BUSINESS

Who can run a business?

- Individual / AOP
- Company

Salary vs Business Income

BUSINESS
Business includes any trade, commerce, manufacture,
profession, vocation or adventure or concern in the nature
of trade, commerce, manufacture, profession or vocation,
but does not include employment
BUSINESS Section 18
• The profits and gains of any business carried on by a
person at any time in the year;
• Any income derived by any trade, professional or
similar association from the sale of goods or provision
of services to its members;
• Income from hire or lease of tangible movable property;
• The fair market value of any benefit or perquisite,
derived by a person in the course of, or by virtue of, a
past, present, or prospective business relationship
(Explanation: Waiver of profit on debt or the debt itself)
BUSINESS Section 18
• Any management fee derived by a management
company including a modaraba management company
• (2) Any profit on debt derived by a person where the
person‘s business is to derive such income shall be
chargeable to tax under the head ―Income from
Business and not under the head ―Income from Other
Sources.
• For tax purposes financial statements must prepared according to
the tax rules (ITO 2001)
• Either we make a new profit & loss
• Or we adjust (modify) the existing P&L (accounting) and convert it
into P&L (tax)
• We start
• Thisfrom
P&L profit before
is prepared undertax (Net Profit)
accounting rules and make adjustments
• Large size businesses will be using IFRS;
one by one
• medium size businesses will be using IFRS for
• P&L (accounting)
SMEs is prepared under accounting rules
•- Small
Large sizesize businesses
businesses willAFRS
will be using be using IFRS;
- (Accounting
Medium and sizeFinancial Reporting Standards)
businesses will be using IFRS for SMEs
for SSEs
•- Sole
Small size businesses
proprietors doing business will
may be using AFRS (Accounting and
be using
Financial
cash basis Reporting
of accounting Standards) for SSEs
• All these are accounting the different accounting
- Sole proprietors doing business may be using cash basis of
rules for preparing financial statements
accounting
• All these are using different accounting rules for preparing financial
statements
 Profit & Loss
‘000 ‘000
Revenue 9,000
Salaries & Wages 2,262
Car Expenses 200
Gifts and donations 250
Legal charges 60
Rent and maintenance 1,550 (4,322)
Profit Before Tax 4,678
Tax (978)
Profit After Tax 3,700
Section 20
Deductions:
• A deduction shall be allowed for any expenditure
incurred by the person in the year wholly and
exclusively for the purposes of business.
• For animals that are not stock-in-trade, that have died
or become useless, cost less salvage value.
• Depreciation, amortization and such other expenses
(section 22, 23, 24 and 25)
Section 21
Deductions not allowed:
a) Any tax paid or payable that is levied on the profits or gains, fines or
penalties for violation of law
b) any amount of tax deducted under Division III of Part V of Chapter X from
an amount derived by the person (Deduction at source)
c) any expenditure from which the person is required to deduct or collect tax
unless the person has paid or deducted and paid the tax.
Provided that disallowance in respect of purchases of raw materials and
finished goods under this clause shall not exceed twenty per cent of
purchases of raw materials and finished goods.
Provided further that recovery of any amount of tax under sections 161 or
162 shall be considered as tax paid
d) any entertainment expenditure in excess of such limits or in violation of
such conditions as may be prescribed (Rule 10 of ITO)
Rule 10
Entertainment Expenses:
“Entertainment" means the provision of meals, refreshments, and reasonable
leisure facilities in accordance with the tradition of business and subject to
overall norms and customs of business in Pakistan.

