Transcript Slide 1

Income Tax Bar Association Karachi
WORKSHOP ON INCOME TAX
Hotel Sheraton, Karachi
29 – 30 August, 2005
Income Tax Bar
Association
Karachi
Workshop
on Income Tax
BUSINESS & OTHER
INCOME TAXATION
By
Haider Ali Patel
Hotel Sheraton
29-30 August 2005
2
CONTENTS
Income Tax Bar
Association
Karachi
Workshop
on Income Tax
Hotel Sheraton
29-30 August 2005
Business & Other Income Taxation
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Income from Business
Speculation business
Deductions – General
Deductions – Special provisions
Property Income, Capital Gains
& other Income
Apportionment of Expenditure
Method of Accounting
Minimum tax / Retail tax
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Section 18
INCOME FROM BUSINESS
SCOPE
The following incomes are chargeable to tax under the
head Income from Business –
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(a)
Profit and gains of any business carried on by
a person at any time during the year
(b)
Any income derived from any trade, profession
or similar association from the sale of goods or
provision of services to its members.
(c )
Any income from hire or lease of tangible
movable property
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Section 18
INCOME FROM BUSINESS
SCOPE
(d)
The Fair Market Value of any benefit or
perquisite whether convertible into money or
not, derived by a person in the course of or by
virtue of
past, present or prospective
business relationship.
(e)
Any management fee derived by a
management company including Modaraba
Management Company.
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Section 18
INCOME FROM BUSINESS
SCOPE
The term “BUSINESS” has been defined in Section
2(9) of the Ordinance as follows –
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(9)
“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
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Section 18
INCOME FROM BUSINESS
SCOPE
The term business has been defined by Kanga and
Palkhiwala in the following manner –
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The word use in this clause are wide, but
underlying each of them is the fundamental
idea of the continuous exercise of an activity,
in the words of S.R. Das J. the word
“Business” connotes some real, substantive
and systematic or organized course of activity
or conduct with a set purpose”
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Workshop
on Income Tax
Hotel Sheraton
29-30 August 2005
Section 18
INCOME FROM BUSINESS
SCOPE
The Courts in Pakistan have also dilated upon the
term “Business” and in one of the reported cases of
CIT Vs. Habib Insurance Company Limited reported
as 19 Tax 229 the Hon. Karachi High Court have
observed –
In order to constitute a business there must be a
continuous exercise of activity for the purpose of
gain. This element of continuity is essential to
constitute a business of investment.. The reason
for this condition is that in modern society
people no longer hold their savings in gold or
cash but are encouraged to invest their savings
in property and securities, yet a man
who
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Workshop
on Income Tax
Hotel Sheraton
29-30 August 2005
Section 18
INCOME FROM BUSINESS
SCOPE
invests his savings in buying a property would not be said
to the carrying on a business if he lets out the property on
rent, nor would a person who has purchase shares out of
his savings be said to carry on business merely because
he derives income from his investments. If, however, he
regularly buys and sells property or shares, so as to make
profit out of the fluctuations in the prices of property of
shares, then it would be said that he was carrying on the
business or investment; there is thus a fundamental
distinction between the business of investment, and the
purchase and sale of investments by a person. As
pointed out by Lord Wright, in the definition quoted, even
occasional speculation in shares does not amount to
carrying on a business; therefore, a person, who buys
property or shares and retains them for a long period of
time, would not be considered to be carrying on the
business or investment.
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Section 18
INCOME FROM BUSINESS
SCOPE
Profit on debt derived by a person whose main business is
to derive such income, would be chargeable to tax as
income from business and not as income from other
sources
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Income from lease of an asset to another person by a
schedule bank, investment bank, development finance
institution, modaraba or leasing company whether owned
by it or not, is chargeable as income from business
Income received by a banking company or NBFI
representing distribution by a mutual fund out of its income
from profit on debt would be chargeable as income from
business and not under income from other sources.
