Tax Treatment of Salary
Thursday, February 26, 2009
Case from mszuberi_associates:
A Non Profit organization not deducted the tax from its' employees salary for several years.
- Who is responsible? Organization, Employee, Or both?
- what is the panalty under Income Tax ordinance, 2001 and who would bear it.
Section 149, Salary, of Division III, Deduction of Tax at Source of the Income Tax Ordinance, 2001 states that;
Every employer paying salary to an employee shall, at the time of payment, deduct tax from the amount paid at the employee’s average rate of tax computed at the rates specified in Division I of Part I of the First Schedule on the estimated income of the employee chargeable under the head “Salary” for the tax year in which the payment is made after making adjustment of tax withheld from employee under other heads and tax credit admissible under section 61, 62, 63 and 64 during the tax year after obtaining documentary evidence, as may be necessary, for
(i) tax withheld from the employee under this Ordinance during the tax year;
(ii) any excess deduction or deficiency arising out of any previous deduction; or
(iii) failure to make deduction during the year;
Sub Section (c) of Section 21 Decduction not allowed states that no deduction shall be allowed in computing the income of a person under head of income from business if that person any salary, rent, brokerage or commission, profit on debt, payment to non-resident, payment for services or fee paid by the person from which the person is required to deduct tax under Division III of Part V of Chapter X or section 233 of chapter XII, 1[unless] the person has 2[paid or] deducted and paid the tax as required by Division IV of Part V of Chapter X;
According to above provisions of Income Tax Ordinance, 2001 it is clear that Organization (whether profitable or non profitable) is requied to deduct tax on salary at the time of payment and if it will not do so then its expense would be not allowed as admissible expense.
Tax accounting: Cash vs. Accrual
Tuesday, February 17, 2009
Query from Khurrum Shahzad, M.Com, ACMA, Head of Accounts Deptts. Rahim Baksh Group:
"A recreational club has received amounting Rs.2,000,000 on account of life membership of a person with family and charged 1,500/- on monthly basis. Can that club defer Rs.2,000,000 on different coming years rather than show as income of the year when it is received? Please advice from taxation point of view."
Section 32. Method of accounting states that a company shall account for income chargeable to tax under the head “Income from Business” on an accrual basis, while other persons may account for such income on a cash or accrual basis.
Further, a person’s income chargeable to tax shall be computed in accordance with the method of accounting regularly employed by such person (wether accrual or cash)
Section 33. Cash-basis accounting states that a person accounting for income chargeable to tax under the head “Income from Business” on a cash basis shall derive income when it is received and shall incur expenditure when it is paid.
Section 34. Accrual-basis accounting states that;
A person accounting for income chargeable to tax under the head “Income from Business” on an accrual basis shall derive income when it is due to the person and shall incur expenditure when it is payable by the person.
- Due to a person means when the person becomes entitled to receive it even if the time for discharge of the entitlement is postponed or the amount is payable by instalments.
- Payable by a person means when all the events that determine liability have occurred and the amount of the liability can be determined with reasonable accuracy.
In the light of above provisions of income tax ordinance, 2001 that club must adopt accrual basis accounting (in case of company) and may adopt accrual basis accounting (in case of other person like AOP). On the basis of accrual accouting Rs.2,000,000/- would be treated as income when club is entitled to receive it irrespective the amount is postponed or payable in instalments.
Ref: Income Tax Ordinance, 2001
Witholding tax on freight charges
Friday, February 13, 2009
According to section 153 (Payments for goods and services) of Income Tax Ordinance, 2001 every prescribed person making a payment in full or part including a payment by way of advance to a resident person or permanent establishment in Pakistan of a non-resident person is required to deduct tax
- for the sale of goods;
- for the rendering of services;
- on the execution of a contract, other than a contract for the supply of goods or the rendering services
Payment to transporters on account of freight charges are covered under rendering of services. Every prescribed person is required to deduct withholding tax @ 2.00% as mentioned in 2(i) division III, part III of first schedule of Income Tax Ordinance, 2001.
Tax Depreciation Rates
Monday, February 2, 2009
Depreciation rates specified for the purposes of section 22 shall be -
I. Building (all types). @10%
II. Furniture (including fittings) and machinery and plant (not otherwise specified), Motor vehicles (all types), ships, technical or professional books @15%
III. Computer hardware including printer, monitor and allied items, machinery and equipment used in manufacture of I.T. products aircrafts and aero engines @30%
IV. In case of mineral oil concerns the income of which is liable to be computed in accordance with the rules in Part-I of the Fifth Schedule.
(a) Below ground installations @ 100%
(b)Offshore platform and production installations. @ 20%