of each of the following
independent situations:
(i). 1 January 2013: Ilyas entered into a contract for the sale of his house in
Islamabad with Mr. Sohail for a consideration of Rs. 50,000,000. Sohail paid
Rs. 5,000,000 at the time of the contract for sale. However, he failed to pay
the balance of the amount by 30 April 2013 and Ilyas forfeited the Rs.
5,000,000 in accordance with the terms of the contract. Subsequently, the
house was sold for Rs. 49,000,000 to Mr Mumtaz on 30 June2013. Ilyas had
inherited the house on 25 June 2010, on which date the fair market value of
the house was estimated at Rs. 39,000,000.
(ii). 15 February 2013 Bilal discarded a machine which he had imported from
China for Rs. 1,000,000 on 1 January 2013 to start the business. However,
the machine was badly damaged during the shipment, rendering it unfit for
use. The shipping company paid him Rs. 850,000 as damages. The scrap
value of the machine on the date it was discarded was estimated to be Rs.
200,000. The documentation charges incurred in connection with the claim
for damages were Rs. 25,000
(iii). On 14 December 2012 Imtiaz sold 10,000 shares in Interwood (Pvt.) Ltd for
Rs. 300,000. He had acquired these shares as follows:
(a). 5,000 shares were purchased at Rs. 18 per share on 5 February 2010.
(b). 5,000 bonus shares were allotted to him on 1 July 2010 when the fair
market value was Rs. 22 per share.
(c). Incidental charges relating to the purchase and sale of these shares of
Rs. 10,000 were paid in cash
(iv). On March 01, 2013 Mr. Aleem sold 10,000 shares in Pakistan
Telecommunication Limited, a company listed on Karachi Stock Exchange
for Rs. 300,000. He had purchased these shares on July 01, 2012 for Rs.
200,000. Brokerage and other expenses on sale transaction were
Rs.1,500 including Rs. 300 being tax withheld at source.
(v). On June 15, 2013 Imran sold his personal car for Rs. 1,500,000. The car
has been originally purchased for Rs. 1,200,000 on September 13, 2010.
(vi). Mr. Salman sold his antique watch for Rs. 150,000 in tax year 2013. The
watch had been gifted to him by his mother back in 2005. Its fair market
value at the time of gift was Rs. 250,000.

Answer
(i)
Transaction with Mr Sohail
The amount of Rs. 5,000,000 forfeited by Ilyas in accordance with the terms of the
contract for the sale of his house to Sohail is to be treated as rent received
[s.15(2)] and taxed under normal tax regime.
Transaction with Mr Mumtaz.
Consideration for the sale of the house on 30 June 2013 49,000,000
Market value on 25 June 2010, the date of inheritance by
Ilyas [S.37(4A)(b)] (39,000,000)
Capital gain 10,000,000
Since the disposal was made after holding the house for more than two years, no
gain is taxable under the law. [S.37(1A)]
(ii) Disposal of machine

Since Bilal was not entitled to claim depreciation on this machine, the machine
falls within the definition of a capital asset. [S.37(5)(b)] Discarding an asset is also
treated as a disposal of the asset. [S.75(3A)] The capital gain is determined as:
Rs.
Consideration received 15 February 2013
Damages from the shipping company 850,000
Scrap value of the machine 200,000
1,050,000
Cost of the machine on 1 January 2013
Purchase price of the machine 1,000,000
Documentation charges incurred 25,000
(1,025,000)
Capital gain 25,000
Since the disposal was made within one year of acquiring the asset, the full
amount of capital gain is taxable. [S.37 (3)]
(iii) Sale of shares in Interwood (Pvt) Ltd

Consideration received on the sale of 10,000 shares on
14 December 2012 300,000
Less:
Purchase price of 5,000 shares at Rs. 18 per share on
5 February 2010(5,000 x 18 90,000
Allotment of 5,000 bonus shares on 1 July 2010
(Fair market value is not relevant in this case) 110,000
Incidental charges [s.76(2)(b)] 10,000
(210,000)
Capital gain 90,000
Since the disposal of the shares was made after holding them for more than a
year, only 75% of the capital gain is taxable at Rs. 67,500. [S.37 (3)]
(iv) Sale of shares

Consideration received 300,000
Less Cost: Original cost 200,000
Brokerage & Commission ( 1500-300) 1,200
Total Cost 201,200
Capital Gain 98,800

Since holding is more than six months therefore 98,800 will be charge to tax as
separate block @ 8%. Further Rs. 300 deducted by stock exchange will be
adjustable against the final liability
(v) Sale of personal car

A moveable asset in the personal use of the taxpayer is not a capital asset.
Therefore, the gain is not taxable [Ref. Sec 37(5)(d)]
(vi) Antique
An antique is a capital asset. However loss is not recognized on an antique [Ref
Sec 38(5)(f)]
Exercise
Mr Mobeen owns different assets. The detail of these assets along with mode and
value of acquisition and nature of transactions is as under:
 On 15 June, 2014, Mr Mobeen sold 5,000 shares of M/s ABC (Pvt.) Limited
for a sum of Rs 625,000. These shares were gifted to him by his friend on
13 September, 2013 on which date the fair market value of the shares was
Rs 500,000. His friend has originally purchased these shares in tax year
2010 for a sum of Rs 525,000.
 Mr Mobeen has also 10,000 shares of XYZ Limited, a listed company, which
were transferred to him through inheritance from father. The face value of
these shares is Rs 10 per share and his father was original allottee of these
shares. FMV of these shares at the time of inheritance also Rs. 10 per
share. Mr Mobeen sold 2,000 shares out of them at Rs 30,000 on 30
January 2014. The break-up value of these shares as per balance sheet of
the company was Rs 15 per share; however, the price ruling in the market
on the date of sale was Rs 20 per share.
 Mr Mobeen has also paid a sum of Rs 60,000 for purchase of dining table
set on 15 January 2002 for his personal use. He sold the said set to Mr
Gufran for a sum of Rs 90,000 on 27 June, 2014.
 Mr Mobeen also has a habit of collection of postage stamps. His collection
includes 2,000 stamps of different countries and occasions. He collected
these stamps in many years. The cost of these stamps aggregates to Rs
275,000. However, due to paucity of space in the home, he is not able to
continue this habit therefore he sold these stamps for a sum of Rs 740,000
in a stamp exhibition.
You are required to compute the taxable income of Mr Mobeen for tax year 2014.

Answer
MR MOBEEN
TAX YEAR 2014
STATUS: RESIDENT PERSON
Particulars Consideration Cost Gain Taxable Remarks
Gain
Capital Gains
Sales of 625,000 500,000 125,000 125,000 For assets acquired by
shares gift (there is no
acquisition cost for the
person acquiring the
asset), the fair market
value of the asset at the
time of its acquisition is
treated to be the cost of
the asset (Ref: Sec
37(4A)).
Further, full amount of
gain is taxable as shares
are sold within 12
months of its acquisition.
Sale of 40,000 20,000 20,000 Nil U/s 37A, there is no tax
Inherited in case securities are held
listed shares for a period exceeding
one year. Further, any
gain on disposal of
securities is taxable as
separate block of income.
Sale of dining 90,000 60,000 30,000 Nil Any movable property
table set for personal use,
except for painting,
sculpture, drawing,
jewellery, rare
manuscript, folio,
book, postage stamps,
first day cover, coin,
medallion or an
antique, is not
chargeable to tax.
Sale 740,000 275,000 465,000 348,750 No loss is recognizable on
consideration sale of stamps; however
of postage any gain is fully taxable.
stamps Further, since holding
period is greater than one
year, therefore, only 3/4th
gain is chargeable to tax.
Total Capital Gain 473,750
Tax on capital gain 7,375 Rs. 473,750 taxable at
normal tax rates
applicable to business
individuals. Rs 400,000
no tax. Tax on sum
exceeding Rs 400,000
i.e. 73,750 @10%
Total Tax 7,375

5 CHAPTER REVIEW
Chapter review
 What is a capital asset?
 What is meant by disposal?
 What is the formula to compute the capital gains?
 What constitutes cost of an asset when the assets, is transferred under a gift
inheritance or succession?
 Taxation mechanism on securities / immoveable property and their tax rates.


10
CHAPTER
Income from other sources
Contents
1 Income from other sources
2 Admissible deductions
3 Chapter review

INTRODUCTION
This chapter deals with the last and residuary head of income i.e. Income from other
sources. It includes all incomes which are not chargeable to tax under the other heads of
income.
Learning outcomes
Concepts
LO 4.3.1 Compute taxable income and tax thereon relating to salary, income from
property, income from business, capital gain, dividend, profit on debt, ground
rent, rent from sub-lease, income from provision of amenities, utilities or any
other services connected with rented building and consideration for vacating
the possession of building

Chapter 10: Income from other sources
1 INCOME FROM OTHER SOURCES

Section overview
 Introduction to ‘income from other sources’

 Scope of income from other sources
 Important aspects of taxability of income from other sources and deductions
allowed there from
 Special provisions relating to different income covered under income from other
sources
1.1 Introduction to the ‘income from other sources’

This is a residuary head of income, all kinds of income, which are not covered
within the ambit of other heads of income, are covered under this head of
income. Section 39 of the Ordinance elaborates its scope in the following
manner:
1.2 Scope, basis of chargeability and contents of income from other sources
 Income of every kind received by a person in a tax year, if it is not included
in any other heading, other than income exempt from tax under this
Ordinance, shall be chargeable to tax in that year under the heading
“Income from Other Sources.
 As may be seen from above, income from other sources is chargeable to
tax on ‘receipt basis’. Thus, any income from other sources which is
accrued for a tax year but is not received is not chargeable in that tax year.
 Income from other sources may include the following namely:
(i). Dividend
(ii). Royalty;
(iii). Profit on debt;
(iv). Additional payment on delayed refund under any tax law;
(v). Ground rent;
(vi). Rent from the sub-lease of land or a building;
(vii). Income from the lease of any building together with plant or machinery;
(viii). Income from provision of amenities, utilities or any other service
connected with renting of building;
(ix). Income deemed u/s 111- unexplained assets or income;
(x). Any annuity or pension;
(xi). Any prize bond, or winnings from a raffle, lottery, prize on winning a
quiz or cross-word puzzle;
(xii). Any other amount received as consideration for the provision, use or
exploitation of property, including from the grant of a right to explore
for, or exploit, natural resources;
(xiii). The fair market value of any benefit, whether convertible to money or
not, received in connection with the provision, use or exploitation of
property; and,

(xiv). Any amount received by a person as consideration for vacating the

possession of a building or part thereof, reduced by any amount paid
by the person to acquire possession of such building or part thereof.
This income shall be taxable in 10 years from the year of receipt in
equal proportion.
(xv). Any amount received by a person from Approved Income Payment
Plan or Approved Annuity Plan under Voluntary Pension System
Rules, 2005.
(xvi). Income arising to the shareholder of a company, from the issuance of
bonus shares.
(xvii). Any amount received as a loan, advance, deposit for issuance of
shares or gift by a person in a tax year from another person other than
a banking company or financial institution or not through a crossed
cheque drawn on a bank or a banking channel or not from a person
holding a National Tax Number. However, advance for the sale of
goods or supply of services are outside the scope of this clause.
 Where any profit on debt derived from National Savings Deposit Certificate
including DSCs is paid to a person in arrears and as a result his income is
chargeable to higher rate of tax than would have been applicable if the amount
had been paid in the tax year to which it relates, he may by a notice in writing
to the Commissioner by the due date for furnishing persons return of income,
elect for the amount to be taxed at the rates that would have been applicable if
the amount had been paid in the tax year to which it relates.
1.3 Important aspects of taxation of income from other sources

Income, which does not fall under any other heading of income, would fall within
this heading of income. Therefore, the kinds of income elaborated above from (a)
to (l) if fall within any other heading of income, then the same may not be
included again under this heading of income. For example, sole business of the
banks is earning profit on debt and it is therefore, classified as “income from
business” in their hands, hence, the said income cannot be classified as “Income
from other sources” again. Section 39(5) of the Ordinance therefore, specifically
inserted to clarify this position and the said section stipulates that:
This section shall not apply to any income received by a person in a tax year that
is chargeable to tax under any other heading of income or subject to tax under
section 5 [income from dividends], 6[income of non-resident person from
technical fee & royalty] or 7 [income of shipping and air transport].
Therefore, it is imperative to decide the classification of an income under a
specific heading of income after considering the scope of activities of the
taxpayer.
For example: The sole business of a company is to manage its investment in
different subsidiaries of a group. Then the ultimate income of the said company
would be dividend income and capital gains from sale of shares. The income of
the company from dividends then would be chargeable to tax under the heading
income from business and not under the heading income from other sources.
However, on the other hand, in case a manufacturing company earns dividend
income in addition to income arising from sale of manufactured goods, then the
said dividend income would be chargeable to tax under the heading income from
other sources.

1.4 Special provisions relating to different incomes covered under income from
other sources
Now we will discuss the key aforesaid incomes and their manner of taxation one
by one in the ensuing paragraphs:
1.4.1 Dividend
Dividend income under the Ordinance has its own meaning and is
taxable under final tax regime in respect of all taxpayers including
companies.
Definition: Dividend
Section 2(19) “Dividend” 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 company immediately before its liquidation, whether capitalised or not;
(d) any distribution by a company to its shareholders on the reduction of its
capital, to the extent to which the company possesses accumulated profits,
whether such accumulated profits have been capitalised or not;
any payment by a private company as defined in the Companies Ordinance,
1984 (XLVII of 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, to the extent to which the
company or trust, in either case, possesses accumulated profits;
but does not include —
a) a distribution made in accordance with 7[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;
b) 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;
c) any dividend paid by a company which is set off by the company against
the whole 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
d) Remittance of after tax profit by a branch of Petroleum Exploration and
Production (E&P) foreign company, operating in Pakistan.
(e) remittance of after tax profit of a branch of a foreign company operating in
Pakistan;

Exercise
Mr Mobeen declared the following particulars:
 Income from salary Rs 750,000.
 Received a dividend warrant of Rs19,500 from a listed company. The
amount is net of income tax @ 10% and Zakat of Rs 7,500.
You are required to compute the taxable income of Mr Mobeen.
Answer
MR MOBEEN
STATUS: RESIDENT PERSON
Gross
Particulars Taxable Tax Remarks
amount
Salary income 750,000 750,000 35,000 10% on the amount
exceeding Rs 400,000
Income from other source:
Dividend income 30,000 30,000 3,000 Taxable income: Amount
before Zakat deduction
(19,500 + 7,500 =
27,000) grossed up
27,000/90 = 30,000
Zakat is not deductible in
case of dividend income.
1.4.2 Profit on debt

The term profit on debt is defined in section 2(46) of the Ordinance in the
following manner:
Definition: Profit on debt

 any profit, yield, interest, discount, premium or other amount, owing under
a debt, other than a return of capital; or
 any service fee or other charge in respect of a debt, including any fee or
charge incurred in respect of a credit facility which has not been utilized;
This definition not only explains the term for the recognition of income
but it also gives the basis of ascertaining the nature of profit on debt as
“admissible expenditure”. We already clarified the basis for taxation of
profit on debt with the example of a bank; the same matter is elucidated
in section 18 in the following manner:
 Any profit on debt derived by a person where the person’s
business is to derive such income shall be chargeable to tax under
the heading “Income from Business” and not under the heading
“Income from Other Sources”.
 Where a lessor, being a scheduled bank or an investment bank or
a development finance institution or a modaraba or a leasing
company has leased out any asset, whether owned by it or not, to
another person, any amount paid or payable by the said person in

connection with the lease of said asset shall be treated as the

income of the said lessor and shall be chargeable to tax under the
heading “Income from Business”.
 Any amount received by a banking company or a non-banking
finance company, where such amount represents distribution by a
mutual fund or a Private Equity and Venture Capital Fund out of its
income from profit on debt, shall be chargeable to tax under the
heading “Income from Business” and not under the heading
“Income from Other Sources”.
The aforesaid provisions of law only specify heading of income under
which certain types of income would be assessed and subsequently
subjected to tax. However, Income from profit on debt is covered within
final tax regime as contained in section 169 read with section 151 of the
Income Tax Ordinance, 2001. It is worthwhile to mention here that
section 169 highlights income liable to taxation under final tax regime.
Such income would not be included in any head of income. Hence,
income from profit on debt will not be deduction of tax and accordingly,
included in total income as defined in section 9 of the Ordinance.
1.4.3 Some examples of amounts covered under income from other sources
Following are examples of some amounts which are covered under the
heading of income from other sources and are part of syllabus:
 Ground rent
A ground rent is a fixed amount generally received annually on the
land on which payer constructs a building. Under this
arrangement, receiver leases, rather than sells the land.
 Rent from the sub-lease of land or a building
An arrangement in which a lessee of land or a building, against an
agreed rent, sub-leases the said land or building.
 Income from provision of amenities, utilities or any other service
connected with renting of building.
 An amount received as consideration for vacating the possession
of building or part thereof, reduced by any amount paid by the
person to acquire possession of such building or part thereof.The
amount so received shall be chargeable to tax under the heading
“Income from Other Sources” in the tax year in which it was
received and the following nine tax years in equal proportion.

2 ADMISSIBLE DEDUCTIONS
Section overview
 Admissible deductions
2.1 Admissible deductions

 In computing the income under the head "Income from Other Sources", the
following allowances and deductions shall be made, namely:
(i). Any expenditure paid for earning Income from Other Sources other than
expenditure of capital nature. It is important to note that as the basis of
chargeability of income from other sources is ‘receipt basis’, therefore
the basis for allowability of deductions is ‘paid basis’.
(ii). In the case of profit on debt, any zakat paid (at the time of receipt of
profit) by the person under Zakat & Usher Ordinance, 1980.
(iii).In the case of income from sub-lease of land or a building or from lease
of building together with machinery or plant, deduction for depreciation
on plant, machinery and building u/s 22 and initial allowance on plant
and machinery only u/s 23.
 No deduction is allowable to a person under this head to the extent that the
expenditure is deductible in computing the income of the person under
another head of income.
 The provisions of section 21- Deductions not allowed shall apply in
determining the deductions allowed to a person under this head in the same
manner as they apply in determining the deductions allowed in computing the
income of the person under the head "Income from Business".
 Expenditure is of a capital nature if it has a normal useful life of more than one
year.
Exercise
On 13 September 2013, Azhar purchased a building which had been previously

used as a factory in the Sundar Industrial Estate for Rs. 5,000,000 and installed
in the building an item of second hand plant previously used in Pakistan, costing
Rs.3,000,000. Azhar leased the Sundar property consisting of the building
together with the plant on 01 January 2014 to Mr. Atif for a composite rent of
Rs.400,000 per month payable in advance.
Azhar is also the owner of a residential building in Gulberg which was let to Beta
Limited on 01 August 2013 for a monthly rent of Rs.250,000. Rent for the two
years was received in advance on 01 August 2013 after deduction of tax at the

prescribed rate.
Following expenses were incurred by Azhar on the two properties during the tax
year 2014:
Description Sundar Gulberg

Repair to building 140,000 63,000
Repair to plant 50,000 -
Ground rent 5,000 5,000
Insurance 48,000 20,000
Total 243,000 88,000
Required:
Compute the taxable income of Mr. Azhar for the tax year 2014 under
appropriate heads of income.

MR. AZHAR
TAX YEAR: 2014
Head of income
Description Note Other Source Income from
Property
Rent (400,000x 6)/(250,000x11) 1&2 2,400,000 2,750,000
Less: Deductions
Repair to building/allowance 3 140,00 550,000
Repair to plant 50,000 -
Ground rent 5,000 5,000
Insurance 48,000 20,000
Initial allowance: Plant 4
Building
Depreciation: Plant 5 450,000
Building 500,000
1,193,000 575,000
Net income 1,207,000 2,175,000
Notes:
N-1: Rent received in advance
Rent is not chargeable to tax on receipt basis. Rent relating to a tax year,
whether received or receivable, is chargeable to tax in that tax year
Therefore, rent received in advance amounting to Rs.3,000,000(250,000x
12) will be charged to tax in the tax year (TY 2015) to which in relates.
N-2: Income from lease of building with plant
A composite rent of Rs. 2,400,000 (400,000x6) was received as

consideration for the lease of the Sundar Industrial Estate property
consisting of building together with the plant installed in the building. Such
income after permissible deductions is chargeable to tax as "Income from
Other Source" under section 39 of the Income Tax Ordinance,2001. Further
all the expenditures incurred in deriving such expense (along with
depreciation and initial allowance) will be allowed.
N-3: Repair expense/allowance
In case of income from other source, actual expense incurred will be
allowed as deduction,whereas in case of income from property, statutory
allowance of 1/5th of the gross rent will be allowed irrespective of the
actual amount of expense.
N-4: Initial allowance
Initial allowance is not allowed on second hand plant or machinery. Further
as per section 40(3)(b) initial allowance is restricted only to plant and
machinery in case of income from other source.
N-5: Depreciation
Building Plant
Cost 5,000,00 3,000,00
Rate of depreciation 0 10% 0 15%
Total 500,00 450,00
0 0

3 CHAPTER REVIEW
Chapter review
 Enumerate the income covered under Income from other sources.
 Which transactions are treated as income from other sources?
 What are the admissible deductions in computing Income from other sources?


11
CHAPTER
Losses, tax credits and exemptions
Contents
1 Treatment of losses
2 Minimum tax
3 Deductible allowances
4 Computation of tax credits
5 Exemptions and tax concessions
6 Chapter review

INTRODUCTION
Learning outcomes
After going through the different heads of income, this chapter now deals with the taxation of
an individual person from all five heads of income. It also describes the treatment of losses
and tax credits
Concepts
LO 4 On completion of this chapter student will be able to comprehend
income tax implications regarding taxation of individuals.
LO 4.6.1 Describe with simple examples the principles of taxation of individuals

Chapter 11: Losses, tax credits and exemptions
1 TREATMENT OF LOSSES
Section overview
 Set-off of losses
 Group taxation
 Group relief
 Set-off of losses consequent to amalgamation
1.1 Set-off of losses

While computing income of a person under a head of income, if the total
deductions allowed to a person under the head exceed the total amounts
chargeable to the person under that head, then the said person is said to have
sustained a loss under the said head of income.
The income tax law includes comprehensive provisions which stipulate the
mechanism for adjustment of the loss under a head against the against the
income under other heads of income and against the income for the ensuing
years. Sections 56 to 58 of the Ordinance deal with this issue and the said
sections are discussed below::
S56. Set-off of losses
 If a person sustains a loss under any head of income in a tax year, the same
can be set-off against the income from any other head of income except for
“income under the heads ‘salary’ or ‘income from property’. For example a
business loss can be set-off against income under the head “Income from
other source” or any other head of income. However the following are
exception to the said rule:
(i). Loss in speculation business cannot be set-off against any other
income.
(ii). Capital loss cannot be set-off against any other income.
(iii).Loss from any head of income falling under presumptive tax regime
(iv). Loss in a case where the income would have been an exempt income
e.g. loss of agriculture income cannot be set-off against any taxable
income
 No loss except loss under the head “Income from Business” (including income
from speculation business) and “Capital gain” can be carried forward.
 If a person sustains loss under the head “Income from Business” in addition to
loss under any other head, the loss under the head “Income from Business”
shall be set-off last

Exercise:
For tax year 2014, taxable income/(loss) of Mr. Bilal under various heads of
income is as follows:
Rs.
Salary 500,000
Income from dividend 125,000
Income from property 250,000
Income from business 300,000
Loss from capital gain 100,000
Loss from income from other source 100,000
Loss from speculation business 100,000
Required:
Calculate the total income of Mr. Bilal after making adjustment of losses and
income under keeping in view the provisions of Income Tax Ordinance,2001.
Answer
Note Amount
Income from salary and property 1 750,000
Income from business 2 200,000
Income from speculation and capital 3 -
gain
Income from dividend 4
Note 1
No loss is allowed to be adjusted against income from salary and property.
Note 2
Income from business amounting to Rs. 300,000 will be adjusted against loss
under the head income from other source amounting to Rs. 100,000.
Note 3
Loss from speculation business and capital gain will be carried forward. These
losses cannot be set-off against any other head of income. However it is pertinent
to mention here that although speculation losses and capital gain losses cannot
be set-off against income in any other head but vice versa is not prohibited. For
instance loss under the head income from business can be set-off against any
profit of speculation business.
Note 4
Income from dividend is chargeable to tax under section 5 on the gross amount.
No loss is allowed to be adjusted.
S57. Carry forward of business losses

 If business loss (other than speculation loss) sustained in a tax year cannot be
fully set-off in the that year with income under any other head, it can be carried
forward to subsequent tax years.
 In subsequent years, this loss can only be set-off against the person’s income
under the head “Income from Business”.

 No loss shall be carried forward to more than six tax years immediately
succeeding the tax year in which the loss was first computed.
 If a person has a business loss carried forward for more than one tax years,
the loss of earliest tax year shall be set-off first.
 If the loss, which is carried forward, includes depreciation, initial depreciation,
first year allowance and amortisation allowed u/s 22, 23, 23A, 23B & 24, such
amounts shall be added to the deductions, under said sections, for the
following tax year(s) and shall be carried forward till they are completely set-
off.
 While computing person’s taxable income, the deductions available u/s 22, 23,
23A, 23B & 24 shall be taken into account last.
Exercise:
The business loss of a company for a tax year amounts to Rs. 1800 million arrived
at as follows:
Rs.Million
Gross Revenue 2,000
Less Expenses:
Tax depreciation 100
Initial Allowance 200
Amortization of intangibles 100
Other deductions 2,500
Business loss for the year (900)
Required:
Calculate the business loss and depreciation/amortization loss. Also mention the
number of years for which the said loss can be carried forward.
Answer
The tax loss of Rs. 900 million will be considered as made up of Rs. 100 on
account of depreciation, Rs. 200 on account of initial allowance, Rs. 100 on
account of amortization of intangibles and the balance amount of Rs. 500 million
on account of other deductions. Accordingly tax loss of Rs. 900 million will be
carried forward as follows:
Rs. In
On account of: "Million"
Depreciation + initial allowance + amortization 400
Business loss 500
900
Loss under the head income from business can be carried forward for a
maximum period of six years immediately succeeding the tax year in which it was
first computed.
Depreciation, initial allowance and amortization loss can be carried forward in the
following tax years until they are completely set-off.

58. Carry forward of speculation business losses

 If a person sustains a loss in a tax year from any speculation business (as
defined in section 19), he can set off such loss only against profits of any other
speculation business carried on by him during the same tax year.
 If any loss cannot be so set-off, either wholly or partly, such portion of loss can
be carried forward upto six tax years immediately succeeding the tax year in
which it was sustained.
 In the subsequent years too, the speculation loss can be set-off against
income of any speculation business only. It means that loss from speculation
business can not be adjusted against income under any other head.
 If a person has a speculation loss carried forward for more than one tax years,
the loss of earliest tax year shall be set-off first.
59. Carry forward of capital losses

 A capital loss sustained by a person during a tax year canl not be set-off
against income of that person under any other head of income, for that tax
year.
 The amount of capital loss which cannot be set-off shall be carried forward
upto six tax years immediately succeeding the tax year in which the loss was
sustained.
 In the subsequent years too, capital loss can be set-off against capital gain
only. It means that capital loss can not be adjusted against income under any
other head.
 If a person has a capital loss carried forward for more than one tax year, the
loss of earliest tax year shall be set-off first
59A.Limitations on set off and carry forward of losses
 An AOP whose profits are chargeable to tax under Income Tax Ordinance,
2001 shall be entitled to a set off or carry forward and set-off any loss of AOP
against the income of AOP in the manner explained above.
 Any members of an AOP shall not be entitled to set off or carried forward and
set off loss of AOP against his income.
 Any person who has succeeded in the business of another person otherwise
than by inheritance, shall not be entitled to set off or carry forward and set off
loss of predecessor.
 If the loss includes depreciation, initial depreciation and amortization allowed
under section 22, 23, 23A, 23B and 24 or 25, and full effect of such amounts
cannot be given either due to their being no profit or profits are less than
deduction stated above, such amounts shall be added to the amount of such
deductions for the following years and shall be carried forward in the following
tax years till they are completely set-off.
 Loss under section 57, 58(2) or 59 shall not be carried forward and set off
unless it is assessed or determined by an order treated as made under section
120, 121 or 122 of the Income Tax Ordinance, 2001.

1.2 Group taxation (Sec-59AA)

 Holding companies and 100% owned subsidiaries may opt to be taxed as a
single fiscal unit for which consolidated group accounts shall be required for
the computation of income and tax liability.
 100% owned company shall be a subsidiary company where holding company
owns all equity shares of such company except those held by nominees to
meet the statutory requirements of Companies Ordinance, 1984.
 Under this option profit and loss of all group companies is pooled together. In
this way, a tax loss sustained by one Group Company is set off against
taxable income of another group company. The benefit of set-off is however
not permissible for losses incurred by a group company prior to exercise of the
option.
 Such option exercised by the group companies shall be irrevocable.
 The group taxation shall be restricted to companies locally incorporated under
the Companies Ordinance, 1984
 The option of group taxation shall be available to those group companies
which comply with such Corporate Governance requirements as may be
specified by the Securities and Exchange Commission of Pakistan from time
to time and are designated as companies entitled to avail group taxation.
 Groups taxation may be regulated through rules as may be made by the
Board.
 Any income derived from inter-corporate dividend within the group companies
entitled to group taxation is exempt from tax.
 In case of divestment of subsidiary company, no effect shall be taken for group
taxation during the year of disposal.
 Each company shall continue to be a withholding agent and file monthly
withholding statements when the group is taxed as one fiscal unit.
1.3 Group Relief (Sec-59B)

 A subsidiary company may surrender its tax loss (excluding brought forward
loss and capital loss)in favor of its holding company or in favor of any
subsidiary of its holding company. The holding company should directly hold
share capital of the subsidiary company as under
If one of the company in group is public listed 55% or more
If none of the company in group is public listed 75% or more
 The other loss surrendered by the subsidiary company may be claimed by the
holding or any subsidiary company under the head income from business in
the tax year in which the loss has been surrendered and in the following 2 tax
years subject to the following conditions:
(i). There is a continued ownership for 5 years of the share capital of the
subsidiary company as mentioned above (reversal of availed relief shall
take place if the equity interest falls below the minimum required in such 5
years)
(ii). A trading company within the group shall not be entitled to avail group
relief

(iii). If a holding company is a private company, it shall get itself listed within 3
years from the year in which the loss is claimed
(iv). Approval of Board of Directors of both the companies (loss surrendering
& loss claiming) is necessary
(v). Subsidiary company shall continue the same business during the
specified period of 3 years
(vi). All the companies in the group comply with corporate governance
requirements.
(vii). The subsidiary company cannot surrender its assessed losses for more
than 3 tax years. Any unadjusted loss of subsidiary company after the
specified period shall be carried forward by the subsidiary in the normal
manner.
 Inter-corporate dividend income within the group companies shall be exempt.
 Loss claiming company is allowed, with the approval of the Board of Directors,
to transfer cash to the loss surrendering company equal to the amount of tax
payable on the profits to be set off against the acquired loss at the applicable
tax rate. The transfer of cash would not be taken as a taxable event in the
case of either of the two companies.
 Transfer of shares between companies and shareholders in one direction,
would not be taxable capital gain provided the transfer is to acquire share
capital for the formation of a group and approval of SECP or SBP has been
obtained in this respect.
1.4 Set off of business loss consequent to amalgamation (Sec-57A)

 Assessed loss (excluding capital loss) for the tax year, other than brought
forward and capital loss, of the amalgamating company or companies shall be
set off against business profits or gains of the amalgamated company in the
year of amalgamation, and vice versa, subject to the condition that the
amalgamated company carries on the business of amalgamating company for
a minimum period of 5 years from the date of amalgamation.
 Any unadjusted loss can be carried forward up to a maximum period of 6
years succeeding the year of amalgamation.
 Unabsorbed depreciation can be carried forward in the normal manner with no
time limits.
 Non-compliance with any of the conditions laid down by SBP, SECP or any
court shall render the allowed adjusted loss be treated as the income of the
amalgamated company in the year which the non-compliance occurred.

