Tax General definitions of tax are given below: Literally: Means burden, strain.

. Economist: It is the general compulsory contribution of wealth levied upon persons by the state, to meet the expenses incurred in providing common benefits to the residents. Income tax ordinance defines tax as, Tax means any tax imposed under chapter II Charge to tax and includes a penalty, fee or other charge or any sum or amount leviable or payable under this ordinance. Taxes versus Fees Taxes Common Benefits Compulsory levy Fees Counter Benefit Discretionary.

Taxes An Integral part of Fiscal Policy: Fiscal Policy: Fiscal policy is a discipline that deals with arrangements which are adopted by government to collect the revenue and make the expenditures so that social and economic stability could be attained/ maintained. Objectives of Fiscal Policy: 1. Economic development 2. Raising level of employment (achieving full-employment) 3. Influencing consumption patterns. 4. Price stability. 5. Redistribution of income. 6. Removal of deficit in Balance of Payments Instruments (tool) of Fiscal Policy Ways and means to achieve fiscal policy objectives are as under: Public Expenditure Taxes Deficit Financing Subsidies Transfer payments like unemployment allowances, Benazir income support fund Sources for Revenue Generation for State Taxes & Tariffs Internal & External borrowing Aids and Grants Canons of Taxation: Taxes are levied on following principles. Simplicity and convenience Certainty & Judicious Capacity/Ability to pay Benefit principle-Business friendly

Types of Taxes Types of taxes based upon various classifications are: Direct Taxes Indirect Taxes Proportional Taxes Progressive Taxes Value Added Taxes Taxation Structure of Pakistan Federal Taxes: Few are, Income tax Progressive tax Corporate tax-One time levy Customs duties/Tariffs Includes Import, Export Duties based on trade policy Sales Tax Provincial Taxes: Few are, Stamps Duty Court Fee Registration Fee such as Motor vehicle, sales-purchase agreement Local Government Different types of taxes on Water, Sanitation, Birth Record, Import and Export Taxes etc. Taxation Management
Taxation management is a strategy where by a person manages its business and other transactions/ activities in such a way so as to make maximum use of tax holidays, exemption, concession, rebates, tax credits, deductible allowances available under law and as a result is able to derive the benefit of minimizing his tax liability. To achieve this objective, clear understanding of respective laws and professional expertise of their application is of at most importance. Scope of taxation management is multi-dimension, while making choices among different opportunities available to a person, the tax factor among others also plays an important role. Taxation management covers a decision regarding available choice between an employment and self- employment or available choice of a business as sole proprietorship, partnership, private company or public company. It is professional strategy to plan tax affairs of a person. It is of significant importance in business management decision. Person includes a living person (natural) or artificial person (corporate person). Scope of Taxation Management ranges from incorporation of a business to mergers, amalgamation, winding up, liquidation, dissolution etc of business Essentials of Taxation Management Understanding and application of updated laws particularly tax laws, rules and procedures Application/use of benefits such as Tax credits, rebates, exemptions, reductions etc available under the law. Maintenance of Records/Books of Accounts as per requirement of law Disclosure of true facts (no concealment) that is there should be no concealment with regard to furnishing of information or preparation of accounts / data.

Background Income Tax Act of 1922 Income Tax Ordinance, 1979 (1st July 1979) Income Tax Ordinance, 2001 (with income tax rules 2002) o Promulgated on 13th sep 2001 o Effective from 1st July 2002 Why Rules are made? Rules are made to aid law. For example, income tax ordinance requires a taxpayer to file return where Income tax rules state the format and procedure for filling return. Fiscal statues change rapidly. Sometimes, tax rates are increased, exemptions are granted etc. Income Tax Ordinance 2001 Income tax rules 2002 promulgated on 1st July 2002 by Board in exercise of powers under Section 237 of the Ordinance. The ordinance overrides all other laws for the time being in force. (Section 3) The Federal Government shall place before the National Assembly all amendments made by it to the Second Schedule (Exemptions & Concessions) in a financial year. (Sec. 53(3)) Board issues administrative instructions explanations/circulars under the powers vested through sec. 206-213. Decisions and interpretation of Supreme Court are binding on all courts in Pakistan. (Article 189 of constitution) Case law is an important source of interpretation a precedent. Scheme of Ordinance 13 Chapters Chapters divided into o Parts & Divisions 240 Sections 7 Schedules Schedules are part of the Ordinance. Rules of interpretation or Construction of Statues Interpretation or aids include 1) Internal Aid facilities, references for interpretation of statues a) Explanation to section b) Marginal Notes c) Punctuation marks comma, semicolon separates/divides whereas and includes d) Preamble gives purpose of the law 3

e) Title of Chapter signifies interpretation must be in accordance with title of chapter such as Appeals, Returns, Head of income f) Non-Obstante clause g) Proviso h) Context 2) External Aid a) Dictionary b) Tax committee report c) Statement of objects appended to a finance bill d) Finance ministers budget Speech e) Circulars issued by Board f) Definitions from other statues Types of Definitions Exclusive or Exhaustive Definitions Exclude ordinary dictionary meanings of word. Usually, start with word mean or means Inclusive Definitions Include dictionary meanings as well as meanings conveyed by definition. Start with word include or includes Exclusive as well as Inclusive Contain both Statutory and dictionary meanings Statutory Definitions (about 100 in Sec. 2) Remember, Legal concepts and technical words are to be understood in the legal and technical perspective. Dictionary meaning can be referred in absence of statutory definitions Some important definitions are, Board Means the central board of revenue established under the Central board of Revenue Act, 1924 (IV of 1924), and on the commencement of Federal Board of Revenue Act, 2007, the Federal Board of Revenue established under section 3 thereof Tax Year Means a period of twelve months ending on the 30th day of June (also referred to as normal tax year) Includes a special year or a transitional year that the person is permitted to use under section 74 Normal Tax Year A period of 12 months from 1st July to 30 June denoted by the calendar year in which the normal tax year ends. Commissioner may allow a taxpayer to change tax year from special tax year upon application after providing him with opportunity of being heard For the year ending 30th June 2003 the tax year shall be 2003 Special Tax Year Any income year ending other than 30th June is special tax year Denoted by the calendar year relevant to the normal tax year in which the year end falls. Commissioner may allow a taxpayer to change tax year to special tax year upon application after providing him with opportunity of being heard. Special income year 1st January 2003 to 31st December 2003; this year end falls in the normal tax year 1st July 2003 to 30th June 2004 therefore tax year relevant to the normal tax year i.e. 2004 shall be the tax year for this special year. 4

