Professional Documents
Culture Documents
Federal Taxes: Canon of Taxation
Federal Taxes: Canon of Taxation
Federal Taxes: Canon of Taxation
Canon of taxation:
1. Equality: Tax payments should be proportional to income and applied equally to all concerned areas
3. Convenience of payment: Taxes should be collected at a time and in a manner convenient for taxpayer
4. Economy of collection: Taxes should be expensive to collect and should not discourage business
Structure of taxes:
2. Progressive tax: Higher income persons pay higher taxes and lower income persons pay lower taxes
3. Regressive tax: Higher income persons pay less tax and lower income persons pay higher tax
Pakistan has agreements with more than 50 countries for double taxation including all the developed countries
Federal Taxes
Income tax
Customs Duties
Excise Duties
Provincial taxes
General Sales Tax on Services
Stamp Duty
Professional Tax
Resident is one who has been in Pakistan for 183 days or more.
Non-resident is one who has not resided in Pakistan for that year
Resident company is
Fiscal policy is use of federal budget to smooth business cycle and encourage economic growth.
(a) Discretionary Fiscal Policy: It is fiscal policy action initiated by the Government
(b) Automatic Fiscal Policy: It is a fiscal policy action that is trigger by the state of the economy.
Expansionary Fiscal policy: Lower taxes and increase in government spending (applied when economy
is in recession and below Full Employment)
Contractionary Fiscal Policy: Government increases taxes and decreases government spending (when
there is demand pull inflation after this the economy slows down run at Full Employment)
Government budget:
Balance budget: Government Tax Revenue = Government Spending
Budget Deficit: Difference between G-T (Add the deficit to the debt)
Types of Deficit:
Cyclical Deficit: The deficit that occurs because of downturn in the business cycle, I.e. because the
economy is in recession.
When economy is in recession the tax revenues are less than the potential GDP. Transfer payments are
higher than they would be at full GDP
Structural Deficit: the deficit that would exist if the economy was at Full Employment.
Pakistan levy high level of indirect taxes which are regressive in nature
Agriculture and service sector dot not contribute their share in proportion of their size
There are wide exemptions and preferential treatment available to certain segment of society
Tax administration is weak. Deduction at source is major contributor followed by voluntary payment. A very less
amount is collected by tax demands
Elimination of due to Black Economy because of lack of documentation. CNIC is the key solution to this problem.
Federal Excise Act 2005
Federal Excise Act was enacted as _______: 1st Schedule to Finance Act 2005
Federal Excise Act published in ____ on _____ : Gazette of Pakistan, 1st July 2005
Federal Excise Act relates to ________: good produced, manufactured, consumed and services
rendered
Federal Excise Act got approval on _____ : 29th June 2005
Federal Excise Act enforced on _____ : 1st July 2005
Prior to Federal Excise Act ______ dealt with excise laws: Central Excise Act 1944
It was repealed u/s ___ of ____: 2, Finance Act 2005
Adjudicating authority means ____ : any authority competent to pass order or make decision
____ & ____ are not adjudicating authorities: FBR, Appellate Tribunal
Appellate tribunal constituted u/s: 130 of Income Tax ordinance
Board mean ____ established u/s ____: FBR, 3 of FBR Act 2007
Which is the highest tax collecting authority ____ which regulates: Board, all direct and indirect taxes
Officers of Inland Revenue appointed u/s ____: 29 of Federal Excise Act 2005
Conveyance means ____: any transport to carry good and passengers such as vessel, aircraft, animal,
vehicle, etc
Default surcharge means surcharge levied u/s ___ of _____: 8, Federal Excise Act
Default surcharge means ____: Failure of person to pay tax in given time is to pay default surcharge
Default surcharge is charged at rate of ____: KIBOR + 3% of duty due, refund of duty or drawback
Distributor is ____: appointed for specific area to buy goods from manufacturer and sell to whole seller
of the area
Due date is ____ u/s ____: 15th of following month, 8
Dutiable good means all excise-able goods excepts those exempted u/s ____ of FEA: 16
Duty means ____ and includes ____ and ____: sum payable, default surcharge, duty chargeable at 0%
Duty due means ____: duty applicable on supplies made and services rendered during a month
Establishment includes___, ____, ___, ___, ____: undertaking, firm, company, AOP, individual
Goods mean ____ specified in ____: goods leviable to excise duty, 1 st schedule
Goods include ____ : Goods manufactured in non-tariff area (AJK, Northern areas, etc) and bought to
tariff area
KIBOR is: Karachi Inter-Bank Offered Rate on 1st day of each quarter
Manufacture means__, __, __ & __: process of manufacturing, re-manufacturing, packing or re-packing
Non-fund banking service means ____: all non-interest based services against fee or commission
Person includes ___, ___, ___, ____, ___, ____: 1. Company2. Association3. body of individual
incorporated or not, public or local govt, provincial
govt, federal govt
Sales Tax Mode means ____ u/s____: excise duty charged as if it is sales tax, 3 of sales tax act
Whole sale dealer means ____: one who buys or sells goods on whole sale bases for trade or
manufacture
Zero-rated means ____ u/s____: excise levied and charged at 0% on good to exported, 5 excise act
Federal Excise Act 2005
Section Related to
Chapter I
Preliminary
1 Short title, extent and commencement
Enforced from 1st July 2005
2 Definitions
Adjudicating authority excludes Board OR Appellate Tribunal
Appellate Tribunal ITO u/s 130
FBR established u/s 3 of FBR Act 2007
Officers appointed u/s 29
KIBOR 1st day of each quarter
Non-tariff area AJK, Northern Areas
Sales tax mode: excise duty collected as sales tax
Chapter II
Levy, collection and payment of duty
3 Duties specified in 1st schedule
To be levied on goods (a)manufactured in Pakistan (b) imported into Pakistan (c) produced in
non-tariff area but bought to tariff area (d) services originated outside but rendered in Pakistan
At rate 15% ad valorem ELSE as specified in 1st schedule
Duty on import collected as it customs duty u/s 31-A of Customs Act 1969
Duty on manufactured goods will be either on (a) plant / machinery capacity (b) fixed basis
Supply of dutiable goods to non-registered person will result in additional 2% of duty
Government can charge higher or lower rate of duty
Liability for payment of duty (a) person manufacturing goods (b) person importing goods (c)
person rendering service, if services are originated abroad than recipient of services in Pak (d)
person bringing goods from non-tariff area to tariff area
Goods include chapter 1 to 97 of 1st schedule and services include chapter 98 of 1st schedule to
customs Act
4 Filing of return, due date and payment of duty
Duty due will be deposited in designated branch of bank
If duty rate is changed during month than particular days in month will apply to that changed
rate and previous rate for others
Revised return: person can deposit correct return in 120 days of filing of return with approval of
commissioner IR
5 Zero rate of duty and drawback of duty
For exported goods and for those goods imported in Pakistan but exported back outside Pakistan