Expenditure incurred on the entertainment of persons related directly to the

person's business.
Rule 10
Entertainment Expenses:
(a) expenditure incurred outside Pakistan on entertainment in connection
with business transactions or where such expenditure is allocated as
head office expenditure;
(b) expenditure incurred in Pakistan on entertainment of foreign customers
and suppliers;
(c) expenditure incurred on entertainment of customers and clients at the
person's business premises;
(d) expenditure incurred on entertainment at a meeting of shareholders,
agents, directors or employees; or
(e) expenditure incurred on entertainment at the opening of branches.
Section 21
Deductions not allowed:
e) Any contribution made by the person to a fund that is not a recognized provident
fund, approved pension fund, approved superannuation fund or approved gratuity fund;
ee) an amount in excess of fifty percent of contribution made by a person to an
approved gratuity fund, an approved pension fund or an approved superannuation fund
f) any contribution made by the person to any provident or other fund established for the
benefit of employees of the person, unless the person has made effective arrangements
to secure that tax is deducted under section 149 from any payments made by the fund
in respect of which the recipient is chargeable to tax under the head "Salary";
(g) any fine or penalty paid or payable by the person for the violation of any law, rule or
regulation
h) any personal expenditures incurred by the person
i) any amount carried to a reserve fund or capitalised in any way;
j) any profit on debt, brokerage, commission, salary or other remuneration paid by an
association of persons to a member of the association (relevant for AoP)
Section 21
Deductions not allowed:
l) Any expenditure for a transaction, paid or payable under a single account head which, in aggregate,
exceeds Rs. 250,000, made other than by a crossed cheque drawn on a bank or by crossed bank draft or
crossed pay order. Provided that online transfer of payment from the business account of the payer to the business account of payee as
well as payments through credit card shall be treated as transactions through the banking channel, subject to the condition that such
transactions are verifiable from the bank statements of the respective payer and the payee

This clause is not applicable to:

- Expenditures not exceeding Rs. 25,000
- Except for payment of Utility bills, Freight charges, Travel fare, Postage and
payment of taxes, duties, fines or any other statutory payment.
2[Provided further also that this clause shall not apply to a company from the date clause (la) has been made
effective through the notification issued by the Board.
(la) any expenditure by a taxpayer being a company for a transaction, paid or payable under a single account
head which, in aggregate, exceeds rupees two hundred and fifty thousand, made other than by digital means from
business bank account of the taxpayer notified to the Commissioner under section 114A:

Provided that this clause shall not apply in the case of-

(a) expenditures not exceeding Rupees twenty-five thousand; and (b) expenditures on account of — (i) utility bills;
(ii) freight charges; (iii) travel fare; (iv) postage; and (v) payment of taxes, duties, fee, fines or any other statutory
obligation:
Section 21
Deductions not allowed:
l) Any expenditure for a transaction, paid or payable under a single account head
which, in aggregate, exceeds Rs. 250,000, made other than by a crossed cheque drawn
on a bank or by crossed bank draft or crossed pay order. Provided that online transfer of
payment from the business account of the payer to the business account of payee as well as payments
through credit card shall be treated as transactions through the banking channel, subject to the condition that
such transactions are verifiable from the bank statements of the respective payer and the payee

This clause is not applicable to:

- Expenditures below Rs. 25,000
- Utility bills, Freight charges, Travel fare, Postage and payment of taxes, duties,
fines or any other statutory payment.
Section 21
Deductions not allowed:
This clause is not applicable to:
- Expenditures not exceeding Rs. 25,000
- Except for payment of Utility bills, Freight charges, Travel fare, Postage and
payment of taxes, duties, fines or any other statutory payment.
2[Provided further also that this clause shall not apply to a company from the date clause
(la) has been made effective through the notification issued by the Board.
(la) any expenditure by a taxpayer being a company for a transaction, paid or payable
under a single account head which, in aggregate, exceeds rupees 250,000 made other than
by digital means from business bank account of the taxpayer notified to the Commissioner
under section 114A:
Provided that this clause shall not apply in the case of-
(a) expenditures not exceeding Rupees 25,000; and (b) expenditures on account of — (i)
utility bills; (ii) freight charges; (iii) travel fare; (iv) postage; and (v) payment of taxes, duties,
fee, fines or any other statutory obligation:
Provided further that this clause shall be effective from such date as the Board may notify.]
Section 21
Deductions not allowed:
(m) any salary paid or payable exceeding 32,000 rupees per month to an individual]
other than by a crossed cheque or direct transfer of funds to the employee’s bank
account or through digital means
(n) except as provided in Division III of this Part, any expenditure paid or payable of a
capital nature;
(o) any expenditure in respect of sales promotion, advertisement and publicity in excess
of 10 per cent of turnover incurred by pharmaceutical manufacturers
Section 21
Deductions not allowed:
(p) any expenditure on account of utility bill in excess of such limits and in violation of such
conditions as may be prescribed; and
(q) any expenditure attributable to sales made to persons required to be registered but not
registered under the Sales Tax Act, 1990 by an industrial undertaking computed according to
the following formula, namely:-
(A/B) x C (D/T) x S
Where—
A is the total amount of deductions claimed under this Part;
B is the turnover for the tax year; and
C is the total amount of sales exclusive of sales tax and federal excise duty to
persons required to be registered but not registered under the Sales Tax, 1990
where sales equal or exceed rupees one hundred million per person:
Provided that disallowance of expenditure under this clause shall not exceed ten percent of
total deductions claimed under this Part:
Ali, born on 30th May 1954, has following information for
his consulting business for the year ended June 30, 2016:
‘000 ‘000
Revenue 9,000
Salaries & Wages (note 1) 2,262
Car Expenses (note 2) 200
Car depreciation (note 6) 700
Gifts and donations (note 3) 250
Legal charges (note 4) 60
Rent and maintenance (note 5) 1,550 (5,022)
Net profit 3,978
 ‘000
Salaries & Wages (note 1) 2,262
Note 1: Salaries include:
• Ali’s monthly salary of 100,000 and monthly salary of
Zahid of 60,000. Zahid is Ali’s brother and manages
accounts and administration for the business. Both
these amounts are directly credited in their
respective bank accounts on the last day of the
month.
• One office assistant is paid 26,000 monthly and a
peon gets 22,500 monthly. Both these amounts are
paid in cash at the end of the month.
 ‘000
Salaries & Wages (note 1) 2,262
Note 1: Salaries include:
• Ali’s salary 1,200,000 = withdrawal from business
(not an allowable expense)
• Zahid’s salary = 60,000 X 12 = 720,000 paid through
banking channel (allowable expense)
• Office assistant salary = 26,000 X 12 = 312,000 (paid
through cash, however, since less than 32,000 p.m. therefore
allowable expense)
• Peon’s salary = 22,500 X 12 (paid through cash,
however, since less than 32,000 p.m. therefore allowable
expense)
 ‘000
Car Expenses (note 2) 200
Note 2:
• Car expenses include 120,000 relating to Ali’s car,
which is used 25% for personal use. The remaining
expense pertains to Zahid’s car.
 ‘000
Car Expenses (note 2) 200
Note 2:
• Ali’s car expenses 120,000 (since 75% related to
business, therefore 120,000 X 75% = 90,000
allowable expense)
• Zahid’s car expense 80,000 (allowable expense)

Car expenses (as per tax laws) 170,000

 ‘000
Car Depreciation expenses (note 6) 700

Note 6:
• A car costing 3,000,000 was purchased by Ali on 1st
July 2015. He estimates 25% of his use of the car is
for personal purposes.
• Another car costing Rs. 1,500,000 was purchased on
1st December 2015 and given to Zahid. He estimates
40% of his use of the car is for personal purposes.
Depreciation expense in accounting is computed using
straight line method with 5 years life
 ‘000
Car Depreciation expenses (note 6) 700
Note 6:
• Accounting depreciation disallowed

• Tax depreciation allowed 506,250

 ‘000
Gifts and donations (note 3) 250
Note 3: Gifts and donations include:
a) Gift of a LED TV costing 60,000 to Zahid on 1.1.16
b) Gift of New Year Diaries costing 40,000 to clients of
the firm. The diaries have the name of the firm
embossed at the front.
c) Donation of 25,000 to Fatmid Foundation, an
organization listed in Thirteenth Schedule
d) Donation of 50,000 to an approved NPO
e) Donation of 75,000 to a distant relative who is facing
financial difficulties.
 ‘000
Gifts and donations (note 3) 250
Note 3:
a) Gift of a LED TV to employee 60,000, i.e. part of salary
(allowable expense)
b) Gift of New Year Diaries with company’s name, therefore
promotional expenses 40,000 (allowable expense)
c) Donation of 25,000 to Fatmid Foundation – (not allowable
expense, however, eligible for tax credit)
d) Donation of 50,000 (not an allowable expense, however, tax
credit)
e) Donation (relative) of 75,000 (not allowable expense)