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Workshop
on Income Tax
Section 18
INCOME FROM BUSINESS
SCOPE
It should be noted that the scope of income provided
in section 18 is not inclusive neither an omnibus
clause has been provided therefore, income fallowing
under the scope as discussed above will only be
taxable as income from business
Any income falling outside the scope of business
income would either be taxed under any other specific
head of income or under the head income from other
sources
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Workshop
on Income Tax
Section 21
DEDUCTION - GENERAL
EXPENDITURE ALLOWED
The general principal of claiming deduction in
computing income chargeable under the head
Income from Business is that deduction shall be
allowed for any expenditure incurred by the person
in the year wholly and exclusively for the
purpose of business
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Workshop
on Income Tax
Hotel Sheraton
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Section 21
DEDUCTION - GENERAL
EXPENDITURE ALLOWED
The term wholly and exclusively has been dealt with by the
appellate forums in several cases. The basic principle
which establishes from these judgements is that it should
be proved that the expense has been incurred for the
purpose of business. In a reported case of CIT Vs. Dalmia
Cement Limited reported as 20 Tax 15, The Honourable
Karachi High Court held that the legal expenses incurred in
defending the employees of the company who were
prosecuted on the charge of selling cement in the black
market were wholly and exclusively for the purpose of
business since the expenses were incurred to retain the
goodwill of the company and the employees, which was
essential to successfully carry on the business
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Section 21
DEDUCTION - GENERAL
EXPENDITURE ALLOWED
Capital expenditure will not be allowed as a deduction
instead a depreciation or amortization expense will be
allowed
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Pre-commencement expenditure will not be allowed as a
deduction instead amortization expense will be allowed
In order to encourage mergers, it has been specifically
provided that expenditure incurred by an amalgamated
company on legal and financial advisory services and
other administrative cost relating to planning and
implementation of amalgamation shall be allowed as a
deduction
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Workshop
on Income Tax
Hotel Sheraton
29-30 August 2005
Section 21
DEDUCTION - GENERAL
EXPENDITURE NOT ALLOWED
Any salary, rent, brokerage or commission, profit on debt,
payment to non-resident, payment for services or fee paid
by the person will not be allowed as a deductible expense
unless the payer has paid or deducted and paid the tax
required to be deducted
Any expenditure paid or payable by an employer to an
employee on account of perquisites and allowances where
the aggregate of perquisites and allowances exceeds 50%
of the employees salary for the tax year
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Section 21
DEDUCTION - GENERAL
EXPENDITURE NOT ALLOWED
Any expenditure paid or payable under a single account head
which in aggregate exceeds Rs.50,000 made other than by a
cross bank cheque or bank draft except the following –
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29-30 August 2005
Expenditure not exceeding ten thousand rupees
Freight charges/Travel fare to an airlines or railway or a
goods carriage company
Postage
Utilities
Payment of taxes, duties, fee, fines or any other statutory
obligation
The Board has further clarified that this provision would not affect
purchases and other manufacturing or trading account expenses
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Workshop
on Income Tax
Hotel Sheraton
29-30 August 2005
Section 21
DEDUCTION - GENERAL
EXPENDITURE NOT ALLOWED
Any salary paid or payable exceeding Rs.10,000 per
month other than by a cross cheque or a direct
transfer of funds to the employee`s bank account
accept for payments for –
•
Piece or job, wages or direct wages, being
trading/manufacturing account expenses
Certain other expenses listed in clause (a) to (n) of
Section 21 of the Ordinance are also not allowed as a
deduction in computing income from business
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Section 22
DEDUCTION – SPECIAL PROVISIONS
DEPRECIATION
The deduction for depreciation under the Income Tax Ordinance,
2001 is also restricted to certain specified tangible assets,
hereinafter referred to as “depreciable assets” that:
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•
•
•
•
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Are Owned by the person claiming the deduction for
depreciation
Have a normal useful life of more than one year
Are likely to loose value as a result of wear and tear, or
obsolescence
Are wholly or partly used by the person, during the
corresponding tax year, in deriving income from business
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Section 22
DEDUCTION – SPECIAL PROVISIONS
DEPRECIATION
“Depreciable assets” are:
•
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on Income Tax
•
•
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29-30 August 2005
Any tangible movable property e.g., furniture,
fixtures, computers, technical or professional books,
ships, motor vehicles, aircrafts, machinery and
plant
Immovable property (other than unimproved land)
e.g., buildings
Structural improvement to immoveable property
Structural improvements to immoveable property include any
building, road, driveway, car park, railway line, pipeline,
bridge, tunnel, airport, runway, canal, dock, wharf, retaining
wall, fence, power lines, water or sewerage pipes, drainage,
landscaping or dam
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Section 22
DEDUCTION – SPECIAL PROVISIONS
DEPRECIATION
Depreciation method prescribed under the Income Tax
Ordinance, 2001, for calculating the deduction for
depreciation is the commonly known “Diminishing Balance
or Written Down Value Method”.
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29-30 August 2005
Under this method, the deduction for depreciation in the
first year is calculated by applying “standard depreciation
rate” on the cost of depreciable asset as reduced by the
deduction for admissible “initial allowance”, if any.
This is one of the departures or changes as compared to
the corresponding provisions of the repealed Income Tax
Ordinance, 1979 whereby both depreciation and initial
allowance were simultaneously calculated on the cost.
