Income Tax- Study Material

Table of Contents
Basics of Income Tax.....................................................................................................................................................2
Income Tax Cycle..........................................................................................................................................................2
RECORDING OF BUSINESS TRANSACTIONS................................................................................................................2
FINANCIAL STATEMENT (INCOME STATEMENT)........................................................................................................2
COMPUTATION OF TAXABLE INCOME / TAX LIABILITY.............................................................................................2
FILING OF RETURN (COMMUNICATION WITH TAX DEPARTMENT)..........................................................................3
ASSESSMENT...............................................................................................................................................................3
APPEALS (AGAINST THE ASSESSMENT)......................................................................................................................3
RECOVERY/COLLECTION PROCEDURE......................................................................................................................3
INCOME TAX AT GLANCE..................................................................................................................................................4
Income Tax LAW Composition......................................................................................................................................5
Income Tax Ordinance................................................................................................................................................5
Income Tax Schedules................................................................................................................................................5
Income Tax Rules........................................................................................................................................................5
A (1) Person Means - Registration..................................................................................................................................6
Tax Objective of Personal Status:............................................................................................................................6
Salaried and Non-Salaried Status................................................................................................................................9
Association of Person.............................................................................................................................................9
Company.................................................................................................................................................................9
A (2) Residential Status- Registration.......................................................................................................................11
Tax Objective........................................................................................................................................................11
How to Find Residential status of a Person..............................................................................................................11
Resident mean.......................................................................................................................................................11
1)
Individual...................................................................................................................................................11
2)
AOP..............................................................................................................................................................12
3)
Company......................................................................................................................................................12
Geographical Source of Income (Another aspect of Residential Status)..................................................................12
Salary:...................................................................................................................................................................12
Rental Income:......................................................................................................................................................12
Business Income:..................................................................................................................................................12
Capital Gains:........................................................................................................................................................13
Others:...................................................................................................................................................................13
Profit on Debt/ Fee for Technical Services/ Royalty:...........................................................................................13
Dividend:...............................................................................................................................................................13
EXCEPTION: (Foreign Source Income Exempt for Resident)................................................................................13
Returning expatriate..............................................................................................................................................13
Short Term Resident..............................................................................................................................................14
Foreign Salary.......................................................................................................................................................14
TAX YEAR
14
i.
Normal tax year............................................................................................................................................15
ii.
Special Tax Year...........................................................................................................................................15
iii. Transitional Tax Year....................................................................................................................................15

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Chapter 1 Introduction
Basics of Income Tax
Income Tax Cycle Steps
1.
2.
3.
4.
5.
6.
7.

RECORDING OF BUSINESS TRANSACTIONS

PREPRATION OF FINANCIAL STATEMENT (INCOME STATEMENT)
COMPUTATION OF TAXABLE INCOME / TAX LIABILITY
FILING OF RETURN (COMMUNICATION WITH TAX DEPARTMENT)
ASSESSMENT
APPEALS (AGAINST THE ASSESSMENT)
RECOVERY/COLLECTION PROCEDURE

T
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RECORDING OF BUSINESS TRANSACTIONS

During the period a person records the business transactions keeping in view the rules and regulations of the income
this case accounting profit and taxable profit will be different.
Taxable Income = Total income from different sources plus exempt income
A) CASH BASIS OF ACCOUNTING /ACCRUAL BASIS OF ACCOUNTING
B) CLOSING STOCK VALUATION
c) 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 BOOKS OF ACCOUNTS TO BE MAINTAINED
FINANCIAL STATEMENT (INCOME STATEMENT)

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.
COMPUTATION OF TAXABLE INCOME / 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.

The whole discussion in the ordinance is divided into three parts which are as follows:
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a) Profile of the person

b) Computation of Taxable Income
c) Computation of Tax Liability
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
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 assessmentand 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 tax

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

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.

Important:On the next page an overview of the ordinance is given. This is the proper way to compute and understand
the income and tax liability of a person.

INCOME TAX AT GLANCE

REGISTRATION

COMPUTATION OF TAXABLE INCOME

Name:

COMPUT

Tax on taxa
Salary

Personal Status:
i.
Individual Salaried
Non-Salaried
ii.
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AOP

Income from business

Income From Property
Capital gains

Less:

(37 & 38)

Other sources
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Sen
Dis
Fu

Fo

iii.

Company
Less:
Less: Zakat , Donation , WWF,
WPPF

Residential Status:
i.

Resident

ii.

Non-Resident

Tax Year:
Normal

ii.

Special

iii.

Transitional

Add: Separate Block

Do

Capital Gains (37A)

Pro

Immoveable Property

Total Income
(relevant for salaried / non
salaried)

D
Less:

Ad

Co
Add: Share from AOP

De

Co
Taxable Income for Rate Purpose

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Inv

Co

Pak and Foreign Source Income

i.

Av

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Income Tax LAW Composition

Income Tax Ordinance

Ordinance

Income Tax rules

Schedule

Income Tax Ordinance

Income tax ordinance is divided into Ordinance in the form of sections and Schedules.
Income Tax Ordinance
Income tax ordinance included provisions of the law means
Definitions
What is meant by person
How to compute income ; and
How to compute tax on income etc.

