FIN623 — Final Term Summary (Lectures 23–53)

📘 Lecture 23 — Significant points regarding Salary

📖 Overview: This lecture continues the computation of salary income under Pakistan's tax laws, focusing on key taxable items like reimbursement, profits in lieu of salary, and provident fund payments. It details how to value perquisites such as motor vehicles, domestic servants, utilities, loans, and housing, and covers special topics like employee share schemes, leave salary, and flying allowance taxation.

🗂️ Topics Covered

This lecture covers significant taxable salary items including reimbursement, profits in lieu of salary, and provident fund employer contributions. It explains the computation of perquisites under Section 13 (motor vehicle, domestic servants, utilities, loans, property, housing) with benchmark rate details. Also covered are employee share schemes (Section 14), Commissioner's power under Section 110 to tax deferred salary, leave salary exemptions, and various taxable salary components like bonus, commission, and flying allowance taxed at 2.5%.

📝 Lecture Summary

Significant points regarding Salary

Reimbursement of expenditure by the employer is considered Taxable. Profits in lieu of salary received as consideration for a person’s agreement to enter into an employment relationship, or on termination of employment (golden handshake payments), are also Taxable. Provident fund payments, specifically only the Employers contribution, are Taxable.

Computation of value of perquisites (Sec 13)

For a Motor vehicle, the value is computed As prescribed in IT rules 2002.

For Services of house keeper, driver, gardener, other domestic servant, the value is the Amount provided by employer which is added back to the employee’s salary. For utilities, add the FMV of utilities as reduced by any amount paid by employee.

For a Loan below benchmark rate, the benchmark rate for tax year 2009 is 11% PA — the difference between the benchmark rate and actual interest paid is added back. However, if the concessional loan is used for construction of house or purchase of house, there is No Add back.

If an obligation of employee is waived off by the employer, this amount is Add back. If Any property transferred to employee, the FMV of property is to be added back. For Accommodation or housing provided, the value is As prescribed in IT rules 2002.

According to sub Section 14 of Section 13:

• Bench mark rate means rate of 5% PA for tax year 2003 and increase by 1% for succeeding tax years.
• Services include any facility provided.
• Utilities include electricity, gas, water, and telephone.
• Benchmark rate for the tax year 2008 is 10% and for the tax year 2009 is 11%.

Employee share schemes (Sec 14)

This covers the treatment of value of a right or option vested in an employee. The formula is: A – B (where A and B represent specific values as defined in the tax rules)

When Commissioner can tax ”salary” on due basis:-

Under Section 110 ("Salary paid by Private Companies"), the Commissioner has powers to tax salary on due basis. This applies when salary is paid by a private company to an employee for services rendered in an earlier tax year, and the salary has not been included in the employee’s salary chargeable to tax in that earlier year. The Commissioner may, if there are reasonable grounds to believe that payment of the salary was deferred, include the amount in the employee’s income under the head “Salary” in the earlier year.

Leave Salary

This is taxable whenever received or right to receive is exercised by the employee. Leave encashment on retirement falls in this category. The only exemption available is for members of the Armed Forces of Pakistan, employees of the Federal Government and Provincial Governments (under clause (19), Part I of Second Schedule to the Ordinance, any sum representing encashment of leave preparatory to retirement in their case is exempt).

Salary in lieu of notice: Taxable Fee and Commission: Taxable Bonus: Taxable Remuneration for extra duties: Taxable Voluntary payments to employees: Taxable

Flying Allowance

Any amount received as flying allowance by: a) pilots, flight engineers and navigators of Pakistan Armed forces, Pakistani Airline or Civil Aviation Authority; and b) Junior commissioned officers of Pakistan Armed Forces. Shall be taxed @ 2.5% as a separate block of income.

Deductible Allowance

The person shall be entitled to a deductible allowance for:

• Any Zakat paid by the person in a tax year according to provisions of sec.60
• Any Workers’ Welfare Fund paid by the person in a tax year under Sec 60-A
• Any Workers’ Participation Fund paid by the person in a tax year under section 60-B

⭐ Key Takeaways

A student must remember that reimbursement, profits in lieu of salary (including golden handshake), and employer contributions to provident fund are all taxable. For perquisites under Section 13, the benchmark rate for loans is 5% in 2003 increasing by 1% yearly (11% for 2009), but no add-back applies if the loan is for house construction or purchase. Leave salary is taxable for all except Armed Forces, federal, and provincial government employees. Flying allowance for specific aviation personnel is taxed at a flat 2.5% as a separate block. Finally, deductible allowances include Zakat, Workers’ Welfare Fund, and Workers’ Participation Fund.

🧠 Quick Revision Questions

1. What is the benchmark rate for tax year 2009 for concessional loans under Section 13? (Answer: 11% PA)

2. When does the Commissioner have power to tax salary on due basis under Section 110? (Answer: When a private company pays salary deferred from an earlier year and it wasn't included in that earlier year's salary)

3. Who is exempt from tax on leave encashment on retirement? (Answer: Members of the Armed Forces of Pakistan, employees of the Federal Government, and Provincial Governments)

4. At what rate is flying allowance taxed, and for which categories of employees? (Answer: 2.5% as a separate block of income for pilots, flight engineers, navigators of Pakistan Armed Forces/Pakistani Airline/CAA, and Junior Commissioned Officers of Pakistan Armed Forces)

5. What three deductible allowances are available to a person under this lecture? (Answer: Zakat (sec.60), Workers’ Welfare Fund (sec.60-A), Workers’ Participation Fund (sec.60-B))

📘 Lecture 24 — Tax Credits on Charitable Donations (Sec 61)

📖 Overview: This lecture continues the module on salary computation by focusing on various tax credits available under the Income Tax Ordinance. It explains the formulas and conditions for claiming tax credits on charitable donations (Sec 61), investment in shares (Sec 62), contributions to approved pension funds (Sec 63), and profit on debt for house construction (Sec 64). Additionally, it covers the Income Tax Rules 2002 regarding the valuation of perquisites like accommodation and conveyance, and key exemptions under the head 'Salary'.

🗂️ Topics Covered

The lecture covers tax credits under Section 61 for charitable donations, Section 62 for investment in shares of public companies, Section 63 for contributions to approved pension funds, and Section 64 for profit on debt for house construction. It also details the Income Tax Rules 2002 for valuing perquisites (accommodation and conveyance) provided by employers and lists specific exemptions for salary income, such as TA/DA, free accommodation for high officials, and a tax rebate for teachers and researchers.

📝 Lecture Summary

Tax Credits on Charitable Donations (Sec 61)

A tax credit is allowed for donations made to specific entities, including any board of education or university in Pakistan, any educational institution, hospital, or relief fund run by a federal/provincial government or local authority, and any non-profit organization. The amount of tax credit is computed using the formula: (A/B) x C.

🔑 Definition — Tax Credit: A reduction in the amount of tax payable, calculated as a percentage of the donation made. 📐 Formula: (A/B) x C

• A = tax assessed before any tax credit under this part
• B = person's taxable income for the year
• C = the lesser of:
  1. Total amount of donations (including fair market value of property given)
  2. For an individual or association of persons: 30% of taxable income; for a company: 15% of taxable income
• Fair market value of any property given as a donation is determined at the time it is given.
• For a cash donation to be eligible, it must be paid by a crossed cheque drawn on a bank. 💡 Why this matters: This encourages charitable giving by directly reducing a taxpayer's liability, subject to specific limits and payment methods.

Investment in Shares – Sec 62

A person (other than a company) is entitled to a tax credit for the cost of acquiring new shares in a public company listed on a stock exchange in Pakistan, where the person is the original allottee or acquires shares from the Privatization Commission of Pakistan. The same formula applies: (A/B) x C. 📐 Formula: (A/B) x C

• C = the lesser of:
  1. Total cost of acquiring the shares in the year
  2. 10% of the person's taxable income for the year
  3. 300,000 rupees (substituted from 200,000 by Finance Bill 2007)
• Clawback: If the person disposes of the shares within 12 months of acquisition, the tax payable for the year of disposal shall be increased by the amount of the credit allowed. 💡 Why this matters: This incentivizes investment in the stock market but discourages short-term speculation by clawing back the credit if shares are sold quickly.

Contribution to an Approved Pension Fund – Sec 63

An eligible person (as defined in section 2(19A)) deriving income from salary or business is entitled to a tax credit for contributions to an approved pension fund under the Voluntary Pension System Rules, 2005. The formula is (A/B) x C. 📐 Formula: (A/B) x C

• C = the lesser of:
  1. Total contribution paid in the year
  2. 20% of taxable income for the year (with an additional allowance for those joining after age 41). The total contribution for such persons cannot exceed 50% of the total taxable income of the preceding year.
  3. 500,000 rupees
• Exclusion: The transfer of existing balances from an approved employment pension or annuity scheme to an individual pension account does not qualify for the tax credit. 💡 Why this matters: This encourages long-term retirement savings by offering a significant tax benefit on contributions, subject to age-related and absolute limits.

Profit on Debt – Sec 64

A tax credit is allowed for profit or share in rent paid on a loan from a scheduled bank, non-banking finance institution, government, local authority, statutory body, or a public company. The loan must be used for the construction of a new house or the acquisition of a house. 📐 Formula: (A/B) x C

• C = the lesser of:
  1. Total profit paid during the year
  2. 40% of taxable income for the year
  3. 500,000 rupees 💡 Why this matters: This supports home ownership by reducing the tax burden on mortgage interest payments.

Income Tax Rules, 2002 Regarding Salary (Effective Tax Year 2009)

• Rule 3: Benefits provided by the employer to the employee shall be included in salary income according to Rules 4 to 7.
• Rule 4 – Valuation of Accommodation:
  • (a) House Rent Allowance: The whole amount received is taxable.
  • (b) Accommodation Facility: The value added to income is the higher of:
    1. The amount the employer would have paid if accommodation was not provided
    2. 45% of MTS (Minimum Taxable Salary) or basic salary
• Rule 5 – Valuation of Conveyance:
  • (i) Partly personal and partly official use: 5% of the cost to the employer or fair market value at lease commencement.
  • (ii) Personal use only: 10% of the cost to the employer or fair market value at lease commencement.
• Rule 6: "Employee" includes a director of a company.
• Rule 7: These rules apply to salary income received after 30th June 2008. 💡 Why this matters: These rules standardize how non-cash benefits (perquisites) provided by an employer are valued and taxed as part of an employee's salary.

Exemptions under the Head 'Salary'

• TA/DA: Exempt under clause 39 of part 1 of the second schedule.
• Free furnished accommodation: Exempt for the President, Provincial Governors, and Chiefs of Staff of Armed Forces (clause 51).
• Free conveyance and entertainment: Exempt for Provincial Governors, Chiefs of Staff, and Corps Commanders (clause 52).
• Workers Participation Fund: Amounts received are exempt (clause 26).
• Local traveling allowance: Exempt for journalists (clause 40).
• Tax Rebate for Teachers and Researchers: A full-time teacher or researcher at a non-profit education or research institution (recognized by HEC, a Board of Education, or a University) is allowed a tax rebate of 75%. 💡 Why this matters: These specific exemptions and rebates reduce the tax burden on certain groups of employees, recognizing their roles and encouraging specific professions.

⭐ Key Takeaways

The most critical points from this lecture are the formulas for computing tax credits, which all follow the structure (A/B) x C, where C represents the amount eligible after applying specific limits (e.g., 30% of income for donations, 20% for pension, 40% for profit on debt). Key limits include the absolute cap of Rs. 500,000 for pension and profit on debt, and Rs. 300,000 for share investment. It is essential to know that for charities, cash donations must be made via crossed cheque, and share disposals within 12 months trigger a clawback of the credit. For valuation of perquisites under the rules, the value of provided accommodation is the higher of 45% of salary or the allowance that would have been paid, while conveyance is valued at 5% or 10% of the vehicle's cost depending on usage. Finally, a 75% tax rebate is available for full-time teachers and researchers in recognized institutions.

🧠 Quick Revision Questions

1. What is the formula for calculating the tax credit for charitable donations under Sec 61, and what are the two possible values for 'C' for an individual and a company?
2. If an individual buys shares worth Rs. 500,000 and has a taxable income of Rs. 2,000,000, what is the maximum eligible value of 'C' for the tax credit under Sec 62?
3. Under what condition will a tax credit for share investment be reversed (clawed back)?
4. For the valuation of employer-provided accommodation under Rule 4, if the house rent allowance that would have been paid is Rs. 100,000 and 45% of the basic salary is Rs. 80,000, what amount is added to the employee's income?
5. Which two groups of employees are specifically eligible for a 75% tax rebate on their salary income, and what are the key conditions for their institution to be recognized?

📘 Lecture 25 — Investment in Shares (Sec. 62) & Profit on Debt (Sec. 64) & Valuation of Perquisites & Rates of Tax for Salaried Individuals

📖 Overview: This lecture covers the computation of tax deductions for investment in shares and profit on debt under sections 62 and 64 respectively. It also details the valuation rules for perquisites like accommodation and conveyance, and provides the complete tax rate slabs for salaried individuals for the tax year 2009, including special provisions for marginal increases in income.

🗂️ Topics Covered

Investment in shares (Section 62) with the formula A/B × C and restrictions for original allottees. Profit on debt (Section 64) with similar formula and eligible loan providers. Valuation of perquisites including accommodation valuation at minimum 45% of MTS or basic salary, and conveyance valuation at 5% or 10% of cost. Various exemptions for salary income under different sections. Concept of MTS (Minimum of Time Scale). Complete tax rate slabs for salaried individuals for tax year 2009 with marginal relief provisions.

📝 Lecture Summary

Investment in Shares (Sec. 62)

This section provides a tax deduction for investment in shares, restricted to the original allottee of the shares. The deduction is computed using the formula A/B × C, where A and B are the same value. C is the lesser of: Cost on acquiring shares, 10% of taxable income, or Rs. 300,000 (originally "two hundred thousand" but substituted by Finance Bill 2007).

🔑 Definition — Original allottee: The first person to whom shares are allotted by the company, not a subsequent purchaser from the secondary market. 📐 Formula: A/B × C → The deduction amount where A and B are equal (making the ratio 1), and C is the lesser of the three specified limits. 📌 Example: If taxable income is Rs. 500,000 and shares were acquired at cost of Rs. 50,000: C is lesser of (50,000, 50,000, 300,000) = Rs. 50,000. Deduction = 1 × 50,000 = Rs. 50,000.

💡 Why this matters: This deduction encourages investment in equity markets by providing tax relief to original subscribers of shares.

Profit on Debt (Sec. 64)

This section provides a deduction for profit paid or shares in rent paid on loan for construction of a new house or acquisition of a house. Eligible loan providers include: Schedule Bank, Non-Banking Finance Institution, Government or Local Authority, Any Statutory Body, or Listed Public Company. The formula is again A/B × C, with A and B being the same. C is the lesser of: Total amount paid during tax year, 40% of taxable income, or Rs. 500,000.

🔑 Definition — Profit on debt: Interest or profit payments made on loans, specifically for house construction or acquisition in this context. 📐 Formula: A/B × C → Deduction amount where A and B are equal, and C is the lesser of the three limits. 📌 Example: If taxable income is Rs. 1,000,000 and total profit paid during the tax year is Rs. 300,000: C is lesser of (300,000, 400,000, 500,000) = Rs. 300,000. Deduction = 1 × 300,000 = Rs. 300,000.

💡 Why this matters: This deduction promotes home ownership by allowing taxpayers to claim interest payments on housing loans as a tax deduction.

Valuation of Perquisites

Valuation of Accommodation: The value is the amount that would have been otherwise provided under the terms of employment, but in no case less than 45% of MTS (Minimum of Time Scale) or basic salary.

Valuation of Conveyance:

• If the vehicle is used partly for personal and partly for official use: 5% of cost or 5% of FMV of vehicle on commencement of lease.
• If the vehicle is used for personal use only: 10% of cost or 10% of FMV of vehicle.
• This applies when the employee includes a director of a company.

🔑 Definition — Perquisite: Any benefit or facility provided by the employer to the employee, which is taxable as part of salary income. 📌 Example: If an employee's basic salary is Rs. 600,000 per year and the employer provides accommodation: Minimum value = 45% of 600,000 = Rs. 270,000, which would be added to taxable salary even if the actual rental value is lower.

Exemptions

Several exemptions are available for salary income:

• Salary earned abroad by a Pakistani citizen in the year of leaving Pakistan — exempt vide section 51(2).
• Exemptions available to Diplomatic personnel and their staff — exempt vide section 42.
• Salary received by foreign government officials — exempt vide section 43.
• Salary received by Foreigners working on certain projects — exempt vide section 44(2).
• Any benevolent grant paid from the benevolent fund to employees or their families — exempt under clause 24 of part 1 of 2nd schedule.
• Any special allowance or benefit (not being entertainment allowance or conveyance allowance) or other perquisites as contained in section 12 specially granted to meet expenses wholly or necessarily incurred in the performance of duties — exempt under clause 39 of part 1 of second schedule.

Concept of MTS (Minimum of Time Scale)

MTS stands for Minimum of Time Scale. This is the starting point or minimum amount which is available to an employee under a time scale. For example, if the time scale is: Rs. 20,000 -- 2000 -- 30000, here Rs. 20,000 is the Minimum of Time Scale.

🔑 Definition — MTS: The lowest salary point in a government or organizational pay scale, used as a base for calculating perquisite values like accommodation.

Rates of Tax for Salaried Individuals for Tax Year 2009

The tax rates are slab-based, starting from 0% for income up to Rs. 180,000, and increasing progressively to 20% for income exceeding Rs. 8,650,000. The complete slab table is as follows:

Special provision for women taxpayers: Where income of a woman taxpayer is covered, no tax shall be charged if the taxable income does not exceed Rs. 240,000.

Marginal Relief Provisions: Where the total income marginally exceeds the maximum limit of a slab, the income tax payable shall be the tax payable on the maximum of that slab plus an amount equal to:
(i) 20% of the amount by which the total income exceeds the said limit where total income does not exceed Rs. 500,000.
(ii) 30% of the excess where total income does not exceed Rs. 1,050,000.
(iii) 40% of the excess where total income does not exceed Rs. 2,000,000.
(iv) 50% of the excess where total income does not exceed Rs. 4,450,000.
(v) 60% of the excess where total income exceeds Rs. 4,450,000.

🔑 Definition — Marginal relief: A mechanism to reduce the tax burden when income slightly exceeds a slab threshold, by taxing only the excess amount at a specified higher percentage rather than the entire income. 📌 Example: If taxable income is Rs. 260,000 (exceeding the Rs. 250,000 slab maximum by Rs. 10,000): Tax on Rs. 250,000 at 0.50% = Rs. 1,250. Marginal relief = 20% of Rs. 10,000 = Rs. 2,000. Total tax = Rs. 1,250 + Rs. 2,000 = Rs. 3,250.

💡 Why this matters: Marginal relief prevents taxpayers from being pushed into a much higher tax bracket when their income just exceeds a slab limit, ensuring a smooth transition between tax rates.

⭐ Key Takeaways

Students must memorize the investment in shares deduction formula (A/B × C) where C is the lesser of cost, 10% of taxable income, or Rs. 300,000, and the profit on debt deduction where C is the lesser of total amount paid, 40% of taxable income, or Rs. 500,000. The valuation of accommodation is always at least 45% of MTS or basic salary, while conveyance is valued at 5% (mixed use) or 10% (personal only) of cost or FMV. The tax rate slabs for 2009 start at 0% up to Rs. 180,000 and end at 20% above Rs. 8,650,000, with a special threshold of Rs. 240,000 for women taxpayers. Marginal relief applies with increasing percentages (20% to 60%) as income exceeds slab limits across different income ranges.

🧠 Quick Revision Questions

1. What are the three limits for determining "C" in the investment in shares deduction formula under Section 62?
2. For the profit on debt deduction under Section 64, what is the maximum percentage of taxable income allowed as a limit?
3. What is the minimum percentage of MTS or basic salary that must be used for valuation of accommodation?
4. What is the tax rate for a salaried individual with taxable income of Rs. 500,000 for tax year 2009?
5. Explain the marginal relief provision when taxable income exceeds Rs. 4,450,000 — what percentage applies to the excess amount?

📘 Lecture 26 — Exercises on Salary and Its Computation

📖 Overview: This lecture provides a series of practical exercises to compute taxable income and tax liability for salaried individuals in Pakistan for Tax Year 2009. It demonstrates how to apply salary tax rules, exemptions, and progressive tax rates to various scenarios involving basic salary, allowances, and bonuses.

🗂️ Topics Covered

The lecture covers five comprehensive exercises that compute taxable income and tax for resident salaried employees. Each exercise applies specific tax rates based on taxable income brackets, demonstrates treatment of exempt and non-exempt allowances (house rent, utilities, medical, and hospitalization), and shows the computation of tax payable after adjusting for tax deducted at source. The exercises also clarify the difference between calendar year and tax year income, and illustrate the legislative changes that removed certain exemptions after June 2006.

📝 Lecture Summary

Exercise 1

This exercise calculates the taxable income for Mr. A, an employee of XYZ Company for the tax year 2009. The employee receives a basic salary of Rs 30,000 per month from January 1, 2008, to December 31, 2008. However, the tax year 2009 in Pakistan covers the period from July 1, 2008, to June 30, 2009, so only six months of salary (180,000) are taxable. The taxable income of Rs 180,000 falls within the first tax bracket (Serial #1) where tax is 0% for income not exceeding Rs 180,000. Therefore, income tax payable = Nil.

🔑 Definition — Tax Year 2009: For the tax year 2009 in Pakistan, the income period is from July 1, 2008, to June 30, 2009, not the calendar year.

📐 Formula: Taxable Income = Total Income − Exempt Income → Tax Liability = Taxable Income × Applicable Tax Rate (0% for income ≤ Rs 180,000)

📌 Example: Mr. A earns Rs 360,000 during calendar year 2008 (Jan-Dec), but only Rs 180,000 falls within the tax year 2009 (Jul 2008-Jun 2009). Tax payable = 180,000 × 0% = Rs 0.

Exercise 2

This exercise computes taxable income for Mr. X, an employee of a private company. He receives basic salary of Rs 40,000 per month (Rs 480,000 annually), bonuses of Rs 80,000, and utilities paid by employer of Rs 40,000. The utilities were previously exempt up to 10% of Minimum Time Scale (MTS) or Basic salary under clause 38 of Part 1 of the Second Schedule, but this clause was omitted by Finance Act, 2006. Hence, no exemption is available for tax year 2009. Total taxable income is Rs 600,000, which falls under tax bracket Serial #7 (income exceeding Rs 550,000 up to Rs 650,000) at a tax rate of 4.50%. Income tax payable = 600,000 × 4.50% = Rs 27,000.

🔑 Definition — Utilities Exemption (Omitted): The exemption for utilities (up to 10% of MTS or Basic salary) was available until June 30, 2006, but was removed by the Finance Act, 2006.

📐 Formula: Tax for income Rs 550,001 to Rs 650,000 = Taxable Income × 4.50%

📌 Example: Mr. X's total income = 480,000 (salary) + 80,000 (bonus) + 40,000 (utilities, no exemption) = Rs 600,000. Tax = 600,000 × 4.50% = Rs 27,000.

Exercise 3

This exercise computes taxable income for Mr. Y, where the Minimum Time Scale (MTS) is given as Rs 20,000—2000—30,000 (starting pay Rs 20,000, increment Rs 2,000, maximum Rs 30,000). He receives basic salary of Rs 24,000 per month (Rs 288,000 annually), house allowance of Rs 2,000 per month (Rs 24,000 annually), and utilities of Rs 36,000 paid by employer. The utilities exemption (clause 38) has been omitted by Finance Act, 2006, so no exemption is available. Total taxable income is Rs 348,000, which falls under tax bracket Serial #3 (income exceeding Rs 250,000 up to Rs 350,000) at 0.75%. Income tax payable = 348,000 × 0.75% = Rs 2,610.

📐 Formula: Tax for income Rs 250,001 to Rs 350,000 = Taxable Income × 0.75%

📌 Example: Mr. Y's taxable income = 288,000 (salary) + 24,000 (house allowance) + 36,000 (utilities, fully taxable) = Rs 348,000. Tax = 348,000 × 0.75% = Rs 2,610.

Exercise 4

This exercise calculates taxable income for Mr. A, with an MTS of Rs 30,000—5000—50,000. He receives basic salary of Rs 40,000 per month (Rs 480,000 annually) and house allowance of Rs 120,000 per annum. Tax deducted at source (TDS) is Rs 6,000. Total taxable income is Rs 600,000, which falls under bracket Serial #7 (income exceeding Rs 550,000 up to Rs 650,000) at 4.50%. Gross tax = 600,000 × 4.50% = Rs 27,000. After deducting TDS of Rs 6,000, net tax payable = Rs 21,000.

🔑 Definition — Tax Deducted at Source (TDS): Tax already withheld by the employer from salary payments, which reduces the final tax payable by the employee.

📐 Formula: Net Tax Payable = Gross Tax Liability − Tax Deducted at Source

📌 Example: Mr. A's taxable income = 480,000 (salary) + 120,000 (house allowance) = Rs 600,000. Gross tax = 600,000 × 4.50% = Rs 27,000. TDS = Rs 6,000. Net tax payable = 27,000 − 6,000 = Rs 21,000.

Exercise 5

This exercise computes taxable income for Mr. Yasir with multiple allowances. He receives basic salary Rs 20,000/month (Rs 240,000), house rent allowance Rs 5,000/month (Rs 60,000), medical allowance Rs 5,100/month (Rs 61,200), free hospitalization services valued at Rs 40,000 (exempt under clause 139(a) of Second Schedule), driver's salary paid by employer Rs 8,000/month (Rs 96,000), and dearness allowance Rs 6,000/month (Rs 72,000). The hospitalization services are fully exempt as per clause 139(a) & (b): free hospitalization provided under terms of employment is exempt; if not available, then 10% of basic salary is exempt for medical allowance. Total taxable income = Rs 529,200, which falls under bracket Serial #6 (income exceeding Rs 450,000 up to Rs 550,000) at 3.50%. Income tax payable = 529,200 × 3.50% = Rs 18,515.

🔑 Definition — Medical Exemption (Clause 139): Clause 139(a) exempts free hospitalization services provided under the terms of employment. Clause 139(b) provides that if (a) is not available, 10% of basic salary is exempt for medical allowance.

📐 Formula: Tax for income Rs 450,001 to Rs 550,000 = Taxable Income × 3.50%

📌 Example: Mr. Yasir's total income = 240,000 (salary) + 60,000 (house allowance) + 61,200 (medical allowance) + 0 (hospitalization, exempt) + 96,000 (driver's salary) + 72,000 (dearness allowance) = Rs 529,200. Tax = 529,200 × 3.50% = Rs 18,515.

⭐ Key Takeaways

The critical concepts for the exam include understanding that the tax year 2009 covers July 1, 2008, to June 30, 2009, not the calendar year, and that all allowances (house, utilities, medical, driver's salary, dearness) are generally fully taxable unless a specific exemption applies. The tax rates are progressive using a slab system, where the applicable rate depends on which bracket the taxable income falls into. Exemptions for utilities were removed by the Finance Act, 2006, making them fully taxable for tax year 2009, while free hospitalization under employment terms remains exempt under clause 139(a). Finally, tax deducted at source (TDS) is subtracted from the gross tax liability to determine the net amount payable.