Exercise:
Big Limited (BL) was incorporated in Pakistan in 1992. It holds the entire share
capital of several locally incorporated companies including Zeta Limited (ZL).
Following information has been extracted from ZL’s records for the year ended 30
September 2013:
Head of income Amount

(Rupees)
Income from business 500,000
Capital gain 800,000
Income from other source 100,000
Total income before tax 1,400,000
ZL is engaged in the business of manufacturing scaffoldings since its

incorporation. Following further information is available from ZL’s records:
(i). The income from business includes deemed income in respect of a loan
of Rs. 85,000 received otherwise than by a crossed cheque.
(ii). Business losses brought forward from tax years 2012 and 2013
amounted toRs. 130,000 and Rs. 200,000 respectively. ZL’s tax
assessment has been finalized upto tax year 2012.
(iii). Capital losses brought forward from assessment years 2007 and 2008
amounted to Rs. 50,000 and Rs. 65,000 respectively.
(iv). The amount of tax depreciation adjusted during the year against income
frombusiness amounted to Rs. 490,000. Unabsorbed tax depreciation
brought forward from previous assessment years amounted to Rs.
135,000.
(v). A loss from speculation business brought forward from tax year 2012
amounted to Rs. 100,000.
(vi). One of BL’s subsidiaries, which is qualified for group relief, surrendered its
assessed losses of Rs. 250,000 in favour of ZL. These losses include
brought forward business loss of Rs. 25,000, capital loss of Rs. 45,000
and an unabsorbed tax depreciation of Rs. 10,000.
Required:
Under the provisions of Income Tax Ordinance, 2001 compute the taxable income
of Zeta Limited for the tax year 2014 and the amount of loss, if any, to be carried
forward to next tax year. State the reason where any of the loss cannot be
adjusted against the given income.
Note: The order in which various deductions are to be set-off against HPL’s income
should be followed.

Answer
Rs. In “000”

500
Profit/(loss) before taxation
490
Add: Tax depreciation for the year
(85)
Less deemed income chargeable under the head
income from other source
905
Total business income/(loss) before tax
(130)
Less: B/f assessed business loss- Tax Year 2012
-
Less: B/f un-assessed business loss- TY 2013-
Note 1
775
Less: Group relief scheme

250
Assessed losses
(70)
Less: b/f business and capital loss not to be
surrendered (25+45)- Note 4
180
Loss including deprecation loss surrendered by
subsidiary in favour of ZL
595
(490)
Less: Tax depreciation- Current Year- Note 3
(135)
Unabsorbed depreciation brought forward
(30)
Total business income/(loss) for the year
Capital Gain Rs. In “000”

800
Gain for the year
-
Less: B/f capital loss- Tax year 2007- Note 2
(65)
Less: B/f capital loss- Tax year 2008
735
Income from other source Rs. In “000”

100
Income for the year
85
Add: deemed income
185
Taxable income (185+735-30) 890

Unabsorbed depreciation loss carried forward
To next year 30
Speculation loss carried forward to next year- Note 5 100

Note:
N-1 : Business losses, speculation business loss and capital loss cannot
be carried forward and set off unless it is assessed or determined by an
order treated as made under section 120, 121 or 122 of the Income Tax
Ordinance, 2001.Therefore loss for tax year 2013 cannot be carried forward.
N-2: The amount of capital loss which cannot be set-off shall be carried
forward upto six tax years immediately succeeding the tax year in which
the loss was sustained.Therefore loss of tax year 2007 cannot be claimed
in tax year 2014 as it has already lapsed in tax year 2013.
N-3: While computing person’s taxable income, the deductions available u/s 22, 23,
23A, 23B & 24 shall be taken into account last.
N-4: Under group relief only the losses other than the capital and brought
Forward losses can be surrendered in favour of subsidiary of a holding
Company
N-5: The speculation loss carried forward from tax year 2012 can only be set-
Off against income from speculation business chargeable to tax in
tax year 2014.

2 DEDUCTIBLE ALLOWANCES AND TAX CREDITS

Section overview
 Zakat
 Workers Welfare Fund (WWF)
 Workers profit participation fund
2.1 Deductible allowances

As discussed in Chapter 4, according to section 9 of the Income Tax Ordinance
2001. taxable income of a person for a tax year shall be the total income other
than exempt income of the person for the year reduced (but not below zero) by
the sum of any deductible allowances of the person for that tax year.
As per sections 60, 60A and 60B of the Income Tax Ordinance, 2001, a person is
entitled to following deductible allowances
(i). Zakat
(ii). Workers’ welfare fund
(iii).Workers’ participation fund
(i) Zakat
A person is entitled to a deductible allowance for the amount of any zakat paid by
the person in a tax year under the Zakat and Ushr Ordinance, 1980 (XVIII of
1980). However, no deduction is allowed if Zakat is paid at the time of receiving
profit on debt under the head “income from other source”.
(ii) Workers Welfare Fund

S60A Workers Welfare Fund: A person shall be entitled to a deductible
allowance for the amount of any Workers Welfare Fund paid by the person in tax
year under Workers Welfare Fund Ordinance, 1971.
Although, according the the above wordings it appears that workers welfare fund
is allowed on ‘paid basis’ only. However, circular No 1 of 2004 dated 3 January
2004 clarifies that the WWF payable expense is also admissible in the cases
where accrual based accounting is employed as regular method of accounting.
Exercise 3
Total business taxable income of LMN Textiles computed by allowing the
admissible expenses worked out at Rs 750,000. Whereas accounting profit is Rs
562,343. Compute the WWF on the said income:
Solution
Particulars Amount
Total income 750,000
WWF expense admissible under section 60A of the Ordinance 15,000
Rs 750,000 x 2%

Total taxable income after allowing WWF 735,000
Tax payable
Tax on business income of Rs 735,000 i.e. Rs 35,000 and 15% 50,600
on sum exceeding Rs 400,000
WWF payable with return 15,000
Total amount payable with return 65,600
(iii) Workers’ participation fund

Section 60B stipulates the provisions regarding deductible allowance of
contribution towards Workers Profit Participation Fund:
60B. Workers’ Participation Fund. A person shall be entitled to a deductible
allowance for the amount of any Workers’ Participation Fund paid by the person
in a tax year in accordance with the provisions of the Companies Profit (Workers’
Participation) Act, 1968.;
In view of the above, any sum paid for Workers Profit Participation Fund is
admissible deductible allowance.
2.2 Tax credits

While computing the tax liability of a person, the personal may be allowed to
reduce certain amounts from the gross amount of his tax liability on fulfilment of
certain conditions. These reductions are termed as ‘tax credits’.
If at the time of calculating income tax payable, a person has more than one
types of tax credits available, these tax credits shall be applied in the following
order:
(i). Foreign tax credit u/s 103
(ii). Tax credit on donations, investment, enlistment, etc.,
(iii).Quarterly advance tax and tax deducted / collected at source
Foreign tax credits are discussed in chapter 13 of this study text.

Following are the tax credits available under Part X Chapter III of the Ordinance.
 Charitable Donations
 Investment in shares
 Approved pension Fund
 Profit on debt
 Tax credit to the persons registered under the sales tax Act, 1990
 Tax credit for investment
 Tax credit for enlistment
 Tax credit for newly established industrial undertakings
 Tax credit for industrial undertakings set up before 01 July 2011
Now we discuss them one by one hereunder:

61 Charitable donations:
A person isl be entitled to a tax credit in respect of any sum paid, or any
property given by the person in the tax year as a donation to:
 any board of education or any university in Pakistan established by, or
under, a Federal or a Provincial law;
 any educational institution, hospital or relief fund established or run in
Pakistan by Federal Government or a Provincial Government or a local
Government; or
 Any non-profit organization.
 The amount of a person’s tax credit allowed for a tax year shall be computed
Tax Credit = (A/B) x C
Where:
A is the amount of tax assessed to the person for the tax year before
allowance of any tax credit
B is the person’s taxable income for the tax year; and
C is the lesser of:
a) the total amount of the person’s donations including the fair market
value of any property given; or
b) where the person is:
 an individual or association of persons, thirty per cent of the
taxable income of the person for the year; or
 A company, twenty per cent of the taxable income of the
person for the year.
 The fair market value of any property given as donation shall be determined at
the time it is given.
 An amount paid by a person as a donation shall be taken into account only if it
is paid by a crossed cheque drawn on a bank.
Donations to institutions under clause 61 part I of the 2nd schedule

 Amount paid as donation to the institutions mentioned in clause 61 Part I
of 2nd schedule of the Income Tax Ordinance,2001are straight deduction
from the total income of the donor (treated like deductible allowances).
 The amount donated shall not exceed 30% of the taxable income in the
case of individual and AOP and 20% in the case of company.
 The condition of payment through banking channel is not applicable for
donations to be permissible deductions.

Exercise
Mr. Hamza made a total contribution of Rs. 150,000 as donation to approved

institution. His taxable income during the tax year 2014 is Rs. 800,000. Calculate
Hamza’s taxable income and tax liability considering that the donations are made
to
(i). Institutions specified in Clause 61 of Part-I of Second Schedule

(ii). Institutions other than those referred above
Answer
(a). In this case donations will be allowed as straight deduction from the taxable
income subject to the conditions that donation should not exceed 30% (Rs.
240,000) of Bilal’s taxable income. So taxable income will be Rs. 650,000
Taxable income 800,000

Less donations paid 150,000
650,000
Tax liability
UptoRs. 400,000
Balance (Rs. 650,000-400,000)*10% 25,000
Tax liability for the year 25,000
(b)
Taxable
800,000
income
Tax liability
UptoRs. 750,000 35,000
Balance (Rs. 800,000-750,000)*15% 7,500
Tax liability 42,500 A
Eligible amount for tax credit- W-1 150,000

Tax credit (42,500/800,000 x 150,000) 7,969 B
Tax liability for the year 34,531 A-B
W-1
Amount of charitable donations 150,000
30% of taxable income 240,000
Eligible amount lower of 1 or 2 150,000
S62. Tax credit for investment in shares and insurance

 A resident person other than a company shall be entitled to a tax credit for a
tax year either:

in respect of the cost of acquiring in the year new shares offered to the
public by a public company listed on a stock exchange in Pakistan provided
the resident person is the original allottee of the shares or the shares are
acquired from the Privatization Commission of Pakistan; or
in respect of any life insurance premium paid on a policy to a life insurance
company registered by the Securities and Exchange Commission of
Pakistan under the Insurance Ordinance, 2000, provided the resident
person is deriving income chargeable to tax under the heading “salary” or
“income from business.”.
Note: In case a taxpayer has made investment in shares and life insurance during
a tax year, he will be entitled for only one tax credit (Higher of both
amounts)
according to the following formula, namely: —
where –
C is the lesser of —
 the total cost of acquiring the shares, or the total contribution or
premium paid by the person in the year;
 twenty per cent of the person’s taxable income for the year; or
 one million rupees.
 Where –
 a person has been allowed a tax credit in a tax year in respect of the
purchase of a share; and
 the person has made a disposal of the share within twenty four
months of the date of acquisition,
 the amount of tax payable by the person for the tax year in which the
shares were disposed of shall be increased by the amount of the
credit allowed.
S63. Contribution to an Approved Pension Fund

 An eligible person as defined in sub-section (19A) of section 2 deriving income
chargeable to tax under the heading “Salary” or the heading “Income from
Business” shall be entitled to a tax credit for a tax year in respect of any
contribution or premium paid in the year by the person in approved pension
fund under the Voluntary Pension System Rules, 2005.
 As per section 2(19A) Eligible Person”, for the purpose of Voluntary Pension
System Rules, 2005, means an individual Pakistani who holds a valid National
Tax Number or Computerized National Identity Card or National Identity Card
for Overseas Pakistanis issued by the National Database and Registration
Authority:

Provided that the total tax credit available for the contribution made to
approved employment pension or annuity scheme and approved pension fund
under Voluntary Pension System Rules, 2005, should not exceed the limit
prescribed or specified in section 63.
according to the following formula, namely: -
Where.-
A is the amount of tax assessed to the person for the tax year, before
C is the lesser of -
 the total contribution or premiumpaid by the person in the year; or
 twenty per cent of the eligible person’s taxable income for the relevant
tax year; Provided that an eligible person joining the pension fund at
the age of forty-one years or above, during the first ten years starting
from July 01,2006, shall be allowed additional contribution of 2% per
annum for each year of age exceeding forty years. Provided further
that the total contribution allowed to such person shall not exceed
50% of the total taxable income of the preceding year.
 The transfer by the members of approved employment pension or annuity
scheme or approved occupational saving scheme of their existing balance
to their individual pension accounts maintained with one or more pension
fund managers shall not qualify for tax credit under this section.
 The terms used in the above section are defined in the following manner in
section 2 of the Ordinance:
“Approved Annuity Plan” means an Annuity Plan approved by Securities
and Exchange Commission of Pakistan (SECP) under Voluntary Pension
System Rules, 2005 and offered by a Life Insurance Company registered
with the SECP under Insurance Ordinance, 2000 (XXXIX of 2000).
“Approved Income Payment Plan” means an Income Payment Plan
approved by Securities and Exchange Commission of Pakistan (SECP)
under Voluntary Pension System Rules, 2005 and offered by a Pension
Fund Manager registered with the SECP under Voluntary Pension System
Rules, 2005.
“Approved Pension Fund” means Pension Fund approved by Securities
and Exchange Commission of Pakistan (SECP) under Voluntary Pension
System Rules, 2005, and managed by a Pension Fund Manager registered
with the SECP under Voluntary Pension System Rules, 2005.
“Approved Employment Pension or Annuity Scheme” means any
employment related retirement scheme approved under this Ordinance,
which makes periodical payment to a beneficiary i.e. pension or annuity
such as approved superannuation fund, public sector pension scheme and
Employees Old-Age Benefit Scheme;
“Approved Occupational Savings Scheme” means any approved gratuity
fund or recognized provident fund;”;
“Contribution to an Approved Pension Fund” means contribution as defined
in rule 2(j) of the Voluntary Pension System Rules, 2005..

S64. Profit on debt:

 A person shall be entitled to a tax credit for a tax year in respect of any profit
or share in rent and share in appreciation for value of house paid by the
person in the year on a loan by a scheduled bank or non-banking finance
institution regulated by the Securities and Exchange Commission of Pakistan
or advanced by Government or the local Government or a statutory body or a
public company listed on stock exchange in Pakistan where the person utilizes
the loan for the construction of a new house or the acquisition of a house.
Note: Tax credit is allowed only for construction of new house or acquisition
of a house. Profit on debt paid for any loan utilised for construction of
existing house is not entitled for tax credit.
where:
allowance of any tax credit under this part;
C is the lesser of:
(a) the total profitpaid by the person in the year;
(b) fifty percent of the person’s taxable income for the year; or
(c) seven hundred and fifty thousand rupees.
1) A person is not entitled to tax credit under this section for any profit
deductible under section 17.
65. Miscellaneous provisions and tax credits for members of AOP

 Where the above mentioned tax credits are allowed to a person who is also a
member of an association of persons who is chargeable to tax u/s 92(1), the
amount of taxable income shall include the share of person in the profit of the
AOP (which is otherwise exempt) and tax payable shall be an amount payable
on taxable income including share in the profit of AOP.
 If any tax credit as mentioned above, is not fully credited due to the credit
being in excess of tax payable, the excess amount shall not be refunded,
carried forward to a subsequent tax year or carried back to a preceding tax
year
 However, if the person is the member of an AOP the amount of tax credit
which cannot be applied as above by the member, can be claimed by the
association of which he is member, in the same year. For this purpose a copy
of written agreement between the member and the association shall be
furnished along with the return of association.
65A. Tax credit to a person registered under the Sales Tax Act, 1990
 Every manufacturer, registered under the Sales Tax Act, 1990, shall be
entitled to a tax credit of two and a half per cent of tax payable for a tax
year, if ninety per cent of his sales are to the person who is registered
under the aforesaid Act during the said tax year.

 For claiming of the credit, the person shall provide complete details of the
persons to whom the sales were made.
 No credit will be allowed to a person whose income is covered under final
tax or minimum tax.
 Carry forward of any amount where full credit may not be allowed against
the tax liability for the tax year, shall not be allowed.
S65B. Tax credit for investment

 Where a taxpayer being a company invests any amount in the purchase of
plant and machinery, for the purposes of extension, expansion, balancing,
modernization and replacement of the plant and machinery, already installed
therein, in an industrial undertaking set up in Pakistan and owned by it, credit
equal to ten percent of the amount so invested shall be allowed against the tax
payable including on account of minimum tax and final taxes payable under
any of the provisions of this Ordinance by it in the manner hereinafter
provided.
 The above provisions shall apply if the plant and machinery is purchased and
installed at any time between the first day of July, 2010, and the 30th day of
June, 2015.
 The amount of credit admissible shall be deducted from the tax payable by the
taxpayer in respect of the tax year in which the plant or machinery in the
purchase of which the amount referred above is invested and installed.
 The provisions of this section shall mutatis mutandis apply to a company setup
in Pakistan before the first day of July, 2011, which makes investment, through
hundred percent new equity, during first day of July, 2011 and 30th day of
June, 2016, for the purposes of balancing, modernization and replacement of
the plant and machinery already installed in an industrial undertaking owned
by the company.
 However, credit equal to twenty percent of the amount so invested shall be
allowed against the tax payable, including on account of minimum tax and final
taxes payable under any of the provisions of this Ordinance. The credit shall
be allowed in the year in which the plant and machinery in the purchase of
which the investment as aforesaid is made, is installed therein.
 new equity‘ means equity raised through fresh issue of shares against cash by
the company and shall not include loans obtained from shareholders or
directors
Provided that short term loans and finances obtained from banking companies
or non-banking financial institutions for the purposes of meeting working
capital requirements shall not disqualify the taxpayer from claiming tax credit
under this section.
 Where no tax is payable by the taxpayer in respect of the tax year in which
such plant or machinery is installed, or where the tax payable is less than the
amount of credit as aforesaid, the amount of the credit or so much of it as is in
excess thereof shall be carried forward and deducted from the tax payable by
the taxpayer in respect of the following tax year and so on, but no such
amount shall be carried forward for more than two tax years in the case of
investment by companies between first day of July 2010 to 30th day of June
2015 and for more than five tax years in respect of investment before first day
of July 2011

 If it is subsequently discovered that all or any of the conditions mentioned

above have not been fulfilled, the tax credit allowed shall be cancelled and the
tax liability shall be recomputed.
S65C. Tax credit for enlistment

 Where a taxpayer being a company, opts for enlistment in any registered stock
exchange in Pakistan, a tax credit equal to 15% of tax payable shall be
allowed for the tax year in which the said company is enlisted.
S65D. Tax credit for newly established industrial undertakings

 Where a taxpayer being a company formed for establishing and operating a
new industrial undertaking for manufacturing in Pakistan sets up a new
industrial undertaking, it shall be given a tax credit equal to 100% of the tax
payable including on account of minimum tax and final tax payable by that
industrial undertaking for a period of five years beginning from setting up or
commencement of commercial production whichever is later.
 Tax credit shall be allowed subject to the following conditions:
i. the industrial undertaking is set up between 01-07-2011 and 30-06-
2016
ii. the company is registered in Pakistan
iii. the industrial undertaking is not established for splitting up or
reconstruction or reconstitution of an undertaking already in existence
iv. the industrial undertaking is set up with hundred percent equity raised
through issuance of new shares for cash consideration Provided that
short term loans and finances obtained from banking companies or
non-banking financial institutions for the purposes of meeting working
capital requirements shall not disqualify the taxpayer from claiming tax
credit
 In case, it is subsequently discovered that the specific conditions have not
been fulfilled, the Commissioner may recompute tax payable
S65D. Tax credit for industrial undertakings established before 01 July 2011
 Where a taxpayer being a company, setup in Pakistan before the first day of
July, 2011, invests any amount, with hundred percent new equity raised
through issuance of new shares, in the purchase and installation of plant and
machinery for an industrial undertaking, including corporate dairy farming, for
the purposes of
a) expansion of the plant and machinery already installed therein or
b) undertaking a new project,
a tax credit shall be allowed against the tax payable for a period of five years
beginning from the date of setting up or commencement of commercial
production from the new plant or expansion project, whichever is later.

 new equity‘ means equity raised through fresh issue of shares against cash by
the company and shall not include loans obtained from shareholders or
directors
Provided that short term loans and finances obtained from banking companies
or non-banking financial institutions for the purposes of meeting working
capital requirements shall not disqualify the taxpayer from claiming tax credit
under this section
 Where a taxpayer maintains separate accounts of an expansion project or a
new project, as the case may be, the taxpayer shall be allowed a tax credit
equal to one hundred percent of the tax payable, including minimum tax and
final taxes payable under any of the provisions of this Ordinance, attributable
to such expansion project or new project.
 In all other cases, the credit under this section shall be such proportion of the
tax payable, including minimum tax and final taxes payable under any of the
provisions of this Ordinance, as is the proportion between the new equity and
the total equity including new equity
 The provisions of sub-section (1) shall apply if the plant and machinery is
installed at any time between the first day of July, 2011 and the 30th day of
June, 2016.
 The amount of credit admissible under this section shall be deducted from the
tax payable, including minimum tax and final taxes payable under any of the
provisions of this Ordinance, by the taxpayer in respect of the tax year in
which the plant or machinery is installed and for the subsequent four years.
 In case, it is subsequently discovered that the specific conditions have not
been fulfilled, the Commissioner may recompute tax payable.

3 EXEMPTIONS AND TAX CONCESSIONS

Section overview
 Exemptions and tax concessions covered in various sections

 Exemptions and tax concessions covered in the Second Schedule
3.1 Exemptions and tax concessions (Sec-41-55)
S41. Agriculture income

 Agriculture income means an income, which satisfies the following conditions:
(i). The income is derived from land. The income may be in the form of
rent or revenue
(ii). The land must be used for agriculture purpose and be situated in
Pakistan
 Agricultural Income derived by a person during the tax year shall be exempt
from tax.
 Various sources of agriculture income are:

i. Income of the cultivator or receiver of rent-in-kind from the sale of agriculture
produce without performing any further process.
ii. Income from the performance of any process by the cultivator or receiver of
rent-in-kind, generally employed to render the produce fit to be taken to
market.
iii. Income from building shall also be agriculture income, subject to the
following conditions
(a) Building is owned and occupied by the cultivator or receiver of rent-in-
kind.
(b) Building is situated in the immediate vicinity of the land used for
agricultural purposes
(c) Building is required as a dewelling house, a store house or other out
building by the cultivator or the receiver of rent-in-kind due to his
connection with the agriculture land
Agriculture produce as raw material (Rule-11)

 Where a person who is a cultivator or receiver of agricultural produce as rent
in kind uses agriculture produce as raw materials in his business, then the
income chargeable to tax under the head income from business shall be
computed as follows:
Total income xxx
Less: Market value of agricultural produce used in xxx
the business as raw material -----

 Only the market value of agriculture produce is deducted. No further deduction

shall be allowed in respect of any expenditure incurred by a taxpayer as
cultivator or as a receiver of rent in kind.
 The market value shall be calculated as follows:
(i).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 agricultural produce 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 person’s business
(ii). in any other case, the sum of the following amounts, namely
(a) the expenses of cultivation; and
(b) the land revenue rent paid for the area in which the produce is
grown.
S42. Diplomatic and United Nations Exemptions

 Income of an individual entitled to privileges under the Diplomatic and
Consular Privileges Act, 1972 or United Nations (Privileges and Immunities)
Act, 1948 shall be exempt from tax under this ordinance to the extent provided
for in these acts.
 Any pension received by a person being citizen of Pakistan from United
Nations or its specialized agencies by virtue of the person’s former
employment, if the salary from such organization was exempt from tax under
the Income Tax Ordinance, 2001.
S43 Foreign Government Officials

 Salary received by an employee of foreign government working in Pakistan
shall be exempt from tax if:
(i). The employee is a citizen of foreign country and not a citizen of
Pakistan.
(ii). The services performed are similar to those performed by employees
of Federal Government in foreign countries; and
(iii).The foreign government grants similar exemptions to employees of
Federal Government of Pakistan performing similar services in such
foreign country.
S44 Exemptions under International Agreements

 Any Pakistan source income shall be exempt if Pakistan is not permitted to tax
it under a tax treaty.
 Any salary received by an individual (who is not a citizen of Pakistan) shall be
exempt from tax under the Ordinance to the extent provided for in an Aid
Agreement between the Federal Government and a Foreign Government or
Public International Organization, where:
(i). the individual is either not a resident individual or a resident individual
solely by reason of the performance of services under the Aid
Agreement;

(ii). if any Aid Agreement is with a foreign country, the individual is a citizen
of that country; and
(iii). the salary is paid by the foreign government or public international
organization out of funds or grants released as aid to Pakistan in
pursuance of such Agreement.
 Any income received by a person (who is not a citizen of Pakistan) and is
engaged as a contractor, consultant, or expert on a project in Pakistan. This
income shall be exempt from tax to the extent provided for in a bilateral or
multilateral technical assistance agreement between the Federal Government
and a foreign government or public international organization, where:
(i). the project is financed out of grant funds in accordance with the
agreement;
(ii). the person is either a non-resident person or a resident person solely
by reason of the performance of services under the agreement; and
(iii). the income is paid out of the funds of the grant in pursuance of the
agreement.
S45 President’s Honours

Any allowance attached to any Honour, Award or Medal as well as any Monetary
award granted to a person by President of Pakistan shall be exempt.
S46 Profit on Debt

Any profit received by a non-resident person on a security issued by a resident
person shall be exempt from tax if:
(i). the persons are not associates;
(ii). the security was widely issued outside Pakistan for the purposes of
raising a loan outside Pakistan for use in a business carried on by the
resident person in Pakistan;
(iii). the profit was paid outside Pakistan; and
(iv). the security is approved by the Board for the purposes of this section.
S47 Scholarship
Any scholarship granted to a person to meet the cost of the person’s education
shall be exempt from tax if it is not paid directly or indirectly by an associate.
S48 Support Payments under an Agreement to Live Apart

Any amount received by a spouse as support payment under an agreement to
live apart shall be exempt from tax.
S49 Federal, Provincial and Local Govt. Income

 The income of the Federal Government shall be exempt from tax.
 The income of a Provincial Government or a Local Government in Pakistan
shall be exempt from tax except income chargeable under the head “Income

from Business” derived by a Provincial Government or Local Government from

a business carried on outside its jurisdictional area.
 Any payment received by the Federal Government, a Provincial Government
or a local Government shall not be liable to any collection or deduction of
advance tax.
 Exemption under this para shall not be available to:
(i). corporation;
(ii). company;
(iii). regulatory authority;
(iv). other body; or
(v). institution;
established by or under a Federal law or a Provincial law or an existing law or,
owned and controlled either directly or indirectly by Federal Government or a
Provincial Government regardless of the ultimate destination of such income
as laid down in Article 165A of the Constitution of the Islamic Republic of
Pakistan.
S50 Foreign-source income of short-term resident individuals

 The foreign-source income of an individual, shall be exempt if:
(i). the person is a resident individual solely by reason of the individual’s
employment and
(ii). the person’s stay in Pakistan does not exceed three years.
 This exemption shall not be available to:
(i). any income derived from a business of the person established in
Pakistan; or
(ii). any foreign source income brought into or received in Pakistan by the
person.
S51 Foreign Source Income of Returning Expatriates

 Foreign Source Income of a Citizen of Pakistan shall be exempt from tax in the
year in which the person became resident and following one tax year. For this
purpose the individual must not remained resident in any of the four preceding
tax years from the year in which the person became resident.
 Where a citizen of Pakistan leaves Pakistan during a tax year and remains
abroad during that tax year, any salary income earned by him outside Pakistan
(only during that tax year) shall be exempt from tax.
S53 Exemptions and tax provisions in other laws

No provision contained in any other law providing for:
(i). an exemption from any tax imposed under the Ordinance
(ii). a reduction in the rate of tax imposed under the Ordinance
(iii). a reduction in tax liability of any person under the Ordinance

(iv). an exemption from the operation of any provision of the Ordinance,

shall have legal effect unless it is also provided for in the Ordinance
S54 Limitation of exemption

Where any income is exempt from tax under the Income Tax Ordinance 2001, the
exemption shall be, in the absence of a specific provision to the contrary
contained in the Ordinance, limited to the original recipient of that income and
shall not extend to any person receiving any payment wholly or in part out of that
income.
3.2 Exemptions and tax concessions in Second Schedule (Sec-53)

 The income or classes of income, or person or classes of persons specified in
Second Schedule shall be:
(i). exempt from tax under the Ordinance, subject to any conditions and to
the extent specified therein (Part I of the schedule)
(ii). at such rates, which are less than the rates specified in the First
Schedule (Part II of the schedule)
(iii).allowed a reduction in tax liability under the Ordinance subject to
certain conditions specified (Part III of the schedule)
(iv). exempted from the operation of any provision of the Ordinance subject
to any condition specified (Part IV of the schedule)
 Where any income is exempt from tax under any provision of Second
Schedule, it shall be included in the total income, however, the tax shall not be
payable in respect of such income. This inclusion shall be made where it is
required by the relevant clause of Second Schedule and shall be subject to
such conditions as may be specified in the said clause.
 The Federal Government is empowered to make such amendment in the
Second Schedule as the Government thinks fit. The amendment may include:
(i). adding any clause or condition therein;
(ii). omitting any clause or condition therein, or
(iii).making any change in any clause or condition therein.
 The amendments shall be effective from such tax year (as notified by the
Government) beginning on any date before or after the commencement of the
financial year in which the notification is issued.
 The Federal Government shall place before the National Assembly, all
amendments made to the Second Schedule in a financial year.