For such goods drawback of duty is provided
6 Adjustment of duties of excise
Input tax will be subtracted from output tax for goods mentioned in 1st schedule
It will be done if registered person has valid proof that he has paid the price of goods purchased
including amount of duty AND received the payment for sale of goods through banking channel
including online payment
7 Application of provisions of sales tax act 1990
In case of 2nd Schedule the duty will be payable in sales tax mode
Registered person will allowed for deduction if input tax from output tax during tax period
input tax, output tax, tax period will be applicable as mentioned in Sales Tax Act
8 Default surcharge
If a person does not pay duty due, or receives drawback or makes inadmissible adjustment
Then he will pay default surcharge at rate KIBOR + 3% per annum, in addition to duty due
Period for default will be from date of duty due to actual payment made
Period for default will be from date of adjustment or refund to the actual receiving of amount
9 Liability of duty in case of private companies or businesses in case of sale of ownership
For businesses that discontinue or change in ownership is made, duty is irrecoverable from
current owner than previous owner(s) will be jointly and severely responsible for duties payable
In case of liquidation the duty due will have first priority on assets of the business
No business will be sold unless NOC obtained from commissioner
10 Applicable value and rate of duty
Date for duty will goods sold or exported
Date for duty will services rendered
Date for duty will imported
11 Collection of excess duty, etc
If excess duty is collected than it should be deposited to Govt.
Claims for refund will not be admissible
All provision of this act will apply for collection of such excess duty collected
12 Determination of value for purpose of duty
If the rate of duty for goods is depended on value of goods than it will be determined u/s 2(46) of
Sales Tax Act
If duty is charged at import stage than duty will determined and paid u/s 25 of Customs Act 1969
Duty for services will be paid on amount of charges for services irrespective of the fact that
payment is made or not
Duty for services will include any ancillary facilities or utilities provided
If duty is paid on retail price it will be paid on retail price of goods including all charges and taxes
BUT excluding sales tax levied u/s 3 of Sales Tax Act
If goods are sold at more than one retail price than the highest price will be considered
FBR can fix minimum price of any goods levy of duty
13 Registration
Person making supplies under this Act will be required to be registered
Person registered under Sales Tax Act 1990 will not be required to be registered for excise
purpose
If person is exempt from registration under Sales Tax Act he has to register under Excise Act
14 Recovery of unpaid duty or of erroneously refunded duty or arrears of duty, etc
Any person not levied or paid any duty or any amount erroneously refund will be sent a show
cause notice within 5 years time
Person has to answer the show cause in 120 days or maximum extendable by 60 days with
approval from commissioner
Further maximum of 30 days can be provided if the case is in Alternate Dispute Resolution or due
to stay order
14-A Short paid amounts recoverable
If person pays duty less than duty due he will pay the short amount duty along with default
surcharge
FBR can stop removal of goods from business premises OR from attached bank accounts
15 Application of custom act 1969 to Federal Excise Act
Any or all provisions of Customs act can be applied by Govt in respect of section 3 and 8
16 Exemptions
All goods produced, imported and services rendered will be exempt from duty except those
mentioned in 1st schedule
Goods in 3rd schedule will be exempt from duty and no adjustment will be admissible
17 Records
Every person will keep record for 6 years or till final order in any proceedings at his business
premises
In English or Urdu
Records for clearance and sales made indicating description, quantity and value of goods and
name, address of person sold to
Records of sold without payment of duty
Records for purchased made indicating description, quantity and value of goods and name,
address of
supplier
Record of imports and exports
18 Invoices
Person will issue serially number invoices at time of clearance or sale of goods including duty at
rate 0%
Name, address, registration number of seller
Name, address, registration number of buyer
Date of issue of invoice
Description and quantity of goods and services
Value exclusive of excise duty
Amount of excise duty
Value inclusive of excise duty
Person making supplied taxable under sales tax act will not be required to issue separate invoice
for excise purpose and amount of excise duty
FBR can specify goods with which the invoice will be carried along with conveyance
Chapter III
Offences and Penalties
19 Offences, penalties, fines and allied matters
Return not filed 5000
Short payment made 10,000 or 5% of duty
Payment made in 15 days 100 per day
Mis-declaration or fake documents 20,000, 5 year imprisonment or both
Obstructing IR officer 50,000 or 5 times or 3 years
Illegally removal of goods 50,000 or 5times or 5 years or both
Manipulation of computer record 75,000 or 10 times or 5 years or both
Inadmissible refund or drawback 100,000 or 5 times or 5 years or both
Retail price not indicated on goods 500% Ad valorem for cigarettes and 40% Ad
valorem for other goods
20 Appointment of Special Judge for trial of offence
A Special Judge will be the person who is or has been or is qualified to be a Session Judge
Government can appoint more than one special judges each within territorial limits
21 Trial of offence by Special Judge
Special judge will deal with all offences mentioned in this act
Criminal Procedure Code will apply except Chapter 38
Chapter 20 of Criminal Procedure Code will apply
Court of Special Judge will be considered session court and person conducting prosecution will be
considered Public Prosecutor
Government can transfer case from 1 special judge to another special judge
21-A Appeal against the order of Special Judge
Appeal against order of special judge be filed with high court within 30 days of passing of order
22 Power to arrest and prosecute
With approval of commissioner IR officer can arrest offender under this act
Special Judge should immediately be informed about the arrest
Arrested person should be produced within 24 hours before special judge or if special judge is
not within reasonable distance to the nearest Judicial Magistrate
Arrested person will be provided opportunity of being heard and can be denied the bail and
directed for detention or execution of bond for bail, with or without sureties
Bail can cancelled later on
Judicial Magistrate will authorize the detention and will facilitate his production before Special
Judge on date and time fixed by him
Remand of 14 days can be granted with IR officer written request
Within 24 hours the IR officer should complete inquiry and may ask for further detention before
special judge or nearest judicial magistrate
IR officer will have same powers as SHO under CrPC 1898
If after inquiry no evidence is established the IR officer with commissioners approval can release
that person executing a bond with or without sureties
Special judge can release or ask prosecution for further evidence