🧠 Quick Revision Questions

1. What is the tax year 2009 period in Pakistan, and how does it affect salary income calculation?

2. For tax year 2009, is the utilities exemption (clause 38) still available? Why or why not?

3. Under clause 139(a) and (b) of the Second Schedule, what medical benefits are exempt from tax?

4. If taxable income is Rs 529,200, which tax bracket applies and what is the tax rate?

5. How do you calculate net tax payable when tax deducted at source (TDS) is provided?

📘 Lecture 6.27 — Computation of taxable income and tax thereon in respect of Mr. Umar (a salaried individual) for the tax year 2009

📖 Overview: This lecture is a practical exercise session demonstrating how to compute taxable income and tax liability for salaried individuals in Pakistan for tax year 2009. Through three detailed case studies (Exercises 6, 7, and 8), it applies key rules for allowances, exemptions, accommodation valuation, and motor vehicle benefits, showing the step-by-step process from gross income to final tax payable.

🗂️ Topics Covered

The lecture covers three sequential exercises: Exercise 6 computes taxable income for Mr. Umar with Basic Salary, Conveyance Allowance, Medical Allowance (with exemption calculation), and Dearness Allowance, applying the 0.75% tax rate. Exercise 7 adds Accommodation provided by employer (valued at 50% of Minimum Time Scale), Computer Allowance, and Qualification Pay, applying the 3.50% tax rate. Exercise 8 for Mr. Yasir includes Accommodation valued at 60% of Basic Salary and a Motor Vehicle for personal use (valued at 10% of cost), applying the 6% tax rate. Each exercise includes detailed notes on exemption rules and valuation methods.

📝 Lecture Summary

Computation of taxable income and tax thereon in respect of Mr. Umar (a salaried individual) for the tax year 2009 from the following information/ data:

Basic Salary Rs. 20,000 pm, Conveyance Allowance Rs. 1,000 pm, Medical Allowance Rs. 28,000 pa, Dearness Allowance Rs. 1,000 pm.

In Exercise 6, Mr. Umar's total income is computed by annualizing all monthly amounts: Basic Salary (20,000 x 12 = 240,000), Conveyance Allowance (1,000 x 12 = 12,000), Medical Allowance (28,000 per annum), and Dearness Allowance (1,000 x 12 = 12,000). The taxable income is calculated by subtracting exempt portions. For Medical Allowance, the exemption is calculated per Note 1: exempt up to 10% of Basic Salary, provided free hospitalization or reimbursement of medical expenses is not given. 10% of 240,000 = 24,000 exempt, so taxable Medical Allowance = 28,000 − 24,000 = 4,000. All other allowances are fully taxable (no exemption). Total taxable income = 240,000 + 12,000 + 4,000 + 12,000 = 268,000.

Tax liability: Since taxable income (268,000) exceeds Rs. 250,000 but is less than Rs. 350,000, the tax rate at serial #3 for that slab is 0.75%. Income tax payable = 268,000 × 0.75% = Rs. 2,010.

🔑 Definition — Medical Allowance exemption: Medical allowance is exempt up to 10% of Basic salary, if free hospitalization services or reimbursement of medical expenses are not provided by the employer. 📐 Formula: Exempt Medical Allowance = min(Actual Medical Allowance, 10% × Basic Salary) 📌 Example: Basic Salary = 240,000; 10% = 24,000; Actual Medical Allowance = 28,000; Exempt = 24,000; Taxable = 28,000 − 24,000 = 4,000.

Computation of taxable income and tax thereon in respect of Mr. Umar (a salaried individual) for the tax year 2009 from the following information/data:

Minimum Time Scale Rs. 20,000-2000-30,000, Basic Salary @ Rs. 24,000 pm, Accommodation provided by the employer (employee entitled for house rent allowance @ 50% of MTS), Computer Allowance Rs. 1,000 pm, Qualification pay Rs. 1,000 pm.

In Exercise 7, Mr. Umar's Basic Salary = 24,000 × 12 = 288,000. Accommodation is valued per Note 1: the amount that would have been otherwise provided under terms of employment, but in no case less than 45% of Minimum Time Scale (MTS) or basic salary. Here, entitlement is 50% of MTS. MTS minimum = 20,000. So 50% × 20,000 = 10,000 per month (or 120,000 per year if annualized at 12 months). However, the solution shows 144,000. This is calculated as: entitlement is 50% of MTS which is 50% × 20,000 = 10,000 pm = 120,000 per year. The "in no case less than 45% of MTS or basic salary" — 45% of MTS = 9,000 pm, 45% of basic salary (24,000) = 10,800 pm. The solution uses the entitlement rate of 50% of MTS but applies it to Basic Salary? Careful check: The solution says Accommodation = 144,000. This equals 50% of Basic Salary (288,000 × 50% = 144,000). So the rule applied: Amount that would have been otherwise provided under terms of employment (50% of MTS or basic salary?) — here "50% of MTS" is the entitlement, but the note says "in no case less than 45% of MTS or basic salary". The solution uses 50% of Basic Salary (144,000), which is greater than 45% of MTS (45% × 240,000? Wait, careful: 45% of MTS = 45% × 20,000 × 12 = 108,000) or 45% of Basic Salary (45% × 288,000 = 129,600). So 144,000 > 129,600, so the amount used is the entitlement rate applied to Basic Salary. Computer Allowance = 1,000 × 12 = 12,000 (fully taxable). Qualification Pay = 1,000 × 12 = 12,000 (fully taxable). Total taxable income = 288,000 + 144,000 + 12,000 + 12,000 = 456,000.

Tax liability: Since taxable income (456,000) exceeds Rs. 450,000 but is less than Rs. 550,000, the tax rate at serial #6 is 3.50%. Income tax payable = 456,000 × 3.5% = Rs. 15,960.

🔑 Definition — Accommodation valuation (employer-provided): The taxable value of accommodation is the amount that would have been otherwise provided under terms of employment (e.g., house rent allowance as a percentage of MTS or Basic Salary), but in no case less than 45% of MTS or basic salary.

Computation of taxable income and tax thereon in respect of Mr. Yasir (a salaried individual) for the tax year 2009 from the following information/data:

MTS Rs. 20,000-2000-30000, Basic Salary @ Rs. 30,000 pm, Accommodation provided to Mr. Yasir by employer (entitled for house rent allowance @60% of Basic Salary), Motor vehicle provided by the employer exclusively for personal use (cost of vehicle is Rs.1 million).

In Exercise 8, Mr. Yasir's Salary = 30,000 × 12 = 360,000. Accommodation: Entitlement is 60% of Basic Salary = 60% × 360,000 = 216,000. Check floor: 45% of MTS = 45% × 20,000 × 12 = 108,000; 45% of Basic Salary = 45% × 360,000 = 162,000. 216,000 > 162,000, so use 216,000. Motor Vehicle for personal use is valued per Note 2: 10% of cost or 10% of Fair Market Value (FMV) of Vehicle, in case of lease. Cost = 1,000,000, so 10% = 100,000. Total taxable income = 360,000 + 216,000 + 100,000 = 676,000.

Tax liability: Since taxable income (676,000) exceeds Rs. 650,000 but is less than Rs. 750,000, the tax rate at serial #8 is 6%. Income tax payable = 676,000 × 6% = Rs. 40,560.

🔑 Definition — Motor Vehicle valuation (personal use): For a vehicle provided by the employer exclusively for personal use, the taxable value is 10% of the cost or 10% of the Fair Market Value of the vehicle; in case of lease, the value is determined differently. 📐 Formula: Taxable value of motor vehicle = 10% × Cost (or FMV) of vehicle

💡 Why this matters: Understanding how to value non-cash benefits like accommodation and motor vehicles is critical because these "perquisites" are often the largest components of taxable income for higher-salaried employees, pushing them into higher tax brackets.

⭐ Key Takeaways

A student must remember the step-by-step process for computing taxable income: start with gross income (annualize monthly amounts), identify exempt portions using specific rules (Medical Allowance exemption = 10% of Basic Salary), and add all taxable allowances. For accommodation, the taxable value is the higher of the entitlement percentage (of MTS or Basic Salary) and the floor of 45% of MTS or basic salary. For motor vehicles used personally, the taxable value is 10% of cost. Finally, apply the correct tax slab rate (0.75% for income 250,000-350,000; 3.5% for 450,000-550,000; 6% for 650,000-750,000) to compute tax payable.

🧠 Quick Revision Questions

1. In Exercise 6, why is only Rs. 4,000 of Medical Allowance taxable when the total is Rs. 28,000?
2. In Exercise 7, how is the taxable value of accommodation calculated when the entitlement is 50% of MTS, and what is the "floor" rule?
3. In Exercise 8, what is the taxable value of the motor vehicle provided for personal use, and what percentage of cost is used?
4. What tax rates are applied to taxable incomes of Rs. 268,000, Rs. 456,000, and Rs. 676,000 in these exercises?
5. What is the difference between the accommodation valuation rules in Exercise 7 (50% of MTS) versus Exercise 8 (60% of Basic Salary)?

📘 Lecture 6.28 — EXERCISES ON SALARY AND ITS COMPUTATION (CONTD....)

📖 Overview: This lecture continues practical computation of salary income and tax liability for salaried individuals in Pakistan. It walks through three progressively complex exercises, covering key fringe benefits (accommodation, motor vehicle, loans, flying allowance), deductions (Zakat, donations), special income blocks (golden handshake, former/prospective employer salary), and tax credits.

🗂️ Topics Covered

The lecture presents three detailed exercises (9, 10, and 11) that cover the computation of taxable income from salary components such as basic pay, accommodation valuation, motor vehicle for personal vs. official use, flying allowance taxed as a separate block, concessional loan benefit, medical allowance, leave pay, bonuses, utilities, TA/DA, golden handshake payments, and the tax credit for charitable donations.

📝 Lecture Summary

Exercise 9: Computation for Mr. Yasir (Basic + Fringe Benefits)

This exercise computes taxable income for a salaried individual receiving basic salary, employer-provided accommodation, a motor vehicle for mixed use, flying allowance from a Pakistani airline, and a concessional loan. The solution adds back the value of accommodation, vehicle personal use, and the loan interest differential, while taxing flying allowance as a separate block.

🔑 Definition — Accommodation benefit: Value is the amount that would have been otherwise provided under the terms of employment, but in no case less than 45% of MTS or basic salary. The problem uses 50% of basic salary here: 20,000 × 50% = 10,000 pm → 120,000 per year. 📐 Formula — Motor vehicle valuation (mixed use): 5% of cost or 5% of FMV of vehicle if leased. Cost = 1,000,000 → 1,000,000 × 5% = 50,000 per year. 📐 Formula — Concessional loan benefit: (Benchmark rate − actual markup rate) × loan amount. Benchmark = 11%, actual = 6%, difference = 5%. 1,000,000 × 5% = 50,000. 🔑 Definition — Flying allowance: Taxed at 2.5% of the amount received as a separate block of income under sub clause 1 of part 3 of the second schedule. The entire 400,000 is exempt from normal tax but taxed separately at 2.5%. 📌 Example: Tax liability = Normal tax (460,000 × 3.5% = 16,100) + Separate block tax (400,000 × 2.5% = 10,000) = Total 26,100.

💡 Why this matters: Concessional loans and mixed-use vehicles are common employer-provided benefits. Their valuation rules ensure that the economic benefit to the employee is captured in taxable income.

Exercise 10: Computation with Donations and Zakat

This exercise adds the considerations of Zakat paid as a deductible allowance and charitable donations as a tax credit. Here, the motor vehicle is provided exclusively for official use, so no add-back is made.

🔑 Definition — Motor vehicle for exclusive official use: No add-back is made to the employee’s salary income. The vehicle provided is fully exempt. 📐 Formula — Tax credit on donation: A/B × C, where A = tax payable before credit, B = total taxable income, C = actual donation or 30% of taxable income (whichever is lower). Here: 42,900/715,000 × 10,000 = 600. (C is taken as 10,000 since 30% of 715,000 = 214,500, which is greater than the donation of 10,000.) 📌 Example: Total taxable income = 480,000 (salary) + 240,000 (accommodation) − 5,000 (Zakat) = 715,000. Tax at 6% = 42,900. After donation credit of 600, final tax = 42,300.

💡 Why this matters: Zakat is deducted from total income, while donations reduce the final tax liability through a credit — both are distinct mechanisms that lower the tax burden.

Exercise 11: Consolidated Comprehensive Exercise

This is the most complex exercise, consolidating many salary components: basic salary, salary from former and prospective employers, tax liability paid by employer, voluntary payments, leave pay, medical allowance, free hospitalization, extra duty allowance, bonuses, utilities, TA/DA, golden handshake, and donations.

🔑 Definition — Salary from former employer & prospective employer: Fully taxable as part of total salary income. 200,000 + 100,000 added. 🔑 Definition — Tax liability paid by employer: This is a taxable fringe benefit — the amount is added to the employee's salary as if it were paid to the employee. 🔑 Definition — Voluntary payments by employee (80,000): These are not deductible for salaried individuals. Similarly, personal expenses like car (40,000) and house renovation (100,000) are not admissible. 🔑 Definition — Medical allowance: Exemption is not allowed if free hospitalization services are already provided under terms of employment. Here, free hospitalization of 100,000 is exempt, but medical allowance of 60,000 is fully taxable. 🔑 Definition — TA/DA for official assignments: Fully exempt (40,000). No tax is charged. 🔑 Definition — Golden handshake payment (1,600,000): Can be taxed at the average rate of tax of the last 3 years. Average = (25+20+15)/3 = 20%. The tax on this block is at 20% (not the slab rate). The solution notes this is "not advisable" — meaning it is computed separately. 📐 Formula — Tax credit on donation: A/B × C = 416,800 / 2,605,000 × 40,000 = 6,400. (C is 40,000 since 30% of taxable income = 781,500 > 40,000.) 📌 Example: Total taxable income = 2,605,000. Tax at 16% slab = 416,800. Donation credit = 6,400. Tax payable = 410,400. Deduct tax at source (224,000) → Net tax payable = 186,400.

💡 Why this matters: Golden handshake payments and salary from multiple employers are real-world complexities. The average-rate method for golden handshake can significantly lower the tax compared to the marginal slab rate.

⭐ Key Takeaways

Students must remember: (1) Accommodation benefit is at least 45% of MTS or basic salary; (2) Motor vehicle valuation is 5% of cost for mixed use, nil for exclusive official use; (3) Flying allowance is a separate block taxed at 2.5%; (4) Concessional loan benefit = loan × (benchmark rate − actual rate); (5) Zakat is a deduction from total income, while donations provide a tax credit (A/B × C, capped at 30% of taxable income); (6) Tax liability paid by employer is a taxable benefit; (7) TA/DA for official use is exempt; (8) Medical allowance is taxable if free hospitalization is provided; (9) Golden handshake is taxed at the average rate of the last 3 years; (10) Tax at source is deducted from final tax payable.

🧠 Quick Revision Questions

1. How is the value of accommodation benefit computed when the employee is entitled to house rent allowance of 50% of basic salary, and what is the minimum floor?
2. Under what condition is a motor vehicle provided by the employer NOT added back to salary income?
3. What is the tax rate applied to flying allowance, and how is it treated in the tax computation?
4. How is the concessional loan benefit calculated when the employer charges 6% markup and the benchmark rate is 11%?
5. Explain the formula for the tax credit on charitable donations using the numbers from Exercise 10 (tax payable 42,900, taxable income 715,000, donation 10,000).

📘 Lecture 29 — SALARY AND ITS COMPUTATION: GRATUITY

📖 Overview: This lecture explains the tax treatment of gratuity under Pakistani tax law. It covers the conditions for approved gratuity funds, the exemption provisions for different categories of employees, and demonstrates the computation through a practical example. Understanding gratuity taxation is crucial for accurate salary computation and tax planning for employees at retirement or termination.

🗂️ Topics Covered

This lecture covers the purpose and definition of gratuity, the conditions for an Approved Gratuity Fund, the detailed tax treatment of gratuity under clause 13 of Part I of the Second Schedule for government and non-government employees, the exceptions to exemption, and a solved exercise computing taxable income for a government employee receiving gratuity.

📝 Lecture Summary

Purpose:

The purpose of gratuity is to provide a benefit to employees or their dependents. It is a payment made upon:

• Provision of gratuity to employees, or
• Undertaking of provision (payment) of gratuity on retirement, or
• On employees becoming incapacitated, or
• On termination of their employment after completion of minimum period of service specified in the regulations of the fund, or
• To the widows, children or dependants of such employees on their death.
• All benefits granted by the fund shall be payable only in Pakistan.

Approved Gratuity Fund

The Commissioner of Income Tax may accord approval to any gratuity fund. A key condition for approval is that the fund must be established under an irrevocable trust and the purposes of gratuity must be fulfilled.

Tax Treatment of Gratuity

The tax treatment of gratuity is provided under Clause 13, Part I of Second Schedule. It distinguishes between different categories of employees:

(i) Government Employees: Any gratuity received on retirement or death by an employee of the Government, a local authority, or a statutory body or corporation or their family is wholly exempt from tax.

(ii) Approved Gratuity Fund: Any amount receivable from any gratuity fund approved by the Commissioner in accordance with the rules in Part III of the Sixth Schedule is exempt.

(iii) Other Employees (Approved Scheme): In the case of any other employee, the amount not exceeding two hundred thousand rupees receivable under any scheme applicable to all employees of the employer and approved by the Central Board of Revenue is exempt.

(iv) All Other Employees (Residual Category): In the case of any employee to whom sub-clause (i), (ii) and (iii) do not apply, fifty per cent of the amount receivable or seventy-five thousand rupees, whichever is the less, is exempt.

💡 Why this matters: The residual category provides a minimum exemption for employees who don't fall under any specific exempt category, ensuring some tax relief.

Exceptions to Exemption: The gratuity exemption does not apply: (a) To any payment which is not received in Pakistan. (b) To any payment received from a company by a director of such company who is not a regular employee of such company. (c) To any payment received by an employee who is not a resident individual. (d) To any gratuity received by any employee who has already received any gratuity from the same or any other employer.

Exercise-1 on Gratuity:

Problem: Compute taxable income and tax thereon for tax year 2009 in respect of Mr. A, an employee of Government of the Punjab.

• Salary: Rs. 800,000
• Gratuity: Rs. 1,000,000
• Tax deducted at source: Rs. 54,000

Solution:

Tax Liability Calculation: The tax rate of 7.50% is at serial no. 9 for taxable income exceeding Rs. 750,000 up to Rs. 900,000.

• Tax Liability = 800,000 x 7.5% = Rs. 60,000
• Tax deducted at source = Rs. 54,000
• Tax payable with return = Rs. 6,000

Note-1: Amount received as gratuity is exempt in this case under clause 13(i), Part I, Second Schedule of the Ordinance.

⭐ Key Takeaways

The critical concepts for the exam are: (1) Gratuity received by government employees (and those of local authorities, statutory bodies, or corporations) is fully exempt from tax. (2) For employees under an approved gratuity fund, the entire amount receivable is exempt. (3) For other employees with an approved scheme, only the first Rs. 200,000 is exempt. (4) For all remaining employees, the exemption is the lower of 50% of the amount or Rs. 75,000. (5) Exemptions are not available if the payment is not received in Pakistan, the recipient is a non-resident, the payment is to a non-regular employee director, or the employee has already received gratuity from any employer.

🧠 Quick Revision Questions

1. Under which clause of the Second Schedule is gratuity received by a government employee fully exempt from tax?
2. What is the condition for a gratuity fund to be "approved" by the Commissioner of Income Tax?
3. For an employee in the private sector (not covered by an approved fund), what is the maximum exemption available under the residual category (sub-clause iv)?
4. List the four specific circumstances under which the gratuity exemption shall not apply.
5. In the solved exercise, why was Mr. A's entire gratuity of Rs. 1,000,000 treated as exempt?

📘 Lecture 30 — Gratuity Received Under Sixth Schedule

📖 Overview: This lecture covers the tax treatment of gratuity received by employees under different approval statuses, including fully exempt gratuity from Commissioner-approved funds, partially exempt gratuity from CBR-approved funds, and the default exemption rule for unapproved gratuity. It also explains the tax treatment of pension, commutation of pension, and lump sum payments like Golden Handshake, with practical exercises and solutions.

🗂️ Topics Covered

The lecture covers gratuity under the Sixth Schedule (fully exempt when fund is approved by Commissioner of Income Tax), gratuity approved under clause (13)(iii) by CBR (first Rs. 200,000 exempt), the default rule for unapproved gratuity (least of 50% of amount or Rs. 75,000), pension exemption for citizens and government employees, commutation of pension exemption, and the tax treatment of lump sum payments with averaging option.

📝 Lecture Summary

Gratuity Received Under Sixth Schedule

In the case of employees covered by an approved gratuity fund under the Sixth Schedule, any gratuity received from a fund approved by the Commissioner of Income Tax in accordance with Part III of the Sixth Schedule is fully exempt under clause (13)(ii), Part I of Second Schedule. This means the entire gratuity amount is excluded from taxable income.

🔑 Definition — Gratuity under Sixth Schedule: A payment received from a gratuity fund approved by the Commissioner of Income Tax, which is fully exempt from tax under clause (13)(ii), Part I, Second Schedule. 📐 Rule: Full exemption → gratuity amount = 0 taxable income 📌 Example: Mr. A received Rs. 1,000,000 from a Commissioner-approved gratuity fund. In the solution, this entire amount is shown as exempt income (Rs. 1,000,000 exempt), and his taxable income is only basic salary Rs. 360,000, bonus Rs. 90,000, and gardener allowance Rs. 48,000, totaling Rs. 498,000. Tax payable = 498,000 × 3.5% = Rs. 17,430.

💡 Why this matters: The approval status of the gratuity fund by the Commissioner determines whether the entire gratuity is tax-free — a critical distinction for compliance.

Treatment if Gratuity Approved by Central Board of Revenue (CBR)

In case gratuity is approved under clause (13)(iii), Part I, Second Schedule (CBR approval), the treatment is:

• First gratuity received up to Rs. 200,000 is exempt.
• Amount exceeding Rs. 200,000 will be taxable as salary.

🔑 Definition — CBR-approved gratuity: Gratuity from a fund approved by the Central Board of Revenue, where only the first Rs. 200,000 is exempt, and the excess is taxable.

Treatment of Gratuity not Covered under any other Clause of Part I of 2nd Schedule

Gratuity received by an employee or family on retirement or death shall be exempt from tax to the extent of the least of the following: a. 50% of amount receivable Or b. Rs. 75,000

However, this exemption is not available in the following cases:

• If gratuity is received outside Pakistan
• Received by a director of a company who is not a regular employee
• If received by a non-resident person
• If recipient has already received any gratuity from the same or any other employer

🔑 Definition — Default gratuity exemption: For unapproved gratuity, exemption is the lesser of 50% of the gratuity amount or Rs. 75,000. 📐 Formula: Exempt amount = min(50% of gratuity, Rs. 75,000) 📌 Example: Mr. A received Rs. 600,000 from an unapproved fund. 50% of Rs. 600,000 = Rs. 300,000. Compare with Rs. 75,000. The lesser is Rs. 75,000, which is exempt. The balance of Rs. 225,000 (600,000 - 75,000) is taxable.

Gratuity: Points to Remember

• Gratuity will be ignored while computing taxable income and tax liability of a deceased person.
• In case the gratuity is received by legal heirs, where employee dies before retirement, the gratuity would be taxable in the hands of legal heirs of the deceased.

Pension

Pension is the amount received on account of past services/employment.

Tax Treatment of Pension – Totally Exempt

Pension is totally exempt if received by a citizen of Pakistan under clause (8), Part I of Second Schedule, provided:

• The recipient should be a citizen of Pakistan
• The recipient must not be working for the same employer for any remuneration
• If a person receives pension from more than one employer, the exemption shall be available to the higher of the pensions received.

Pension Received by Ex-Government Employees and Members of Armed Forces

Any pension received by employees of Federal Govt./Provincial Govts., Members of Armed Forces of Pakistan, or granted under the rules to their families is exempt from tax under clause (9), Part I of Second Schedule.

🔑 Definition — Pension: Amount received on account of past services/employment, which may be exempt depending on the recipient's status and circumstances.

Clauses (8), (9), (12), (16), (17) Part I of Second Schedule

• Clause (8): Any pension received by a citizen of Pakistan from a former employer, other than where the person continues to work for the employer (or an associate). If more than one pension, exemption applies only to the higher of the pensions.
• Clause (9): Any pension (i) received in respect of services rendered by a member of the Armed Forces of Pakistan, Federal Government, or Provincial Government; (ii) granted to families and dependents of public servants or Armed Forces members who die during service.
• Clause (12): Any payment in the nature of commutation of pension received from Government or under a pension scheme approved by CBR.
• Clause (16): Any income derived by families and dependents of "Shaheeds" belonging to Pakistan Armed Forces from special family pension, dependents' pension, or children's allowance.
• Clause (17): Any income derived by families and dependents of "Shaheeds" belonging to Civil Armed Forces of Pakistan, to whom Joint Services Instruction No. 5/66 would have applied, from any like payment.

📌 Example (Pension): Mr. A retired and joined a private company. He received salary Rs. 600,000 and pension Rs. 300,000. Solution: Pension from ex-employer is exempt under clause (17), Part I, Second Schedule. Taxable income = Rs. 600,000 (salary only). Tax payable = 600,000 × 4.5% = Rs. 27,000.

Pension Granted to Injured or Disabled

Pension granted to a public servant or personnel of Armed Forces on injuries or body disability, and to families and dependents of 'Shaheeds' belonging to civil or Pakistan Armed Forces, or public servant or member of Armed Forces who dies during service, is exempt as provided in Part I of Second Schedule.

Any Payment in the Nature of Commutation of Pension [Clause (12), Part I, 2nd Schedule]

Any payment in the nature of commutation of pension received from the government or under any pension scheme approved by the Central Board of Revenue under clause (12), Part I, Second Schedule is exempt from tax.

📌 Example (Commutation of Pension): Mr. A, a government servant, retired and received Rs. 900,000 as commutation of pension. Solution: Commutation of Pension is exempt under clause (12), Part I of Second Schedule. The entire amount is exempt.

Exercise on Lump Sum Payments Received (Golden Handshake)

Mr. A received Rs. 1,500,000 on opting for Golden Handshake in tax year 2009. He received total income of Rs. 600,000 as salary during the year. Rate of tax for the preceding three tax years was 20%, 15%, and 10%. Compute taxable income and tax thereon.

Solution: Tax payer can opt to seek approval from CIT to charge lump sum payments received in a tax year at average tax rate of last three years. The average tax rate for last three years = (20% + 15% + 10%) / 3 = 15%. It is advisable to opt for this method.

Computation of Tax:

• Salary at normal rate: Rs. 600,000 × 4.5% = Rs. 27,000
• Lump sum payments: Rs. 1,500,000 × 15% = Rs. 225,000
• Total tax = Rs. 27,000 + Rs. 225,000 = Rs. 252,000

If lump sum payments of Rs. 1,500,000 had been included in salary income, taxable income would have been Rs. 2,100,000, charged at the rate of 25% (for taxable income exceeding Rs. 1,300,000). Tax liability would have been Rs. 2,100,000 × 25% = Rs. 525,000. Hence, it is advisable to opt for charging the tax at average rate of last three years.

💡 Why this matters: The averaging option for lump sum payments can significantly reduce tax liability compared to including the lump sum in current year's income.

⭐ Key Takeaways

Students must remember that gratuity exemption depends entirely on the approval status of the fund — Commissioner-approved funds give full exemption, CBR-approved funds exempt only the first Rs. 200,000, and unapproved funds exempt the lesser of 50% of amount or Rs. 75,000. Pension received by Pakistani citizens (who are not working for same employer) and government/armed forces pensions (including families of Shaheeds) are fully exempt. Commutation of pension from government or CBR-approved schemes is also fully exempt. For lump sum payments like Golden Handshake, the taxpayer can elect to tax them at the average tax rate of the preceding three years, which is often more favorable than inclusion in current year income.