Significant Exemptions from total income (Part I of 2nd Schedule)
Clause no. Subject Exemptions

57 Income of mutual
Any income (other than capital gain on
fund/unit
stock and shares of public company, PTC
trust/investment
vouchers, modaraba certificates or any
company
instrument of redeemable capital and
derivative products held for less than 12
months) derived by any Mutual Fund,
investment company, or a collective
investment scheme, if not less than ninety
per cent of its income of that year is
distributed amongst the Unit-holders.
61 Amount paid as Any amount paid as donation to the

donation following institution, foundations, societies,
boards, trusts and funds, namely any
Sports Board or institution recognised by
the Federal Government for the purposes
of promoting, controlling or regulating any
sport or game;
 The Citizens Foundation

 Fund for Promotion of Science and
Technology in
 Pakistan;
 Fund for Retarded and Handicapped
Children;
 National Trust Fund for the Disabled;
 Fund for Development of Mazaar of
HazaratBurri Imam;
 Rabita-e-Islami's Project for printing
copies of the Holy
 Quran;
 Fatimid Foundation, Karachi;
 Al-Shifa Trust

 Other institutions as mentioned in 2nd

schedule
Provided that the amount so donated shall

not exceed
(a) in the case of an individual or

association of persons,
thirty percent of the taxable
income of the person for the
year; and
(b) in the case of a company,

twenty percent of the
taxable income of the person for
the year
91. Income of text-book Any income of a text-book board of a

board Province established under any law for the
time being in force, accruing or arising
from the date of its establishment
98. Income derived by Any income derived by any Board or other
Sports Board organization established in Pakistan for
the purposes of controlling, regulating or
encouraging major games and sports
recognised by Government.
Provided that the exemption of this clause

shall not be applicable to the Pakistan
Cricket Board.
99. Income derived by Any income derived by a Collective
CollectiveInvestment Investment Scheme or a REIT Scheme, if
Scheme or REIT not less than ninety percent of its
Scheme accounting income of that year, as
reduced by capital gains whether realized
or unrealized, is distributed amongst the

unit or certificate holders or shareholders

as the case may be.
Explanation.- For the purpose of this
clause the expression accounting income
means income calculated under the
generally accepted Accounting Principles
and verified by the auditors. Further,
distribution shall not include issue of
bonus shares.
101 Profits and gains of Profits and gains derived between the first
venture capital day of July, 2000 and the thirtieth day of
company June, 2024 both days inclusive, by a
venture capital company and venture
capital fund registered under Venture
Capital Companies and Funds
Management Rules, 2000
102A Subsidy granted to a Income of a person as represents a
person by Federal subsidy granted to him by the Federal
Government Government for the purposes of
implementation of any orders of the
Federal Government in this behalf
103A Inter Corporate Any income derived from inter-corporate
dividend within dividend within the group companies
group companies entitled to group taxation under section
59AA or section 59B
133 Export of IT Services Income from exports of computer software
or IT services or IT enabled services upto
the period ending on 30th day of June,
2016.
Explanation.- For the purpose of this

clause
(a) IT Servicesǁ 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
centres, medical transcription,
remote monitoring, graphics
design, accounting services, HR
services, telemedicine centers,
data entry operations locally
produced television programs
and insurance claims processing.
136 Income of special Any income of a special purpose vehicle
purpose vehicle as defined in the Asset Backed
Securitization Rules, 1999 made under
the Companies Ordinance, 1984.
Reduction in tax rates (Part II of 2nd Schedule)
Clause Subject Applicable tax rate

no.
3 Income from The tax in respect of income from
services rendered services rendered outside Pakistan
and construction shall be charged at the rate of one
contracts outside percent of the gross receipts provided
Pakistan that such receipts are brought into
Pakistan in foreign exchange through
normal banking channel
20 Dividend declared by The rates of tax on dividends shall be
power generation reduced to 7.5% in case of dividend
companies declared or distributed on shares of a
company set up for power generation.

Reduction in tax liability (Part III of 2nd Schedule)
Clause Subject Reduction in tax liability

no.
2 Full time teacher or The tax payable by a full time teacher or
researcher a researcher, employed in a non profit
education or research institution duly
recognized by Higher Education
Commission, a Board of Education or a
University recognized by the Higher
Education Commission, including
government training and research
institution, shall be reduced by an amount
equal to 40% of tax payable on
hisincome from salary.
6 Behbood saving The tax payable on profit on debt in
certificates respect of any amount paid as yield or
profit on investment in Bahbood Savings
Certificate or Pensioners Benefit Account
shall not exceed 10% of such profit
7 Minimum tax on Where any company engaged in the
distributors of business of distribution of cigarettes
cigarettes manufactured in Pakistan is required to
pay minimum tax on the amount
representing its turnover under section
113, the amount of tax payable under the
said section shall be reduced by eighty
percent
8,10 Minimum tax on For the distributors of pharmaceutical
distributors of products, fertilizers, consumers goods
pharmaceutical including fast moving consumers goods
products, FMCG, (FMCG) and floor mills, the rate of
floor mills etc. minimum tax on the amount representing
their annual turnover under section 113
shall be reduced by eighty percent
9 Minimum tax on In cases of oil marketing companies, oil
OMC, refineries etc. refineries, Sui Southern Gas Company
Limited and Sui Northern Gas Pipelines
Limited the rate of minimum tax shall be
reduced to 0.5% only for the cases where
annual turnover exceeds rupees one
billion.
Exemptions from specific provisions (Part IV of 2nd Schedule)
Part IV of the second schedule contains various clauses that provide exemptions to
various persons or classes of persons from the applicability of various sections.

5 CHAPTER REVIEW
Chapter review
 What is the treatment of losses under various heads of income?
 What are deductible allowances such as zakat, workers welfare fund and workers
profit participation fund?
 Explanation and computation of the different tax credits available to a taxpayer.
 What are the various types of exemptions and tax concessions available under
the Income Tax Ordinance, 2001?.

12
CHAPTER
Taxation of individual and association of

persons
Contents
1 Taxation of individual
2 Association of Persons (AOP) and its taxation
3 Taxation of joint venture
4 Concept of minimum tax
5 Chapter review

INTRODUCTION
Learning outcomes
Concepts
LO 4.7.1 Describe with simple examples the principles of taxation of individual and
association of persons

Chapter 12: Taxation of individual and association of persons
1 PRINCIPLES OF TAXATION OF INDIVIDUALS

Section overview
 Taxation of individuals- classification

 Principle of taxation
 Taxation of income of a minor and deceased individuals
 Mechanism for determination of total income of a person
 Exercise
1.1 Taxation of individuals-classification

In order to calculate the taxable income and tax liability, individuals are broadly
categorized as:
(i). Salaried individuals – Salary income exceeds 50% of the taxable income
(ii). Non-Salaried Individuals – No salary income or salary income is less than
50% of the taxable income
Calculation of taxable income is same in both cases. However, the tax rates
(calculation of tax liability) for salaried individuals are different from those
applicable to non-salaried individuals.
Rates of tax for every individual – Non-Salaried Individuals
The rates of tax imposed on the taxable income of every individual except a
salaried Individual shall be as set out in the following table, namely:
S. No. Taxable Income Rate of tax.
0%
1. Upto Rs.400,000
Exceeds Rs.400,000 but does not 10% of the amount

2
exceed Rs.750,000 exceeding Rs. 400,000
Rs.35,000 + 15% of
Exceeds Rs.750,000 but does not the amount exceeding
3 Rs.750,000
exceed Rs.1,500,000
Rs147,500 +20% of
Exceeds Rs.1,500,000 but does not the amount exceeding
4. Rs 1,500,000
exceed Rs.2,500,000
Rs.347,500 +25% of
Exceeds Rs2,500,000 but does not
the amount exceeding
5. exceeds
Rs.2,500,000
Rs 4,000,000

Rs. 722,500 + 30% of

Exceeds Rs,4,000,000 but does not
6. the amount exceeding
exceeds Rs6,000,000
Rs4,000,000
Rs 1,322,500 + 35% of
7. Above 6,000,000 the amount exceeding
Rs. 6,000,000.
Rates of tax for salaried individuals

Where the income of an individual chargeable under the heading “salary”
exceeds fifty percent of his taxable income, the rates of tax to be applied shall be
as set out in the following table namely: -
Sr. Taxable Income (Rs.) Rate of Tax
No. From To
1. Up to 400,000 0%
2. 400,001 750,000 5% of the amount exceeding Rs.
400,000
3. 750,001 1,400,000 Rs.17,500 + 10% of the amount
4. 1,400,001 1500,000 Rs.82,500 +12.50% of the amount

5. 1,500,001 1,800,000 Rs.95,000 + 15% of the amount

6. 1,800,001 2,500,000 Rs.140,000 + 17.5% of the amount
7. 2,500,001 3,000,000 Rs.262,500 + 20% of the amount
8. 3,000,001 3,500,000 Rs.362,500 + 22.5% of the amount
9. 3,500,001 4,000,000 Rs.475,000 + 25% of the amount
10. 4,000,001 7,000,000 Rs.600,000 + 27.5% of the amount
1.2 Principle of taxation of individuals

Section 86 of the Ordinance deals with the taxation of individuals and the said
section stipulates that:
S86.Principle of taxation of individuals.
Taxable income and tax liability of each individual shall be determined separately.

1.3 Taxation of deceased individual and minor

Deceased individual:
Although the above stated section 86 of the Ordinance states that every person
shall be charged to tax separately, however, there are certain exceptions to this
general provision.
Section 87 of the Ordinance deals with the taxation of income of a deceased
individual:
 Legal representative is a person who in law represents the estate of a
deceased person. Any person to whom the estate of the deceased person
passes on his death or who intermeddles with such estate is also treated as
legal representative.
 Legal representative is liable for:
(i). any tax that the deceased would have become liable for if he had not
died; and
(ii). any tax payable in respect of the income of deceased’s estate.
 Liability of the legal representative shall be limited to the extent to which
deceased estate is capable of meeting the liability.
 Any proceedings taken against the deceased before his death shall be
treated as taken against the legal representative and may be continued
against him from the stage at which the proceedings stood on the date of
deceased death.
 Any proceedings which could have been taken against the deceased if he
had survived may be taken against the legal representative.
The aforesaid provision of law clearly states that the income of a deceased
person is taxable in the hands of its legal representative and the said
representative is liable to pay tax on such income to the extent of estate of the
said deceased person capable for meeting the tax liability.
Income of a minor child
Definition: Minor child

“Minor child” means an individual who is under the age of eighteen years at the
end of a tax year.
Section 91 of the Ordinance provides that any income of a minor child for a tax
year chargeable under the head "Income from Business" shall be chargeable to
tax as the income of that parent of the child who has the highest taxable income
for that year.
However, the above provision shall not apply in case the income of a minor child
is derived from a business acquired by the child through an inheritance.

2. ASSOCIATION OF PERSONS (AOP) AND ITS TAXATION
SECTION OVERVIEW
 Association of persons
 Basic principles for taxation of AOP
 Individual as a member of AOP
 Rates of tax for an AOP
2.1 Association of persons

“Association of persons” includes a firm, a Hindu undivided family, any artificial
juridical person and anybody of persons formed under a foreign law, but does not
include a company.
“Firm” means the relation between persons who have agreed to share the profits of
a business carried on by all or any of them acting for all.
2.2 Basic principles for taxation of AoP

 An association of persons is considered a separate entity from its members
(partners). Accordingly, the AoP is liable to tax separately from the members of
the association.
 An AoP is treated as tax resident for a tax year if the control and management of
its affairs is situated wholly or partly in Pakistan at any time during that tax year.
 A resident AOP is taxable on its worldwide income.
 If the AoP has paid tax for a tax year, the amount received by a member of the
association in the capacity as member out of the income of the association shall
be exempt from tax. However, such share of member is included in income of the
member for determination of tax rate i.e. for rate purpose (discussed below in
detail).
 If at least one of the members of an AoP is a company, the share of such
company or companies shall be excluded for the purpose of computing the total
income of the AoP and the company or companies shall be taxed separately at
the rates applicable to the companies, according to their share.
 The AoP is entitled to set off and carry forward its losses as per normal
procedure. However, share of loss from AOP is neither adjustable against the
income of its members nor it is considered for rate purpose.
 Where a change occurs in the constitution of a firm during a tax year, the firm’s
income is apportioned amongst the members on a time basis
 The responsibility for filing the tax return of a firm for any tax year rests with the
persons who are members in the firm on the date the firm is required to file its tax
return.
 Where a firm dissolves or discontinues carrying on business, any tax payable by
the firm is recoverable from any person who was a member in the firm at the time
of dissolution or discontinuance of business. Tax payable can also be recovered
from legal heirs of the deceased partners.

 In case more than 50% of underlying ownership of an AOP changes in a tax

year, any loss incurred before the said change will not be allowed as deduction
unless
(i). The said AOP continues to conduct the same business as it was doing
before the change until loss has been fully set off
(ii). AOP, until the loss is set off, does not engage in any new business or
investment after the change where the principal purpose of the entity or
the beneficial owners of the entity is to utilise the loss so as to reduce the
income tax payable on the income arising from the new business or
investment.
2.3 Individual as a member of AOP

If, for a tax year, an individual has taxable income besides exempt share of profit
from AOP, then the amount of tax payable on the taxable income of the individual
shall be computed in accordance with the following formula:
(A/B) x C
Where
A is the amount of tax that would be assessed to the individual for the year if the
amount or amounts exempt from tax (i.e. share of profit from AOP) were
chargeable to tax
B is the taxable income of the individual for the year if the amount or amounts
exempt from tax under (i.e. share of profit from AOP) were chargeable to tax; and
C is the individual‘s actual taxable income for the year
Key points for solving AOP numerical

Following points should be kept in mind when solving AOP numerical:
 Any profit on debt, brokerage, commission, salary or other remuneration paid
by an association of persons to a member of the association is not allowed as
an expense; hence it should be added back to the taxable income of AoP.
 FBR has clarified that it is the divisible income (profit after tax) of AoP that
will be included in the taxable income of its members for rate purpose.
 Share of loss from AoP is neither adjustable against income of its members
nor it is considered for rate purpose.
 If an AoP has any income that falls under presumptive tax regime (PTR) then
members share from such income shall not be added in the taxable income
of the member. Section 4(4) read with Section 169(2) clearly states that
income falling under PTR is not to be included in any taxable income.

2.4 Rates of tax for association of persons

Rates of tax for income earned by AOP are reproduced hereunder for facilitation:
S. No. Taxable Income Rate of tax.
1. Upto Rs.400,000 0%
Exceeds Rs.400,000 but does not 10% of the amount

2
exceed Rs.750,000 exceeding Rs. 400,000
Rs.35,000 + 15% of the

Exceeds Rs.750,000 but does not
3 amount exceeding
exceed Rs.1,500,000
Rs.750,000
Rs.147,500 + 20% of the
Exceeds Rs.1,500,000 but does
4. amount exceeding
not exceed Rs.2,500,000
Rs.1,500,000
Rs.347,000 + 25% of the
5. amount exceeding
Rs.2,500,000
Rs.722,500 + 30% of the
6. amount exceeding
Rs.4,000,000
Rs.1,322,500 + 35% of the
7. Above Rs 6,000,000 amount exceeding
Rs.6,000,000
Exercise
Associated Consultants is a joint venture (JV) of Mr. Ghulam Rasool and Consultancy
Enterprises, a sole proprietorship of Mr Ahsan. The JV is not registered with registrar
of firms. The proportion of interest of the members in the JV is 70:30 between Mr
Ghulam Rasooland Mr Ahsan respectively. The JV is engaged in the providing of
accounting, taxation and other services to different departments. During the year,
total Income of the JV under the normal tax regime was Rs 2,000,000 against the
total revenue of Rs 30,000,000. It is worth mentioning that Mr Ahsan earned
following income during the year:
Salary from Joint Venture 450,000
Profit on debt from joint venture 400 000
Compute the taxable income and tax liability of the Joint Venture for tax year 2014
(Ignore the minimum tax provision.)
Answer
Profit as per accounts 2,000,000
Add Inadmissible deductions
Salary paid to members 450,000
Profit on debt paid to members 400 000

Taxable income 2,850,000

Tax on taxable income Of JV Rs 2,850,000 i.e. RS 347,500 +
435,000
25% on income exceeding Rs 2.5 Million
Share of members out of profits of JV

Ghulam
Nature of income Mr. Ahsan Total
Rasool.
Share in profits 1,400,000 600,000 2,000,000
Salary received - 450,000 450,000
Profit on debt received - 400,000 400,000
Gross distribution 1,400,000 1,450,000 2,850,000
Proportionate tax 213,684 221,316 435,000
Income in hands of members
1,186,316 1,228,684 2,415,000
of AOP
Exercise:
Mr Rizwan and Mr Wajahat are two lawyers and working together as a firm in the
name and style of “RizwanWajahat Associates”. During the year, the firm has
earned aggregate profit of Rs 300,000. The aforesaid profit includes following
deductions:
 Salaries to Partners
 Mr Rizwan RS 100,000
 Mr Wajahat RS 150,000
 Expenses on which tax has not been deducted Rs 40,000
 Payments exceeding RS 10,000
[made otherwise than crossed cheques] RS 60,000
 Profit on debt to Rizwan Rs 50,000
Both partners have equal sharing in the firm. Mr Rizwan has no other income. Mr
Wajahat is also running a business of printing and advertising services. He earned
income of RS 150,000 from the said business.
Determine the tax liability of the firm, and its members for the tax year 2014.
Answer
Tax liability of the Firm
For the Tax Year 2014
Particulars Amount (RS)
Profit as per accounts 300,000
Add
Partners salaries 250,000
Inadmissible expenses due to non-deduction of tax 40,000

Payments otherwise than banking channel 60,000

Profit on debt payable to a partner 50,000
Total taxable income 700,000
Tax liability i.e.10% on sum exceeding Rs 400,000 30,000
Computation of divisible income of members

Particulars Amount (RS)
Total taxable income of AOP 700,000
Less
Partners salaries 250,000
Profit on debt payable to a partner 50,000
Divisible taxable income 400,000
Distribution of taxable income

Particulars Mr Rizwan Mr Wajahat Total
Divisible taxable income 200,000 200,000 400,000
Salaries paid to 100,000 150,000 250,000
partners
Profit on debt 50,000 - 50,000
350,000 350,000 700,000
Proportionate tax 15,000 15,000 30,000
Income in hands of 335,000 335,000 670,000
members of AOP
Computation of individual tax liability

Tax liability of Mr Rizwan
As Mr Rizwan has no other source of income, therefore, his income is not
chargeable to tax any further.
Tax liability of Mr Wajahat

Share from AOP (Exempt, but included for rate purpose) Rs 335,000
Add: Income from printing and advertising income Rs 150,000
Total Rs 485,000
Tax on the income on sum exceeding Rs 400,000 i.e. 85,000 Rs 8,500
@ 10%
Tax on printing income Rs 150,000 x 8,500/485,000 Rs 2,629
Note:
In the normal course of taxation, income of Wajahat is lower than Rs 400,000 and
tax rate would have to be 0%. However, due to earning of share out of profit, tax on
printing income has been levied @8,500/485,000. It is to clarify that tax of Rs.
8,500 on income including share of AOP is only worked out to determine the rate
applicable to income of printing. Share of member out of profits of AOP still remain
exempted.

3 PRINCIPLES OF TAXATION OF JOINT VENTURE

Section overview
 Principles of taxation
 A joint venture is treated as an association of persons and is liable to tax

separately from its members.
 In case a joint venture has net taxable income, tax would be calculated according
to the rules and principles applicable to the relevant head of income.
 In case a joint venture incurs a loss in a tax year, the entire loss would be carried
forward to the following tax year and so on for a maximum period of six tax years.

4 CHAPTER REVIEW
Chapter review
 Principles of taxation of individual
 Definition of an association of persons.
 Taxation of a firm including expenses inadmissible while computing income of
an AOP
 Rates of Tax for an AOP
 Taxation of member of a firm on share out of profits of AOP
 Taxation of joint venture

13
CHAPTER
Foreign source income

of a resident person
Contents
1 Taxation of foreign source income of residents
2 Special provisions with respect to foreign source
income
3 Chapter review

INTRODUCTION
After going through the different heads of income, this chapter deals with the taxation of
foreign source income of a resident person
Learning outcomes
Concepts
LO 4.8.1 Understand the applicability of tax on foreign salary income, credit against
foreign tax and treatment of foreign loss of a resident on simple scenarios

Chapter 13: Foreign source income of a resident person
1 TAXATION OF FOREIGN SOURCE INCOME OF RESIDENT PERSONS

Section overview
 Principles of taxation of foreign source income
 Computation of income
 Foreign tax credit
 Foreign tax losses
3.1 Principles of taxation of foreign source income of resident persons

As discussed in Chapter 4 of the study text, a resident person is liable to tax in
respect of his worldwide income meaning thereby that he pays tax on his
Pakistan-sourced income as well as his foreign-sourced income. Accordingly,
where a resident person carries out business outside Pakistan, income derived
from such foreign operations is taxable in Pakistan.
3.2 Computation of income

 Foreign sourced income is computed separately from Pakistan-sourced
income. Consequently, expenditure incurred in deriving foreign-sourced
income is not deductible against Pakistan-sourced income and vice versa.
 Foreign sourced income is computed separately for each head of income.
Accordingly foreign-sourced income under the head “income from other
source” will be computed separately from foreign-sourced income
chargeable under any other head of income.
 Foreign-sourced business income is computed under the same principles
as these apply to computation of Pakistan-sourced business income.
 Foreign losses are not adjustable against Pakistan-sourced income
3.3 Foreign tax credit

 Section 103 of the Ordinance lays down different aspects of foreign tax
credit in the following manner:
1) Where a resident taxpayer derives foreign source income chargeable to tax
in respect of which he has paid foreign income tax, the taxpayer shall be
allowed a tax credit of an amount equal to the lesser of:
a) the foreign income tax paid; or
b) the Pakistan tax payable in respect of the income.
2) The Pakistan tax payable in respect of foreign source income shall be
computed by applying the average rate of Pakistan income tax applicable to
the taxpayer for the year against the taxpayer’s net foreign source income
for the year.
3) If a taxpayer has foreign income under more than one head of income, this
principle shall apply separately to each head of income.
4) Income derived by a taxpayer from carrying on a speculation business shall
be treated as a separate head of income.
5) If a person has more than one type of tax credits available to him, these
shall be applied in the following order:
(a) Foreign tax credit u/s 103

(b) Tax credit/rebate on donations, investment, enlistment, etc.,

(c) Advance tax and tax deducted/collected at source
6) Any tax credit or part of a tax credit allowed for a tax year that is not
credited shall not be refunded, carried back to the preceding tax year, or
carried forward to the following tax year.
7) A foreign tax credit shall be allowed only if the foreign income tax is paid
within two years after the end of the tax year in which the foreign income to
which the tax relates was derived by the resident taxpayer.
Definition: Average rate of Pakistan Income Tax

 “average rate of Pakistan income tax” in relation to a taxpayer for a tax
year, means the percentage that the Pakistani income tax (before
allowance of the tax credit under this section) is of the taxable income of
the taxpayer for the year;
 “foreign income tax” includes a foreign withholding tax; and
 “net foreign-source income” in relation to a taxpayer for a tax year, means
the total foreign-source income of the taxpayer charged to tax in the year,
as reduced by any deductions allowed to the taxpayer for the year that:
 relate exclusively to the derivation of the foreign-source income; and
 are reasonably apportioned to the derivation of foreign-source income
in accordance with section 67.
Note : Section 67 provides the method for apportionment of expenditure relevant
to different sources of incomes
3.4 Foreign tax losses

Section 104 of the Ordinance deals with treatment of foreign losses and it states
that:
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 exceed the total foreign source income
for a tax year chargeable to tax under a head of income (hereinafter
referred to as a “foreign loss”), the foreign loss shall be carried forward to
the following tax 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 loss for the earliest year shall be set off first.
 Section 67-Apportionment of deductions shall apply for the purposes of this
section on the basis that:
 income from carrying on a speculation business is a separate head of
income; and
 foreign source income chargeable under a head of income including a
speculation business is a separate head of income.

Exercise:
KL is an Association of Persons having two partners, Mr. K and Mr. L sharing profit
and loss equally. During the tax year 2014, KL’S Pakistan source income
amounted to Rs.2,500,000 and tax payable thereon amounted to Rs.722,500.
Following are the details of its foreign source incomes, tax paid thereon and
foreign losses brought forward for the tax year 2014:
Heads of income Foreign income Foreign tax paid Foreign losses
brought forward
Speculation 500,000 125,000 (250,000)
business
Non-speculation (1,000,000)
business
Income from 1,250,000 187,500
other source
Capital gain 750,000 75,000 (1,500,000)
Tax credit amounting to Rs.100,000 relating to income from other source

remained unadjusted during the last tax year.
Required:
Calculate KL’s total tax payable and foreign tax losses to be carried forward to the
next year (if any)
Answer
Description Pakistan ---------------------------Foreign Source---------------------------- Total
Source Speculation Non Capital Gain Other Total (PSI+FSI)
Income Speculation Sources
Icome for the year 2,500,000 500,000 (1,000,000) 750,000 1,250,000 1,500,000
Losses brought forward - (250,000) - (1,500,000)
Balance income 2,500,000 250,000 (1,000,000) (750,000) 1,250,000 500,000
Loss adjustments - - 1,000,000 - (1,000,000) -
Taxable income 2,500,000 250,000 - (750,000) 250,000 500,000 3,000,000
Pakistan income tax 472,500
Proportionate Paistan tax [(472,500/3,000,000) X 500,00] 78,750
Foreign tax actually paid 125,000 187,500 312,500
Foreign tax credit allowed
(Lower of the two) (78,750)
Balance tax payable 393,750
Unadjusted foreign tax credit cannot be refunded, carried back to preceding year
or carried forward to the following year.

Exercise:
GCL Limited is engaged in the business of manufacturing and sale of Fertilizers
both locally and internationally. The company has two overseas branches located
in Brazil and Italy. Following information has been extracted from company’s
records for the year ended 30 June 2014:
Pakistan Operations Overseas Branches
Local Brazil Italy
Sales 5000,000 8,000,000 6,000,000
Profit before 1,000,000 1,000,000 800,000
taxation
Taxes paid 400,000 300,000 200,000
during the year
GCL Limited net profit from local operation includes the following:
(a) Profit on debt amounting to Rs. 800,000 paid by GCL Limited to bank
against a short term loan obtained to meet the working capital
requirements of its Italy branch.
(b) Rs. 100,000 written back on account of excess provision for bad debts,
made last year.
A donation of Rs. 600,000 paid to an institution mentioned in 2nd Schedule of the
Required:
Under the provisions of Income Tax Ordinance, 2001 compute the taxable income
and net tax payable / refundable for the tax year 2014. Give brief reasons for the
treatment of the items excluded from computation or for which no expense
deduction is allowed.

Answer
GCL LIMITED
TAX YEAR: 2014
Pakistan source
Foreign source income
Particulars income
Local Brazil Italy
Profit before tax 1,000,000 1,000,000 800,000
Add:
Profit on debt to finance the 800,000 (800,000)
operations of branch-
Note-1
Less Excess provision
written back (100,000)
Taxable income 1,700,000
Less donation paid- Note-2 600,000
Taxable income 1,100,000 1,000,000
Tax rate 34% 34% 34%

Tax @ 34% 374,000 340,000 -
Less already paid 400,000
Foreign tax credit lower of
foreign tax paid or 300,000 -
Pakistani tax payable-
Note3
Tax (refundable) / payable (26,000) 40,000 -
Notes
N-1Any profit on debt paid by resident to finance the operation of Permanent

establishment outside Pakistan will be allowed as expense against the income of
overseas branch.
N-2Any donation paid to an institution mentioned in 2nd schedule of the Income

Tax Ordinance, 2001 will be allowed as straight deduction from taxable income
N-3 In case of Italy branch, since the foreign income tax paid of Rs. 200,000 is in
excess of the Pakistan income tax of Rs. Nil, the tax credit allowed would be
restricted to Nil and the excess amount of Rs. 200,000 would not be allowed to be
refunded, carried back to the previous year or carried forward to the next tax year.

2 OTHER PROVISIONS WITH RESPECT TO FOREIGN SOURCE INCOME

Section overview
 Foreign source salary income of a resident person

 Foreign source income of a short term resident person
 Foreign source income of returning expatriates
 Exemptions to certain foreign residents or foreign source income of residents
2.1 Foreign source salary of a resident person

Section 102 of the Ordinance states that:
 Any foreign-source salary received by a resident individual shall be exempt
from tax if the individual has paid foreign income tax in respect of the
salary.
 A resident individual shall be treated as having paid foreign income tax if
tax has been withheld from his foreign source salary by the his employer
and paid to the revenue authority of the foreign country in which the
employment was exercised.
2.2 Foreign source income of a short term resident person

Section 50 of the Income Tax Ordinance states that:
1) Foreign-source income of an individual shall be exempt from tax in Pakistan
if he is:
 a resident individual solely by reason of the individual’s employment;
and
 present in Pakistan for a period or periods not exceeding three years,
2) The above exemption shall not apply to:
 any income derived from a business of the person established in
Pakistan; or
 any foreign-source income brought into or received in Pakistan by the
person.
2.3 Foreign source income of returning expatriates

Section 51 of the Income Tax Ordinance, 2001 states that:
 Any foreign source income derived by a citizen of Pakistan in a tax year
who was not a resident individual in any of the four tax years preceding the
tax year in which the individual became a resident shall be exempt from tax
in the tax year in which he became a resident individual and in the following
tax year.
 If a citizen of Pakistan leaves Pakistan during a tax year and remains
abroad during that tax year, any foreign source salary earned by him
outside Pakistan during that tax year shall be exempt from tax.

2.4 Exemptions to certain foreign residents or foreign source income of residents

Following exemptions are available to foreigners or the foreign source income of
residents which are discussed in detail in Chapter 11of this study text:
Section # Title of Section
42 Diplomatic and United Nations exemptions.
43 Foreign government official
44 Exemption under international agreements
Exercise:
Mr Akhtar has served in South Africa (SA) for last five years. He was Chief
Engineer at a multinational Company in SA. He returned to Pakistan in
September 2013. Detail of his income for the year 2014 is as under:
1. His emoluments for the last July to September converted into Pak Rupees are
as under:
Particulars Amount
Pay 1,500,000
Expatriate allowance 680,000
Medical allowance 320,000
Total 2,500,000
2. Mr Akhtar spent his whole income for personal expenses and balance amount
was invested in a Consultancy business. He was a member in an engineering
consulting AoP in of South Africa. His investment in the firm still exists and
during the year 2013, he earned income equivalent to Rs 750,000 after
paying tax of Rs 125,000. He has not drawn any sum from the share of his
profit.
3. Mr Akhtar also received rent in Pakistan of his apartment situated in SA. The
rental income earned and received aggregates to PKR 1,200,000. In SA the
rental income is taxed as separate block of income and tax on the rental
income paid by Mr Akhtar was Rs 120,000. Mr Akhtar paid a sum of Rs
12,000 to the banker for rent collection.
4. Mr Akhtar received pension amounting to Rs 250,000 during the year from
his employer at SA. This pension was paid to his son in South Africa to meet
his educational expenses.
5. Mr Akhtar deposited his cumulative pension in the SA special bonds and
earned profit on debt amounting to Rs 325,000 during the year from the said
investment. Mr Akhtar opted to invest the profit in the said bonds in order to
avoid reduction in interest rates which are applicable on fresh investments.
6. In Pakistan, Mr Akhtar joined Gatron International Limited on 01 October
2013 and received following salary income from the company:
Particulars Amount
Basic Pay 2,800,000
Utilities allowance 280,000
Medical allowance 280,000
Total 3,360,000
7. South African Revenue Authorities raised a tax demand against Mr.Akhtar
equivalent to Rs 25,000 on the rental income in view of claim of inadmissible
expenses thereagainst and Mr Akhtar paid this demand in August 2014.

