Taxation

CHAPTER – 1
Understanding of Income Tax Ordinance, 2001

PRACTICAL STEPS INVOLVED FOR TAXATION:

In the first we should have the knowledge of the practical steps involved in the taxation process
Step - 1 Recording of business transactions:
During the period a person records the business transactions keeping in view the rules and
regulations of the income tax but this is not compulsory. A person may prepare its books of
accounts on the basis of accounting conventions and at the end of the year it will calculate its
taxable income by making certain adjustments in the profit and loss. In this case accounting profit
and taxable profit will be different.
Taxable Income = total income from different sources

Step - 2 Financial Statement (profit)

Financial statements are prepared at the end of the period and the document which is
important for tax department is the profit and loss account from where the income and
expenditures are assessed.

Step - 3 Calculate the tax liability

It has already been mentioned in step one that if accounts are prepared on the basis of
accounting standards then the taxable income is calculated and also calculate the tax
liability as well.
Step - 4 Filing of Return (Communication with Tax Department)
“Filing” means submission and “Return” is the prescribed form by the tax department on
which a person provides the detail of his income and tax. This return is divided into three
parts.
 Profile
 Computation of Income
 Computation of Tax

Step - 5 Assessment
When the person file the return of income tax the tax department (assessing officer)
evaluate that whether the information provided by the person (assessee) is correct or not.
For this they may call them for other information as required and may made certain
amendments. This process of evaluation is known as assessment and an assessment order is
made. There are different types of assessment procedures are given by the Income Tax
Ordinance 2001
Assesses Tax payer/who is liable to pay tax
Assessment Checking/detailed checking
Assessment officer Who will made the assessment of assesses commissioner income tad
officer,
1
Imran Shahzad (Rise School of Accountancy)
Taxation

Step - 6 Appeals (against the assessment)

If the person is not satisfied with the order made by the department then it has options to go
against the order of the department and may file an appeal. Following rooms are available:
 CIT (Commission of Income Tax) - Appeal
 ITAT (Income Tax Appellate Tribunal)
 Reference to High court

Step - 7 Recovery/collection procedure

The law has given different powers to the assessing officers for the recovery and collection of
income tax that are also discussed in the law.

2
 Taxation

Promulgation of Income Tax Ordinance, 2001

(Travelling from ITO 1979 to ITO 2001)

Note:- (this is for general knowledge not as a part of syllabus)

Authorities legally empowered to amend assessment orders: cases finalised under repealed IT
Ordinance 1979
SOHAIL SARFRAZ
http://www.aajtv.com/news/Business/129435_8detail.html
Aaj TV Online - Pakistan Ki Awaz

ISLAMABAD ( 2009-02-18 04:13:59 ) :Tax authorities are legally empowered to amend income tax
assessment orders finalised under the repealed Income Tax Ordinance 1979. Tax practitioners told
Business Recorder on Tuesday that when the Income Tax Ordinance 2001 was enforced, a
corresponding amendment was made in the Finance Act 2002 to authorise the tax authorities to amend
cases assessed under repealed Ordinance 1979.

Through Finance Act 2002, the department has the legal authority to amend assessment finalised under
the repealed Ordinance 1979. The provision to reopen cases was also available in the repealed
Ordinance. The question relates to dealing with the past issues when a law is repealed and new law
comes into force in place of the old Ordinance.

If the contention of some lawyers is correct that the reopening of cases should be done prospectively,
than how can the department amend the assessments, which were finalised in the previous Ordinance?
There could be many cases of concealment; under-assessment; in correction and misapplications of
laws under repealed Ordinance 1979.

The only question is related to limitations and applicability of tax rates in cases related to repealed
Ordinance 1979. The application of rate would be the same as was applicable in the relevant
assessment year, sources said.

On the other hand, certain lawyers and chartered accountants came up with entirely different viewpoint
on the reopening of assessment under the repealed Ordinance. There is a tax controversy over the
discretionary powers of the commissioners for reopening of income tax assessment orders passed
under the repealed Income Tax Ordinance of 1979.

They said that the new Income Tax Ordinance was promulgated in 2001 and implemented from July 1,
2002. The Ordinance was a 180 degree shift from the already practised law in Pakistan ie, Income Tax
Ordinance, 1979.