IR officer will keep Register of arrests and detention
First Class Magistrate can record confession or statement under this act in accordance with
section 164 of CrPC
23 Power to summon persons to give evidence and produce documents in inquiries
IR officer can summon anyone whose attendance he considers necessary either to give evidence
or produce document or any other information
Exemptions under section 132 and 133 of CrPC 1898 will be applicable
Every inquiry will be considered as judicial proceeding within meaning of section 193 and 228
of PPC 1860
24 Officers required to assist [officer of Inland Revenues]
Police, customs, IR civil armed forces, revenue department, all village officer will assist IR officers
Chapter IV
Searches, arrests and seizures
25 Searches and arrests how to be made under CrPC 1898
26 Power to seize cigarettes or beverages manufactured illegally or duty evaded will be confiscated along
with conveyance, transport, fixtures, fitting
27 Confiscation of counterfeit or injurious to health cigarettes and order for their destruction
28 Power to release seized conveyance by special judge with guarantee from bank for value equal to one
year value of conveyance
Chapter V
Power, Adjudication and Appeals
29 Appointed of Federal Excise officers and delegation of powers
30 Use of powers of subordinate officers
32 Option to pay fine in lieu of confiscated conveyance
33 Appeals to Commissioner (Appeals)
Within 30 days against order passed by officer up to rank of Additional Commissioner
If Commissioner (Appeals) thinks that such order will bring undue hardship to taxpayer he may
stay recovery of tax up to 30 days
Commissioner (Appeals) may confirm, alter, and annul the original decision. Such order can be
passed up to 120 days of filing of appeal, with maximum extended period of 60 days. Due to stay
order or matter being in Alternate Dispute Resolution the period can be extended up to 30 days
A / B%
Where,
A is total tax paid or payable for last 3 years
B is total income for last 3 years
If salary has been paid in arrear the person may request that he be taxed in year in which he
rendered service
13 Value of perquisite
House, car, driver, guard, loan. Loan considered at benchmark rate
14 Employee share schemes
Employee share scheme is (a) when a company or associated company issues share to
employee (b) trustee of a trust under trust deed transfer the employee
Any option or right to acquire share is exempt from tax. Share at fair market value less any
amount given the employee
Transfer of shares having following restrictions that no amount will be chargeable to tax until
(a) the employee has free right to transfer the shares (a) the time employee disposes off the
shares earlier of both be considered
Cost of share will be total of (a) amount given by employee for shares (b) any amount given
for the right to get any shares
When an employee disposes of a right to acquire shares under employee share scheme the
amount taxable under head Salary will be under following formula:
AB
Where,
A is amount received for disposal of right or option
B is employees cost for right or option
Part III
Head of Income: Income from Property
15 Income from Property
Rent received or receivable other than exempt under this section is considered for head
Income from Property
Rent includes any amount received by owner as consideration for use or occupy a land or
building and includes any deposit paid under contract to for sale of land or building
This does not include building along with plant and machinery and also amenities, services
connected with renting of building which is considered for Income from other sources
Where the rent is less than fair market rent but it will be considered for fair market rent
15-A Deductions in computing income chargeable under the head income from property
Repair allowance of 1/5th considered before any of following deductions
Any premium paid to insure building
Any local cess, tax, charge paid to local authority or government
Any profit paid on money borrowed by the way of mortgage, to aquire, construct, renovate,
and reconstruct the property. Also include money got from HBFC or any other ban
Any expenditure not exceeding 6% of rent chargeable to tax before any deduction allowed for
the purpose of collecting the rent
Any expenditure to defend the legal title to the property
Where the unpaid rent is irrecoverable, an allowance equal to unpaid rent. If recovered that
portion of unpaid rent will be included in that years head income from property
When a person is allowed deduction and has not paid in 3 years of tax year in which allowed
such deduction. Such amount will be chargeable from 1st year after the end of 3rd year. If the
person pay the liability or portion of liability such person will be allowed the deduction for
amount paid in the tax year in which the payment is made
Any expenditure for which deduction is allowed in this section will not be considered for any
other heads deduction
16 Non-adjustable amounts received in relation to buildings
Non-adjustable amount against the rent payable will be chargeable to tax under head
income from property in the tax year it is received and following 9 years in equal proportion
If the tenancy is terminated before the ten years the earlier amount payable is refunded no
portion will be allocated in that year or subsequent years
If owner lets building to next tenant, the succeeding amount as decrease by earlier amount
will be charged under head income from property
Part IV
Head of Income: Income from Business
18 Income from business
Following incomes of person other than exempt from tax will be chargeable to tax under head
income from business
The profit or gains from any business carried by the person in any time of tax year
Income from hire or lease of tangible moving property
Any perquisite by virtue of past, present or prospective business relationship
Any management fee derived by management company (including modharba)
Any profit on debt income from business not income from other sources
Lease of any asset by any institution, bank, modaraba
Mutual fund income from profit on debt under head income from business not income
from other sources
19 Speculation business
Speculation business means any contract for purchase and sale of commodity or stocks
Speculation business is considered separate from other business of person
This will be a separate part in head income from business
Any loss will be dealt under section 58
Speculation does not include
Any contract to safeguard loss against future price fluctuation
Any contract entered by investor or dealer to guard loss of holding shares
Division II
Deductions: General Principles
20 Deductions in computing income chargeable under head Income from Business
Any expenditure incurred by person in the tax year
21 Deduction not allowed
Any amount of tax deducted under Division III of Part V of Chapter X from an amount derived
by person
Any cess, tax paid or payable by person in Pakistan or foreign that applied on the profits of
business or assessed as percentage of such profit
Any salary, commission, rent profit on debt to non-resident
Any entertain expenditure
Any contribution other than provident fund, approved pension fund, approved gratuity fund,
approved superannuation fund
Any fine or penalty
Any personal expenditure
Any amount carried to reserve fund
Any salary commissioner, brokerage, profit on debt paid by AOP to member of AOP
