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BASIC CONCEPT COMMON RULES AND UNDERSTANDING INCOME TAX STRUCTURE AND OPERATION

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Title: BASIC CONCEPT COMMON RULES AND UNDERSTANDING INCOME TAX STRUCTURE AND OPERATION


1
BASIC CONCEPT COMMON RULES AND UNDERSTANDING
INCOME TAX STRUCTURE AND OPERATION
CHARTERED ACCOUNTANTS
Karachi Tax Bar Association Professional
Development Program
Contact Address
4th Floor, Central Hotel Building Civil Lines,
Mereweather Road Karachi - Pakistan Phone 021
35644872-7 Fax 021 35694573 E-mail
aar_at_mimandco.com
  • Presented by
  • M. Rehan Siddiqui
  • Partner

2
Objective
  • The objective of this presentation is to
    discuss and develop some of the fundamental
    principles of taxation as applicable both under
    the direct and indirect taxes in Pakistan

3
Contents
  • Concept of tax
  • Types of taxation
  • Reason for taxation and
  • History and evolution of taxation
  • Structure of income tax law
  • Returns and rates of Tax
  • Operation of income tax law
  • General provisions
  • Withholding Taxes

4
Contents
  • Penalties
  • Tax Credits
  • Exemptions and Concessions
  • Payment of Refunds
  • Sales Tax and Federal Excise Duty (FED)

5
CONCEPT OF TAX-GENERAL
6
CONCEPT OF TAX - GENERAL
TYPES OF TAXATION
  • PROVINCIAL TAX PROPERTY TAXPROVINCIAL
    EXCISEWATER TAXCUSTOM DUTYUSHER/DHAL/ABIYANA
    A HOST OFOTHER TAXES
  • FEDERAL TAX INCOME TAXSALES TAX / VATFEDERAL
    EXCISECUSTOM DUTYWEALTH TAX ZAKAT

In certain countries these taxes are imposed
on the Provincial / State Level.
7
CONCEPT OF TAX - GENERAL
WHY TAXATION -
  • Every country needs funds
  • For Running the Government Establishment
  • For Defence
  • For Future Developments Programmes

(Contd....)
8
CONCEPT OF TAXEVOLUTION OF INCOME TAX - HISTORY
Pakistan adopted the Income tax Act, 1922 when
it became Independent in 1947 and this Act was
followed upto 1979 when a new Income Tax
Ordinance, 1979 was promulgated. The concept of
the Income Tax Ordinance, 1979 was very much the
same as the Act of 1922 but was brought into a
serial order till a new Law called the Income Tax
Ordinance, 2001 was enacted which came into force
from 2003.
(Contd....)
9
CONCEPT OF TAXEVOLUTION OF INCOME TAX- HISTORY
PROGRESSIVE TAX
PROPORIONATE TAX
REGRESSIVE TAX
SALES TAXEXCISE TAXCUSTOM DUTY
SHARE OF TAX
INCOME TAX
10
POWER TO TAX
  • Entry No. 47 and 48 of the Federal Legislature
    List as contained in Part- I of the Fourth
    Schedule to the Constitution of Pakistan, 1973,
    empowers the Federal Government to impose tax on
    income and corporations respectively.
  • Entry No. 49 of the said list also empowers the
    Federal Government to levy taxes on the sales
    and purchases of goods imported exported,
    produced, manufactured or consumed in Pakistan.

(Contd....)
11
TERROTORIAL JURISDICTION OF TAX LAWS
  • The tax laws extends to whole of Pakistan. The
    territories of Pakistan under the Constitution
    means
  • The four provinces viz Balochistan, KPK, Sindh
    and Punjab
  • The Federal Capital
  • The Federally Administered Tribal Areas and
  • Such states or territories as are or may be
    included in the territories of Pakistan, by
    accession or otherwise.
  • However, any Federal law, including tax laws do
    not automatically apply to FATA and PATA unless
    the president or the governor with the approval
    of the president respectively direct that a
    particular legislature is in force to the
    respective Federally or Provincially
    administered tribal area.