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Section 22
DEDUCTION – SPECIAL PROVISIONS
DEPRECIATION
Written down value for the purposes of calculating
depreciation in the following years of a depreciable
asset is the cost of a depreciable asset as reduced by
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•
•
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Aggregate depreciation and initial allowance
deductions actually allowed against the income
from business in respect of that depreciable
asset in the preceding years
Aggregate depreciation attributable to fair
proportional use of the depreciable asset for
purposes other than deriving income from
business
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Section 22
DEDUCTION – SPECIAL PROVISIONS
DEPRECIATION
Cost of depreciable asset, generally comprises of the :
•
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on Income Tax
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29-30 August 2005
•
•
•
Amount paid to own the asset, such as purchase
price, expenditure incurred to produce or create, etc
Amount paid to bring the asset to its present location
and condition fit for its intended use, such as
incidental expenditure incurred in acquiring,
transporting, altering, improving, renewing, installing,
etc
The fair market value of any non-cash benefit given
Debt incurred to pay the amount or to provide a noncash benefit
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Section 22
DEDUCTION – SPECIAL PROVISIONS
The restriction on cost of passenger vehicle transport
not plying for hire has been removed on assets
acquired on or after July 1, 2005
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Where a depreciable assets used in Pakistan is
exported or transferred outside Pakistan the person
shall be treated as having disposed of the assets at
the time of the export or transfer for a consideration
equal to the cost of the asset
In other words, the entire depreciation expense
allowed on such assets would be re-captured
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
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Section 23
DEDUCTION – SPECIAL PROVISIONS
INITIAL ALLOWANCE
Initial Allowance of 50% of the ‘cost’ of “eligible
depreciable assets” is allowed as deduction against
the chargeable income from business in the tax year
in which such asset is used for the first time or
commercial production is commenced, whichever is
later
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Section 23
DEDUCTION – SPECIAL PROVISIONS
INITIAL ALLOWANCE
“Eligible depreciable assets” for the purposes of
initial allowance are all ‘depreciable assets’ except the
following:
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•
•
•
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•
Plant or Machinery, which is previously used in
Pakistan
Furniture, including fittings
Road transport vehicle, which is not plying for
hire
Any plant or machinery where the entire cost of
the asset is allowed as a deduction in the year
of acquisition
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Section 23
DEDUCTION – SPECIAL PROVISIONS
INITIAL ALLOWANCE
Rate of initial allowance is 50% of the ‘cost’ for all
eligible depreciable assets.
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This is one of the departures or changes as compared
to the corresponding provisions of the repealed
Income Tax Ordinance, 1979 whereby multiple rates
of initial allowance were available.
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Section 24
DEDUCTION – SPECIAL PROVISIONS
INTANGIBLE
Amortization deduction is allowed only while
computing income from business and is restricted to
intangible assets, that -
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on Income Tax
•
•
•
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are owned by the person claiming the
deduction for amortization
Have a normal useful life of more than one
year
Are wholly or partly used by the person, during
the corresponding tax year, in deriving
income from business chargeable to tax
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Section 24
DEDUCTION – SPECIAL PROVISIONS
INTANGIBLE
Intangible Assets are:
•
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on Income Tax
•
•
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29-30 August 2005
Any patent, invention, design or model, secret
formula or process, copyright, trade mark,
scientific or technical knowledge, computer
software, motion picture film, export quota,
franchise, license, intellectual property or other
like property or right
Contractual rights
Any expenditure that provides an advantage or
benefit for a period of more than one year (other
than expenditure incurred to acquire a
depreciable asset or unimproved land)
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Section 24
DEDUCTION – SPECIAL PROVISIONS
INTANGIBLE
Amortization method for calculating the deduction for
amortization is the commonly known “Straight Line
Method”.
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on Income Tax
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29-30 August 2005
Under this method, the annual deduction for
amortization is calculated by equally distributing the
cost of specified intangible asset over its normal useful
life in whole years i.e., cost of the specified intangible
asset divided by normal useful life in whole years.
The maximum normal useful life of a specified
intangible asset, where it is more than ten years or
cannot be ascertained is taken as ten years
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Section 25
DEDUCTION – SPECIAL PROVISIONS
PRE-COMMENCEMENT EXPENDITURE
pre-commencement expenditures are expenditures
incurred before the commencement of business
wholly and exclusively to derive income chargeable to
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tax like, cost of feasibility studies, construction of
prototypes, trial production activities, etc.
