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NAME: MEHREEN KHAN

ENROLL NO:01-112171-013
SUBMITTED TO: MAM AMAL KHAN
SUBJECT: ADVANCE TAXATION
Question 1: How does taxable income vary as per following categories:
a) Single owned business/entrepreneurship

A sole proprietorship is taxed through the personal tax return of the owner,. The
business profit is calculated and presented on Schedule —Profit or Loss from
Small Business. To complete Schedule , the income of the business is calculated
including all income and expenses, along with cost of goods sold for products sold
and costs for a home-based business. The result of this calculation (income minus
expenses) is the net income, the amount of taxable business income.

This net income or loss of the business is entered on Line of the owner's Form , to
be included along with other income/loss of the owner (and spouse) for income
tax purposes. If the business has a loss, this loss may be used to reduce the total
adjusted gross income of the owner (the income before exemptions and
deductions) on the tax return. 

The owner of the sole proprietorship pays income tax on all income listed on the
personal tax return, including income from business activities, at the applicable
individual tax rate for that year.

Tax Rates on Sole proprietorships in Pakistan


 The business individual is taxed for the profits only unless turnover exceed
10 million rupees. In case exceed 10 million rupees, 1.25% of total turnover
is payable.
 NTN is issued in name of the sole proprietor / owner.
 Taxed for the profits only. Progressive tax based on the amount of profits.
 Filing of annual income tax returns is mandatory. Tax returns for July 1 of
the preceding year to June 30 of the current year have to be submitted by
30th September of every year.

b) Partnership

Generally, the FBR does not consider partnerships to be separate from their
owners for tax purposes; instead, they are considered "pass-through" tax entities.
This means that all of the profits and losses of the partnership "pass through" the
business to the partners, who pay taxes on their share of the profits (or deduct
their share of the losses) on their individual income tax returns. Each partner's
share of profits and losses is usually set out in a written partnership agreement.

Filing Tax Returns


Even though the partnership itself does not pay income taxes, it must file Form
with the FBR. This form is an informational return the FBR reviews to determine
whether the partners are reporting their income correctly. The partnership must
also provide a Schedule to the FBR and to each partner, which breaks down each
partner's share of the business's profits and losses. In turn, each partner reports
this profit and loss information on his or her individual tax return, with Schedule
attached.

Estimating and Paying Taxes


Because there is no employer to compute and withhold income taxes, each
partner must set aside enough money to pay taxes on his share of annual profits.
Partners must estimate the amount of tax they will owe for the year and make
payments to the IRS (and usually to the appropriate state tax agency) each
quarter.
Tax Rates on AOP / Partnerships in Pakistan
 NTN is issued in the name of Partnership (in case of Registered Partnership
with Registrar of Firms)
 Taxed for the profits only. Progressive tax based on the amount of profits.
Slabs can be seen in the tax card below.
 Filing of annual income tax returns is mandatory on Partnership / AOP. In a
registered partnership, NTN is issued in name of the partnership and the
individual partners are not taxed separately. However, in an unregistered
partnership, each partner has to file his/her own personal tax returns. Tax
returns for July 1 to June 30 have to be submitted by 30th September of
every year.

C) Pvt Ltd Companies

Private Limited Company is a form of business wherein shareholders have limited


liabilities and their shares may not be offered to the general public, unlike those
of a public limited company. It has separate legal status from its shareholders and
directors who have limited liabilities for the debts and losses of the company. And
since it is considered a legal entity, it must be registered as a taxpayer in its own
right.
Having a private limited company is a good way to protect business owners
against trading losses meaning the company as a separate entity will be
responsible for its own debts and trading losses rather than the individual. The
individual persons´ own assets will remain protected and their liability will be
limited to their shared amount. Being a private limited company will also mean
that the business profits are liable for corporation tax at the single rate. This is a
far better rate than what sole proprietor is paying, or if he or she is a part of a
partnership.
Tax Rates on Private Limited Companies in Pakistan
 NTN is issued in name of the Company.
 Filing of annual income tax returns is mandatory and directors and
shareholders are taxed separately. Tax returns for July 1 of the preceding
year to June 30 of the current year have to be submitted by December of
every year.
 Taxed for the profits at the following rates:
a) Small Company 24% (will decrease by 1% every year to 20% by the year
2023).
b) Other than small company 29% (will decrease by 1% every year to 25%
by the year 2023).
c) Minimum Turnover Tax of 1.25
D) Public Limited Companies
A Public Limited Company (PLC) is a form of business that is legally allowed to
offer its shares for sale to the public. A PLC is a separate legal existence separate
from its management and shareholders and is protected through limited liability.
And while sole proprietorship and partnerships have to pay basic rate or higher
income tax, PLCs pay corporation taxes on their taxable profits. There are also tax-
deductible costs and allowances that can be offset against company profits for
even greater tax savings.
Question 2: How is the investment of Sukuks important, how does tax affect
Sukuks, and other bond, currency notes etc.?