Any payment other crossed chaque in excess of 50,000. Online payment like credit card also
considered as banking transaction
Expenditure not exceeding 10,000
Utility bills, freight charges, travel fare, postage and payment of duty, fees fines as statuary
obligation
Any salary paid or payable exceeding 15,000 per month other than by crossed chaque or to
directly to employee bank account
Division III
Deductions: Special Provisions
22 Depreciation
The depreciation deduction for tax year will be computed by applying the part I of 3rd
schedule
If asset is partly used for business and partly for other than such proportion will be considered
as it was wholly used for business. The written down value is increased by the amount used
for other purpose
Formula for above condition will be as following:
AxB/C
Where,
A is the amount of depreciation as whole or part of usage
B is number of months in tax year
C is number of months in tax year
A/B
Where
A is the cost of the intangible; and
B is the normal useful life of the intangible in whole years
Where an intangible is not used for the whole of the tax year in deriving income from business
chargeable to tax, the deduction allowed under this section will be computed according to the
following formula
A x B/C
Where,
A is the amount of amortization computed in above given formula
B is the number of days in the tax year the intangible is used in deriving income from business
chargeable to tax; and
C is the number of days in the tax year
The total deductions allowed to a person under this section in the current tax year and all
previous tax years in respect of an intangible will not exceed the cost of the intangible
Where, in any tax year, a person disposes of an intangible, no amortization deduction will be
allowed under this section for that year and
(a) if the consideration received by the person are GREATER than the written down value of the
intangible at the time of disposal, the excess will be income of the person chargeable to tax in that
year
under the head Income from Business
(b) if the consideration received is LESS than the written down value of the intangible at the time of
disposal, the difference will be allowed as a deduction in computing the persons income chargeable
under the head Income from Business in that year
For the purposes of this section, an intangible that is available for use on a day (including a
non-working day) is treated as used on that day
cost in relation to an intangible, means any expenditure incurred in acquiring or creating the
intangible, including any expenditure incurred in improving or renewing the intangible; and
intangible means any patent, invention, design or model, secret formula or process,
copyright, trade mark, scientific or technical knowledge, computer software, motion picture
film, export quotas, franchise, license, intellectual property], or other like property or right,
contractual rights and 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).
25 Pre-commencement expenditure
A person will be allowed a deduction for any pre-commencement expenditure in accordance
with this section
Pre-commencement expenditure will be amortized on a straight-line basis at the rate
specified in Part III of the Third Schedule
The total deductions allowed under this section in the current tax year and all previous tax
years in respect of an amount of pre-commencement expenditure will not exceed the amount
of the expenditure
No deduction will be allowed under this section where a deduction has been allowed under
another section of this Ordinance for the entire amount of the pre-commencement
expenditure in the tax year in which it is incurred
pre-commencement expenditure means any expenditure incurred before the
commencement of a business wholly and exclusively to derive income chargeable to tax,
including the cost of feasibility studies, construction of prototypes, and trial production
activities, but will not include any expenditure which is incurred in acquiring land, or which is
depreciated or amortized under section 22 or 24
26 Scientific research expenditure
A person will be allowed a deduction for scientific research expenditure incurred wholly and
exclusively for the purpose of deriving income from business chargeable to tax
scientific research means any activity undertaken in Pakistan in the fields of natural or applied
science for the development of human knowledge;
scientific research expenditure means any expenditure incurred by a person on scientific research
undertaken in Pakistan for the purposes of developing the persons business, including any
contribution to a scientific research institution to undertake scientific research for the purposes of the
persons business, other than expenditure incurred
(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; and
scientific research institution means any institution certified by the 4 [Board] as conducting scientific
research in Pakistan
27 Employees training and facilities
A person will be allowed a deduction for any expenditure (other than capital expenditure) incurred in
a tax year in respect of
(a) any educational institution or hospital in Pakistan established for the benefit of the persons
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 Government or
(c) the training of any person, being a citizen of Pakistan, in connection with a scheme approved by
the Board for the purposes of this section.
28 Profit on debt, financial costs and lease payments
A deduction will be allowed for a tax year for
(a) any profit on debt incurred by a person in the tax year to the extent that the proceeds or benefit
of the debt have been used by the person for the purposes of business
(b) any lease rental incurred by a person for the purposes of business
(c) any amount incurred by a person in the tax year to a modaraba or a participation term certificate
holder for any funds borrowed and used by the person for the purposes of business
(d) any amount incurred by a person in the tax year to a banking company under a scheme of
musharika representing the banks share in the profits of the musharika
(e) any amount incurred by a scheduled bank in the tax year to a person maintaining a profit or loss
sharing account or a deposit with the bank as a distribution of profits by the bank in respect
of the account or deposit
(f) the financial cost of the securitization of receivables incurred by an Originator in the tax year from a
Special Purpose Vehicle being the difference between the amount received by the Originator and the
amount of receivables securitized from a Special Purpose Vehicle
29 Bad debts
A person will be allowed a deduction for a bad debt in a tax year if the following conditions
are satisfied, namely:
(a) the amount of the debt was
(i) previously included in the persons income from business chargeable to tax; or
(ii) in respect of money lent by a financial institution in deriving income from business chargeable to
tax;
(b) the debt or part of the debt is written off in the accounts of the person in the tax year; and
(c) there are reasonable grounds for believing that the debt is irrecoverable
The amount of the deduction allowed to a person under this section for a tax year will not
exceed the amount of the debt written off in the accounts of the person in the tax year
Where a person has been allowed a deduction in a tax year for a bad debt and in a