🧠 Quick Revision Questions

1. What is the exemption limit for gratuity received from a fund approved by the Commissioner of Income Tax under the Sixth Schedule?
2. A taxpayer receives Rs. 500,000 from a CBR-approved gratuity fund — what amount is exempt and what is taxable?
3. Under the default rule for unapproved gratuity, what is the formula for computing the exempt amount?
4. Under which clause is commutation of pension exempt, and from what sources?
5. How is the average tax rate calculated for lump sum payments like Golden Handshake, and why would a taxpayer choose this option?

📘 Lecture 31 — SALARY AND ITS COMPUTATION: PROVIDENT FUND

📖 Overview: This lecture covers the different types of provident funds under Pakistani tax law, focusing on their definitions, conditions for recognition, and tax treatment. It also addresses benevolent grants. Understanding these concepts is crucial for correctly computing taxable salary income and exemptions for employees.

🗂️ Topics Covered

This lecture defines and distinguishes between Statutory, Recognized, and Unrecognized Provident Funds. It details the conditions for approval of a Recognized Provident Fund by the Commissioner of Income Tax. The tax treatment for each fund type is explained, including the exemption limit for employer contributions. An exercise demonstrates the computation of taxable income for provident fund contributions, and the lecture concludes with an exercise on the exemption for benevolent grants.

📝 Lecture Summary

Types: Provident Fund

The lecture introduces the three main types of provident funds in Pakistan. A Provident Fund is a retirement savings fund for employees. The first type is the Statutory Provident Fund, governed by the Provident Funds Act, 1925 (commonly known as GP Fund). The second is a Recognized Provident Fund, which is recognized by the Commissioner of Income Tax under Part I of the Sixth Schedule. The third is an Unrecognized Provident Fund, which does not meet the conditions for recognition.

🔑 Definition — Recognized Provident Fund: A provident fund recognized by the commissioner in accordance with Part I of the Sixth Schedule [as defined in clause (48) of Section 2].

Recognized Provident Fund under Part I of 6th Schedule

The Commissioner of Income Tax (CIT) may accord recognition to a fund if it complies with the requirements laid down in rule 2. The CIT may also withdraw recognition after providing a reasonable opportunity to the fund’s trustees to be heard.

Condition for Approval

For a provident fund to be recognized, several conditions must be met. All employees shall be employed in Pakistan, or shall be employed by an employer whose principal place of business is in Pakistan. An employee's contributions in a tax year shall be a definite proportion of his salary. An employer's contributions to an employee's individual account in a tax year shall not exceed the contributions made by the employee. The fund shall be vested in two or more trustees, or an official trustee. The accumulated balance due to an employee shall be payable on the day he ceases to be an employee of the employer who maintains the fund.

Tax Treatment

The tax treatment varies by fund type. A Statutory Provident Fund is wholly exempt under Clause 22. A Recognized Provident Fund is partially taxable within limits. An employer’s contribution up to 10 percent of salary is exempt, while any employer’s contribution exceeding 10% of ‘salary’ is taxable under rule 3, Part 1 of the Sixth Schedule. An Unrecognized Provident Fund is wholly taxable.

The accumulated balance due and becoming payable to any employee participating in a recognized provident fund is fully exempt under clause (23) Part I of Second Schedule.

📌 Example: Mr. A received a credit of Rs. 50,000 as employer’s contribution to his recognized provident fund. His salary during tax year 2009 is:

1. Basic salary: Rs. 840,000
2. Computer allowance: Rs. 12,000
3. Medical allowance: Rs. 60,000 Compute taxable income.

Solution: N-1: Under rule 3 of Part I of Sixth Schedule, exemption is available up to 10% of salary, and the excess amount shall be taxable. In this case, the entire amount of Rs. 50,000 is exempt as it is within the prescribed limit of 10% of salary. The salary for this purpose is Rs. 840,000 + Rs. 12,000 = Rs. 852,000 (Basic + Computer Allowance). 10% of Rs. 852,000 is Rs. 85,200. Since Rs. 50,000 is less than Rs. 85,200, it is fully exempt. N-2: Medical allowance up to 10% of basic salary (Rs. 84,000) is exempt. Since the allowance is Rs. 60,000, the full amount is exempt. Taxable income is Rs. 852,000 (Basic + Computer Allowance), and tax can be computed as explained in previous exercises.

Computation of Taxable Income:

Benevolent Grant

A Benevolent Grant is a payment made from a Benevolent Fund to employees or their families in case of need.

🔑 Definition — Benevolent Grant: Any benevolent grant paid from the Benevolent Fund to the employees or members of their families in accordance with the provisions of the Central Employee Benevolent Fund and Group Insurance Act, 1969 [under clause (24) of part 1 of 2nd schedule].

📌 Example: Mr. A, a government servant, retired on 01-05-2009. He received Rs. 600,000 from a duly approved benevolent fund. He received total income amounting to Rs. 480,000 under the head salary during tax year 2009. Compute taxable income and tax.

Solution: The benevolent grant of Rs. 600,000 is fully exempt from tax under clause (24) of Part I of the Second Schedule. Therefore, only the salary income of Rs. 480,000 is taxable.

⭐ Key Takeaways

A student must understand the three types of provident funds (Statutory, Recognized, Unrecognized) and their respective tax treatments. For a Recognized Provident Fund, the key threshold is that employer contributions up to 10% of salary are exempt, and any excess is taxable. The accumulated balance from a recognized provident fund is fully exempt when paid. Finally, benevolent grants received from an approved Benevolent Fund are fully exempt under the Second Schedule. The salary for calculating the 10% limit on employer contributions includes basic salary and allowances, but not medical allowance if it is within the exempt limit.

🧠 Quick Revision Questions

1. What are the three types of provident funds discussed in this lecture?
2. What is the maximum percentage of salary that an employer's contribution to a Recognized Provident Fund can be without being taxable?
3. Which clause of the Second Schedule exempts the accumulated balance from a Recognized Provident Fund?
4. What is the tax treatment of a benevolent grant paid from a duly approved Benevolent Fund?
5. In the exercise on Mr. A, which allowance was fully exempt even though it was below the usual 10% limit, and why?

📘 Lecture 32 — Taxation of rental income arising from use and exploitation of immovable property ‘Income from Property’

📖 Overview: This lecture focuses on the taxation of rental income from immovable property under Section 15 of the Income Tax Ordinance. It defines “rent,” explains how fair market rent is applied, and outlines the treatment of non-adjustable advances. The lecture also covers exemptions, the final tax regime, and the specific tax rate slabs for individuals, AOPs, and companies, with solved exercises for practical application.

🗂️ Topics Covered

The lecture begins by defining income from property under Section 15 and the meaning of “rent,” including forfeited deposits and utilities. It covers the application of fair market rent and exemptions for trusts and welfare institutions. The treatment of non-adjustable amounts is explained with an illustration. The lecture then details exclusions from property income, the final tax regime and rate slabs for individuals, AOPs, and companies, and ends with solved exercises demonstrating the computation of taxable income and tax.

📝 Lecture Summary

Taxation of rental income arising from use and exploitation of immovable property ‘Income from Property’

‘Income from Property’ includes Rent received or receivable by a person in a tax year other than rent exempt from tax, as per Sec 15 (1) . Rent means any income received or receivable by the owner of land or building as consideration for: use, occupation, or the right to use the land or building. Rent also includes forfeited deposits paid under a contract for the sale of land or building.

Where a building is leased out together with Plant & Machinery, it is not income from property but ‘income from other sources’ under Sec. 15(3). Rent must be in line with Fair Market Rent. If the rent received is less than the fair market rent, the person shall be treated as having derived the fair market rent for the period the property is let. Where utilities are included in rent, such amount is chargeable to tax under the head income from other sources and not under the head income from property.

🔑 Definition — Rent: Any income received or receivable by the owner of land or building as consideration for its use, occupation, or the right to use it, including forfeited deposits from a sale contract.

🔑 Definition — Fair Market Rent: The rent a person is treated as having derived if the actual rent received is less than the market rate for the property.

Exemptions Available Under Property Income

Exemptions are available for income of a trust or welfare institution from housing property under clause (58)(1) and for income from property held under trust or other legal obligations for religious or charitable purpose under Clause (59) of Part 1 of the 2nd Schedule.

Certain deductions were allowable under sec 17 up to tax year 2006, but Section 17 stands omitted by Finance Act, 2006. Hence, no deductions are permissible from 1st July 2006.

Sec 15 (7) states that provisions of Section 15 shall not apply to a taxpayer who: (i) is an individual or association of persons; (ii) derives income from property not exceeding Rs. 150,000 in a tax year; and (iii) does not derive taxable income under any other head.

Fair Market Rent is not applicable when the lessee is chargeable to tax under the head ‘Salary Income’.

Treatment of Non-Adjustable Amounts Received in Relation to Buildings

These amounts shall be treated as rent and chargeable to tax under the head “income from property”. These amounts are spread over a period of 10 years.

📌 Example: Say non-adjustable advance rent received is Rs. 120,000. Amount adjustable per year shall be 120,000/10 = Rs. 12,000. Rs. 12,000 shall be adjustable for ten years.

Income from Property not taxable under section 15

The following are not taxable under Section 15: Ground rent, Rental income from a building kept on lease together with plant and machinery, Rental income derived by subletting a building or land by a tenant, Mining right and royalty, and Provision of amenities, utilities, or any other service connected with renting of building.

Treatment of Income from Property under Sec 15

Income from property is taxable as a separate block of income and should not be included in total income and taxable income. The tax deducted under sub-section (1) is a final tax on the income from property. Persons liable to deduct tax at source include the Federal Government, a Provincial Government, a local authority, a company, a non-profit organization, a diplomatic mission, or any other person notified by the CBR.

(a) Rate of tax for individuals and AOPs:

(b) Rate of tax for companies:

💡 Why this matters: These are the specific tax rate slabs used to compute the final tax liability on rental income.

Exercise-1

Mr. A let out a building for rent of Rs 1,600,000 and received Rs 800,000 as a non-adjustable advance. He also forfeited a Rs 200,000 deposit from a failed sale.

The solution shows:

• Rental Income: Rs. 1,600,000 is taxable.
• Non-adjustable advance: Rs. 800,000 / 10 = Rs. 80,000 is taxable for the year.
• Forfeited deposit: Rs. 200,000 is taxable as rent.
• Gross Taxable Income: Rs. 1,880,000.
• Tax Calculation: Tax on initial Rs. 1,000,000 is Rs. 57,500. Tax on the remaining Rs. 880,000 at 10% is Rs. 88,000. Total tax: Rs. 145,500.

Exercise-2

Mr. A has rental income from a shop of Rs 120,000 and a gratuity of Rs 900,000.

The solution shows:

• The rental income (Rs. 120,000) does not exceed Rs. 150,000.
• Mr. A’s gratuity of Rs. 900,000 is exempt income.
• Therefore, Mr. A does not derive taxable income under any other head.
• As all three conditions of Sec 15(7) are met, the rental income is exempt.
• Taxable income: Nil.

Exercise-3

Mr. A has rental income from a building of Rs 450,000 and a non-adjustable advance of Rs 200,000.

The solution shows:

• Rental Income: Rs. 450,000 is taxable.
• Non-adjustable advance: Rs. 200,000 / 10 = Rs. 20,000 is taxable for the year.
• Gross Taxable Income: Rs. 470,000.
• Tax Calculation: Tax on initial Rs. 400,000 is Rs. 12,500. Tax on the remaining Rs. 70,000 at 7.5% is Rs. 5,250. Total tax: Rs. 17,750.

⭐ Key Takeaways

The most critical point is the definition of “rent” for tax purposes, which includes forfeited deposits and is adjusted to fair market rent if the actual rent is too low. A key rule is that non-adjustable advances are spread over 10 years and taxed as rent each year. You must memorize the progressive tax rate slabs for individuals and AOPs to compute the final tax on gross rental income. Finally, remember the three conditions for exemption: the taxpayer is an individual or AOP, the total rental income does not exceed Rs. 150,000, and the person has no other taxable income. The tax is a final tax, and no deductions are allowed after 2006.

🧠 Quick Revision Questions

1. What is the definition of “rent” under Section 15(1), and name two specific items included in this definition.
2. How is a non-adjustable advance received from a tenant treated for tax purposes, and over how many years is it spread?
3. What are the three conditions that must be met for rental income to be exempt under Section 15(7)?
4. For an individual with a gross rental income of Rs. 500,000, calculate the final tax liability using the correct tax rate slab.
5. Is the rental income from a building leased together with plant and machinery still taxable under the head “Income from Property”? If not, under which head is it taxed?

📘 Lecture 33 — Business Defined Section 2(9)

📖 Overview: This lecture defines what constitutes "business" under Section 2(9) of the Income Tax Ordinance, including the various types of income chargeable under the head "Income from Business." It also covers exemptions on business income and the special treatment of speculation business, which is crucial for distinguishing between ordinary business income and speculative transactions.

🗂️ Topics Covered

The lecture covers the legal definition of business under Section 2(9), enumerates specific types of income taxable under the head "Income from Business" (including profit on debt, leasing income, and management fees), lists exemptions from business income under Part 1 of the Second Schedule, and explains the separate treatment of speculation business under Section 19 with its exclusions for hedging and arbitrage transactions.

📝 Lecture Summary

Business Defined Section 2(9)

"Business includes any trade, commerce, manufacture, profession, vocation but doesn’t include employment."

Following incomes (except exempt income) shall be charged to tax under the head 'Income from Business': a) Profits & Gains from any business in a tax year. b) Income derived from any trade, profession, sale of goods or provision of any services. c) Income from hire or lease of tangible movable property. d) FMV (Fair Market Value) of Perquisites derived by a person by virtue of business relationships. e) Management Fee derived by a management company.

Income from Business also includes:

• Any profit on debt derived by a person (only applicable to persons whose business is to derive such income, e.g., a banking company).
• Any amount received by a schedule bank from a mutual fund as share of profit.
• Profit earned on debts in the course of business shall be chargeable to 'income from business'.
• Income on leasing by lessor, being banks, leasing companies, etc.

💡 Why this matters: The definition of business is broad and covers many activities beyond traditional trading, including professional income and income from leasing movable property. The key distinction is that employment income is excluded.

🔑 Definition — Perquisite: Any benefit or privilege received by a person by virtue of their business relationship, valued at Fair Market Value (FMV).

📐 No formula required.

Exemptions on Business Income Under Part 1 of Second Schedule

The following clauses provide exemptions from tax on business income:

💡 Why this matters: These exemptions are specific to entities serving public or educational purposes. Students must memorize these clauses for exam purposes.

Speculation Business (Sec 19)

Speculation Business shall be charged under the head "Income from Business" but with separate treatment.

Treatment of Speculation Business (Sec 19):

• To be treated as distinct and separate from other business carried on by the person.
• Expenditures/deductions incurred on account of speculation business shall be apportioned in light of Section 67.
• Profit and gains arising out of speculation business shall be included in the person's income chargeable under the head "Income from Business".

Definition of Speculation Business (Sec. 19): Speculation 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 members.

🔑 Definition — Speculation Business: A business where contracts for purchase/sale of commodities (including stocks/shares) are settled without actual delivery or transfer of the commodity.

📐 Formula: Speculation Business = Contracts settled without delivery → Taxed separately under Section 19

📌 Example: If a trader enters into a contract to buy 100 shares of Company A at Rs. 100 per share, but settles the contract by paying the difference in price (instead of taking delivery of the shares), this is speculation business. However, if the same trader is a dealer holding shares and enters into a futures contract to guard against a fall in price (hedging), that is not speculation business under the exclusions.

⭐ Key Takeaways

The lecture clarifies that "business" is broadly defined to include trade, commerce, manufacture, profession, and vocation but explicitly excludes employment. All profits and gains from business, including profit on debt (for financial institutions), leasing income, and management fees, are taxable under this head. Certain entities like Text-Book Boards, non-profit educational institutions, and Modaraba companies enjoy exemptions from business income. Speculation business receives special treatment under Section 19: it must be treated as a separate business, with its own expenses apportioned under Section 67, and excludes hedging transactions for raw materials, stocks/shares, and arbitrage by exchange members from the definition of speculation.

🧠 Quick Revision Questions

1. What is the legal definition of "business" under Section 2(9) of the Income Tax Ordinance?
2. List five types of income specifically included under the head "Income from Business" besides general profits and gains.
3. Name three types of entities whose business income is exempt under Part 1 of the Second Schedule.
4. What is the key difference between speculation business and hedging transactions under Section 19?
5. How must speculation business be treated for tax purposes under Section 19?

📘 Lecture 8.33 — Deductions Allowed under Section 20 & Deductions not Allowed – Sec. 21

📖 Overview: This lecture details the specific deductions allowed under Section 20 of the Income Tax Ordinance for business expenditures, and then comprehensively lists the deductions not allowed under Section 21. Understanding these disallowed expenses is critical for correctly computing taxable income from business, as claiming them can lead to penalties and reassessment.

🗂️ Topics Covered

The lecture first covers two specific deductions allowed under Section 20: expenditure on acquiring a depreciable asset or intangible with a useful life of more than one year, and expenditure in the course of amalgamation. It then provides a detailed enumeration of all deductions not allowed under Section 21, covering taxes, personal expenses, capital expenditures, and specific payment methods, including special conditions for salary payments and cash transactions.

📝 Lecture Summary

Deductions Allowed under Section 20

Deduction is allowed for expenditure incurred by a person in the year wholly for the purpose of business. This includes expenditure on acquiring a depreciable asset or an intangible with a useful life of more than one year. It also includes expenditure in the course of amalgamation of companies incurred by an amalgamated company.

💡 Why this matters: These are specific exceptions to the general rule that capital expenditures are not deductible, allowing for tax relief on certain long-term business investments and restructuring costs.

Deductions not Allowed – Sec. 21

This section lists all expenditure that is disallowed for deduction when computing business income. The key categories are:

a. Taxes: Any cess, rate or tax paid or payable by a person in Pakistan or a foreign country under PTR/Final Tax Regime is not allowed. Also, any amount of tax deducted at source (TDS) is not allowed.

b. Failure to deduct tax (Salary): If the payer/employer does not deduct tax from payments/disbursement of salary, then the payments made, salaries paid by such payer/employer shall not be allowed for deduction of these expenses.

c. Entertainment expenditure: Any entertainment expenditure in excess of such limits [or in violation of such conditions] as may be prescribed.

d. Unrecognized funds: Any contribution made by the person to a fund that is not a recognized provident fund*, approved pension fund, approved superannuation fund, or approved gratuity fund.

e. Employee funds without tax deduction: Any contribution made by the person to any provident or other fund established for the benefit of employees, 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”.

f. Fines and penalties: Any fine or penalty paid or payable by the person for the violation of any law, rule or regulation.

g. Personal expenses: Any personal expenditures incurred by the person.

h. Reserves and capitalization: Any amount carried to a reserve fund or capitalized in any way.

i. Payments to AOP members: Any profit on debt, brokerage, commission, salary or other remuneration paid by an association of persons to a member of the association.

j. Cash payments exceeding Rs. 50,000 (Banking Channel Requirement): 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 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. Provided that: 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 verification from bank statements. Further provided that this clause shall not apply in the case of:

• (a) Expenditure not exceeding ten thousand rupees;
• (b) Expenditures on account of: utility bills; freight charges; travel fare; postage; and payment of taxes, duties, fee, fines or any other statutory obligation.

k. Omitted by finance act, 2006.

l. Salary exceeding Rs. 10,000 per month (Banking Channel Requirement): Any salary paid or payable exceeding [ten] thousand rupees per month other than by a crossed cheque or direct transfer of funds to the employee’s bank account.

m. Capital nature expenditures: Except as provided in Division III of this Part, any expenditure paid or payable of a capital nature.

⭐ Key Takeaways

The most critical takeaway is that Section 21 explicitly disallows a wide range of common business expenditures, including taxes, fines, personal expenses, reserves, and payments to AOP members. Any expenditure exceeding Rs. 50,000 under a single account head must be made through a banking channel (crossed cheque, bank draft, or online transfer) to be deductible, with specific exceptions for small amounts and utility bills. Similarly, salary exceeding Rs. 10,000 per month must be paid by crossed cheque or direct bank transfer. Failure to deduct tax on salary payments also disallows the entire salary expense. Capital expenditures are generally not deductible unless specifically allowed under Division III of Part III of the Ordinance. The only deductions specifically allowed under Section 20 are for acquiring depreciable assets or intangibles with useful lives over one year, and for amalgamation expenses.

🧠 Quick Revision Questions

1. What is the primary rule under Section 21 regarding salary payments exceeding Rs. 10,000 per month?
2. Under what condition is an expenditure exceeding Rs. 50,000 under a single account head disallowed, and what are the exceptions?
3. Are contributions to an unrecognized provident fund allowed as a deduction under Section 21?
4. Why are fines or penalties paid for violation of law not allowed as a deduction?
5. What specific expenditures are allowed as deductions under Section 20?

📘 Lecture 8.34 — Deductions---Special Provisions

📖 Overview: This lecture covers special provisions for deductions under the Pakistani tax code, focusing on depreciation of business assets, initial allowances for new assets, and amortization of intangibles and pre-commencement expenditures. It also outlines key rules for scientific research, employee training, financial costs, bad debts, and the taxation of certain recoveries and gains even after business cessation.

🗂️ Topics Covered

The lecture first details depreciation under Section 22, including the written down value computation, disposal rules, and the definition of depreciable assets. It then explains the initial allowance under Section 23 for eligible assets placed into service for the first time in Pakistan. Next, it covers amortization of intangibles under Section 24, followed by pre-commencement expenditure amortization under Section 25. The lecture concludes with a list of other special deduction provisions (Sections 26–30) and the taxation of certain income items even in the absence of a business under Section 31.

📝 Lecture Summary

Depreciation (Sec. 22)

A deduction for depreciation is allowed if depreciable assets are used in a person’s business in a tax year. The rate of depreciation is applied as specified in Part 1 of the 3rd Schedule. The written down value (WDV) of a depreciable asset at the beginning of the tax year is calculated as:

• For an asset acquired in the tax year: the cost of the asset reduced by any initial allowance under Section 23.
• For any other case: the cost of the asset reduced by the total depreciation deductions (including any initial allowance under Section 23) allowed in previous tax years.

🔑 Definition — Depreciable asset: A tangible movable or immovable property (not unimproved land) or structural improvement to immovable property owned by a person that has a normal useful life of one year or more, is likely to lose value due to normal wear and tear, and is used wholly in deriving income from business chargeable to tax.

📐 Formula (Written Down Value for asset acquired in tax year): WDV = Cost of Asset – Initial Allowance (Sec 23) 📐 Formula (Written Down Value for asset acquired in prior years): WDV = Cost – Total Depreciation allowed in previous years (including initial allowance)

💡 Why this matters: Special rules apply when an asset is disposed of. No depreciation is allowed in the year of disposal. If the consideration received exceeds the WDV at the time of disposal, the excess is chargeable to tax under “Income from business.” If the consideration received is less than the WDV, the difference is allowed as a deduction in computing business income for that year.

📌 Example (Gain on Sale): A machine with a cost of PKR 100,000 and accumulated depreciation of PKR 40,000 (WDV = PKR 60,000) is sold for PKR 80,000. The excess of PKR 20,000 (80,000 – 60,000) is chargeable to tax as income from business.

📌 Example (Loss on Sale): Using the same machine (WDV of PKR 60,000), if it is sold for PKR 50,000, the difference of PKR 10,000 (60,000 – 50,000) is allowed as a deduction from business income.

Initial Allowance (Sec. 23)

A person who places an eligible depreciable asset into service in Pakistan for the first time in a tax year shall be allowed a deduction at the rate of 50% of the cost of the asset. This allowance is provided that the asset is used by the person for business purposes for the first time or in the tax year in which commercial production is commenced, whichever is later.

🔑 Definition — Eligible depreciable asset: A depreciable asset other than:

• Any road transport vehicle (unless the vehicle is plying for hire);
• Any furniture, including fittings;
• Any plant or machinery that has been used previously in Pakistan; or
• Any plant or machinery for which a deduction has been allowed under another section of this Ordinance for the entire cost of the asset in the acquisition year.

📐 Formula: Initial Allowance = 50% × Cost of Eligible Depreciable Asset

📌 Example: A company purchases a new, never-before-used-in-Pakistan machine for PKR 5,000,000 and places it into service for business in the current tax year. The initial allowance is PKR 2,500,000 (50% × PKR 5,000,000). This reduces the cost for computing future WDV.

Intangibles (Sec. 24)

A person shall be allowed an amortization deduction for the cost of intangibles, provided the intangibles are wholly or partially used in the tax year for deriving income from business and have a normal useful life exceeding one year.

📐 Formula (Amortization Deduction): A / B Where A is the cost of the intangible, and B is the normal useful life of the intangible.

🔑 Special Rule: An intangible with a normal useful life of more than 10 years, or one that does not have an ascertainable useful life, shall be treated as if it had a normal useful life of 10 years.

📌 Example: A company acquires a patent for PKR 1,000,000 with a legal life of 8 years. The annual amortization deduction is PKR 125,000 (PKR 1,000,000 / 8 years).

📌 Example: A company acquires goodwill for PKR 2,000,000, which has an indefinite/useful life. Since the useful life is not ascertainable, it is treated as having a 10-year useful life. The annual amortization deduction is PKR 200,000 (PKR 2,000,000 / 10 years).

Pre-commencement expenditure (Sec.25)

Pre-commencement expenditure means any expenditure incurred before the commencement of the business wholly and exclusively to derive income chargeable to tax. This includes the cost of feasibility studies and trial production activities. However, it shall not include any expenditure incurred in acquiring land, or any expenditure which is depreciated under Section 22 (depreciation) or amortized under Section 24 (intangibles).

📐 Formula: Rate of amortization of pre-commencement expenditure = 20% (Straight line)

📌 Example: A new business incurs PKR 500,000 in feasibility studies and trial production costs before officially commencing operations. These costs cannot be deducted in full in year 1. Instead, the business can amortize them at 20% per year, allowing a deduction of PKR 100,000 each year for 5 years.

Deductions—Special Provisions (Sections 26–30)

The lecture lists the following special provisions for deductions:

• Scientific research institutions (sec 26)
• Employee training and facilities (sec 27)
• Profit on debt, financial costs and lease payments (sec 28)
• Bad debts (sec 29)
• Sec 29A: Deductions on consumer loans to a banking company, non-banking finance company, and house building finance corporations. (Deduction shall not exceed 3% of income for the tax year arising out of consumer loans.)
• Profit on non-performing debts of a banking company or development finance institution (sec 30)

Transfer to Participatory Reserve (Sec 31) – Income taxable even without business

The following incomes are taxable under the head "Income from Business" even in cases where no business is carried on by the taxpayer in that year:

• Recovery against any deduction/expenses previously allowed (Add back to income).
• Gain on sale of depreciable asset.
• Recovery of bad debt or written off loan.
• Trading liabilities not paid within expiration of three years.
• Amount received after discontinuance of business.

📌 Example: A business wrote off PKR 100,000 of bad debts in Year 1, getting a tax deduction. In Year 3, the customer pays PKR 50,000. Even if the business has ceased operations, this PKR 50,000 recovery is taxable as "Income from Business."