Income Tax Schedules

Income tax schedule is a part of income tax ordinance and different issues are discussed. There are eight schedules
of income tax ordinance 2001 listed below:

12345678-

Income tax Rates

Exemptions and tax concessions
Depreciation and Amortization
Tax Rules for Insurance Business
Tax Rules for Exploration and Production of Petroleum
Rules for Recognized Provident Fund.
Rules for Banking Companies
Computation of Capital Gain on Listed Companies

Income Tax Rules

Income tax Rules normally explains the income tax ordinance, like ITO says that if an Individual stays in Pakistan
for 183 days or more in a tax year, he will be a resident person. So, the way to compute 183 days is given in the
Rules rather than in the ordinance. Similarly, computation of perquisites and benefits is also given in the Rules.

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Chapter 2/1
Person
A (1) Person Means (Registration Part)
a) Individual
a. Salaried
b. Non-salaried
b) AOP (association of person )
c) Company
d) Government
Tax Objective of Personal Status:
The persons are classified into different categories because different tax rates are applicable on
the income of different persons as follows:
a) Individual (Slab rates are given)
a. Salaried
b. Non-salaried
b) AOP (association of person)(Slab rates are given)
c) Company (Fix rate of 33%)
The tax rate for Non-salaried and AOP are same with effect from tax year 2014
Illustration
Below is the information mentioned related to the incomes earned by different persons:
Source of Income

MR. ALI

MR. AHMAD

A & B Enterprises
Firm

Ali Limited

Salary

500,000

300,000

Capital Gains
Business
Taxable Income

300,000
50,000
850,000

500,000
50,000
850,000

800,000
50,000
850,000

800,000
50,000
850,000

Requirements:a. Mention the Personal Status?

b. Calculate Tax Payable by each of them?
Solution:Name
Personal Status

MR. ALI
Salaried
500,000/850,000*100 = 58%

Taxable Income
Tax Rates
Tax Liability

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850,000
17,500 + 10%
(850,000-750,000)=
27,500

Rs.27,500

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MR.AHMAD
Non-Salaried

A&B
Enterprises
AOP

Ali
Limited
Company

850,000

850,000
33%

300,000/850,000*100 = 35%

850,000
35,000 + 15%
(850,000-750,000)=50,000

Rs.50,000

35,000 + 15%
(850,000750,000)=50,000

Rs.50,000

Rs. 280,500

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Tax Rates - Tax Year 2015

A. Salaried
In case of salaried person (salary income more than 50% of taxable income) if the taxable
income exceeds Rs.400,000/- the following slab rate applicable:
Sr. No

Taxable Income

Rate of Tax

0 to Rs.400,000

Rs.400,000 to Rs.750,000

5% of the amount exceeding Rs.400,000

Rs.750,000 to Rs.1,400,000

Rs.1,400,000 to Rs.1,500,000

Rs.1,500,000 to Rs. 1,800,000

Rs.1,800,000 to Rs. 2,500,000

Rs.2,500,000 to Rs. 3,000,000

Rs.3,000,000 to Rs. 3,500,000

Rs.3,500,000 to Rs. 4,000,000

10

Rs.4,000,000 to Rs. 7,000,000

11

Rs.7,000,000 and above

Rs.17,500 + 10% of the amount exceeding

Rs.750,000
Rs.82,500 + 12.5% of the amount exceeding
Rs.1,400,000
Rs.95,000 + 15 % of the amount exceeding
Rs.1,500,000
Rs.140,000 + 17.5 % of the amount exceeding
Rs.1,800,000
Rs.262,500 + 20 % of the amount exceeding
Rs.2,500,000
Rs.362,500 + 22.5 % of the amount exceeding
Rs.3,000,000
Rs.475,000 + 25 % of the amount exceeding
Rs.3,500,000
Rs.600,000 + 27.5 % of the amount exceeding
Rs.4,000,000
Rs.1,425,000 + 30 % of the amount exceeding
Rs.7,000,000

0%

B. Non-Salaried and AOP

In case of Individual (Non-Salaried person whose salary income is equal to or less than 50%
of taxable income) and AOP if the taxable income exceeds Rs.400,000/- the following slab
rate applicable:
.
Sr. No

Taxable Income

Rate of Tax

0 to Rs.400,000

Rs.400,000 to Rs.750,000

10% of the amount exceeding Rs.400,000

Rs.750,000 to Rs.1,500,000

Rs.1,500,000 to Rs. 2,500,000

Rs.2,500,000 to Rs. 4,000,000

Rs.4,000,000 to Rs. 6,000,000

Rs.6,000,000 and above

Rs.35,000 + 15% of the amount exceeding

Rs.750,000
Rs.147,500 + 20 % of the amount exceeding
Rs.1,800,000
Rs.347,500 + 25 % of the amount exceeding
Rs.2,500,000
Rs.722,500 + 30 % of the amount exceeding
Rs.4,000,000
Rs.1,322,500 + 35 % of the amount exceeding
Rs.6,000,000

0%

C. Companies
Small Company 25%
Other Companies 33%

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Salaried and Non-Salaried Status