Any
expenditure
incurred
in
acquiring
land,
depreciable asset or specified intangible asset cannot
be claimed as pre-commencement expenditure
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29-30 August 2005
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Section 25
DEDUCTION – SPECIAL PROVISIONS
PRE-COMMENCEMENT EXPENDITURE
Amortization method for calculating the deduction for
amortization is the commonly known “Straight Line
Method”
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Under this method, the annual deduction for
amortization of pre-commencement expenditure is
calculated on a straight-line basis at the rate of 20%
per annum
In other words the specified pre-commencement
expenditure is amortized over a period of five years
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Association
Karachi
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on Income Tax
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Section 26
DEDUCTION – SPECIAL PROVISIONS
SCIENTIFIC RESEARCH EXPENDITUREPRE
A deduction is allowed on account of scientific
research expenditure incurred in Pakistan in a tax
year wholly and exclusively for the purpose of deriving
income from business chargeable to tax
“scientific research expenditure” means any
expenditure incurred by a person on scientific
research undertaken in Pakistan for the purposes of
developing the person’s business, including any
contribution to a scientific research institution to
undertake scientific research for the purposes of the
person’s business
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Section 26
DEDUCTION – SPECIAL PROVISIONS
SCIENTIFIC RESEARCH EXPENDITUREPRE
other than expenditure incurred –
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(a)
in the acquisition of any depreciable asset or
intangible
(b)
in the acquisition of immovable property; or
(c)
for the purpose of ascertaining the existence,
location, extent or quality of a natural deposit
“scientific research institution” means any
institution certified by the Central Board of
Revenue as conducting scientific research in
Pakistan
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Section 27
DEDUCTION – SPECIAL PROVISIONS
EMPLOYEE TRAINING AND FACILITY
A person shall be allowed a deduction for any expenditure
(other than capital expenditure) incurred in a tax year in
respect of–
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(a)
any educational institution or hospital in Pakistan
established for the benefit of the person’s
employees and their dependents
(b)
any institute in Pakistan established for the training
of industrial workers recognized, aided, or run by the
Federal Government or a Provincial Government or a
local authority
(c)
the training of any person, being a citizen of Pakistan,
in connection with a scheme approved by the Central
Board of Revenue for the purposes of this section
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Section 29
DEDUCTION – SPECIAL PROVISIONS
BAD DEBTS
A person shall be allowed a deduction for a bad debt in
a tax year if the following conditions are satisfied,
namely:-
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29-30 August 2005
(a)
The amount of the debt was –
(i)
previously included in the person’s income
from business chargeable to tax
(ii)
in respect of money lent by a financial
institution in deriving income from
business chargeable to tax;
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Section 29
DEDUCTION – SPECIAL PROVISIONS
BAD DEBTS
(b)
the debt or part of the debt is written off in the
accounts of the person in the tax year
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(c)
there are reasonable grounds for believing
that the debt is irrecoverable
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29-30 August 2005
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Section 29
DEDUCTION – SPECIAL PROVISIONS
BAD DEBTS
It has been generally observed that the tax authorities
are interpreting the condition set-out in (c) above very
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on Income Tax
rigorously and are not allowing bad debts even where
debts have been written off.
The appellate forum and courts have however,
interpreted this condition liberally and held that
provisions can also be allowed provided they are
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29-30 August 2005
ascertained and quantified on reasonable basis.
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Section 29
DEDUCTION – SPECIAL PROVISIONS
BAD DEBTS
In case a bad debt is allowed in a year and
subsequently the debt is recover it is to be offered for
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tax in the year in which recovery take place
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29-30 August 2005
38
INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Section 29A
DEDUCTION – SPECIAL PROVISIONS
PROVISION FOR CONSUMER LOANS
Banking Companies, Non-Banking Financial Institution
and House Building Finance Corporation can claim a
deduction upto 3% of income arising from consumer
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loans for creation of a reserve to offset debt out of
such loans
Where the actual bad debts out of consumer loans
exceed the 3% ceiling the balance can be carried
forward for off setting against the reserve for the
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29-30 August 2005
following years
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Section 28
DEDUCTION – SPECIAL PROVISIONS
PROFIT ON DEBT, FINANCIAL COST AND LEASE PAYMENTS
Profit on debt incurred on a debt utilized for business,
lease rental paid for an assets used for business and
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profit paid to depositors by commercial banks have
been specifically stated as allowable deduction
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29-30 August 2005
40
INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
Workshop
on Income Tax
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Section 28
SPECULATION BUSINESS
It has been provided that where a person carries on
speculation business than such business shall be
treated as distinct and separate from any other
business carried on by that person
Speculation business has been defined as follows –
any business in which a contract for the
purchase and sale of any commodity
(including stock and shares) is periodically or
ultimately settled otherwise than by the actual
delivery or transfer of the commodity
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
SPECULATION BUSINESS
However a speculative transaction under the following
circumstances will not be considered speculation business
(a)
a contract in respect of raw materials or merchandise
is entered into by a person to guard against
loss
through future price fluctuations for fulfilling
its
obligation
(b)
a contract in respect of stocks and shares is entered
into by a dealer or investor to guard against loss
through price fluctuations
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Section 28
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INCOME FROM BUSINESS
Income Tax Bar
Association
Karachi
SPECULATION BUSINESS
(c)
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Section 28
a contract 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 loss in the ordinary course of the person’s
business
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29-30 August 2005
43
INCOME FROM PROPERTY
Income Tax Bar
Association
Karachi
Section 15
SCOPE
“Income from property” comprises of
rent received or receivable by the owner for a tax year
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amounts not adjustable against the rent received from
the tenant
subsequent recovery of irrecoverable unpaid rent
earlier allowed as deduction
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29-30 August 2005
unpaid liability in respect of a deduction for an
expenditure earlier allowed on payable basis, if not paid
within three years.