12
SPECIAL PROVISIONS OF LAW TO PREVAIL OVER GENERAL
PROVISIONS
  • Where a law provides for a specific treatment in
    respect of a particular category of, say,
    income, person, or class of persons, the same
    would prevail over the general provisions of the
    law.

13
STRUCTURE OF INCOME TAX LAW
14
STRUCTURE OF INCOEM TAX LAW
  • The Income Tax Ordinance, 2001 has 240 Sections,
    Seven Schedules which are govern by 232 Rules.
  • SECTION
  • Section guides about the nature of taxable
    income, charge liability of tax on income.
  • SCHEDULE
  • Schedules provides special guidance in respect of
    tax rates applicable on certain income and talks
    about special exemptions and reduction in rate of
    taxes that are available to certain classes of
    persons or income. Apart from this, schedules are
    also stipulates special rules for computing the
    Profits Gain and other special privileges for
    banking, insurance, business exploration
    production of petroleum and exploration and
    extraction of mineral deposits (other than
    petroleum)
  • RULES
  • Rules deals in computing taxable income.

15
INCOME GENERAL MEANING
  • All receipts by a person does not necessarily
    constitute income
  • Generally, income connotes a periodical monetary
    return, coming in with certain regularity from
    a definite source Commissioner Income Tax,
    Bengal V. Shaw Wallace, (AIR 1932 PC 138)
  • Generally, capital receipts are not taxable
    unless they are specifically provided in the tax
    law to be taxable.
  • Revenue receipts are generally almost always
    taxable (being income) unless they are
    explicitly provided as not to be taxable.

16
INCOME GENERAL MEANING
  • Following may be the distinguishing criteria
    between capital and revenue receipts-
  • Receipt from circulating capital versus receipt
    from fixed capital
  • Receipt from source of income versus receipt in
    lieu of source of income
  • Payers motive ignored - receipt in the hands of
    the recipient is relevant
  • Lump sum payment is not the determining factor
    between capital and revenue receipt

17
INCOME GENERAL MEANING
  • Certain capital receipts deemed as income for
    tax purposes include -
  • Golden handshake payments on termination of
    services
  • Gain on disposal of capital assets, including
    jewellery, painting manuscripts etc.
  • Certain revenue receipts which should otherwise
    be taxed but not taxed include -
  • Agricultural income
  • Profit and gains derived by electric power
    generating projects

18
INCOME UNDER THE ORDINANCE
  • As per Section 2(29) of the Ordinance, income
    has the following scope
  • Income as understood in normal parlance
  • Any amount chargeable to tax under the Ordinance
  • Any amount subject to collection or deduction of
    tax under the Ordinance as a final discharge of
    tax liability
  • Any amount treated as income under the
    Ordinance
  • Loss of income is also income

19
NON INCOME VS. EXEMPT INCOME VS INCOME
TAXABLE AT 0
  • As discussed above, certain income may not be
    income and therefore are not taxable.
  • Other category of receipt may be income but
    provided to be exempt from tax, as in the case
    of Second Schedule to the Ordinance
  • There may be some other receipts which are
    taxable at 0

20
CLASSES OF INCOME VS HEADS OF INCOME
  • There are different classes of income,
    including -
  • Salary (Arising out of employment)
  • Income from property (being rental income from
    immovable property)
  • Royalty (on account of use of or right to use
    intellectual property)
  • Profit on debt/interest (on funds lended to
    others)
  • Dividend (from shares held by the investor)

21
CLASSES OF INCOME VS HEADS OF INCOME
  • There are only five heads of income in which
    each of such class of income is to be
    classified. These heads are -
  • Salary
  • Income from Property
  • Income from Business
  • Capital Gains
  • Income from Other Sources
  • Categorization of a particular class of income
    into a particular head of income is dependent on
    the person who is deriving such income and
    therefore may differ from one person to another.