subsequent tax year the person receives in cash or kind any amount in respect of that debt,
the following rules will apply, namely:
(a) where the amount received exceeds the difference between the whole of such bad debt and the
amount previously allowed as a deduction under this section, the excess will be included
in the persons income under the head Income from Business for the tax year in which it was
received; or
(b) where the amount received is less than the difference between the whole of such bad debt and
the amount allowed as a deduction under this section, the shortfall will be allowed as a bad debt
deduction in computing the persons income under the head Income from Business for the tax year
in which it was received
29-A Provision regarding consumer loans
A non-banking finance company or the HBFC will be allowed a deduction, not exceeding three
per cent of the income for the tax year, arising out of consumer loans for creation of a reserve
to off-set bad debts arising out of such loans
Where bad debt cannot be wholly set off against reserve, any amount of bad debt, exceeding
the reserves will be carried forward for adjustment against the reserve for the following years
consumer loan means a loan of money or its equivalent made by a non-banking finance
company or the House Building Finance Corporation to a debtor (consumer) and the loan is
entered primarily for personal, family or household purposes and includes debts created by
the use of a lender credit card or similar arrangement as well as insurance premium financing
30 Profit on non-performing debts of a banking company or development financial institution
A financial institution or modaraba will be allowed a deduction for any profit accruing on a
non-performing debt of the banking company or institution or Non-Banking Finance Company
(NBFC) or modaraba where the profit is credited to a suspense account in accordance with the
Prudential Regulations for Banks or Non-Banking Finance Company or modaraba Non-bank
Financial Institutions, as the case may be, issued by the State Bank of Pakistan or the
Securities and Exchange Commission of Pakistan
Any profit deducted under above that is subsequently recovered by the banking company or
development finance institution or Non- Banking Finance Company (NBFC) or modaraba will
be included in the income of the company or institution or Non-Banking Finance Company
(NBFC) or
modaraba chargeable under the head Income from Business for the tax year in which it is
recovered
31 Transfer on participatory reserve
Subject to this section, a company will be allowed a deduction for a tax year for any amount
transferred by the company in the year to a participatory reserve created under section 120 of
the Companies Ordinance, 1984 in accordance with an agreement relating to participatory
redeemable capital entered into between the company and a banking company as defined in
the Financial Institutions (Recovery Of Finances) Ordinance,2001
The deduction allowed under 1st point for a tax year will be limited to five per cent of the
value of the companys participatory redeemable capital.
No deduction will be allowed under 1st point if the amount of the tax exempted accumulation
in the participatory reserve exceeds ten per cent of the amount of the participatory
redeemable capital.
Where any amount accumulated in the participatory reserve of a company has been allowed
as a deduction under this section is applied by the company towards any purpose other than
payment of share of profit on the participatory redeemable capital or towards any purpose
not allowable for
Deduction or exemption under this Ordinance the amount so applied will be included in the
income from business of the company in the tax year in which it is so applied.
Division IV
Tax Accounting
32 Method of accounting
Companies will taxed under head Income from business on accrual basis
Persons may opt either cash or accrual basis
33 Cash-basis accounting
Cash basis: Tax on income when received and expenditure when paid
34 Accrual-basis accounting
Accrual basis: income when becomes due and expenditure when becomes payable
35 Stock-in-trade
The cost of stock-in-trade disposed of by person will be computed under formula:
(A + B) C
Where,
A is the opening value of persons stock-in-trade for the year
B is cost of stock-in-trade acquired by the person
C is the closing value of stock in trade
Person using cash basis may compute the stock-in-trade value by either prime-cost method or
absorption-cost method
For accrual basis persons stock-in-trade will be computer using absorption-cost method
Where particular items of stock-in-trade are not readily identifiable, a person may account for
that stock on the first-in-first-out method or the average-cost method
absorption-cost method means the generally accepted accounting principle under which the
cost of an item of stock-in-trade is the sum of direct material costs, direct labour costs, and
factory overhead costs;
average-cost method means the generally accepted accounting principle under which the
valuation of stock-in-trade is based on a weighted average cost of units on hand;
direct labour costs means labour costs directly related to the manufacture or production of
stock-in-trade;
direct material costs means the cost of materials that become an integral part of the stock-
in-trade manufactured or produced, or which are consumed in the manufacturing or
production process;
factory overhead costs means the total costs of manufacturing or producing stock-in-trade,
other than direct labour and direct material costs;
first-in-first-out method means the generally accepted accounting principle under which the
valuation of stock-in-trade is based on the assumption that stock is sold in the order of its
acquisition;
prime-cost method means the generally accepted accounting principle under which the cost
of stock-in-trade is the sum of direct material costs, direct labour costs, and variable factory
overhead costs;
stock-in-trade means anything produced, manufactured, purchased, or otherwise acquired
for manufacture, sale or exchange, and any materials or supplies to be consumed in the
production or manufacturing process, but does not include stocks or shares; and
variable factory overhead costs means those factory overhead costs which vary directly with
changes in volume of stock-in-trade manufactured or produced.
36 Long-term contracts
Persons income arising from long term contract will be on the basis of percentage of
completion method which will be determined by comparing the total costs allocated to the
contract and incurred before the end of the year with the estimated total contract costs as
determined at the commencement of the contract.
long-term contract means a contract for manufacture, installation, or construction, or, in
relation to each, the performance of related services, which is not completed within the tax
year in which work under the contract commenced, other than a contract estimated to be
completed within six months of the date on which work under the contract commenced; and
percentage of completion method means the generally accepted accounting principle under
which revenue and expenses arising under a long-term contract are recognized by reference
to the stage of completion of the contract
Part V
Head of Income: Capital Gains
37 Capital gains
A gain arising on the disposal of a capital asset by a person in a tax year.