44
INCOME FROM PROPERTY
Income Tax Bar
Association
Karachi
Workshop
on Income Tax
Section 15
SCOPE
Rent is the amount received or receivable by the owner of
land or a building as consideration for the use or
occupation of, or the right to use or occupy, the land or
building; and any forfeited deposit received under a
contract for the sale of land or a building
However the following will not be considered as rent
the rent of a building let out together with plant and
machinery is specifically excluded and is chargeable under
the head “income from Other Sources”
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29-30 August 2005
any amount included in the rent for the provision of
amenities, utilities or any other service connected with the
renting of the building is specifically excluded and is
chargeable under the head “income from Other Sources”
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INCOME FROM PROPERTY
Income Tax Bar
Association
Karachi
Workshop
on Income Tax
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Section 15
FAIR MARKET VALUE
Where the rent received or receivable is less than the
fair market rent of the property, the owner will be
treated as having derived the fair market rent for the
period the property is let on rent in the tax year
Ownership of land or building has a direct nexus with
“income from property”. This means that any amount
received or receivable as consideration for the use or
occupation, or the right to use or occupy, any land or
building which is owned by the taxpayer is chargeable
under this head of income. While similar consideration
for any land or building not owned by the taxpayer falls
under the head “income from Other Sources” e.g., subletting
46
INCOME FROM PROPERTY
Income Tax Bar
Association
Karachi
Section 16
AMOUNT NOT ADJUSTABLE AGAINST THE RENT
Amount not adjustable against the rent received by the
owner of a building, from a tenant is treated as rent
chargeable to tax in the tax year in which it was
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received and the following nine years in equal
proportion i.e. one-tenth of the amount is treated as rent
received from the building for ten years commencing
from the year in which it was received
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29-30 August 2005
47
INCOME FROM PROPERTY
Income Tax Bar
Association
Karachi
Section 16
AMOUNT NOT ADJUSTABLE AGAINST THE RENT
In case the amount not adjustable against the rent is
refunded to the tenant on termination of the tenancy
before the expiry of ten years and
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•
no further similar amount is received from the
succeeding tenant or the land or building is not
further let out, no portion of the amount is treated
as rent received for inclusion in the chargeable
income of the tax year in which it is refunded and
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29-30 August 2005
in any subsequent tax years
48
INCOME FROM PROPERTY
Income Tax Bar
Association
Karachi
Section 16
AMOUNT NOT ADJUSTABLE AGAINST THE RENT
•
a further similar amount is received from the
succeeding tenant, the amount received from the
succeeding tenant as reduced by such portion of
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the amount already treated as rent received from
the preceding tenant, is treated as rent chargeable
to tax in the tax year in which further similar
amount is received and the following nine years in
equal proportion
Hotel Sheraton
29-30 August 2005
49
INCOME FROM PROPERTY
Income Tax Bar
Association
Karachi
Section 17
ADMISSIBLE DEDUCTIONS
Basis of deduction for expenditures is either:
• Actually paid during the tax year
Workshop
on Income Tax
Hotel Sheraton
29-30 August 2005
• Payable for the corresponding tax year
• Repairs
allowance equal to one-fifth of the rent of
the building chargeable to tax. This is a fixed
allowance admissible against the rent irrespective of
the amount if any, expended on the repairs of the
building, previously repair allowance was allowed on
the basis of ALV
50
INCOME FROM PROPERTY
Income Tax Bar
Association
Karachi
Section 17
ADMISSIBLE DEDUCTIONS
• Premium paid or payable
• Local rate, tax, charge or cess paid or payable in
Workshop
on Income Tax
respect of the land or building
• Ground rent paid or payable in respect of the land
or building;
Hotel Sheraton
29-30 August 2005
51
INCOME FROM PROPERTY
Income Tax Bar
Association
Karachi
Workshop
on Income Tax
Section 17
ADMISSIBLE DEDUCTIONS
• Profit (interest / mark-up) paid or payable on money
borrowed, including by way of mortgage, to acquire,
construct, renovate, extend or reconstruct the land or
building
• Share in rent or share towards appreciation in value
of land or building paid or payable to House Building