⭐ Key Takeaways

Depreciation is allowed on tangible business assets with a useful life over one year, with the written down value method being the basis. The initial allowance of 50% is a significant upfront deduction for eligible new assets. Intangibles are amortized over their useful life, with a default of 10 years for those with a life exceeding 10 years or an unascertainable life. Pre-commencement expenditures are amortized at a flat rate of 20% per year. Crucially, certain recoveries and gains (e.g., on asset sales or bad debt recoveries) are taxable as business income even if the business has ceased operations.

🧠 Quick Revision Questions

1. What is the formula for calculating the written down value of a depreciable asset that was acquired in the current tax year and has received an initial allowance?
2. If a depreciable asset with a WDV of PKR 200,000 is sold for PKR 250,000, how is the PKR 50,000 excess treated for tax purposes?
3. List the four types of assets that are explicitly excluded from being an "eligible depreciable asset" for the purposes of the initial allowance under Section 23.
4. An intangible asset has a normal useful life of 15 years. Over how many years must it be amortized under Section 24?
5. Name two specific types of income that are taxable under the head "Income from Business" even when no business is being carried on, as per Section 31.

📘 Lecture 36 — Methods of Accounting

📖 Overview: This lecture covers the fundamental methods of accounting for tax purposes under Pakistani income tax law, including cash-basis and accrual-basis accounting. It also provides detailed tax rate schedules for individuals, AOPs, and companies for Tax Year 2009, along with specific rates for dividends, non-resident payments, withholding tax, and depreciation.

🗂️ Topics Covered

This lecture begins with methods of accounting under Section 32, distinguishing between cash-basis (Section 33) and accrual-basis (Section 34) accounting, with mandatory accrual basis for companies. It then covers valuation of stock using the A+B-C formula, record-keeping requirements, and detailed tax rate schedules for individuals and AOPs (1st Schedule) and companies for Tax Year 2009. The lecture also includes rates for dividend tax under Section 5, tax on payments to non-residents under Section 6, withholding tax rates on profit on debt and prizes, and depreciation rates from the Third Schedule Part 1.

📝 Lecture Summary

Methods of Accounting

Under section 32, a person's income is to be computed in accordance with the method of accounting regularly employed by such person. There are two types of accounting methods: Cash-Basis accounting under Section 33, and Accrual-Basis accounting under Section 34. For companies, accrual basis is mandatory, while for other persons, it is optional to use either cash or accrual basis. Under Cash-Basis Accounting, a person derives income when it is received and incurs expenditure when it is paid. Under Accrual Basis Accounting, a person derives income when it is due to the person and incurs expenditure when it is payable by the person. Any change in the method of accounting requires prior approval from the Commissioner under Section 32(4).

Valuation of Stock

The cost of stock-in-trade disposed of (consumed) during the year is computed using the formula: 🔑 Definition — Stock-in-trade: Goods held by a business for the purpose of sale or trading. 📐 Formula: A + B - C → Opening stock plus stock acquired during the year minus closing stock.

Records

The kinds of records to be maintained include: records of money received and expended, sales and purchases records, assets and liabilities records, and a stock register. If a computerized system is used, electronic receipts must be maintained. General instructions require that a backup system is in place, proper security arrangements/system are implemented, records are maintained in line with International Accounting Standards, and records are kept at a specified place.

Rates of Tax for Individuals and AOP (1st Schedule) for Tax Year 2009

The tax rates are slab-based, starting at 0% for taxable income up to Rs. 100,000, and increasing progressively to 25% for taxable income exceeding Rs. 1,300,000. For example, income between Rs. 100,001 and Rs. 110,000 is taxed at 0.5%, between Rs. 200,001 and Rs. 300,000 at 5%, between Rs. 600,001 and Rs. 800,000 at 15%, and between Rs. 1,000,001 and Rs. 1,300,000 at 21%.

Rates of Tax for Companies for Tax Year 2009

The standard rate of tax imposed on the taxable income of a company is 35%. However, for a small company as defined in section 2, tax is payable at the rate of 20%, provided the turnover does not exceed Rs. 250 million. If turnover exceeds Rs. 250 million, a graduated rate structure applies: 20% on income up to Rs. 250 million turnover, 25% on income attributable to turnover between Rs. 250 million and Rs. 350 million, 30% on income attributable to turnover between Rs. 350 million and Rs. 500 million, and 35% on income attributable to turnover exceeding Rs. 500 million. 💡 Why this matters: These progressive rates incentivize small companies and impose higher rates on larger businesses.

Rate of Dividend Tax under Section 5

Dividends received from another company are taxed at 10% of the gross amount of dividend. Dividends received from a power project company privatized by WAPDA are taxed at 7.5% of the gross amount. Dividends received from a power generation company are also taxed at 7.5% of the gross amount.

Rate of Tax on Certain Payments to Non-Residents under Section 6

Royalty or fee for technical services paid to a non-resident is taxed at 15% of the gross amount. For shipping or air transport of a non-resident person, the rate is 8% of the gross amount received for shipping income and 3% of the gross amount received for air transport income.

Deduction of Tax at Source

Profit on debt under Section 151 is subject to 10% withholding tax on the profit paid. For prizes and winnings under Section 156, a prize bond is taxed at 10% of the gross amount paid, while winnings from raffle, lottery, or winning a quiz are taxed at 20% of the gross amount paid.

Depreciation (Sec. 22) Third Schedule Part 1

Depreciation rates specified for the purposes of Section 22 are prescribed. For Building (all types), the rate is 10%. For Furniture (including fittings), machinery and plant (not otherwise specified), Motor Vehicles (all types), ships, technical or professional books, the rate is 15%. For Computer hardware including printer, monitor and allied items, machinery and equipment used in manufacture of I.T. products, aircrafts and aero engines, the rate is 30%. For mineral oil concerns, below ground installations are depreciated at 100%, and offshore platform and production installations are depreciated at 20%.

⭐ Key Takeaways

Students must remember that companies are mandatorily required to use accrual-basis accounting, while individuals and AOPs have a choice. The valuation of stock follows the A+B-C formula, and comprehensive records including stock register and backup systems are mandatory. The tax rate schedules for Tax Year 2009 are critical: individuals and AOPs face progressive rates from 0% to 25%, while companies pay 35% generally, with small companies paying 20% up to Rs. 250 million turnover, after which graduated rates apply. Dividend tax rates vary (10% for regular companies, 7.5% for power companies), non-resident payments have specific rates (15% for royalties, 8% for shipping, 3% for air transport), and withholding tax applies at 10% for profit on debt and prize bonds, and 20% for other winnings. Depreciation rates under the Third Schedule are 10% for buildings, 15% for furniture/machinery/vehicles, 30% for computer hardware, and special rates for mineral oil concerns.

🧠 Quick Revision Questions

1. Under which section is the method of accounting determined, and what are the two main types of accounting methods?
2. What is the formula for computing the cost of stock-in-trade disposed of during the year?
3. For Tax Year 2009, what is the tax rate for an individual with taxable income of Rs. 450,000?
4. What is the tax rate for a small company with a turnover of Rs. 300 million, and how is it computed?
5. What is the depreciation rate for computer hardware under the Third Schedule, and what is the rate for a building?

📘 Lecture 37 — Taxation of Resident Company & Business Income Computation

📖 Overview: This lecture covers the computation of taxable income and tax liability for resident companies in Pakistan, focusing on disallowed deductions under Section 21, minimum tax on turnover under Section 113, depreciation calculations, and the treatment of speculation business losses. It is important for understanding how tax authorities adjust declared income and how companies must comply with specific payment and deduction rules.

🗂️ Topics Covered

The lecture presents four exercises: Exercise 1 deals with add-backs for failure to deduct tax at source on salaries, contract payments, and professional fees; Exercise 2 addresses add-backs for cash payments exceeding certain thresholds under Section 21; Exercise 3 covers the computation of normal depreciation and initial allowance on plant and machinery; Exercise 4 deals with the treatment of speculation business losses and their set-off against speculation income only.

📝 Lecture Summary

Taxation of Resident Company — Exercise 1

M/S XYZ Ltd. declared taxable income of Rs. 1,350,000 for tax year 2009. During scrutiny, the tax authority found the company failed to deduct tax at source on three payments: salaries of Rs. 350,000, payments for a contract to purchase office appliances of Rs. 150,000, and professional fees paid to a chartered accountant of Rs. 100,000. Since deductions are not allowed under provisions of Section 21, these amounts are added back to income.

🔑 Definition — Add Back: An amount that must be added to declared taxable income because an expense claimed as a deduction is disallowed under tax law.

📐 Formula: Taxable Income after add back = Declared taxable income + Total amounts added back under Section 21

📌 Example: Declared taxable income Rs. 1,350,000 + Add back of Rs. 600,000 (350,000 + 150,000 + 100,000) = Rs. 1,950,000. Tax on declared income: Rs. 1,350,000 x 35% = Rs. 472,500. Additional tax on add backs: Rs. 600,000 x 35% = Rs. 210,000.

Taxation of Companies — Minimum Tax on Resident Companies Sec. 113

A resident company is subjected to minimum tax at 0.50% of its turnover for a tax year, even when the company sustains a loss. Turnover under this section includes gross receipts from the sale of goods (exclusive of sales tax, central excise duty, and trade discounts shown on invoices), gross fees for rendering services or giving benefits including commissions, gross receipts from the execution of contracts, and the company’s share of these amounts from any association of persons it is a member of.

💡 Why this matters: This minimum tax ensures that even loss-making companies contribute a baseline amount of tax based on their business activity.

Exercise 2 — Add Back for Cash Payments

M/s XYZ (Pvt) Ltd. filed a return for tax year 2009 declaring taxable income of Rs. 1,300,000 and paid the full tax liability of Rs. 455,000 (1,300,000 x 35%). The tax authorities found that certain payments were made in cash. Under Section 21, payments for salary (Rs. 30,000), office rent (Rs. 120,000), and professional fee (Rs. 80,000) made by cash are added back, totaling Rs. 230,000.

🔑 Definition — Section 21(L): A provision that disallows deductions for certain expenses if they are paid in cash and exceed specified limits. In this exercise, postages (Rs. 8,000), freight (Rs. 9,000), electricity bill (Rs. 7,000), telephone (Rs. 5,000), and penalty (Rs. 9,000) are not added back as they are not covered by the cash payment prohibition.

📐 Formula: Additional tax = Add back amount x 35%

📌 Example: Rs. 230,000 x 35% = Rs. 80,500 additional tax payable.

Computation of Depreciation — Exercise 3

M/S A.K. Brothers, a partnership firm, provided information on plant and machinery: opening book value (W.D.V) as on 01-07-2008 was Rs. 1,800,000, machinery with a book value of Rs. 600,000 was disposed of during the year, and additions of eligible depreciable assets during the year were Rs. 1,000,000.

🔑 Definition — Initial Allowance: An additional depreciation allowance granted in the year of acquisition of a depreciable asset, calculated at a specified rate (here 50%) on the cost of additions.

🔑 Definition — Normal Depreciation: The standard annual depreciation rate applied to the written down value (W.D.V) of an asset, here 15% for plant and machinery.

📐 Formula:

• Opening W.D.V – Disposals = Balance W.D.V
• Initial Allowance = Additions x 50%
• Total book value = Balance W.D.V + (Additions – Initial Allowance)
• Normal Depreciation = Total book value x 15%

📌 Example: Opening W.D.V Rs. 1,800,000 – Disposal Rs. 600,000 = Balance W.D.V Rs. 1,200,000 (X). Additions Rs. 1,000,000. Initial Allowance = Rs. 1,000,000 x 50% = Rs. 500,000. Balance book value of additions = Rs. 1,000,000 – Rs. 500,000 = Rs. 500,000 (Y). Total book value (X+Y) = Rs. 1,200,000 + Rs. 500,000 = Rs. 1,700,000. Normal Depreciation = Rs. 1,700,000 x 15% = Rs. 255,000. Total Depreciation = Rs. 500,000 (Initial) + Rs. 255,000 (Normal) = Rs. 755,000.

On Speculation Business — Exercise 4

M/s ABC Ltd., a manufacturing company, provided: gross income from normal business Rs. 2,500,000, expenditures on normal business Rs. 1,000,000, gross income from speculation business Rs. 600,000, expenditures on speculation business Rs. 300,000, loss carried forward on normal business Rs. 200,000, loss carried forward on speculation business Rs. 900,000, and advance tax paid Rs. 200,000.

🔑 Definition — Speculation Business: A business where profits arise from transactions involving the purchase and sale of commodities or securities without the intention of taking delivery, and losses from such business can only be set off against profits from speculation business.

📐 Formula:

• Net Income = Gross Income – Expenditures
• Taxable Income = Net Income – Carried Forward Loss (subject to set-off rules)

📌 Example:

• Speculation: Gross income Rs. 600,000 – Expenditure Rs. 300,000 = Net Income Rs. 300,000.
• Normal: Gross income Rs. 2,500,000 – Expenditure Rs. 1,000,000 = Net Income Rs. 1,500,000.
• Total Net Income = Rs. 1,800,000.
• C/F Loss: Speculation Rs. 900,000 (can only be set off against speculation income), Normal Rs. 200,000.
• Speculation Net Income Rs. 300,000 – C/F Speculation Loss Rs. 900,000 = Rs. (600,000) (cannot be set off against normal income; carried forward).
• Normal Net Income Rs. 1,500,000 – C/F Normal Loss Rs. 200,000 = Rs. 1,300,000.
• Taxable Income: Normal business Rs. 1,300,000. Tax = Rs. 1,300,000 x 35% = Rs. 455,000.

⭐ Key Takeaways

Students must remember that Section 21 requires add-backs of certain expenses where tax was not deducted at source or payments were made in cash, with specific items like salary, rent, and professional fees being affected. Minimum tax under Section 113 is 0.50% of turnover and applies even if the company has a loss. Depreciation computation involves calculating initial allowance (50% on additions) and then normal depreciation (15%) on the total written down value. Speculation business losses can only be set off against speculation business profits, not against normal business income, and any unabsorbed loss is carried forward to subsequent years.

🧠 Quick Revision Questions

1. Under Section 21, what three payments made by M/S XYZ Ltd. were added back for failure to deduct tax at source, and what was the total add-back amount?
2. What is the rate of minimum tax on turnover for a resident company under Section 113, and what components constitute turnover?
3. In Exercise 2, which cash payments were added back under Section 21 and which were not, and why?
4. In Exercise 3, how is initial allowance calculated, and what is the normal depreciation rate applied to plant and machinery?
5. In Exercise 4, why was the loss of Rs. 600,000 from speculation business not set off against normal business income, and what happens to it?

📘 Lecture 38 — Taxation of Companies

📖 Overview: This lecture covers the practical computation of taxable income and tax liability for different business structures in Pakistan, specifically a limited company, a sole proprietorship, and an association of persons (partnership firm). It demonstrates how a taxation officer identifies and adds back inadmissible expenses and how the tax liability is calculated for each entity type.

🗂️ Topics Covered

The lecture presents three detailed exercises: Exercise 5 on the taxation of a limited company running a hospital chain, including the identification of inadmissible expenses and their add-back; Exercise 6 on the taxation of a sole proprietorship, covering the computation of gross profit and net profit from a trading and profit & loss account; and Exercise 7 on the taxation of an association of persons (a partnership firm), explaining the firm's tax liability and the individual partners' tax computation, including the special rule for adding a partner's share of profit for rate purposes only.

📝 Lecture Summary

Taxation of Companies Exercise-5

The first exercise involves M/S XYZ Ltd., a resident company running hospitals, whose tax return for tax year 2009 has been selected for total audit. As a taxation officer, you must compute the taxable income and tax liability. The solution begins by reconstructing the revenue account as submitted by the company, showing total receipts of Rs. 8,200,000 and total expenditures including medicines, ambulances running expenses, depreciation, salaries, and other items, resulting in a net profit of Rs. 5,388,000. The company then set off a loss carried forward from tax year 2005 of Rs. 1,200,000, arriving at a taxable income of Rs. 4,188,000 and a tax payable of Rs. 1,465,800 (at 35%), which after withholding tax deductions of Rs. 525,000 resulted in a tax paid of Rs. 940,800 showing nil balance.

However, the taxation officer must make additions for inadmissible expenses discovered during audit. These include an unsupported payment of Rs. 12,000, depreciation claimed on a personal car of the director of Rs. 40,000, payment of legal fee by cash of Rs. 60,000 (which violates the specified mode of payment rule), and the purchase of an X-Ray machine of Rs. 1,000,000 which was incorrectly shown as a revenue expense but must be capitalized as a balance sheet item. These total additions of Rs. 1,112,000 are taxed at 35%, resulting in an additional tax of Rs. 389,200 payable by the company.

🔑 Definition — Inadmissible Expenses: Expenses that are not allowed as deductions under tax law, either because they are personal in nature, lack proper supporting evidence, or violate payment rules. 📐 Formula: Tax on Additions = Total Inadmissible Expenses × Corporate Tax Rate 📌 Example: For M/S XYZ Ltd., the inadmissible expenses (Rs. 1,112,000) are added back to the income and taxed at 35%. The extra tax payable is Rs. 1,112,000 × 35% = Rs. 389,200. This is in addition to the tax already computed on the originally reported net profit. 💡 Why this matters: This shows that a company can still face additional tax liability even after filing a return if the taxation officer identifies expenses that do not meet the legal requirements for deduction.

Sole Proprietorship Exercise-6

The second exercise covers Mr. A, a sole proprietor, for tax year 2009. A trading and profit & loss account is prepared to compute taxable income. The trading account starts with an opening stock of Rs. 800,000 plus purchases of Rs. 1,000,000 and carriage inwards of Rs. 30,000. After accounting for sales of Rs. 2,000,000 and a closing stock of Rs. 800,000, the gross profit is calculated as Rs. 970,000. From this gross profit, operating expenses including electricity (Rs. 18,000), telephone (Rs. 20,000), office rent (Rs. 120,000), stationery (Rs. 4,000), postages (Rs. 3,000), salaries (Rs. 200,000), and advertising (Rs. 10,000) are deducted, yielding a net profit of Rs. 595,000.

The tax payable is then calculated at the applicable individual tax rate. For tax year 2009, the rate used is 12.50% on the net profit of Rs. 595,000, resulting in a gross tax of Rs. 74,375. After subtracting the advance tax paid of Rs. 60,000, the balance tax payable is Rs. 14,375, which was paid with the return, showing a nil tax payable or refundable.

🔑 Definition — Sole Proprietorship: A business owned and operated by one individual, where the business income is taxed as part of the individual's total income at personal income tax rates. 📐 Formula: Gross Profit = Sales + Closing Stock - (Opening Stock + Purchases + Carriage Inwards) 📌 Example: Gross Profit = Rs. 2,000,000 + Rs. 800,000 - (Rs. 800,000 + Rs. 1,000,000 + Rs. 30,000) = Rs. 2,800,000 - Rs. 1,830,000 = Rs. 970,000. Net Profit = Gross Profit - Total Operating Expenses = Rs. 970,000 - (Rs. 18,000 + Rs. 20,000 + Rs. 120,000 + Rs. 4,000 + Rs. 3,000 + Rs. 200,000 + Rs. 10,000) = Rs. 970,000 - Rs. 375,000 = Rs. 595,000.

Taxation of Association of Persons Exercise-7

The third exercise deals with M/S XYZ brothers, a partnership firm (an Association of Persons) comprising three partners (Mr. X, Mr. Y, and Mr. Z) with equal profit shares. The firm's net profit for tax year 2009 is Rs. 900,000. The tax liability of the firm itself is computed at the applicable rate for the firm, which for this income range (Rs. 800,000 to 1,000,000) is 17.50%, resulting in a tax of Rs. 157,500. This tax liability is the obligation of the firm, not of the partners individually.

The lecture then explains the special rule for partners, specifically Mr. Z, who has additional income from other sources of Rs. 200,000. For the purpose of determining Mr. Z's tax rate, his share of profit from the firm (Rs. 300,000) is added to his other income for rate purposes only. This gives a total of Rs. 500,000, on which the tax is calculated at the rate of 10%, yielding Rs. 50,000. However, a proportional deduction is made to remove the tax attributable to the share of profit (which is taxed at the firm level). This deduction is calculated as (Rs. 50,000 / Rs. 500,000) × Rs. 300,000 = Rs. 30,000. Therefore, the final tax payable by Mr. Z is Rs. 50,000 - Rs. 30,000 = Rs. 20,000.

🔑 Definition — Association of Persons (AOP): A business structure, including a partnership firm, which is taxed as a separate entity on its total income, and partners are not taxed on the same share of profit again, except for rate determination. 📐 Formula: Tax Payable by Partner = [Tax on (Partner's Other Income + Share of Profit)] - [Proportional Tax on Share of Profit] 📌 Example: For Mr. Z, the tax on Rs. 500,000 (Rs. 200,000 other income + Rs. 300,000 share of profit) at 10% is Rs. 50,000. The proportional tax on the share of profit is (Rs. 50,000 / Rs. 500,000) × Rs. 300,000 = Rs. 30,000. Therefore, Mr. Z's final tax is Rs. 50,000 - Rs. 30,000 = Rs. 20,000. Without this rate effect, he would have paid only Rs. 8,000 (Rs. 200,000 × 4%).

⭐ Key Takeaways

The most critical point is that for a company under audit, a taxation officer must scrutinize all expenses and add back any that are inadmissible, such as unsupported payments, personal expenses, cash payments above the specified limit, and capital expenditures incorrectly claimed as revenue expenses, all of which attract additional tax at the corporate rate. For a sole proprietorship, the taxable income is simply the net profit computed from the trading and profit & loss account, and the tax is applied at the individual income tax rates. For an association of persons, the firm itself is taxed on its profit, but a partner's share of profit is added to their other income only for determining the applicable tax rate, not for double taxation, requiring a proportional deduction to avoid taxing the same income twice. The specific tax rates used in the exercises (35% for companies, 12.50% for individuals, and 17.50% for AOPs) are crucial for historical context; students must refer to current tax rates for contemporary applications.

🧠 Quick Revision Questions

1. What are the four inadmissible expenses identified in the audit of M/S XYZ Ltd., and what is the total amount added back and the resulting additional tax?
2. In Exercise 6, how is the gross profit calculated, and what is the net profit for Mr. A's sole proprietorship?
3. What is the firm-level tax liability for M/S XYZ brothers on a net profit of Rs. 900,000, and what tax rate is applied?
4. Explain the rule for adding a partner's share of profit for rate purposes only. What is the final tax payable by Mr. Z, and why is a deduction made?
5. Why is the purchase of an X-Ray machine for Rs. 1,000,000 considered an inadmissible expense in the company's revenue account, and how should it have been treated?

📘 Lecture 39 — Capital Gains

📖 Overview: This lecture explains how capital gains are defined, computed, and taxed under the Income Tax Ordinance. It covers the formula for calculating capital gains, special treatment for assets held over one year, exemptions, and the definition of capital assets and disposal. Understanding capital gains taxation is essential for accurate tax compliance on asset sales.

🗂️ Topics Covered

The lecture covers the chargeability of capital gains to tax, the formula for computing capital gain (consideration received minus cost), the reduced gain rate for assets held over one year (three-fourths of total gain), treatment of cost for assets acquired by gift or inheritance, deductions for losses on capital asset disposal (with exceptions for certain items like artwork and jewelry), the definition of "capital asset" including excluded items, examples of capital assets, and the legal definition of "disposal" with examples.

📝 Lecture Summary

Capital gain subject to this ordinance

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 under this ordinance, shall be chargeable to tax under the head "Capital gains".

Computation of Capital Gain

Capital gain shall be computed in accordance with the following formula:

Capital Gain = A - B

• A is the consideration received by the person on disposal of the capital asset
• B is the cost of the asset

If a capital asset has been held by a person for more than one year, the gain shall be considered as 3/4th of total capital gain derived on disposal of the capital asset.

📌 Example: Say capital gain is Rs 100,000, if the capital asset is disposed of after retaining for more than one year, then gain chargeable to tax would be: 100,000 × 3/4 = Rs 75,000

No amount shall be included in the cost of the capital asset (B) for any expenditure incurred by a person where a capital asset becomes the property of the person as outlined below:

• a) Under a gift or will
• b) By succession, inheritance or devolution
• c) A distribution of assets on dissolution of an association of persons
• d) On distribution of assets on liquidation of a company

In these cases, 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.

🔑 Definition — Fair market value: The price that an asset would sell for on the open market on the date of transfer or acquisition.

Deductions of losses in computing the amount chargeable under the head "Capital Gains" [sec 38]

Deductions shall be allowed under sec 38 for any loss on the disposal of a capital asset by the person in the year.

However, no loss shall be recognized under this ordinance on the disposal of the following capital assets:

• A painting, sculpture, drawing or other work of art
• Jewelry
• A rare manuscript, folio or book
• A postage stamp
• A coin or medallion
• An antique

Definition of 'Capital Asset'

'Capital Asset' means property of any kind held by a tax payer, whether or not connected with business, but does not include the following:

Assets Excluded From the Definition of "Capital Asset":

• Any stock-in-trade (not being stocks and shares), 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
• Any immovable property
• Any movable property (excluding capital assets specified in sub section (5) of section 38) held for personal use by the person or any member of the person's family dependent on the person

💡 Why this matters: These exclusions mean that most business assets (like inventory and depreciable property) and personal-use movable property are not treated as "capital assets" for capital gains tax purposes.

"Capital Assets" Include among others the following:

• Movable assets
• Immovable Assets (excluding Immoveable Property)
• Tangible Assets
• Intangible Assets, etc.
• Share of partner/member in a firm or AOP (in this ordinance even firms are treated as AOP)
• Mining rights
• Industrial licenses & import/export licenses acquired for consideration
• Tenancy right or leasehold rights
• Foreign currency
• Right to subscribe for shares
• The contractual right of a purchaser to obtain title to an immovable property
• A license to manufacture certain product or render any services (known as franchise)
• Goodwill for which payment has been made. Self-created goodwill does not come into the ambit of chargeability under this head
• All precious metals, gems, stones, antique pieces and Jewelry which are not held by the assessee for his family members dependent on him. This includes gold and silver coins, art collections, etc.

Term Disposal – Defined [Section 2(8) read with section 75]

Some Examples of Disposal: i. Transfer of capital asset by a subsidiary company to a parent company or vice versa ii. Any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company to the amalgamated company iii. Transfer of share by a shareholder in a scheme of amalgamation of companies iv. Any transfer of a capital asset by a wholly-owned subsidiary company to its Pakistani holding company v. Any transfer of capital asset being any work of art, archaeological, scientific nature or art collection, book, manuscript, drawing, painting, photograph or print, to the Government or a University or the National Museums, National Art Gallery, National Archives or any other such public museum or institution

⭐ Key Takeaways

The most critical points from this lecture are: (1) Capital gain is computed as consideration received minus cost, but for assets held over one year only 3/4th of the gain is chargeable to tax. (2) For assets acquired by gift, will, inheritance, or distribution on dissolution/liquidation, the fair market value on the date of transfer is treated as the cost. (3) No loss is recognized on disposal of specified personal property like paintings, jewelry, stamps, coins, antiques, or rare manuscripts. (4) "Capital asset" excludes stock-in-trade, depreciable property, immovable property, and personal-use movable property, but includes shares, mining rights, licenses, franchise rights, purchased goodwill, and precious metals/gems not held for personal use. (5) Disposal includes specific transfers between related companies, amalgamation transfers, and transfers of art/archaeological items to government or public institutions.