Classes of Taxpayers All persons carrying on business of manufacturing and dealing in Shawls All persons carrying on business of rice husking All persons carrying on business of oil milling Companies manufacturing Sugar All persons exporting rice Insurance companies

Special Accounting (Income) Year 1st April to 31st March 1st September to 31st August 1st September to 31st August 1st October to 30th September 1st January to 31st December 1st January to 31st December

Note: A tax year can be a period less than 12 months under special circumstances for example, Discontinuance of business u/s 117. In such situation, tax payer must notify a commissioner of income tax within 15 days of discontinuation. Transitional Tax year If a normal tax year or special tax year changes then the period from the day next following the last full tax year to the date of commencement of new tax year shall be treated as transitional tax year Normal tax year 1st July 2002 to 30th June 2003 i.e. Tax year 2003 changes to special year 1st January 2004 to 31st December 2004 i.e. Tax year 2005. In this case, period from 1st July 2003 to 31st December 2003 shall be treated as transitional tax year i.e. Transitional tax year 2004 Find Tax year for following Accounting Periods
Accounting (Income) Period 1st July 2002 to 30th June 2003 1st July 2003 to 30th June 2004 1st Jan 2003 to 31 Dec 2004 1st Jan 2005 to 31 Dec 2005 1st April 2002 to 31st March 2003 1st April 2003 to 31st March 2004 1st April 2004 to 31st March 2005 1st October 2003 to 30th September 2004 1st October 2004 to 30th September 2005 1st October 2005 to 30th September 2006 Type of Tax Year Normal Tax Year Special Tax Year Special Tax Year Tax Year 2003 2005 2003

Special Tax Year

2005

Person (clause 42 section 2) read with section 80 The following shall be treated as persons for the purposes of this Ordinance, namely: o An individual; o a company or association of persons incorporated, formed, organised or established in Pakistan or elsewhere; o The Federal Government, a foreign government, a political sub-division of a foreign government, or public international organisation. Association of Person Includes o A firm, o A Hindu undivided family o Any artificial juridical person and o Any artificial body of persons o but does not include a company Company Means o A company as defined in Companies ordinance, 1984 o A Small company as defined in Section 2(59A) 5

o A body corporate formed by or under any law in force in Pakistan o A body incorporated by or under the law of a country outside Pakistan, relating to incorporation of companies o A trust, a cooperative society or a finance society A foreign association whether incorporated or not, which the board has, by general or special order, declared to be a company for the purpose of this ordinance. A provincial government A local government Small company u/sec. 2(59A) Means a company which 1) has paid up capital plus undistributed reserves not exceeding 25 million rupees 2) has employees not exceeding 250 any time during the year 3) has annual turnover not exceeding 250 million rupees and 4) Is not formed by the splitting up or the reconstitution of company already in existence. Trust Means an obligation annexed to the ownership of a property and arising out of the confidence reposed in and accepted by the owner, or declared and accepted by the owner for the benefit of another, or of another and the owner, and includes a unit trust Unit Trust Means any trust under which beneficial interest are divided into units such that the entitlements of the beneficiaries to income or capital are determined by the number of units held. Tax payer Means any person who derives an amount chargeable to tax under this Ordinance, and includes o Any representative of a person who derives an amount chargeable to tax under this Ordinance; o Any person who is required to deduct or collect tax under Part V (Collection and recovery of Tax) of Chapter X(Procedure) [and Chapter XII (Transitional or Advance Tax] or o Any person required to furnish a return of income or pay tax under this Ordinance;

Determination of Legal Status of Persons U/sec 80:

ABC University Karachi XYZ Bank Limited A joint family of Mr. H (a Hindu) comprising Mr. H, His sons Mr. C & Mr. D XYZ Modarba XYZ Mills Ltd. Federal Government Government of Sindh Government of Punjab ABC Trust KDs an Unregistered firm of K, and D Mr. A serving as a Manager in a Textile Company Mr. Z a Director in Private Company Mr. Y running his business as Sole Proprietor Company Company AOP Company Company A Person, not sub categorized Company Company Company AOP Individual Individual Individual 6

ABC Welfare Trust Company Mr. A & B Joint Owners in Immovable Property AOP XYZ Cooperative Housing Society Company Resident taxpayer means a taxpayer who is a resident person Non-resident taxpayer means a taxpayer who is a non-resident person Resident Person (u/sec. 81) A person shall be a resident person for a tax year if the person is: A resident individual, resident company or resident association of persons for the year; or The federal government. Resident Individual (u/sec.82) An individual shall be a resident individual for a tax year if the individual, Is present in Pakistan for a period of, or periods amounting in aggregate to, one hundred and eighty three (183) days or more in the tax year. Or Is an employee or official of the federal government or a provincial government posted abroad in the tax year Computation of Number of Days an Individual is present in Pakistan (Income Tax Rule 14) A day or part of a day where an individual is in Pakistan solely by reason of being in transit
between two different places outside Pakistan does not count as a day present in Pakistan. A Part of a day that an individual is present in Pakistan (including the day of arrival in, and the day of departure from Pakistan) counts as a whole day of such presence. The following days in which an individual is wholly or partly present in Pakistan count as a whole day of such presence, namely; o A Public holiday; o A day of leave, including sick leave; o A day that the individuals activity in Pakistan is interrupted because of a strike, lock out or delay in receipt of supplies or o A holiday spent by the individual in Pakistan before, during or after any activity in Pakistan.

Resident Company(u/sec.83) A company shall be a resident company for a tax year if, It is incorporated or formed by or under any law in force in Pakistan The control and management of the affairs of the company is situated wholly in Pakistan at any time in the year; or It is a provincial government or local government in Pakistan. Resident Association of Persons (u/sec.84) An association of person shall be a resident association of persons for the tax year if the control & management of the affairs of the association is situated wholly or partly in Pakistan at any time in the year. Non-Resident Person (u/sec. 81(2)) A person shall be a non-resident person for a tax year if the person is not a resident person for that year. 7

Exercise: Determination of Residential Status Tax Year -2005 -Mr. Hanif visited Pakistan on 1st August 2004 in connection with a seminar, which continued for seven days, and then he left for Singapore. Mr. Hanif again came back to Pakistan on 16th February 2005 and Stayed in Pakistan till 20th June 2005.