the gain arising on the disposal of a capital asset by a person will be computed in accordance with
following formula:
AB
Where,
A is the consideration received by the person on disposal of the asset; and
B is the cost of the asset
Where a capital asset has been held by a person for more than one year the amount of any gain
arising on disposal of the asset will be computed in accordance with the following formula:
Ax
Where,
A is the consideration received by the person on disposal of the asset
AB
Where,
A is the consideration received by the person on disposal of the security; and
B is the cost of acquisition of the security
The holding period of a security will be considered reckoned from the date of acquisition to
the date of disposal of such security
Gain under this section will be treated as a separate block of income
When a person sustains a loss on disposal of securities in a tax year, the loss will be set off
only against the gain of the person from any other securities chargeable to tax under this
section and no loss will be carried forward to the subsequent tax year
38 Deduction of losses in computing the amount chargeable under head Capital Gains
a deduction will be allowed for any loss on the disposal of a capital asset
No loss will be deducted under this section on the disposal of a capital asset where a gain on
the disposal of such asset would not be chargeable to tax
The loss arising on the disposal of a capital asset by a person will be computed in accordance
with the following formula:
AB
Where,
A is the cost of the asset; and
B is the consideration received by the person on disposal of the asset
No loss will be recognized for painting, sculpture, postage stamp, coin, medal, antique under
this section
Part VI
Head of Income: Income from other sources
39 Income from other sources
Income of every kind received by a person in a tax year, if not included in any other head be
chargeable to tax in that year under the head Income from Other Sources, including
following:
Dividend
Royalty
Profit on debt
Additional payment on delayed refund under any tax law
ground rent
rent from the sub-lease of land or a building
income from the lease of any building together with plant or machinery
income from provision of amenities, utilities or any other service connected with renting of
building
any annuity or pension
any prize bond, or winnings from a raffle, lottery
any other amount received as consideration for the provision,
use or exploitation of property, including from the grant of a
right to explore for, or exploit, natural resources
the fair market value of any benefit from use or exploitation of property
Any amount received by a person as consideration for vacating. Tax to be paid in 10 equal
proportion each year
the possession of a building or part thereof, reduced by any amount paid by the person to
acquire possession of such building
Approved Income Payment Plan or Approved Annuity Plan
issuance of bonus shares to shareholder
any amount received as a loan, advance,
deposit for issuance of shares or gift by a person in a tax year from another person except
from crossed chaque drawn on a bank or through a banking channel from a person holding a
National Tax Number be treated as income chargeable to tax under the head Income from
Other Sources for the tax year
Above point will not apply to an advance payment for the sale of goods or supply of services
40 Deduction of losses in computing the amount chargeable under head Income from other sources
in computing the income of a person chargeable to tax under the head Income from Other
Sources for a tax year, a deduction will be allowed for any expenditure paid by the person in
the year to the extent to which the expenditure is paid in deriving income chargeable to tax
under that head, other than expenditure of a capital nature
A person receiving any profit on debt chargeable to tax under the head Income from Other
Sources will be allowed a deduction for any Zakat paid by the person at the time the profit is
paid to the person
Expenditure is of a capital nature if it has a normal useful life of more than one year
Part VII
Exemptions and Tax Concessions
41 Agricultural income
Agricultural income derived by a person will be exempt from tax
42 Diplomatic and UN exemptions
The income of an individual entitled to privileges under the Diplomatic and Consular Privileges
Act,
1972 will be exempt from tax
The income of an individual entitled to privileges under the United Nations (Privileges and
Immunities) Act, 1948, will be exempt from tax
43 Foreign government officials
Any salary received by an employee (a foreign citizen) of a foreign government
44 Exemptions under international agreement
Any Pakistan-source income which Pakistan is not permitted to tax under a tax treaty or Aid
Agreement will be exempt from tax
Any income received by a person (not being a citizen of Pakistan) engaged as a contractor,
consultant, or expert on a project in Pakistan will be exempt from tax under bilateral or
multilateral technical assistance agreement (a grant fund)
45 Presidents honour
Any allowance attached to any Honour, Award, or Medal awarded to a person by the
President of Pakistan will be exempt from tax
46 Profit on debt
Any profit received by a non-resident person on a security issued by a resident person will be
exempt from tax, where,
(a) the persons are not associates
(b) security was issued outsider Pakistan
(c) profit was paid outside Pakistan
(d) security is approved by FBR for this section
47 Scholarships
Any scholarship will be exempt from tax
48 Support payment under agreement to live apart
Any income received by a spouse as support payment under an agreement to live apart will be
exempt from tax
49 Exemption of Federal government, provincial government and local government
income of the Federal Government will be exempt from tax
income of a Provincial Government or a Local Government will be exempt from tax other
than income chargeable under the head Income from Business from a business carried on
outside its
jurisdictional area
any payment received by the Federal Government, a Provincial Government or a Local
Government will not be liable to any collection or deduction of advance tax
Any other corporation, company, authority, body, institution of govt will not be exempt from
tax
50 Foreign source income of short-resident individuals
A person:
(a) who is a resident individual solely by reason of the individuals employment; and
(b) who is present in Pakistan for a period or periods not exceeding three years
will be exempt from tax
This section will not apply to:
(a) any income derived from a business of the person established in Pakistan; or
(b) any foreign-source income brought into or received in Pakistan by the person
51 Foreign source income of returning expatriates
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 will 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 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
will be exempt from tax
53 Exemptions and tax concessions in Second Schedule
The income or classes of income, or persons or classes of persons specified in the Second
Schedule will be exempt from tax
54 Exemption and tax concessions in other laws will not apply until provided in this Ordinance also
55 Limitation on exemption
Part VIII
Losses
56 Set off of losses
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
except income under the head salary or income from property for the year
Where, 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
56-A Set off of losses of companies operating hotels
operating hotels in Pakistan or AJ&K, sustains a loss in Pakistan or AJ&K for any tax year under
the head income from business shall be entitled to have the amount of the loss set off
against the companys income
57 Carry forward of business losses
Where a person sustains a loss for a tax year under the head Income from Business (other
than a loss to which section 58 (speculation)applies) and the loss cannot be wholly set off
under section 56, so much of the loss that has not been set off shall be carried forward to the
following tax year and set off against the persons income chargeable under the head Income
from Business for that year
no loss can be carried forward to more than six tax years immediately succeeding the tax year
for which the loss was first computed
Where a person has a loss carried forward under this section for more than one tax year, the
loss of the earliest tax year shall be set off first
Where the loss referred to in 1st point includes deductions allowed under sections 22, 23, 23A,
23B and 24 that have not been set off against income, the amount not set off shall be added