You are required to compute Pakistan tax liability of Mr Akhtar for the tax year
2014. It is worthwhile to mention here that the nationality of Mr Akhtar is not
confirmed, therefore, it is desired that the Pakistan tax of Mr Akhtar should
be worked out considering that:
(a) Mr Akhtar is Pakistani National
(b) Mr Akhtar is SA National
Answer
MR AKHTAR
Situation Number 1
Mr Akhtar is Pakistani National Person
As per information provided to us, he remained outside Pakistan since last five
years, therefore, foreign source income of Mr Akhtar is exempt from levy of tax
under section 51 of the Ordinance and tax liability on the Pakistan source income
is as under:
Particulars Gross Exempt Taxable
Income
Basic Pay 2,800,000 0 2,800,000
Utilities allowance 280,000 280,000
Medical allowance 280,000 280,000 3,080,000
Total taxable income 3,080,000
Tax l 380,500
Situation Number 2
Mr Akhtar is a national of South Africa
Under section 50 of the Ordinance, the foreign source income of a short term
resident individual is not taxable in Pakistan if it is not received in Pakistan.
Therefore, Income of Mr Akhtar is only taxable to the extent it is received in
Pakistan. The bare perusal of the question reveals that Mr Akhtar received only
rental income in Pakistan from abroad. Therefore, the same will be taxed with the
Pakistan source income.
Particulars Notes Taxable
Amount
Income from salary As in Situation 1 3,080,000
Foreign source rental income (less 1/5 allowance at Rs.
th 948,000
240,000 and collection charges at Rs. 12,000)
Total Income 4,028,000
Tax Liability
As the taxable salary exceeds 50% of taxable income
hence, tax rates applicable on salaried person is
computed as under
Tax on taxable income 600,000 + 27.5% on sum
exceeding Rs 4 M 607,700
Less Foreign Tax Credit
Average tax 607,700/4,028,000 x 948,000 143,024
Foreign Tax paid (120,000 +25,000) whichever is less 143,024
Balance Tax Payable 464,676

3 CHAPTER REVIEW
Chapter review
 What is foreign tax credit and how it is computed?
 What is the treatment of foreign losses?
 What is the tax treatment of foreign source income of short term resident
individuals and returning expatriates


14
CHAPTER
Returns
Contents
1 Tax return
2 Persons liable to file a tax return
3 Method of filing of tax return
4 Revision of tax return
5 Due date for filing of tax return
6 Filing of wealth statement
7 Filing of tax return on discontinuance of business
8 Extension of time for furnishing of tax return
9 Chapter review

INTRODUCTION
This chapter explicates provisions regarding filing of tax return, wealth statement and
statement under section 115(4) of the Income Tax Ordinance, 2001, and other related
documents
Learning outcomes
Concepts
LO 4.9.1 Identify persons required to furnish a return of income
LO 4.9.2 Identify persons not required to furnish a return of income
LO 4.9.3 Identify persons required to furnish wealth statements
LO 4.9.4 List the contents of wealth statement

Chapter 14: Returns
1 TAX RETURN
Section overview
 Introduction to the tax return
1.1 Introduction to tax return

A tax return is the prescribed document which is used by the taxpayer in order to
declare his taxable income and tax liability thereon. Income tax rules, 2002
prescribe the forms to be used for returns of income.

2 PERSONS LIABLE TO FILE A TAX RETURN

Section overview
 Persons liable to file a tax return

 Persons not liable to file tax return
 Powers to call returns and statements
2.1 Persons liable to file a tax return

The following persons are required to furnish a return of income for a tax year:
(i). Every company;
(ii). Every person (other than a company) whose taxable income for the year
exceeds the maximum amount that is not chargeable to tax; or
(iii). Any non-profit organisation as defined in clause (36) of section 2; or
(iv). Any welfare institution approved under clause 58 of part 1of the second
schedule.
In addition to the above, return is also required to be filed by the person who,-
(i). has been charged to tax in respect of any of the two preceding tax years;
(ii). claims a loss carried forward for a tax year;
(iii). owns immovable property with a land area of two hundred and fifty square
yards or more or owns any flat located in areas falling within the municipal
limits existing immediately before the commencement of local government
laws in the provinces; or areas in a cantonment; or the Islamabad capital
territory. However the following persons shall not be required to furnish a
return of income solely by the above reason.
(a) a widow
(b) an orphan below the age of 25 years
(c) a disabled person; or
(d) in case of ownership of immoveable property
(iv). owns immoveable property with a land area of five hundred square yards or
more located in a rating area;
(v). owns a flat having covered area of two thousand square feet or more
located in a rating area;
(vi). owns a motor vehicle having engine capacity above 1000 CC;
(vii). has obtained National Tax Number or
(viii). Is the holder of commercial or industrial connection of electricity where the
amount of annual bill exceeds five hundred thousand.
(ix). is a resident person registered with any chamber of commerce and industry
or any trade or business association or any market committee or any
professional body including Pakistan Engineering Council, Pakistan
Medical and Dental Council, Pakistan Bar Council or any Provincial Bar
Council, Institute of Chartered Accountants of Pakistan or Institute of Cost
and Management Accountants of Pakistan.

Chapter 14: Returns
(x). Every individual whose income under the heading ‘Income from business’
exceeds Rupees three hundred thousand but does not exceed Rupees four
hundred thousand is also required to file tax return.
2.2 Persons not liable to file tax return

 Under section 115, the following persons are granted immunity from the
aforesaid provision of filing of tax return:
 Following persons shall not be required to furnish a return of income
for a tax year solely by reason of owning immovable property with a
land area of two hundred and fifty square yards or more or any flat
located in areas falling within the municipal limits
 a widow;
 an orphan below the age of twenty-five years;
 a disabled person; or
 in the case of ownership of immovable property, a non-resident
person.
 any person who is not obliged to furnish a return for a tax year
because all the person’s income is subject to final taxation under
sections 5 (Tax on dividend income) ,6(Tax on royalty and fee for
technical services paid to non-residents),7(Tax on shipping and Air
transport),148( Final Tax on imports) ,151 (Final Tax on Profit on
debts) and 152 (Final Tax on non-residents) , sub-section (3) of
section 153 (Final Tax on residents on supply of goods, services
rendered and execution of contracts), sections 154 (Final Tax on
Exports), 156 (Final Tax on Prize Bonds) and 156A (Final Tax on
Petroleum Products), sub-section (3) of section 233 (Final Tax on
Commission) or sub-section (3) of section 234A (Final Tax on CNG
Stations) shall furnish to the Commissioner a statement showing such
particulars relating to the person’s income for the tax year. This
statement is usually called ‘statement of final tax’.
2.3 Powers to call for returns and statements

Section 114 empowers the Commissioner of income tax to call for return.
 the Commissioner may, by notice in writing, require a person, or a person’s
representative, as the case may be, to furnish a return of income by the date
specified in the notice for a period of less than twelve months, where:
 the person has died;
 the person has become bankrupt or gone into liquidation;
 the person is about to leave Pakistan permanently;
 the Commissioner otherwise considers it appropriate to require such
a return to be furnished.
 the Commissioner may, by notice in writing, require any person who, in the
Commissioner’s opinion, is required to file a return of income for a tax year or
assessment year but who has failed to do so to furnish a return of income for
that year within thirty days from the date of service of such notice or such
longer or shorter period as may be specified in such notice or as the
Commissioner may allow. Any such notice may be issued in respect of one or
more of the last five completed tax years or assessment years.

 Section 115 provides for calling of statement of final tax in the following
manner:
 The Commissioner may, by notice in writing, require any person who,
in his opinion, is required to file a prescribed statement under this
section for a tax year but who has failed to do so, to furnish a
prescribed statement for that year within thirty days from the date of
service of such notice or such longer period as may be specified in
such notice or as he may, allow.
 A notice under the above sub-section may be issued in respect of one
or more of the last five completed tax years.

Chapter 14: Returns
3 METHOD OF FILING OF TAX RETURN

Section overview
 Method of filing of Tax Return
3.1 Method of filing of Tax Return [Section 118]:

1) A return of income shall be in the prescribed form and shall be
accompanied by such annexure, statements or documents as may be
prescribed;
a. shall fully state all the relevant particulars or information as specified in
the form of return, including a declaration of the records kept by the
taxpayer; and
b. shall be signed by the person, being an individual, or the person’s
representative where section 172 applies.
c. shall be accompanied with due payment of tax as per return of income;
and
d. shall be accompanied with a wealth statement as required under
section 116.
2) A return of income filed electronically on the web or any magnetic media or
any other computer readable media as may be specified by the Board shall
also be deemed to be a return and the Board may, by notification in the
official Gazette, make rules for determining eligibility of the data of such
returns and e-intermediaries who will digitise the data of such returns and
transmit the same electronically to the Income Tax Department under their
digital signatures and other matters relating to electronic filing of returns,
statements or documents etc..
3) Every return purporting to be made or signed by, or on behalf of a person
shall be treated as having been duly made by the person or with the
person’s authority until the person proves the contrary.

4 REVISION OF TAX RETURN

Section overview
 Filing of revised return or statement

 Procedure for filing of revised return and statement (S114(6A)
4.1 Filing of revised return or statement

Any person who, having furnished a return, discovers any omission or wrong
statement therein, may file revised return subject to the following conditions,
namely: —
a. It is accompanied by the revised accounts or revised audited accounts, as
the case may be;
b. the reasons for revision of return, in writing, duly signed, by the taxpayers
are filed with the return;
c. it is accompanied by approval of the commissioner in writing for revision of
return; and
d. taxable income declared is not less than and loss declared is not more than
income or loss, as the case may be, determined by an order issued under
sections 121, 122, 122A, 122C, 129, 132, 133 or 221.(These sections are
discussed in detail in the next chapter)
provided that if any of the above conditions is not fulfilled, the return furnished
shall be treated as an invalid return as if it had not been furnished.
4.2 Procedure for filing of revised return and statement [S114 (6A)]
If a taxpayer files a revised return voluntarily along with deposit of the amount of
tax short paid or amount of tax sought to be evaded along with the default
surcharge, whenever it comes to his notice, before receipt of notice under
sections 177 (Audit) or sub-section (9) of 122 (Amendment of Assessment) , no
penalty shall be recovered from him:
In case the taxpayer deposits the amount of tax as pointed out by the
Commissioner during the audit or before the issuance of notice under sub-section
(9) of section 122, he shall deposit the amount of tax sought to be evaded, the
default surcharge and twenty-five per cent of the penalties leviable under the
ordinance along with the revised return:
In case the taxpayer revises the return after the issuance of a show cause notice
under sub-section (9) of section 122, he shall deposit the amount of tax sought to
be evaded, default surcharge and fifty per cent of the leviable penalties under the
ordinance along with the revised return and thereafter, the show cause notice
shall stand abated.

Chapter 14: Returns
5 DUE DATE FOR FILING OF TAX RETURN

Section overview
 Due dates for filing tax returns
5.1 Due dates for filing tax returns

Following are the different dates for tax reporting purposes
Section Tax Return Filer Return Period Due Date
st
118(1) A return of income Tax year within 1 On or before 31
and statement of January to 30 December next
final tax of a June following the end of
company tax year
118(1) A return of income Tax year within 1st On or before 30
and statement of July to 31 September next
final tax of a December following the end of
company tax year
118(1) All salaried person All year ends On or before
&(3) and persons required 31August next
to file statement of following the end of
final tax tax year
118(1) All other cases of All year ends On or before 30
&(3) person filing returns September next
or statement of final following the end of
tax tax year
118(5) Return in response Year end as Due date fixed for
to notice under specified in notice submission of tax
section 117 return.
(discontinuance of
business)
114(4) Return in response Year end as Due date specified in
to notice under specified in notice the notice for
section 114(5) submission of tax
(return liable to be return or thirty days
filed but not filed) from the date of
issuance of notice.
Where salary income for the tax year is five hundred thousand rupees or more,
the taxpayer shall file return of income electronically in the prescribed form and it
shall be accompanied by the proof of deduction or payment of tax and wealth
statement as required under section 116

6 FILING OF WEALTH STATEMENT

Section overview
 Wealth statement
 How to prepare wealth statement
 Exercise
6.1 Wealth statement

 Wealth statement is a statement of assets and liabilities, for any year, which a
person is required to file, in the prescribed form and verified in prescribed
manner giving particulars of
 the person’s total assets and liabilities as on the date or dates
specified in such notice;
 the total assets and liabilities of the person’s spouse, minor children,
and other dependents as on the date or dates specified in such
notice;
 any assets transferred by the person to any other person during the
period or periods specified in such notice and the consideration for
the transfer; and
 the total expenditures incurred by the person, and the person’s
spouse, minor children, and other dependents during the period or
periods specified in the notice and the details of such expenditures;
and
 the reconciliation statement of wealth.
 Every resident taxpayer being an individual, filing a return of income for any
tax year shall furnish a wealth statement and wealth reconciliation
statement for that year along with such return.
Further, every member of an association of persons shall also furnish
wealth statement and wealth reconciliation statement for the year along
with return of income of the association.
 Where a person files a return in response to a provisional assessment
under section 122C, he shall furnish a wealth statement for that year along
with that return and such wealth statement shall be accompanied by a
wealth reconciliation statement and an explanation of sources of acquisition
of assets specified therein.
 Where a person, who has furnished a wealth statement, discovers any
omission or wrong statement therein, he may, without prejudice to any
liability incurred by him under any provision of this ordinance, furnish a
revised wealth statement at any time before an assessment, for the tax
year to which it relates, is made.
 Every person (other than a company or an association of persons) filing
statement of final tax, shall file a wealth statement along with reconciliation
of wealth statement.

Chapter 14: Returns
6.2 How to prepare a wealth statement

Preparation of wealth statement is a technical task but familiarity with the method
of preparation of financial statements helps a lot in solving such problems. The
manner of preparation of wealth statements is given hereunder:
 wealth statement is primarily a balance sheet of an individual taxpayer
where personal assets and liabilities of a person are reflected on any given
date i.e. the date on which the taxpayer closes his accounts or the date as
demanded through a notice in writing. It is worthwhile to mention here that
wealth statement only gives details of personal assets and liabilities held by
a person but does not reflect the status of business assets and liabilities.
However, it does show net equity or shareholding of that person in any
business. A wealth statement is incomplete without reconciliation statement
showing accretion no change or decrease in wealth.
 Cash& bank reconciliation statement is derived from the cash & bank
account. It starts from taking opening balance of cash & bank balances and
after adding cash inflows and subtracting cash outflows, the remaining
amount portrays closing balances of cash & bank account(s). This closing
balance is included in the assets of the wealth statement. It is important to
bear in mind that where expenditure side is not explained through the cash
receipt side, then the difference could be un-explained investment subject
to addition under section 111 as income for the year. To avoid this
treatment, figures need to be tallied with investments worked out through
wealth reconciliation statement.
 now after taking the figure of the cash & bank reconciliation, wealth
statement for the current year is complete and a person can easily calculate
the figure of increase/decrease in the net wealth by subtracting the last
year’s net wealth figure from the current year’s net wealth figure shown in
the current year wealth statement.
 While preparing wealth statement assets and liabilities are recorded at
historical cost irrespective of their present market value.
6.3 Exercise
Exercise:
Mr. Nadeem has filled following wealth statement as on 30.06.2013
Plot at DHA, Lahore 3,500,000
Capital in ABC & Co 2,500,000
Jewelry 500,000
Shares in XYZ (Pvt.) Ltd 1,000,000
Cash 1,500,000
Bank 2,000,000
TOTAL 11,000,000
Personal Loan 1,000,000
TOTAL 10,000,000
During the year following information is provided:
He earned salary income of Rs 1,200,000 and paid tax Rs 100,000.
He sold share of Rs 200,000 for a consideration of Rs 350,000.
He settled his personal loan of Rs 500,000.

His household expenses aggregates to Rs 850,000.

He has given gift of Rs 400,000 to his brother Kamran through crossed cheque.
He has earned profit on ABC & Co of Rs 450,000.His drawings from the firm
during the year was Rs 275,000. He paid tax of Rs 40,000on firm income.
He purchased a new plot at EME society for total consideration Rs2,000,000
payable in 20 installments.During the year.He paid Rs 700,000 in installments.
On 30th June 2014, his bank balance was Rs 475,000.
Required:
Prepare the wealth reconciliation statement and wealth statement for 2014.
Answer
MR. NADEEM
Wealth reconciliation statement
Amount
Opening Wealth 10,000,000
Add: Sources
Salary Income 1,200,000
Gain on sale software 150,000
Profit on ABC & CO 450,000
Total 11,800,000
Less:
Gift to brother 400,000
Tax deducted from salary 100,000
Tax on profit of ABC & Co. 40,000
Household expenses 850,000
1,390,000
Total (11,800,000-1,390,000) 10,410,000
Note 2
Cash Reconciliation
Opening cash 1,500,000
Opening bank 2,000,000
3,500,000
Add:
Salary 1,200,000
Drawings 275,000
Sale of shares 350,000
1,825,000
Total 5,325,000
Less:
House hold expenses 850,000
Taxes 140,000
Gift 400,000
Plot instalments 700,000
Loan instalment 500,000 2,590,000
2,735,000
Cash balancing 2,260,000

Chapter 14: Returns
Bank 475,000
Wealth statement 2014

Plot at DHA 3,500,000
Capital in ABC (Note 1) 2,675,000
Advance for plot at EME 700,000
Jewellery 500,000
Shares in XYZ 800,000
Cash (note 2) 2,260,000
Bank (note 2) 475,000
Total 10,910,000
Less:
Loan (500,000)
Closing wealth 10,410,000
Note 2capital
Opening 2,500,000
Profit 450,000
2,950,000
Drawings 275,000
Total 26,75,000

7 FILING OF TAX RETURN ON DISCONTINUANCE OF BUSINESS

Section overview
 Notice of discontinued business
7.1 Notice of discontinued business

 Any person discontinuing a business shall give the Commissioner a notice in
writing to that effect within fifteen days of the discontinuance
 The person discontinuing a business shall, under the provisions of the
Ordinance or on being required by the Commissioner by notice, in writing,
furnish a return of income for the period commencing on the first day of the tax
year in which the discontinuance occurred and ending on the date of
discontinuance and this period shall be treated as a separate tax year for the
purposes of this Ordinance.
 Where no notice has been given but the Commissioner has reasonable
grounds to believe that a business has discontinued or is likely to discontinue,
the Commissioner may serve a notice on the person who has discontinued the
business or is likely to discontinue the business to furnish to the Commissioner
within the time specified in the notice a return of income for the period
specified in the notice.
 A return furnished under this case shall be treated for all purposes of the
Ordinance as a return of income, including the application of Section 120.

Chapter 14: Returns
8 EXTENSION OF TIME FOR FURNISHING OF TAX RETURN

Section overview
 Extension of time for furnishing returns and other documents
8.1 Extension of time for furnishing returns and other documents:

 A person required to furnish return/certificate or statement may apply, in
writing, to the Commissioner for an extension of time to furnish the return or
statement, as the case may be.
 Extension in due date may be granted if the Commissioner is satisfied that the
taxpayer was unable to furnish return, or statement due to
(a) absence from Pakistan;
(b) sickness or other misadventure; or
(c) any other reasonable cause
 An extension of time as discussed above should not exceed fifteen days from
the due date for furnishing the return of income, employer’s certificate, or
statement, as the case may be, unless there are exceptional circumstances
justifying a longer extension of time.
 An extension of time granted as discussed above shall not change the due
date for payment of income tax under section 137 and default surcharge shall
be chargeable for delayed payment of tax due.,

9 CHAPTER REVIEW
Chapter review
 Return is the prescribed document used by the taxpayer to declare his taxable
income and tax liability.
 Who is required to file tax returns and who is immune from filing of tax return?
 What are the due dates for filing of tax returns and statements?
 A wealth statement is also to be filed by a taxpayer along with his return of total
income.
 What is a wealth statement and method of preparation of wealth statement?
 A person whose income is covered under final tax regime is required to file
statement of final taxation.

15
CHAPTER
Assessment, Records and Audit
Contents
1 Assessment
2 Special provisions with respect to assessment
3 Amendment of assessment
4 Action against assessment/Amended
assessment/order
5 Records and Audit
6 Chapter review

INTRODUCTION
Assessment is the key area of procedural aspects of taxation. Taxation system in Pakistan is
generally based on self-assessment of taxable income and tax liability theron. Taxpayers
compute their income and can file their returns declaring their computed income which is
treated as income assessed by tax authorities, subject to certain conditions. However, tax
authorities are empowered to select certain persons and conduct audit of selected persons.
Learning outcomes
Concepts
LO 4.10.1 Understand the meaning of assessment and power of commissioner to
conduct audit
LO 4.12.1 Understand the provisions relating to records to be kept by the taxpayers
LO 4.12.2 Describe the provisions relating to audit by commissioner

Chapter 15: Assessment, Records and Audit
1 ASSESSMENT
Section overview
 Assessment
 Ways of framing the assessment
 Normal assessment
 Best judgment assessment
 Provisional assessment
 Provisional assessment in certain cases
1.1 Assessment
Assessment under the Income Tax Ordinance, 2001 is made on the basis of
returns filed for a tax year. This is termed as Universal Self-Assessment Scheme
(USAS) by the FBR, though no such words are used in the Ordinance.
1.2 Ways of framing the assessment

Various ways of framing the assessment under the Income Tax
Ordinance,2001are as under:
 Normal assessment, usually referred to as ‘assessment’
 Best judgment assessment
 Provisional assessment
 Provisional assessment in certain cases
Now we will discuss them one by one in the ensuing paragraphs:
1.3 Normal assessment

Section 120 of the Ordinance states that:
120. Assessments:
 If a taxpayer has furnished a complete return of income other than a revised
return, the Commissioner shall be treated to have assessed the income and
tax due thereon on the basis of return.
 Return shall be taken to be complete if it is in accordance with section 114(2)
 Return furnished shall be considered as an assessment order issued by the
Commissioner to the taxpayer on the date it was furnished.
 However, in addition to above deemed assessment, the Commissioner has
powers to conduct audit of income tax affairs of a person under section 177
and all the provisions of that section shall apply accordingly.
Assessment in case of incomplete return
 If the return of income furnished is not complete, the Commissioner shall issue
a notice to the taxpayer informing him of the deficiencies (other than incorrect
amount of tax payable on taxable income, as specified in the return, or short
payment of tax payable) and directing him to provide certain information,
particulars, statement or documents by the date specified in the notice in order
to make the return a ‘complete return’.

 If a taxpayer fails to fully comply, by the due date, with the requirements of the
notice the return furnished shall be treated as an invalid return as if it had not
been furnished. However, if the taxpayer fully complies with the requirements
of the notice, by the due date, the return furnished shall be treated to be
complete on the day it was furnished.
 Such notice shall not be issued after expiry of one hundred and eight days
from the end of the financial year is which return was furnished.
1.4 Best judgment assessment

S121. Best Judgment assessment:
 This type of judgment is made where a person fails to:
 furnish a statement as required by a notice under sub-section (5) of
section 115; or
 furnish a return as required under section 143 or section 144 (return
to be filed by air carrier or shipping companies); or
 furnish the wealth statement as required under section 116; or
 produce before the commissioner, or any person employed by a firm
of chartered accountants or a firm of cost and management
accountants under section 177, accounts, documents and records
required to be maintained under section 174, or any other relevant
document or evidence that may be required by him for the purpose of
making assessment of income and determination of tax due thereon,
 Under any of the above cases, the Commissioner may, based on any
available information or material and to the best of his judgment, make an
assessment of the taxable income of the person and the tax due thereon.
Under such a case, the assessment, if any, treated to have been made on the
basis of return or revised return filed by the taxpayer shall be of no legal effect.
 As soon as possible after making a best judgment assessment, the
Commissioner shall issue the assessment order to the taxpayer stating:
 the taxable income;
 the amount of tax due;
 the amount of tax paid, if any; and
 The time, place and manner of appealing against the assessment
order.
 An assessment order under this section shall only be issued within five years
from the end of the tax year to which it relates.
1.5 Provisional assessment

122C. Provisional assessment
 Where in response to a notice under sub-section (3) or sub-section (4) of
section 114 a person fails to furnish return of income for any tax year, the
commissioner may, based on any available information or material and to the
best of his judgment, make a provisional assessment of the taxable income of
the person and issue a provisional assessment order specifying the taxable
income and the tax due thereon.

 The provisional assessment order completed is treated as the final

assessment order after the expiry of forty five days from the date of service of
order of provisional assessment;
 However, the provisional assessment shall not be treated as final order if:
(i). In case of individual and AOP, the person files return of income along with
wealth statement, wealth reconciliation statement and other documents
u/s 116 (2A) for the relevant tax year during the said period of forty five
days.
(ii). In case of company the person files return of income electronically along
with audited accounts for the relevant tax year during the said period of
forty five days
 The provisional assessment order made u/s 122C is not appealable
1.6 Provisional assessment in certain cases

123. Provisional assessment in certain cases:
 This type of assessment is applicable in case where any concealed asset of a
person is impounded by any agency of Federal or Provincial Government. In
such a case, the Commissioner is empowered to make provisional
assessment before making a best judgment assessment or amended
assessment
 Where any concealed asset is impounded, it shall be taken into account in the
computation of taxable income and tax payable for the last completed tax year
of the person during which the concealed asset was accounted for.
 The Commissioner shall finalize the provisional order or provisional amended
assessment order as soon as possible.
 Concealed asset means any property or asset which, in the opinion of
Commissioner, is acquired from any income chargeable to tax but could not be
charged to tax.

2 SPECIAL PROVISIONS WITH RESPECT TO ASSESSMENT

Section overview
 Assessment in relation to disputed property

 Evidence of assessment
 Assessment in the case of persons about to leave Pakistan
Following are three provisions which are associated with framing of assessment order:
2.1 Assessment in relation to disputed property

S125. Assessment in relation to disputed property:
Where the ownership of any property the income from which is chargeable to tax
is in dispute in any civil court in Pakistan, an assessment order or amended
assessment order in respect of such income may be issued at any time within
one year after the end of the financial year in which the decision of the court is
made.
2.2 Evidence of Assessment

S126. Evidence of assessment:
 The production of an assessment order or its certified copy shall be conclusive
evidence of due making of assessment. The assessment order or its certified
copy shall also be a conclusive evidence that the amounts and all other
particulars are correct except in cases where the proceedings relating to
assessment are under appeal.
 Any order of assessment or other document required to be made under
Income Tax Ordinance, 2001, may not be:
(i). quashed or void or voidable for want of form; or
(ii). affected due to any mistake, defect or omission therein
 However, an order shall be quashed or void:
(i). if it is in substance and effect, not in conformity with Income Tax
Ordinance, 2001; or
(ii). the person assessed or intended to be assessed or effected by the
document is not designated in it according to common understanding.

3 AMENDMENT OF ASSESSMENT
Section overview
 Amendment of assessment
 Detailed explanation
3.1 Amendment of assessments

Method of amendment of assessment is elaborated in section 122 of the
Ordinance.
122. Amendment of assessments:
 Commissioner is empowered to amend an assessment order treated as
issued on self-assessment basis u/s 120 or an assessment order made to the
best of Commissioner’s judgment u/s 121 or provisional assessment made u/s
122C. The Commissioner may make such alteration or additions as he
considers necessary
 Amendment of assessment shall not be made after the expiry of 5 years, from
the end of the financial year in which the order is issued or treated as issued.
 If a taxpayer furnishes a revised return of income
(i). the Commissioner shall treat the revised return as amended
assessment of the taxable income and tax payable thereon as set out
in the revised return; and
(ii). the taxpayer’s revised return shall be taken to be an amended
assessment order issued to the taxpayer by the Commissioner on the
day the revised return was furnished.
 Commissioner is also empowered to amend further as many times as may be
necessary, the original assessment order as amended previously within the
later of:.
(i). five years from the end of the financial year in which the original
assessment order is issued or treated as issued by the Commissioner;
or
(ii). one year from the end of the financial year in which the amended
assessment order is issued or is treated as issued.
 An assessment order shall only be amended, or an amended assessment
shall only be further amended as above, where the Commissioner has definite
information, acquired from an audit or otherwise, that:
(i). any taxable income has escaped assessment;
(ii). total income has been under assessed or assessed at too low tax rate
or has been the subject of excessive relief or refund; or
(iii).any amount under a head of income has been misclassified.
 Definite information includes information relating to sales or purchases of any
goods made by the taxpayer, receipts of the taxpayer from services rendered
or other receipts relating to the acquisition / possession / disposal of any
money / asset / valuable article, or investment made or expenditure incurred
by the taxpayer.

 The Commissioner may amend, or further amend, an assessment order, if he

considers that it is erroneous in so far it is prejudicial to the interest of revenue.
 Once the order of assessment is amended, the Commissioner shall issue an
amended assessment order as soon as possible stating:
(i). the amended taxable income of taxpayer;
(ii). the amended amount of tax due;
(iii).the amount of tax paid, if any, and
(iv). the time, place and manner of appealing the amended assessment
 No assessment shall be amended or further amended without giving the
taxpayer an opportunity of being heard.
3.2 Detailed explanation

The above provisions relating to amendment of assessment carry much
significance. Following points should be kept in mind:
1) An assessment can only be amended in two situations i.e. on the basis of
any definite information or where the assessment is erroneous and
prejudicial to the interest of revenue.
2) An assessment can be erroneous however, in case the same is not
prejudicial to the interest of revenue then tax authorities cannot initiate the
proceedings of amendment of assessment under section 122(5A) of the
Ordinance. Thus, co-existence of both situations i.e. first error in the
assessment secondly tax loss suffered by the tax authorities, is very
necessary to invoke provisions of section 122(5A).
3) Any change of opinion does not constitute any definite information or
makes the assessment as erroneous and prejudicial to the interest of
revenue.
4) No amendment is allowed unless the taxpayer has been given proper
opportunity of being heard.

4 ACTION AGAINST THE ASSESSMENT/AMENDED ASSESSMENT

ORDER
Section overview
 Revision of assessment by the Commissioner

 Revision by Chief Commissioner
 Modification of orders
 Rectification of mistake
From the Tax department

 Revision by the Commissioner
 Revision by the Chief Commissioner
 Modification of orders
From the Tax payer
 Rectification of mistake – Section 221 (Not in Syllabus)
 Appeal (see Chapter 16)
 Alternate dispute resolution committee (see Chapter 16)
4.1 Revision of assessment by the Commissioner

Process of revision of assessment is defined in section 122A of the Ordinance in
the following manner:
122A. Revision by the Commissioner
 The commissioner may, suomoto call for the record of any proceeding in
which an order has been passed by any Officer of Inland Revenue other than
the Commissioner (Appeals).
 Where, after making such inquiry as is necessary, Commissioner considers
that the order requires revision, the he may make such revision to the order as
he deems fit.
 Any such order shall not be prejudicial to the person to whom the order
relates.
 The Commissioner shall not revise any order if:
(i). an appeal against the order lies to the Commissioner (Appeals) or to the
Appellate Tribunal and the time within which such appeal may be made has
not expired; or
(ii).The order is pending in appeal before the Commissioner (Appeals) or has
been made the subject of an appeal to the Appellate Tribunal.
4.2 Revision by Chief Commissioner

122B. Revision by Chief Commissioner
 The Chief Commissioner may, either of his own motion or on an application
made by the taxpayer for revision, call for the record of any proceedings
relating to issuance of an exemption or lower rate certificate with regard to
collection or deduction of tax at source under Income Tax Ordinance,

2001.Record of such proceedings shall be called in which an order has been

passed by any authority subordinate to him.
 If, after making such inquiry as is necessary, The Chief Commissioner
considers that the order requires, revision, he may make such order as he
may deem fit in the circumstances of the case. However, he shall provide a
reasonable opportunity of being heard to the taxpayer.
4.3 Modification of orders

The modification of orders is elaborated in section 124A of the Ordinance in the
following way:
124A. Powers of tax authorities to modify orders, etc.
 This applies where a question of law is decided either by a High Court or the
Appellate Tribunal in case of a taxpayer.
 In such a case the Commissioner may proceed to amend the assessment, to
the extent it needs revision due to the decision of High Court or Appellate
Tribunal on the question of law. In this regards the Commissioner shall ignore
the fact that either an appeal is preferred or an application for reference is
made against the order of High Court or Appellate Tribunal.
 Where decision of High Court or Appellate Tribunal is reversed or modified,
the Commissioner may modify assessment in which the said decision was
followed within one year of the date of receipt of decision. In making such
modification, the provisions of Income Tax Ordinance, 2001 relating to time
limit for making an assessment or amended assessment shall be ignored.