Solution Tax Year: 1st July 2004-30th June 2005 Days to Count August 2004 -7 days February 2005 -13 days March 2005 -31 days April 2005 -30 days May 2005 -31 days June 2005 -20 days During Tax year, his stay in Pakistan amounted to periods aggregating to a total of 132 days. Therefore, Mr. Hanif is a Non-Resident Individual for Tax Year 2005. -Mr. Sajjad an employee of Federal Government at London stayed in Pakistan from 1st September 2003 to 20th November 2003. For rest of period pertaining to tax year 2004 and 2005 his stay was in London. Solution Mr. Sajjad is a Non-Resident individual for tax year 2004, 2005 because he is employee of Federal Government posted abroad during that period. -Mr. Kalim came to Pakistan on 2nd August 2005 and left the country for Frankfurt on 15th June, 2006. Determine the residential status; for tax year 2006. (Total =319) During Tax Year 2006, Mr. Kalim stay in Pakistan is more than 183 days; therefore he is a Resident Individual. Scope of Total Income of a Resident Person (u/sec. 11(5)) The income of a resident person under a head of income shall be computed by taking into account amounts that are Pakistan-source income and amounts that are foreign-source income. Scope of Total Income of a Non-Resident Person (u/sec. 11(6)) The income of a non-resident person under a head of income shall be computed by taking into account only amounts that are Pakistan-source income. Important Points Regarding Income Incomes Received (Receipts) are chargeable to tax but Remittances are not chargeable to tax Cash & Kind: Income is chargeable to tax whether in cash or kind Income may be on Receipt basis or Accrual Basis Actual Receipts & Constructive Receipts: o Actual Receipts are income o Constructive Receipts are Deemed income e.g. Unexplained expenses. 8

Geographical Sources of Income

Foreign Source Income u/sec. 101(16) An amount shall be foreign-source income to the extent to which it is not Pakistan-Source Income.

Pakistan-Source Income u/sec. 101 Item/ Head Salary To the extent to which Received from any employment exercised in Pakistan, wherever paid. or Paid by (or on behalf of) Federal Government, Provincial Government or Local Government in Pakistan, wherever employment is exercised Business Income Extent to which the income is derived from any business carried on in of Resident Person Pakistan. Business Income Extent to which it is directly or indirectly attributable to of Non-Resident Permanent Establishment in Pakistan Person Sale of same or similar kind of goods as those sold by Person through Permanent Establishment in Pakistan. Other business activities carried on in Pakistan of same/similar kind as those effected by Non-Resident through a Permanent Establishment in Pakistan. Or Any Business Connection in Pakistan. Non-Resident Where the business comprises of rendering independent services, the Pakistan Person source income shall also include any amount derived by the person that is paid by resident person or borne by a permanent establishment in Pakistan of a non resident Person. Gain on Disposal It is a Pakistan source business income of either resident or non-resident person. of Asset or Property Dividend If Paid by a resident Company Profit on Debt If Paid by resident person, except when debt is used for the purpose of a business carried on by resident outside Pakistan through permanent establishment. Or Born by a permanent establishment in Pakistan of a non-resident Royalty If Paid by resident person, except where the royalty is payable in respect of a business carried on by resident outside Pakistan through a permanent establishment. Or Borne by a permanent establishment in Pakistan of a Non-Resident -Rental Income If -Gain from the Derived from the lease of immovable property in Pakistan whether Alienation of improved or not, or from any other interest in or over immovable property, Property, Right or including a right to explore for, or exploit, natural resources in Pakistan. shares In case of Share of a company the assets of which consist wholly or principally, directly or indirectly, or property or rights referred above Pension or If Annuity Paid by a resident or borne by a permanent establishment in Pakistan of a

non-resident person. Technical Fee If paid by a resident person, except where the fee is payable in respect of services utilized in a business carried on by the resident outside Pakistan through a permanent establishment borne by a permanent establishment in Pakistan of a non-resident person Gain on disposal of shares in a resident Company Any amount paid by an insurance company to an overseas insurance or reinsurance company shall be deemed to be Pakistan source income Any other amount if it is paid by a resident person or borne by a permanent establishment in Pakistan of a non-resident person.

Gain on Disposal of Share Insurance or Reinsurance Premium

Taxation of Foreign Source Income of Resident Person

Foreign source Salary of Resident Individuals u/sec. 102 Any foreign-source salary received by a resident individual shall be exempt from tax if the individual has paid foreign income tax in respect of the salary. A resident individual shall be treated as having paid foreign income tax in respect of foreign-source salary if tax has been withheld from the salary by the individuals employer and paid to the revenue authority of the foreign country in which the employment was exercised

Taxation of Non-Resident Person

Taxation of Permanent Establishment in Pakistan of Non-resident Person (u/sec. 105) 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, namely 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 nonresident person of which it is a permanent establishment b. subject to this Ordinance, 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 of the nonresident person (other than towards reimbursement of actual expenses incurred by the non-resident person to third parties) by way of: i. royalties, fees or other similar payments for the use of any tangible or intangible asset by the permanent establishment; ii. compensation for any services including management services performed for the permanent establishment; or iii. 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 of the non-resident person (other 10

than towards reimbursement of actual expenses incurred by the permanent establishment to third parties) by way of: i. royalties, fees or other similar payments for the use of any tangible or intangible asset ii. compensation for any services including management services performed by the permanent establishment; or iii. profit on debt on moneys lent by the permanent establishment, except in connection with a banking business 2. No deduction shall be allowed in computing the income of a permanent establishment in Pakistan of a non-resident person chargeable to tax under the head Income from Business 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 nonresidents total head office expenditure bears to its worldwide turnover. 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 of the person, including a. any rent, local rates and taxes excluding any foreign income tax, current repairs, or insurance against risks of damage or destruction 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 expenditure which may be prescribed. 4. No deduction shall be allowed in computing the income of a permanent establishment in Pakistan of a non-resident person chargeable under the head Income from Business 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. Exercise 1: determination of Gross Total Income For the tax year 2006, Mr. A employed in Pakistan, received Rs.400, 000 as Salary. His income from other sources is given under: a. Dividends received in Tokyo on 20th August 2005 from a Pakistani resident company: amounting Rs.10,000 b. Share of profit received in Tokyo on 10th May 2006 from a business situated in Kuwait but controlled through Permanent Establishment in Pakistan: amounting Rs. 60,000 c. Remittance from Tokyo on March 10, 2006 out of past profits earned and received there amounting Rs.600,000 d. Profit on Debt received and earned in Pakistan on 1st August 2006 Rs.50,000 Calculate his gross total income if he is: Resident Non-Resident Solution (refer: lecture-18 42.50) Tax Year: 2006 Tax Period: 1st July 2005-30th June 2006 Exercise 2: determination of Gross Total Income of Mr. Athar (Refer Lecture 19 -41.55) Royalty earned in Pakistan but received in April 01, 2006 in Sydney Rs.140,000 Dividend form a foreign company received in London on May 10, 2006 Rs.150,000 11

