Basic Concepts of Income Tax

Question 1

Normal Tax Year (S.74)

Answer 1

1. The tax year shall be a period of 12 months ending on June 30th and shall be denoted by the calender year in which 30th June falls.

Question 2

Special Tax Year (S.74)

Answer 2

2- Where a person is allowed, to use a 12 months period different from normal tax year, such period shall be that person’s tax year and shall be denoted by the calender year relevant to normal tax year in which the closing date of the special tax year falls.

Question 3

Transitional tax year (S.74)

Answer 3

9- Where the tax year of person changes, the period between:
- the end of the last tax year prior to change and
- the date on which the changed tax year commences

Shall be treated as a separate tax year, to be known as the transitional tax year.

Question 4

Change of tax year from normal to special (S.74)

Answer 4

3- A person using a special tax year, may apply in writing, to the Commissioner to allow him to use 12 months period other than normal tax year as special tax year and the Commissioner may allow him.

5- The Commissioner shall grant the permission to change the tax year only if the person has shown a compelling need. The Commissioner may impose conditions while giving permission.

Question 5

Resident individual (S.82)

Answer 5

An individual shall be a resident individual for a tax year if the individual:
a- is present in Pakistan for a period of, or periods amounting in aggregate to, 183 days or more in the tax year;
c- is an employee or official of the Federal Government or a Provincial Government posted abroad in the tax year.

Question 6

Resident company (S.83)

Answer 6

A company shall be a resident company for a tax year if:
a- it is incorporated or formed by or under any law in force in Pakistan

b- the control and management of the affairs of the company is situated wholly in Pakistan at any time in the year; or

c- it is a Provincial Government or Local Government in Pakistan

Question 7

Resident association of person (S.84)

Answer 7

An association of persons shall be a resident association of persons for a tax year if the control and management of the affairs of the association is situated wholly or partly in Pakistan at any time in the year

Question 8

Person (S.80)(1)

Answer 8

1- The following shall be treated as persons under Income Tax Ordinance, 2001, namely;
a- An individual;

b- A Company or an association of persons incorporated, formed or established in Pakistan or elsewhere;

c- The Federal Government, a foreign government, a political sub division of a foreign government, or public international organization.

Question 9

Company(S.80)(2b)

Answer 9

Company means
a- a company as defined in the companies Act, 2017;
b- a body corporate formed by or under any law in force in Pakistan;
c- A Modaraba
d- a body incorporated under the law of a country outside Pakistan relating to incorporation of companies;
e- a co-operative society, a finance society or any other society;
f- a non-profit organization
g- a trust, an entity or a body of persons established by or under any law for the time being in force;
h- a foreign association, whether incorporated or not, which the board has declared to be a company for the purpose of ITO 2001;
i- a Provincial Government
j- a Local Government in Pakistan; or
k- a Small Company

Question 10

Trust(S.80)(2d)

Answer 10

Trust means an obligation attached to the ownership of property (cash) and arising out of the confidence given to and accepted by the owner (expert), for the benefit of another (capital provider), or of another and the owner (expert), and includes a unit trust.

Question 11

Unit trust (S.80)(2e)

Answer 11

Unit trust means any trust under which beneficial interests are divided into units so that the rights of the beneficiaries to income or capital are determined by the number of units held.

Question 12

Association of Person(S.80)(2a)

Answer 12

“Association of persons “ includes
a- A firm

b- A hindu undivided family

c- Any artificial juridical person (Modern town young student society)

d- Any body of persons (foreign AoP) formed under a foreign law. However a company is not included in association of person.

Question 13

Firm(S.80)(2c)

Answer 13

Firm means the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

Question 14

Total income(S.10)

Answer 14

The total income is sum of:
a- Person’s income under all heads of income for the year; and

b- Person’s income exempt from tax under any of the provisions of this Ordinance.

Question 15

Heads of income(S.11)
Difference in case of resident and non resident (SS 5,6)

Answer 15

5- The income of a resident person under a head of income shall be computed by adding:
- Pakistan-source income and
- Foreign-source income

6- The income of a non-resident person under a head of income shall be computed by considering only amounts that are Pakistan-source income.

Question 16

Workers Welfare Fund (S.60A)

Answer 16

A person shall be entitled to a deductible allowance for the amount of any worker welfare fund paid by the person under worker welfare fund ordinance or under any law relating to workers welfare fund enacted by provinces.

No deductible allowance will be allowed for amount of WWF paid to Provinces by a trans-provincial establishment. (However, allowed when paid to employee by province.)

Question 17

Workers Participation Fund (S.60B)

Answer 17

A person shall be entitled to a deductible allowance for the amount of any Workers Participation Fund paid by the person under Companies Profit (Worker Participation) Act or under any law relating to the Workers Profit Participation Fund enacted by provinces.

No deductible allowance will be allowed for amount of WPPF paid to Provinces by a trans-provincial establishment.

Question 18

Principle of taxation of individuals (S.86)

Answer 18

The taxable income of each individual shall be determined separately.