5 RECORDS AND AUDIT

Section overview
 Records
 Prescribed books of accounts
 Books of accounts, records to be kept at specified place
 Audit
5.1 Records (Section 174)

 Every taxpayer shall maintain in Pakistan such accounts, documents and
records as may be prescribed.
 The Commissioner may disallow or reduce a taxpayer‘s claim for a deduction
if the taxpayer is unable, without reasonable cause to provide a receipt, or
other record or evidence of the transaction or circumstances giving rise to the
claim for the deduction.
 The accounts and documents required to be maintained shall be maintained
for six years after the end of the tax year to which they relate
 However where any proceeding is pending before any authority or court the
taxpayer shall maintain the record till final decision of the proceedings.
 Pending proceedings include proceedings for assessment or amendment of
assessment, appeal, revision, reference, petition or prosecution and any
proceedings before an Alternative Dispute Resolution Committee
 Deduction means any amount debited to trading account, manufacturing
account, receipts and expenses account or profit and loss account.
 The Commissioner may require any person to install and use an Electronic
Tax Register of such type and description as may be prescribed for the
purpose of storing and accessing information regarding any transaction that
has a bearing on the tax liability of such person.
5.2 Prescribed books of accounts (Rule 28-33)
S.N Taxpayer required to Records to be kept

maintain proper books of
account, documents and
records
1. Every taxpayer deriving  all sums of money received and
income from business expended by the
taxpayer and the matters in respect
of which the receipt and expenditure
takes place.
 all sales and purchases of goods

and all services
provided and obtained by the
taxpayer.
 all assets of the taxpayer

 all liabilities of the taxpayer; and
 in case of a taxpayer engaged in

assembly, production, processing,
manufacturing, mining or like
activities, all items of cost relating to
the utilization of materials, labour
and other inputs.
 The books of account, documents

and records to be maintained under
this chapter shall be maintained for
five years after the end of the tax
year to which they relate.
2. Every taxpayer other than

companies, deriving income
chargeable under the head
a. Taxpayers with business  Serially numbered and dated cash-
income uptoRs. 200,000 and memo / invoice / receipt for each
new taxpayers deriving transaction of sale or receipt
income from business containing the following
(a) taxpayer’s name or the name of
his business, address, national
tax number and sales tax
registration number, if any
(b) the description, quantity and
value of goods sold or services
rendered;
 Where each transaction does not

exceed
Rs. 100, one or more cash-memos
per day for all such transactions
may be maintained
 Daily record of receipts, sales,

payments, purchases and expenses
a single entry in respect of daily
receipts, sales, purchases and
different heads of expenses will
suffice; and
 Vouchers of purchases and

expenses.
b. Taxpayers with business  Serially numbered and dated cash-

income exceeding Rs. memo / invoice / receipt for each
200,000 and wholesalers, transaction of sale or receipt
distributors, dealers and containing the following
commission agents


his business, address, national
tax number and sales tax
registration number, if any

value of goods sold or services
rendered; and
(c) in case of a wholesaler,

distributor, dealer and
commission agent, where a
single transaction exceeds Rs.
10,000, the name and address
of the customer
Provided that where each

transaction does not exceed
Rs.100, one or more cash-
memos per day for all such
transactions may be
maintained
 Cash book and/or bank book or

daily record of receipts, sales,
payments, purchases and
expenses; a single entry in respect
of daily receipts, sales, purchases
and different heads of expenses will
suffice.
 General ledger or annual summary

of receipts, sales, payments,
purchases and expenses under
distinctive heads.

expenses and where a single
transaction exceeds Rs. 10,000 with
the name and address of the payee;
and
 Where the taxpayer deals in

purchase and sale of goods,
quarterly inventory of stock-in-trade
showing description, quantity and
value.
c. Professionals like medical  Serially numbered and dated

practitioners, legal patient-slip / invoice /receipt for
practitioners, accountants, each transaction of sale or receipt
auditors, architects, containing the following
engineers etc.

his business or profession,

address, national tax number
and sales tax registration
number, if any

value of medicines supplied or
details of treatment/ case/
services rendered (confidential
details are not required) and
amount charged
(c) the name and address of the

patient / client
Provided that the condition of
recording address of the patient on
the patient slip under this clause
shall not apply to general medical
practitioners
 Daily appointment and engagement

diary in respect of clients and
patients provided that this clause
shall not apply to general medical
practitioners
 Daily record of receipts, sales,

payments, purchases and
expenses; a single entry in respect
of daily receipts, sales, purchases
and different heads of expenses will
suffice

expenses
d. Manufacturers (with turnover  Serially numbered and dated cash-
exceeding Rs. 2.5 million): memo / invoice /receipt for each
transaction of sale or receipt
containing the following

his business
(b) address, national tax number

and sales tax registration
number, if any
(c) the description, quantity and,

value of goods sold
(d) where a single transaction

exceeds Rs. 10,000 with the
name and address of the
customer

 Cash book and/or bank book
 Sales day book and sales ledger

(where applicable)
 Purchases day book and purchase

ledger (where applicable)
 General ledger

expenses and where a single
transaction exceeds Rs. 10,000 with
the name and address of the payee;
 Stock register of stock-in-trade

(major raw materials and finished
goods) supported by gate in-ward
and outward records and quarterly
inventory of all items of stock-in-
trade including work-in-process
showing description, quantity and
value.
3. Every taxpayer deriving Salary

income chargeable under the
head income from salary,  Salary certificate indicating the
property, capital gains or amount of salary and tax deducted
other sources there from.
Income from property
 Tenancy agreement, if executed
 Tenancy termination agreement, if

executed
 Receipt for amount of rent received
 Evidence of deductions claimed in

respect of premium paid to insure
the building, local rate, tax, charge
or cess, ground rent, profit/interest
or share in rent on money borrowed,
expenditure on collecting the rent,
legal services and unpaid rent.
Capital gain
 Evidence of cost of acquiring the

capital asset
 Evidence of deduction for any other

costs claimed
 Evidence in respect of consideration

received on disposal of the capital
asset.
Income from other sources
Dividends
 Dividend warrants
Royalty
 Royalty agreement.
Profit on debt
 Evidence and detail of profit yielding

debt
 Evidence of profit on debt and tax

deducted thereon, like certificate in
the prescribed form or bank account
statement; and
 Evidence of Zakat deducted, if any.
Ground rent, rent from the sub-lease

of land or building, income from the
lease of any building together with
plant or machinery and
consideration for vacating the
possession of a building or part
thereof
(a) Lease agreement

(b) Lease termination agreement.
Annuity or Pension
Evidence of amount received.
Prize money on bond, winning from

a raffle, lottery or cross word puzzle
 Evidence of income and tax

deducted thereon, like certificate in
the prescribed form.
Provision, use or exploitation of

property
 Agreement.

Loan, advance, deposit or gift
 Evidence of mode of receipt of a

loan, advance, deposit
 or gift i.e., by a crossed cheque or
through a banking channel.
General
 Evidence of deduction for any other

expenditure claimed.
5.3 Books of accounts, documents, records to be kept at specified place (Rule

33)
1. Income from business The books of accounts, documents and
records required to be maintained by a
taxpayer shall be kept at the place where
the taxpayer is carrying on the business
or, where the business is carried on in
more places than one, at the principal
place of business or at
each of such places if separate books of
accounts are maintained in respect of
each place.
2. Income from sources Where a person derives income from

other than business sources other than from business, the
books of accounts, documents and
records shall be kept at the person’s
place of residence or such other place
as may be so declared by such person.
3. Place to be clearly stated The place or places where the books of

on tax returns accounts, documents and records are
kept shall be clearly stated on the tax
return form in the column requiring the
details of the records maintained
5.4 Audit
A person can be selected for audit in the following two manners.
(i). Selection for audit by the Board under section 214C
(ii). Selection by the Commissioner under section 177
(i) Selection for audit by the Board (Section 214C)
 The Board may select persons or classes of persons for audit of Income Tax
affairs through computer ballot which may be random or parametric as the
Board may deem fit.
 The Board shall keep the parameters confidential.

 Audit of Income Tax affairs of persons selected shall be conducted as per

procedure given in section 177 and all the provisions of the Ordinance, except
the first proviso to sub-section (1) of section 177, shall apply accordingly.
 Board shall be deemed always to have had the power to select any persons or
classes of persons for audit of Income Tax affairs.
 Powers of the Commissioner under section 177 are independent of the powers
of the Board under section 214C and nothing contained in this section restricts
the power of the Commissioner to call for the record or documents including
books of accounts of a taxpayer for audit and to conduct audit under section
177.
(ii) Audit (Section 177)
 The Commissioner may call for any record or documents including books of
accounts maintained under the Ordinance or any other law for the time being
in force for conducting audit of the income tax affairs of the person
 Where such record or documents have been kept on electronic data, the
person shall allow access to the Commissioner or the officer authorized by the
Commissioner for use of machine and software on which such data is kept
and the Commissioner or the officer may have access to the required
information
 The Commissioner shall not call for record or documents of the taxpayer after
expiry of six years from the end of the tax year to which they relate.
 After obtaining the record of a person, the Commissioner shall conduct an
audit of the income tax affairs.
 After completion of the audit the Commissioner may, if considered necessary,
after obtaining taxpayer‘s explanation on all the issues raised in the audit,
make amendment of assessment under section 122. .
 The fact that a person has been audited in a year shall not preclude the
person from being audited again in the next and following years where there
are reasonable grounds for such audits
 The Board may appoint a firm of Chartered Accountants or a firm of Cost and
Management Accountants to conduct an audit of the income tax affairs of any
person or classes of persons and the scope of such audit shall be as
determined by the Board or the Commissioner on a case to case basis.
 where a person fails to produce before the Commissioner or a firm of
Chartered Accountants or a firm of Cost and Management Accountants
appointed by the Board or the Commissioner to conduct an audit, any
accounts, documents and records, required to be maintained under section
174 or any other relevant document, electronically kept record, electronic
machine or any other evidence that may be required by the Commissioner or
the firm of Chartered Accountants or the firm of Cost and Management
Accountants for the purpose of audit or determination of income and tax due
thereon, the Commissioner may proceed to make best judgment assessment
under section 121 and the assessment treated to have been made on the
basis of return or revised return filed by the taxpayer shall be of no legal effect.
 Power of the Commissioner under this section are independent of the powers
of the Board under section 214C and nothing contained in section 214C
restricts the power of the Commissioner to call for the record or documents
including books of accounts of a taxpayer for audit and to conduct audit under
this section.

6 CHAPTER REVIEW
Chapter review
 Assessment is made on the basis of returns filed for a tax year. This is termed
as Universal Self-Assessment Scheme (USAS) by the FBR,
 Various kinds of assessments are provided in the Ordinance i.e. normal
assessment, best judgment assessment, provisional assessment, and
provisional assessment in certain cases.
 An amended assessment can be made by tax authoritie on the basis of definite

information acquired from audit or otherwise where the assessment is found to
be erroneous and pre-judicial to the interest of revenue.
 An assessment or amended assessment can be changed by way of
rectification, revision or modification by the tax authorities.
 The accounts and documents shall be maintained for six years after the end of
the tax year to which they relate.
 A person can be selected for audit in the following two manners:
(i). Selection for audit by the Board under section 214C
(ii). Selection by the Commissioner under section 177


16
CHAPTER
Appeals, references and petitions
Contents
1 Appeal and circumstances giving rise to appeal
2 Appeal to the commissioner (appeals)
3 Appeal before Appellate Tribunal
4 Reference application before High Court
5 Alternate Dispute Resolution
6 Other appeal related matters
7 Chapter review

INTRODUCTION
This chapter explicates appeal, petition, reference and complaints which are different legal
rights available to the taxpayer against various unjust assessment/order made by an
assessing authority. At the same time, except for appeal before Commissioner (Appeals), the
department also has the right to avail these modes. This chapter covers different provisions
dealing with it.
Learning outcomes
2002 and Sales Tax Act 1990 and Sales Tax Rules 2006.
Concepts
LO 4.11.1 List the appellate bodies
LO 4.11.2 Explaining simple examples the circumstances when appeal is made and the
pre-conditions applicable
LO 4.11.3 Explain the provisions relating to decision of appeals by Commissioner
(Appeals) using simple examples

Chapter 16: Appeals, references and petitions
1. WHAT IS APPEALS
Section overview
 What is appeal
 Circumstances giving rise to appeals
 Forum of appeals
1.1 What is an appeal?

 Most appeals arise on account of disagreement between the taxpayer and
the tax collectors (income tax department) regarding the quantification of
the taxable income and tax liability thereon as well as levy of default
surcharge, penalties, etc.
 Usually an agreement is reached through correspondence or discussion
and in most cases disputes are settled with the taxpayers at the Taxation
Officer’s / Commissioner’s level, saving time and trouble all around.
 However, there may be disagreement over facts, figures or interpretation
of law between the taxpayer and the tax collectors (income tax
department). To resolve such disagreements law lays down the
procedure, which gives the taxpayer right of appeal before the
Commissioner (Appeals) and if the taxpayer or the tax collectors are not
satisfied with the appellate order of the Commissioner (Appeals), further
right of appeal before the Appellate Tribunal.
 The taxpayer or the tax collectors may refer the case to the High Court in
case a question of law arises out of the decision of the Appeallate
Tribunal.
1.2 Circumstances giving rise to appeal to the Commissioner (Appeal)

Circumstances giving rise to an appeal may include:
(i). A best judgment assessment (ex-parte assessment) based on any
available information or material to the best of the Taxation Officer’s /
Commissioner’s judgment.
(ii). An amendment of assessment
(iii). An order holding an individual personally liable to pay the amount of tax,
which was required to be collected or deducted by him/her or having
collected or deducted fails to pay the same as required by the law
(iv). An order declaring or treating a person as a representative of a non-
resident person
(v). An order refusing to rectify the mistake, either in full or in part
(vi). An order having the effect of enhancing the assessment or reducing a
refund or otherwise increasing the tax liability
1.3 Forums of appeals
Following forums of appeal are available to an aggrieved person:

(i). Commissioner (Appeals)

(ii). Appellate Tribunal

(iii). High Court; and
(iv). Supreme Court of Pakistan (Against Decision of reference to High Court).
(Although the Ordinance does not provide anything on the subject, but
any person can prefer to SC under the Constitution)
(v). Alternative Dispute Resolution

2. APPEAL TO THE COMMISSIONER (APPEALS)

Section overview
 Procedure for filing of appeal before the Commissioner of income tax

 Procedure for disposal of appeal
 Decision in appeal
2.1 Procedure for filing of appeal before the Commissioner of Income Tax
The taxpayer may file appeal against an assessment or assessment order in
addition to many other actions prejudicial to the taxpayer, before the
Commissioner of income tax (Appeals). Section 127 deals with this issue in the
following manner:
(S127) Appeal to the Commissioner (Appeals):
 Any person who is aggrieved by an order passed by the Commissioner or
a Taxation Officer can file the appeal before the Commissioner (Appeals).
 Every appeal shall be filed in the prescribed form, verified in the
prescribed manner, be accompanied by the prescribed fee and shall
precisely state the grounds upon which the appeal is made.
 In case appeal is made against an order of assessment the application
shall be accompanied by fee of Rs.1,000.
 In case of any other order, fee of Rs. 1,000 in case of company and Rs.
200 in other cases, shall be payable.
 No appeal shall lie if the taxpayer has not paid tax due u/s 137(1) (i.e. tax
payable with return).
 The appeal should be filed:
(i). where the appeal relates to an order of assessment or penalty,
within 30 days from the date of service of notice of demand u/s
137(2) in respect of any order of assessment or penalty; and
(ii). in any other case within 30 days of the service of intimation of
order against which appeal is to be filed.
 However, Commissioner (Appeals) may condone the delay in filing of an
appeal upon application in writing by the appellant
2.2 Procedures for disposal of appeals

Section 128 of the Ordinance outlines the procedure for disposal of appeal in the
following manner:
(S128). Procedure in appeal:
 The Commissioner (Appeals) shall give notice of the day fixed for the
hearing of the appeal to the appellant and to the Commissioner against
whose order the appeal has been made.
 Where in a particular case, the Commissioner (Appeals) is of the opinion
that the recovery of tax levied, shall cause undue hardship to the
taxpayer, he, after affording opportunity of being heard to the
Commissioner against whose order appeal has been made, may stay the
recovery of such tax for a period not exceeding thirty days in aggregate.

 The Commissioner (Appeals) may adjourn the hearing of the appeal from
time to time.
 The Commissioner (Appeals) may, before the hearing of an appeal, allow
an appellant to file any new ground of appeal not specified in the grounds
of appeal already filed by the appellant where the Commissioner
(Appeals) is satisfied that the omission of the ground from the form of the
appeal was not wilful or unreasonable.
 The Commissioner (Appeals) may, before disposing of an appeal, call for
such particulars as the Commissioner (Appeals) may require respecting
the matters arising in the appeal or cause further enquiry to be made by
the Commissioner.
 The Commissioner (Appeals) shall not admit any documentary material or
evidence which was not produced before the Commissioner unless the
Commissioner (Appeals) is satisfied that the appellant was prevented by
sufficient cause from producing such material or evidence before the
Commissioner.
2.3 Decision in appeal

129. Decision in appeal:
 In disposing of an appeal, the Commissioner (Appeals) may:
(i). make an order to confirm, modify or annul the assessment order
after examining such evidence as required by him respecting the
matters arising in appeal or causing such further enquires to be
made as he deems fit; or
(ii). In any other case, make such order as the Commissioner
(Appeals) thinks fit.
 The Commissioner (Appeals) shall not increase the amount of any
assessment order or decrease the amount of any refund unless the
appellant has been given a reasonable opportunity of showing cause
against such increase or decrease, as the case may be.
 Where, as the result of an appeal, any change is made in the assessment
of an association of persons or a new assessment of an association of
persons is ordered to be made, the Commissioner (Appeals) may
authorise the Commissioner to amend accordingly any assessment order
made on a member of the association and the time limit specified in
section 122(2) shall not apply to the making of such amended
assessment.
 As soon as practicable after deciding an appeal, the Commissioner
(Appeals) shall serve his order on the appellant and the Commissioner.
Provided that such order shall be passed not later than one hundred and
twenty days from the date of filing of appeal or within an extended period
of sixty days, for reasons to be recorded in writing by the Commissioner
(Appeals):
Provided further that any period during which the hearing of an appeal is
adjourned at the request of the appellant or is postponed due to any
appeal or proceedings or stay order, remand or alternative dispute
resolution proceedings or for any other reason, shall be excluded in the
computation of the aforementioned periods.

3 APPEAL BEFORE APPELLATE TRIBUNAL

Section overview
 Appointment of Appellate Tribunal
 Appeal to Appellate Tribunal
 Procedure for disposal of appeal by Appellate Tribunal
3.1 Appointment of Appellate Tribunal

(S130). Appointment of the Appellate Tribunal:
 This Tribunal is under the administrative control of the Ministry of Law,
Justice and Parliamentary Affairs and therefore enjoys independence
from the Board and the assessment machinery.
 The Appellate Tribunal shall consist of a chairperson and such other
judicial and accountant members as are appointed by the Federal
Government having regard to the needs of the tribunal.
 A person may be appointed as a judicial member of the Appellate
Tribunal if the person:
(i). has exercised the powers of a District Judge and is qualified to be
a Judge of a High Court;
(ii). is or has been an advocate of a High Court and is qualified to be a
Judge of the High Court: or
(iii).Is an officer of Inland Revenue Service in BS-20 or above
and is a law graduate.
 A person may be appointed as an accountant member of an Appellate
Tribunal if,
(i). he is an officer of Inland Revenue Service equivalent to the rank
of Regional Commissioner;
(ii). A Commissioner Inland Revenue or Commissioner Inland
Revenue (Appeals) having at least three years’ experience as
Commissioner or Collector.
(iii).a person who has, for a period of not less than ten years,
practiced professionally as a chartered accountant within the
meaning of the Chartered Accountants ordinance, 1961 (X of
1961).
 The Federal Government shall appoint a member of the Appellate
Tribunal as Chairperson of the tribunal and, except in special
circumstances; the person appointed should be a judicial member.
 The powers and functions of the Appellate Tribunal shall be exercised
and discharged by Benches constituted from members of the tribunal by
the Chairperson of the tribunal.
 A Bench shall consist of not less than two members of the Appellate
Tribunal and shall be constituted so as to contain an equal number of
judicial and accountant members, or so that the number of members of
one class does not exceed the number of members of the other class by
more than one.

 The Federal Government may direct that all or any of the powers of the
Appellate Tribunal shall be exercised by:
(i). any one member; or
(ii). More members than one, jointly or severally.
 Notwithstanding anything contained above, the Chairperson may
constitute as many benches consisting of a single member as he may
deem necessary to hear such cases or class of cases as the Federal
Government may by order in writing, specify.
 The Chairperson or other member of the Appellate Tribunal authorized,
in this behalf by the Chairman may, sitting singly, dispose of any case
where the amount of tax or penalty involved does not exceed one million
rupees.
 If the members of a Bench differ in opinion on any point, the point shall be
decided according to the opinion of the majority.
 If the members of a Bench are equally divided on a point, they shall state
the point on which they differ and the case shall be referred by the
Chairperson for hearing on that point by one or more other members of
the Appellate Tribunal, and the point shall be decided according to the
opinion of the majority of the members of the Tribunal who have heard
the case including those who first heard it.
 If there are an equal number of members of the Appellate Tribunal, the
Federal Government may appoint an additional member for the purpose
of deciding the case on which there is a difference of opinion.
 The Appellate Tribunal shall have the power to regulate its own
procedure, and the procedure of Benches of the Tribunal in all matters
arising out of the discharge of its functions including the places at which
the Benches shall hold their sittings.
3.2 Appeal to Appellate Tribunal

Formation and functions of Income Tax Appellate Tribunal
The taxpayer or tax department may file appeal before the Income Tax Appellate
Tribunal under section 131 of the Ordinance. The said section provides that:
(S131). Appeal to the Appellate Tribunal:
 Where the taxpayer or Commissioner objects to an order passed by the
Commissioner (Appeals), the taxpayer or Commissioner may appeal to
the Appellate Tribunal against such order.
 An appeal shall be:
(i). in the prescribed form;
(ii). verified in the prescribed manner;
(iii). accompanied, except in case of an appeal preferred by the
Commissioner, by the prescribed fee and
(iv). Preferred to the Appellate Tribunal within sixty days of the date of
service of order of the Commissioner (Appeals) on the taxpayer or
the Commissioner, as the case may be.
 The prescribed fee shall be two thousand rupees.

 The Appellate Tribunal may, upon application in writing, admit an appeal

after the expiration of the above said sixty days if it is satisfied that the
appellant was prevented by sufficient cause from filing the appeal within
that period.
 Notwithstanding that an appeal has been filed before the Appellate
Tribunal, tax shall, unless recovery thereof has been stayed by the
Appellate Tribunal, be payable in accordance with the assessment made
in the case:
Provided that if on filing of application in a particular case, the Appellate
Tribunal is of the opinion that the recovery of tax, shall cause undue
hardship to the taxpayer, the Tribunal, after affording opportunity of being
heard to the Commissioner, may stay the recovery of such tax for a period
not exceeding one hundred and eighty days in aggregate:
Provided further that in computing the aforesaid period of one hundred
and eighty days, the period, if any, for which the recovery of tax was
stayed by a High Court, shall be excluded.
 It is worthwhile to mention here that an income tax Appellate Tribunal has
to be established under section 130 of the ordinance in order to exercise
the powers conferred under section 131 of the ordinance.
3.3 Procedure for disposal of appeal by Appellate Tribunal

The mechanism for disposal of appeals by the Appellate Tribunal has been
described in section 132 of the Ordinance in the following manner:
(S132.) Disposal of appeals by the Appellate Tribunal:
 The Appellate Tribunal may, before disposing of an appeal, call for such
particulars as it may require in respect of the matters arising on the
appeal or cause further enquiry to be made by the Commissioner.
 The Appellate Tribunal shall afford an opportunity of being heard to the
parties to the appeal and, in case of default by any of the party on the
date of hearing, the Tribunal may proceed ex-parte to decide the appeal
on the basis of the available record.
 The Appellate Tribunal shall decide the appeal within six months of its
filing;
 Where the appeal relates to an assessment order, the Appellate Tribunal
may make an order to:
(i). affirm, modify or annul the assessment order; or
(ii). remand the case to the Commissioner or the Commissioner
(Appeals) for making such enquiry or taking such action as the
Tribunal may direct.
 The Appellate Tribunal shall not increase the amount of any assessment
or penalty or decrease the amount of any refund unless the taxpayer has
been given a reasonable opportunity of showing cause against such
increase or decrease, as the case may be.
 Where, as the result of an appeal, any change is made in the assessment
of an association of persons or a new assessment of an association of
persons is ordered to be made, the Appellate Tribunal may authorise the
Commissioner to amend accordingly any assessment order made on a

member of the association and the time limit specified in of section 122(2)
shall not apply to the making of such amended assessment.
 Where the appeal relates to a decision other than in respect of an
assessment, the Appellate Tribunal may make an order to affirm, vary or
annul the decision, and issue such consequential directions as the case
may require.
 The Appellate Tribunal shall communicate its order to the taxpayer and
the Commissioner.
 Except as provided in section 133, the decision of the Appellate Tribunal
on an appeal shall be final.

4 REFERENCE APPLICATION BEFORE HIGH COURT

Section overview
 Reference application before High Court

 Petition before Supreme Court
4.1 Reference application before High Court

Procedure to file application to avail advisory jurisdiction after the receipt of
Appellate Order
After the receipt of appellate order of the Appellate Tribunal, the taxpayer or the
tax department may file a reference application in order to avail the advisory
jurisdiction of High Court on any point of law. Section 133 of the ordinance deals
with this issue and the said section states that:
(S133). Reference to High Court.
 The taxpayer or the Commissioner who find themselves aggrieved upon
the order of the Appellate Tribunal can make an application in the
prescribed form to the High Court within ninety days of the communication
of an order of the Appellate Tribunal.
 The application should be with a statement of case to the High Court
stating any question of law arising out of such order.
 The statement to the High Court referred to in above para shall set out the
facts, the determination of the Appellate Tribunal and the question of law
which arises out of its order.
 Where, on an application the High Court is satisfied that a question of law
arises out of the order of the Appellate Tribunal, it may proceed to hear
the case.
 A reference to the High Court shall be heard by a Bench of not less than
two judges of the High Court and, in respect of the reference, the
provisions of section 98 of the code of Civil Procedure, 1908, shall apply,
so far as may be, notwithstanding anything contained in any other law for
the time being in force.
 The High Court upon hearing a reference shall decide the question of law
raised by the reference and pass judgment thereon specifying the
grounds on which such judgment is based and the Tribunal’s order shall
stand modified accordingly. The Court shall send a copy of the judgment
under the seal of the Court to the Appellate Tribunal.
 Notwithstanding that a reference has been made to the High court, the
amount of tax shall be payable in accordance with the order of the
Appellate Tribunal:
 If the amount of tax is reduced as a result of the judgment in the reference
by the High Court, and any amount of tax is found refundable, the High
Court may, on application submitted by the Commissioner, within thirty
days of the receipt of the judgement of the High Court, that he wants to
prefer petition for leave to appeal to the Supreme Court, make an order
authorizing the Commissioner to postpone the refund until the disposal of
the appeal by the Supreme Court.

 Where recovery of tax has been stayed by the High Court by an order,
such order shall cease to have effect on the expiration of a period of six
months following the day on which it is made unless the appeal is
decided, or such order is withdrawn by the High Court earlier.
 Section 5 of the Limitation Act, 1908, shall apply to an application made to
the High Court.
 A Reference application by a person other than the Commissioner shall
be accompanied by a fee of one hundred rupees.
4.2 Petition before Supreme Court

Appeals to Supreme Court
Supreme Court is the final forum for appeal available to the aggrieved parties
against any judgment of the High Court. However, provision relating to filing of
appeal before the Supreme Court of Pakistan has been omitted from the Income
Tax Ordinance, 2001 through Finance Act, 2005 in view of the reason that Article
185 of the Constitution of Pakistan clearly provides that any aggrieved party to
the decision of the High Court can prefer appeal before the Supreme Court of
Pakistan.