🧠 Quick Revision Questions

1. What is the formula for computing capital gain under the Income Tax Ordinance?
2. How is capital gain reduced if the asset was held for more than one year?
3. When a capital asset is acquired by gift or inheritance, how is the cost determined?
4. Which types of capital assets are excluded from recognition of loss on disposal under section 38?
5. List five items that are specifically included in the definition of "capital asset" but are not ordinary business assets.

📘 Lecture 40 — Disposals Not Chargeable To Tax Under Sec.79 Non Recognition Rules

📖 Overview: This lecture covers situations where capital gains or losses are not recognized for tax purposes under Section 79 of the Income Tax Ordinance, along with exemptions provided in the Second Schedule. It explains the "non-recognition rules" that apply to specific disposals like gifts, inheritances, and transfers between spouses, and provides practical exercises to calculate taxable capital gains.

🗂️ Topics Covered

The lecture begins with the six types of disposals that are not chargeable to tax under Section 79, including transfers between spouses, gifts, inheritances, and compulsory acquisitions with reinvestment. It then outlines exemptions for capital gains from the Second Schedule, covering shares, Mudarba certificates, and special zones. Finally, it presents four practical exercises that demonstrate how to calculate capital gains and determine taxability in different scenarios, including compulsory acquisition, share sales, and mining rights.

📝 Lecture Summary

Disposals Not Chargeable To Tax Under Sec.79 Non Recognition Rules

No gain or loss shall be taken to arise on the disposal of an asset in the following situations:

• Between spouses under an agreement to live apart
• By reason of the transmission of the asset to an executor or beneficiary on the death of a person
• By reason of a gift of the asset
• By reason of the compulsory acquisition of the asset under any law where the consideration received for the disposal is reinvested by the recipient in an asset of a like kind within one year of the disposal
• By a company to its shareholders on liquidation of the company
• By an association of persons to its member on dissolution of the association where assets are distributed according to their interests

💡 Why this matters: These non-recognition rules prevent tax from triggering on transfers that don't involve real economic gain, such as gifts or inheritances, and encourage reinvestment of compensation into similar assets.

Exemptions as Contained in Second Schedule

The Second Schedule provides several exemptions for capital gains:

• Clause 110: Exempts income from the sale of Mudarba certificates, any instrument of redeemable capital as defined in Companies Ordinance, 1984 and listed on a stock exchange in Pakistan, shares of a public company, and Pakistan Telecommunication Corporation vouchers issued by the Government of Pakistan
• Clause 111: Exempts capital gains from sale of shares of a public company derived by a foreign institutional investor approved by the Federal Government
• Clause 112: Omitted
• Clause 113: Exempts capital gains from sale of shares of a public company set up in any special industrial zone (referred to in clause 126), derived by a person for five years from the date of commencement of commercial production, provided the company is eligible for exemption under clause 126
• Clause 114: Exempts capital gains derived by a person from an industrial undertaking set up in an area declared by the Federal Government to be a "Zone" within the meaning of the Export Processing Zone Authority Ordinance 1980
• Clause 114A: Exempts capital gains from sale of ships and all floating crafts including tugs, dredgers, survey vessels and other specialized craft up to the tax year ending on 30th June, 2011

Exercise on Capital Gain

Exercise-1: On 1st July 2008, the Govt. prohibited sale of plastic bags and took over machines of M/s WW Ltd (cost Rs. 1,000,000). The Govt. paid Rs. 2,500,000 as compensation. The company purchased new machines of the related business on 1st April 2009 costing Rs. 4,000,000.

📐 Formula: Capital Gain = Consideration received – Cost of acquisition → Plain-English: The profit is the amount received minus what you originally paid. 📌 Example:

• Consideration received (A) = Rs. 2,500,000
• Cost of Acquisition (B) = Rs. 1,000,000
• Capital Gain = Rs. 2,500,000 – Rs. 1,000,000 = Rs. 1,500,000
• Result: Although there is a gain of Rs. 1,500,000, it is not chargeable to tax because the consideration received was reinvested in a like business within one year of disposal (compulsory acquisition rule).

Exercise 2: On 01/01/2007, Mr. Y purchased 10,000 shares at Rs. 30 per share. He sold them on 20/06/2009 at Rs. 50 per share.

📐 Formula: Taxable Capital Gain (held > 1 year) = Capital Gain × 3/4 📌 Example:

• Consideration received (A) = 10,000 × 50 = Rs. 500,000
• Cost of acquisition (B) = 10,000 × 30 = Rs. 300,000
• Capital Gain = Rs. 500,000 – Rs. 300,000 = Rs. 200,000
• Since shares held for more than one year, 3/4th of the gain is taxable:
• Taxable Capital Gain = Rs. 200,000 × 3/4 = Rs. 150,000

Exercise 3: On 01/10/2008, Mr. A acquired mining rights at Rs. 2,000,000. On 01/02/2009, he disposed of them to Mr. Y for Rs. 5,000,000.

📌 Example:

• Consideration received (A) = Rs. 5,000,000
• Cost of acquisition (B) = Rs. 2,000,000
• Capital Gain = Rs. 5,000,000 – Rs. 2,000,000 = Rs. 3,000,000
• Note: Held for less than one year (4 months), so full gain is taxable (no 3/4 reduction).

Exercise 4: On 01/01/2007, M/s XYZ Pvt. Ltd. purchased 5,000 shares of a public company at Rs. 100 per share. On 10/05/2009, they sold at Rs. 150 per share.

📌 Example:

• Consideration received (A) = 5,000 × 150 = Rs. 750,000
• Cost of acquisition (B) = 5,000 × 100 = Rs. 500,000
• Capital Gain = Rs. 750,000 – Rs. 500,000 = Rs. 250,000
• Since held more than 1 year, normally taxable gain = Rs. 250,000 × 3/4 = Rs. 187,500
• However, gain is not taxable because exemption under Clause 110 of Part I of Second Schedule applies to gains from sale of shares of a public limited company.

⭐ Key Takeaways

The most critical points to remember are the six non-recognition rules under Section 79, where no gain or loss arises: transfers between spouses under separation agreements, inheritances, gifts, compulsory acquisitions with reinvestment within one year into like-kind assets, company liquidations to shareholders, and dissolution of associations to members. For capital gains taxation, if an asset is held for more than one year, only three-quarters (3/4th) of the gain is taxable, while gains from assets held less than one year are fully taxable. Crucially, exemptions under the Second Schedule (especially Clause 110 for shares of public companies and Clause 111 for foreign institutional investors) can override normal taxability, so always check applicable exemptions before computing tax.

🧠 Quick Revision Questions

1. List four of the six situations where no gain or loss arises on disposal under Section 79.
2. If a person receives compensation for compulsory acquisition and reinvests it in a different type of asset after 13 months, is the gain taxable?
3. Under which clause of the Second Schedule are capital gains from shares of a public company exempt for a Pakistani taxpayer?
4. Calculate taxable capital gain: Mr. X bought shares at Rs. 20 each on 1 Jan 2008 and sold them at Rs. 35 each on 30 June 2009 (no exemption applies).
5. Why was the capital gain in Exercise 4 not taxable despite the shares being held for more than one year?

Here is the summary of the provided lecture text, formatted according to your strict instructions.

📘 Lecture 10.39 — Income from Other Sources (Section 39)

📖 Overview: This lecture covers the residual head of income, "Income from Other Sources," which captures all income not classified under the other four specific heads (Salary, Property, Business, Capital Gains). It explains the types of income included, special rules for cash receipts and unexplained investments, and the deductions allowed against such income, making it essential for understanding how the tax system catches all other taxable inflows.

🗂️ Topics Covered

This lecture begins by defining "Income from Other Sources" and listing specific examples like dividends, royalty, and profit on debt. It then covers miscellaneous incomes such as annuities and pensions, followed by special provisions for sums not received through permissible banking channels. The lecture concludes with an in-depth look at unexplained income or assets under Section 111, including exemptions, and finally outlines the admissible deductions available against this income.

📝 Lecture Summary

Income from Other Sources (Section 39)

This head of income acts as a "catch-all" for incomes not specifically covered under the heads of Salary, Property, Business, or Capital Gains. It ensures that all taxable income is captured even without a specific category.

🔑 Definition — Income from Other Sources: Income from dividends, royalty, and profit on debt. Profit on debt includes profit, yield, interest, and premium received or accrued.

📌 Example: If an individual receives a pension, it is not "Salary" from a current employer. Therefore, pension is taxed under "Income from Other Sources."

Other Miscellaneous Incomes Covered Under the Head 'Income from Other Sources'

This section lists other diverse types of income that are taxed under this head. Examples include annuities, pension, income from exploration rights (e.g., oil fields), income from interest-free loans (calculated above the benchmark rate), and any sum paid to a person for vacating premises.

🔑 Definition — Sum paid for vacating premises: Any payment received by a tenant or occupant for agreeing to leave a property is treated as taxable income of the recipient under this head.

Other Specific Items Covered Under the Head Income From Other Sources

A specific rule targets sums received in an unorthodox manner. If a sum, such as a loan, gift, or deposit for shares, is received otherwise than through a crossed bank cheque or a permissible banking channel, or from a person without a National Tax Number (NTN), the entire amount is treated as income under this head for the year it was received [Sec. 39(3)].

📌 Example: A person receives a gift of Rs. 500,000 in cash from a friend who does not have an NTN. Since the amount was not received through a banking channel and the friend has no NTN, the entire Rs. 500,000 will be treated as the recipient's income and taxed under "Income from Other Sources."

🔑 Exception — Advance payment for goods/services: [Sec. 39(4)] The above rule does not apply to advance payments received for the sale of goods or supply of services. Such advances are not added to income even if received in cash. However, advances for a contract (e.g., a construction contract) must follow the rule.

Unexplained Investments [Sec. 111]

This section deals with unexplained income or assets. If a person has made an investment, had a credit in their books of account, or incurred an expenditure, and cannot provide a reasonable explanation for the source of funds, that amount is treated as the person's taxable income.

🔑 Definition — Unexplained income: Any investment, credit, or expenditure for which the taxpayer cannot satisfactorily explain the source.

📌 Example: A taxpayer deposits Rs. 2,000,000 in a bank account but cannot provide any evidence of the loan, gift, or prior savings from which this money came. The tax department can treat this Rs. 2,000,000 as the taxpayer's unexplained income and tax it under this section.

Immune (Exempted) Investments/Income [Sec. 111]

This rule does not apply to certain funds. Key exemptions include:

• Amounts of Foreign Exchange remitted from outside Pakistan through normal banking channels and encashed into PKR with a certificate from a scheduled bank.
• Unexplained amounts relating to a period beyond the preceding five tax years (i.e., you cannot be taxed for mysterious income from 10 years ago).
• Specific investments like Private Foreign Currency Accounts and Three Years Foreign Currency Bearer Certificates.

📌 Example: A person has Rs. 500,000 in cash at home from 15 years ago. This amount is outside the preceding five tax years, so Section 111 does not apply to it.

Admissible Deductions

Taxpayers can claim certain deductions against income under this head. These include:

• Any expenditure incurred solely to earn the income (e.g., collection charges for dividends).
• Any Zakat paid on profit on debt (e.g., interest on a savings account).
• Depreciation on assets used to generate this income (e.g., depreciation on a machine used to earn royalty income).

💡 Why this matters: These deductions lower the taxable income, so understanding exactly what can be deducted is crucial for accurate tax calculation.

⭐ Key Takeaways

For the exam, a student must remember that "Income from Other Sources" is the residual head for any taxable income not covered elsewhere. The most critical point is the strict rule under Sec. 39(3) regarding cash receipts and non-NTN holders, which can turn a loan or gift into taxable income. Additionally, Sec. 111 on unexplained investments is a powerful tool to tax any unaccounted wealth unless it falls under specific exemptions like foreign remittances or relates to a period beyond five years. Finally, remember that while expenses like Zakat and depreciation are deductible, only expenditures directly incurred to earn this specific income are allowed.

🧠 Quick Revision Questions

1. A company pays a director a pension after retirement. Under which head of income is this pension taxed?
2. Ali receives a gift of Rs. 200,000 in cash from a friend who has a valid NTN. Is this gift taxable under "Income from Other Sources"?
3. A taxpayer is found to have a new car worth Rs. 3,000,000 but cannot explain the source of the money used to buy it. Which section of the Income Tax Ordinance will apply, and what is the consequence?
4. Zara receives profit on her savings account. What two specific deductions is she allowed against this profit under the head "Income from Other Sources"?
5. What is the key exception to the rule that sums received not through a banking channel are taxable?

📘 Lecture 42 — Set Off of Losses, Deductible Allowances, and Common Rules

📖 Overview: This lecture covers the comprehensive framework for handling tax losses under Pakistan's Income Tax Ordinance, including how losses can be set off against different income heads and carried forward. It also details various deductible allowances and tax credits available to taxpayers, along with common rules for computing taxable income that apply universally.

🗂️ Topics Covered

The lecture systematically covers five main areas: (1) set off of losses under Section 56, including the hierarchy of loss adjustment; (2) carry forward of business losses under Section 57 and amalgamation provisions under Section 57A; (3) carry forward of capital losses under Section 59; (4) various deductible allowances including Zakat (Section 60), charitable donations (Section 61), investment in shares (Section 62), pension fund contributions (Section 63), retirement annuity schemes, and profit on debt (Section 64); and (5) common rules covering joint ownership, apportionment, fair market value, receipt of income, recouped expenditure, currency conversion, cessation of source, and anti-double derivation rules.

📝 Lecture Summary

56. SET OFF OF LOSSES

Subject to sections 58 and 59, where a person sustains a loss for any tax year under any head of income specified in section 11, the person shall be entitled to have the amount of the loss set off against the person's income chargeable to tax under any other head of income for that year. This means losses in one category can reduce taxable income in another category in the same year.

🔑 Definition — Set Off: The process of deducting a loss sustained under one head of income against income earned under another head of income in the same tax year.

Except as provided in this Part, where a person sustains a loss under a head of income that cannot be set off under sub-section (1), the person shall not be permitted to carry the loss forward to the next tax year. This establishes a strict rule: only losses specifically allowed can be carried forward.

Where, in a tax year, a person sustains a loss under the head "Income from Business" and a loss under another head of income, the loss under the head "Income from Business" shall be set off last. This creates a priority order where business losses are the final adjustment against other income.

💡 Why this matters: The order of loss set-off directly affects the taxpayer's tax liability. Setting off non-business losses first maximizes the benefit of the business loss carry-forward provisions.

57. Carry forward of Business Losses

Where a person sustains a loss for a tax year under the head "Income from Business" (other than a loss to which section 58 applies) and the loss cannot be wholly set off under section 56, so much of the loss that has not been set off shall be carried forward to the following tax year and set off against the person's income chargeable under the head "Income from Business" for that year. This allows business losses to be used against future business profits.

If a business loss is not wholly set off in the first carry-forward year, the remaining amount shall be carried forward to the following tax year and applied similarly, but no loss can be carried forward to more than six tax years immediately succeeding the tax year for which the loss was first computed. This creates a strict six-year limitation period.

For banking companies wholly owned by the Federal Government as of June 1, 2002, and approved by the State Bank of Pakistan, losses relating to assessment years from July 1, 1995, to June 30, 2001, shall be carried forward for a period of ten years.

📐 Formula: Business loss carry-forward = Original loss − Amounts already set off (limited to 6 subsequent tax years maximum)

Where a person has a loss carried forward for more than one tax year, the loss of the earliest tax year shall be set off first. This FIFO (First-In, First-Out) method ensures old losses are utilized before newer ones.

Where the business loss includes deductions allowed under sections 22, 23, and 24 (relating to depreciation, initial allowance, and other capital allowances) that have not been set off against income, the amount not set off shall be added to the deductions allowed under those sections in the following tax year, and so on until completely set off. Unabsorbed depreciation is thus treated as a continuing deduction.

In determining whether a person's deductions under sections 22, 23, and 24 have been set off against income, the deductions allowed under those sections shall be taken into account last.

57A. Set off of business loss consequent to Amalgamation

The accumulated loss under the head "Income from Business" (not being a loss to which section 58 applies) of an amalgamating company or companies shall be set off or carried forward against the business profits and gains of the amalgamated company and vice versa up to a period of six tax years immediately succeeding the tax year in which the loss was first computed. This allows loss continuity through corporate mergers.

The provisions of sub-sections (4) and (5) of section 57 shall, mutatis mutandis, apply for allowing unabsorbed depreciation of amalgamating company or companies in the assessment of amalgamated company and vice versa.

Where any conditions laid down by the State Bank of Pakistan, the Securities and Exchange Commission of Pakistan, or any court in the scheme of amalgamation are not fulfilled, the set off of loss or allowance for depreciation made in any tax year of the amalgamated or amalgamating company shall be deemed to be income of that company for the year in which such default is discovered by the Commissioner or taxation officer, and all provisions of this Ordinance shall apply accordingly.

💡 Why this matters: Amalgamation provisions allow businesses to restructure without losing tax benefits, but strict conditions mean non-compliance can trigger retrospective taxation.

59. Carry forward of Capital Losses

Where a person sustains a capital loss for a tax year under the head "Capital Gains," the loss shall not be set off against the person's income chargeable under any other head of income for the year. Instead, it shall be carried forward to the next tax year and set off against the capital gain chargeable under the head "Capital Gains" for that year. Capital losses can only offset capital gains.

If a capital loss is not wholly set off in the first carry-forward year, the remaining amount shall be carried forward to the following tax year, and so on, but no loss shall be carried forward to more than six tax years immediately succeeding the tax year for which the loss was first computed.

Where a person has a loss carried forward under this section for more than one tax year, the loss of the earliest tax year shall be set off first.

🔑 Definition — Capital Loss: A loss sustained under the head "Capital Gains" that cannot be set off against other income heads and must be carried forward against future capital gains only.

60. Zakat

A person shall be 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. This provides a deduction for religious tax paid.

Sub-section (1) does not apply to any Zakat taken into account under sub-section (2) of section 40 (which deals with amounts already deducted from income).

Any allowance or part of an allowance under this section for a tax year that is not able to be deducted under section 9 for the year shall not be refunded, carried forward to a subsequent tax year, or carried back to a preceding tax year. Unused Zakat deductions are forfeited.

61. Charitable donations

A person shall 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: a) any board of education or any university in Pakistan established by, or under, a Federal or a Provincial law; b) any educational institution, hospital or relief fund established or run in Pakistan by Federal Government, Provincial Government or a local authority; or c) any non-profit organization.

The amount of the tax credit for a tax year shall be computed according to the following formula:

📐 Formula: (A/B) × C

Where:

• A = Amount of tax assessed to the person for the tax year before allowance of any tax credit under this Part
• B = Person's taxable income for the tax year
• C = Lesser of:
  • (a) Total amount of donations in the year (including fair market value of property given); or
  • (b) Where the person is:
    • An individual or AOP: 30% of taxable income for the year; or
    • A company: 15% of taxable income for the year

For the purposes of clause (a) of component C, the fair market value of any property given shall be determined at the time it is given.

A cash amount paid as a donation shall be taken into account only if it was paid by a crossed cheque drawn on a bank. This prevents cash-only donations from qualifying.

The Central Board of Revenue may make rules regulating the procedure of grant of approval under sub-clause (c) of clause (36) of section 2 and any other incidental matters.

🔑 Definition — Tax Credit: A direct reduction in the amount of tax payable, as opposed to a deduction which reduces taxable income. The formula (A/B)×C effectively applies the taxpayer's average tax rate to the donation amount.

📌 Example: An individual has taxable income of Rs. 1,000,000 and tax assessed of Rs. 150,000. They donate Rs. 200,000 cash by crossed cheque to an approved non-profit organization.

• A = 150,000; B = 1,000,000; C = lesser of (a) Rs. 200,000 or (b) 30% × 1,000,000 = Rs. 300,000 → C = 200,000
• Tax Credit = (150,000 / 1,000,000) × 200,000 = 0.15 × 200,000 = Rs. 30,000
• The taxpayer's tax liability is reduced by Rs. 30,000.

62. Investment in shares

A person other than a company shall be entitled to a tax credit for a tax year 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, where the person is the original allottee of the shares or the shares are acquired from the Privatization Commission of Pakistan.

📐 Formula: (A/B) × C

Where:

• A = Tax assessed before allowance of any tax credit under this Part
• B = Taxable income for the tax year
• C = Lesser of:
  • (i) Total cost of acquiring the shares in the year
  • (ii) 10% of the person's taxable income for the year; or
  • (iii) Rs. 300,000

Where a person has been allowed a tax credit for share purchase and then disposes of the shares within twelve months of the date of acquisition, the amount of tax payable for the tax year in which the shares were disposed of shall be increased by the amount of the credit allowed. This is a clawback provision.

💡 Why this matters: This provision encourages investment in the stock market but penalizes short-term speculation. The 12-month holding period rule ensures genuine long-term investment.

63. Contribution to an Approved Pension Fund

An eligible person deriving income under "Salary" or "Income from Business" shall be entitled to a tax credit for contributions or premiums paid in an approved pension fund under the Voluntary Pension System Rules, 2005.

📐 Formula: (A/B) × C

Where:

• C = Lesser of:
  • (a) Total contribution or premium paid in the year
  • (b) 20% of the eligible person's taxable income (with additional 2% per annum for those aged 41+ joining in first 10 years from July 1, 2006, up to maximum 50% of preceding year's income); or
  • (c) Rs. 500,000

The transfer by members of approved employment pension or annuity scheme or approved occupational saving scheme of their existing balance to individual pension accounts with pension fund managers shall not qualify for tax credit under this section.

63. Retirement annuity scheme (Note: duplicate section numbering in original)

A resident individual deriving income under "Salary" or "Income from Business" shall be entitled to a tax credit for contributions paid under a contract of annuity scheme approved by SECP of an insurance company registered under the Insurance Ordinance, 2000, providing an annuity in old age.

📐 Formula: (A/B) × C

Where:

• C = Lesser of:
  • (a) Total contribution or premium paid in the year
  • (b) 10% of the person's taxable income for the year; or
  • (c) Rs. 200,000

A person shall not be entitled to a tax credit under this section if the annuity contract provides: (a) for payment during the life of any amount besides an annuity (b) for the annuity to commence before the person attains age 60 (c) that the annuity is capable of surrender, commutation, or assignment; or (d) for payment of the annuity outside Pakistan

64. Profit on debt

A person shall be entitled to a tax credit for a tax year in respect of any profit, share in rent, and share in appreciation for value of house paid on a loan by a scheduled bank, non-banking finance institution regulated by SECP, or advanced by Government, local authority, statutory body, or public company listed on a registered stock exchange, where the person utilizes the loan for construction of a new house or acquisition of a house.

📐 Formula: (A/B) × C

Where:

• C = Lesser of:
  • (a) Total profit paid in the year
  • (b) 40% of the person's taxable income for the year; or
  • (c) Rs. 500,000

A person is not entitled to tax credit under this section for any profit deductible under section 17 (which deals with interest expense deductions for business).

Common Rules

Income of joint owners — Section 66

Where any property is owned by two or more persons and their respective shares are definite and ascertainable: a) The persons shall not be assessed as an AOP in respect of the property; and b) The share of each person in the income from property shall be taken into account in computing that person's taxable income.

This section shall not apply in computing income chargeable under the head "Income from Business."

Apportionment of deductions — Section 67

Where expenditure relates to:

• The derivation of more than one head of income; or
• The derivation of income comprising taxable income and income under final tax regime; or
• The derivation of income chargeable to tax and to some other purpose

The expenditure shall be apportioned on any reasonable basis taking account of the relative nature and size of the activities.

Fair Market Value — Section 68

The fair market value of any property, rent, asset, service, benefit, or perquisite at a particular time shall be the price which would ordinarily fetch on sale or supply in the open market at that time.

Receipt of Income — Section 69

A person shall be treated as having received an amount, benefit, or perquisite if it is: a. Actually received by the person b. Applied on behalf of the person, at the person's instruction, or under any law; or c. Made available to the person

Recouped expenditure — Section 70

Where a person has been allowed a deduction for any expenditure or loss and subsequently receives in cash or kind any amount in respect of such expenditure or loss, the amount so received shall be included in income chargeable under the head for the tax year in which it is received.

Currency Conversion — Section 71

Every amount taken into account under this Ordinance shall be in Rupees. Where an amount is in a foreign currency, it shall be converted to Rupees at the State Bank of Pakistan exchange rate applicable on that date.

Cessation of Source of Income — Section 72

Where any income is derived by a person from a business, activity, investment, or other source that has ceased, and if the income had been derived before cessation it would have been chargeable to tax, then this Ordinance shall apply on the basis that the source had not ceased at the time the income was derived.

Rules to prevent double Derivation and double Deductions — Section 73

Where any amount is chargeable to tax on the basis that it is receivable, it shall not be chargeable again on the basis that it is received, and vice versa.

Where any expenditure is deductible on the basis that it is payable, it shall not be deductible again on the basis that it is paid, and vice versa.

⭐ Key Takeaways

The most critical concepts from this lecture are the strict rules governing loss set-off and carry-forward: business losses can be carried forward for a maximum of six years and are set off last when multiple losses exist, while capital losses can only offset capital gains and cannot be set off against other income heads. The tax credit formula (A/B) × C applies uniformly across charitable donations, share investment, pension contributions, retirement annuities, and housing loan profit, representing the taxpayer's effective tax rate applied to the qualifying expenditure — students must memorize the percentage limits and monetary caps (e.g., 30% for individual donations, Rs. 300,000 for shares, Rs. 500,000 for pension funds). The common rules sections contain essential operational principles including the FIFO method for carry-forward losses, the requirement that cash donations be made by crossed cheque to qualify, the apportionment of mixed-use expenses on a reasonable basis, and the anti-avoidance provisions preventing double derivation and double deductions. Understanding the distinction between deductible allowances (which reduce taxable income, like Zakat) and tax credits (which directly reduce tax liability, like charitable donations) is fundamental for exam questions on tax computation. Finally, special provisions for amalgamating companies and banking companies demonstrate that general rules have important exceptions that must be memorized specifically.

🧠 Quick Revision Questions

1. For how many years can a business loss be carried forward under section 57, and what exception exists for certain government-owned banking companies?

2. What is the maximum tax credit allowed for an individual investing in new shares of a listed public company, and what happens if the shares are sold within 12 months?

3. Under what circumstances can a capital loss be set off against income from other heads of income, and how long can capital losses be carried forward?

4. A taxpayer with taxable income of Rs. 800,000 and tax assessed of Rs. 120,000 makes a charitable donation of Rs. 250,000 to an approved non-profit organization. Calculate the tax credit using the formula (A/B) × C, stating the applicable limit.

5. What are the four conditions that disqualify a retirement annuity scheme from qualifying for a tax credit under section 63 (retirement annuity scheme), and at what age must the annuity commence?

📘 Lecture 12.39 — Taxation of Individuals and Taxation of Association of Persons

📖 Overview: This lecture focuses on computing taxable income and tax liability for two distinct business structures: sole proprietorship and partnership (Association of Persons). It demonstrates the practical application of tax rules through step-by-step exercises, highlighting how to prepare a trading and profit & loss account, apply progressive tax rates, and handle the unique treatment of partnership income where share of profit is added only for rate purposes.

🗂️ Topics Covered

The lecture covers two main exercises: Exercise 1 demonstrates the computation of taxable income and tax liability for a sole proprietorship (Mr. A) using a trading and profit & loss account, including calculation of gross profit, net profit, and tax payable after adjusting advance tax paid. Exercise 2 covers the taxation of an Association of Persons (M/S XYZ brothers partnership firm), where the firm's net profit is taxed at the applicable slab rate, and each partner's share of profit is added to their individual income only for rate purposes to compute their personal tax liability.