Share of Profit of business situated in Sydney, received in Paris on August 14, 2005 but from Permanent Establishment in Pakistan Rs.250,000; and Rent for tax year 2006 of a house property situated in Sydney and received ther on 01-012006 Rs.1,000,000

Assumes Mr. Athar to be Resident Individual Non Resident Person

Exercise 3: Determination of Gross Income of Mr. A for Tax Year 2006 Relevant information is given below: Interest on Australian Bonds (1/3rd is received in Pakistan) Rs.24, 000. Income from Agriculture in Australia received there but later on remitted to Pakistan Rs. 50,000. Income from Property in London received outside Pakistan Rs. 20,000. Income earned from business in London which is controlled through a Permanent Establishment in Pakistan (Rs.10,000 is received in Pakistan) Rs.30,000. Dividend paid by a resident company but received outside Pakistan Rs. 40,000 Remittance (not in the nature of income) brought to Pakistan Rs.50,000. Profits from a business in Karachi and managed from outside Pakistan Rs.20,000. Profits on sale of an asset in Pakistan but received in Sydney Rs.5000. Pension from Pakistan Government but received in Sydney Rs.20,000. Find out gross total income of Mr.Tahir, if he is:(Refer Lecture_20 10.33) Resident Non-Resident Permanent establishment u/sec. 2(41) In relation to a person, means a fixed place of business through which the business of the person is wholly or partly carried on, and includes a) a place of management, branch, office, factory or workshop, premises for soliciting orders, warehouse, permanent sales exhibition or sales outlet, other than a liaison office except where the office engages in the negotiation of contracts (other than contracts of purchase); b) a mine, oil or gas well, quarry or any other place of extraction of natural resources; c) an agricultural, pastoral or forestry property; d) a building site, a construction, assembly or installation project or supervisory activities connected with such site or project but only where such site, project and its connected supervisory activities continue for a period or periods aggregating more than ninety days within any twelve-months period] ; e) the furnishing of services, including consultancy services, by any person through employees or other personnel engaged by the person for such purpose; f) a person acting in Pakistan on behalf of the person (hereinafter referred to as the agent, other than an agent of independent status acting in the ordinary course of business as such, if the agent 12

has and habitually exercises an authority to conclude contracts on behalf of the other person; ii has no such authority, but habitually maintains a stock-in-trade or other merchandise from which the agent regularly delivers goods or merchandise on behalf of the other person; or g) any substantial equipment installed, or other asset or property capable of activity giving rise to income;

Private Company u/sec. 2(45) Means a company that is not a public company Public Company u/sec.2 (47) Means a company in which not less than fifty per cent of the shares are held by the Federal Government or Provincial Government; a company in which not less than fifty per cent of the shares are held by a foreign Government, or a foreign company owned by a foreign Government; a company whose shares were traded on a registered stock exchange in Pakistan at any time in the tax year and which remained listed on that exchange at the end of that year; or a unit trust whose units are widely available to the public and any other trust as defined in the Trusts Act, 1882 (II of 1882); Royalty u/sec.2 (54) Means any amount paid or payable, however described or computed, whether periodical or a lump sum, as consideration for a. the use of, or right to use any patent, invention, design or model, secret formula or process, trademark or other like property or right; b. the use of, or right to use any copyright of a literary, artistic or scientific work, including films or video tapes for use in connection with television or tapes in connection with radio broadcasting, but shall not include consideration for the sale, distribution or exhibition of cinematograph films; c. the receipt of, or right to receive, any visual images or sounds, or both, transmitted by satellite, cable, optic fiber or similar technology in connection with television, radio or internet broadcasting; d. the supply of any technical, industrial, commercial or scientific knowledge, experience or skill; e. the use of or right to use any industrial, commercial or scientific equipment; f. the supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as mentioned in sub-clauses (a) through (e); and g. the disposal of any property or right referred to in sub-clauses (a) through (e); Profit on a debt U/sec. 2(46) Whether payable or receivable, means any profit, yield, interest, discount, premium or other amount , owing under a debt, other than a return of capital; or 13

any service fee or other charge in respect of a debt, including any fee or charge incurred in respect of a credit facility which has not been utilized; Debt U/sec.2 (15) Means any amount owing, including accounts payable and the amounts owing under promissory notes, bills of exchange, debentures, securities, bonds or other financial instruments; Speculation Business U/sec. 19(2) 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. 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 persons other contracts for the actual delivery of the goods to be manufactured or merchandise to be sold; b. a contract in respect of stocks and shares is entered into by a dealer or investor therein to guard against loss in the persons holding of stocks and shares through price fluctuations; or c. 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 persons business as such member. Dividend U/sec. 2(19) Includes a. any distribution by a company of accumulated profits to its shareholders, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets including money of the company; b. any distribution by a company, to its shareholders of debentures, debenture-stock or deposit certificate in any form, whether with or without profit, to the extent to which the company possesses accumulated profits whether capitalised or not; c. any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not; d. any distribution by a company to its shareholders on the reduction of its capital, to the extent to which the company possesses accumulated profits, whether such accumulated profits have been capitalised or not; e. any payment by a private company as defined in the Companies Ordinance, 1984 (XLVII of 1984)] or trust of any sum (whether as representing a part of the assets of the company or trust, or otherwise) by way of advance or loan to a shareholder or any payment by any such company or trust on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company or trust, in either case, possesses accumulated profits; or f. remittance of after tax profit of a branch of a foreign company operating in Pakistan; But does not include a distribution made in accordance with sub-clause (c) or (d) in respect of any share for full cash consideration, or redemption of debentures or debenture stock, where the holder of the share or debenture is not entitled in the event of liquidation to participate in the surplus assets; any advance or loan made to a shareholder by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company; 14

any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e) to the extent to which it is so set off; and Remittance of after tax profit by a branch of Petroleum Exploration and Production (E&P) foreign company, operating in Pakistan.] Fee for Technical Services U/sec. 2(23) means any consideration, whether periodical or lump sum, for the rendering of any managerial, technical or consultancy services including the services of technical or other personnel, but does not include a. Consideration for services rendered in relation to a construction, assembly or like project undertaken by the recipient; or b. Consideration which would be income of the recipient chargeable under the head Salary; Business Includes any trade, commerce, manufacture, profession, vocation or adventure or concern in the nature of trade, commerce, manufacture, profession or vocation, but does not include employment. U/sec. 2(9)