5 ALTERNATE DISPUTE RESOLUTION COMMITTEE

Section overview
 Alternate Dispute Resolution Committee (ADRC)

 Rules for formation and working of ADRC
5.1 Alternate Dispute Resolution Committee

Another mechanism for settling disputes provided in the income tax law is the
Alternative Dispute Resolution under section 134A. This envisages formation of
an alternate Dispute Resolution Committee. The said section is as under:
(S134A). Alternative Dispute Resolution
 An aggrieved person, in connection with any matter pending before an
Appellate Authority, may apply to Board for the appointment of a
committee for the resolution of any hardship or dispute mentioned in detail
in the application except where prosecution proceedings have been
initiated or where interpretation of question of law having effect on
identical other cases.
 The Board after examination of the application of an aggrieved person,
shall within sixty days of receipt of such application in the Board appoint a
committee consisting of an Officer of Inland Revenue and two persons
from a panel comprising of Chartered or Cost Accountants, Advocates,
Income Tax Practitioners or reputable taxpayers for the resolution of the
hardship or dispute.
 The Committee constituted shall examine the issue and may if it deemsfit
necessary conduct inquiry seek expert opinion, direct any officer of the
Inland Revenue or any other person to conduct an audit and shall make
recommendations within ninety days of its constitution in respect of the
resolution of the dispute. If the committee fails to make recommendations
within the said period the Board shall dissolve the committee and
constitute a new committee which shall decide the matter within a further
period of ninety days. If after the expiry of that period the dispute is not
resolved the matter shall be taken up by the appropriate forum for
decision.
 The Board may, on the recommendation of the committee, pass such
order, as it may deem appropriate within forty five days of the receipt of
recommendations of the Committee.
 The Chairman Federal Board of Revenue may, on the application of an
aggrieved person, for reasons to be recorded in writing, and on being
satisfied that there is an error in order or decision, pass such order as
may be deemed just and equitable.
 The aggrieved person may make the payment of income tax and other
taxes as determined by the Boardin its order under and all decisions,
orders and judgments made or passed shall stand modified to that extent
and all proceedings under this Ordinance or the rules made there-under
by any authority shall abate:
 Provided that an order passed by the Board in the light of
recommendations of the committee shall be submitted before that
authority, tribunal or the court where the matter is subjudice for
consideration and orders as deemed appropriate:

 Provided further that if the taxpayer is not satisfied with the said order, he
may continue to pursue his remedy before the relevant authority, tribunal
or court as if no such order had been made by the Board.
 The Board may, by notification in the official Gazette, make rules for
carrying out the purposes of this section.
5.2 Rules for formation and working of ADRC

Rule 231C of the Income Tax Rules 2002 also provides the procedure for
formation of alternative Dispute Resolution Committee. The said section
elaborates the provisions encompassing around this committee:
231C. Income tax alternative dispute resolution.
 This rule shall apply to all cases of disputes brought or specified for
resolution under section 134A.
 Any person or class of persons interested for resolution of any dispute
under section 134A shall submit a written application for alternative
dispute resolution to the Board in the form as set out after this rule.
 The Board, after examination of the contents of an application by a
taxpayer and facts stated therein and on satisfaction that the application
may be referred to a Committee for the resolution of the hardship or
dispute, shall constitute a Committee consisting of the following members,
namely:
(i). the Director General, Large Taxpayers Unit or Commissioner,
Medium Taxpayers Unit or any other Commissioner of officer of the
Income Tax Department nominated by the Board;
(ii). a Fellow of Chartered Accountants, registered with the Institute of
Chartered Accountants of Pakistan or an Associate of Cost and
Management Accountant, an advocate of High Court or Income Tax
Practitioner; and
(iii).a reputable taxpayer.
 The Board may appoint one of the members of the Committee to be its
Chairman.
 An application filed under this rule may be disposed of by the Committee
within thirty days of its constitution:
Provided that the time so specified may, if requested by the Chairman, of
the Committee for reasons to be recorded in the request, be extended by
the Board to such extent and subject to such conditions and limitations as
it may deem proper.
 The Chairman of the Committee shall be responsible for deciding the
procedure to be followed by the Committee which may inter-alia include
the following, namely:
(a) to decide about the place of sitting of the Committee, in consultation
with the Director General Regional Tax Office, or as the case may be,
the Director General Large Taxpayer Unit;
(b) to specify date and time for conducting proceedings by the
Committee;
(c) to supervise the proceedings of the Committee;
(d) to issue notices by courier or registered post or Electronic mail to the
applicant;
(e) to requisition and produce relevant records or Witnesses from the
Commissioner or other concerned quarters;

(f) to ensure attendance of the applicant for hearing either in person or

through an advocate, representative or a tax consultant;
(g) to consolidate recommendations for the Committee and Submission
of a conclusive report to the Board; and
(h) for any other matter covered under these rules.
 The Committee may conduct inquiry, seek expert opinion, direct any
officer of income tax or any other person to conduct an audit and make
recommendations to the Committee in respect of dispute or hardship.
 The Committee may determine the issue and may thereafter seek further
information or data or expert opinion or make or cause to be made such
inquiries or audit as it may deem fit, to formulate its recommendations in
respect of any matter specified in sub-section (1) of section 134A.
 The applicant may withdraw the application at any time before the
Committee submits its recommendations to the Board.
 The Chairman of the Committee shall send a copy of the
recommendations of the Committee to the Board, applicant and the
concerned Commissioner, simultaneously.
 The Board on its own motion or on the request of the applicant may refer
back the recommendations of the Committee for rectification of any
mistake apparent from record or for reconsideration of the facts or law as
the case may be, not considered earlier by the Committee.
 The Committee after rectification of the mistake or reconsideration of the
facts or law as aforesaid shall furnish to the Board its fresh or amended
recommendation within such period as specified by the Board.
 The Board, after examining the recommendations of the Committee shall
finally decide the dispute or hardship and make such orders as it may
deem fit for the resolution of the dispute or hardship, within ninety days of
receipt of such recommendations, under intimation to the applicant,
Chairman, of the Committee and the concerned Commissioner:
 Provided that the resolution reached by the taxpayer and the Board shall
not bind them for tax year not covered by the agreement. Any such
resolution shall not be used as precedent, except as provided in the
agreement.
 The copy of order passed by the Board shall be provided to the applicant
and to the Commissioner having jurisdiction over the case for modification
of all decision, orders and judgments passed in respect of the said dispute
or hardship, within such period as may be specified by the Board in the
order.
 On receipt of the Board's order as aforesaid, the concerned
Commissioner shall implement the order in such manner and within such
period as may be specified by the Board in the order.
 Notwithstanding anything contained in this rule an order passed by the
Board shall cease to exist if it is subsequently found to have been
obtained by fraud or misrepresentation of facts about the nature of dispute
or hardship on which the said order was passed and all decisions, orders
and judgments modified under the said order shall deemed to be re-
modified.

6 OTHER APPEAL RELATED MATTERS

Section overview
 Assessment giving effect to an order

 Burden of Proof
6.1 Assessment giving effect to an order

S124. Assessment giving effect to an order:
 The various situations and time limitations are tabulated below:
Decision of appellate Time within which the new assessment order has
authority to be made
Direct relief provided Two months from the date the order is served on the
to taxpayer commissioner
One year from the end of the financial year in which
Assessment order the commissioner is served with the order provided
wholly or partly set no further appeal or reference is preferred against
aside the order of the appellate authority either by the
commissioner or the taxpayer
Two years from the end of the financial year in which
Any other decision
the commissioner is served with the order
 In case of an assessment order is set aside or modified, the proceedings

may commence from the stage next preceding the stage where the setting
aside or modification took place. In these cases, Commissioner shall not
be entitled to re-issue any notice which was earlier issued or shall not
require refurnishing or re-filing of any return, statement or other particulars
which were earlier furnished or filed.
 Where in consequence of an order of any appellate forum or court any
income is excluded from the computation:
(i). of taxable income of a person for any year and included in the
computation of taxable income for another year; or
(ii). of taxable income of one person is included in the taxable income
of other person.
the assessment or amended assessment made as above shall be treated
as assessment in consequence of such order.
6.2 Burden of Proof

Section 136 of the Ordinance points to one very important aspect of appeal and
states that:
136. Burden of proof;
In any appeal by a taxpayer, the burden shall be on the taxpayer to prove, on the
balance of probabilities:
1) In the case of an assessment order, the extent to which the order does not
correctly reflect the taxpayer’s tax liability for the tax year; or
2) In the case of any other decision, that the decision is erroneous.

7 CHAPTER REVIEW
Chapter review
 What is appeal and circumstances giving rise to appeal
 What is the procedure for filing of appeal before the commissioner of Income
Tax (Appeals)?
 Describe the procedure for disposal of appeal of the Commissioner of Income
Tax (Appeals). Moreover, what powers are available to the CIR(Appeals) for
disposal of appeals?
 What is the formation of Income Tax Appellate Tribunal (ATIR)?
 Describe the procedure for disposal of appeals by the ATIR
 Describe the procedure for filing petition before High Court
 What is Alternate Resolution Committee and how it works?
 What is the time limit for giving appeal effect


17
CHAPTER
Scope of sales tax law

and rules for registration and
deregistration
Contents
1 Sales tax law- Introduction
2 Basic concepts and definitions
3 Scope of tax
4 Liability to pay sales tax
5 Zero rating
6 Registration
7 De-registration
8 Chapter review

INTRODUCTION
Learning outcomes
Concepts
LO 5.1.1 Describe the definitions given in section 2 clauses (11), (17), (21), (25), (28),
(29A), (33), (39), (41) & (46)
LO 5.1.3 Apply definitions to simple scenarios
LO 5.2.1 Understand the application of sales tax law on taxable supplies including zero
rated and exempt supplies
LO 5.3.1 State the requirement and procedure of registration
LO 6.1.1 Explain the requirement and procedure of registration, compulsory registration
and deregistration using simple examples

Chapter 17: Scope of sales tax law and rules for registration and deregistration
1 SALES TAX LAW-INTRODUCTION

Section overview
 Preamble
 Extent and applicability of Sales Tax Act, 1990
 Taxes under sales tax law
1.1 Preamble
The preamble of Sales tax Act, 1990 states that it is an act to consolidate and
amend the law relating to the levy of a tax on the sale, importation, exportation,
production, manufacture or consumption of goods.
The aforesaid preamble clarifies that the sales tax is not only leviable on the sale
of goods but is also on import, export, production, manufacture and consumption
of goods. Before we study these terminologies in the ensuing paragraphs, we
would like to describe the jurisdiction and extent of applicability of Sales Tax Act,
1990.
1.2 Extent and applicability of Sales Tax Act, 1990

Section 1 states that the Sales Tax Act, 1990 extends to the whole of Pakistan.
The territories of Pakistan as per Article 1(2) of the Constitution comprise the
following:
1) the Provinces of Baluchistan, the North-West Frontier, the Punjab and Sind;
2) the Islamabad Capital territory hereinafter referred to as the Federal
Capital;
3) the Federally Administered Tribal Areas; and
4) Such States and territories as are or may be included in Pakistan, whether
by accession or otherwise.
Keeping in view the aforesaid discussion, it means that the Sales Tax Act, 1990
is applicable to the whole of Pakistan except for the tribal areas defined in Article
246 of the Constitution of Pakistan. Now we discuss the tax covered under the
sales tax law:
1.3 Taxes under sales tax law

First of all, we should see that what are the meanings of tax under the Sales Tax
Act, 1990? Section 2 (34) of the Sales Tax Act, 1990 states that:
Definition: Tax [Section 2(34)]

“Tax”, unless the context requires otherwise, means sales tax;

The term sales tax is defined in section 2(29A) of the Sales Tax Act, 1990 in the
following manner:
Definition: Sales Tax

“sales tax” means—
 the tax, additional tax, or default surcharge levied under this Act;
 a fine, penalty or fee imposed or charged under this Act; and
 any other sum payable under the provisions of this Act or the rules made
thereunder.

2 BASIC CONCEPTS AND DEFINITIONS

Section overview
 Taxable supplies
 Supply
 Taxable goods
 Exempt supplies
 Zero rated supplies
 Supplies without payment of sales tax
 Importer, Manufacturer, Wholesaler , Distributor and Retailer
 Registered person
 Taxable activity
 Value of supply
 Time of supply
 Other definitions/concepts
2.1 Taxable supplies

The term “taxable supplies” is defined in section 2(41) of the Act in the following
manner:
Definition: Taxable Supplies [Section 2(41)]

"Taxable supply" means a supply of taxable goods made by an importer;
manufacturer, wholesaler (including dealer), distributor or retailer other than a
supply of goods which is exempt under section 13 and includes a supply of goods
chargeable to tax at the rate of zero per cent under section 4
It is clear from the above definition that the following transactions do not
constitute taxable supply:
 Supply of exempt goods
 Supply of taxable goods by persons other than importer, wholesaler,
distributor, retailer, and manufacturer e.g. agriculturist, transporters etc.
In addition to above, it is imperative to ascertain the answer of the following
questions which would eventually clarify whether any transaction is taxable
supply or not:
i. Whether the transaction constitutes a “supply”?
ii. Whether the supply relates to any “taxable goods”?
iii. Whether these taxable goods are supplied by importer; manufacturer,
wholesaler (including dealer), distributor or retailer?
iv. Which goods are exempted from levy of tax?
v. What are “zero rated supplies”?
vi. What are “supplies without payment of sales tax”

2.2 Supply
Definition: Supply
The term supply is defined in section 2(33) of the Act in the following way:
“A sale or other transfer of the right to dispose of goods as owner, including such
sale or transfer under a hire purchase agreement and also includes”
 putting to private, business or non-business use of goods produced or
manufactured in the course of taxable activity for purposes other than those
of making a taxable supply;
 auction or disposal of goods to satisfy a debt owed by a person and;
 possession of taxable goods held immediately before a person ceases to be
a registered person;
Provided that the Federal Government, may by notification in the official Gazette,
specify such other transactions which shall or shall not constitute supply
2.3 Taxable goods
Definition: Taxable Goods

The definition of term “taxable goods” as given in section 2(39) of the Sales Tax
Act. 1990 is as under:
 "Taxable goods" means all goods other than those which have been
exempted under section 13;
The term “goods” is elaborated in section 2(12) of the Act in the following way:
 "Goods" include every kind of movable property other than actionable
claims, money, stocks, shares and securities;
It is important to place on record that under section 8 of the Act, the Federal
Government is empowered to prohibit registered persons from supplying taxable
goods to specified un-registered persons.
2.4 Exempt supplies
Definition: Exempt Supplies

"exempt supply" means a supply which is exempt from tax under section 13
[Section 2(11) of the Sales Tax Act, 1990)
Section 13 stipulates that following goods are exempt from levy of sales tax:
 Goods listed in sixth schedule
 Goods specified by Federal Government through its SROs to the extents
and from the date specified therein
The sixth schedule includes a list of items on which no sales tax is levied. The
said sixth schedule is given as Annexure to this book.

2.5 Zero rated supplies
Definition: Zero Rated Supplies [Section 2(48)]

The term “Zero rated supplies” is elaborated in section 2(48) of the Act in the
following manner:
"Zero-rated supply" means a taxable supply which is charged to tax at the rate of
zero per cent under section 4.
Section 4 of the Act elucidates following items which are chargeable to tax at the
rate of zero per cent:
a. Goods exported, or the goods specified in the Fifth Schedule;
b. Stores and provisions for consumption aboard a conveyance proceeding to
a destination outside Pakistan as specified in section 24 of the Customs
Act, 1969 (IV of 1969);
c. Such other goods as the Federal Government may, by notification in the
Official Gazette, specify
d. Such other goods as may be specified by the Federal Board of Revenue
through a general order as are supplied to a registered person or class of
registered persons engaged in the manufacture and supply of zero-rated
goods.
2.6 Supplies without payment of sales tax

Under section 60 of the Act, the Federal Government is empowered to prescribe
any specified taxable goods which can be imported without payment of whole or
part of sales tax.
2.7 Importer, manufacturer, wholesaler, distributor and retailer

Goods supplied by an importer; manufacturer, wholesaler (including dealer),
distributor or retailer are taxable goods. Therefore, the goods supplied by
persons other than by these are not taxable goods e.g. supplies by an
agriculturist or a bank. These persons are defined in the law in the following
manner:
Definition: Importer & Manufacturer [Section 2(17)]

Importer [Section 2(13)]
Importer is any person who imports any goods into Pakistan
Manufacturer or producer [Section 2(17)]
Manufacturer means a person who engages, whether exclusively or not, in the
production or manufacture of goods whether or not the raw material of which the
goods are produced or manufactured are owned by him; and shall include:
 a person who by any process or operation assembles, mixes, cuts, dilutes,
bottles, packages, repackages or prepares goods by any other manner;
 an assignee or trustee in bankruptcy, liquidator, executor, or curator or any
manufacturer or producer and any person who disposes of his assets in any
fiduciary capacity; and
 any person, firm or company which owns, holds, claims or uses any patent,
proprietary or other right to goods being manufactured, whether in his or its

name, or on his or its behalf, as the case may be, whether or not such
person, firm or company sells, distributes, consigns or otherwise disposes of
the goods.
Provided that for the purpose of refund under this Act, only such person shall be
treated as manufacturer-cum-exporter who owns or has his own manufacturing
facility to manufacture or produce the goods exported or to be exported;
The bare reading of the definition clarify that manufacturing services provided by
a person on behalf of a principal are covered within the definition of
manufacturing. For example dyeing services, toll manufacturing, knitting services
etc. Moreover, any person who either produces goods himselfor out-sources
such manufacture is also treated as a manufacturer.
Definition: Manufacture or Produce

"Manufacture" or "produce" includes:
 Any process in which an article singly or in combination with other articles,
materials, components, is either converted into another distinct article or
product or is so changed, transformed or reshaped that it becomes capable
of being put to use differently or distinctly and includes any process
incidental or ancillary to the completion of a manufactured product;
 Process of printing, publishing, lithography and engraving; and
 Process and operations of assembling, mixing, cutting, diluting, bottling,
packaging, repacking or preparation of goods in any other manner.
Definition: Retailer [Section 2(28)]

Means a person supplying goods to general public for the purpose of
consumption.
Provided that any person, who combines the business of import and retail or
manufacture or production with retail, shall notify and advertise wholesale prices
and retail prices separately, and declare the address of retail outlets, and his total
turnover per annum shall be taken into account for the purposes of registration
under section 14.
Definition: Retail Price [Section 2(27)]

With reference to the Third Schedule, means the price fixed by the manufacturer,
inclusive of all duties, charges and taxes (other than sales tax) at which any
particular brand or variety of any article should be sold to the general body of
consumers or, if more than one such price is so fixed for the same brand or
variety, the highest of such price;
Definition: Distributors [Section 2(7)]

A person appointed by a manufacturer, importer or any other person for a
specified area to purchase goods from him for further supply and includes a
person who in addition to being a distributor is also engaged in supply of goods as
a wholesaler or a retailer.

Definition: Wholesaler
Includes a dealer and means any person who carries on, whether regularly or
otherwise, the business of buying and selling goods by wholesale or of supplying
or distributing goods, directly or indirectly, by wholesale for cash or deferred
payment or for commission or other valuable consideration or stores such goods
belonging to others as an agent for the purpose of sale; and includes a person
who deducts income tax at source under the Income Tax Ordinance, 2001.
2.8 Registered person

Any importer, distributor, exporter, manufacturer or wholesaler is not liable to
sales tax until and unless he is a registered person. The term “Registered
person” is reproduced hereunder as defined in section 2(25) of the Act:
Definition: Registered Person [Section 2(25)]

Means a person who is registered or is liable to be registered under this Act
Provided that a person liable to be registered but not registered under this act
shall not be entitled to any benefit available to a registered person under any of
the provisions of this act or the rules made thereunder.
It is evident that a person liable to be registered is covered within the definition of

registered person. Hence, a person not registered but liable to be registered can
equally be held liable to pay sales tax on the goods supplied during the period
that he remained un-registered. However, such person is not entitled to get the
benefit of input tax credit or other benefit available to a registered person as the
same are not claimed by way of filing tax returns.
Whereas the term person is defined in section 2(21) of the Act in the following
manner:
Definition: Person
“Person” means,–
 individual;
 a company or association of persons incorporated, formed, organized or
established in Pakistan or elsewhere;
 the Federal Government;
 a Provincial Government;
 a local authority in Pakistan; or
 a foreign government, a political subdivision of a foreign government, or
public international organization
2.9 Taxable activity
Definition: Taxable Activity [Section 2(35)]

“Taxable activity”, means any economic activity carried on by a person whether or
not for profit, and includes—
a. an activity carried on in the form of a business, trade or manufacture;
b. an activity that involves the supply of goods, the rendering or providing of

services, or both to another person;

c. a one-off adventure or concern in the nature of a trade; and
d. anything done or undertaken during the commencement or termination of
the economic activity,
but does not include—
a. the activities of an employee providing services in that capacity to an
employer;
b. an activity carried on by an individual as a private recreational pursuit or
hobby; and
c. an activity carried on by a person other than an individual which, if carried
on by an individual, would fall within sub-clause (b).
2.10 Value of supply
Definition: Value of Supply [Section 2(46)]

(i). In respect of a taxable supply, the consideration in money including all
Federal and Provincial duties and taxes, if any, which the supplier receives
from the recipient for that supply but excluding the amount of tax:
Provided that:
(a) In case the consideration for a supply is in kind or is partly in kind
and partly in money, the value of the supply shall mean the open
market price of the supply excluding the amount of tax;
(b) In case the supplier and recipient are associated persons and the
supply is made for no consideration or for a consideration which is
lower than the open market price, the value of supply shall mean
the open market price of the supply excluding the amount of tax;
and
(c) In case a taxable supply is made to a consumer from general
public on installment basis on a price inclusive of mark up or
surcharge rendering it higher than open market price, the value of
supply shall mean the open market price of the supply excluding
the amount of tax.
(ii). In case of trade discounts, the discounted price excluding the amount of
tax provided the tax invoice shows the discounted price and the related
tax and the discount allowed is in conformity with the normal business
practices;
(iii). In case where for any special nature of transaction it is difficult to
ascertain the value of a supply, the open market price;
(iv). In case of imported goods, the value determined under section 25 of the
Customs Act, including the amount of customs-duties and central excise
duty levied hereon;
(v). In case where there is sufficient reason to believe that the value of a
supply has not been correctly declared in the invoice, the value
determined by the Valuation Committee comprising representatives of
trade and the Inland Revenue constituted by the Commissioner ; and
(vi). In case the goods other than taxable goods are supplied to a registered
person for processing, the value of supply of such processed goods shall
mean the price excluding the amount of sales tax which such goods will
fetch on sale in the market;

(vii). In case of a taxable supply, with reference to retail tax, the price of taxable
goods excluding the amount of retail tax, which a supplier will charge at
the time of marking taxable supply by him, or such other price as the
Board may, by a notification in the Official Gazette, specify.
Provided that, where the Board deems it necessary it may, by notification
in the official Gazette, fix the value of any imported goods or taxable
supplies or class of supplies and for that purpose fix different values for
different classes or description of same type of imported goods or
supplies.
Provided further that where the value at which import or supply is made is
higher than the value fixed by the Board, the value of goods shall, unless
otherwise directed by the Board, be the value at which the import or
supply is made.
The aforesaid definition used two further terms i.e. associated person and open
market price. These two terms are defined in the Act in the following manner:
(3) “Associates (associated persons)” means, –
i. Two persons are associate 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 persons may reasonably be expected to act
in accordance with the intentions of a third person;
ii. 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;
iii. Without limiting the generality of the above provisions the following shall be
treated as associates, namely: –
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. 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–
 Fifty per cent or more of the voting power in the company;
 Fifty per cent or more of the rights to dividends; or
 Fifty per cent or more of the rights to capital; and
f. 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 –
 Fifty per cent or more of the voting power in both companies;
 Fifty per cent or more of the rights to dividends in both
companies; or

 Fifty per cent or more of the rights to capital in both companies.

iv. Two persons shall not be associates under sub-clause (a) or (b) of
paragraph (iii) above, where the Commissioner is satisfied that neither
person may reasonably be expected to act in accordance with the
intentions of the other.
v. In this clause, “relative” in relation to an individual, means:
(a) An ancestor, a descendant of any of the grandparents, or an adopted
child, of the individual, or of a spouse of the individual; or
(b) A spouse of the individual or of any person specified in sub-clause
(a).
Definition: Open Market Price

"Open market price" means the consideration in money which that supply or a
similar supply would generally fetch in an open market;
The term similar supply is elaborated in the following way:
Definition: Similar Supply

"Similar supply", in relation to the open market price of goods, means any other
supply of goods which closely or substantially resembles the characteristics,
quantity, components and materials of the aforementioned goods;
Exercise
(a) Waqar Ltd has supplied 2000 tons of steel to Shoaib Limited. The market
price of the supply is Rs. 2.8 million exclusive of sales tax. Owing to financial
difficulties, Shoaib Limited has requested to settle the price by transferring a
portion of building having a market value of Rs. 2.5 million and to pay Rs.
75,000 in final settlement along with the applicable sales tax by way of a
cheque drawn in favour of Waqar Ltd.
(b) Atif’s son started his business in June 2014. In order to assist him, Atif
supplied him the goods at a discounted price of Rs. 2,500,000. The discount
rate allowed was 18% against the normal business practice of allowing a
discount at 8%. What would be the correct value of supply on which Atif
would be chargeable to sales tax.
(c) Usama has supplied 200 kg of material , falling under the Third schedule to
Munawar Limited at wholesale price of Rs. 500 per kg. The retail price of the
material is Rs. 900 Kg.
Required:
Determine the value of supply on which sales tax would be levied under the
provisions of the Sales Tax Act, 1990.

Answer
(a) Supply partly in kind
In case the consideration for a supply is in kind or is partly in kind and partly in
money, the value of supply shall mean the open market price of the supply
excluding the amount of tax. Therefore, value of supply shall be Rs. 2,800,000
and not the consideration received. i.e. Rs. 2,575,000.
However if the sales tax invoice reflects trade discount of Rs. 225,000 and
discount allowed is in conformity with the normal business practices, then the
value of taxable supply will be taken at Rs. 2,575,000.
(b)Discounted price
The transaction is with an associate and not at arm’s length. In the case of trade
discounts, sales tax is levied on the discounted price excluding the amount of tax,
provided that the sales tax invoice shows the discounted price and related tax.
Further, the discount allowed should be in conformity with normal business
practice.
In this case, the discounted price for charging sales tax will be computed by
allowing a discount at 8% instead of 18% as below:
Rs.
Price at 18% discount 2,500,000
Price at 8% discount (2,500,000/0·82 x 0·92) 2,804,878
(c) Retail price
On Third Schedule items, sales tax is charged on the retail price of goods
excluding the amount of retail tax. Therefore sales tax would be charged @ 17%
on Rs. 180,000 (Rs.200 x 900)
2.11 Time of supply
Definition: Time of Supply

in relation to,
(a) a supply of goods, other than under hire purchase agreement, means the
time at which the goods are delivered or made available to the recipient
of the supply or the time when any payment is received by the supplier in
respect of that supply, whichever is earlier
(b) a supply of goods under a hire purchase agreement, means the time at
which the agreement is entered into; and
(c) services, means the time at which the services are rendered or provided;
Provided in respect of clause (a), (b) and (c) above where any part payment is
received for a supply in a tax period
(a) it shall be accounted for in the return for that tax period
(b) In respect of exempt supply, it shall be accounted for in the return for the
tax period during which the exemption is withdrawn from such supply.

2.12 Other definitions/concepts
Definition: Cottage industry[Section 2(5AB)]

means a manufacturer
(a) whose annual turnover from taxable supplies made in any tax
period during the last twelve months ending any tax period does not
exceed five million rupees or
(b) whose annual utility (electricity, gas and telephone) bills during the last
twelve months ending any tax period do not exceed seven hundred
thousand rupees
Treatment of supplies by cottage industry
Local supplies of goods made by a cottage industry are exempt from sales tax.
[Sr. No. 3 of Table 2 of the Sixth Schedule to the Sales Tax Act, 1990.
Definition: CREST [Section 2(5AC)]

Means the computerized program for analysing and cross-matching of sales tax
returns, also referred to as computerized Risk-Bases Evaluation of Sales Tax.
Definition: Due Date [Section 2(9)]

th
In relation to the furnishing of a return means the 15 day of the month following
the end of the tax period, or such other date as the Board may, by notification in
the official Gazette, specify.
Definition: Provincial Sales Tax [Section 2(22A)]

Means tax levied under the provincial laws or laws relating to Islamabad Capital
Territory, declared by the Federal Government through notification in the official
Gazette to be provincial sales tax for the purpose of input tax.
Definition: Tax Period [Section 2(43)]

Means a period of one month or such other period as the Federal Government
may, by notification in the official Gazette, specify.

3 SCOPE OF TAX
Section overview
 Normal rate of sales tax

 Tax on taxable supplies specified in third schedule
 Special rate of tax
 Extra tax
 Capacity tax
 Tax on supply to CNG stations
 Special powers to the Federal Government
3.1 Normal rate of sales tax

 Sales tax @ 17%% is charged, levied and paid on the value of:
(i). taxable supplies made by a registered person in the course or
furtherance of any taxable activity carried on by him; and
(ii). goods imported into Pakistan.
 Where the taxable supplies are made to a person who has not obtained
registration number, there shall be charged, levied and paid a further tax at
the rate of 1% of the value in addition to the normal rate of 17%.
 However Federal Government may, by notification in the official Gazette
specify the taxable supplies in respect of which the further tax shall not be
charged, levied and paid.
 SRO 648(1)/2013 dated 9th July, 2013 provides following list of persons on
which this further tax @ 1%is not leviable:
(i). Electricity energy supplied to domestic and agricultural consumers
(ii). Natural gas supplied to domestic consumers
(iii). Motor oil, diesel oil, jet fuel, kerosene oil and fuel oil
(iv). Goods sold by the retailers to end customers
(v). Supply of goods directly to end customers including food, beverages,
fertilizers and vehicles
(vi). Items listed in Third Schedule to the Sales Tax Act, 1990
3.2 Tax on taxable supplies specified in third schedule [Section 3(2)(a)]

 Sales Tax @17 % will be charged on the retail price on the goods specified
in Third Schedule.
 The manufacturer shall legibly, prominently and indelibly print or emboss
retail price along with the amount of sales tax on the packet, container,
package, cover or label etc.
 Federal Government, may exclude from or include into said schedule any
taxable supply by notification in the official Gazette.

Goods specified in the third schedule are:

S. Description S.N Description
N
1. Fruit Juices and Vegetable Juices 17. Milky Drinks
2. Detergents 18. Powder Drinks
3. Toothpaste 19. Toilet paper & tissue paper
4. Shaving Cream 20. Spices sold in retail packing
bearing brand names and trade
marks.
5. Perfumery and Cosmetics 21. Tyres and tubes
6. Ice Cream 22. Storage batteries
7. Tea 23. Finished or made up articles of
textile and leather, including
garments, footwear and bed ware
and sold in retail packing.
8. Aerated Waters or Beverages 24. Auto parts and accessories sold in
retail packing
9. Syrups and Squashes 25. Fertilizers
10 Cigarettes 26. Arms and ammunition
.
11 Toilet Soap 27. Biscuits, confectionary,
. chocolates, toffees and candies
12 Shampoo 28. Tiles sold in retail packing
.
13 Other goods and products sold in 29. Cement sold in retail packing
. retail packing
14 Household gas appliances, 30. Shoe polish and shoe cream
. including cooking range, ovens
and gas heaters
15 .
Lubricating oils 31. Foam or spring mattresses etc
.
16 Household electrical goods 32. Paints, distempers, enamels,
. including air conditioners, pigments, colors, varnishes,
refrigerators, deep freezers, gums, resins, dyes and polishers
televisions, recorders and and sold in retail packing
players, telephone sets etc
3.3 Special rates of tax [Section 3(2)(b)]

The Federal Government is empowered to prescribe any higher or lower rate of
tax in respect of any class of taxable goods.
3.4 Extra tax (Section 3(5))

Federal Government is empowered to levy and collect extra amount of tax at the
rate upto 17% in addition to the amount of sales tax or retail tax, levied under
Sales Tax Act, 1990. This tax shall be levied on the value of such goods or class
of goods, on such persons or class of persons, in such mode, manner and at
time and subject to such conditions & limitations as may be prescribed.

3.5 Capacity tax (Section 3(1B)

Moreover the Board may levy and collect tax on the following instead of levying
and collecting tax on taxable supplies:
a. production capacity of plants, machinery, undertaking, establishments or
installations producing or manufacturing such goods; or
b. fixed basis, as it may deem fit, from any person who is in a position to
collect such tax due to the nature of the business.
3.6 Tax on supply to CNG stations

 In case of supply of natural gas to CNG stations, the Gas Transmission and
Distribution Company shall charge sales tax from the CNG stations at the
rate of nine percent in addition to normal sales tax rate of 17% on the value
of supply.
 Value for the purpose of levy of sales tax shall include price of natural gas,
charges, rents, commissions and all local, provincial and Federal duties
and taxes but excluding the amount of sales tax
3.7 Special Powers to the Federal Government
The Federal Government or the Board is authorised to levy, in lieu of Sales Tax
under section 3(1), by notification in the Official Gazette such amount of tax as it
may deem fit on any supplies or class of supplies or any goods or class of goods.
They are also authorized to specify the mode, manner or time of payment of such
tax.

4 LIABILITY TO PAY SALES TAX

Section overview
 Liability to pay tax

 Collection of excess tax
 Joint and several liability of registered person in supply chain
4.1 Liability to pay tax

 The liability to pay the tax shall be:
(i). In the case of supply of goods in Pakistan, of the person making the
supply, and
(ii). In the case of goods imported into Pakistan, of the person importing the
goods.
 The Federal Government may specify the goods in respect of which the
liability to pay tax shall be of the person receiving the supply.
4.2 Collection of excess tax

S 3B Collection of excess tax etc.
 Any person who has collected or collects any tax or charge, whether under
misapprehension of any provision of this Act or otherwise, which was not
payable as tax or charge or which is in excess of the tax or charge actually
payable and the incidence of which has been passed on to the consumer,
shall pay the amount of tax or charge so collected to the Federal
Government.
 Any amount payable to the Federal Government shall be deemed to be an
arrear of tax or charge payable under this Act and shall be recoverable
accordingly and no claim for refund in respect of such amount shall be
admissible.
 The burden of proof that the incidence of tax or charge has been or has not
been passed to the consumer shall be on the person collecting the tax or
charge.
Exercise
Hassan Pvt. Ltd under misapprehension collected additional sales tax of Rs.
100,000 from one of its customers. 65% of the goods on which additional sales
tax was collected are still lying with the customer as unsold stock.
Answer
In the above scenario, since 65% of the stock, on which excess tax of (100,000 x
65%) Rs. 65,000 was collected, is still unsold, Hassan Ltd should return this
amount to its customer. However the balance amount of Rs. 35,000, the
incidence of which has been passed on to the consumers should be deposited
with the Federal Government.