to the deductions allowed under those sections in the following tax year, and so on until
completely set off. the deductions allowed under those sections shall be taken into account
last
57-A Set off of business loss consequent to amalgamation
The assessed loss (excluding capital loss) for the tax year, other than brought forward and
capital loss, of the amalgamating company or companies shall be set off against business
profits and gains of the amalgamated company, and vice versa, in the year of amalgamation
and where the loss is not adjusted against the profits and gains for the tax year the
unadjusted loss shall be carried forward for adjustment up to a period of six tax years
succeeding the year of amalgamation
58 Carry forward of speculation business losses
Where a person sustains a loss for a tax year in respect of a speculation business carried on by
the person (hereinafter referred to as a speculation loss), the loss shall be set off only
against the income of the person from any other speculation business of the person
chargeable to tax for that year
no speculation loss shall be carried forward to more than six tax years immediately succeeding
the tax year for which the loss was first computed
Where a person has a loss carried forward under this section for more than one tax year, the
loss of the earliest tax year shall be set off first
59 Carry forward of capital losses
Where a person sustains a loss for a tax year under the head Capital Gains (hereinafter
referred to as a capital loss), the loss shall not be set off against the persons income, if any,
chargeable under any other head of income for the year, but shall be carried forward to the
next tax year and set off against the capital gain, if any, chargeable under the head Capital
Gains for that year
no loss shall be carried forward to more than six tax years immediately succeeding the tax
year for which the loss was first computed
Where a person has a loss carried forward under this section for more than one tax year, the
loss of the earliest tax year shall be set off first
59-A Limitation on set off and carry forward of losses
In case of association of persons 4 [any loss] shall be set off or carried forward and set off
only against the income of the association
any member of an association of persons to set off any loss sustained by such association of
persons or have it carried forward and set off, against his income
59-AA Group taxation
Locally incorporated, holding companies and subsidiary companies of 100% owned group may
opt to be taxed as one fiscal unit. In such cases, besides consolidated group accounts as
required under the Companies Ordinance, 1984 (XLVII of 1984), computation of income and
tax payable shall be made for tax purposes
The companies in the group shall give irrevocable option for taxation under this section as one
fiscal unit
The relief under group taxation would not be available to losses prior to the formation of the
group
59-B Group relief
any company, being a subsidiary of a holding company, may surrender its assessed loss
(excluding capital loss) for the tax year (other than brought forward losses and capital losses),
in favour of its holding company or its subsidiary or between another subsidiary of the holding
company
Provided that where one of the company in the group is a public company listed on a
registered stock exchange in Pakistan, the holding company shall directly hold 55% or more of
the share capital of the subsidiary company. Where none of the companies in the group is a
listed company, the holding company shall hold directly 75% or more of the share capital of
the subsidiary company
The loss surrendered by the subsidiary company may be claimed by the holding company or a
subsidiary company for set off against its income under the head Income from Business in
the tax year and the following two tax years
The subsidiary company shall not be allowed to surrender its assessed losses for set off
against income of the holding company for more than three tax years
Where the losses surrendered by a subsidiary company are not adjusted against income of the
holding company in the said three tax years, the subsidiary company shall carry forward the
unadjusted losses in accordance with section 57.
If there has been any disposal of shares by the holding company during the aforesaid period of
five years to bring the ownership of the holding company to less than fifty-five per cent or
seventy-five per cent, as the case may be, the holding company shall, in the year of disposal,
offer the amount of profit on which taxes have not been paid due to set off of losses
surrendered by the subsidiary company.
Loss claiming company shall, with the approval of the Board of Directors, transfer cash to the
loss surrendering company equal to the amount of tax payable on the profits to be set off
against the acquired loss at the applicable tax rate. The transfer of cash would not be taken as
a taxable event in the case of either of the two companies.
The transfer of shares between companies and the share holders, in one direction, would not
be taken as a taxable event provided the transfer is to acquire share capital for formation of
the group and approval of the Security and Exchange Commission of Pakistan or State Bank of
Pakistan, as the case may be, has been obtained in this effect. Sale and purchase from third
party would be taken as taxable event
Part IX
Deductable Allowances
60 Zakat
A person shall be entitled to a deductible allowance for the amount of any Zakat paid by the
person in a tax year under the Zakat and Ushr Ordinance, 1980
60-A Workers welfare fund
A person shall be entitled to a deductible allowance for the amount of any Workers Welfare
Fund
60-B Workers participation fund
A person shall be entitled to a deductible allowance for the amount of any Workers
Participation Fund paid by the person in a tax year in accordance with the provisions of the
Companies Profit (Workers Participation) Act, 1968
Part X
Tax Credits
61 Charitable donations
A person shall be entitled to a tax credit in respect of any sum paid, or any property given by
the person in the tax year as a donation to
(a) any board of education or any university in Pakistan established by, or under, a Federal or a
Provincial law;
(b) any educational institution, hospital or relief fund established or run in Pakistan by Federal
Government or a Provincial Government or a Local Government, or
(c) any non-profit organization
The amount of a persons tax credit allowed for a tax year shall be computed according to the
following formula, namely
(A/B) x C
where
A is the amount of tax assessed to the person for the tax year before allowance of any tax credit
under this Part;
B is the persons taxable income for the tax year; and
C is the lesser of :
(a) the total amount of the persons donations referred to in 1st point in the year, including the fair
market value of any property given; or
(b) where the person is
(i) an individual or association of persons, thirty per cent of the taxable income of the person for the
year; or
(ii) a company, 20% per cent of the taxable income of the person for the year
(A/B) x C
where
A is the amount of tax assessed to the person for the tax year
before allowance of any tax credit under this Part;
B is the persons taxable income for the tax year; and
C is the lesser of
(A/B) x C
Where.-
A is the amount of tax assessed to the person for the tax year, before allowance of any tax credit
under this Part;
B is the persons taxable income for the tax year; and
C is the lesser of
(i) the total contribution or premium referred to in 1st point paid by the person in the year; or
(ii) twenty per cent of the eligible persons taxable income for the relevant tax year; Provided that an
eligible person joining the pension fund at the age of 41 years or above, during the first ten years
starting from July 1, 2006 shall be allowed additional contribution of 2% per annum for each year of
age exceeding forty years. Provided further that the total contribution allowed to such person shall
not exceed 50% of the total taxable income of the preceding year
64 Profit on debt
A person shall be entitled to a tax credit for a tax year in respect of any profit or share in rent
and share in appreciation for value of house paid by the person in the year on a loan by a
scheduled bank or non- banking finance institution regulated by the Securities and Exchange
Commission of Pakistan or advanced by Government or the Local Government or a statutory
body or a public company listed on a registered stock exchange in Pakistan where the person
utilizes the loan for the construction of a new house or the acquisition of a house.