Tax on Income u/Sec. 4

Income tax is a tax on a person in respect of his income during a tax year. Income of a tax year as computed under the provisions of this ordinance is Taxable income, it is total income reduced by total of any deductible allowances. It is charged to tax in a tax year according to prescribed rules Deductible Allowances: Zakat Workers Welfare Fund Workers Participation Fund Also if deductions are allowed, these can also be deducted from total income to arrive at taxable income. Deductions allowed are expenses allowed by board Income Any amount chargeable to tax under this ordinance Any amount subject to collection or deduction under various provisions of this ordinance Any amount treated as income under any provision of this ordinance. Any loss of income but does no include, in case of a shareholder of a company, the amount representing the face value of any bonus share or the amount of any bonus declared, issued or paid by the company to the shareholders with a view to increasing its paid up share capital. Concepts of Income 1. Receipt of Income U/sec. 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 instruction of the person or under any law; or c. Made available to the person. Note: It may be in form of cash or kind The perquisites are valued in accordance with rules prescribed by the board. 15

2. Deemed income at par with real income ( this is a case of legal fiction). For arriving at Tax income from accounting income deductions not allowed will be added back and considered deemed income. 3. Cash Basis vs. Accrual Basis 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. u/sec. 33 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. U/sec. 34(1) 4. Illegal Income: will be charged to tax. Illegal income is an offence will be taken in accordance to relevant law. 5. Lump Sum Receipts: Taxpayer may opt to be taxed at either average rate of tax or normal procedure. 6. Tax-free Income: When an employee has an agreement with the employer that employees tax will be borne by employer then that amount will be added back to the income of the employee. 7. Income Can not be taxed twice if not expressly mentioned otherwise. For example, the income of the company is taxed, but when that company announces dividends to its share holders, dividend income of shareholders is taxed again 8. Charge of Tax on person Person may be a resident person or non resident person 9. Certain Incomes excluded from Taxable Income (Exemptions) 10 Heads income U/sec. 11 Salary U/sec 12 Income from Property U/sec. 15 Income from business U/Sec. 18 Capital Gains U/Sec. 37 Income from other Sources U/sec. 39 Total Income U/sec. 10 The total income of a person for a tax year shall be the sum of the persons income under each of the heads of income for the year
Heads of Income 1. Head of Income Salary Salary (sec. 12) Taxable salary income by way of allowances and perquisites (sec. 12-13 & IT rules 3-7 Basic Salary Medical Allowances House Rent Allowance Head of income from Salary 2. Income from Property Rent received/ Receivable u/sec. 15 &16 Deductions u/sec. 17 Net Income from Property 3. Head of Income: Business Income from business excluding incomes to which section 169 applies and which are taxed as a separate block of income sections 18 & 19 Gross profit as per profit & loss Less deductions allowed in sec. 20,22-31 Add: Deductions which are inadmissible in sec. 21 Net income from business Rs. Rs.

xxx xxx xxx xxx xxx (xxx) xxx xxx xxx xxx xxx xxx

16

4. Income from Capital gain Amount of Capital Gain u/sec. 37 Less :deductions u/sec. 38 Net Income from Capital Gains 5. Income from other sources excluding incomes to which section 169 applies and which are taxed as a separate block of income U/sec. 39 Gross income Less: Deductions u/sec. 40 Net income from other sources Total Income Less Deductible Allowances U/sec.60A-63 & Exemptions Under Second Schedule Taxable Income Tax Rate Tax Liability

xxx (xxx) xxx

xxx (xxx) xxx xxx (xxx) xxx xxx xxx

Methods of Accounting u/sec. 32

Two Methods of Accounting It is the choice of person to decide between following two methods of accounting o Cash Basis o Accrual Basis For Companies Accrual basis of accounting is compulsory. U/sec.32(2) Change of Method of Accounting (u/sec. 32(4)) A person may apply, in writing, for a change in the persons method of accounting and the Commissioner may, by [order] in writing, approve such an application but only if satisfied that the change is necessary to clearly reflect the persons income chargeable to tax under the head Income from Business

Rules to Prevent Double Derivation of Income and Double Deductions (u/sec. 73): (1) For the purposes of this Ordinance, where (a) any amount is chargeable to tax under this Ordinance on the basis that it is receivable, the amount shall not be chargeable again on the basis that it is received; or (b) Any amount is chargeable to tax under this Ordinance on the basis that it is received; the amount shall not be chargeable again on the basis that it is receivable. (2) For the purposes of this Ordinance, where (a) Any expenditure is deductible under this Ordinance on the basis that it is payable, the expenditure shall not be deductible again on the basis that it is paid; or (b) Any expenditure is deductible under this Ordinance on the basis that it is paid, the expenditure shall not be deductible again on the basis that it is payable.