22
EXPENDITURE GENERAL MEANING
  • The term expenditure means spending or
    paying out or away, i.e., something that goes
    out of the coffers of the taxpayer. It means
    something which is gone irretrievably B. K.
    Khanna Co. (P.) Ltd. V. CIT 2000 113 Taxman
    164 (Delhi)
  • Expenditure, not being capital or personal
    expenditure, is an allowable deduction to the
    taxpayer in the tax year.
  • Capital expenditure, in the form of depreciable
    assets and intangibles, is allowed in the form
    of depreciation and amortization.

23
SCHEMES OF TAXATION
  • Broadly, there are two schemes of taxation -
  • Final Tax Regime
  • Whereby tax is levied on the gross amount,
    without
  • allowability of any expense
  • Normal Tax Regime
  • Whereby bottom line income, after allowing for
    all admissible deductions, are taxed at
    applicable rates.

24
PERSONS LIABLE TO TAX
  • The Ordinance tends to tax the income derived by
    a person
  • Following are the main categories of persons
  • Federal Government
  • Foreign Government
  • Political sub division of a Foreign Government
  • International Organization
  • Individuals
  • Association of persons
  • Companies

25
TAX YEAR
  • Income derived by a person in tax year is
    taxable
  • Normal tax year is from 01 July to 30 June
  • Adopting any other 12 month period may be
    allowed which is called as the special tax year.
  • The Government has prescribed special tax year
    for certain persons, including -
  • Insurance Companies
  • Companies Manufacturing Sugar
  • Companies Manufacturing Jute Goods
  • All Persons Manufacturing Rice
  • Interim period between the normal tax year and
    the special tax year is called the transitional
    tax year.

26
PERSON LIABLE TO FILE RETURN OF INCOME
27
PERSON LIABLE TO FILE RETURN OF INCOME
Salaried person, income exceeding Rs. 300,000
Business individual person, income exceeding Rs. 300,000
Association of person, income exceeding No Slab of income
Resident companies, income exceeding No Slab of income
28
RATE OF TAX ON INCOME CHARGEABLE TO TAX
29
RATE OF TAX ON INCOME CHARGEABLE TO TAX
  • The rate of taxes are provided in the First
    Schedule of the
  • Income Tax Ordinance, 2001.

Head Of Income Minimum Rate Highest Rate
Salary Income 0.75 20
Business Income of an Individual 7.50 25
Income of an Association of Person 0 25
Companies 0 35
30
OPEATION OF INCOME TAX LAW
31
OPEATION OF INCOME TAX LAW
Filing of Income Tax Return Under Section 114
Return Filled is Deemed Assessment Under Section 120
Selection of return for audit Under Section 177
Amendment of assessment Under Section 122(5A)
Provisional assessment for non-filling of return Under Section 122 (C)
32
FILILG OF INCOME TAX RETURN SECTION 114
As per the provision of section 114 a person
shall declare his annual income in the prescribed
form which shall be accompanied by such annexure,
statement or documents. An individual having
salary, business income and association of person
are require to file their return of income on or
before September 30th after closing of financial
year which was ended on June 30th. A company
shall file its return of income on or before
December 31st after closing of financial year
which was ended on June 30th.
33
DEEMED ASSESSMENT SECTION 120
  • 120. Assessments
  • Return filed by a taxpayer under section 114 is
    deem to be an order.
  • Selection of case for Audit under section 177 may
    be conducted by the Commissioner of Income Tax.
  • The return filed can be disqualify under section
    120 if the deficiencies has not been removed
    which were pointed out by the Commissioner of
    Income Tax.

34
SELECTION OF RETURN FOR AUDITSECTION 177
  • 177. Audit
  • The Commissioner of Inland Revenue may call for
    any record or documents including books of
    accounts maintained by taxpayer person for
    conducting audit of the income tax affairs of the
    person.
  • The Officer Inland Revenue subordinate officer of
    Commissioner of Inland Revenue who delegated his
    power to him in order to verify records. (Books
    of accounts)
  • The Officer Inland Revenue after conducting audit
    confront the taxpayer those additions which were
    came to surface during audit proceedings.