Gifts and Donations (as per Tax Laws) 100,000

 ‘000
Legal charges (note 4) 60
Note 4:
• Legal charges include 25,000 paid to a lawyer to
defend the firm’s internet domain name.
• Another lawyer was paid 35,000 to appear in a family
court on Zahid’s behalf.
 ‘000
Legal charges (note 4) 60
Note 4:
• Legal charges related to business 25,000 (allowable
expense)
• Another lawyer – family case 35,000 (not allowable
expense)

Legal charges (as per tax laws) 25,000

 ‘000
Rent and maintenance (note 5) 1,550
Note 5: Office rent and maintenance includes:
• 1,200,000 paid as rent of the office on 1st July 2015
for a period of two years.
• 350,000 was to buy new furniture for the office in the
month of January 2016. This amount is included in
the rent and maintenance account head.
 ‘000
Rent and maintenance (note 5) 1,550
Note 5:
• 1,200,000 / 2 = 600,000 allowable expense (if
accrual basis of accounting)
• 350,000 (not completely allowable expense,
depreciation expense of Rs. 52,500* is however
allowed)

Repair and maintenance (as per tax laws) 652,500

* Will be covered in later slide

P&L as per Tax
‘000 ‘000
Revenue 9,000
Salaries & Wages (note 1) 750
Car Expenses (note 2) 170
Car depreciation (note 6) 506.25
Gifts and donations (note 3) 100
Legal charges (note 4) 25
Rent and maintenance (note 5) 652.5 (2,203.75)
Net profit 6,796.25
Income From Business 6,796,250

Taxable Income 6,796,250

Tax 1220,000

(6,796,250-6,000,000)*29% 278,688 1,498,688

Tax % (1,498,688 / 6,796,250) 22.05%

Tax Credit (75,000 X 22.05%) 16,538

Tax 1,482,149
Method of Accounting Section 32

Company – Accrual basis

Other Persons – Cash or Accrual basis

Change in method of accounting – application to

commissioner
Cash Basis Section 33

Income – when it is received

Expense – when it is paid

Accrual Basis Section 34

Income – when it is due (i.e. when entitled to receive it even if the

time for discharge of the entitlement is postponed or the amount is payable
by instalments)
Expense – when it is payable (i.e. when all the events that
determine liability have occurred and the amount of the liability can be
determined with reasonable accuracy )
Accrual Basis Section 34

Where a person has been allowed a deduction for any expenditure incurred
in deriving income chargeable to tax under the head ―Income from
Business and the person has not paid the liability or a part of the liability to
which the deduction relates within three years of the end of the tax year in
which the deduction was allowed, the unpaid amount of the liability shall be
chargeable to tax under the head ―Income from Business in the first tax
year following the end of the three years

