1. Presented by: M. Rehan Siddiqui Partner
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 –
Fax: –
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
FEDERAL TAX INCOME TAX SALES TAX / VAT* FEDERAL EXCISE* CUSTOM DUTY* WEALTH TAX ZAKAT
PROVINCIAL TAX PROPERTY TAX PROVINCIAL EXCISE WATER TAX CUSTOM DUTY USHER/DHAL/ABIYANA & A HOST OF OTHER TAXES
* 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 TAX EVOLUTION 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. SALES TAX EXCISE TAX CUSTOM DUTY
CONCEPT OF TAX EVOLUTION OF INCOME TAX- HISTORY
PROGRESSIVE TAX
REGRESSIVE TAX
PROPORIONATE TAX
INCOME TAX
SALES TAX EXCISE TAX CUSTOM DUTY
SHARE OF 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
Payer’s 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
Association of person, income exceeding
No Slab of income
Resident companies, income exceeding

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
Salary Income
0.75%
20%
Business Income of an Individual
7.50%
25%
Income of an Association of Person 0%
Companies
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
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 AUDIT SECTION 177
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 COMMISSIONER SECTION 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 person’s 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 taxpayer’s turnover for the quarter
B is the tax assessed to the taxpayer for the latest tax year;
C is the taxpayer’s 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
(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 TAX PROVISION 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 DEFAULT IN 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 ,000 or 10% of tax, whichever is higher

46. Section to which offences has reference
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 person’s taxable income for the tax year; and
C Total amount of person’s donations including the fair market value of property
(Contd....)

49. TAX CREDIT (Contd....) 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 person’s taxable income for the tax year; and
C Total amount of person’s investment
(Contd....)

50. TAX CREDIT (Contd....) 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,
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 person’s taxable income for the tax year; and
C Total contribution or premium paid in a year
(Contd....)

51. TAX CREDIT (Contd....) 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 person’s 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 AND FEDERAL 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 AND FEDERAL 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. Thank You