Finance Corporation or a scheduled bank
Hotel Sheraton
29-30 August 2005
• Profit (interest / mark-up) paid on a property subject
to mortgage or other capital charge
52
INCOME FROM PROPERTY
Income Tax Bar
Association
Karachi
Section 17
ADMISSIBLE DEDUCTIONS
• Collection
charges on account of expenditure (not
exceeding six percent of the rent chargeable to tax)
paid or payable for the purpose of collecting the rent
Workshop
on Income Tax
due
• Legal
charges i.e. expenditure for legal services
acquired to defend the title to the land or building or
any suit in a court connected with the land or building
in a court
Hotel Sheraton
29-30 August 2005
53
INCOME FROM PROPERTY
Income Tax Bar
Association
Karachi
Section 17
ADMISSIBLE DEDUCTIONS
Irrecoverable unpaid rent of the land or building
subject to the conditions that –
Workshop
on Income Tax
•
•
•
Hotel Sheraton
29-30 August 2005
The tenancy was bonafide
The defaulting tenant has vacated or steps
have been taken to compel the tenant to
vacate the land or building
The defaulting tenant is not in occupation of
any other land or building owned by the same
person
54
INCOME FROM PROPERTY
Income Tax Bar
Association
Karachi
Workshop
on Income Tax
Section 17
ADMISSIBLE DEDUCTIONS


All reasonable steps have been taken to institute
legal proceedings for the recovery of the unpaid
rent or there are reasonable grounds to believe
that legal proceedings would be useless
The amount of irrecoverable unpaid rent was
included in the chargeable income under the
head “income from property” of the relevant tax
year in which the rent was due and tax thereon
was duly paid
Hotel Sheraton
29-30 August 2005
55
INCOME FROM PROPERTY
Income Tax Bar
Association
Karachi
Section 17
INADMISSIBLE DEDUCTIONS
Expenditure other than those mentioned above.
The expenditure allowed under this section are
Workshop
on Income Tax
subject to the restriction contain in section 21 which
lays down certain restriction on allowability of
expenses in computing income under the head
“Income from Business”
Hotel Sheraton
29-30 August 2005
56
INCOME FROM PROPERTY
Income Tax Bar
Association
Karachi
Section 15
FUNDAMENTAL CHANGES
VIZ-A-VIZ THE REPEALED ORDINANCE
Fundamental changes as compared to the
corresponding provisions of the repealed Income Tax
Ordinance, 1979 are:
Workshop
on Income Tax
Hotel Sheraton
29-30 August 2005
•
the concept of computing the “income from
property” on the basis of Annual Value, which was
the sum for which the property might reasonably be
expected to let from year to year, is done away
with. Now the “income from property” shall be
computed on the basis of actual rent received or
receivable for the period the land or building
remained in the use or occupation of, or the tenant
had the right to use or occupy the premises
57
INCOME FROM PROPERTY
Income Tax Bar
Association
Karachi
Section 15
FUNDAMENTAL CHANGES
VIZ-A-VIZ THE REPEALED ORDINANCE
•
in consequence:
-
the concept of vacancy allowance, a deduction
for the period the property remained vacant, is
also done away with
-
no notional income chargeable to tax in
respect of any land or building against which
no rent is received or receivable by the owner
Workshop
on Income Tax
Hotel Sheraton
29-30 August 2005
58
INCOME FROM PROPERTY
Income Tax Bar
Association
Karachi
Section 15
FUNDAMENTAL CHANGES
VIZ-A-VIZ THE REPEALED ORDINANCE
•
rent of land is now chargeable under the head
“income from property”, which was previously
chargeable under the head “income from other
Workshop
on Income Tax
sources”
•
forfeited deposit under a contract for the sale of
land or a building is also now chargeable under the
head “income from property”
Hotel Sheraton
29-30 August 2005
59
INCOME FROM PROPERTY
Income Tax Bar
Association
Karachi
Section 15
FUNDAMENTAL CHANGES
VIZ-A-VIZ THE REPEALED ORDINANCE
•
deductions allowed in computing income from
property can now be claimed either on the basis of
actually paid during the tax year or on the basis of
Workshop
on Income Tax
payable for the corresponding tax year
•
liabilities in respect of deductions allowed on
payable basis are to be included in chargeable
income, if not paid within three years.
Hotel Sheraton
29-30 August 2005
60
CAPITAL GAIN
Income Tax Bar
Association
Karachi
Workshop
on Income Tax
Hotel Sheraton
29-30 August 2005
Section 15
SCOPE
Gain on disposal of a Capital Asset is chargeable to tax
under the head Capital Gains
Capital asset has been defined to mean property of
any kind held by a person, whether or not connected
with a business, but does not include –
(a)
any stock-in-trade (not being stocks and
shares), consumable stores or raw materials held
for the purpose of business;
(b)
any property with respect to which the person is
entitled to a depreciation deduction under
section 22 or amortization deduction under
section 24; .