The amount of a persons tax credit allowed under 1st point for a tax year shall be computed
according to the following formula, namely:
(A/B) x C
where
A is the amount of tax assessed to the person for the tax year before
allowance of any tax credit under this Part;
B is the persons taxable income for the tax year; and
C is the lesser of
(a) the total profit referred to in 1st point paid by the person in the year;
(b) 50% per cent of the persons taxable income for the year;
or
(c) 750,000 rupees.
65 Misc provisions related to tax credits
65-A Tax credit for person registered under Sales Tax Act 1990
Every manufacturer, registered under the Sales Tax Act, 1990, shall be entitled to a tax credit
of two and a half per cent of tax payable for a tax year, if ninety per cent of his sales are to the
person who is registered under the aforesaid Act during the said tax year.
For claiming of the credit, the person shall provide complete details of the persons to whom
the sales were made.
No credit will be allowed to a person whose income is covered under final tax or minimum
tax.
Carry forward of any amount where full credit may not be allowed
against the tax liability for the tax year, shall not be allowed
65-B Tax credit for investment
Where a taxpayer being a company invests any amount in the purchase of plant and
machinery, for the purposes of extension, expansion, balancing, modernization and
replacement of the plant
and machinery, already installed therein, in an industrial undertaking set up in Pakistan and
owned by it, credit equal to ten per cent of the amount so invested shall be allowed against
the tax payable, including on account of minimum tax and final taxes payable under any of the
provisions of this Ordinance, by it in the manner provided here
65-C Tax credit for enlistment
Where a taxpayer being a company opts for enlistment in any registered stock exchange in
Pakistan, a tax credit equal to 15% of the tax payable shall be allowed for the tax year in which
the said company is enlisted
65-D Tax credit for newly established industrial undertakings
Where a taxpayer being a company formed for establishing and operating a new industrial
undertaking including corporate dairy farming sets up a new industrial undertaking including
a corporate dairy farm, it shall be given a tax credit equal to hundred per cent of the tax
payable
, including on account of minimum tax and final taxes payable under any of the provisions of
this Ordinance, on the taxable income arising from such industrial undertaking for a period of
five years beginning from the date of setting up or commencement of commercial production,
whichever is later.
65-E Tax credit for industrial undertaking established before the 1st day of July 2011
Where a taxpayer being a company, setup in Pakistan before the first day of July, 2011, invests
any amount, with hundred per cent new equity raised through issuance of new shares, in the
purchase and installation of plant and machinery for an industrial undertaking, including
corporate dairy
farming, for the purposes of:
expansion of the plant and machinery already installed therein;
or
undertaking a new project,
a tax credit shall be allowed against the tax payable for a period of five years beginning from
the date of setting up or commencement of commercial production from the new plant or
expansion project, whichever is later
Chapter X
Part IV
Collection and Recovery of Tax
137 Due date for tax payment
Tax will payable on due date
If tax is to be paid on assessment order or amended assessment order it will be payable in 15
days from date of serving of notice
Tax payable on provisional assessment u/s 122-C will be payable in 60 days of serving a notice
Commissioner can grant extension in time for payment and allow installments
When paying in installments of person defaults any payment whole tax will be immediately
payable
138 Recovery of taxes out of property and through arrest of taxpayer
Commissioner will serve a notice to taxpayer, if he does not pay the tax within due time he
may:
(a) arrest him for 6 months
(b) sale any movable or immovable property
(c) appoint receiver of any movable or immovable property of taxpayer
For doing above commissioner will have powers of Civil Court under Code of Civil Procedure
1908
138-A Recovery of taxes by District Officer (Revenue) upon forwarded by commissioner IR as if it is
revenue dues
District Officer (Revenue) will have power of Civil Court under Code of Civil Procedure 1908
138-B Tax liability will pass on to the estate in bankruptcy
It will be considered current expenditure in the estate
And it will have the first priority over other creditors claims
139 Collection of tax in the case of private companies and associations of persons will be collected from:
(a) Director (b) shareholder (c) member of AOP
140 Recovery of taxes from persons holding money on behalf of a tax payer
141 Liquidators
Liquidators include (a) a liquidators of a company (b) receiver appointed by court (c) trustee of
bankrupt (d) mortgagee in possession
Liquidator will inform within 14 days of being appointed of taking possession to commissioner
Commissioner within 3 months of being notified will inform about sales tax payable
Liquidator will not sell any assets until notified by commissioner
Liquidator will pay the sales tax liabilities due to the person whose assets are in possession
If assets are less than sales tax amount due liquidator will sell the assets
142 Recovery of Tax due by non-resident member of an association of persons will be received from
resident member of AOP
143 Non-resident ship owner or character
Master of ship will furnish commissioner a return showing gross amount in sub-section 1 of
section 7
Commissioner will assess the tax liability and issue assessment order to master of ship
If non-resident owner or master of ship has not furnished the return the commissioner may
give 30 days of departure of ship to file return
Collector customs will not give port clearance until he is satisfied that tax liabilities have been
paid u/s 7
144 Non-resident aircraft owner or character should file return of gross amount to be filed in 45 days
from last days of each quarter
Commissioner will issue tax assessment. The owner has to pay in 3 months if he does not he
will be refused for clearance from any airport of Pakistan
145 Assessment of person about to leave Pakistan
A person leaving Pakistan and not intending to come back to Pakistan will give notice at least
15 days before his departure
Along with notice the person will also file return showing his tax year ending the said date
146 Recovery of tax from person assessed in AJK
If income tax authorities in AJK cannot recover amount from a person because (a) he is in
Pakistan (b) he has not property in AJK
The DC in AJK will forward certificate of recovery to commissioner. Upon receiving such
certificate the commissioner will recover the tax
Certificate will include (a) person residence in Pakistan (b) persons property in Pakistan (c)
amount of tax payable by the person
146-A Initiation, validity, etc of recovery proceedings at any time by commissioner u/s 138-A
146-B Tax arrears settlement incentive scheme