The new law was seen as not applicable to the tax conditions of Pakistan, therefore, wholesale
amendments brought into it before it came into force on July 1, 2002 as the Ordinance did not save
many of the provisions and eventualities including Section 65 and 66A of the repealed Ordinance.

Sources said that the Ordinance 2001 suggested that all tax returns filed would be deemed to be
assessed the moment the return was received by the Commissioner of Income Tax under section 120 of
the Ordinance. This was generally publicised as the Universal Self Assessment Scheme. The
provisions of section 122 of the Ordinance provided for the reopening of an already assessed deemed
income, however, there was no enabling provision which could allow the Commissioner to reopen
assessments passed under the repealed Ordinance. Thus, an SRO 633(I)/2002 of September 14,
3
Imran Shahzad (Rise School of Accountancy)
Taxation

2002 was issued as per powers given under section 240 of the Ordinance 2001, ie, Removal of
Difficulties. This SRO amended various provisions of the Ordinance 2001 to allow the Commissioner
to take action on all those assessments that were passed under the repealed Ordinance. This SRO also
amended section 122 (5) of the Ordinance 2001 to give powers of amendment to the Commissioner for
assessments passed under the repealed Ordinance.

Sources said that the amendment brought into section 122(5) of the Ordinance 2001 through SRO was
viewed as an amendment of the statute by a subordinate legislation by the legal fraternity. The said
amendment and SRO was challenged in writ jurisdiction before the Lahore High Court (LHC) and
after detailed arguments from both sides it was declared that SRO 633(I)/2002 of September 14, 2002
is illegal and is not sustainable in the eyes of law.

The same was ordered to be struck down. The department challenged the decision of the LHC before
the Supreme Court of Pakistan. The matter was heard and the decision of the LHC was upheld. The
review application filed by the department was also dismissed. Thus, the SRO 633(I)/2002 was struck
off from the statute book. This clearly reflects that the department had no jurisdiction to amend the
assessments passed under the Repealed Ordinance.

Sources further stated that the department had proposed an amendment in section 122 of the Ordinance
2001 by way of Finance Act, 2003. The provisions of section 122(5) were replaced with a new sub-
section and section 122 (5A) was introduced in the Ordinance 2001. The amendment has proposed that
the said provisions allowed the department to not only reopen and revise the assessments made under
the Ordinance but also the ones passed under the repealed Ordinance.

They were of the view that the law gave it a prospective effect as nothing was said by the legislature as
to from which date it will be made effective. Thus, where the legislature does not give any provision of
law a clear retrospective effect it is deemed to be prospective in nature. This showed that newly
provided provisions of Section 122 (5) & (5A) of the Ordinance 2001 were to be effective from July
01, 2003.

Sources said that the assessments made under the repealed Ordinance 1979 and passed before the
amendments made in Section 122 by Finance Act, 2003 were reopened under Section 122 (5A) of the
Ordinance 2001. Once again the legal fraternity was of the view that the department cannot reopen
passed and closed transaction made prior to July 1, 2003 by exercising the powers given by a law
which came on to the statute book after July 1, 2003.

The notices so issued were challenged in writ jurisdiction of the Sindh High Court at Karachi. The
notice u/s 122(5A) of the Ordinance in the case of Honda Shahrah-e-Faisal was declared to be illegal.
It was also held that the assessments passed under the repealed Ordinance prior to July 1, 2003 are
passed and closed assessments and the department has no power under the Ordinance to revisit them.
These judgements were challenged in appeal before the SC and are pending adjudication.

While other judgements were pending adjudication before the SC another judgement was delivered by
the LHC titled as Idrees Cloth House vs Commissioner of Income Tax. In the said judgement the
provisions of Section 122 (5) were also held to be prospective in nature and not applicable on the
assessments passed under the repealed Ordinance prior to July 1, 2003. All the appeals disposed of by
the LHC have also been challenged in further appeal before the SC.

Experts said that the provisions of Section 122 (5) & (5A) of the Ordinance are a replica of provisions
of Section 65 & 66A of the repealed Ordinance. In simple words the first one deals with amendment of
an assessment while the second one deals with the revision of an assessment.
4
 Taxation

Altogether there are more than 800 appeals pending before the Supreme Court. These appeals were
fixed before the apex court on February 4, 2009 when it was ordered by the court that the appeals be
identified in categories. The appeals were adjourned for this reason to February 10, 2009.