Sukuk:

Sukuk refers to certificates of equal value which evidence undivided ownership or


investment in the assets using Shariah principles and concepts endorsed by the
Shariah Advisory Council. Think of Sukuk as Islamic bonds that are structured in a
way to generate returns to investors. They are issued and traded in compliance
with the principles of Shariah, which prohibit “riba” or interest. When you buy
bonds, you are essentially loaning money to the issuer for a fixed period of time.
You will receive a predetermined interest rate, which is usually paid annually
within that fixed timeframe. The value of the bond is repaid at the end of the
period and you get your money back. However, because Shariah law prohibits the
generation of money from money (such as interest or “riba”), financial
instruments that involve the trading and selling of debts, and conventional loan
lending (which includes conventional bonds) are not permissible. This is where
Sukuk comes in to fill in the gap between Islamic financing and the global capital
market.

How does Sukuk work?

Sukuk represent certificates of equal value that evidence undivided ownership or


investment in the assets using Shariah principles and concepts endorsed by the
Shariah Advisory Council. Essentially, when you invest in Sukuk, your money is put
into the assets of a project or investment in order to generate profit. The investor
receives a margin of that profit based on a pre-agreed ratio.

When investors buy Sukuk and become Sukuk holders, they receive a certificate
from the issuer to evidence ownership, and are entitled to receive periodic profit
payments on the principal amount invested. Upon maturity, the Sukuk holder will
get back the principal amount of investment. As with most Islamic financial
instruments, there are different methods of achieving the same objective, and the
above is just one method of doing it. For instance, the periodic profit payments
may come in the form of profit-sharing or rental from the asset.
IMPORTANCE

Sukuk can play an important part in the development of an Islamic market and
banking system. The main advantage of sukuk is to comply with Sharia while
boosting the standard of living in Islamic society and developing these societies’
economies. However, sukuk also bring several other important benefits.
Sukuk provide an ideal way of financing large projects for the public good that
would otherwise not be possible. There are many economic activities or projects
that are out of reach of individuals, companies, or, in the case of various
developing Islamic economies, governments. In these cases, sukuk are perfect for
financing these projects without falling into interest-based debt. This makes sukuk
an important avenue for redistribution of wealth and achievement of social
justice. The use of sukuk to fund large projects means that investors in sukuk are
incentivized to help economies develop by creating and producing rather than by
consuming or manipulating others. Islamic finance is based on principles of
fairness and justice which are achieved by avoiding Riba.

Investors on the secondary market that are looking for investments that can be
liquidated easily will find that sukuk are ideal. Thanks to the secondary market for
Islamic securities, investors can sell their securities and obtain the cost of their
certificates. If the projects that back their sukuk certificates have generated
profits, this results in a quick return in investment.  This means that Islamic
financial instruments are well suited for fund management. Banks or institutes
can use part of their funds to purchase Islamic securities and then sell them on
the secondary market when liquid assets are needed.
Sukuk are well suited for smart management of risk. Uncertainty is a big part of
investment. Islamic securities can be issued with varying degrees of risk and yield,
allowing investors to choose a portfolio best suited for their risk management
profiles. It is important to note that risk in sukuk is more difficult to manipulate
artificially than is the case in other types of securities. This is because the value
and risk of sukuk is always related to real assets with provable, tangible value,
rather than on artificial manipulation of debt and credit ratings.

Tax Affect :

One of the most important factors that is necessary for sukuk when it comes to
tax regulations is to ensure that there is a parity between taxation on sukuk and
conventional bonds. If the tax system favors one of these, this creates an unfair
market where it is impossible for the financial instrument in disadvantage to
thrive. Currently, most tax systems around the world are structured to handle
conventional bonds, but lack some of the specific attributes necessary to work
with sukuk and other Islamic financial instruments.
There are several reasons why the appropriate legal structures are necessary for
the use of sukuk. These types of Islamic bonds usually involve multiple transfers
due to the nature of how they are backed by real assets rather than working on
the basis of interest. Legal structures that are not designed to handle this will tax
every transfer, creating an unsustainable situation for those involved in the sukuk
transaction. The main reason for this is that sukuk often require that ownership of
the asset covered by the sukuk be transferred repeatedly from one party to
another. Ownership of assets in many regions requires additional tax duties and
often involves other legal transactions that incur additional costs. Without special
provisions for sukuk, this characteristic of Islamic financial instruments puts them
at a severe disadvantage if the right legal frameworks do not exist. A typical
example is an Ijara sukuk structure. In these cases, the initial transfer of asset
ownership can trigger capital gains, sales tax, holding tax, and stamp duty. Each
time a transfer of ownership occurs, which will happen at least twice, these taxes
would be required, unlike convetional bonds which would only be taxed according
to their capital gains.
One hurdle when creating the necessary legal framework for sukuk in a country’s
legislation is the differential treatment between profit and interest. Most of the
time, interest payments are tax deductible. On the other hand, profit is taxable.
Some types of transactions are affected by additional duties. For example,
Murabahah sukuk must pay sales tax or Ijarah sukuk often suffers from additional
stamp duty payments. Currently, the United Kingdom, Malaysia, Qatar, and
Turkey are the four countries that have some of the best conditions when it
comes to taxation systems and frameworks for Islamic financial instruments.