📝 Lecture Summary

Exercise 1 – Sole Proprietorship

This exercise shows how to compute taxable income for a sole proprietor, Mr. A, for tax year 2009. The process begins by preparing a trading and profit & loss account to determine gross profit and net profit. Gross profit is calculated as Sales plus Closing Stock minus (Opening Stock plus Purchases plus Carriage Inward). Then, all allowable business expenses are deducted from gross profit to arrive at net profit, which is the taxable income for a sole proprietorship. The tax is then computed by applying the relevant tax rate to this net profit, and any advance tax paid is subtracted to find the final tax payable or refundable.

🔑 Definition — Sole Proprietorship: A business owned and operated by a single individual, where the business income is taxed as the individual's personal income. 📐 Formula: Gross Profit = Sales + Closing Stock – (Opening Stock + Purchases + Carriage Inward); Net Profit (Taxable Income) = Gross Profit – All Allowable Business Expenses 📌 Example: For Mr. A: Opening Stock = Rs. 800,000; Purchases = Rs. 1,000,000; Sales = Rs. 2,000,000; Carriage Inward = Rs. 30,000; Closing Stock = Rs. 800,000.

• Gross Profit = 2,000,000 + 800,000 – (800,000 + 1,000,000 + 30,000) = 2,800,000 – 1,830,000 = Rs. 970,000.
• Expenses: Electricity Rs. 18,000 + Telephone Rs. 20,000 + Office Rent Rs. 120,000 + Stationary Rs. 4,000 + Postages Rs. 3,000 + Salaries Rs. 200,000 + Advertising Rs. 10,000 = Total Expenses Rs. 375,000.
• Net Profit (Taxable Income) = 970,000 – 375,000 = Rs. 595,000.
• Tax payable = 595,000 × 12.50% = Rs. 74,375.
• Advance tax paid = Rs. 60,000.
• Tax payable with return = 74,375 – 60,000 = Rs. 14,375.
• Final tax payable/refundable = Nil (after paying the balance).

💡 Why this matters: In a sole proprietorship, the business and owner are the same legal entity, so all business profits are directly taxed as the individual's income at personal income tax rates.

Exercise 2 – Taxation of Association of Persons

This exercise demonstrates the unique tax treatment for a partnership firm (Association of Persons – AOP). The firm itself is a taxable entity, and its net profit is taxed at the applicable slab rate for firms. However, the partners are not taxed on their share of profit as separate income; instead, their share is added to their other income only for rate purposes to determine the tax rate applicable to their other income. This prevents partners from paying lower rates on their other income by artificially keeping their income low. The partner's tax liability is computed by first calculating the tax on their total income (including share of profit for rate purposes), then subtracting the tax attributable to the share of profit from the firm.

🔑 Definition — Association of Persons (AOP): A partnership firm treated as a separate taxable entity for income tax purposes, with its own tax liability calculated on its net profit. 📐 Formula: Tax Liability of Firm = Net Profit × Applicable Slab Rate; Partner's Tax = Tax on (Partner's Other Income + Share of Profit) – [Tax on Total Income / Total Income × Share of Profit] 📌 Example: M/S XYZ brothers has three equal partners (X, Y, Z) and net profit of Rs. 900,000.

• Firm's Tax Liability: 900,000 × 17.50% (slab rate for income Rs. 800,000–1,000,000) = Rs. 157,500.
• Each partner's share of profit = Rs. 300,000.
• For Mr. Z: Other income = Rs. 200,000. His share of profit (Rs. 300,000) is added only for rate purposes.
• Total income for rate purposes = 200,000 + 300,000 = Rs. 500,000.
• Tax on Rs. 500,000 = 500,000 × 10% = Rs. 50,000.
• Tax attributable to share of profit = (50,000 / 500,000) × 300,000 = Rs. 30,000.
• Tax payable by Mr. Z = 50,000 – 30,000 = Rs. 20,000.
• Comparison: Without adding the share of profit, Mr. Z would have paid 200,000 × 4% = Rs. 8,000 instead of Rs. 20,000.

💡 Why this matters: This mechanism ensures that partners cannot avoid higher tax brackets by having their income split across the firm and personal sources; the share of profit pushes them into a higher bracket for rate determination only.

⭐ Key Takeaways

The critical takeaway is that sole proprietorship income is straightforward—net profit equals taxable income and is taxed at personal rates, with advance tax payments deducted. For partnerships, the firm is taxed separately on its net profit at the applicable slab rate, while partners only add their share of profit to their other income for rate purposes—not as actual taxable income. This "rate purpose only" addition prevents partners from paying lower rates on their other income. The partner's final tax liability is computed using a proportional allocation formula to isolate the tax on their other income. Understanding these two distinct approaches is essential for correctly calculating tax liabilities for individuals and associations of persons.

🧠 Quick Revision Questions

1. In a sole proprietorship, what is the relationship between net profit and taxable income?
2. For the sole proprietor Mr. A, what was the total amount of allowable business expenses deducted from gross profit?
3. In Exercise 2, what tax rate was applied to the firm's net profit of Rs. 900,000, and what was the firm's total tax liability?
4. Why is a partner's share of profit from a firm added to their income "only for rate purposes" and not as actual taxable income?
5. If Mr. Z had no other income besides his share of profit from the firm, what would be his tax liability?

📘 Lecture 44 — Taxation of Companies

📖 Overview: This lecture covers the minimum tax on resident companies, calculation of depreciation for plant and machinery, treatment of speculation business losses, and comprehensive tax computation exercises for companies. It’s crucial for understanding how to compute taxable income and tax liability in various corporate scenarios.

🗂️ Topics Covered

The lecture covers minimum tax under Section 113 for resident companies, computation of normal and initial depreciation for plant and machinery (Exercise 2), treatment of speculation business and set-off of losses (Exercise 3), and a full company audit scenario with inadmissible expenses added back (Exercises 1 & 4). Key concepts include turnover definition for minimum tax, depreciation rules, and cash payment restrictions under Section 21.

📝 Lecture Summary

Minimum Tax on Resident Companies Sec 113

A Resident Company is subjected to a minimum tax @ 0.50% of its turnover for a tax year, even in cases where the company sustains a loss. Turnover under this section means:

• The gross receipts, exclusive of sales tax and central excise duty or any trade discounts shown on invoice or bills, derived from the sale of goods.
• The gross fees for the rendering of services or giving benefits, including commissions.
• The gross receipts from the executions of contracts.
• The company’s share of the amounts stated above of any association of persons of which the company is a member.

Exercise-1 — Inadmissible Deductions under Section 21

M/S XYZ (PVT) Ltd. filed return for tax year 2009, declaring taxable income of Rs. 1,300,000 and paid entire liability of tax. On scrutiny, it came to notice that certain amounts were paid by cash:

• Salary: Rs. 30,000
• Office Rent: Rs. 120,000
• Professional Fee: Rs. 80,000
• Postages: Rs. 8,000
• Freight paid: Rs. 9,000
• Electricity bill: Rs. 7,000
• Telephone: Rs. 5,000
• Penalty: Rs. 9,000

Solution of E-1 Add Back Inadmissible Deductions under Section 21:

• Salary paid by cash: Rs. 30,000
• Rent of office paid by cash: Rs. 120,000
• Professional fee paid by cash: Rs. 80,000
• Total Additions: Rs. 230,000

Declared income: Rs. 1,300,000 Tax already paid (1,300,000 x 35%): Rs. 455,000 Additions made U/S 21: Rs. 230,000 Tax payable on additions: Rs. 80,500

🔑 Note: Additions on account of rest of payments (postages, freight, electricity, telephone, penalty), although by cash, are not required to be added back as provided in section 21(L).

Computation of Depreciation — Exercise 2

M/S A.K. Brothers is a partnership firm. Information regarding plant and machinery:

• Book value of plant and machinery as on 01-07-2008: Rs. 1,800,000
• Machinery disposed of during the year with book value: Rs. 600,000
• Additions of eligible depreciable asset during the year: Rs. 1,000,000

Solution of E-2 Tax Payer: A.K. Brothers | Tax Year: 2009 | Residential Status: Resident | NTN: 000111

📐 Formula: Initial Allowance = 50% of additions; Normal Depreciation = 15% of total book value (after initial allowance). 📌 Example: Initial allowance = 50% × 1,000,000 = 500,000; Normal depreciation = 15% × 1,700,000 = 255,000; Total = 755,000.

On Speculation Business — Exercise 3

M/s ABC Ltd. furnished accounting information for tax year 2009:

• Gross Income from normal business: Rs. 2,500,000
• Expenditures on normal business: Rs. 1,000,000
• Gross income from speculation business: Rs. 600,000
• Expenditures on speculation business: Rs. 300,000
• Loss carried forward on normal business: Rs. 200,000
• Loss carried forward on speculation business: Rs. 900,000
• Advance Tax Paid: Rs. 200,000

Solution of E-3 Tax Payer: ABC Ltd. | Tax Year: 2009 | Residential Status: Resident | NTN: 000111

Taxable Income: Normal business Rs. 1,300,000 Tax payable = (1,300,000 x 35%) = Rs. 455,000

🔑 Note-1: Loss of Rs. 600,000 from speculation business cannot be set off against business income; it can be set off against speculation business income only. Hence this loss of Rs. 600,000 shall be carried forward to next year.

💡 Why this matters: Speculation business losses have strict ring-fencing—they can only offset speculation profits, not normal business income. This prevents tax avoidance through artificial speculation losses.

Taxation of Companies — Exercise 4

M/S XYZ Ltd., running a chain of hospitals, filed return for tax year 2009 selected for total audit. Data:

• Medicines purchased: Rs. 1,000,000
• Ambulances running expenses: Rs. 300,000
• Depreciation on ambulances: Rs. 40,000
• Depreciation on other assets: Rs. 60,000
• Salaries paid through bank accounts: Rs. 300,000
• Unsupported payment for purchase of stationery: Rs. 12,000
• Depreciation on director’s personal car: Rs. 40,000
• Payment of legal fee by cash: Rs. 60,000
• Received payments from corporations: Rs. 6,000,000
• Other receipts: Rs. 2,000,000
• Gain on sale of a vehicle: Rs. 200,000
• Purchase of X-Ray machine shown as expense: Rs. 1,000,000
• Withholding tax deductions: Rs. 525,000
• Loss carried forward from tax year 2008: Rs. 1,200,000

Solution of E-4 Revenue Account as Submitted by Company:

Computation of Tax Payable:

• Net Profit as computed by Co.: 5,388,000
• Less set off of c/f losses: (1,200,000)
• Taxable Income: 4,188,000
• Tax Payable (4,188,000 x 35%): 1,465,800
• Less withholding tax deductions: 525,000
• Balance Tax Payable: 940,800
• Tax Paid with Return: 940,800
• Tax Payable/Refundable: NIL

Additions by Taxation Officer on account of inadmissible expenses:

• Unsupported payments: 12,000
• Depreciation claimed on personal car of Director: 40,000
• Payment of legal fee by cash: 60,000
• Purchase of X-Ray machine (to be capitalized, not revenue): 1,000,000
• Total additions: 1,112,000
• Tax payable on account of add backs (1,112,000 x 35% = 389,200): 389,200

The company shall have to pay additional tax amounting Rs. 389,200.

⭐ Key Takeaways

1. Resident companies face a minimum tax of 0.50% of turnover under Sec 113, even if making a loss—turnover includes gross receipts from goods, services, contracts, and AOP shares.
2. Under Section 21, certain cash payments (salary, rent, professional fees) are disallowed and added back to income, increasing tax liability; other payments (postage, freight, utilities) by cash are permissible.
3. Depreciation on plant and machinery includes an initial allowance of 50% on additions plus normal depreciation of 15% on the remaining book value—both must be computed correctly.
4. Speculation business losses are ring-fenced: they can only be set off against speculation business profits, not normal business income; any excess is carried forward.
5. Capital expenditures (e.g., X-Ray machine) and personal expenses (e.g., director’s car depreciation) must be added back as inadmissible deductions, and unsupported payments or cash legal fees are also disallowed.

🧠 Quick Revision Questions

1. What is the minimum tax rate under Section 113 for a resident company, and on what base is it calculated?
2. Under Section 21, which types of cash payments are disallowed as deductions? Give three examples.
3. How is the total depreciation on plant and machinery calculated for a given year when additions and disposals occur?
4. Can a loss from speculation business be set off against normal business income? Explain the rule.
5. In Exercise 4, why was the purchase of the X-Ray machine added back as an inadmissible expense?

📘 Lecture 14.39 — Presumptive Income Taxation of Permanent Establishment (PE)

📖 Overview: This lecture covers the presumptive tax regime, where tax is charged on gross receipts instead of net taxable income under normal tax rules. It then focuses on the taxation of Permanent Establishments (PEs) of non-resident persons in Pakistan, detailing how their business income is computed, allowable deductions, and restrictions on head office payments. This matters because it clarifies special tax rules for foreign entities operating in Pakistan.

🗂️ Topics Covered

The lecture begins by defining presumptive income and explaining tax on dividends, tax on certain payments to non-residents (royalties and fees for technical services), and tax on shipping and air transport income of non-resident persons. It then transitions to the detailed taxation of a Permanent Establishment in Pakistan under Section 105, including principles for profit computation, allowable deductions, the prohibition of certain internal payments, and limitations on head office expenditure.

📝 Lecture Summary

Presumptive Income:

Under normal tax regime, income tax is chargeable on taxable income but under some exceptional circumstances, the income tax shall be charged on gross receipts. This is also called as presumptive tax regime. Under following situations the tax will be charged on gross receipts basis.

Tax on dividends:

a. Subject to this Ordinance, a tax shall be imposed, at the rate specified in Division III of Part I of the First Schedule, on every person who receives a dividend from a company. b. The tax imposed on a person who receives a dividend shall be computed by applying the relevant rate of tax to the gross amount of the dividend. c. This section shall not apply to a dividend that is exempt from tax under this Ordinance.

🔑 Definition — Presumptive Tax Regime: A tax system where tax is charged on gross receipts rather than net taxable income. 📐 Formula: Tax = (Relevant Rate) × (Gross Amount of Dividend) 📌 Example: If a person receives a dividend of Rs. 100,000 and the relevant rate is 15%, the tax is 15% × Rs. 100,000 = Rs. 15,000.

6. Tax on Certain Payments to Non-Residents:

(1) Subject to this Ordinance, a tax shall be imposed, at the rate specified in Division IV of Part I of the First Schedule, on every non-resident person who receives any Pakistan-source royalty or fee for technical services. (2) The tax imposed on a non-resident person shall be computed by applying the relevant rate of tax to the gross amount of the royalty or fee for technical services. (3) This section shall not apply to: (a) any royalty where the property or right is effectively connected with a permanent establishment in Pakistan of the non-resident person; (b) any fee for technical services where the services are rendered through a permanent establishment in Pakistan; or (c) any royalty or fee for technical services that is exempt from tax. (4) Any such payment received by a non-resident to whom this section does not apply by virtue of (a) or (b) shall be treated as income from business attributable to the permanent establishment in Pakistan.

🔑 Definition — Royalty: Payment for the use of property or rights. 🔑 Definition — Fee for Technical Services: Payment for services rendered. 📐 Formula: Tax = (Relevant Rate) × (Gross Amount of Royalty or Fee) 💡 Why this matters: If a non-resident has a PE in Pakistan, these payments are not taxed at gross but are treated as business income of the PE, subject to net income computation.

7. Tax on Shipping and Air Transport Income of a Non-Resident Person

(1) Subject to this Ordinance, a tax shall be imposed, at the rate specified in Division V of Part I of the First Schedule, on every non-resident person carrying on the business of operating ships or aircraft as the owner or charterer in respect of: (a) the gross amount received for the carriage of passengers, livestock, mail or goods embarked in Pakistan; and (b) the gross amount received or receivable in Pakistan for the carriage of passengers, livestock, mail or goods embarked outside Pakistan. (2) The tax imposed shall be computed by applying the relevant rate of tax to the gross amount referred to in subsection (1). (3) This section shall not apply to any amounts exempt from tax under this Ordinance.

📐 Formula: Tax = (Relevant Rate) × (Gross Amount from Shipping/Air Transport Operations) 📌 Example: A foreign airline receives Rs. 50 million for tickets sold in Pakistan for international travel. If the rate is 5%, tax = 5% × Rs. 50 million = Rs. 2.5 million.

Taxation of PE

105. Taxation of a Permanent Establishment in Pakistan of a Non-Resident Person. (1) The following principles shall apply in determining the income of a permanent establishment in Pakistan of a non-resident person chargeable to tax under the head “Income from Business”: (a) The profit of the permanent establishment shall be computed on the basis that it is a distinct and separate person engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the non-resident person of which it is a permanent establishment; (b) there shall be allowed as deductions any expenses incurred for the purposes of the business activities of the permanent establishment including executive and administrative expenses so incurred, whether in Pakistan or elsewhere; (c) no deduction shall be allowed for amounts paid or payable by the permanent establishment to its head office or to another permanent establishment (other than towards reimbursement of actual expenses incurred to third parties) by way of:

• royalties, fees for the use of any tangible or intangible asset;
• compensation for any services including management services; or
• profit on debt on moneys lent to the permanent establishment, except in connection with a banking business; and (d) no account shall be taken in the determination of the income of a permanent establishment of amounts charged by the permanent establishment to the head office or to another permanent establishment (other than towards reimbursement of actual expenses incurred to third parties) by way of:
• royalties, fees for the use of any tangible or intangible asset;
• compensation for any services including management services; or
• profit on debt on moneys lent by the permanent establishment, except in connection with a banking business.

🔑 Definition — Permanent Establishment (PE): A fixed place of business through which a non-resident person carries on business in Pakistan. 🔑 Definition — Arm's Length Principle: The PE's profits are computed as if it were a separate and independent entity dealing at arm's length with its head office. 💡 Why this matters: The PE is treated as a separate taxpayer for income computation, but internal payments (like royalties or interest) between the PE and its head office are generally not deductible/recognized to prevent profit shifting.

(2) No deduction shall be allowed in computing the income of a permanent establishment for a tax year for head office expenditure in excess of the amount as bears to the turnover of the permanent establishment in Pakistan the same proportion as the non-resident’s total head office expenditure bears to its worldwide turnover.

📐 Formula: Allowable Head Office Deduction = (Turnover of PE in Pakistan / Worldwide Turnover) × Total Head Office Expenditure 📌 Example: If a PE has turnover of Rs. 10 million, the worldwide turnover is Rs. 100 million, and total head office expenditure is Rs. 20 million, then the allowable deduction = (10/100) × 20 million = Rs. 2 million. Any excess is not deductible.

(3) In this section, “head office expenditure” means any executive or general administration expenditure incurred by the non-resident person outside Pakistan for the purposes of the business of the Pakistan permanent establishment, including: (a) any rent, local rates and taxes excluding any foreign income tax, current repairs, or insurance outside Pakistan; (b) any salary paid to an employee employed by the head office outside Pakistan; (c) any traveling expenditures of such employee; and (d) any other expenditures which may be prescribed

(4) No deduction shall be allowed in computing the income of a permanent establishment for: (a) any profit paid or payable by the non-resident person on debt to finance the operations of the permanent establishment; or (b) any insurance premium paid or payable by the non-resident person in respect of such debt.

⭐ Key Takeaways

The key takeaways from this lecture are: (1) Presumptive tax is charged on gross receipts for dividends, certain payments to non-residents, and shipping/air transport income. (2) A Permanent Establishment (PE) is taxed under the head "Income from Business" on its net income, computed as if it were a separate and independent entity. (3) Internal payments between a PE and its head office (like royalties, management fees, or interest) are generally not deductible to prevent tax avoidance, except for reimbursement of actual third-party expenses. (4) Head office expenditure allocated to the PE is deductible only up to a proportion calculated using the PE's turnover relative to worldwide turnover. (5) Interest on debt financing the PE's operations and related insurance premiums are not deductible by the PE.

🧠 Quick Revision Questions

1. What is the general rule for taxing dividends under the presumptive tax regime?
2. When does a non-resident's royalty or fee for technical services NOT fall under the presumptive tax on gross receipts?
3. What gross amounts are subject to tax for a non-resident carrying on shipping or air transport business in Pakistan?
4. According to Section 105, what is the fundamental principle for computing the profit of a Permanent Establishment?
5. Why are payments like royalties and management fees from a PE to its head office generally not allowed as deductions?

📘 Lecture 46 — Tax Returns & Assessment of Income Universal Self Assessment Scheme

📖 Overview: This lecture covers the mandatory requirements for filing tax returns in Pakistan under the Income Tax Ordinance. It details who must file, who is exempt, the rules for wealth statements, revised returns, and extensions, which are fundamental for understanding taxpayer compliance obligations.

🗂️ Topics Covered

The lecture begins by defining a tax return as a prescribed document for submitting taxable income, designed by CBR under Income Tax Rules 2002. It then lists persons required to file returns, including all companies and individuals meeting certain conditions like prior tax liability or property ownership. Returns on notice by the Commissioner are explained for special circumstances, followed by persons not required to file returns, such as salaried employees with employer certificates. Wealth statement filing under Section 116 is detailed, along with rules for discontinuance of business, revised returns, and extensions for filing.

📝 Lecture Summary

TAX RETURN

A tax return is the prescribed document for submission of taxable income by a taxpayer. Specimens of return to be submitted by different taxpayers are designed by CBR under the Income Tax Rules, 2002.

🔑 Definition — Tax Return: A prescribed form where a taxpayer declares their taxable income and relevant particulars for a tax year.

Persons Required to File Returns

a) Every Company: Every person (other than company) whose taxable income exceeds the initial threshold as provided under the ordinance. However, companies must submit a return and pay minimum tax even in case of loss @ 0.50% of annual turnover.

b) Every Person:

• Charged to tax for any two preceding years
• Claims loss that is carried forward
• Owns immovable property, with a land area of 250 Sq. yards or more in municipal limits, cantonment and CDA

A return of income shall be: (a) Prescribed form along with required documents. (b) Fully state all relevant particulars or information as specified in the form of return, including a declaration of the records kept by the taxpayer; and (c) Shall be signed by the person, being an individual, or the person’s representative where section 172 applies.

💡 A return of income can also be filed electronically (e-Filing of return).

Returns on Notice by Commissioner

The Commissioner may, by notice in writing, require a person to furnish a return by a specified date for a period of less than 12 months in these cases:

• The person has died

• The person has become bankrupt or gone into liquidation

• The person is about to leave Pakistan permanently

• If the Commissioner believes a person failed to file a required return, he may require them to file. The person must file within 30 days from the date of service of notice.

• In case of omission, a revised return can be filed within 5 years of the date the original return was furnished.

Person Not Required to File Tax Return

Section 115 grants immunity to salaried persons: a salary certificate from the employer is sufficient in lieu of a return.

Other Exceptions (Sec-115):

• Widow
• Orphan below age of 25 years
• Disabled person
• In case of ownership of immovable property, a non-resident person

Further Exceptions: All persons subject to final tax regime/PTR under sections 5, 6, 7, 113A, 148, 153, 154, 156, 156A, 233 or 235(5) shall furnish to CIT a statement showing such particulars relating to the person’s income.

Filing of Wealth Statement (Sec. 116)

The Commissioner may require any person to furnish a wealth statement in prescribed form giving particulars of: (a) The person’s total assets and liabilities as on specified date(s) (b) The total assets and liabilities of the person’s spouse, minor children and other dependents (c) Any assets transferred by the person to any other person and the consideration (d) The total expenditures incurred by the person and their spouse, minor children, and other dependents

• Every resident taxpayer filing a return whose last declared or assessed income is five hundred thousand rupees or more shall furnish a wealth statement along with the return.
• A revised wealth statement can be furnished at any time before an assessment is made for the tax year.

Sec. 117—Discontinuance of Business

Return to be filed within 15 days of discontinuance.

• Where NTN is not already registered, the taxpayer shall apply on prescribed form for NTN at the time of furnishing return of income.

Provision of Revised Tax Return

A person may furnish a Revised Return within five years of the date when the original return was furnished.

Extension in Time for Furnishing Returns

If the Commissioner is satisfied that the applicant is unable to furnish returns by the due date, he can grant extension for 15 days from the due date. Under exceptional circumstances, a longer extension can be granted for:

• Absence from Pakistan
• Sickness or other misadventure
• Any other reasonable cause

⭐ Key Takeaways

All companies must file returns and pay minimum tax of 0.50% of turnover even if they have a loss. Salaried persons with employer certificates are generally exempt from filing returns under Section 115. Taxpayers with declared income of PKR 500,000 or more must also submit a wealth statement with their return. Revised returns can be filed up to five years after the original return, and the Commissioner can grant extensions for filing in cases of absence, sickness, or other reasonable cause. Returns on notice must be filed within 30 days for special circumstances like death, bankruptcy, or permanent departure from Pakistan.

🧠 Quick Revision Questions

1. What is the minimum tax rate for a company that has incurred a loss for the tax year?
2. A salaried individual earning PKR 600,000 per year — are they required to file a tax return? Why or why not?
3. A taxpayer discovers an omission in their filed return after 3 years. Can they file a revised return?
4. What is the filing deadline for a return of income when the Commissioner issues a notice of discontinuance of business?
5. Under what conditions must a taxpayer furnish a wealth statement along with their return of income?

📘 Lecture 15.41 — TAX RETURNS & ASSESSMENT OF INCOME UNIVERSAL SELF ASSESSMENT SCHEME

📖 Overview: This lecture explains the three main ways tax assessments are framed under the normal tax regime in Pakistan, focusing on the Universal Self Assessment Scheme (USAS). It details the processes for normal assessment, best judgment assessment, and provisional assessment, along with amendments and revisions. Understanding these mechanisms is critical for tax professionals to know how taxpayer claims are verified and finalized.

🗂️ Topics Covered

The lecture covers the definition and types of assessments under the normal tax regime, including Normal Assessment under USAS (Sec. 120), Best Judgment Assessment (Sec. 121), and Provisional Assessment (Sec. 123). It details the amendment of assessments (Sec. 122), revisions by the Commissioner (Sec. 122A) and Regional Commissioner (Sec. 122B), and special provisions for assessments. The salient features of the Universal Self Assessment Scheme are explained in depth, covering its scope, requirements for a complete return, short documents notice, and the criteria for selection for audit (Sec. 177).

📝 Lecture Summary

Assessments

An assessment is the process whereby claims of taxpayers are verified by tax authorities and taxable income and the tax thereon is determined according to the ordinance.

Ways of Framing Assessment under Normal Tax Regime

There are three main ways: 1) Normal Assessment/USAS, 2) Provisional Assessment, and 3) Best Judgment Assessment.

1. Normal Assessment/Universal Self assessment Scheme (Sec. 120)

This applies when a taxpayer furnishes a complete return. In this case, the commissioner is deemed to have made an assessment of taxable income and tax equal to the amounts specified in the return. The return itself is taken as the assessment order.

A return is considered complete if it is in accordance with Sec. 114(2). If a return is incomplete, the Commissioner (CIT) issues a notice to rectify omissions or deficiencies by a due date. Errors pertaining to taxable income and tax payable are not rectifiable under this section. If the taxpayer does not reply by the due date, the incomplete return is treated as invalid. If the taxpayer complies with the notice, the return is treated as complete. No notice under Sec. 120(3) can be issued after the expiration of one year, at which point the return and assessment attain finality.