Exemptions and Tax Concessions

Section 41 to 53, Section 102 and various clauses of second schedule to the ordinance deal with exemptions available to Incomes, Persons or Class of incomes or Class of persons Shall be: a. Exempt from tax under this ordinance, subject to the conditions and to the extent specified therein; Or b. Liable to tax at such rates, which are less than the rates specified in the first schedule; Or 17

c. Allowed a reduction in tax liability, subject to the conditions and to the extent specified therein; Or d. Exempt from the operation of any provisions of this ordinance, subject to the conditions and to the extent specified therein; U/sec. 53(2) The Federal Government may, from time to time, by notification in the official Gazette, make such amendment in the Second Schedule by (a) Adding any clause or condition therein; (b) Omitting any clause or condition therein; or (c) Making any change in any clause or condition therein, As the Government may think fit, and all such amendments shall have effect in respect of any tax year beginning on any date before or after the commencement of the financial year in which the notification is issued. U/sec. 53(3) The Federal Government shall place before the National Assembly all amendments made by it to the Second Schedule in a financial year. Exemptions & Concessions 1) Agriculture Income derived by a person shall be exempt from tax under this ordinance. u/sec. 41 2) Diplomats and the officials of United Nations shall be exempt from tax. u/sec.42 3) Foreign Government Officials: Salary of an employee of Foreign Government shall be exempt from tax u/sec.43 4) Exemptions under International agreements u/sec.44 a) Exemptions under Tax Treaty b) Any salary received by an individual (not being a citizen of Pakistan) shall be exempt from Tax to the extent provided for in an aid agreement. 5) Presidents Honors u/sec.45 6) Profit on debt u/sec.46 a) Any profit received by a non-resident person on a security issued by a resident person shall be exempt from tax under this ordinance. 7) Scholarships u/sec.47 a) Any scholarship granted to a person to meet the cost of persons education shall be exempt from tax 8) Support Payment under an Agreement to live apart u/sec. 48 a) Amount received on account of separation is support payment 9) Federal, Provincial Govt. & Local Authority Income u/sec. 49 (Read) a) Income of Federal government is exempt from tax b) Income of provincial government or a local authority in Pakistan shall be exempt under all heads of income other than income from business, derived outside its jurisdictional area that shall be taxable. c) Federal government, a provincial government or a local authority shall not be liable to any collection or deduction of advance tax. 10) Foreign Source Income of Short-term Resident Individuals u/sec. 50 11) Foreign Source Income of returning expatriates u/sec. 51 a) Any foreign-source income derived by a citizen of Pakistan in a tax year who was not a resident individual in any of the four tax years preceding the tax year in which the individual became a resident shall be exempt from tax under this Ordinance in the tax year in which the individual became a resident individual and in the following tax year.

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b) Where a citizen of Pakistan leaves Pakistan during a tax year and remains abroad during that tax year, any income chargeable under the head Salary earned by him outside Pakistan during that year shall be exempt from tax under this Ordinance.] Exemptions and tax concessions in the Second Schedule u/sec. 53 Lecture 14 Review Agricultural income (u/sec. 41(2)) Means, a) any rent or revenue derived by a person from land which is situated in Pakistan and is used for agricultural purposes; b) any income derived by a person from land situated in Pakistan from i agriculture; ii the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by such person to render the produce raised or received by the person fit to be taken to market; or iii the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by such person, in respect of which no process has been performed other than a process of the nature described in sub-clause (ii); or c) any income derived by a person from i any building owned and occupied by the receiver of the rent or revenue of any land described in clause (a) or (b); ii any building occupied by the cultivator, or the receiver of rent-in-kind, of any land in respect of which, or the produce of which, any operation specified in subclauses (ii) or (iii) of clause (b) is carried on, but only where the building is on, or in the immediate vicinity of the land and is a building which the receiver of the rent or revenue, or the cultivator, or the receiver of the rent-in-kind by reason of the persons connection with the land, requires as a dwelling-house, a store-house, or other out-building. Non-Agriculture Income Following incomes are held to be Non-Agricultural Incomes Income from Spontaneous forest Income from sale of fruits and flowers growing on land naturally, spontaneously, and without the intervention of human agency Interest on arrears of rent payable in respect of agricultural land as it is neither rent nor revenue derived from land. Interest accrued on promissory notes obtained by a landlord (zamindar) from defaulting tenants. Income from sale of wild grass and weeds of spontaneous growth. Profit accruing from the purchase of standing crops and resale of it after harvest by a merchant having no interest inland except a mere license to enter upon the land and gather upon the produce, land is not direct, immediate or effective source of income. Interest received by a money-lender in the form of agriculture produce. Income from sale of agricultural produce received by way of price for water supplied to land. Commission earned by the landlord for selling agricultural produce of his tenant. Income from fisheries Royalty income of mines Dividend received from company engaged agriculture activity 19

Income received for land let out for storing crops. Income from poultry farm Income from butter and cheese making Maintenance of agricultural land allowance.

Agriculture Incomes Following incomes are held to be agriculture Income If denuded parts of the forest are replanted and subsequent operations in forestry is carried out the income arising from the sale of replanted trees. The fees collected from owners of cattle (normally used for agricultural purpose) for allowing them to graze on forest lands covered by jungle and grass grown spontaneously. Profit on sale of standing crops or the produce after harvest by a cultivating owner or tenant of land. Compensation received from an insurance company for danger caused by hailstorm or another natural calamity to crops or agricultural produce. Income from growing flowers and creepers Share of profit received including salary by a partner from a firm engaged in agriculture operations Interest on capital received by partner from a firm engaged in agricultural operation. Computation of Income Which Is Partly Agricultural and Partly From Business Or Agricultural Produce Is Used As Raw Material (Rule 11) 1) This rule applies to a person who is a cultivator or receiver of agricultural produce as rent-inkind and who uses agricultural produce raised or received as raw materials in a business the income from which is chargeable to tax under the head Income from Business. 2) In determining the amount of income of a person to whom this section applies, the market value of any agricultural produce raised or received as rent-in-kind by the person and used as raw materials in the persons business shall be allowed as a deduction. 3) For the purposes of sub rule 2 the market value of agricultural produce shall be a) Where the agricultural produce is ordinarily sold in the market in its raw state or after application of any process ordinarily employed by a cultivator or receiver of agricultural produce as rent-in-kind to render it fit to be taken to market, the market price for the produce at the time it is used as raw materials in the persons business; or b) In any other case, the sum of the following amounts, namely:i) The expense of cultivation; and ii) The land revenue rent paid for the area in which the produce is grown. 4) No deduction shall be allowed for any expenditure incurred by a person as cultivator or receiver of agricultural produce as rent-in-kind, other than as specified in sub-rule (2). Exercise 1 Computation of taxable income where agricultural income is to be clubbed for rate purposes Mr. Aslam is running a rice husking mill and he used agricultural produce grown on his land. During the tax year 2011 he got 9,000 kg of raw rice from his land and used it in his mill for husking. He would get Rs. 400 per 40 kg if he had sold it directly to the market. Declared particulars of said business are given hereunder: Rs. Rs. Sale 300,000 Operating Expenses 20