On the said date the department identified the appeals into three categories but again on the objection
of the respondents it was ordered that the FBR and the lawyers of the respondents sit together and
identify the main categories. The FBR and the respondent lawyers sat together in the Supreme Court
Bar and agreed on 6 categories.

The same were presented to the court and it was ordered that the FBR will list all the cases into the
categories identified and complete all the paper books by March 10, 2009. After this has been done the
service of notices will also be completed with the help of the department. The cases have now been
ordered to be listed on April 6, 2009, lawyers added.

5
Imran Shahzad (Rise School of Accountancy)
Taxation

Construction of the Law:

Income tax ordinance 2001

Ordinance Schedule Rules

General Rules/provision Schedule is a part of ordinance. Explanation of the

There are 7 schedule ordinance
First - Tax Rates on Persons
Second - Exemptions
Third - Depreciation , Initial All, Pre.Com
Fourth - Profit and Gains of Insurance Business
Fifth - Profit and Gains of Exploration
Sixth - Provident Fund
Seventh - Profit and Gains of Banking Company

Difference between Income Tax Ordinance, Schedule and Income Tax Rules:
In Ordinance rules and regulations are given and in the Income Tax Rules, explanations and application
of the provisions are given. For example, in ordinance the structure of salary is given that it may
include certain facilities (perquisites) provided by the employer and in the Rules the method of
calculations are given. The schedule is a part of a Ordinance. There are seven schedules in Income Tax
Ordinance, 2001. In schedules tax rates, privileges, exemptions and rules for special businesses i.e. bank
and Insurance etc are given.

How to read the law:

Income Tax Ordinance and Rules are segregated into Chapters, Parts, Divisions, Sections, Sub-sections,
Clauses and Sub-Clauses. There are 12 chapters and 240 Sections. If chapters are divided into parts and
parts into divisions and so on up sub-clauses if required. Chapters and sections are continuous but
divisions and parts start for each chapters and divisions e.g

Chapters III Tax on Taxable Income

PART IV INCOME FROM BUSINESS
Division I Income from Business
Section 18 Income from business include
Sub-Section 1 of 18 – write as 18(1) Income chargeable to tax under Business
Clause “a” of Sub section 1 18(1)(a) the profits and gains of any business carried on by a person at any time in the
year;

6
 Taxation

Classification
Chapters
Parts
Division
Provisions starts from
Sections
Sub Sections
Clauses
Sub Clauses

Definitions:

All laws define the terms in their own ways and in order to understand the law we must understatnd these
definitions because these are immense important.

Definitions

Inclusive Inclusive & Exclusive Exclusive

It retains its ordinary dictionary This definitions has both elements It excludes the ordinary dictionary
meaning and also acquires the meaning and gives definitive
meaning assigned to the term or meaning to the term or phrase.
phrase by the definition given in Banking company means a Starts with the word mean/means.
the statute. banking company as
Starts with the word includes. defined in the Banking Agricultural income means an income that
Companies Ordinance satisfies following conditions.
Person include: 1962 and includes any 1) Income is derived from land that
body corporate which may be in the form of rent or
 Individual
transacts the business of revenue.
 AOP
 Company 2) Land is situated in Pakistan.
 Government
3) Land is used for agricultural
purpose.

CLAUSES

Superlative Subordinate
clause clause
Starts with the Starts with the
word word
“Notwithstanding “Subject to the
anything provision of”
contained”

7
Imran Shahzad (Rise School of Accountancy)
Taxation

CHAPTER – 2
Computation of Tax Liability of a Person

STEPS INVOLVED FOR THE CALCUALTION OF TAX :

Return is divided into three parts:

Profile Computation of Income Computation of Tax

Name: Assessee Tax on taxable income
Income from Salary (in accordance with the first schedule)
Status: xxxxx
Income from property A - Less: Tax Credits
Personal status: I - Senior Citizen Allownce
(IND / AOP/ CO) Income from business II- Full Time Teacher All
Residential status: III- Foreign Tax Credit
(Resident / Non-Residet) Capital gains:
B - Less: Average Relief (IPDP)
Other sources: Investment in shares X
Less: Person fund X
Zakat Donation X
Donation u/c 61 Profit on debt X
Worker welfare fund - WWF
Tax year: Worker profit participation fund - C – Advance Tax
WPPF
Add: Collection of Tax (X)
Share from AOP Deduction of Tax (X)