6) Where an unpaid liability is chargeable to tax as a result of the

application of sub-section (5) and the person subsequently pays the liability
or a part of the liability, the person shall be allowed a deduction for the
amount paid in the tax year in which the payment is made.
DEPRECIATION RATES 3rd Schedule
Buildings 10%
Furniture, Fittings,
Plant & Machinery, 15%
Motor Vehicles and ships,
Technical and professional books
Computer and related equipment,
Machinery & Equipment used in 30%
manufacture of IT Products,
Aircrafts and Aero engines.
A ramp for persons with disabilities (not 100%
exceeding Rs.250,000 each).
DEPRECIATION RULES Section 22
• “Depreciable asset” means any tangible movable
property, immovable property (other than unimproved
land), or structural improvement to immovable
property, owned by a person that:
a) has a normal useful life exceeding one year;
b) is likely to lose value as a result of normal wear and
tear, or obsolescence; and
c) is used wholly or partly by the person in deriving
income from business chargeable to tax,
But shall not include anything to which a deduction has been for the entire cost of the property or
improvement in the tax year in which the property is acquired or improvement made by the person; and
DEPRECIATION RULES Section 22
• Depreciation on depreciable assets used in person’s
business in a tax year
• Reducing Balance Method (i.e. tax depreciation % on
opening WDV)
DEPRECIATION RULES Section 22
• Opening WDV
a) Acquisition during a tax year = Cost of the asset to
the person - any initial allowance (u/s 23)
(b) Already available assets, the cost of the asset to the
person - total depreciation deductions (including any
initial allowance under section 23) allowed to the person
in respect of the asset in previous tax years.
DEPRECIATION RULES Section 22
• The cost of a depreciable asset being a passenger
transport vehicle not plying for hire shall not exceed
seven and half million rupees;
• Where a depreciable asset is used in a tax year partly
in deriving income from business chargeable to tax
and partly for another use, the deduction allowed
under this section for that year shall be restricted to the
fair proportional part of the amount that would be
allowed if the asset was wholly used to derive income
from business chargeable to tax.
DEPRECIATION RULES Section 22
• Asset partly used for business purpose: The written
down value of the asset shall be computed on the
basis that the asset has been solely used to derive
income from business chargeable to tax.
ASSETS PURCHASED
• A car costing 3,000,000 was purchased by Ali on 1 st
July 2015. (Estimated 25% personal use).
• Another car costing Rs. 1,500,000 was purchased on
1st December 2015 and given to Zahid. (Estimated
40% personal use).
• Gift of a LED TV costing 60,000 to Zahid on 1.1.16
• 350,000 was to buy new furniture for the office in
month of January 2016. This amount is included in
the rent and maintenance account head.
CALCULATION OF DEPRECIATION
• A car costing 3,000,000 was purchased by Ali on 1st July 2015.
(Estimated 25% personal use).
Car: 2,500,000 (restricted to Rs. 2.5 mn)
Dep. (15%) (375,000) x 75% = 281,250
2,125,000
From Tax Year 2021 (i.e. assets purchased after Jul 1 2020), 50% of eligible depreciation is
allowed in year of addition. This means, on disposal of that asset 50% of eligible depreciation
would be allowed in year of disposal

WDV will be reduced by 15% of Restricted Cost, although tax depreciation

for the year will be only 75% i.e. 281,250.
Car is 25% used by owner, and personal expenses not allowed.
Note: For Tax Years 2021-2022, depreciation in year of addition was 50%
and likewise 50% in year of disposal (of the actual eligible depreciation
amount)
KEY POINTS
• Car threshold increased to 7.5m for Tax Year 2022
and onwards
• Tax depreciation restricted to 50% in year of addition
and disposal for Tax Years 2021-2022
CALCULATION OF DEPRECIATION
• Another car costing Rs. 1,500,000 was purchased on
1st December 2015 and given to Zahid. (Estimated
40% personal use).
Car: 1,500,000
Dep. (15%) (225,000)
1,275,000

Car is used by employee therefore full depreciation

allowed as business expense.
CALCULATION OF DEPRECIATION
• Gift of a LED TV costing 60,000 to Zahid on 1.1.16
Already covered in previous slide – allowable business
expense
CALCULATION OF DEPRECIATION
350,000 was to buy new furniture for the office in month
of January 2016. This amount is included in the rent and
maintenance account head.
The WDV of furniture is 350,000.
Opening WDV: 350,000
Depreciation. (15%) (52,500)
Closing WDV 297,500
CALCULATION OF DEPRECIATION
Case 2
The WDV of furniture on 1st July 2015 is 510,000. Rs. 350,000 was to buy new
furniture for the office in month of January 2016. This amount is included in the rent
and maintenance account head.
Opening WDV: 510,000
Depreciation. (15%) (76,500)
Closing WDV 433,500

The WDV of furniture is 350,000.

