Taxation

~~with focus on tax education~~

Salary - Definition

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Any amount received by an employee other than an amount exempt from tax, in a tax year from employment, whether the amount is in a capital or revenue nature, including arrears or amount received in advance, shall be chargeable under the head salary. Salary shall include:

i) any pay, wages or other remuneration including leave pay, overtime, bonus, commission, fees, gratuity, work condition supplements (such as for the un pleasant or dangerous working conditions);

ii) any perquisite whether convertible into money or not;

iii) any allowance provided to employee including cost of living, rent, utilities, education, entertainment, traveling etc. excluding allowance solely expended in the performance of duties of employment;

iv) any personal expenditure reimbursed by employer;

v) consideration received for entering into an employment agreement or for agreement to any condition of employment or changes to the employment conditions.

vi) amount received on the termination of employment.

vii) amount received from provident fund except for a contribution made by the employee in respect of which the employee was not entitled to a deduction.

viii) Consideration received for an employee’s agreement to a restrictive condition in respect of past, present or prospective employment;

ix) any pension or annuity or any supplement to a pension or annuity received / receivable from employer;

x) any amount of gain earned by employee on the issue of shares or on the disposal of any right or option to acquire shares under “Employee Share Scheme”;

xi) amount of tax chargeable on employee’s salary and paid by employer.

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Salary Income - Taxability

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Taxability: Salary is taxable on "Receipt" basis.
 
Receipt: means if salary is
 - actually received or
 - made available to
 - apply or contribute on behalf of the employee by any law or regulation
 
Question: Salary is taxable on Receipt basis. Is there any exception available in the Ordinance
 
Answer: Yes, Salary paid by private companies can be taxable on accrual basis;

Where, in any tax year, salary is paid by a private company to an employee of the company for services rendered by the employee 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 that earlier year

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Sectoin 101 - Geographical Source of Income

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All incomes, which are chargeable to tax under Income Tax Ordinance, 2001 may broadly be classified into the following two categorize:
  1. Pakistan Source Income
  2. Foreign Source Income (that is not Pakistan Source income )
Status wise Taxable income:

Resident: Both Pakistan Source Income and Foreign Source income are Taxable
Non-Resident: Pakistan Source Income is Taxable only.

Head wise detail of Pakistan Source Income is as follows;

Salary:
  • Received from any employment exercised in Pakistan, wherever Paid.
  • Paid by or on behalf of the Fed. Govt., Provincial Govt. or local Govt. in Pakistan wherever the employment is exercised
Business Income - Resident:
  • Income is derived from any business carried on in Pakistan
Business Income - Non Resident:

Income is directecly or indirectly attributable to -
  • Permanent establishment (PE) of non resident person in Pakistan
  • Sales in Pakistan of goods marchandise of the same or similar kind as those sold by the person through PE in Pakistan
  • Other business activities carried on in Pakistan of the same or similar kind as those effected by the non resident through a PE in Pakistan
  • Any business conncection in Pakistan
  • Any remuneration derived by a person where the remuneration is paid by the resident person or borne by the PE in Pakistan of non-resident person on account of independent services including
  1. Professional services
  2. Services of entertainers
  3. Services of sportsman
  • Gain from disposal of any asset or property used in driving business income referred above.


Dividend Income:
  • When it is paid by resident company
Capital Gain:
  • Any Gain arising on disposal of shares in a resident company
Rental Income:
  • If it is derived from
  1. the lease of immovable property or
  2. any interest in or over immovable property including right to explore or exploit natural resouces
  • Any Gain arising from
  1. From alienation of any property or right mentioned above
  2. From alienation of any share in a company the assets of which consist wholly or principally, directly or indirectly, of property or right mentioned above.
Profit / Royalty / Technical Fee:
  • If it is paid by resident person except Where the profit / royalty / technical fee is payable in respect of any debt / right & property / services for the purpose of business carried on by resident outside Pakistan through a PE.
  • borne by PE in Pakistan of a non-resident person
Pension / Annuity:
  • If it is paid by resident or borne by PE in Pakistan of a non-resident person
Insurance / Reinsurance Premium:
  • If it is paid by insurance company to an overseas insurance / re insurance company
Any amount not covered above:
  • If it is paid by resident or borne by PE in Pakistan of a non-resident person

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Heads of Income, Total Income and Taxable Income

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Taxable income.- (Section - 9) means

The total income of the person
Less: deductible allowances (Zakat, WWF, WPPF).