Salaries and Wages Rent Utilities Net Profit

50,00 0 36,00 0 50,00 0

136,000 164,000

Compute Taxable Income [Ans: 164,000-90,000 =74,000] For the tax year 2011, agricultural income of Mr. Akram is declared as Rs. 120,000. His income form business for the said tax year is Rs. 500,000. Calculate taxable Income and Tax liability thereon. Hint: Exempt income is clubbed for tax rate purposes Associates u/sec. 85 1) Two persons shall not be associates solely by reason of the fact that one person is an employee of the other or both persons are employees of a third person. 2) Two persons shall be associates where the relationship between the two is such that one may reasonably be expected to act in accordance with the intentions of the other, or both persons may reasonably be expected to act in accordance with the intentions of a third person. 3) The following shall be treated as associates a) an individual and a relative of the individual; b) members of an association of persons; c) a member of an association of persons and the association, where the member, either alone or together with an associate or associates under another application of this section, controls fifty per cent or more of the rights to income or capital of the association; d) a trust and any person who benefits or may benefit under the trust; e) a shareholder in a company and the company, where the shareholder, either alone or together with an associate or associates under another application of this section, controls either directly or through one or more interposed persons i) fifty per cent or more of the voting power in the company; ii) fifty per cent or more of the rights to dividends; or iii) fifty per cent or more of the rights to capital; and f) two companies, where a person, either alone or together with an associate or associates under another application of this section, controls either directly or through one or more interposed persons i) fifty per cent or more of the voting power in both companies; ii) fifty per cent or more of the rights to dividends in both companies; or iii) fifty per cent or more of the rights to capital in both companies. 4) Two persons shall not be associates under clause (a) or (b) of sub-section (3) where the Commissioner is satisfied that neither person may reasonably be expected to act in accordance with the intentions of the other. Security (Securities & Exchange Ordinance) Security includes1. any stock, transferable share, scrip, Modaraba Certificate, note, debenture, debenture stock, participation term certificate, bond, investment contract, and pre-organization certificate or subscription, and, in general, any interest or instrument commonly known as a security and, any certificate of deposit for, certificate of interest or participation in, temporary or interim certificate for, receipt for , or any warrant or right to subscribe to or 21

purchase, any of the foregoing but does not include currency or any note, draft, bill of exchange or bankers acceptance or any note which has a maturity at the time of issuance of not more than twelve months, exclusive of days of grace, or any renewal thereof whose maturity is likewise limited; 2. any Government security as defined in the Securities Act, 1920 (X of 1920); and 3. any bonus entitlement voucher issued by the State Bank of Pakistan in accordance with any scheme announced by the Commission;

Losses Set off, Carry forward & Set off

Losses: Where the total deductions allowed under Income tax ordinance 2002 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. U/sec. 11(3)
For the purposes of set off of losses the heads of income may be split into the following three categories: Category A Category B Category C Salary Income from Property Income from capital Assets Income from speculation Income from non-speculation (excluding Securities business business u/sec.37A(3) Income from other sources

Rules for Set off of Losses 1. Where a tax payer sustains a loss from any head specified under category A, it may be set-off against income from any other head of income during the tax year. The income may be from any head specified under category A, B or C. 2. The loss from a peculation business may be set off only against the income from any other speculation business carried on by the tax payer during the same tax year. 3. The capital losses may be set off only against the capital gains during the same tax year 4. Any loss sustained by a person on disposal of securities in a tax year shall be set off only against any gain of the person from any other security disposed off during that tax year. Remember, A taxpayer cannot sustain a loss under the head salary. The business loss shall be set off last. The depreciation allowance admissible under the Third Schedule shall be charged up to that portion only which can be absorbed by the incomes. The general rules relating to set off and carry forward of losses shall not apply to unabsorbed depreciation. Amount of such depreciation shall not be taken as a normal business loss rather, shall be treated separately. If an income form a source is exempt from tax, the loss, if any , from such source cannot be set off or carried forward. There can be loss under head of income property. Where a loss cannot be set off it can be carried forward to six succeeding tax year for following heads only: i. Non-Speculation business 22

ii. Speculation business iii. Capital gains. Speculation Business Loss: U/sec.58 A loss sustained by a person for a tax year in respect of a speculation business
Set off only against any other Income from speculation business of the person for the tax year.

Amount of loss no set off shall be carried forward to following tax year & applied against income of any speculation business of the person. No speculation loss shall be carried forward to more than six tax years. Only the loss of earliest tax year shall be set off first. Capital Loss: U/sec.59 Capital loss is a loss sustained by the person for a tax year in respect of Capital Gains Set off only against any other income from head of Income Capital Gains Amount of loss not set off shall be carried forward to the following tax year and then set off against Head of Income Capital Gains. A loss, shall not be carried forward to more than six tax years immediately succeeding The loss of the earliest tax year shall be set off first Loss on Disposal of Securities: U/sec.37A (5) Notwithstanding anything contained in this ordinance, where a person sustains a loss on disposal of securities in a tax year, the loss shall be set off only agains the gain of the rperson from any other securities chargeable to tax under this section and no loss shall be carried forward to the subsequent tax year. Set off of Losses: U/sec.56 (1) & (3) 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 persons income, if any, chargeable to tax under any other head of income for the year Where, 1[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. Set off, Carry forward & Set off of Business Losses other than Speculation Business: U/sec.57 Set off against persons income chargeable to tax under any other Head of Income for the year. U/sec. 56(1). Loss under the head Income from businesses shall be set off last. u/sec.56(3) Loss not wholly set off shall be carried forward to following tax year & set off against persons income chargeable under the Head Income from Business. No loss shall be carried forward to more than six tax years immediately succeeding the tax year for which the loss was first computed. Loss of earliest tax year shall be set off first. Losses in case of Industrial Undertakings: Clause 2, Part IV 2nd Schedule In the case of losses referred to in section 57 in respect of an industrial undertaking set up in an area declared by the Federal Government to be a "Zone" within the meaning of Export Processing Zones Authority Ordinance, 1980 (IV of 1980), the period of six tax years specified in the said section shall not apply. Setting off Deductions Allowed: U/sec.57(4)&(5), 59A(5)&(6)

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In case of Business losses other than speculation, if loss includes deductions allowed under sections 22 (Depreciation), 23 (Initial Allowance), 23A (First year allowance), 23B (Accelerated Depreciation to alternate energy projects & 24 (Intangibles). The amount of deductions not set off against Income, shall be added to deductions allowed under those sections in the following tax year, and so on until completely set off. While calculating the amount of calculating the amount of loss to be carried forward, the total business loss is split into the following two categories: o Loss due to the business transactions o Loss due to the depreciation allowance as per Third Schedule Whenever taxpayer earns a profit form his business, it shall be utilized in the following manner: o Set off the current losses from any other head of Income which can be set-off, if any; o Set of the carried forward business losses; and o Utilize the residual amount of profits, it any, for setting-off the unabsorbed depreciation.