Question 19

Deceased individual (S.87) (SS.1)

Answer 19

1- The legal representative of a deceased individual shall be liable for:
a- any tax that the individual would have become liable if he had not died; and
b- any tax payable in respect of the income of the deceased’s estate.

Question 20

Deceased individuals (S.87) (SS.2,2A)

Answer 20

2- The liability of a legal representative shall be limited to the extent of deceased’s estate.

2A- The (tax) liability shall be the first charge on the deceased’s estate.

Question 21

Deceased individuals (S.87) (SS.3)

Answer 21

For the purpose of this Ordinance;

a- any proceeding taken against the deceased before his death shall be assumed as having been taken against the legal representative. The proceeding will be continued against the legal representative from the stage at which they were at the time of death; and

b- any proceeding which could have been taken against the deceased may be taken against the legal representative of the deceased.

Question 22

Deceased individuals (S.87) (SS.4)

Answer 22

4- In this section, “legal representative” means a person:

• who in law represents the estate of a deceased person,
• who intermeddles with the estate of the deceased and
• on whom the estate devolves (shift) on the death of representative, if the representative is being sued in a case.

Question 23

Authors (S.89)

Answer 23

Where the time taken by an author of a literary or artistic work to complete the work exceeds 24 months, the author may elect any lump sum amount received in a tax year as royalties for the work as having been (assume it is) received in that tax year and the preceding 2 tax years in equal proportions.

Question 24

Income of minor child (S.91) (SS.1,2)

Answer 24

1- Income from business of minor child is taxable in hands of parents who has highest taxable income.

2- Above provision will not apply if business is acquired through inheritance.

(Minor child is an individual under age of 18 at end of tax year.)

Question 25

Apportionment of deduction (S.67)

Answer 25

1- Where expenditure , deduction and allowances (Ch.8) related to
a- the derivation of more than one head of income; or

ab- derivation of income comprising of:
- taxable income and
- income falling under final tax regime or;

b-
-the derivation of income chargeable (taxable) to tax under a head of income and
- for some other purpose ,
the expenditure, deduction and allowances shall be apportioned on any reasonable basis considering the relative nature and size of the activities.

Question 26

Fair market value (S.68) (SS.1)

Answer 26

1- The FMV of any property or rent , asset , service , benefit or prequisite at a particular time shall be the price which will ordinarily be fetched on sale or supply in the open market at that time.

Question 27

Fair market value (S.68) (SS.2)

Answer 27

2- The FMV shall be determined ignoring:
- any restriction on transfer or
- the fact that it is not convertible to cash (and zabardasti convert it into cash.)

Question 28

Fair market value (S.68) (SS.3)

Answer 28

3- Where the price is not ordinarily ascertainable, the board may, by notification in the official gazette determine the fair market value of the immoveable property.

Question 29

Fair market value (S.68) (SS.4)

Answer 29

4- Where the fair market value of any immoveable property of an area has not been determined by the board as above, the fair market value of such immoveable property shall be deemed (assume) to be the value fixed by the district officer (revenue) or provincial or any other authority authorized for the purposes of stamp duty.

Question 30

Recouped expenditure (S.70)

Answer 30

In case of subsequent recoupment of any expenditure or loss, in cash or kind, the recouped amount shall be included in the income chargeable (taxable) under relevant head for the tax year in which it is received.

Question 31

Currency conversion (S.71) (SS.1,2)

Answer 31

1- Every amount taken into account (recorded) under this Ordinance shall be in Rupees.

2- Where an amount is in a currency other than rupees, conversion shall be at the State bank of Pakistan rate prevailing at the date at which the amount is taken into account (recorded).

Question 32

Cessation of source of income (S.72)

Answer 32

If a taxable source of income ceases to exist either:
- before the commencement of the year or
- during the tax year ,
then any subsequent benefit derived from it shall be taxable in normal way assuming that the source has not ceased at the time income was derived.

Question 33

Rules to prevent double derivation and double deductions (S.73)

Answer 33

If any income is taxed on receivable basis it shall not become taxable again on receipt basis and vice versa. Likewise, if any expenditure is deductible on payable basis he same shall not be deducted when it is paid and vice versa.

Question 34

Tax on dividends (S.5) (SS.1,2,3)

Answer 34

1- A tax shall be imposed , at prescribed rate , on every person who receives a dividend from a company

2- The tax shall be computed by applying the rate of tax to the gross amount of the dividend.

3- This section shall not apply to a dividend that is exempt from tax.

Every company paying a dividend shall deduct tax on gross amount of dividend.

Question 35

General provisions relating to taxes imposed under section 5 and 7B (S.8)(SS. a, b, c, d, e)

Answer 35

Rules applicable to income chargeable under final tax regime:

The tax imposed under section 5 and 6 shall be a final tax and

a- This income shall not be chargeable under any head of income;

b- no deduction shall be allowable for any expense incurred;

c- the income shall not be reduced by
1- any deductible allowance (Zakat etc); or
2- the set off of any loss;

d- the tax deducted shall not be reduced by any tax credit; and

e- the liability of a person (under section 5 or 7B) shall be discharged if tax has been deducted.

The tax deducted on dividend is commonly known as non-adjustable tax.