Best Judgment Assessment Sec. 121

This assessment is made when a person: (a) Fails to furnish a return u/s 114(3) or 114(4) (b) Fails to furnish return u/s 143 or 144 (for non-resident Air Carriers or Shipping Companies) (d) Fails to furnish return u/s 116 (Wealth Statement on notice by CIT or where income is Rs. 500,000 and above) (e) Fails to furnish documents u/s 174

The Assessment Order by the Commissioner must state: Taxable Income, Tax Due, Amount of Tax Paid, Tax Payable, and the Time, place & manner of appealing the assessment order.

Amendment of Assessments (Sec 122)

Amendments are made when the commissioner is satisfied, on the basis of definite information, that:

• Any income chargeable to tax has escaped assessment; or
• Total income has been under-assessed, or assessed at too low a rate, or has been the subject of excessive relief or refund; or
• Any amount under a head of income has been misclassified.

Revision by the Commissioner Sec 122A

The commissioner shall not revise an order if an appeal lies to the Commissioner (Appeals) or the Appellate Tribunal and the time for appeal has not expired, or the order is pending in appeal.

Revision by the Regional Commissioner Sec 122B

Revision can be made by the RCIT (Regional Commissioner of Income Tax) on his own or on an application by the taxpayer, relating to the issuance of an exemption or lower rate certificate regarding collection or deduction of tax at source.

2. Provisional Assessment (Sec. 123)

Under Sec. 123(1), where concealed assets are impounded by any department or agency of the federal or provincial government, the commissioner may issue a provisional assessment order for the last completed tax year, taking into account the concealed asset. A concealed asset is any property or asset acquired from income subject to tax, in the opinion of the CIT.

Assessment giving effect to an order Sec. 124

This concerns assessments that give effect to an order from the CIT (A), ITAT, High Court, or Supreme Court.

Sec. 124-A modification of an Order by Commissioner The CIT must follow a decision on a question of law by the High Court or ITAT, even if an appeal has been filed. On reversal, the CIT shall modify the order.

Special Provisions with respect to Assessment Sec. 125

For disputed properties, assessment must be made within one year from the date of the court's decision.

Sec. 126 Evidence of Assessment

Production of an assessment order or a certified copy is conclusive evidence. An assessment order may not be deemed void or voidable for want of form, nor affected by any mistake, defect, or omission, if it is in substance and effect in conformity with the ordinance.

3. Self Assessment Scheme ➡️ Universal Self Assessment Scheme

1) Scope of the scheme: Section 120 (1) (2)

• Where a taxpayer has furnished a complete return of income (other than a revised return under Sec. 114(6)) for a tax year ending on or after July 1, 2002: (a) The commissioner is deemed to have made an assessment of taxable income and tax due, equal to the amounts specified in the return. (b) The return is taken, for all purposes of the Ordinance, to be an assessment order issued to the taxpayer on the day the return was furnished.
• A return of income is considered complete if it is in accordance with Sec. 114(2), meaning it is in the prescribed form, fully states all relevant particulars, and is duly signed.

2) Requirements of a Return (Rule 34)

• A return of income under Sec. 114 must be in the specified form for companies (Part-i), non-salaried individuals and AOPs (Part-ii), or salaried individuals (Part-iii A).
• The return must be verified in the manner specified in the form.
• It must be accompanied by all applicable documents, statements, certificates, and annexes.

3) Short Documents Notice: Section 120 (3) (4) (5) (6)

• If a return is not complete, the Commissioner issues a notice to the taxpayer informing them of deficiencies (other than incorrect tax payable or short payment of tax). This notice directs the taxpayer to provide the required information by a specified date.
• If the taxpayer fails to comply by the due date, the return is treated as an invalid return as if it had not been furnished.
• If the taxpayer fully complies by the due date, the return is treated as complete from the day it was originally furnished, and the provisions of sub-section (1) apply.
• No notice under sub-section (3) can be issued after the end of the financial year in which the return was furnished.

4) Selection for Audit Section 177

• The Central Board of Revenue (CBR) may lay down criteria for selecting a person for audit. The Commissioner must select persons for audit in accordance with these criteria, which the CBR keeps confidential.
• In addition, the Commissioner may select a person for audit having regard to:
  • The person’s history of compliance or non-compliance.
  • The amount of tax payable.
  • The class of business conducted.
  • Any other matter material for determination of correct income.
• After selection, the Commissioner conducts an audit of the person's income tax affairs, including examination of accounts, records, expenditure, assets, and liabilities.
• After the audit, the Commissioner may, after obtaining the taxpayer’s explanation, amend the assessment under Sec. 122.
• Being audited in one year does not preclude being audited again in subsequent years if there are reasonable grounds.
• The CBR may appoint a firm of Chartered Accountants to conduct an audit, with the scope determined on a case-to-case basis.

Section 120 (1A) Notwithstanding the provisions of sub-section (1) of Section 120, the Commissioner may select a person for an Audit of his income tax affairs under Section 177.

⭐ Key Takeaways

The most critical concept is that under the Universal Self Assessment Scheme (USAS), a taxpayer’s complete return is automatically treated as the assessment order, making self-declaration the primary assessment method. Students must differentiate between the three types of assessment: Normal (USAS, based on a filed return), Best Judgment (for failure to file or comply), and Provisional (for concealed assets). The process for amending an assessment (Sec. 122) requires "definite information," and the time limits for issuing a "Short Documents Notice" (end of financial year) and for the assessment attaining finality (one year) are crucial. Finally, audit selection under Sec. 177 can be based on confidential CBR criteria or on commissioner discretion, and an audit does not prevent future audits.

🧠 Quick Revision Questions

1. Under the Universal Self Assessment Scheme (Sec. 120), when is a return of income considered an "assessment order"?
2. What are the three ways of framing an assessment under the normal tax regime?
3. What is the difference between an "Amendment of Assessment" (Sec. 122) and a "Revision" (Sec. 122A/122B)?
4. According to Sec. 120, after how long does a return and assessment attain finality?
5. List three factors a Commissioner may consider, in addition to CBR criteria, when selecting a person for an audit under Sec. 177.

📘 Lecture 48 — Advance Tax Collection & Recovery of Tax Penalties & Prosecution

📖 Overview: This lecture covers the legal mechanisms for tax collection and recovery in Pakistan, including due dates for payment, recovery methods through property attachment and arrest, and procedures involving third parties and liquidators. It also details the specific penalties for various tax offenses and the prosecution framework for non-compliance, providing a comprehensive view of the enforcement powers of tax authorities.

🗂️ Topics Covered

The lecture begins with the collection and recovery of tax, specifying due dates under Section 137 and recovery methods under Sections 138 and 138A, including property attachment and arrest. It then covers special recovery rules for private companies and AOPs, recovery from persons holding money for the taxpayer, and the obligations of liquidators. The second half details a comprehensive list of penalties for failures like not filing returns or maintaining records, followed by the prosecution framework for offenses such as false statements and obstruction, concluding with an explanation of advance tax computation.

📝 Lecture Summary

Collection and recovery of tax — Due date for payment of taxes (Sec. 137)

Tax shall be due on the due date for furnishing the return for that tax year, or within thirty days of service of notice in case of an assessment order passed by the commissioner.

Recovery of tax out of Property and through arrest of Tax-Payer (Sec. 138)

The commissioner may recover tax by:

• Attachment and sale of any movable or immovable property of the tax payer
• Appointment of receiver for the management of movable or immovable property of the taxpayer
• Arrest of taxpayer and his detention in prison not exceeding six months

Recovery of Tax by District Officer (Revenue) (Sec. 138A)

On a Certificate from Commissioner, the specified property of taxpayer and amount of tax due can be recovered by a District Officer (Revenue).

Collection of tax in the case of private companies and Association of Persons

If tax due cannot be recovered from the company, it can be recovered from every person who was at any time in that tax year:

• A director of the company, other than employed director
• Share holder owning at least ten percent of paid up capital of the company — these persons shall be jointly and severally responsible.

In case of AOP, if tax due from a member in respect of the member’s share of income cannot be recovered from the member, the association shall be liable for the tax due by the member.

Recovery of Tax from persons holding money due on behalf of a taxpayer (Sec. 140)

For recovering any tax due by a taxpayer, the commissioner may, by notice in writing, require any person:

• Owing or who may owe money to the taxpayer
• Holding or who may hold money for or on account of the taxpayer
• Holding or who may hold money on account of some other person for payment to the taxpayer
• Having authority of some other person to pay money to the taxpayer

Liquidators (Sec. 141)

The following are referred to as liquidator:

• A liquidator of a company
• A receiver appointed by a Court or appointed out of court
• A trustee for a bankrupt
• A mortgagee in possession

🔑 Definition — liquidator: A person appointed to manage the winding-up of a company or the administration of assets, including court-appointed receivers, trustees for bankrupts, and mortgagees in possession.

Liquidators shall, within fourteen days of being appointed or taking possession of an asset in Pakistan, give written notice to the commissioner. The commissioner shall within three months provide information regarding tax payable by the person whose assets are in possession. A liquidator shall not part with any asset until notified by the commissioner.

The liquidator:

• Shall set aside, out of proceeds of sale, the amount notified by the commissioner (or lesser amount agreed)
• Shall be liable to the extent of the amount set aside for the tax
• May pay any debt that has priority over the tax

Additional sections mentioned include: Recovery of tax due by non-resident member of an Association of Persons (Sec. 142), Non-resident ship owner or charterer (Sec. 143), Non-resident aircraft owner or charterer (Sec. 144).

Assessment of Person about to Leave Pakistan (Sec. 145)

A person must notify the CIT about the probable date of departure not less than fifteen days from said date if they have to leave the country with no intention to return to Pakistan. The CIT shall give notice to furnish a return of taxable income, which shall be charged to tax.

Penalty for failure to furnish a return or statement Sec. 182

A person is liable for a penalty equal to one-tenth of one percent of the tax payable for each day of default, subject to a minimum penalty of Rupees five hundred and a maximum penalty of twenty-five percent of tax payable in respect of that tax year.

📐 Formula: Penalty = (0.1% × Tax Payable × Days of Default), with minimum Rs. 500 and maximum 25% of tax payable.

Penalty for non-payment of tax Sec 183

A person is liable for penalty equal to:

• (a) In case of first default, five percent of the amount of tax in default
• (b) In case of second default, an additional penalty of twenty-five percent of the amount of tax in default
• (c) In case of third default, an additional penalty of twenty-five percent of the amount of tax in default
• (d) In case of fourth and subsequent default, an additional penalty of up to fifty percent of the amount of tax in default

The total penalty in respect of the amount of tax in default shall not exceed one hundred percent of such amount of tax.

📌 Example: If a taxpayer has a tax default of Rs. 10,000 and this is a first default, the penalty would be 5% of Rs. 10,000 = Rs. 500. If it is a second default, the additional penalty would be 25% of Rs. 10,000 = Rs. 2,500 (total penalty now Rs. 3,000). If it is a third default, another 25% = Rs. 2,500 (total Rs. 5,500). If a fourth default occurs, the commissioner can impose up to 50% = Rs. 5,000, but total cannot exceed 100% of Rs. 10,000 = Rs. 10,000.

💡 Why this matters: The escalating penalty structure creates a strong deterrent against repeated non-payment, with the total potential penalty reaching 100% of the tax in default.

Penalty for failure to maintain records Sec. 185

• (a) In case of first failure: two thousand rupees
• (b) In case of second failure: five thousand rupees
• (c) In case of third and subsequent failure: ten thousand rupees

Penalty for non-compliance with notice: Sec 186

• (a) In case of first failure: two thousand rupees
• (b) In case of second failure: five thousand rupees
• (c) In case of third and subsequent failure: ten thousand rupees

Penalty for making false or misleading statements Sec 187

• Where the statement or omission is made knowingly or recklessly: two hundred percent of the tax shortfall
• In any other case: twenty-five percent of tax shortfall

Penalty for failure to give notice Sec 188

• For failure to give notice of business discontinuation: penalty not exceeding the amount of tax payable for the tax year
• For failure to give notice of appointment as liquidator: penalty not exceeding ten thousand rupees

Penalty for obstruction Sec 189

The commissioner may impose a penalty not exceeding ten thousand rupees.

Imposition of penalty Sec 190

No penalty may be imposed on any person unless the person is given a reasonable opportunity of being heard.

Offences & Prosecutions

• Prosecution for non-compliance with certain statutory obligations (Sec. 191): Failure to comply with notices, non-payment of advance tax (Sec. 147), or non-collection/deduction of tax. Punishable on conviction with a fine or imprisonment for a term not exceeding one year, or both.
• Prosecution for false statement in verification (Sec. 192): Punishable on conviction with a fine or imprisonment for a term not exceeding three years, or both.
• Prosecution for failure to maintain records (Sec. 193): If deliberate, a fine or imprisonment for a term not exceeding two years, or both; in any other case, a fine shall be imposed.
• Prosecution for improper use of National Tax Number card (Sec. 194): Punishable on conviction with a fine or imprisonment for a term not exceeding two years, or both.
• Prosecution for making false or misleading statements (Sec. 195): If made knowingly or recklessly, a fine or imprisonment for a term not exceeding two years, or both; in any other case, with a fine.
• Prosecution for obstructing an income tax authority (Sec. 196): Punishable on conviction with a fine or imprisonment for a term not exceeding one year, or both.
• Prosecution for disposal of property to prevent attachment (Sec. 197): Punishable on conviction with a fine or imprisonment for a term not exceeding three years, or both.
• Prosecution for unauthorized disclosure of information by a public servant (Sec. 198): Punishable on conviction with a fine or imprisonment for a term not exceeding six months, or both.
• Prosecution for abetment (Sec. 199): Punishable on conviction with a fine or imprisonment for a term not exceeding three years, or both.
• Offences by companies and associations of persons (Sec. 200): In case of a company, every person who at the time of the offence was: Principal Officer, Director, General Manager, Company secretary, or any similar officer, or acting or purporting to act in that capacity, shall be guilty of the offence.
• Power to compound offences (Sec. 202): The CIT may compound with the taxpayer/person and order them to pay the amount for which the offence may be compounded.

147. Advance tax paid by the taxpayer

Every taxpayer whose income was charged to tax for the latest tax year, other than certain incomes (capital gains, income under sections 5, 6, 7, 15, income subject to deduction at source under section 149, and income from which tax has been collected/deducted with no tax credit allowed), shall be liable to pay advance tax.

This section does not apply to an individual or AOP where the latest assessed taxable income (excluding specified income) is less than one hundred and fifty thousand rupees.

For a company, the amount of advance tax due for a quarter shall be computed by the formula:

(A/4) – B

Where:

• A is the tax assessed to the taxpayer for the latest tax year or latest assessment year under the repealed ordinance
• 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)

⭐ Key Takeaways

The lecture establishes that tax authorities have extensive powers for recovery, including property attachment, arrest for up to six months, and holding company directors and major shareholders jointly liable. Penalties are structured to escalate with repeated offenses, ranging from fixed amounts (Rs. 2,000-10,000 for record-keeping failures) to percentage-based penalties that can reach 200% of tax shortfall for fraudulent statements. The prosecution framework provides for imprisonment terms from six months to three years for various offenses, with the most severe penalties for false verification, disposal of property to prevent attachment, and abetment. Advance tax for companies is computed as one-quarter of the prior year's assessed tax, less tax credits already paid, with a Rs. 150,000 threshold exempting small individuals and AOPs.

🧠 Quick Revision Questions

1. What are the three methods available to the commissioner for recovering tax under Section 138, and what is the maximum duration of imprisonment for arrest?
2. Under Section 141, what is the timeline for a liquidator to notify the commissioner of their appointment, and how long does the commissioner have to respond with the tax amount?
3. Calculate the penalty for a taxpayer who has a first default of non-payment of Rs. 50,000 in tax under Section 183. What would be the penalty if this is a fourth default?
4. What is the maximum imprisonment term for prosecution under Section 192 (false statement in verification), and how does this compare to the penalty for obstructing an income tax authority under Section 196?
5. Using the formula in Section 147, calculate the advance tax due for a company's first quarter if its latest assessed tax (A) is Rs. 400,000 and the tax paid in the quarter eligible for credit (B) is Rs. 30,000.

📘 Lecture 17.42 — Appeal to the Commissioner (Appeals) (Sec.127)

📖 Overview: This lecture covers the complete appeals and references framework under the Federal Tax law in Pakistan. It explains the hierarchical process from filing an appeal with the Commissioner (Appeals) to the Appellate Tribunal, High Court references, and the role of the Alternate Dispute Resolution committee and the Federal Tax Ombudsman.

🗂️ Topics Covered

The lecture details the procedure for filing an appeal to the Commissioner (Appeals) under Section 127, including prescribed fees and timelines. It then covers the procedure for appeal under Section 128, decisions by the Commissioner under Section 129, and the structure and qualification requirements for the Appellate Tribunal under Section 130. The lecture also explains appeals to the Appellate Tribunal under Section 131, references to the High Court under Section 133 on a question of law, burden of proof in appeals under Section 136, the Alternate Dispute Resolution mechanism, and a comprehensive overview of the Federal Tax Ombudsman including its establishment, objectives, jurisdiction, and procedures.

📝 Lecture Summary

Lesson 17.42 — Appeal to the Commissioner (Appeals) (Sec.127)

An appeal to the Commissioner (Appeals) is the first level of formal appellate remedy. The appeal is allowed only provided that the amount of tax due under section 137 has been paid. The appeal must be filed: i) in the prescribed form, ii) with proper verification, iii) stating the grounds of appeal, iv) accompanied by the prescribed fee, and v) within 30 days of the date of service of the order against which the appeal is filed.

🔑 Definition — Prescribed Fee for Appeal: In case of an appeal against an assessment order/notice, the fee is the lesser of Rs. 1,000 or 10% of the tax assessed. In any other case, companies pay Rs. 1,000 and others pay Rs. 200.

Procedure in appeal (Sec.128)

The Commissioner (Appeals) (CIT) shall give notice of hearing to both the appellant and the commissioner. If satisfied, the CIT may allow an appellant to file any new ground of appeal. However, the CIT (Appeal) shall not admit any documentary material or evidence which was not produced before the original commissioner, unless the CIT is satisfied that the appellant was prevented by sufficient cause from producing such material earlier.

Decision in Appeal (Sec.129)

The Commissioner of appeal may confirm, modify, or annul the assessment order. The order must be passed within three months of the date of filing the appeal. 💡 Why this matters: If the order is not passed within this period, the relief sought by the appellant in the appeal is treated as having been automatically given.

Appointment of the Appellate Tribunal (Sec. 130)

The Appellate Tribunal consists of a Chairperson, judicial members, and accountant members appointed by the Federal Government. A judicial member must have exercised the powers of a District Judge and be qualified to be a Judge of a High Court, or be or have been an advocate of a High Court qualified to be a Judge of a High Court. An accountant member must be an officer of an income tax group equivalent in rank to that of a Regional Commissioner.

🔑 Definition — Judicial Member Qualification: A person who has exercised the powers of a District Judge and is qualified to be a Judge of a High Court; or is or has been an advocate of a High Court and is qualified to be a Judge of a High Court.

Appeal to Appellate Tribunal (Sec. 131)

An appeal to the Appellate Tribunal must be: in the prescribed form, verified in the prescribed manner, and accompanied by the prescribed fee. The fee for an appeal in relation to an assessment order is the lesser of Rs. 2,500 or 10% of the tax assessed. In any other case, if the appellant is a company, the fee is Rs. 2,000; if not a company, Rs. 500. The appeal must be filed within 60 days of the order of the Commissioner (Appeals). The maximum period for staying recovery of tax is not beyond six months. The appellate tribunal must decide the appeal within 6 months of its filing and communicate its order to both the taxpayer and the commissioner.

Reference to the High Court (Sec. 133) on a Question of Law

A Reference to the High Court may be filed within 90 days of the communication of the order of the Appellate Tribunal. The aggrieved person or the commissioner may prefer an application in the prescribed form, along with a statement of the case, to the High Court, stating any question of law arising out of such order. A Division Bench of the High Court hears the reference. The High Court delivers a judgment, and a copy is sent to the Tribunal for giving effect. A fee of Rs. 100 is paid by a person other than the commissioner.

Burden of proof in appeals (sec. 136) on Tax Payers

The burden of proof lies on the tax payer: i) in the case of an assessment order, to the extent to which the order does not correctly reflect the taxpayer's liability for the tax year; or ii) in the case of any other decision, that the decision is erroneous.

Alternate Dispute Resolution

An aggrieved person may apply to the CBR for the appointment of a committee for the resolution of any hardship or dispute pending before an appellate authority. The CBR appoints a committee consisting of: an officer of income tax and two persons from a panel of Chartered Accountants, Cost Accountants, Advocates, or reputable taxpayers. The committee conducts an inquiry and seeks expert opinion, then makes recommendations. The CBR may pass an order based on these recommendations. This order is submitted to the authority, tribunal, or court where the matter is sub judice. If the taxpayer is not satisfied, they may continue to pursue their remedy before the relevant authority.

Federal Tax Ombudsman

The Federal Tax Ombudsman (FTO) was established by the “Establishment of the Office of the Federal Tax Ombudsman, Ordinance, 2000” on 11/08/2000. Its objective is to diagnose, investigate, redress, and rectify any injustice done through mal-administration by functionaries administering tax laws.

🔑 Definition — Mal-administration: Includes decisions, processes, or acts contrary to law, perverse, arbitrary, biased, or discriminatory; neglect, inattention, or delay; repeated notices or prolonged hearings; wilful errors in refunds; coercive recovery methods; and avoidance of disciplinary action.

The FTO is independent from the executive, easily accessible, impartial, and ensures quick disposal. Its jurisdiction extends to all Federal Taxes and the Revenue Division. It can be exercised on a complaint, on a reference by the President, Senate, National Assembly, on a motion of the Supreme Court or High Court, or on its own motion. It cannot investigate matters that are sub judice or relate to assessment of income, wealth, or tax liability where appeal remedies are available, or service matters of employees.

Procedure: Any aggrieved person sends an application on plain paper (anonymous complaints not entertained) within six months of having notice of the matter. After scrutiny, a notice is issued to the CBR, and most cases are disposed of within 60 days. The FTO makes a Recommendation/Finding.

Implementation: It is the duty of the Revenue Division to implement findings within 30 days. If CBR fails, it is treated as Defiance. The FTO may refer the matter to the President, and the report becomes part of the responsible employee's personal file, who is liable for contempt. The FTO has the same powers as the Supreme Court to punish for contempt.

Reference: Any person aggrieved by the FTO's finding can file a representation to the President.

⭐ Key Takeaways

A student must remember the strict 30-day timeline for appeal to the Commissioner and the 60-day timeline for appeal to the Appellate Tribunal, along with the specific fee structures which are the lesser of a fixed amount or a percentage of tax assessed. The Commissioner (Appeals) must decide within 3 months, and the Appellate Tribunal within 6 months. The High Court reference is only on a question of law, filed within 90 days. The Alternate Dispute Resolution offers a settlement mechanism pending appeal. Finally, the Federal Tax Ombudsman provides an independent, swift remedy for mal-administration, with findings that CBR must implement within 30 days, and defiance carries serious consequences including contempt powers.

🧠 Quick Revision Questions

1. What is the prescribed fee for filing an appeal against an assessment order to the Commissioner (Appeals)?
2. Within how many days must the Commissioner (Appeals) pass an order after an appeal is filed, and what happens if this deadline is missed?
3. What are the qualifications required for a judicial member of the Appellate Tribunal?
4. On what basis (question of fact or question of law) can a case be referred to the High Court under Section 133, and what is the filing deadline?
5. What specific recourse does a taxpayer have if the Central Board of Revenue fails to implement a finding of the Federal Tax Ombudsman?

📘 Lecture 50 — Background & Definitions under Sales Tax Act 1990

📖 Overview: This lecture introduces the historical background of Sales Tax in Pakistan and the basic philosophy of Value Added Tax (VAT). It then systematically defines the key terms used in the Sales Tax Act, 1990, which form the foundation for understanding the entire tax system.

🗂️ Topics Covered

The lecture begins with the historical evolution of Sales Tax from a provincial subject at independence to the current Sales Tax Act, 1990. It explains the concept of Value Added Tax (VAT) and its credit mechanism. The preamble of the Act states its scope over sale, import, export, production, manufacture, or consumption of goods. Features of sales tax are listed, followed by a comprehensive set of definitions from Section 2 of the Act, covering key terms such as Appellate Tribunal, associated persons, defaulter, default surcharge, distributor, input tax, manufacturer, and others.

📝 Lecture Summary

Background

At the time of Pakistan's independence, Sales Tax was a provincial subject and existed only in the provinces of Sindh and Punjab. In 1948, it was declared a federal subject through the General Sales Tax Act, 1948. This levy was transferred to the Central Government's domain via the Sales Tax Act, 1951. The Sales Tax Act, 1951 was later replaced by the Sales Tax Act, 1990, which remains the current sales tax law to date.

Sales Tax Act 1990

The basic philosophy of this Act is based on a "VAT" type of tax.

What is Value Added Tax (VAT)? VAT is a specific turnover tax levied at each stage in the production and distribution process. Ultimately, its incidence falls on the individual consuming the goods and availing the services. However, the liability for VAT is on the supplier of goods and services. In this type of tax, the VAT system of Tax Credit is available for all intermediaries (suppliers of goods and services), and the burden of tax lies on the final consumer.

The Preamble of the Act states it is an Act to consolidate and amend the law relating to the levy of tax on:

• Sale
• Importation
• Exportation
• Production
• Manufacture or
• Consumption of goods

Features of Sales Tax

• Indirect tax
• Broad based
• Elastic/Flexible
• Easy to collect
• Potential for revenue generation

💡 Why this matters: Understanding that Sales Tax in Pakistan is a VAT-based system is crucial. The tax credit mechanism means that businesses do not bear the tax cost; they only collect it and pass it forward to the final consumer, who bears the ultimate burden.

Definitions: ‘Section 2’

“Appellate Tribunal” means the Customs, Excise and Sales Tax Appellate Tribunal constituted under section 194 of the Customs Act.

“Appropriate officer” means an officer of Sales Tax authorized by the Board by notification in the official Gazette to perform certain functions under this Act.

'arrears' includes the unpaid amounts of tax, default surcharge, extra amount of tax, fines, penalties, fees or any other sums, however described, as have been assessed, adjudged or demanded under this Act.

"associated persons" means any two or more persons who are close relatives to each other or who are interconnected with each other in the following way, namely:-

• i. if the persons, being companies or undertakings, are under common management or control or one is the subsidiary of the other;
• ii. if a person who is the owner or partner or director of a company or undertaking, or who, directly or indirectly, holds or controls twenty per cent shares in such company or undertaking, is also the owner, partner or director of another company or undertaking, or, directly or indirectly, holds or controls twenty per cent shares in that company or undertaking;

“Banking Company” means a banking company as defined in the Banking Companies Ordinance, 1962 and includes any body corporate which transacts the business of banking in Pakistan.

"Board" means the Central Board of Revenue constituted under the Central Board of Revenue Act, 1924 (IV of 1924).

"Collector" means the Collector of Sales Tax appointed under section 30.

"Common taxpayer identification number” means the registration number or any other number allocated to a registered person.

"Computerized system” means any comprehensive information technology system to be used by the Board or any other office as may be notified by the Board, for carrying out the purposes of this Act.

"Customs Act" means the Customs Act 1969, and where appropriate all rules and notifications made under that Act.

'defaulter' means a person and, in the case of company or firm, every director, or partner of the company, or as the case may be, of the firm, of which he is a director or a partner or a proprietor and includes guarantors or successors, who fail to pay the arrears.

"Default Surcharge” means the surcharge payable by a defaulter at the rate specified in section 34 of this Act.

“Distributor” means 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.

“Document” includes any electronic data, computer programs, computer tapes, computer disks, microfilms or any other medium for the storage of such data.