35
REVISION BY THE COMMISSIONERSECTION 122(5A)
  • The Commissioner may call any record in respect
    of return filed under section 120.
  • Verification of records the Commissioner may
    amend the basis of computing income for the
    purpose filing return adopted by the taxpayer.
  • The Commissioner has the power to amend the
    return for five years from the financial year in
    which the return was filed.

36
PROVISIONAL ASSESSMENT SECTION 122(C)
  • The Commissioner may require any person to file
    the return of Income.
  • In case the return not file by the person the
    Commissioner may issue provisional order on the
    basis of information available on records.
  • After issuing provisional order the taxpayer has
    sixty days to file the return in case to annulled
    the provisional order.
  • In case sixty days time elapsed the provisional
    order becomes the order and the tax liability
    work out by the Commissioner becomes payable to a
    taxpayer.

37
GENERAL PROVISIONS
38
CARRY FORWARD OF BUSINESS LOSSES
  • The section 57 of the Income Tax Ordinance, 2001
    allow taxpayer to carry forward its business loss
    to next tax year after setting off against the
    persons income chargeable under the head income
    from business for that year.
  • A person cannot set off or carry forward
    speculation business losses against the income,
    which is other than speculation business income
    chargeable to tax for that year.
  • A person also cannot set off or carry forward
    capital losses against the income, which is other
    than capital gains chargeable to tax for that
    year.

(Contd....)
39
ADVANCE TAX UNDER SECTION 147
  • Every taxpayer whose income was chargeable to tax
    for the latest tax year is require to pay advance
    tax under section 147 of the Income Tax
    Ordinance, 2001.
  • Where a taxpayer is an Association of Persons
    Company shall pay advance tax on the basis of
    following formula.
  • (A x B / C) - D
  • A is the taxpayers turnover for the quarter
  • B is the tax assessed to the taxpayer for the
    latest tax year
  • C is the taxpayers turnover for the latest tax
    year and
  • D is the tax paid in the quarter for which a tax
    credit is allowed under section 168, other than
    tax deducted under section 155.

(Contd....)
40
ADVANCE TAX UNDER SECTION 147
  • An individual taxpayer shall pay advance tax for
    a tax year on the basis of the following formula.
  • (A / 4) - B
  • A is the tax assessed to the taxpayer for the
    latest tax year or latest assessment year under
    the repealed Ordinance and
  • B is the tax paid in the quarter for which a tax
    credit is allowed under section 168 other than
    tax deducted under section 149 or 155.

(Contd....)
41
ADVANCE TAX UNDER SECTION 147
  • The Finance Act, 2010 has introduced advance tax
    on Capital Gains earn by a taxpayer on sale of
    securities.

Where holding period of a security is less than six months. 2 of the capital gains derived during the quarter
Where holding period of a security is more than six months but less than twelve months. 1.5 of the capital gains derived during the quarter.

42
WITHHOLDING TAX PROVISIONS
43
DETERMINE WITHHOLDING TAXPROVISION FOR MAKING
PAYMENT
  • Determine nature of payment / receipt
  • Determine applicable withholding tax provision
    including applicable rate and double tax treaty
    provisions (if applicable)
  • Determine status of payer as withholding agent
    (prescribed person)
  • Determination of status of recipient liable or
    exempt from withholding tax
  • Payment, deduction / collection (or
    non-deduction/collection) of tax
  • Timing of deduction / collection
  • Deposit of tax and issuance of certificate
    Reporting
  • Monitoring of withholding taxes.

