Income Tax Ordinance 2001

INCOME TAX
Tax:
“Tax” means any tax imposed under Chapter II, and includes any penalty, fee or other
charge or any sum or amount leviable or payable under this Ordinance;

Objects of Income Tax Ordinance:

i.The aim and object of income tax ordinance 2001 are as follows:
ii.To simple the law.
iii.To rearrange the provision of income tax law.
iv.To eliminate tax evasion
v.Evolve an equitable tax system.
vi.To rationalize and improve the system as to meet the changing business
circumstances.
vii.To plug loop holes and remove ambiguities.
viii.To introduce a system of assessment leads to create an atmosphere of mutual trust
and confidence between the tax payer and tax officials.
Taxation Officer:
“Taxation officer” means any Additional Commissioner of Income Tax, Deputy
Commissioner of Income Tax, Assistant Commissioner of Income Tax, Income Tax
Officer, Special Officer or any other officer however designated appointed by the
Central Board of Revenue for the purposes of this Ordinance;

Tax Payer:
“Taxpayer” means any person who derives an amount chargeable to tax under this
Ordinance, and includes:

(a) any representative of a person who derives an amount chargeable to tax under this
Ordinance;
(b) any person who is required to deduct or collect tax
(c) any person required to furnish a return of income or pay tax under this Ordinance;

Income Year:
This concept refers to the income tax ordinance 1979. Basically income tax ordinance
2001 not assigns any specify meaning to the income year however section 26(2) of the
income tax ordinance 1979 status that.
• The financial year next preceding the assessment year (in Pakistan financial year
starts from 1st July and end on 30th June next.)
• Any such period as the central Board of Revenue (FBR/CBR) may specify. The
FBR/CBR has an authority to specify any special any special income year.
Previous Year:
Previous year in relation to assessment year means income year in which any
assessee earns his income.

From the desk of: Muhammad Zaeem Farooqui

 Income Tax Ordinance 2001

Tax Year:
Tax year shall be a period of twelve months ending on the 30th day of June and shall be
denoted by the calendar year in which the said date falls.

Types Of Tax Year:

• Normal Tax Year:
A period of twelve months from 1st July to 30th June denoted by the calendar year
in which the normal tax year ends. For the year ending 30th June 2011 tax year shall
be 2011

• Special Tax Year:

Any income year ending other than 30th June is special tax year and denoted by the
calendar year relevant to the normal tax year in which the year end falls.
Special tax year: April 30, 2010 to March 31, 2011 tax year shall be 2011
The FBR has authority to prescribe any special tax year in respect of any particular
class of taxpayers e.g., September 30 has been prescribed for textile Industry. If the
tax year is not specified by the FBR and the taxpayer want to have any special tax
year than he is required to make an application to the FBR specifying the reasons
for the same.

• Transitional Tax Year:

If a normal tax year or special tax year changes then the period from the day next
the following the full tax year to the date of commencement of new tax year shall be
treated as transitional tax year. Normal tax year July 1, 2009 to June 30, 2010 i.e.
tax year 2010 changes to special year Jan 1, 2011 to Dec 31, 2011 i.e. tax year 2012.
In this case, period from July 1, 2010 to Dec 31, 2010 shall be treated as a
transitional tax year i.e. transitional tax year 2011.
Change In The Tax Year:
a) A person using normal tax year may apply to the commissioner to allow him to use
any special tax year.
b) A person using special tax year may apply to the commissioner to allow him to use
any another special tax year or normal tax year.
c) The commissioner shall grant permission subject to conditions, if any, only if the
person has shown a compelling need for the change,
d) If the application is rejected, the commission shall provide an opportunity of being
heard to the person and shall record in the order the reasons for such rejection. In
this case the person may file a review application to the FBR and the decision of the
FBR shall be final.