61
CAPITAL GAIN
Income Tax Bar
Association
Karachi
Workshop
on Income Tax
Hotel Sheraton
29-30 August 2005
Section 15
SCOPE
(c)
any immovable property; [or] ;
(d)
any movable property held for personal use by
the person or any member of the person’s family
dependent on the person except for the
following -
•
•
•
•
•
•
A painting, sculpture, drawing or other work
of art;
jewellery;
a rare manuscript, folio or book;
a postage stamp or first day cover;
a coin or medallion; or
an antique.
62
CAPITAL GAIN
Income Tax Bar
Association
Karachi
Workshop
on Income Tax
Section 37
SCOPE
Capital Gain is the difference between the
consideration received by the person on disposal of the
assets and the cost at acquisition
If the capital asset becomes the property of the person
by way of –
(a)
under a gift, bequest or will;
(b)
by succession, inheritance or devolution; .
Hotel Sheraton
29-30 August 2005
63
CAPITAL GAIN
Income Tax Bar
Association
Karachi
Workshop
on Income Tax
Section 37
SCOPE
(c)
a distribution of assets on dissolution of an
association of persons
(d)
on distribution of assets on liquidation of a
company .
The fair market value of asset on the date of the
transfer would be regarded as the cost.
Hotel Sheraton
29-30 August 2005
64
INCOME FROM OTHER SOURCES Section 37
Income Tax Bar
Association
Karachi
Workshop
on Income Tax
Hotel Sheraton
29-30 August 2005
SCOPE
Income not taxable under any head of income and not
exempt under the Ordinance is chargeable to tax as
“income from other sources”
The following sources of income have specifically been
included in the scope of “Income from other sources” –
(a)
Dividend
(b)
royalty
(c)
profit on debt
(d)
ground rent
(e)
rent from the sub-lease of land or a building
65
INCOME FROM OTHER SOURCES Section 37
Income Tax Bar
Association
Karachi
SCOPE
(f)
income from the lease of any building together
with plant or machinery
(fa)
income from provision of amenities, utilities or
any other service connected with renting of
Workshop
on Income Tax
building
(g)
any annuity or pension
(h)
any prize bond, or winnings from a raffle, lottery
prize on winning a quiz, prize offered by
Hotel Sheraton
29-30 August 2005
companies for promotion of sale] or cross-word
puzzle
66
INCOME FROM OTHER SOURCES Section 37
Income Tax Bar
Association
Karachi
SCOPE
(i)
any other amount received as consideration for
the provision, use or exploitation of property,
including from the grant of a right to explore for,
Workshop
on Income Tax
or exploit, natural resources;
(j)
the fair market value of any benefit, whether
convertible to money or not, received in
connection with the provision, use or exploitation
of property
Hotel Sheraton
29-30 August 2005
67
INCOME FROM OTHER SOURCES Section 37
Income Tax Bar
Association
Karachi
SCOPE
(k)
any
amount
received
by
a
person
as
consideration for vacating the possession of a
building or part thereof, reduced by any amount
paid by the person to acquire possession of
Workshop
on Income Tax
such building or part thereof
(l)
Any amount received by a person from
Approved Income Payment Plan or approved
Annuity Plan under Voluntary Pension System
Rules, 2005
Hotel Sheraton
29-30 August 2005
68
INCOME FROM OTHER SOURCES Section 37
Income Tax Bar
Association
Karachi
SCOPE
(m)
Any Amount (other than advance payment for
the supply of goods or services) received as
loan, advance, deposit, for issuance of shares
Workshop
on Income Tax
or gift by a person from another person (other
than banking company or financial institution)
otherwise than by a cross cheque or through a
banking channel from a person holding NTN.
Hotel Sheraton
29-30 August 2005
69
INCOME FROM OTHER SOURCES Section 37
Income Tax Bar
Association
Karachi
Workshop
on Income Tax
SCOPE
Expenditure paid in deriving income chargeable under
this head is allowable as a deduction in computing
income from other sources
Apart from the above the following specific deductions
have been specified –


Hotel Sheraton
29-30 August 2005
Any Zakat paid at the time of payment of
profit on debt
In computing income from lease of building
alongwith plant and machinery deduction
shall be allowed for admissible normal and
initial depreciation
70
APPORTIONMENT OF DEDUCTION
Income Tax Bar
Association
Karachi
Section 67
A special provision has been inserted which requires
apportionment of expenditure where the expenses
relates to –
(a) The derivation of more than one head of
Workshop
on Income Tax
income
(b) The derivation of income taxable under normal
law and the taxable under final tax regime
(c) The derivation of income chargeable to tax and
for some other purpose
Hotel Sheraton
29-30 August 2005
71
APPORTIONMENT OF DEDUCTION
Income Tax Bar
Association
Karachi
Workshop
on Income Tax
Hotel Sheraton
29-30 August 2005
Rule 13
The Rules framed for the purpose of apportionment of
expenditure provide that –
(a)
Where an expense relates to a particular class
of income it shall be allocated to that class of
income
(b)
Common
expenses
including
financial
expenses are to be allocated on the basis of the
gross receipts of a particular class of income
and total gross receipt from all classes of
income
In case the gross revenues comprise of gross sales,
net gain, brokerage, commission and other income
than while allocating the expenses instead of gross
sales the gross profit should be taken as revenue.