"due date", in relation to the furnishing of a return under section 26 and section 26AA, means the 15th day of the month following the end of the tax period, or such other date as the Federal Government may, by notification in the official Gazette, specify.

“e-intermediary” means a person appointed as e-intermediary under section 52A for filing of electronic returns and such other documents as may be prescribed by the Board from time to time, on behalf of a person registered under section 14.

"Establishment" means an undertaking, firm or company, whether incorporated or not, an association of persons or an individual.

“Exempt supply” means a supply which is exempt from tax under section 13.

"Goods" include every kind of movable property other than actionable claims, money, stocks, shares and securities.

"Importer" means any person who lawfully imports any goods into Pakistan.

"Input tax", in relation to a registered person, means the tax:

• (a) Levied under this Act on the supply of goods received by that person;
• (b) Levied under this Act on goods imported, entered and cleared under section 79 or section 104 of the Customs Act, by that person;
• (c) levied under the Sales Tax Act, 1990 of Pakistan as adapted in the State of Azad Jammu and Kashmir, on the supply of goods received by that person; and
• (d) chargeable as duties of excise under section 3 of the Federal Excise Act, 2005, on such excisable goods as are mentioned in the Second Schedule thereto or such excisable services as the Federal Government may from time to time notify under section 7 thereof and on which such duties are charged, levied and paid as if it were a tax payable under section 3 of this Act.

🔑 Definition — Input Tax: The tax paid by a registered person on purchases (supplies received) and imports of goods, which can be set off against the output tax they collect from their customers.

"Local Sales Tax Office" means the office of Superintendent of Sales Tax, or such other office as the Board may, by notification in the official Gazette, specify.

"Manufacture" or "produce" includes:

• (a) 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;
• (b) Process of printing, publishing, lithography and engraving; and
• (c) Process and operations of assembling, mixing, cutting, diluting, bottling, packaging, repacking or preparation of goods in any other manner;

"Manufacturer" or "producer" 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) a person who by any process or operation assembles, mixes, cuts, dilutes, bottles, packages, repackages or prepares goods by any other manner;
• (b) 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
• (c) 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.

"Officer of Sales Tax" means an officer appointed under section 30.

"Open market price" means the consideration in money which that supply or a similar supply would generally fetch in an open market.

⭐ Key Takeaways

The Sales Tax Act, 1990, is based on the Value Added Tax (VAT) system, which levies tax at each stage of production and distribution but ultimately places the burden on the final consumer through a tax credit mechanism. The definitions in Section 2 are essential for legal interpretation, covering who is a manufacturer, what constitutes manufacture, which persons are associated, and what input tax means. A defaulter includes not just the person but also directors, partners, and guarantors who fail to pay arrears. The due date for filing returns is the 15th of the following month, and exempt supplies are those specifically exempted under section 13. The definition of manufacturer is broad, including those who assemble, package, or hold patent rights, but for refund purposes, only those with their own manufacturing facility are considered manufacturer-cum-exporters.

🧠 Quick Revision Questions

1. What was the first federal law that declared Sales Tax a subject of the federal government in Pakistan?
2. Under the VAT system, who ultimately bears the burden of sales tax, and how is the burden shifted from intermediaries?
3. According to the definition of "associated persons," what minimum percentage of shares makes a person associated with a company?
4. What is the due date for furnishing a return under sections 26 and 26AA of the Sales Tax Act, 1990?
5. For the purpose of refund under the Act, who is treated as a "manufacturer-cum-exporter"?

📘 Lecture 18.44 — Sales Tax

📖 Overview: This lecture provides an exhaustive definition of key terms under the Sales Tax Act, including output tax, registered person, supply, taxable activity, and tax fraud. It then explains the scope of sales tax, retail tax, zero rating, and the levy and collection of tax on value addition, concluding with the requirements for registration and de-registration under Section 14 and Section 21.

🗂️ Topics Covered

The lecture begins by defining over 25 critical terms from section 2 of the Sales Tax Act, such as output tax, registered person, supply, taxable activity, tax fraud, and value of supply. It then covers the scope of tax, retail tax under section 3AA, zero rating under section 4, and the levy of tax on specified goods based on value addition. Finally, it explains registration requirements under Section 14 and the procedures for de-registration, black listing, and suspension of registration under Section 21.

📝 Lecture Summary

Definitions (Section 2)

This section provides detailed legal definitions of key terms used throughout the Sales Tax Act.

🔑 Definition — Output tax: The tax charged under this Act in respect of a supply of goods made by a registered person. It includes duties of excise chargeable under the Central Excises Act on notified goods.

🔑 Definition — Person: Includes a company, association, body of individuals (incorporated or not), public or local authority, a Provincial Government, or the Federal Government.

🔑 Definition — Registered person: A person who is registered or is liable to be registered under this Act. 📌 Key Provision: A person liable to be registered but not registered shall remain liable to further tax under section 3(1A) and shall not be entitled to any benefit available to a registered person under this Act or the rules.

🔑 Definition — Retail price: The price fixed by the manufacturer inclusive of all charges and taxes (other than sales tax) at which a brand or variety should be sold to the general body of consumers. If more than one price exists, it is the highest such price.

🔑 Definition — Retailer: A person supplying goods to the general public for the purpose of consumption. 📌 Key Provision: Any person who combines import and retail, or manufacture with retail, must notify and advertise wholesale and retail prices separately, declare the address of retail outlets, and have his total turnover considered for registration under section 14.

🔑 Definition — Supply: Includes sale, lease, or other disposition of goods in the course of business for consideration. It also includes: (a) Putting to private, business, or non-business use of goods acquired, produced, or manufactured in the course of business. (b) Auction or disposal of goods to satisfy a debt. (c) Possession of taxable goods held immediately before a person ceases to be a registered person.

🔑 Definition — Tax: Means the sales tax, retail tax, and includes default surcharge, or any other sum payable under this Act or the rules.

🔑 Definition — Taxable activity: Any activity carried on by any person, whether or not for pecuniary profit, that involves the supply of goods or rendering of services on which sales tax has been levied, including the use of goods for private purposes or manufacture of exempt goods without making supply.

🔑 Definition — Tax fraction: The amount worked out using the formula: a / (100 + a), where 'a' is the rate of tax specified in section 3.

📐 Formula: Tax fraction = a / (100 + a) → Plain-English meaning: This fraction is used to calculate the amount of tax embedded in a tax-inclusive price.

🔑 Definition — Tax fraud: Knowingly, dishonestly, or fraudulently, without any lawful excuse: (i) Doing any act or causing to do any act; or (ii) Omitting to take any action, including making taxable supplies without registration; or (iii) Falsifying sales tax invoices; with the intention of understating tax liability or overstating entitlement to tax credit or refund for two consecutive tax periods, causing loss of tax.

🔑 Definition — Taxable goods: All goods other than those exempted under section 13.

🔑 Definition — Taxable supply: A supply of taxable goods made by an importer, manufacturer, wholesaler (including dealer), distributor, or retailer, other than a supply exempt under section 13. It includes supplies chargeable at zero per cent under section 4.

🔑 Definition — Time of supply: A supply is deemed to have taken place at the earlier of the time of delivery of goods or the time when any payment is received by the supplier. 📌 Key Provisions:

• Where any part payment is received for a supply in a tax period, it shall be accounted for in the return for that tax period.
• For an exempt supply, part payment is accounted for in the tax period during which the exemption is withdrawn.
• For supplies to an associated person where goods are not removed, time of supply is when goods are made available to the recipient.
• Under a hire purchase agreement, time of supply is when the agreement is entered into.

🔑 Definition — Value of supply means: (a) For a taxable supply, the consideration in money including all Federal and Provincial duties and taxes received by the supplier, excluding the amount of tax. 📌 Key Provisions for value determination:

• If consideration is in kind or partly in kind, value is the open market price excluding tax.
• If supplier and recipient are associated persons and supply is for no consideration or below open market price, value is the open market price excluding tax.
• For installment sales to consumers at a price higher than open market price, value is the open market price excluding tax.
• For trade discounts, value is the discounted price excluding tax, provided the tax invoice shows the discounted price and the discount conforms to normal business practices.
• For imported goods, value is determined under section 25 of the Customs Act, including customs duties and central excise duty.
• If the declared value is incorrect, the value determined by the Valuation Committee applies.
• For goods supplied to a registered person for processing, the value of processed goods is the price excluding sales tax that such goods will fetch on sale in the market.

📌 Key Provision: The Central Board of Revenue may fix the value of any taxable supplies by notification. If the actual supply value is higher, that higher value shall be used.

Scope of the Tax

Sales tax shall be charged, levied, and paid at the rate of 15% of the value of:

• Taxable supplies made by a registered person in the course or furtherance of any taxable activity.
• Goods imported into Pakistan.
• Taxable supplies specified in the Third Schedule (charged at 15% of the retail price).

📌 Key Provisions:

• Liability to pay tax: In the case of supply of goods, it is the person making the supply. In the case of imported goods, it is the person importing the goods.
• The Federal Government may specify goods where liability to pay tax falls on the person receiving the supply.

Retail Tax (Section 3AA)

The retailer shall pay retail tax at the rate specified in section 3. The retail tax shall be charged, collected, and paid in such manner and at such higher or lower rate or rates as may be specified in the notification.

Zero Rating (Section 4)

Notwithstanding section 3, the following goods shall be charged to tax at the rate of zero per cent: (a) Goods exported, or goods specified in the 5th Schedule. (b) Supply of stores and provisions for consumption aboard a conveyance proceeding to a destination outside Pakistan (as per section 24 of the Customs Act, 1969). (c) Such other goods as the Federal Government may specify by notification.

Levy and Collection of Tax on Specified Goods on Value Addition

(1) The Federal Government may specify, by notification, that sales tax on certain goods shall be levied and collected on the difference between the value of supply for which the goods are acquired and the value of supply for which the goods (in the same state or after further manufacture) are supplied. (2) The Federal Government may specify the minimum value addition required to be declared by certain persons for supply of goods, and may waive the requirement of audit or scrutiny of records if such minimum value addition is declared.

Registration (Section 14)

Persons required to get registration are subject to sales tax rules. Registration is regulated in such manner and subject to rules as the Board may prescribe.

Requirement of registration: The following persons engaged in making taxable supplies in Pakistan (including zero-rated supplies) in the course or furtherance of any taxable activity are required to be registered: (ii) A manufacturer whose annual turnover from taxable supplies in any period during the last twelve months exceeds two and a half million rupees. (iii) A retailer whose value of supplies in any period during the last twelve months exceeds twenty million rupees. (iv) An importer. (v) A wholesaler (including dealer) and distributor.

📌 Key Provision: Buyers or importers of taxable plant and machinery who intend to make taxable supplies and wish to claim credit or refund of tax paid on such plant and machinery shall also be required to be registered.

De-Registration, Black Listing, and Suspension of Registration (Section 21)

(1) The Board or any authorized officer may, subject to the rules, de-register a registered person or class of registered persons not required to be registered under this Act. (2) If the Collector is satisfied that a registered person has issued fake invoices or has otherwise committed tax fraud, he may blacklist such person or suspend his registration in accordance with prescribed procedure.

Exercise

Problem: M/s WW brothers purchased cloth amounting Rs 1,000,000 and paid sales tax at 15%. They availed dying services from M/s Hilton Ltd and paid Rs 300,000 for these services. They disposed of the cloth for Rs 4,500,000. Compute the sales tax liability of M/s WW brothers.

Solution: 📌 Example:

💡 Why this matters: This exercise demonstrates the practical application of the input-output tax mechanism, which is fundamental to how sales tax works in Pakistan. The taxpayer subtracts input tax (paid on purchases and services) from output tax (charged on sales) to arrive at the net tax payable.

⭐ Key Takeaways

The most critical concepts from this lecture are the precise legal definitions that determine who is a registered person, what constitutes a supply and a taxable supply, and how the value of supply is calculated in various scenarios. Students must remember the distinction between output tax (charged on sales) and input tax (paid on purchases), and that sales tax liability is computed as output tax minus input tax. The registration thresholds are essential: manufacturers must register when turnover exceeds Rs. 2.5 million, and retailers when value of supplies exceeds Rs. 20 million. Finally, tax fraud involves knowingly falsifying invoices or evading registration to understate tax liability, and it can lead to blacklisting or suspension of registration.

🧠 Quick Revision Questions

1. What is the difference between "output tax" and "input tax" as defined in the lecture?
2. Under what circumstances can the "time of supply" occur before the actual delivery of goods?
3. What are the three categories of goods that are charged at zero per cent under section 4?
4. A manufacturer has an annual turnover of Rs. 1.8 million from taxable supplies. Is he required to register under the Sales Tax Act?
5. What is the formula for the "tax fraction," and when is it used?

📘 Lecture 52 — Appointment of Officer of Sales Tax Sec 30

📖 Overview: This lecture covers the hierarchy of sales tax officers, the penalties for various sales tax offences, and the complete appeals process under the Sales Tax Act. Understanding these enforcement and redressal mechanisms is crucial for compliance, as they outline the consequences of non-compliance and the legal avenues available to taxpayers.

🗂️ Topics Covered

The lecture begins with the appointment hierarchy for officers of sales tax under Section 30. It then details specific offences and their corresponding penalties, ranging from failure to file returns to submitting forged documents. The summary then explains the powers of adjudication vested in different officers based on the amount of tax involved, followed by the process for appeals to the Collector (Appeals) and the Appellate Tribunal, concluding with the procedure for making a reference to the High Court.

📝 Lecture Summary

Appointment of Officer of Sales Tax Sec 30

The law provides for the appointment of various officers to administer the Sales Tax Act. These officers include a Collector of Sales Tax, a Collector of Sales Tax (Appeals), an Additional Collector of Sales Tax, a Deputy Collector of Sales Tax, an Assistant Collector of Sales Tax, a Superintendent of Sales Tax, and an officer of sales tax with any other designation.

Offences and Penalties

The law specifies set penalties for different types of non-compliance. The penalties are designed to increase with the severity of the offence.

• Any person who fails to furnish a return within the due date is liable to a penalty of Rs 5,000.
• Any person who fails to issue an invoice is liable to a penalty of Rs 5,000 or 3% of the amount of tax involved, whichever is higher.
• A person who fails to deposit the amount of tax due is liable to a penalty of Rs 10,000 or 5% of the amount of tax involved, whichever is higher.
• A person who fails to apply for registration before making taxable supplies is liable to a penalty of Rs 10,000 or 5% of the amount of tax involved, whichever is higher.
• A person who fails to maintain records is liable to a penalty of Rs 10,000 or 5% of the amount of tax involved, whichever is higher.
• A person who submits a false or forged document to any officer of sales tax is liable to a penalty of Rs 25,000 or 100% of the amount of tax involved, whichever is higher.

🔑 Definition — Penalty: A financial punishment imposed for non-compliance with sales tax laws. 📐 Formula: Various (Fixed amount or percentage of tax involved, whichever is higher). 📌 Example: If a registered person fails to deposit tax due of Rs 100,000, the penalty would be the higher of Rs 10,000 or 5% (5% of 100,000 = Rs 5,000). Since Rs 10,000 is higher, the penalty is Rs 10,000.

Appeals: Powers of Adjudication

Different officers have the authority to adjudicate (decide) on cases based on the amount of tax involved or erroneously refunded. This hierarchy ensures cases are handled by the appropriate level of authority.

• Additional Collector: Handles cases under sub-section (2) of section 11 and section 36 without any restriction as to the amount.
• Deputy Collector: (a) Cases under sub-section (1) of section 11. (b) Cases under sub-section (2) of section 11 and section 36, provided the amount of tax involved or erroneously refunded exceeds one million rupees but does not exceed two and a half million rupees.
• Assistant Collector: Handles cases under sub-section (2) of section 11 and section 36, provided the amount of tax involved or erroneously refunded exceeds ten thousand rupees but does not exceed one million rupees.
• Superintendent: Handles cases under sub-section (2) of section 11 and section 36, provided the amount of tax involved or erroneously refunded does not exceed ten thousand rupees.
• Officer of sales tax with any other designation: Handles such cases as may be notified by the Board.

💡 Why this matters: This tiered system of adjudication allows for efficient case management, with less serious cases handled by lower-level officers and more complex, higher-value cases by senior officers. The CBR and Collector can also call for and examine the record of any departmental proceedings on their own motion.

Appeal to Collector of Sales Tax (Appeals) Sec 45 b

An appeal against an adjudication order can be filed by any person (other than an officer of sales tax) with the Collector of Sales Tax (Appeals). This appeal must be filed within 30 days of the date of receipt of the decision or order.

Appeals to Appellate Tribunal

The next level of appeal is to the Appellate Tribunal.

1. Any person, including an officer of Sales Tax not below the rank of an Additional Collector, who is aggrieved by: a. Any order passed by the Collector under section 45A or the Collector of Sales Tax (Appeals) under section 45B. b. Any order passed by the Board or the Collector of Sales Tax under section 45A. May, within sixty days of the receipt of such decision or order, prefer an appeal to the Appellate Tribunal.
2. The Tribunal may admit an appeal after the limitation period if it is satisfied there was sufficient cause for the delay.
3. The appeal must be accompanied by a fee of one thousand rupees.
4. After hearing the parties, the Tribunal may pass such orders as it thinks fit.
   • Interim orders (e.g., staying recovery of tax) shall cease to have effect after six months unless the case is finally decided or the order is withdrawn earlier.
   • The total period for interim orders cannot exceed a total of six months from the date the first interim order was made.
   • A final order under this section shall be passed within six months of the filing of the appeal.

Reference to High Court

A final appeal on a question of law can be made to the High Court.

• Within ninety days of the communication of the Appellate Tribunal's order, the aggrieved person or an officer of Sales Tax (not below the rank of Additional Collector) may file an application to the High Court.
• This application must state any question of law arising out of the Tribunal's order and be accompanied by a statement of the case.
• A reference to the High Court under this section shall be heard by a bench of not less than two judges.

⭐ Key Takeaways

A student must memorize the specific penalty amounts (Rs 5,000, Rs 10,000, Rs 25,000) and corresponding percentages (3%, 5%, 100%) for each type of sales tax offence. The hierarchy of adjudicating officers (Additional Collector, Deputy, Assistant, Superintendent) is directly tied to the monetary value of the tax involved, creating a clear jurisdiction for each case. The strict timelines for filing appeals are critical: 30 days to the Collector (Appeals), 60 days to the Appellate Tribunal, and 90 days to the High Court for a reference on a question of law. Finally, any interim order from the Appellate Tribunal has a maximum lifespan of six months, forcing a resolution or expiry of the stay.

🧠 Quick Revision Questions

1. What is the penalty for failing to deposit the amount of tax due?
2. Which officer has the power to adjudicate a case where the amount of tax involved is Rs 500,000?
3. Within how many days must an appeal be filed with the Collector of Sales Tax (Appeals)?
4. What is the fee required for filing an appeal to the Appellate Tribunal?
5. What is the maximum duration for an interim order staying the recovery of tax, as passed by the Appellate Tribunal?

📘 Lecture 20.45 — CAPITAL VALUE TAX (CVT) PROCEDURE FOR LEVY & COLLECTION OF CAPITAL VALUE TAX CAPITAL VALUE TAX RECOVERY & REFUND RULES

📖 Overview: This lecture introduces Capital Value Tax (CVT), a tax levied on the capital value of assets acquired through specific means. It covers the procedure for levy and collection, tax rates for different assets, and the rules for recovery and refund, along with an extensive annexure detailing the First and Third Schedules of the Income Tax Ordinance, which include tax rates for individuals, companies, and various withholding tax provisions.

🗂️ Topics Covered

The lecture begins with the levy of CVT on assets acquired by individuals, AOPs, firms, or companies through purchase, gift, or exchange, excluding inheritance. It then explains key definitions like "development authority" and "urban area". Detailed tax rates are provided for motor vehicles, immovable property, residential flats, and shares. The procedure for collection by registration authorities, manufacturers, customs, and stock exchanges is outlined. The second half of the lecture presents the full text of the First Schedule (Rates of Tax, Advance Tax, Deduction at Source) and the Third Schedule (Depreciation, Initial Allowance, Pre-Commencement Expenditure).

📝 Lecture Summary

Capital Value Tax was levied with effect from 1st July, 1989 on the capital value of assets.

Capital Value Tax (CVT) is a tax payable when an individual, AOP, firm, or company acquires an asset (or a right to its use for more than twenty years) by purchase, gift, exchange, relinquishment, or surrender of rights (orally, by deed, or court decree), but not by inheritance. The tax is levied on the capital value of the asset.

🔑 Definition — Capital Value Tax (CVT): A tax levied on the capital value of certain assets acquired by individuals, AOPs, firms, or companies through means other than inheritance.

Exceptions to the levy of CVT include assets acquired by inheritance, gift from spouse, parents, grandparents, a brother, or a sister, and an asset or right to use thereof for more than 20 years.

💡 Why this matters: This establishes the fundamental scope of the tax, clarifying who is liable and which transactions trigger the tax.

Levy of tax on Capital Value of certain assets:

Capital value tax shall be payable by Individuals, Association of persons (AOP), firms, or a company which acquires by: Purchase, Gift, Exchange, Power of attorney, Surrender of rights, Relinquishment of rights by the owner. Exceptions are when capital assets are acquired by: Inheritance, or a Gift from spouse, Parents, Grand parents, a brother and a sister, or An asset or a right to use thereof for more than 20 years.

🔑 Definition — Association of persons and firm: Shall have the same meaning as contained in the Income Tax Ordinance, 1979.

🔑 Definition — Company: Shall have the same meaning as defined in the Income Tax Ordinance, 1979.

🔑 Definition — Development authority: An authority formed by or under any law for the purposes of development of an area, including any authority, society, agency, trust, association or institution declared as development authority by the Central Board of Revenue.

🔑 Definition — Registration authority: The person responsible for registering or attesting the transfer of the asset or of the right to use thereof for more than twenty years. In the case of a development authority or a cooperative society, it is its principal officer.

🔑 Definition — Urban area: An area falling within the limits of: The Islamabad Capital Territory; a cantonment board; a municipal body; in case of Karachi up to 40 kilometers from the outer limit; in case of Lahore and Faisalabad up to 30 kilometers; in other cases, up to 10 kilometers from the outer limits. It also includes areas defined in the Urban Immovable Property Tax Act, 1958.

Capital Value Tax— Tax Rates

Motor vehicles: CVT is payable on purchase of motor vehicles not previously used in Pakistan at specified rates based on engine capacity:

• Up to 850cc: Rs. 7,500
• 851cc to 1000cc: Rs. 10,500
• 1001cc to 1300cc: Rs. 16,875
• 1301cc to 1600cc: Rs. 16,875
• 1601cc to 1800cc: Rs. 22,500
• 1801cc to 2000cc: Rs. 16,875
• Above 2000cc: Rs. 50,000

Immovable property (other than commercial property and residential flats), situated in urban areas, measuring at least one canal or 500 square yards (whichever is less):

• (i) Where value is recorded: 2% of the recorded value
• (ii) Where value is not recorded: Rs. 50 per square yard of the landed area.

Commercial immovable property of any size situated in urban area:

• (i) Where value is recorded: 2% of the recorded value
• (ii) Where value is not recorded: Rs. 50 per square yard of the landed area.

Residential flats with covered areas measuring 1500 sq. feet and above:

• (i) Where value is recorded: 2% of the recorded value
• (ii) Where value is not recorded: Rs. 50 per square yard of the landed area.

Purchase of modaraba certificates or shares of a listed public company: 0.02% of the purchase value.

Imported motor vehicle (not plying for hire): Tax rate is landed cost as determined by customs authorities. Motor Vehicle purchased from a manufacturer in Pakistan: The price paid by the purchaser.

📌 Example: If a person buys a new, unregistered car with an engine capacity of 1500cc in Pakistan, the CVT payable is Rs. 16,875. If the same person buys an immovable plot of 1 canal (500 sq. yards) in an urban area for Rs. 5,000,000, the CVT payable is 2% of Rs. 5,000,000 = Rs. 100,000.

CVT to be collected by the person responsible for registering or attesting the transfer of the asset

The registration authority is responsible for collecting CVT at the time of transfer. For motor vehicles purchased from a manufacturer in Pakistan, the manufacturer collects CVT before delivery. For imported motor vehicles, the Collector of Customs collects CVT. For Modaraba certificates or shares of a public company, the Registered stock exchange collects CVT from resident persons. The proceeds are credited to the Federal Consolidated Funds.

Liability for failure to collect/pay: If a person fails to collect, or having collected fails to pay the tax, they are personally liable to pay the tax along with additional tax at 15% per annum for the period of default. The Commissioner of Wealth Tax may revise any order made under this section upon application. The Federal Government may exempt any person or asset from CVT by notification.

💡 Why this matters: This section outlines the enforcement mechanism, ensuring that the collection responsibilities are clear and penalties for non-compliance are severe.

Annexure First & Third Schedule

The lecture provides the full text of the First and Third Schedules of the Income Tax Ordinance 2001.

THE FIRST SCHEDULE Part I. Rates of Tax includes divisions for individuals and AOPs, a special rate for certain persons (0.50% of turnover), companies (35% general, 20% for small companies with a progressive structure for higher turnover), dividend tax (10%), payments to non-residents (15%), shipping/air transport income (8% for shipping, 3% for air), and income from property (progressive rates up to 10%).

Part II. Rates of Advance Tax (Section 148): 2% of the value of imported goods.

Part III. Deduction of Tax at Source includes profit on debt (10%), payments to non-residents (5% or 30%), payments for goods/services (1.5% to 6%), exports (1%), income from property (5%), prizes and winnings (10% for prize bonds, 20% for others), and petroleum products (10%).

Part IV. Deduction or Collection of Advance Tax includes brokerage and commission (10%), transport business (fixed amounts per vehicle based on weight or seating capacity, and private cars based on engine capacity), electricity consumption (Rs. 60 up to 10% of bill), telephone users (10% of prepaid cards or post-paid bills over Rs. 1000), and cash withdrawal from a bank (0.3%).

THE THIRD SCHEDULE covers Depreciation (rates: 10% for buildings, 15% for furniture and general plant, 30% for computers and aircraft, 100% for certain mineral oil installations), Initial Allowance (50%), and Pre-Commencement Expenditure (20% amortization).

📌 Example: A small company with a turnover of Rs. 200 million pays tax at 20%. A company with a turnover of Rs. 400 million will pay 20% on the first Rs. 250 million of attributable income, and 25% on the income attributable to the next Rs. 100 million.

⭐ Key Takeaways

The key to this lecture is understanding that Capital Value Tax is a one-time tax on the acquisition of assets, with specific rates for different asset classes and clear collection responsibilities. For exam purposes, memorize the CVT rates for motor vehicles (by engine size), immovable property (2% of recorded value or Rs. 50/sq yard), and shares (0.02%). A critical distinction is the exemption for inheritance and gifts from immediate family. The lecture also provides a comprehensive reference to the First Schedule (tax rates and withholding rates) and the Third Schedule (depreciation and allowances), which must be consulted for specific rate questions. The penalty for failing to collect/pay CVT is the tax amount plus 15% per annum additional tax.

🧠 Quick Revision Questions

1. What are the three main modes of acquisition (other than inheritance) that trigger Capital Value Tax?
2. What is the CVT rate for the purchase of a new car with a 1500cc engine?
3. For an immovable property in an urban area where the value is not recorded, how is CVT calculated?
4. Who is responsible for collecting CVT on a motor vehicle imported into Pakistan?
5. What is the general tax rate for a public company under the First Schedule, Part I, Division II?