Taxable income XXXX Tax payable/refundable XXXX

8
 Taxation

PERSON:
Person may be a salaried or non salaried person. Person is divided into three parts

Rs. Rs.
Salaried 500,000
Non-salaried 17,500
AOP 50,000
Company 35% 175,000
Small company 20% 100,000
Salary 700,000 700,000
Capital gain 600,000
Other resources 200,000 200,000
1500,000 950,000
700,000  100 = 46%
1,500,000
If the rate exceeds 50% than the person is salaried.
If the rate is below 50% the person is non-salaried.
Illustration:
For the tax year 2009 the following is the detail of the taxable income of Mr. X.
Rs.
Salary 900,000
Income from business 500,000
Income from other sources 100,000
Required:
Calculate taxable income of Mr. X and tax liability their own:
= 900,000  100
1,500,000

9
Imran Shahzad (Rise School of Accountancy)
Taxation

= 60%

10
 Taxation

Mr. X is a salaried person

= 1,500,000  12.50% = 187,500

RESIDENTIAL STATUS:

Resident Non-residents

Pak source Pak-source income

income

Foreign source
income

How to find the residential status of the person.

PERSONS

Salaried Non-salaried AOP Company

Individual
If an individual live 183 days. In Pakistan he If the management of an AOP 1. If the company is in
is a resident person. live in Pakistan wholly or corporated in Pakistan
partly at any time then
Feb 2. If the management and
March control of the company is
in Pakistan
April
3. If it is provincial
May
Government or it is
June Federal Government
August
Sept

Financial year: Jan – Dec.

1
Income year: /1 – 31/12
1
/7 – 30/6
¼ – 31/03
Tax year → ends on 30 of June
Taxable salary > 50% → salaried person

AOP:
If the management of an AOP is live in Pakistan. Wholly or partly at any time then AOP shall be resident. W1.
11
Imran Shahzad (Rise School of Accountancy)
Taxation

TAX YEAR

Normal Special Transitional

1. Practical steps
2. Income Tax Ordinance
 Ordinance
 Schedule
 Rules
3. How to read law
4. Laws
 Inclusive
 Inclusive/exclusive
 Exclusive
5. Clauses
 Superlative
 Subordinater
6. Division of returns
7. Person
8. Residential Status

Sole provider
+
Partnership Ind/AOP Vs Company
Same rate are Slabe rate
Plan salaried
+
AOP If the rate are increased
Name rater are The slabe rate are also increased

12
 Taxation

Every year we see a budget on 30th June.

Profile Computation of taxable income Computation of tax liability
Name: Assesse Salary: Tax on taxable income
Less: Average relief
Personal status: Income from property: Investment in store
Pension fund
Residential status: Income from business Donation
Profit on debt
Capital gains: Advanced tax

Other sources:
Less: WWF
Tax year: Worker profit WPPF
participation fund
ZAKAT
DONATION
Taxable income

Difference between private & public limited company

Public company
1. If the company is listed in any stock exchange that company shall be listed company
2. 50% or more shares are held by F/G/PG. (PIA, PTCL, WAPDa)
3. 50% or more shares are held by a company which is wholly owned subsidiary of a toriean Govt.
4. A unit trust
Private company: A company which is not a public company:
(a) Banking Company:
A company is banking company as defined in Banking Ordinance in 1961.
(b) A company is a banking company which transact the business of a banking company.

Tax year:
Financial year: Jan – Dec.
Income year:
e.g co. X 1/1 → 31/12/08
Y 1/4 → 31/3
Z 1/X→ 31/09
Q 1/7 → 30/06

Tax Year:
(B/S) cut off date
Tax year
13
Imran Shahzad (Rise School of Accountancy)
Taxation

X 1/1/08 → 31/12/08 2009

Y 1/4/08 → 31/03/09 2009
Z 1/X/07 → 30/09/08 2009
Q 1/7/08 → 30/06/09 2009
2009

Normal tax year:

All those company having the income year ending on 30th, June is called a Normal tax year.
There would be no effect of tax year types. These are only the terms.

Transitional tax year:

The word is derived from transit. A transitional period will be created when on assesse applies for the
change of income year i.e from normal year to special year or vise versa. Or when switches from one
special year to another special year.