Total Income:
The total income of a person for a tax year shall be the sum of the person’s under each of
the heads of income for the year.
1. Salary

From the desk of: Muhammad Zaeem Farooqui

 Income Tax Ordinance 2001

2. Income from property

3. Capital Gain
4. Income from other sources
5. Income from other sources

Taxable Income:
The taxable income of a person for a tax year shall be the total income of the person for
the year reduced (but not below zero)by the total of any deductible allowances of the
person for the year.
Following deductions are allowed from total income to compute taxable income:
(i) Zakat except the Zakat deducted from profit on debt under the head of "Income from
other sources".
(ii)Contribution to workers' Welfare Fund, Workers" Participation Fund.”
(iii) Donations (up to 30% of total income) to Sports Board organized by the Government
for promoting sports; Fatima Foundation Karachi; Citizens-Police Liaison Committee
Karachi; Shaheed Zulfiqar Ali Bhutto Memorial Society; Iqbal Memorial Fund; Shaukat
Khanum Memorial Trust Lahore; National Museums; National Libraries; Bagh-e-Quaid-
e-Azam Project Karachi; Relief or Welfare Fund established by the Federal Government.

Tax on Taxable Income.-

(1) Subject to this Ordinance, income tax shall be imposed for each tax year, at the rate
or rates specified in First Schedule, as the case may be, on every person who has taxable
income for the year.

(2) The income tax payable by a taxpayer for a tax year shall be computed by applying
the rate or rates of tax applicable to the taxpayer under this Ordinance to the taxable
income of the taxpayer for the year, and from the resulting amount shall be subtracted any
tax credits allowed to the taxpayer for the year.

(3) Where a taxpayer is allowed more than one tax credit for a tax year, the credits shall
be applied in the following order –
(a) any foreign tax credit allowed under section 103; then
(b) any tax credit allowed under Part X of Chapter III; and then
(c) any tax credit allowed

Person:
(1) The following shall be treated as person for the purpose of this ordinance namely;
(a) An individual.
(b) A company or AOP incorporated formed organized or established in Pakistan or
elsewhere.
(c) The federal Government a foreign government, a political subdivision of a foreign
government, or public international organization.

(2)For the purpose of this ordinance:

From the desk of: Muhammad Zaeem Farooqui

 Income Tax Ordinance 2001

(a) “AOP” includes a firm, a Hindu undivided family, any artificial juridical person and
anybody of persons formed under a foreign law, but does not include a company.
(b) “Company” means:
(i) a company as defined in the company ordinance, 1984.
(ii) a body corporate formed by or under any law enforce in Pakistan.
(iii) a modaraba.
(iv) a body incorporated by or under the law of a country outside Pakistan relating
to Incorporation of companies.
(v) a trust, a co-operative society or a finance society or any other society
established or constituted by or under any law for the time being in force.
(vi) a foreign association, whether incorporated or not, which is the board has, by
general or special order, declared to be a company for the purposes of the
ordinance.
(vii) a Provisional Government.
(viii) a Local Government in Pakistan, or
(xi) a small company as defined in section 2;
(c) “Firm” means the relation between persons who have agreed to share the profits of a
business carried on by all or any of them acting for all.
(d) “Trust” means an obligation annexed to the ownership of property and arising out of
the confidence reposed in and accepted by the owner, or declared and accepted by the
owner for the benefit of another, or of another and the owner and includes a unit trust;
and
(e) “Unit Trust” means any trust under which beneficial interest divide into units such
that the entitlements of the beneficiaries to income or capital are determined by the
number of units held.

Resident or Non Resident Persons:

(1) A person shall be a resident person for a tax year if the person is:
(a) a resident individual, resident company or resident AOP for the year
(b) the federal government

Resident Individuals:
An individual shall be a resident individual for a tax year if the individual
(a) is present in Pakistan for a period of , or periods amounting in aggregate to
183 days or more in the tax year or
(b) deleted
(c) is an employee or official of the Federal Government or a provincial Government
posted abroad in the tax year.

Resident Company:
A company shall be a resident company for a tax year if-
(a) It is incorporated or formed by or under any law in force in Pakistan.
(b) The control and management of the affairs of the company is situated wholly in
Pakistan in any time in the year; or
(c) It is a Provincial Government or Local government in Pakistan.