4.3 Joint and several liability of registered persons in supply chain where tax
unpaid.
 Where a registered person receiving a taxable supply from another
registered person is in the knowledge or has reasonable grounds to
suspect that some or all of the tax payable in respect of that supply or any
previous or subsequent supply of the goods supplied would go unpaid,
such person as well as the person making the taxable supply shall be
jointly and severally liable for payment of such unpaid amount of tax.
 Provided that the Board may by notification in the official gazette, exempt
any transaction or transactions from the provisions of this section.

5 ZERO RATING AND EXEMPTION

Section overview
 Goods charged to tax @ 0%

 Exception to the rule
 Fifth schedule
 Goods exempt from sales tax
5.1 Goods charged to tax @ 0%

 Value of following goods shall be charged to tax at the rate of zero percent:
(i). goods exported, or the goods specified in the Fifth Schedule;
(ii). supply of stores and provisions for consumption aboard a conveyance
proceeding to a destination outside Pakistan as specified in section 24
of the Customs Act, 1969; and
(iii). such other goods notified by the Federal Government in the Official
Gazette.
(iv). such other goods as may be specified by the Federal Board of
Revenue through a general order as are supplied to a registered
person or class of registered persons engaged in the manufacture and
supply of zero-rated goods.
5.2 Exception to the above rule

 Provision relating to zero rating shall not apply in respect of a supply of goods
which:
(i). are exported, but have been or are intended to be re-imported into
Pakistan; or
(ii). have been entered for export under Section 131 of the Customs Act,
1969, but are not exported; or
(iii).have been exported to a country specified by the Federal Government,
by Notification in the official Gazette.
 Federal Government may, by a notification in the official Gazette, restrict the

amount of credit for input tax actually paid and claimed by a person making a
zero-rated supply of goods otherwise chargeable to sales tax.

5.3 Fifth Schedule is given hereunder:
Sr. # Description
2. (i) Supply, repair or maintenance of any ship which is
neither;
(a) a ship of gross tonnage of less than 15 LDT; nor
(b) a ship designed or adapted for use for recreation
or pleasure.
(ii) Supply, repair or maintenance of any aircraft which is
neither;
a) an aircraft of weight-less than 8000 kilograms;
nor
(b) an aircraft designed or adapted for use for
recreation or pleasure.
(iii) Supply of spare parts and equipment for ships and
aircraft falling under (i) and (ii) above.
(iv) Supply of equipment and machinery for pilot age,
salvage or towage services.
(v) Supply of equipment and machinery for air navigation
services.
(vi) Supply of equipment and machinery for other services
provided for the handling of ships or aircraft in a port or
Customs Airport.
3. Supply to diplomats, diplomatic missions, privileged persons
and privileged organizations which are covered under
various Acts, Orders, Rules, Regulations and Agreements
passed by the Parliament or issued or agreed by the
Government of Pakistan.
4. Supplies to duty free shops, provided that in case of
clearance from duty free shops against various baggage
rules issued under the Customs Act, 1969, (IV of 1969), the
supplies from duty free shops shall be treated as import for
the purpose of levy of sales tax.
5. Supplies of raw materials, components and goods for further
manufacture of goods in the Export Processing Zone.
6. Supplies of such locally manufactured plant and machinery
to the Export Processing Zones and to petroleum and gas
sector Exploration and Production companies, their
contractors and sub-contractors as may be specified by the
Federal Government, by notification in the official Gazette,
subject to such conditions and restrictions as may be
specified in such notification.
7. Supplies made To exporters under the Duty and Tax
Remission Rules, 2001 subject to the observance of
procedures, restrictions and conditions prescribed therein.

Sr. # Description
8. Imports or supplies made to Gawadar Special Economic

Zone, excluding vehicles falling under heading 87.02 of the
Pakistan Customs Tariff, subject to such conditions,
limitations and restrictions as the Board may impose.
5.4 Goods exempt from sales tax (Section 13)

 Supply of goods or import of goods specified in the Sixth Schedule shall,
subject to such conditions as may be specified by the Federal Government,
be exempt from tax under Sales Tax Act. The provisions of section 13 shall
apply notwithstanding anything contained in section 3.
 Notwithstanding the provisions of section 13(I)
(i). the Federal Government may, exempt any taxable supplies made or
import or supply of any goods or class of goods from the whole or
any part of the tax chargeable under the Sales Tax Act. This
exemption shall be notified in the official Gazette and shall be
subject to such conditions and limitations as specified in the
notification.
(ii). the Board may, by special order in each case stating the reasons,
exempt any import or supply of goods from the payment of the
whole or any part of the tax chargeable under the Sales Tax Act.
 Exemption from tax chargeable under above second para above may be
allowed from any previous date specified in the notification issued or order
made.
Exercise:
Distinguish the concept of zero rating with exempt supply as laid down in the
Sales Tax Act 1990.
Distinction Zero Rated Supply Exempt Supply
points
Definition 48) “Zero rated supply 11) “Exempt Supply means a
under section 2 means a taxable supply supply which is exempt from
which is charged to tax at tax under section 13”
the rate of zero per cent
under section 4”
Products Goods exported, notified Goods listed in Sixth
covered by FBR or listed in the Schedule are exempt
Fifth Schedule are supplies. Moreover, Federal
charged to sales tax at Government and FBR may
the rate of zero per cent. specify any goods exempt
from levy of tax
Invoicing Invoice shall be raised for No sales tax invoice shall be
Requirements the goods supplied but raised.
sales tax shall be charged
at the rate of zero per
cent

Registration A person engaged in zero A person engaged exclusively

rated supplies has to be in the exempt supplies is not
registered with the Sales liable to be registered under
tax department. the sales tax Act.
Input tax credit Input Tax paid related to Input Tax paid related to
zero rated supplies is Exempt supplies is
refundable. inadmissible, therefore,
neither adjustable nor
refundable.

6 REGISTRATION
Section overview
 Registration and person required to be registered

 Registration application
 Option to file application with LRO
 Compulsory registration
 Change in the particulars of registration
 Transfer of registration
 Revised certificate of registration
6.1 Registration and person required to be registered

Registration (Rule 4)
Under Sales Tax Act, 1990 registration will be required for such persons and be
regulated in such manner and subject to rules as may be prescribed in
notification by the Board which is published in the official Gazette.
Persons required to be registered (Rule 4)
The following persons engaged in making of taxable supplies in Pakistan
(includingzero-rated supplies) in the course or furtherance of any taxable activity
carried on by them, if not already registered, are required to be registered
namely:--
(i). a manufacturer not being a cottage industry;
(ii). a retailer whose value of supplies, in any period during the last twelve
months exceeds five million rupees;
(iii). an importer;
(iv). a wholesaler (including dealer) and distributor.
(v). a person required, under any other Federal law or Provincial law, to be
registered for the purpose of any duty or tax collected or paid as if it
were a levy of sales tax to be collected under the Act 19; and
(vi). a commercial exporter, who intends to obtain sales tax refund against
his zero-rated supplies.
Exercise
Under the provisions of Sales Tax Act, 1990 and Rules made thereunder, briefly
explain whether the persons under each of the following situations are required to
be registered with Inland Revenue Department. Also compute the amount of
sales tax, if any, payable by or refundable to such persons. The rate of sales tax is
17%.
(i). A manufacturer whose annual turnover during the last twelve months
ended 31 March 2013 is Rs. 4,500,000 and the amount of his annual
utility bills for the same period is Rs. 700,000.
(ii). A distributor whose annual turnover during the last twelve months is
Rs. 3,000,000.
(iii). An importer whose annual turnover is Rs. 12,000,000.
(iv). A commercial exporter who intends to claim a refund of Rs. 200,000.

Answer
Requirement of registration:
(i). Manufactures other than those classified as cottage industry are required
to be registered under the Sales Tax Rules 2006. Cottage industries are
those whose annual turnover from taxable supplies made in any tax period
during the last twelve months ending any tax period does not exceed Rs.
5,000,000 or whose annual utility bills for the same period does not
exceed Rs. 700,000.
Therefore, in this case since the manufacturer is a cottage industry, it is
not required to be registered and pay any sales tax.
(ii). Since a distributor is required to be registered with Inland Revenue
Department irrespective of his turnover, therefore, in this case the
distributor would register with the Inland Revenue Department and pay
sales tax of Rs. 510,000 on his turnover of Rs. 3,000,000.
(iii). Since an importer is required to be registered with Inland Revenue
Department irrespective of his turnover, therefore, in this case the importer
would be required to register himself with the Inland Revenue Department.
Sales tax at import stage would be paid on the basis of import value.
However, the amount of output tax would be Rs.2,040,000
(iv). A commercial exporter is not required to be registered with Inland Revenue
Department. However, an exporter who intends to obtain sales tax refund
against his zero-rated supplies must get registration before making an
application for such refund. Therefore, in this case since the exporter
intends to claim a refund of Rs. 200,000 he must get himself registered
with Inland Revenue Department
6.2 Registration application (Rule 5)

Every person who intends to get itself registered is required to file an application
with the concerned collector of sales tax. The Sales Tax Rules prescribes the
mechanism for filing of this application in the following manner:
Rule 5 Application for registration:
 A person required to be registered under the Sale Tax Act shall, before
making any taxable supplies, apply for registration to Central Registration
Officer [CRO] Islamabad through owner, member or director, as the case
may be. The application shall be made in the form STR-I, which shall be
submitted, duly filled in, as per instructions printed thereon, through
registered mail (acknowledgment due), or through courier service or
transmitted electronically to Central Registration Office. Such application
will specify the collectorate in whose jurisdiction the registration is sought,
as per criteria given below:
In the case of Jurisdiction

In case of a corporate and non- Regional Tax Office or Large
corporate person having a single Taxpayers Unit as the case may be in
manufacturing unit or business whose jurisdiction the manufacturing
premises unit or business premises is actually
located.

In case of a corporate and non- Board may decide the place of

corporate person having multiple registration of such persons
manufacturing units or business
premises
 Where the applicant has unsold or un-used stocks of tax-paid inputs on

which he desires to claim the benefit of section 59 of the Act, he shall
declare such stocks in a statement in the form set out as STR-4, to be
appended with his application for registration.
 CRO may cause further inquiry from the applicant through LRO or
otherwise including issuance of Objection Slip.
 On completion of such verification or inquiry, through LRO or otherwise, as
the CRO deems necessary, it may register the applicant and issue a
certificate of registration containing the registration number of the applicant
in the Form as set out in the Form STR-5, or reject the application within
fifteen days from the date complete application is received in the CRO,
under intimation to the applicant, specifying the reasons for such rejection.
 A person who has applied for registration as manufacturer shall be
registered after LRO has verified his manufacturing facility.
 In no case, a person required to be registered under the Act shall be issued
more than one registration Number.
Information to be furnished for registration

 Complete business name
 Business nature, main / activity or service;
 Complete address of Head Office and all business units, godowns, outlets
mentioning, phone, fax, email, electricity, gas consumer no. etc.
 All Bank account numbers, with name and address.
 NTN (National Tax Number)
 NIC (National Identity Card Number) of the owner, partners or directors of
the business (passport number in case of foreigner).
 In case of a company, registration number and date of incorporation.
 Every director / member of AOP has to fill in STR – 1 (A) Form.
 Date of commencement of business and initial capital employed.
 The mode of maintenances of business records should also be mentioned.
6.3 Option to file application with LRO (Rule 9)

 The person applying for registration, changes in particulars of registration
or transfer of registration, may, in exceptional cases where he is not
able to send such application directly to CRO, file the prescribed application
in LRO, instead of filing the same in CRO.
 In such case LRO shall forward the same to CRO within three days and the
Collector concerned shall ensure that such application is transmitted to
CRO within the stipulated period.
6.4 Compulsory registration (Rule 6)

Rule 6 of the sales tax rules states that:

 If a person, who is required to be registered under this Act, does not apply
for registration and the LRO or any other office as may be authorized by the
Board or the Collector, after such inquiry as deemed appropriate, is
satisfied that such person is required to be registered, it shall issue notice
to such person in the form set out in the form STR-6.
 In case the LRO receives a written reply from the said person within the
time specified in notice, contesting his liability to be registered, the LRO
shall grant such person opportunity of personal hearing, if so desired by the
person, and shall thereafter pass an order whether or not such person is
liable to be registered compulsorily. Copy of the said order shall invariably
be provided to that person.
 Where the person to whom a notice is given does not respond within the
time specified in the notice, the LRO shall transmit the particulars of the
person to the CRO, which shall compulsorily register the said person and
allot him a registration Number which shall be delivered to the said person
either in person through LRO or through registered mail (acknowledgement
due) or through courier service.
 A person registered compulsorily as aforesaid, is required to comply with all
the provisions of the Act and rules made thereunder from the date of
compulsory registration, and in case of failure to do so, the Collector of
sales tax having jurisdiction may issue notice under section 25 of the Act
for production of records or documents and appearance in person to
assess the amount of sales tax payable under the Act, and take any other
action as required under the law against such person.
 Provided that if it is subsequently established that a person was not liable
to be registered but was wrongly registered under this rule due to
inadvertence, error or misconstruction, the CRO, shall cancel his
registration. In case of such cancellation of registration, such person shall
not be liable to pay any tax, default surcharge or penalty under the Act or
rules made thereunder, subject to the conditions, limitations and restrictions
prescribed under section 3B of the Act
6.5 Change in the particulars of registration (Rule 7)

 In case there is a change in the name, address or other particulars as
stated in the registration certificate, the registered person shall notify the
change in the Form STR-1 to the CRO, within fourteen days of such
change.
 The change of business category as 'manufacturer' shall be allowed after
LRO has verified the manufacturing facility and confirmed the status as
industrial consumer of the electricity and gas distribution companies.
 In case of approval of the change applied for, the CRO shall issue revised
registration certificate, which will be effective from the date the concerned
person has applied for the change.
 The change of nature of business (e.g. from individual to AOP or corporate
person) shall be allowed as under, namely:--
(i) in case of transfer of individual business from any person to his
spouses or children, the change shall be made by LRO on receipt of
verification of documents from RTO;

(ii) in case of change in nature of business from individual to AOP, the

change shall be made by LRO on receipt of verification of documents
from RTO;
(iii) in case of change of nature of business from AOP to corporate entity,
the same shall only be allowed by LRO on receipt of verification from
RTO or LTU, however, this change shall only be allowed in cases
where the same persons who are members of AOP are nominated as
directors in the corporate entity; and
(iv) in case of transfer of business or change in nature on any other
account, a new Sales Tax Registration Number shall be issued to the
entity.
6.6 Transfer of registration (Rule 8)

 The CRO may, subject to such conditions, limitations or restrictions as it
may deem fit to impose, by an order, transfer the registration of a registered
person from the jurisdiction of one Collectorate to another Collectorate or,
as the case may be, to the LTU or RTO.
 On transfer of registration:
(i). all the records and responsibilities relating to such registered person
shall be transferred to the Collectorate or, as the case may be, to
the LTU or RTO, in whose jurisdiction the registration has been so
transferred; and
(ii). notwithstanding the actions already taken, being taken or otherwise
pending immediately before the transfer in respect of such
registered person under any of the provisions of the Act or the rules
made thereunder in the Collectorate from where his registration has
been transferred, the Collectorate, or as the case may be, the LTU
or RTO, in whose jurisdiction the registration is so transferred shall
exercise the jurisdiction over such person in the manner as if it
always had such jurisdiction. and
(iii).the return for the tax period in which the registration is transferred
shall be filed in the Collectorate from where the registration is
transferred.
 In case of transfer of registration, the CRO shall issue intimation letter to
the registered person along with copy to concerned Collectorate, or as the
case may be the Large Taxpayers Unit or RTO.
 In case a registered person intends to shift his business activity from the
jurisdiction of one Collectorate to another, or he has any other valid reason
for such transfer, he shall apply to the CRO for transfer of his registration
along with form STR-1. The CRO shall follow the same procedure as given
above.
6.7 Revised registration certificate (Rule 10)

In case of multiple registrations, the registered person shall apply on form STR-1
for single registration to the CRO which after ascertaining tax liabilities from the
concerned Collectorate shall issue revised registration certificate in which
previous registration number shall be merged.

7 DE-REGISTRATION
Section overview
 De-registration
 Blacklisting and suspension of registration
7.1 De-registration (Sec-21)
 The Board or any Officer, authorised in this behalf, may deregister a

registered person or such class of registered persons as are not required to
be registered under the Sales Tax Act. The deregistration shall be made in
accordance with the rules framed by Board.
In addition to aforesaid provision of the sales tax Act, 1990, following Rule 11 of
Sales tax rules, 2006 are also prescribed in connection with de registration:
 A registered person may be liable for deregistration due to any of the
following reasons:
(i). He ceases to carry on his business;
(ii). His supplies have become exempt from tax;
(iii). His taxable turnover during the last 12 months has remained below the
threshold;
(iv). He transfers or sells his business;
(v). Merger with another person; or
(vi). Failure to file tax return for six consecutive months.
Procedure of de-registration:
 A registered person shall apply to the Local Registration Office (LRO), on
the prescribed form, stating the reason(s) for the cancellation of his
registration.
 The LRO, upon completion of any audit or inquiry which may have been
initiated consequent upon the application of the registered person for
deregistration shall direct the applicant to discharge any outstanding
liability which may have been raised therein by filing a final return.
 The LRO may, after satisfaction, recommend to the Central Registration
Office (CRO) to cancel the registration.
 The registration shall be cancelled from such date as may be specified, but
not later than three months from the date of application or the date all the
dues outstanding against such person are deposited by him, whichever is
later.
 In case of the failure of a registered person for filing a tax return for the six
consecutive months, the LRO may, after issuing a notice in writing and after
giving an opportunity of being heard to such person and after satisfying
itself that no tax liability is outstanding against such person, recommend to
the CRO for the cancellation of the registration.

7.2 Blacklisting and suspension of registration (Rule 12)
 Where a Collector has reasons to believe that a registered person is found

to have committed tax fraud or evaded tax or has failed to deposit the tax
due on his supplies despite having recovered it from the respective buyers
or recipients of such supplies, he may suspend his registration through an
order in writing and initiate such enquiry, as deemed appropriate.
 After such inquiry and investigation to confirm the facts and veracity of the
information and after giving an opportunity to such person to clarify his
position, the Collector, if satisfied that such person has committed any of
the offences as aforesaid, may blacklist such person through an order in
writing, and such blacklisting shall be without prejudice to any other action
that may be taken against such person under the Sales Tax Act and the
rules made thereunder.
 The inquiry in such cases shall be completed within ninety days, and show
cause notice for recovery of any evaded amount of tax and for
contravention of the provisions of the Sales Tax Act may be issued within
the period specified under section 36 of the Act.
Provided that where the records required for completion of the inquiry are
not produced by the blacklisted person or a person whose registration has
been suspended or by the suppliers of such person, the period of ninety
days for completion of the inquiry shall be deemed to have been extended
by a further period of ninety days.
 The order for blacklisting or suspending the registration of a registered
person shall be communicated to such person, the CRO and to the Central
Sales Tax database provided for this purpose.
 During the period of suspension of registration, the invoices issued by such
person shall not be entertained for the purposes of sales tax refund or input
tax credit, and once such person is blacklisted, the refund or input tax credit
claimed against the invoices issued by him, whether prior or after such
blacklisting, shall be rejected through a self-speaking appealable order and
after affording an opportunity of being heard to such person.

7 CHAPTER REVIEW
Chapter review
 Definition of followings as per provision of sales tax Act, 1990:
 Supply
 Taxable goods
 Exempt supply
 Manufacturer
 Wholesaler
 Distributor
 Retailer
 Registered person
 Taxable activity
 Value of supply
 Time of supply
 Knowledge about zero rated supplies?
 Who is liable to pay sales tax?
 Who is liable to sales tax registration under the Sales Tax Act, 1990?
 What is compulsory registration and what is the process to get a person
compulsorily registered?
 What is meant by de registration and explain the mechanism of de registration
of a person?
 Explain the reasons due to which a collector may blacklist or suspend the
registration of a registered person.


18
CHAPTER
Determination of sales tax liability
Contents
1 Determination of tax liability
2 Output tax
3 Input tax
4 Tax refunds, Assessment and recovery
5 Tax on value addition
6 Chapter review

INTRODUCTION
Concepts
LO 5.1.1 Describe the definitions given in section 2 clauses(14), (20), (44), (46)
LO 5.2.1 Understand the application of sales tax law on taxable supplies including zero
rated and exempt supplies
LO 5.2.2 State the determination, time and manner of sales tax liability and payment
using simple examples
LO 6.3.1 Explain the requirement and procedure of issuing debit and credit notes using
simple examples
LO 6.3.2 State the procedure for destruction of goods
LO 6.4.1 Explain the requirement and procedure of apportionment of input tax using
simple examples

Chapter 18: Determination of sales tax liability
1 DETERMINATION OF TAX LIABILITY

Section overview
 Determination of tax liability
 Change in the rate of tax
 Time and manner of payment
1.1 Determination of tax liability

 The liability of a registered person in respect of taxable supplies made by
him during the tax period shall be the difference between
(i). Output tax due from him in respect of taxable supplies made during a
tax period; and
(ii). Input tax paid or payable during the said tax period for the purpose of
taxable supplies made or to be made by him excluding the amount of
further tax; and
Any adjustment u/s 9 due to debit or credit notes.
 Where a registered person did not deduct input tax within the relevant
period, he may claim such tax in the return for any of the six succeeding tax
periods.
 Credit for input tax paid on purchases which are not paid for as per the
provisions of section 73, shall not be allowed.
 Deduction of input tax from the output tax payable by a registered person
shall be allowed if:
(i). In case of a claim for input tax in respect of a taxable supply made,
he holds a tax invoice in his name and bearing his registration
number in respect of such supply for which a return is furnished;
(ii). In case of goods imported into Pakistan, he holds bill of entry or
goods declaration in his name and showing his sales tax registration
number, duly cleared by the customs under section 79 or section
104 of the Customs Act, 1969; and
(iii).In case of goods purchased in auction, he holds a treasury challans
bearing his name and his registration number showing payment of
Sales Tax.
 The sales tax liability of a person is determined by solving the following

equation:
Particulars Tax
Sales tax on supplies +/ – effect of debit/credit notes Output tax
Less: Admissible sales tax on purchases or utilities Input tax
Balance sales tax payable / carried forwarded / xxxxx
refundable
Now we will discuss its components in detail in the ensuing paragraphs.

1.2 Change in the rate of tax (Section 5)

 If there is a change in the rate, tax shall be applicable as under:-
(i). A taxable supply made by a registered person shall be charged to
tax at such rate which is in force at the time of making supply;
(ii). Imported goods shall be charged to tax at such rate as is in force:
(a) in case the goods are entered for home consumption, on the
date on which a goods declaration is presented under section
79 of the Customs Act, 1969; and
(b) in case the goods are cleared from warehouse, on the date on
which a goods declaration for clearance of such goods is
presented under section 104 of the Customs Act, 1969.
 Where a bill of entry is presented in advance of the arrival of the
conveyance by which the goods are imported, the tax shall be charged at
the rate as is in force on the date on which the manifest of the conveyance
is delivered.
 However, if the tax is not paid within seven days of the presenting of the bill
of entry under section 104 of the Customs Act the tax shall be charged at
the rate as is in force on the date on which tax is actually paid.
 If there is a change in the rate of tax during a tax period, a separate return
in respect of each portion of tax period showing the application of different
rates of tax shall be furnished.

Exercise
Rate of sales tax has increased from 16% to 17% effective from 23 May 2013.
The accountant of the company is unsure about the manner in which sales tax
return for the month of May 2013 would need to be furnished.
Answer
If there is a change in the rate of tax during a tax period, a separate return in
respect of each portion of the tax period has to be furnished showing the
application of the different rates of tax.
Therefore, company will furnish two returns:

 a return for the period from 1 May 2013 to 23 May 2013 with 16% rate; and
 a separate return for the period from 23 May 2013 to 31 May 2013 with 17%
rate
1.3 Time and manner of payment (Section 6)

Time of payment
 Time for payment of tax on goods imported
Tax in respect of goods imported into Pakistan shall be charged and paid in
the same manner and at the same time as if it were a duty of customs
payable under the Customs Act, 1969.

 Time for payment of tax on taxable supplies

Tax in respect of taxable supplies made during a tax period shall be paid by
the registered person at the time of filing the return in respect of that period.
Mode of payment
 The tax due on goods imported or taxable supplies shall be paid in any of
the following manners:
(i). Tax on goods imported shall be paid in the manner as if it were a
duty of customs payable under the Custom Act, 1969;
(ii). The tax due on taxable supplies shall be paid by any of the following
modes, namely:
(a) through deposit in a bank designated by the Board; and
(b) through such other mode and manner as may be specified
by the Board.

2 OUTPUT TAX
Section overview
 Output tax
 Adjustment of debit and credit notes
2.1 Output tax

Output tax is defined in section 2(20) in the following manner:
Definition: Output Tax

Section 2(20) of the Ordinance defines this term in the following manner:
“output tax”, in relation to a registered person, means-
(i). tax levied under this Act on a supply of goods, made by the person;
(ii). tax levied under the Federal Excise Act, 2005 in sales tax mode as a duty
of excise on the manufacture or production of the goods, or the rendering
or providing of the services, by the person;
(iii).Provincial sales tax levied on services rendered or provided by the person;
2.2 Adjustment for debit and credit notes

Section 9 of the Act read with section 7 permits the adjustment of the debit /
credit notes against output tax. These notes can be issued where a registered
person has issued a tax invoice in respect of a supply made by him, however,
due to the following circumstances, the said invoice may desire amendments:
 Cancellation of supply or
 Return of goods or
 A change in the nature of supply or
 Change in the value of the supply or
 Some such event the amount shown in the tax invoice or
 Return needs to be modified.
2.2.1 Applicability (Rule 19)
The above adjustment can only be made where a registered person has issued a
tax invoice in respect of a supply made by him and as a result of any of the
events specified in section 9 of the Sales Tax Act, 1990; the amount shown in the
tax invoice or the return needs to be modified.
2.2.2 Cancellation or return of supply. (Rule 20)
 In case a registered person has made a supply, and such supply or part
thereof is cancelled or returned, the buyer or the recipient shall issue a
debit note (in duplicate) in respect of such supply or part thereof, indicating
the quantity being returned or the supply of which has been cancelled, its
value determined on the basis of the value of supply as shown in the tax

invoice issued by the supplier and the amount of related sales tax paid
thereon, as well as the following, namely:--
i. Name and registration number of the recipient;
ii. name and registration number of the supplier;
iii. number and date of the original sales tax invoice;
iv. the reason of issuance of the debit note; and
v. signature and seal of the authorized person issuing the note.
 The original copy of the debit note shall be sent to the buyer and the
duplicate copy shall be retained for record.
 In the case of cancellation of supplies made to, or return of goods by, an
unregistered person, the supplier shall issue a credit note providing the
same particulars as are specified above and keep a copy for record.
2.2.3 Change in Value of Supply or amount of sales tax. (Rule 21)
Where for any valid reason the value of supply or the amount of sales tax
mentioned in the invoice issued has increased, the supplier shall issue a debit
note (in duplicate), with the following particulars, namely:-
 name and registration number of the supplier;
 name and registration number of the recipient;
 number and date of the original sales tax invoice;
 original value and sales tax as in original invoice;
 the revised value and sales tax;
 the difference of value and sales tax adjustable;
 the reason for revision of value; and
 signature and seal of the authorized person issuing the note.
 Where, for any valid reason, the value of supply or the amount of sales tax
mentioned in the invoice issued has decreased, the supplier shall issue a
credit note (in duplicate), with the same particulars as specified above. The
original copy of the note shall be sent to the recipient and the duplicate
shall be retained for record.
2.2.4 Adjustment of input and output tax (Rule 22)
 The buyer shall not be entitled to claim input tax in respect of the supply
which has been cancelled or returned to the supplier or in respect of which
the amount of tax was reduced.
 Where the buyer has already claimed input tax credit in respect of such
supplies, he shall reduce or increase the amount of input tax by the
corresponding amount as mentioned in the Debit Note or Credit Note, as
the case may be, in the return for the period in which the respective note
was issued.
 Where the supplier has already accounted for the output tax in the sales tax
return for the supplies against which Debit Note was issued subsequently,
he may increase or reduce the amount of output tax by the corresponding
amount as mentioned in the Debit Note, in the return for the period in
which the respective note was issued

Provided that in case of return of supplies by an unregistered person, the

adjustment as aforesaid can be made against the Credit Note issued by the
supplier.
 The adjustments as herein before noted which lead to reduction in output
tax or increase in input tax can only be made if the corresponding Debit
Note or Credit Note is issued within one hundred and eighty days of the
relevant supply
Provided that the Collector may, at the request of the supplier, in specific
cases, by giving reasons in writing, extend the period of one hundred and
eighty days by a further one hundred and eighty days.
 Where the goods relating to a returned or cancelled supply are
subsequently supplied to the original buyer or some other person with or
without carrying out any repairs, the supplier shall charge sales tax thereon
in the normal manner and account for it in his return for the period in which
these goods were supplied.
2.2.5 Destruction of goods. (Rule 23)
Where any goods are returned by the buyer on the ground that the same are unfit
for consumption and are required to be destroyed by the supplier, the goods shall
be destroyed after obtaining permission from the Collector of sales tax having
jurisdiction, and under the supervision of an inland revenue officer of sales tax
not below the rank of an Assistant Collector as may be deputed by the Collector
for the purpose and the input tax credit in respect of goods so destroyed shall not
be admissible.
Exercise
Following are results of Nadeem Associates for preparation of sales tax return for
the, month of June, 200X
Supplies 75,000,000
Purchases 55,000,000
Sales tax on utilities bills of factory 500,000
Sale returns of April 200X 6,500,000
Purchase returns of May 200X 1,200,000
Compute sales tax liability of Nadeem Limited
Answer
Particulars Value of supply Sales tax
Output tax on supplies 68,500,000 (i.e. 75,000,000 - 11,645,000
6,500,000) x 17%
Less input tax 53,800,000 (55,000,000 – 9,146,000
1,200,000) x 17%
Less sales tax on utilities 500,000
Net sales tax payable 1,999,000

3 INPUT TAX
Section overview
 Definition of Input tax

 Time of claim of input tax
 Input tax not admissible
 Certain transactions and input tax related thereto are inadmissible
 Adjustable input tax
 Tax paid on electricity bills
3.1 Definition of input tax

The peculiar meanings assigned to this widely used term are given in section
2(14) of the Act:
Definition: Input Tax

(14) “input tax”, in relation to a registered person, means—
 tax levied under this Act on supply of goods to the person;
 tax levied under this Act on the import of goods by the person;
 in relation to goods or services acquired by the person, tax levied under the
Federal Excise Act, 2005 in sales tax mode as a duty of excise on the
manufacture or production of the goods, or the rendering or providing of the
services;
 Provincial sales tax levied on services rendered or provided to the person;
and
 levied under the Sales Tax Act, 1990 as adapted in the State of Azad
Jammu and Kashmir, on the supply of goods received by the person;
3.2 Time of claim of input tax

Section 7 stipulates that a registered person shall not be entitled to deduct input
tax from output tax unless:
 in case of a claim for input tax in respect of a taxable supply made in
Pakistan, he holds a tax invoice in his name and bearing his registration
number in respect of such supply for which a return is furnished;
 in case of goods imported into Pakistan, he holds the goods declaration
duly cleared by the customs under section 79 or section 104 of the
Customs Act, 1969 (IV of 1969);
 in case of goods purchased in auction, he holds a treasury challanin his
name and bearing his registration Number;
3.3 Input tax not admissible

 A registered person shall not be entitled to deduct input tax paid on:
(i). the goods which are not used or not to be used for the manufacture or
production of taxable goods or for taxable supplies made or to be
made by him;

(ii). the goods on which extra amount of tax is payable under sub-section
(5) of section 3;
(iii). any other goods which the Federal Government may by a notification
in the official Gazette specify;
(iv). the goods in respect of which sales tax has not been deposited in the
Government treasury by the respective supplier;
(v). fake invoices;
(vi). purchases made by a registered person in case he fails to provide
information relating to his imports, purchases, sales etc as required
by the Board through a notification u/s 26(5);
(vii). Purchases in respect of which a discrepancy is indicated by CREST
or input tax of which is not verifiable in the supply chain;
(viii). Goods and services not related to the taxable supplies made by
the registered person;
(ix). Goods and services acquired for personal or non-business
consumption;
(x). Goods used in, or permanently attached to, immoveable
property, such as building and construction materials, paints,
electrical and sanitary fittings, pipes, wires and cables, but
excluding such goods acquired for sale or re-sale or for direct
use in the production or manufacture of taxable goods; and
(xi). Vehicles falling in Chapter 87 of the First Schedule to the
Customs Act, 1969 (IV of 1969), parts of such vehicles,
electrical and gas appliances, furniture furnishings, office
equipment (excluding electronic cash registers), but excluding
such goods acquired for sale or re-sale.
 If a person deals in taxable and non-taxable supplies he can reclaim only
such portion of input tax as is attributable to taxable supplies computed in
the following manner:
Residual input tax Value of taxable supplies

X Residual input
credit on taxable
Value of taxable + exempt supplies tax
supplies tax
Exercise
Omega Enterprises has submitted the following data for the month of July 2014.
Rupees
Total Sales registered 6,000,000
Export Sales 2,500,000
Exempt Supplies 500,000
Gross Purchases from Registered suppliers 6,500,000
Gross Purchases from Unregistered suppliers 500,000
Purchase Return to Registered suppliers 650,000

Required:
You are required to compute the sales tax liability of Omega Enterprises for the
month of July 2014. For the sake of simplicity ignore the 90% adjustment of
input tax against output tax rule as mentioned in section 8B
Answer
Omega Enterprise
Sales tax payable/refundable
July 2014
(Rupees
Output tax
Total sales Rs. 6,000,000 @ 17% 1,020,000

Export sales Rs. 2,500,000 @ 0% 0
Exempt supplies - Ni
1,020,000
Less: Input tax (W-1) (939,250)
Balance payable 80,750
Working:
Apportionment of input tax, as per Apportionment of Input Tax Rules, 1996
Residualinput Tax x value of taxable supplies
* value ofTaxable supplies Exempt supplies
Rupees
994,500 x 8,500,000
= = 939,250
9,000,000
Residual Input Tax
Gross purchases from Registered suppliers Rs. 6,500,000
Purchase return to registered (650,000)
5,850,000
Input tax @ 17% 994,500
 Monthly adjustment of input tax claimed by a registered person shall be

treated as provisional adjustment and at the end of each financial year, the
registered person shall make final adjustment on the basis of taxable and
exempt supplies made during the course of that year.
 Deduction of input tax from output tax shall not be allowed to a person who
is not registered under Sale Tax Act.