For example:
Suppose that X ltd. Normal tax year is ending on 30th June, 2008. The company has applied with the
CIT to change its Income year from 30 June to 30 of September to every year.

Required:
Compute the normal tax year, transitional tax year and special tax year.

Solution:
Tax year
1/07/07 → 30/06/08 12 month 2008
Normal to special 1/07/08 → 30/09/08 3 month 2009
1/X/08 → 30/09/09 12 month 2010

1/07/08 30/09/08

1/07/07 30/06/08 1/X/08 30/09/09

Transitional period
According to tax year ordinance the tax year should not be exceeded to 12 month.

14
 Taxation

Returning expatriate: For individual

2001 2002 2003 2004 2005 2006

NR NR NR NR + +

Example:
1/1/08 → 31/12/08

1/4/08 → 30/03/10

Tax year
1/01/08 → 31/12/08 2009
Special to special 1/01/09 → 30/03/09 2009
1/04/08 → 30/03/10 2010

Computation of taxable income

Salary:
Any income drived from employee to employer

Income (Deduction)
Expenditure

Taxable income Exempt income Admissible In-admissible

(revenue – (Allowed) (Disallowed)
expense)

Revenue 100,000
Expenses (70,0000
Taxable income 30,000

Income from property:

Any rent received from immoveable property

Income fro business:

Any income generated from business, trade, commerce or inform a profession
(a) speculation business
(b) Non speculation business

Capital gain
Income received from any gain or loss from the disposal of capital assets shall be tax under the head
capital gain.

Capital assets:
Capital assets does not include intangible assets, immoveable, depreciable and other assets.

15
Imran Shahzad (Rise School of Accountancy)
Taxation

Example of capital assets:

1. Shares
2. Debentures
3. Jewellery
4. Painting
5. Medallions / medals
6. Antiques
7. PTCL voucher
8. Coins
9. Postage stamp
10. Rare manuscript

Other sources:
Any income that is not fallen any of the above four head. The income is fallen on other source.
Dividend earned by a person and the person have not the business of dividend

Foreign income of a returning expatriate: Sec: 51

Who has left the country and established foreign country and returning back permanently, his foreign
source income shall be exempt in the current tax year and in the following tax year.

Foreign source income of a short term resident Section: 50

1. Short term resident (3 years maximum)
2. No foreign income is brought in Pakistan.
3. Comes to Pakistan due to employment.

Foreign source salary of resident individual: Section 102

1. Income earned in foreign
2. Tax is paid in foreign country for that

16
 Taxation

Marginal relief:
Marginal relief for only salaried person.
This is a new concept that is introduced in financial year 2008 to 2009 e.g.
Rs. 1,700,000 @ 12.50% = 212,500
Increment
Rs. 1,7820,000 @ 14% = 240,800
_____ _____
20,000 28,300
The tax rate will be increased marginally
Normal:
1,720,000 @ 14% = 240,800
Marginal relief:
1,700,000 @ 12.50% 212,500 500,000 → 20%
Marginal relief 20,000 ______ 1,050,000 → 30%
1,72,000 (b) 220,500 2,000,000 → 40%
4,450,000 → 50%
Tax liability = Rs. 220,500 4,450,000 → 60%
Which ever is less a and b is taxable
Example: 1
7. Rs. 560,000 @ 4.5% (a) = 25.200
6. Rs.550,000 @ 3.50% = 19,250
Marginal amount
550,000 @ 3.50% = 19250
10,000 @ 30% = 3,000
560,000 22,250
Rs. 22,250 will be taxable
Example: 2
7. Rs. 590,000 @ 4.5% (a) = 26,550
Marginal amount
Rs. 550,000 @ 3.50% = 19,250
40,000 @ 30% = 12,000
590,000 (b) 31,250

Rs. 26,550 will be taxable

Example: 3
16. Rs. 2,280,000 @ 16.00% (a) = 364,800
Marginal account
15. Rs. 2,250,000 @ 15.00% 337,500
70,000 @ 50% 15,000
2,280,000 352,500
Example: 4
Rs. 2,320,000 @ 16.00% (a) 371,200
Marginal amount
Rs. 2,250,000 @ 15.00% 337,500
Rs. 70,000 @ 50% 35,000
2,320,000 (b) 372,500