From the desk of: Muhammad Zaeem Farooqui

 Income Tax Ordinance 2001

Resident Association of persons:

An AOP shall be a resident AOP for a tax year if the control and management of the affairs
of the association is situated wholly or partly in Pakistan at any time in the year.
Income With Reference To Residents And Non-Resident
(i.e. Scope Of Taxable Income)
A resident person is taxable for his world over income subject to agreement for the
avoidance of double taxation (Tax Treaty).A non person is taxable only for his Pakistan
source income subject to Tax Treaty. {Section 11(5)(6)}.
Foreign Source Income Of A Short Term Resident Section—50
An individual shall be exempt in respect of foreign-source income which is not brought
received in Pakistan if he is resident only by reason of his employment and he is Pakistan
for not exceeding 3 years. This section does not apply on business established in Pakistan
by an individual foreigner.

Foreign Source Income Of A Returning Expatriate Section—51

If an individual citizen of Pakistan (returning expatriate) is resident in the current tax year
but was not resident in the 4 preceding tax years, his foreign-source income shall be exempt
in the current tax year and in the following tax year.

Foreign Source Salary Of Resident Individual

Foreign source salary by a resident individual is exempt in Pakistan if he has paid foreign
income tax on foreign country-section 102
Salary earned outside Pakistan shall be exempt if a citizen of Pakistan leaves Pakistan
during a tax year and remain abroad during that tax year section 51(2)

Agricultural Income:
Agricultural income means:
• Any rent or revenue from land in Pakistan used for agricultural purposes
• Any income from land situated in Pakistan from:
a) Agriculture
b) Performance or receiver of rent in kind of any agricultural process to render the
pproduce fit to be taken to market.
c) Sale of such produce in respect of which no process has been performed.
• Any income from:
a) Any building owned and occupied by the receiver of rent or revenue being used for
agricultural purpose.
b) Any building occupied by the cultivator or the receiver of rent in kind for
agricultural process as dwelling house or store house and is in the immediate
vicinity of the agricultural land.

Profit on Debts:
“profit on a debt” whether payable or receivable, means

(a) any profit, yield, interest, discount, premium or other amount, owing under a debt,
other
than a return of capital; or

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 Income Tax Ordinance 2001

(b) any service fee or other charge in respect of a debt, including any fee or charge
incurred in respect of a credit facility which has not been utilized;

Dividend Income:
Dividend includes –
(a) any distribution by a company of accumulated profits to its shareholders, whether
capitalised or not, if such distribution entails the release by the company to its
shareholders of all or any part of the assets including money of the company;

(b) any distribution by a company, to its shareholders of debentures, debenture-stock

or deposit certificate in any form, whether with or without profit, to the extent to
which the company possesses accumulated profits whether capitalised or not;

(c) any distribution made to the shareholders of a company on its liquidation, to the
extent to which the distribution is attributable to the accumulated profits of the
company immediately before its liquidation, whether capitalised or not;

(d) any distribution by a company to its shareholders on the reduction of its capital, to
the extent to which the company possesses accumulated profits, whether such
accumulated profits have been capitalised or not; or

(e) any payment by a private company as defined in the Companies Ordinance, 1984
(XLVII of 1984) or trust of any sum (whether as representing a part of the assets
of the company or trust, or otherwise) by way of advance or loan to a shareholder
or any payment by any such company or trust on behalf, or for the individual
benefit, of any such shareholder, to the extent to which the company or trust, in
either case, possesses accumulated profits; but does not include –

(i) a distribution made in accordance with sub-clause (c) or (d) in respect of any
share for full cash consideration, or redemption of debentures or debenture stock,
where the holder of the share or debenture is not entitled in the event of
liquidation to participate in the surplus assets;

(ii) any advance or loan made to a shareholder by a company in the ordinary course
of its business, where the lending of money is a substantial part of the business of
the company; and

(iii) any dividend paid by a company which is set off by the company against the
whole or any part of any sum previously paid by it and treated as a dividend
within the meaning of sub-clause (c) to the extent to which it is so set off;

From the desk of: Muhammad Zaeem Farooqui