3.4 Certain transactions and input tax related thereto that are inadmissible
Where the sum received is partly in cash and partly in kind, then the same
transaction would be allowed subject to the conditions:
 Goods received in kind represent taxable goods
 Goods received are reflected in records.
 The balance amount even less than Rs 50,000 is received through crossed
banking instrument.
If the banking instrument is issued but the same is not encashed or deposited
within 180 days then the input tax shall not be denied. However, it must be
ensured that the amount is ultimately deposited in the seller account and the said
instrument is not cancelled.
3.5 Adjustable input tax [Section 8B]

Section 8B of the Sales Tax Act, 1990 states that:
 A registered person shall not be allowed to adjust input tax in excess of
ninety per cent of the output tax for that tax period.
 Restriction on the adjustment of input tax in excess of 90% of the output tax
shall not apply in case of fixed assets or capital goods. However the Board
may, by notification in the official Gazette, exclude any person or class of
persons from the purview of this para.
 A registered person may be allowed adjustment or refund of input tax not
allowed as per the above provisions subject to the following conditions
(i). In the case of registered persons, whose accounts are subject to
audit under the Companies Ordinance, 1984, upon furnishing a
statement along with annual audited accounts, duly certified by the
auditors, showing value additions less than the limit prescribed
under (a) above; or
(ii). In case of other registered persons, subject to the conditions and
restrictions as may be specified by the Board by notification in the
official Gazette.
 The adjustment or refund of input tax if any, shall be made on yearly basis
in the second month following the end of the financial year of the registered
person.
 The Board may, by notification in the official Gazette, prescribe any other
limit of input tax adjustment for any person or class of persons.
 Any auditor found guilty of misconduct in furnishing the certificate
mentioned in (b) shall be referred to the Council for disciplinary action
under section 20D of Chartered Accountants, Ordinance, 1961.

3.6 Tax paid on electricity bills
Exercise
In the light of the provisions of Sales Tax Act, 1990 explain as to the
chargeability/adjustment of sales tax in respect of each of the following
independent situations
(i). Rate of sales tax has increased from 16% to 17% effective from 23 May
2013. The accountant of the company is unsure about the manner in
which sales tax return for the month of May 2013 would need to be
furnished.
(ii). Sales tax of Rs. 100,000 was paid along with the electricity bill paid in
cash during February 2013. The bill pertained to the manufacture of 50%
of goods exported to the UAE and 50% of the goods which are exempt
from sales tax.
(iii). Free replacement of defective parts is made in the case of taxable goods,
which have been sold under warranty. During the month of May 2013 the
market value of such replacement parts was Rs. 500,000
(iv). ABC Manufacturing Limited purchased raw material amounting to Rs. 100
million on credit. The payment was made after 240 days of the issuance
of tax invoice by way of crossed cheque drawn on the business bank
account of the supplier.
(v). Destruction of damaged goods
(vi). Purchase of taxable goods from a person who has reputation of evading
sales tax
(vii). Payment of fuel to be used for machinery by the Director of the company
using his own credit card
Answer
(i). Change in rate of sales tax
If there is a change in the rate of tax during a tax period, a separate return in
respect of each portion of the tax period has to be furnished showing the
application of the different rates of tax. Therefore, company will furnish two
returns:
– a return for the period from 1 May 2013 to 23 May 2013; and
– a separate return for the period from 23 May 2013 to 31 May 2013
(ii). Sales tax paid on electricity bills

Sales tax paid along with an electricity bill is an admissible input tax only when
the electricity was used to produce taxable goods. Further, in the case of utility
bills, payment in cash does not disentitle a claim of input tax paid thereon.
Therefore, input tax of Rs. 50,000 would be admissible, whereas, balance sales
tax of Rs. 50,000 paid in respect of exempt supplies would not be allowed as
input.
(iiii). Free replacement of defective parts

The free replacement of defective parts (open market value of Rs. 500,000)

during the warranty period is considered as equivalent to the value of the original
supply and not a separate supply. Such replacement is not chargeable to tax.
(iv). Payment after 240 days

Although payment is made through crossed cheque drawn on the business bank
account of the seller yet the transaction is inadmissible for the purpose of
claiming input tax as the payment was made after 180 days of the issuance of
tax invoice.
(v). Destruction of damaged goods
Where any goods are returned by the buyer on the ground that the same are unfit
for consumption and are required to be destroyed by the supplier, the goods shall
be destroyed after obtaining permission from the Collector of Sales Tax having
jurisdiction, and under the supervision of an Inland Revenue Officer not below the
rank of an Assistant Collector as may be deputed by the Collector for the purpose
and the input tax credit in respect of goods so destroyed shall not be admissible.
(vi). Joint and several liability of registered persons in supply chain where tax
unpaid
Where a registered person receiving a taxable supply from another registered
person is in the knowledge or has reasonable grounds to suspect that some or all
of the tax payable in respect of that supply or any previous or subsequent supply
of the goods supplied would go unpaid, such person as well as the person making
the taxable supply shall be jointly and severally liable for payment of such unpaid
amount of tax
(vii) Payment through credit card

Although payment made through credit card is considered as payment made
through banking channel yet the payment must be verifiable from the business
bank accounts of both the buyer and the seller. Since the director made the
payment from his personal credit card, therefore, company will not be able to
obtain input tax on its payment due to non verifiability of the said payment from
the business bank account of the company.

4 TAX REFUNDS, ASSESSMENT AND RECOVERY

Section overview
 Refund of input tax

 Assessment of tax
 Recovery of short paid amounts without notice
4.1 Refund of input Tax (Section 10)

 If the input tax paid by a registered person on taxable purchases made
during a tax period exceeds the output tax on account of zero rated local
supplies or export made during that tax period, the excess amount of input
tax shall be refunded to the registered person not later than forty-five days
of filing of refund claim in such manner and subject to such conditions as
the Board may, by notification in the official Gazette specify.
 In case of excess input tax against supplies other than zero-rated or
exports, such excess input tax may be carried forward to the next tax
period and shall be treated as input tax for that period.
 The Board may, subject to such conditions and restrictions as it may
impose, by notification in the official Gazette, prescribe the procedure for
refund of excess input tax against other taxable supplies;
 The Board may, from such date and subject to such conditions and
restrictions as it may impose, by notification in the official Gazette, direct
that refund of input tax against exports shall be paid along with duty
drawback at the rates notified in the said notification.
 If a registered person is liable to pay any tax, default surcharge or penalty
payable under any law administered by the Board, the refund of input tax
shall be made after adjustment of unpaid outstanding amount of tax or,
default surcharge and penalty, as the case may.
 Where there is reason to believe that a person has claimed input tax credit
or refund which was not admissible to him, the proceedings against him
shall be completed within sixty days. For the purposes of enquiry or audit or
investigation regarding admissibility of the refund claim, the period of sixty
days may be extended up to one hundred and twenty days by an officer not
below the rank of an Additional Commissioner Inland Revenue and the
Board may, for reasons to be recorded in writing, extend the aforesaid
period which shall in no case exceed nine months.
4.2 Assessment of Tax (Section 11)
 Assessment, of tax can be made by an officer of Inland Revenue, Where
(i). a person, who is required to file tax return, failed to file the return for
a tax period by due date; or
(ii). a person pays an amount which is less than the amount of tax
actually payable due to some miscalculation or error.

 In the above-referred cases, an officer of Inland Revenue shall serve a

notice to show cause to such person. After this, the officer shall make an
order for assessment of tax, including imposition of penalty and default
surcharge.
 However, the notice stated above and the order of assessment shall abate
if the person, required to file a tax return, files return after the due date and
pays the amount of tax payable in accordance with the tax return alongwith
default surcharge and penalty.
 Where a person for reasons other than those specified in first para above
(i). has not paid the tax due on supplies made by him; or
(ii). has made short payment of tax; or
(iii).has claimed input tax credit or refund which is not admissible under
the Sales Tax Act.
In the above stated cases an officer of Inland Revenue shall make an
assessment of Sales Tax actually payable by that person or determine the
amount of tax credit or tax refund which he has unlawfully claimed and shall
impose a penalty and charge default surcharge in accordance with section
33 and 34.
 Order under the above para shall not be made by an officer of Inland
Revenue unless a notice to show cause is given within five years to the
person in default. The notice shall specify the grounds on which the officer
is intended to proceed against him. The officer of Inland Revenue shall take
into consideration the representation made by such person and provide him
with an opportunity of being heard.
 Order as referred above shall be made within one hundred and twenty days
of issuance of show cause notice or within such extended time which the
Commissioner of Sales Tax may fix. Such extended time shall not, in any
case, exceed 90 days.
 Where a registered person fails to file a return, an officer of Inland
Revenue, not below the rank of Assistant Commissioner, shall determine
the minimum tax liability of the registered person. These powers shall be
exercised subject to such conditions as may be specified by the Board.
4.3 Recovery of short paid amounts without notice (Section 11A)
 Where a registered person pays the amount of tax less than the tax due as
indicated in his return, the short paid amount of tax alongwith default
surcharge shall be recovered from such person by stopping removal of any
goods from his business premises and through attachment of his business
bank accounts. Any of these actions may be taken without giving him a
show cause notice and without prejudice to any other action prescribed
under section 48 of this Act or the rules made thereunder.
Provided that no penalty under section 33 of this Act shall be imposed
unless a show cause notice is given to such person.
 Provisions of this section shall apply notwithstanding any of the provisions
of this Act.

5 TAX ON VALUE ADDITION

Section overview
 Tax on value addition

 Tax on value addition (rule 58C)
5.1 Tax on value addition

Section 7A of the Act states that:
 Notwithstanding anything contained in the Sales Tax Act, 1990 or the rules
made thereunder, the Federal Government may specify, by notification in
the official Gazette, that sales tax chargeable on the supply of goods of
such description or class, shall be levied and collected on the difference
between the following:
(i). the value of supply for which the goods are acquired; and
(ii). the value of supply for which the goods, either in the same state or
on further manufacture, are supplied.
 The tax charged in the above referred manner shall be subject to such
limitations or restrictions as may be prescribed.
 It is important to note that the Federal Government may, by notification in
the official Gazette, specify the minimum value addition required to be
declared by certain persons or categories of persons, for supply of goods of
such description, or class as may be prescribed. The tax charged in this
manner shall be subject to the conditions, limitations, restrictions and
procedure mentioned in the notification. The Federal Government may
also, by notification, waive the requirement of audit or scrutiny of records if
such minimum value addition is declared.

6 CHAPTER REVIEW
Chapter review
 Sales tax liability of a person can easily be determined by subtracting the
amount of input sales tax from the output sales tax.
 Output sales tax is the tax which is charged on the value of taxable supplies of
a registered person.
 Section 9 of the Sales Tax Act, 1990 describes the method for issuance of
debit and credit notes. These notes are prescribed for issuance in the cases of
cancellation of supply, return of goods, changes in the nature and price of the
goods etc. On the basis of debit or credit note, a registered person may make
suitable adjustments to its output or input tax, as the case may be.
 Input tax is the tax which a registered person pays on the local as well as
imported purchases.
 Input tax paid on certain prescribed goods such as giveaways, consumables
etc. is not admissible.
 Input tax which is not used for the production or supply of taxable goods is not
admissible.
 Where the extent of usage of a input tax for the taxable viz a viz exempt goods
is not determined, then the admissible sales tax amount can be determined on
the basis of formula laid down under the rules for apportionment of input tax.
 Where the input sales tax exceeds the output tax, then the excess amount
shall be carried forwarded.
 Maximum input tax which can be allowed against the output tax is 90% of the
output tax.
 Excess input tax over output tax will be refunded in the cases where the
registered person is engaged in supply of zero rated supplies and exports.

19
CHAPTER
Returns and records
Contents
1 Returns
2 Records
3 Miscellaneous
4 Chapter review

INTRODUCTION
This chapter provides for filing of tax returns, preparation and maintenance of records.
Learning outcomes
Concepts
LO 5.1.1 Describe the definitions given in section 2 clauses(9), (40)
LO 5.4.1 List the record to be kept by a registered person
LO 5.4.2 State the requirements of tax invoice
LO 5.4.3 Explain the retention period of record using simple examples
LO 5.5.1 Understand the various types of returns required to be filed by registered and
un-registered persons

Chapter 19: Returns and records
1 RETURNS
Section overview
 Returns
 Return for person operating in different sectors
 Electronic filing
 Particulars of sales tax return
 Special return
 Final return
 Returns deemed to have been made
 Summary of returns and their filing dates
1.1 Returns [Sections 26 to 28]

 A Sales Tax return is the taxpayer’s document of declaration through which
taxpayer not only furnishes the details of transactions during a tax period but
also determines his sales tax liability.
 On the return form, the taxpayer declares,for a particular tax period, his
respective input tax and output tax For different categories of taxpayers,
monthly, quarterly or annual returns may be filed on prescribed format.
Following returns may be filed under the sales tax act by the taxpayers:
 Monthly return
 Quarterly return
 Annual return
Monthly Return
 Every registered person shall furnish a true and correct return in the
prescribed form upto the 15th day of month next following the end of tax
period.
 The return shall be filed in the bank or any other office specified by Board.
Quarterly Return
 The Board may, by notification in the official Gazette, require any person
or class of persons to submit return on quarterly basis
 Further, the Board may, by notification in the official Gazette, require any
person or class of persons to submit such return as may be prescribed
annually in addition to the monthly return or quarterly return.
 In this regard retailers are required to file quarterly return as per the sales
tax special procedure rules.
Annual return
A private or public limited company is required to file annual sales tax return, for a
financial year by 30th September of the following financial year.

1.2 Return for person operating in different sectors

In case a registered person operates in different sectors for which different dates
of filing of return have been prescribed in any rules made under the Sales Tax
Act, 1990 or the Federal Excise Act, 2005, such person shall file a single return
for all such sectors by the due date applicable to his major activity in terms of
sales tax or federal excise duty payable.
1.3 Electronic filing

 The return filed electronically on the web or any magnetic media or any other
computer readable media (as may be specified by the Board) shall also be
deemed to be a valid return filed. The Board is authorised to make rules for
determining eligibility of the data of returns filed electronically and e-
intermediaries who will digitize the data of such returns and transmit the same
electronically under their digital signatures.
 Facility of electronic filing of sales tax return has been made available to the
following categories of registered persons.
(i). the registered persons falling in the jurisdiction of the Large Taxpayers
Units, Karachi and Lahore.
(ii). the private and public Ltd companies registered in any Collectorate of
Sales Tax.
(iii).other taxpayers who may like to opt for electronic filing of sales tax returns
 A registered person filing returns electronically shall make payment of the
amount of sales tax due, if any, in any of the designated branches of the
National Bank of Pakistan.
 In case where due date has been prescribed as 15th of a month, the tax due
shall be deposited by the 15th and the return shall be submitted electronically
by 18th of the same month.
1.4 Particulars of sales tax return

 The return shall indicate:
i. Sales tax registration number (STRN), name and address of registered
person.
ii. Tax credit carried forward from previous period.
iii. Value of supplies
iv. Output tax due on supplies as under:
a) Local taxable supplies
b) Exempted supplies
c) Zero rated supplies
v. Value of purchases;
vi. Input tax paid on purchases as under:
d) Local taxed goods
e) Imported taxed goods
f) Exempted purchases
g) Zero rated purchases

h) Other purchases
vii. Arrears payable
viii. Amount payable / refundable.
 The registered person shall deposit in the banks, the amount of sales tax
indicated as “Sales Tax Payable” in the return at the time of filing of return.
 In case no amount of sales tax is payable by the registered person, he shall
file “Nil” return without depositing any amount.
 If there is a change in the rate of tax during a tax period, a separate return in
respect of each portion of tax period showing the application of different rates
of tax shall be furnished.
 A registered person may file a revised return to correct any omission or wrong
declaration made in a return filed under section-26, subject to approval of the
Commissioner Inland Revenue having jurisdiction within 180 days of filing of
return.
If a registered person wishes to file revised return voluntarily along with
deposit of the amount of tax short paid or amount of tax evaded along with
default surcharge, whenever it comes to his notice, before receipt of notice of
audit, no penalty shall be recovered from him.
However, in case the registered person wishes to deposit the amount of tax
as pointed out by the officer of Inland Revenue during the audit, or at any time
before issuance of the show cause notice, he may deposit the evaded
amount of tax, default surcharge under section 34, and twenty-five percent of
the penalty payable under section 33 along with the revised return.
Further in case the registered person wishes to deposit the amount after
issuance of show cause notice, he shall deposit the evaded amount of Sales
Tax, default surcharge under section 34, and full amount of the leviable
penalty under section 33 alongwith the revised return and thereafter, the
show cause notice, shall stand abated.
 Board may require any person or classes of persons, for any goods of such
description, or class, to furnish such summary or details or particulars relating
to imports, purchases and supplies made by them during any tax period or
periods in such format as may be specified.
1.5 Special return (Section 27)

 In addition to the return specified u/s 26, a registered person may be required
to file special return containing information relating to:
(i) Quantity of goods manufactured or produced.
(ii) Purchases made.
(iii) Goods supplied.
(iv) Payment of arrears made.
 This special return will be for such period as the Board may, by a notification
in official Gazette, specify.
 The Commissioner may also require from any person whether, he is
registered or not, a return in a prescribed form and such person shall furnish
the return not later than the date specified in this regard. This return may be
demanded from any person in respect of information relating to himself or
relating to his principal if he is acting as agent.

1.6 Final return (Section 28)

 If a person applies for de-registration in terms of section 21, he shall before
such de-registration, furnish a final return to the Commissioner in the specified
form, in such manner and at such time as directed by the Commissioner.
1.7 Returns deemed to have been made (Section 29)

 A return purporting to be made on behalf of a person by his duly appointed
representative shall, for all purposes, be deemed to have been made by such person
or under his authority unless proved to the contrary.
1.8 Summary of returns and their filing dates

Summary of returns and their filing dates is given hereunder:
Filer Nature of Return Due Date
Registered Monthly return 15th of next month following any tax
Person period
Registered Change in rate of Separate returns for each applicable
Person tax tax rate in the next month following the
tax period.
Registered or Special return On the date specified by the
unregistered commissioner in its notice calling for
such return.
Person applied Final return On the date specified by the
for de registration commissioner
Every private or Annual return 30th of September following the year
Public Limited end.
Company

2 RECORDS [SECTION 22]

Section overview
 Records
 Tax invoices
 Retention of record and documents for sixyears
2.1 Records
 A registered person shall maintain the following records of goods purchased
locally or imported and supplies (including zero-rated and exempt supplies):
 Records of supplies indicating
 description
 quantity
 value of goods
 name and address of the person to whom supplies were made
 the amount of the tax charged;
 records of goods purchased showing
 description
 quantity
 value of goods
 name, address and registration number of the supplier
 the amount of the tax on purchases;
 records of goods imported showing
 description
 quantity
 value of goods
 the amount of the tax paid on imports;
 records of zero-rated and exempt supplies;
 double entry sales tax accounts;
 Following further records is desired
 Tax invoices
 Credit notes, debit notes,
 Bank statements,
 Banking instruments in terms of section 73
 Inventory records,
 Utility bills,

 Salary and labour bills

 Rental agreements,
 Sale-purchase agreements and
 Lease agreements;
 Record relating to gate passes, inward or outward, and transport
receipts;
 Such other records as may be specified by the Board.
Provided that the persons paying retail tax shall keep such record as may
be specified by the Board.
 The Board may also requirea registered person or class of registered
persons to declare and use only as many number of business bank accounts
as may be specified by the Board in such notification to make or receive
payments on account of purchase and sale transactions for the purpose of
the Sales Tax Act, 1990 or rules made thereunder and to make payment of
due tax from such accounts only.
 The Board may specify to keep such other records for the sales tax law
purposes.
 The Board may specify to use such electronic fiscal cash registers as are
approved by the Board.
 The registered person shall keep the aforesaid record at his business
premises or registered office in English or Urdu language
 The registered persons, whose accounts are subject to audit under the
Companies Ordinance, 1984, shall be required to submit a copy of the annual
audited accounts, along with a certificate by the auditors certifying the
payment of due tax by the registered person.
2.2 Tax invoices [Section 23]

 A registered person making a taxable supply shall issue a serially numbered
tax invoice at the time of supply of goods containing the following particulars,
namely:
(i) name, address and registration number of the supplier;
(ii) name, address and registration number of the recipient;
(iii) date of issue of invoice;
(iv) description and quantity of goods;
(v) value exclusive of tax;
(vi) amount of sales tax; and
(vii) value inclusive of tax:
 No person other than a registered person or a person paying retail tax shall
issue an invoice under this section. Moreover, not more than one tax invoice
shall be issued for a taxable supply.
 The sales tax registered person may also issue sales tax invoice
electronically to its buyers. Chapter XVI of the sales tax rules prescribes the
procedure for issuance of sales tax invoice electronically.

 The Board may specify modified invoices for different persons along with the
manner and procedure for regulating the issuance and authentication of the
invoices.
2.3 Retention of record and documents for sixyears [Section 24]

A person shall retain the record and documents for a period of six years after the
end of the tax period to which such record or documents relate or till the final
decision in any proceedings including proceedings for assessment, appeal,
revision, reference, petition and any proceedings before an alternative Dispute
Resolution Committee.

3 MISCELLANEOUS
Section overview
 Access to record & documents

 Drawing of samples
 Transaction between associates
3.1 Access to record and documents. [Section 25]

 A person who is required to maintain any record or documents under the
Sales Tax Act, 1990 or any other law shall, as and when required by
Commissioner, produce record or documents which are in his possession or
control or in the possession or control of his agent. Where such record or
documents have been kept on electronic data, access to such data shall be
allowed to the officer of Inland Revenue authorized by the Commissioner and
use of any machine on which such data is kept.
 The officer of Inland Revenue authorized by the Commissioner, on the basis
of the record, obtained under section 25(1), may, once in a year, conduct
audit.
However, in case the Commissioner has information or sufficient evidence
showing that such registered person is involved in tax fraud or evasion of tax,
he may authorize an officer of Inland Revenue, not below the rank of
Assistant Commissioner, to conduct an inquiry or investigation under section
38.
Provided further that nothing contained above shall bar the Officer of Land
Revenue from conducting audit of the records of the registered person if the
same were earlier audited by the Office of the Auditor General of Pakistan.
 After completion of audit , the officer of Inland Revenue may, after obtaining
the registered person’s explanation on all the issues raised in the audit shall
pass an order under section 11 or section 36, as the case may be.
 Notwithstanding the penalties prescribed in section 33, if a registered person
wishes to deposit the amount of tax short paid or amount of tax evaded along
with default surcharge voluntarily, whenever it comes to his notice, before
receipt of notice of audit, no penalty shall be recovered from him:
If a registered person wishes to deposit the amount of tax short paid or
amount of tax evaded along with default surcharge during the audit, or at any
time before issuance of show cause notice, he may deposit the evaded
amount of tax, default surcharge under section 34, and twenty five per cent of
the penalty payable under section 33.
In case a registered person wishes to deposit the amount of tax short paid or
amount of tax evaded along with default surcharge after issuance of show
cause notice, he shall deposit the evaded amount of tax, default surcharge
under section 34, and full amount of the penalty payable under section 33 and
thereafter, the show cause notice, shall stand abated.

3.2 Drawing of samples (Section 25A)

 An authorized officer of Inland Revenue, if consider it necessary, may take a
sample of any goods or raw materials, for the purpose of:
(i) determining the liability to sales tax of a registered person; or
(ii) for the purpose of establishing value of goods; or
(iii) for any other reason.
 The sample drawn shall be a minimum quantity of goods or raw materials
sufficient to enable a proper examination or analysis to be made.
 At the time of taking the sample the person in possession of the goods shall
be informed and given the opportunity to sign the representative samples, so
drawn, and take corresponding sample for his own record.
 Any sample taken as above shall be taken against a proper receipt a copy
each of which shall be kept in the record by the registered person and the
large Tax payers unit or Regional Tax Officer, as the case may be.
3.3 Transaction between associates (Section 25AA)

The Commissioner or an officer of Inland Revenue may, in respect of any
transaction between persons who are associates, determine the transfer price of
taxable supplies between the persons as is necessary to reflect the fair market
value of supplies in an arm’s length transaction.

4 CHAPTER REVIEW
Chapter review
Before finishing work on this chapter check that you now know:
 What are different returns required to be filed under the Sales Tax Act, 1990,
the difference between all of them?
 Elaborate the procedure and conditions for revision of sales tax return.
 List down the records which are required to be maintained and kept under
section 22 of the sales tax act, 1990.
 Describe the different contents of sales tax invoice prescribed under section 23
of the Act.
 Discuss provisions related to inspection and audit of sales tax records kept by
a registered person

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Phone: (041) 8531028 e-mail: faisalabad@icap.org.pk
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Phone: (061) 6510511-6510611 e-mail: multan@icap.org.pk
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PRINCIPLES OF TAXATION
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2014

© Emile Woolf International, October 2014

© Emile Woolf International ii The Institute of Chartered Accountants of Pakistan

© Emile Woolf International iii The Institute of Chartered Accountants of Pakistan

© Emile Woolf International iv The Institute of Chartered Accountants of Pakistan

CERTIFICATE IN ACCOUNTING AND FINANCE

The candidate will be able to:

© Emile Woolf International v The Institute of Chartered Accountants of Pakistan

A Basic concepts of taxation

3 System of taxation in 1 LO 1.3.1: Comprehend different kinds

© Emile Woolf International vi The Institute of Chartered Accountants of Pakistan

3 Distribution of revenues 1 LO 2.3.1: Demonstrate familiarity with

© Emile Woolf International vii The Institute of Chartered Accountants of Pakistan

© Emile Woolf International viii The Institute of Chartered Accountants of Pakistan

8 Chapter VII Part II – 2 LO 4.8.1: Understand the applicability

© Emile Woolf International ix The Institute of Chartered Accountants of Pakistan

© Emile Woolf International x The Institute of Chartered Accountants of Pakistan

3 Chapter III – Credit and 2 LO 6.3.1: Explain the requirement and

© Emile Woolf International xi The Institute of Chartered Accountants of Pakistan

© Emile Woolf International xii The Institute of Chartered Accountants of Pakistan

System of taxation in Pakistan

© Emile Woolf International 1 The Institute of Chartered Accountants of Pakistan

© Emile Woolf International 2 The Institute of Chartered Accountants of Pakistan

1 OBJECTIVES OF TAX LAWS

 Definition of taxation and objectives of the taxation laws

1.1 Definition of taxation and objectives of the taxation laws

1.2 Non-revenue objectives

© Emile Woolf International 3 The Institute of Chartered Accountants of Pakistan

Illustration: Objectives of Taxation Laws

Tax Law Objective

1.4 Taxes as means for development

© Emile Woolf International 4 The Institute of Chartered Accountants of Pakistan

2 BASICS OF TAXATION LAWS

 Basics of tax laws

2.1 Basics of tax laws

2.2 Principles for levy of tax

© Emile Woolf International 5 The Institute of Chartered Accountants of Pakistan

2.3 Structure of taxes

A proportional tax is also called a flat tax.

2.4 Characteristics of tax laws

© Emile Woolf International 6 The Institute of Chartered Accountants of Pakistan

2.5 Forms of escape from taxation

© Emile Woolf International 7 The Institute of Chartered Accountants of Pakistan

2.6 Strategies of taxation management

Illustration: Basics of Taxation Laws

Tax Law Objective

© Emile Woolf International 8 The Institute of Chartered Accountants of Pakistan

3 INTRODUCTION TO DIFFERENT TAXATION LAWS OF PAKISTAN

 Brief overview of different direct and indirect taxes

3.1 Brief overview of different direct and indirect taxes

© Emile Woolf International 9 The Institute of Chartered Accountants of Pakistan

3.2 Tax reliefs in cross border transactions

© Emile Woolf International 10 The Institute of Chartered Accountants of Pakistan

4 HISTORY OF TAX LAWS IN PAKISTAN

 History of tax laws in Pakistan

4.1 History of tax laws in Pakistan

In Pakistan, Federal Government is empowered to levy and collect tax on the

The 1918 Act consolidated a number of wartime amendments. A graduated

Income Tax Ordinance 1979 was amended through innumerable presidential

© Emile Woolf International 11 The Institute of Chartered Accountants of Pakistan