Average Relief:
17
Imran Shahzad (Rise School of Accountancy)
Taxation

Tax Liabilities:
Tax Liabilities xxx
Tax Credit:
a) Full time teacher allowance
b) Foreign tax credit
c) IPDP
i) Investment in share
ii) Pension fund
iii) Donation
iv) Profit on debt
Formula of Average Relief:
Tax Liability × (Amount eligible for Average relief)
Taxable Amount
I P D P
10 20 30 40
3 5 0 5
(Note: The above rule is applicable in computing the amount eligible for Average Relief.)
Example: Rs.
Total Taxable Income 1,700,000
Tax liability @ 12.5% ( 1,700,000 x 12.5%) 212,500
Investment made in actual 400,000

So, as per the IPDP- Rule

Actual amount of investment 400,000
Taxable income (1,700,000 x 10%) 170,000
OR 300,000
(Whichever is less, will be eligible for Avg. Relief)
So,
Average Relief = 212, 500 x 170,000
1,700,000
Average Relief = Rs. 21,250

Reduction in Tax Liability:

18
 Taxation

Part-III of second schedule deals with the provisions, which reduce the tax liability of a tax
payer. These are:

a) Senior Citizen Allowance:

The tax liability of the taxpayer is reduced by fifty percent (50%), if the following
conditions are satisfied:
a) The person is 60 or more of the age on the first day of the tax year; and
b) The taxable income of the person does not exceed Rs. 500,000

b) Full Time Teacher Allowance:

In the case of full time teacher or a researcher , the tax payable shall be reduced by an
amount equal to 75% of tax payable by him on his income from salary, if
a) He is employed in a non-profit educational or research institution (including
government training and research institution)
b) That institution is recognised by:
i) Higher Education Commission
ii) Board of Education or;
iii) A University recognised by the Higher Education Commission

Foreign Tax Credit:

a) Any foreign source income of a resident taxpayer, other than salary income, shall be
chargeable to tax under the income tax ordinance (2001). However he shall be allowed a tax
credit in respect of the foreign source income of the amount lesser of the following:
i) The foreign income tax paid; or
ii) The Pakistan income tax payable in respect of net foreign source income computed at
average rate of Pakistan income tax.
Note:
i) For the purpose of foreign tax credit the average rate of Pakistan income tax is
computed on basis of tax on taxable income.
ii) Net Foreign Source Income = Total foreign source income – Any deduction
allowed (under the Income Tax Ordinance(2001)
b) Foreign income tax is to be paid in the foreign country within the period of two (2) years
from the end of tax year in which the income is earned, in case of non-payment of tax, the
tax credit allowed shall be treated as tax liability. eg

2009 2010 2011 2012 2013

19
Imran Shahzad (Rise School of Accountancy)
Taxation

If the foreign source income relates to the tax year 2009, then
Pakistan Source Income = 400,000
Foreign Source Income = 50,000
Total Taxable income = 450,000

Tax Liability:
Tax on taxable income = 45,000
Less: Foreign tax credit (W-1) =
(W-1)
A) In respect of Income from other sources:
Less of:
i) Foreign income tax paid = 4,000
OR
ii) Pakistan Income Tax
45,000 x 50,000 = 5,000 4,000
450,000
B) In respect of income from business:
Less of:
i) Foreign Income Tax paid= 6,000
OR
ii) Pakistan Income Tax
45,000 x 50,000 = 5,000 5,000
450,000
Total Tax Credit 9,000

Note:
a) And, if the tax liability is not paid till the end of year 2012, then the tax credit
allowed as reduction shall be included in the taxable income of Tax Year 2013.
b) If the foreign income falls under different Heads of Income, then it shall be charged
to tax under their respective heads.
Investment in Shares:
A person other than a company shall be entitled to a tax credit, at the average rate of tax, for a
tax year, if the taxpayer has made investments in purchase of
a) New shares offered to the public by a Company listed on stock exchange
b) Shares sold by Privatization Commission of Pakistan.
And the taxpayer is;