72
APPORTIONMENT OF DEDUCTION
Income Tax Bar
Association
Karachi
Workshop
on Income Tax
Rule 13
The allocation of expenditure is required to be certified
by a Chartered Accountant or Cost and Management
Accountant where the assessee is required to submit
audited accounts. Such certified working would be
accepted unless significant variation is found.
Where audited accounts are not required the
allocation made on the basis as discussed above
would be accepted unless variation is found.
Hotel Sheraton
29-30 August 2005
73
APPORTIONMENT OF DEDUCTION
Income Tax Bar
Association
Karachi
Workshop
on Income Tax
Rule 13
For the purpose of apportionment classes of income
have been defined to mean –
(a)
Each head of income listed in Section 11
bifurcated between Pakistan source and foreign
source
(b)
Income exempt from tax
(c)
Income taxable under final tax regime,
dividends, certain payments to non-resident,
shipping and air transport income of nonresident person
Hotel Sheraton
29-30 August 2005
74
METHOD OF ACCOUNTING
Income Tax Bar
Association
Karachi
Workshop
on Income Tax
Section 32
Income chargeable to tax is required to be computed in
accordance with the method of accounting regularly
employed
Income from business derived by a company is
required on an accrual basis
Other assessee’s have an option either account for
income on a cash or accrual basis
Hotel Sheraton
29-30 August 2005
75
METHOD OF ACCOUNTING
Income Tax Bar
Association
Karachi
Workshop
on Income Tax
Section 33
CASH OR ACCRUAL BASIS ACCOUNTING
Under the cash method income is to be recorded on a
receipt basis and expenses are to be recorded or
capitalized when paid
Under the accrual method income is to be recorded when
it is due to the person and expenses are deducted or
capitalized when they are payable
An amount is treated as due to a person when a person
become entitled to receive it no matter when it is received
Hotel Sheraton
29-30 August 2005
An amount is payable by person when all the events that
determine liability and the liability can be determine with
reasonable accuracy
76
METHOD OF ACCOUNTING
Section 35
Income Tax Bar
Association
Karachi
Stock-in-trade disposed by the person in a year is the
difference between the opening stock plus purchases
Workshop
on Income Tax
less closing stock
Hotel Sheraton
29-30 August 2005
77
MINIMUM TAX
Income Tax Bar
Association
Karachi
Applies only to resident Companies, where -
•No tax is payable due to-
Workshop
on Income Tax
Hotel Sheraton
29-30 August 2005
Section 113
sustaining of loss,
setting off of losses of prior years,
exemption from tax,
application of credits and rebates,
claiming of allowances or deductions
•
allowed under the Ordinance or any other law
the time being in force
•
Tax payable is less than 0.5% of the amount
representing the person`s turnover from all sources
for
78
MINIMUM TAX
Income Tax Bar
Association
Karachi
Workshop
on Income Tax
Hotel Sheraton
29-30 August 2005
Section 113
Turnover has been defined as follows • the gross receipts, exclusive of sales tax and
Federal Excise duty or any trade discounts
shown on invoices or bills, derived from the sale
of goods;
• the gross fees for the rendering of
services or
giving benefits, including
commissions;
•
the gross receipts from the execution of
contracts
•
the company’s share of the amounts stated
above of any association of persons of which
the company is a member.
79
MINIMUM TAX
Income Tax Bar
Association
Karachi
Workshop
on Income Tax
Hotel Sheraton
29-30 August 2005
Section 113
Retailers being an individual or association of
person having turnover upto Rs.5,000,000 per tax
year can opt for payment of a final tax of 0.75% on
their turnover
Retailers whose turnover exceeds Rs.5,000,000 for
a tax year dealing in textile fabrics and apparels,
ready made garments, fashion wear, leather goods,
footwear, carpets, surgical goods and sports goods
can opt for payment of final tax at the rate of 1% of
the turnover
The 1% tax would be treated as part of the sales tax
recovered on such turnover at 3% of the declared
value
80