Set-Off and Carry Forward of Losses of AOPs: U/Sec. 59A & 56(2) Sections 59A deals with the provision relating to set off and carry forward of losses by AOPs. But after omission of sub sections 2 to 5 of section 92 and section 92 by the Finance Act, 2007, provisions of section 59A become non-operative. Under such a case the general provisions regarding set-off and carry forward of losses shall be applicable. An AOP, being taxable independent of its members, is entitled to set-off and carry forward its losses as other persons (i.e., individuals and companies) are entitled. As the share received by a member out of the incomes of an AOP is exempt from tax, the member is not allowed to set-off and carry forward his respective share in losses of the AOP. Only AOP can set-off and carry forward its losses in accordance with the rules specified in sections 56 to 59 of the Income Tax Ordinance. Limitations as to Set-off, Carry forward & Set off of Losses: U/sec. 92(1), 56(2), 59A(4) 1. A member of a non-professional association of persons (AOP) is not entitled to set off or carry forward any share in losses sustained by AOP against his other incomes. This is due to the reason that the share in the income of such an AOP is exempt from tax. 2. Where there is a change in the constitution of an AOP then it will not be entitled to carry forward and set off that part of its losses which represents the share of a retired or deceased member. 3. Where a person has succeeded the business of any other person, he will not be entitled to carry forward and set off against his income any loss sustained by the other person. However, if the succession is by inheritance, then he is allowed to carry forward and set off losses. Set-off of Losses of Companies Operating Hotels: U/sec. 56A A company shall be entitled to set-off its loss under the head Income from Business against its income in Pakistan or Azad Jammu and Kashmir (AJ&K), as the case may be, from the tax year 2007 onwards, if following conditions are satisfied: 1. the company is registered in Pakistan or AJ&K; 2. It is operating hotels in Pakistan or AJ&K; and 24

3. It sustains a loss in Pakistan or AJ&K for any tax year under the head Income from Business. Foreign Losses: U/sec.104 1. Deductible expenditures incurred by a person in deriving foreign-source income chargeable to tax under a head of income shall be deductible only against that income. 2. If the total deductible expenditures referred to in sub-section (1) exceed the total foreign source income for a tax year chargeable to tax under a head of income (hereinafter referred to as a foreign loss), the foreign loss shall be carried forward to the following tax year and set off against the foreign source income chargeable to tax under that head in that year, and so on, but no foreign loss shall be carried forward to more than six tax years immediately succeeding the tax year for which the loss was computed. 3. Where a taxpayer has a foreign loss carried forward for more than one tax year, the loss for the earliest year shall be set off first. 4. Section 67 shall apply for the purposes of this section on the basis that a. income from carrying on a speculation business is a separate head of income; and b. Foreign source income chargeable under a head of income (including the head specified in clause (a)) shall be a separate head of income.

Carry Forward of Losses of Exempt Business:

The business income may be exempt from tax permanently or for a specific period (commonly known as tax holiday). A question arises that if a business has sustained a loss, then how it will be dealt with in taxation. Legal provisions in this regard are discussed in following paragraphs: a. Business Permanently exempt from Tax: Where a business is permanently exempt from tax, then there will be no need to determine the incomes under the Income Tax Ordinance. The taxpayer will ignore the provisions regarding the set off & Carry forward of losses. Such a person will maintain books of accounts and prepare financial statement as per his own requirements. b. Business Exempt from Tax for a specific Period: A loss sustained during the exemption period may also be carried forward & set off after the expiry of exemption period. Where a business is enjoying tax holiday, its losses whether within or after the exemption period can be carried forward as per normal procedure i.e., up to 6 tax years. Change in Control of an Entity (Sec.98) Where there is a change of fifty percent or more in the underlying ownership of an entity then any loss incurred for a tax year before the change shall not be allowed as deduction (set off) in the tax year after change. However, the above provision shall not apply if the following conditions are fulfilled: 1) the entity continues to conduct the same business until the loss has been fully set off; and 2) The entity does not engage in any new business or investment after the change until the loss has been fully set off. From above it is evident that an entity may set off it losses incurred prior to the change in underlying ownership if it continues to conduct the same business and if it does not engage in any anew business or investment. Losses of a Subsidiary Company (56, 57&59B) The losses of a subsidiary company may be set off in any of the following ways; 1) setting off and carrying forward its losses by the subsidiary; or 2) Surrendering of losses by the subsidiary to its holding company for set off. 25

Setting off the losses by the subsidiary: A subsidiary is a separate legal person distinct from its holding company. It may set off and carry forward its losses in the like manner as other persons are entitled (i.e., it may set off the loss in the year of its occurrence and carry forward the unadjusted loss upto a period of 6 tax years. Heads of Income -U/sec.11 (1) For the purposes of the imposition of tax and the computation of total income, all income shall 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

Salary and its Computation

Significant Points: Relationship between Payer and Payee should be that of an Employer and Employee. Salary means any amount received by an employee from any employment, whether of a revenue or capital nature.(u/sec.12(2)) Employee means any individual engaged in employment. u/sec. 2(20) Employer means any person who engages and remunerates an employee. u/sec.2(21) Employment (u/sec. 2(22)) includes, o A directorship or any other office involved in the management of a company; o A position entitling the holder to a fixed or ascertainable remuneration. o Holding or acting in any public office Salary from more than one source during a tax year is taxable Income. Salary may be from former employer, present employer or prospective employer. Group taxation u/sec. 59AA Set off of business losses consequent to amalgamation u/sec. 57A ITO pp.70 Offences & Penalties 307-315 FTR 338-349 Refund & Tax Credit Provident Fund Assessment & Returns

ITO pp.72 Method of Accounting 203-211 Scope of Tax 57-70

316-318 Appeals 319-332 Miscellaneous 333-337

143-147 Taxation of Person 105-118 Anti-avoidance

291-306 Income tax Authorities 41-56

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ITO Income Tax Ordinance

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