20
 Taxation

a) Is the original allottee

b) Shares are not disposed off before the period of 12-months
The amount of tax credit hall be computed by the following formula:
(A / B) x C
A = Tax liability of the person before any tax credit
B = Taxable income of the person
C = is lesser of
a) Total cost of acquiring the shares
b) 10% of the person’s taxable income for the year
c) Rs. 300,000
Contribution to Approved pension Fund:
An Eligible Person shall be allowed a tax credit(at average rate of tax) in respect of
contribution to Approved Pension Fund, if the following conditions are satisfied;
a) The person is deriving income under the head ‘Salary’ and ‘Income from Business’.
b) The pension fund is approved under the Voluntary Pension System Rules,(2005)
c) The amount of tax credit, for the tax year, shall be computed by the following
formula:
(A / B) x C
A = Tax assessed for the year before any tax credit
B = Total Taxable income of the person
C = is lesser of
a) Total contribution
b) 20% of taxable income of the person
c) Rs. 500,000
*Eligible Person: is
a) The person who has National Tax No.
b) He is a Pakistani and holds computerised National Identity Card

Donations to Approved Charitable institutions:

A person shall be entitled to a tax credit;
a) As a deduction of total amount of donation out of total income. However the
amount of donation to such institutions should not increase the following limits:
i) 30% of taxable income of the person, in case of Individual or AOP.
ii) 15% of the taxable income of the company, in case of the company.
b) As a tax credit at the average rate of tax if the following conditions are satisfied:
21
Imran Shahzad (Rise School of Accountancy)
Taxation

i) Donation have been made to the following institutions, run by the Federal, or
Provincial Government
a) A Board of Education
b) A University
c) An educational institutions
d) A hospital
e) A relief fund
ii) Any non-profit organisation
iii) The tax credit is restricted upto the lesser of the following amounts:
a) Total amount of donation
b) 15% of taxable income for the year, in case of the company
c) 30% of the taxable income for the year, if the person is individual orAOP
Profit on Debt:
A person shall be entitled to a tax credit, at the average rate of tax, for a tax year for an amount
paid as an interest (i.e. share in rental income and share towards appreciation in the value of
house) on loans borrowed for acquisition of houses, if;
a) The amount of loan has been utilized for the construction or acquisition of houses.
b) The loan has been taken from:
i) A scheduled bank
ii) A non-bank finance institution regulated by the SECP
iii) The Government
iv) A local Government
v) A statutory body
vi) A public company listed on a registered stock exchange in Pakistan
The amount of tax credit shall be computed by the following formula:
(A / B) x C
A = Tax liability
B = Total taxable income for the tax year
C = is the lesser of;
a) Total amount of profit on debt paid by the taxpayer in the tax year
b) 40% of the taxable income of the taxpayer
c) Rs. 500,000
Problem: 1A
Name:
Personal : Salaried
Residential: Resident
Tax year : 2009
Computation of Taxable Income:
22
 Taxation

Salary = 400,000
Capital Gain = 90,000
Foreign Source income = 150,000
Less:
Zakat = (7,000)
Taxable Income = 633,000
Computation of Tax Liability:
a) Tax on Rs. 633,000 @ 4.50% = 28,485
OR
b) Marginal Relief:
550,000 @ 3.50% = 19,250
83,000 @ 30% = 24,900
633,000 44,150
Which ever is less: = 28,485
Less:
1) Full time teacher allowance:
[(28,485 / 633,000) x 400,000] x 75% = (13,500)
14,985
2) Foreign Tax Credit:
a) Actual Tax paid: 30,000
OR
b) [(14,985 / 633,000) x 150,000]= 3,551
Whichever is less = (3,551)
11,434

3) Investments in Shares ( N-1) = (1,143)

4) Pension Fund (N-2) = -
5) Donation (N-3) = (1,716)
6) Profit on debt (N-4) = (162)
Total Tax Liability = 8,413

(N-1) Investment in shares:

(A / B) x C
(11,434 / 633,000) x 63,300 = 1,134
A= Tax Payable = 11,434
B= Taxable income = 633,000
C= Lesser of:
a) Investment = 10,500
b) 10% x 633,000 = 63,300
c) Rs. 300,000
(N-2) Pension Fund:
Not given.
23
Imran Shahzad (Rise School of Accountancy)
Taxation

(N-3) Donation:
= [(11,434 / 633,000) x 95,000)] = 1,176
Donation = 95,000
OR
30% x 633,000 = 189,900
Whichever is less.
(N-4) Profit on Debt:
= [(11,434 / 633,000) x 9,000] = 162

Profit = 9,000
OR
40% x 633,000 = 253,200
OR
Rs. 500,000

24