44
PENALTIES FOR NON DEDUCTION OF TAX
45
REPERCUSSIONS FOR DEFAULTIN WITHHOLDING TAXES
  • Disallowance of expense - Section 21(c )
  • Recovery of tax not deducted from payer - Section
    161
  • Recovery of tax not deducted from recipient -
    Section 162
  • Default surcharge for delayed deposit of tax
    deducted / collected
  • KIBOR 3 - Section 205(3)
  • 19 161(1A)
  • Penalty - Section 182(1)
  • Entry 5 - 5 additional 25 50 for second
    third default
  • Entry 15 - 25,000 or 10 of tax, whichever is
    higher

46
PENALTY PROVISIONS
The Income Tax Ordinance, 2001 penalized a
taxpayer for non compliance of statutory
obligation as under -
Offences Penalties Section to which offences has reference
Non furnishing of return/statements 0.1 of the tax payable for each day of default 114, 115, 116, and 165
Failure to pay tax due 5 of the amount of tax for first default, additional penalty of 25 for the second default and 50 of the amount of tax for third default. 137
Fails to maintain records under the Ordinance, 2001 10,000/- Rupees or 5 of the amount of tax on income which ever is higher 174
Fails to produce records or documents 5,000/- Rupees 177
Fails to furnished the information required or comply with 5,000/- Rupees for first default and 10,000/- Rupees for subsequent default 176
Makes a false statement Penalty 25,000/- Rupees or 100 of the amount of tax short paid which ever is higher 114, 115, 116, 174, 176 177
47
TAX CREDIT
48
TAX CREDIT
  • Section 61 of the Income Tax Ordinance, 2001 has
    allowed a taxpayer to claim tax credit against
    the total tax liability for a tax year.
  • Charitable Donation
  • A person shall be entitled to a tax credit in
    respect of any sum paid or any property given as
    donation to an approved institution under section
    2(36)(c).
  • Where a person is an individual or Association
    of Persons can claim tax credit up to 30 of the
    taxable income and 20 in case of companies.
  • Formula
  • A/B x C
  • A is the amount of tax assessed to the person
    for the tax year before allowance of any tax
    credit under this part
  • B is the persons taxable income for the tax
    year and
  • C Total amount of persons donations including
    the fair market value of property

(Contd....)
49
TAX CREDIT
  • Investment In Shares
  • A person other than company shall be entitled to
    claim tax credit in respect of the cost of
    acquiring new shares offer to the public by a
    public limited company or share acquired from the
    privatization commission of Pakistan with the
    condition that the buyer is the original allottee
    of the shares.
  • A person can claim cost of shares up to 10 of
    the taxable income or 300,000/- Rupees or actual
    cost which ever is lower.
  • Formula
  • A/B x C
  • A is the amount of tax assessed to the person
    for the tax year before allowance of any tax
    credit under this part
  • B is the persons taxable income for the tax
    year and
  • C Total amount of persons investment

(Contd....)
50
TAX CREDIT
  • Contribution To An Approved Pension Fund
  • An eligible person deriving income chargeable to
    tax under the head salary shall be entitled to a
    tax credit in respect of any contribution or
    premium paid in a tax year in approved pension
    fund under the Voluntary Pension System Rules,
    2005.
  • Formula
  • A/B x C
  • A is the amount of tax assessed to the person
    for the tax year before allowance of any tax
    credit under this part
  • B is the persons taxable income for the tax
    year and
  • C Total contribution or premium paid in a year

(Contd....)
51
TAX CREDIT
  • Profit On Debt
  • A personal shall be entitled to claim a tax
    credit in respect of any profit or share in rent
    and share in appreciation for value of house paid
    by a person on a loan from a financial
    institution regulated by S. E. C. P. or utilizes
    the loan for the construction of new house or
    acquisition.
  • A person can claim 50 of the taxable income or
    700,000/- Rupees or actual amount of profit which
    ever is lower.
  • Formula
  • A/B x C
  • A is the amount of tax assessed to the person
    for the tax year before allowance of any tax
    credit under this part
  • B is the persons taxable income for the tax
    year and
  • C Total amount of interest against loan

(Contd....)
52
EXEMPTION TAX CONCESSIONS
53
THE SECOND SCHEDULE
  • The Income Tax Ordinance, 2001 provide exemptions
    and tax concessions
  • in Second Schedule.
  • The Second Schedule constitutes four parts.
  • Part-I Exemption from Total Income
  • Part-II Reduction in Tax Rates
  • Part-III Reduction in Tax Liability
  • Part-IV Exemption from specific provisions