Opening WDV: 350,000
Depreciation. (15%) (52,500)
Closing WDV 297,500

Total Depreciation 129,000

CALCULATION OF DEPRECIATION
OR
• The WDV of furniture is 350,000 + 510,000.
Opening WDV: 860,000
Depreciation. (15%) (129,000)
Closing WDV 731,000

Same results, i.e. 433,500 + 297,500 = 731,000 (closing

WDV)
DEPRECIATION RULES Section 22
• Disposal of asset in a tax year – no depreciation
expense for that year
Provided that where a depreciable asset is used in the person’s business for the first time in
a tax year commencing on or after the 1st day of July, 2020, depreciation deduction
equal to fifty percent of the rate specified in Part I of the Third Schedule shall be
allowed in the year of disposal- This proviso was added in Finance Act 2020 and removed
in Finance Act 2022
• Consideration – WDV of asset (at time of disposal) =
Gain / Loss (included under the head Income from
Business)
• Where sub-section (3) applies (i.e. partly business
use), the WDV of the asset shall be increased by the
amount that is not allowed as a deduction as a result of
the application of sub-section (3)
• Car costing 3,000,000 was purchased on 1st July
2015. It is 40% used for personal purposes.
Car: 2,500,000 restricted to 2.5 m
Dep. (15%) (375,000) X 60% = 225,000 (Tax Year
2016)

Closing WDV 2,125,000 (not allowed=150,000)

• Car was sold on 10th May 2017 for 2,700,000.
Dep: not allowed 150,000
2,275,000
Disposal proceed (2,250,000) restricted 2.5/3.0 x 2.7
Tax loss on sale 25,000 (Tax Year 2017)
DEPRECIATION RULES Section 22
• In case of disposal of passenger transport vehicle (not plying
for hire) whose cost is more than Rs. 7.5 million, the
consideration received on disposal shall be computed
according to the following formula —
• A x B/C
• where –
• A is the amount received on disposal of the vehicle;
• B is Rs. 7.5 million
• C is the actual cost of acquiring the vehicle.
7.5m threshold is introduced in Finance Act 2022 (i.e. tax year 2023 and onwards. For previous tax
years, this threshold was Rs. 2.5m)
DEPRECIATION RULES Section 22
• Where a depreciable asset that has been used by a
person in Pakistan is exported or transferred out of
Pakistan, the person shall be treated as having
disposed of the asset at the time of the export or
transfer for a consideration received equal to the cost
of the asset.
INITIAL ALLOWANCE Section 23
A person who places an eligible depreciable asset into service in Pakistan
for the first time in a tax year shall be allowed a deduction (an “initial
allowance”) in the tax year: Allowance will not be available to the following:
• Any road transport vehicle unless the vehicle is plying for hire;
• Any furniture, including fittings;
• Any plant or machinery previously used in Pakistan;
• Any plant or machinery in relation to which a deduction has been allowed
under another section of this Ordinance for the entire cost of the asset in
the tax year in which the asset is acquired or
• Immovable property or structural improvement to the immovable property
The rate of initial allowance under section 23 shall be 25% for plant and
machinery and
15% for buildings (FA 2019)
• A computer costing 60,000 was purchased on 1st
July 2014. It is 40% used for personal purposes.
Computer: 60,000
I.A. (25%) (15,000) (full I.A. available)
45,000
Depreciation (30%) (13,500) x 60% = 8,100
31,500 not allowed = 5,400
• It was sold on 10th May 2016 for Rs. 30,000.
5,400
36,900 – 30,000 = 6,900 (loss)
INITIAL ALLOWANCE CALCULATION
• A stitching machine costing 2,000,000 was
purchased by Ali on 1st July 2015.
Machine: 2,000,000
I.A. (25%) (500,000)
1,500,000
Dep. (15%) (225,000)
Closing WDV 1,275,000
Total expense = Depreciation + I.A = 725,000
INITIAL ALLOWANCE CALCULATION
• A building costing 5,000,000 was purchased by Ali on
1st July 2015.
Building: 5,000,000 IA on buildings not available for
assets acquired after 1 Jul 2019
I.A. (15%) (750,000)
4,250,000
Dep. (10%) (425,000)
Closing WDV 3,825,000
Total expense = Depreciation + I.A = 1,175,000
INITIAL ALLOWANCE CALCULATION
• Furniture costing 500,000 was purchased by Ali on
1st July 2015.
Furniture: 500,000
Dep. (15%) (75,000)
Closing WDV 425,000
Depreciation = 75,000
• Initial Allowance is not available on furniture, fixtures
or cars.