Total Income.- (Section - 10) means

Sum of the person’s income under each of the heads of income for the year  + Exempt Income

Heads of income.- (Section - 11) can be classified under the following heads, namely:–

(a) Salary;
(b) Income from Property;
(c) Income from Business;
(d) Capital Gains; and
(e) Income from Other Sources.

The total of the amounts derived by the person in that year that are chargeable to tax under the head as reduced by the total deductions to the person for the year under that head.

Where the total deductions allowed to a person for a tax year under a head of income exceed the total of the amounts derived by the person in that year that are chargeable to tax under that head, the person shall be treated as Sustaining a Loss for that head for that year of an amount equal to the excess.

All incomes, which are chargeable to tax under Income Tax Ordinance, 2001 may broadly be classified into the following two catogaries:

  • Pakistan Source Income
  • Foreign Source Income (that is not Pakistan Source income)
  • Status Pakistan source Income Foreign source Income
    Resident Taxable Taxable
    Non - Resident Taxable Non Taxable

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Tax Year - Normal, Special and Transitional

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Normal Tax Year

A period of 12 months ending on 30th June
1-07-2011---to---30-06-2012

Special Tax Year

A period of 12 months ending on any date other than 30th June
1-10-2012---to---30-09-2013

Transitional Tax Year

Whenever there is a change in tax year the period in between the normal tax year and special tax year is treat as transitional tax year.

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posted @ 10:06 AM, , links to this post

Resident Person Vs. Non-Resident Person

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For a Tax Year Resident Person means (Section- 81)

If the person is a resident individual, resident company or resident association of persons for the year; or the Federal Government

Non Resident Person (Section- 81)

If the person is not a resident persons for the year

Resident Individual (Section- 82)

Present in Pakistan for a period of, or periods in aggregate to, one hundred and eighty three days or more in the tax year; - 183 Days
or
is an employee or official of the Federal Government or a Provincial Government posted abroad in the tax year.

Resident Company (Section- 83)

(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.

Resident Association of Person (Section- 84)

If the control and management of the affairs of the association is situated wholly or partly in Pakistan at any time in the year



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Person - Section-80

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(Section-80) - Person include

(a) an individual
(b) a company or association of persons incorporated, formed, organised or established in Pakistan or elsewhere;
(c) the Federal Government, a foreign government, a political subdivision of a foreign government, or public international organisation

Association of Persons

includes a firm, a Hindu undivided family, any artificial juridical person and any body of persons formed under a foreign law, but does not include a company;

Company means
(i) a company as defined in the Companies Ordinance, 1984
(ii) a body corporate formed by or under any law in force in Pakistan
(iii) a modaraba;
(iv) a body incorporated by or under the law of a country outside Pakistan relating to incorporation of companies;
(v) a trust, a co-operative society or a finance society or any other society established or constituted by or under any law for the time being in force
(vi) a foreign association, whether incorporated or not, which the Board has, by general or special order, declared to be a company for the purposes of this Ordinance;
(vii) a Provincial Government;
(viii) a Local Government in Pakistan;
(ix) a Small Company as defined in section 2

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Introduction to Taxation

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Constitution of Pakistan empowers Federal Government to Levy Tax (for the purpose of federation) through Act or Ordinance.

Act: is approved by the Parliament (eg: Sales Tax Act, 1990)

Ordinance: is promulgated by the President (eg: I.Tax ordinance, 2001)

Income Tax aims at two Roles:

1- Redistribution of wealth: (Through progressive taxation means higher level of income is subject to higher rate of tax)

2- Serve as an instrument of fiscal policy: (through granting exemptions to a particular class of income / person)

Scheme of the Income Tax Ordinance, 2001
  • Chapters (total number are 13 and each chapter deals with particular subject
  • Parts
  • Divisions
  • Section
  • Sub section
  • Clauses

Paper – C7: TAXATION - (Syllabus)

Income Tax
Marks
a. Basic concepts of taxation

15

b. Heads of income, Computation of income, Determination of tax liability
40
c. Types of persons and their taxation
10
d. Procedures and Administration
e. Income Tax Rules 2002
10
Sales Tax

Prescribe chapters of Sales Tax Act and Rules.
25
Total
100
* Indicative Grid but not final

(a) Source of Income Tax Law




1- Legislative Law (I Tax Ordin.)
2- Procedural Law (I Tax Rules)
3- Notification, Circulars issued by the board
4- Case Laws: Judgments of tribunal and courts.


(b) Purpose of Income Tax Law: In the society is
  • To levy and collect tax
  • On income of person and
  • Use it for the welfare purpose

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