54
PART-I EXEMPTION FROM TOTAL INCOME
  • Part-I of the Second Schedule provides exemption
    from total income of
  • the following categories of income.
  • Salary Allowances (Perquisites)
  • Pension
  • Funds (Pension, Benevolent, Super Annuation
  • Trust, NGO Non Profit Organization
  • Mutual Funds
  • Donation

55
PART-II REDUCTION IN TAX RATES
  • Part-II of the Second Schedule provides reduction
    in tax liability calculated
  • for a year by a taxpayer.
  • - Services Rendered Out Side Pakistan
  • - Shipping Business
  • - Dividend of Power Companies
  • - Import of Zero Rated Goods
  • - Import of Capital Goods
  • - Payments to Non Residents

56
PART-III REDUCTION IN TAX LIABILITY
  • Part-III of the Second Schedule provides
    reduction in tax liability of a taxpayer.
  • - Flying Allowance
  • - Income from National Saving Center
  • - Senior Citizen Teacher etc.,
  • - Pharmaceutical, Fertilizer and oil marking
    refineries
  • - Flour Mills
  • - Manufacturer of Cigarettes

57
PART-IV EXEMPTION FROM SPECIFIC PROVISIONS
  • Part-IV of the Second Schedule provides exemption
    to certain business
  • transactions as exempt from tax, which are
    taxable under the various
  • Provisions of the law.
  • - Donation to Agha Khan
  • - Presumptive tax for non resident
  • - Sale of Air Tickets
  • - Payment to NIT, REIT
  • - Foreign Exchange Account
  • - Companies Operating Trading House

58
PAYMENTS OF TAX REFUND
59
PAYMENTS OF TAX AND REFUND
  • A taxpayer can claim credit of tax which has been
    paid in advance during a financial year
  • against its normal tax liability at the time
    of filing the return.
  • Any tax which covered under Final Tax Regime the
    adjustment of tax deducted or paid
  • in advance not adjustable against the income
    covered under normal tax regime.
  • - Income from Supplies
  • - Income from Imports
  • - Income from Exports
  • - Profit on debt other than companies
  • - Prize Winning
  • - Income from CNG Filling Station
  • - Contract Income Commission Income

(Contd....)
60
PAYMENTS OF TAX AND REFUND
  • Taxpayer can claim credit of tax against normal
    tax liability other than taxes
  • deducted on account of income covered under Final
    Tax Regime.
  • - Tax Deduction on Utilities
  • - Tax on Imports in case of manufacturer
  • - Tax Paid along with return under section 137
  • - Tax Paid under section 147
  • - Income Tax Paid on Motor Vehicle
  • - Income Tax Paid on Mobile

61
  • SALES TAX
  • AND
  • FEDERAL EXCISE DUTY

62
POWER TO LEVY SALES TAX ANDFEDERAL EXCISE DUTY
  • - Sales Tax on goods in a federal levy
  • - Sales Tax on services is a provincial levy
  • - FED on specified goods and services is a
    federal levy.

63
BASIC OF LEVING SALES TAX ANDFEDERAL EXCISE DUTY
  • - Income tax is charged on Income derived by a
    person
  • - Sales tax and Federal Excise Duty are charged
    on the transaction executed by the person
  • - Federal Excise Duty is levied on import,
    manufacturing and supply of excisable goods and
    services
  • Sales Tax is charged on
  • Import of taxable goods
  • Supply of taxable goods

64
RATE OF SALES TAX
  • - The general rate of Sales Tax is 17
  • - The rate of Federal Excise Duty varies
    depending on the category of goods and services

65
INPUT AND OUTPUT TAX
  • - When a person supplies good, sales tax is
    charged. This is called the Output Tax.
  • - Generally, Sales Tax paid at import stage or
    purchases of goods is an Input tax.
  • - The output tax is adjusted against input tax
    to arrive at the balance tax payable or
    refundable
  • - Generally, the period in Sales Tax and Federal
    Excise Duty is one month

66
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