Individual person may have different sources of income. We have to find his status to apply tax rates because
different tax rates are applicable for salaried and non-salaried person. The salaried status is computed by the
following formula:

Taxable salary
Taxable income x 100 =
If more than 50% salaried person otherwise non-salaried
Example
(i)

Salary Income
Business Income

100
50

100
150 x 100 = 66.67%
(ii)

Salary Income
Business Income

Salaried

100
200

100
300 x 100 = 33.3 %

Non Salaried

Association of Person
Includes
i.
a firm,
ii.
a Hindu undivided family,
iii.
any artificial juridical person and
iv.
anybody of persons formed under a foreign law,
but does not include a company

Company
Company means
i.
a company as defined in the Companies Ordinance, 1984;
ii.
a body corporate formed by or under any law in force 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 co-operative society, a finance society or any other society;
vi.
a non-profit organization;
vii.
a trust, an entity or a body of persons established or constituted by or under any law for the time being
in force;
viii.
a foreign association, whether incorporated or not, which the Board has, by general or special order,
declared to be a company for the purposes of this Ordinance;
ix.
a Provincial Government;
x.
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
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(e)
unit trust means any trust under which beneficial interests are divided into units such that the entitlements
of the beneficiaries to income or capital are determined by the number of units held

Public Company

Which is listed in any stock exchange in Pakistan

In which at least 50% shares are held by FG (Federal Government), PG (Provincial Government) or
by a Foreign Government
A unit trust

Small Company
Small company may be any company. Actually this is a condition that a company may have.It means
i.
a company registered on or after the first day of July, 2005, under the Companies Ordinance,
1984 and
ii.
has paid up capital plus undistributed reserves 25M rupees;
iii.
has employees 250(any time during the year);
iv.
has annual turnover 250M rupees; and
v.
Is not formed by the splitting up or the reconstitution of business already in existence.

Industrial undertaking
means
(a) an undertaking which is set up in Pakistan and which employs,
i.
ten or more persons in Pakistan; and
involves the use of electrical energy or any other form of energy which is mechanically transmitted and
is not generated by human or animal energy; or
ii.
twenty or more persons in Pakistan; and
does not involve the use of electrical energy or any other form of energy which is mechanically
transmitted and is not generated by human or animal energy:
(b) which is engaged in,
i.
The manufacture of goods or materials or the subjection of goods or materials to any process which
substantially changes their original condition;
ii.
Ship-building;
iii.
Generation, conversion, transmission or distribution of electrical energy, or the supply of hydraulic power;
or
iv.
The working of any mine, oil-well or any other source of mineral deposits;
(c) Any other industrial undertaking which the Board may by notification in the official gazette, specify.

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Chapter 2/2
Residential Status
A (2) Residential Status- Registration
A person may be
i.
Resident ; or
ii.
Non-resident.
i.
ii.

Income by geographically may be (classification of income):

Foreign sources income
Pakistan source income

Tax Objective
The objective behind the defining of residential status of a person is that if a person is resident then his Pakistan
and foreign source income shall be taxed whereas, non-resident is liable to tax for Pakistan source income.
Figure 1 - Residential Status
Resident

Foreign Source Income

Pakistan Source Income

Person
Non-Resident

Following issues will be discussed now

a) Defining residential status
b) How to define the Pakistan and foreign source income (geographical source of income)
c) Under what circumstances the foreign source income of a resident person is exempt

How to Find Residential status of a Person

Resident mean
A person shall be a resident person for a tax year if the person is:
(a) a resident individual;
(b) resident company;
(c) resident AOP; or
(d) Federal Government.
1) Individual
i.
An individual is resident if he present in Pakistan for a period of, or periods amounting in aggregate to,
183days or more in the tax year; or
ii.
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Employee of FG and PG are always resident without any days condition.

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Q Under What situations a persons stay in Pakistan is more than 183 days but he is not resident?
Stays exceeding 183 days in Pakistan but still non-resident:
Assume Mr. X reached in Pakistan on March 01, 2011 and left the country on October 15, 2012.
1 March, 2011

|
15 October, 2011
|
30 June
|
No 183 days during tax year
No 183 days during this tax year

As his total stay in Pakistan exceeds 183 days but he didnt complete 183 days in any tax years that is 2011 and
2012. We have to compute 183 days in a tax year and 2011 ends on 30 th June , 2011 and 2012 starts from July 1 st
, 2011 and ends on 30th June, 2012. So, he shall be considered non-resident even he completed the required
days.
Rule:
All days shall be included for the computation like, part of the day as full day, hospitalized, strikes, holidays or
the days when no business activityis perform EXCEPT In-Transit days (when somebody was not meant to stay
but have to stay like hijacked and taking shuttle.
2)

AOP
An association of persons shall be a resident association of persons for a tax year if:
i.
The control and management of the affairs of the association is situated wholly or partly in Pakistan at
any time in the year.

3)

Company
A company shall be a resident company for a tax year if:
i.
it is incorporated or formed in Pakistan;
ii.
the control and management of the affairs of the company is situated wholly in Pakistan at any time in
the year; or
iii.
it is a Provincial Government or Local Government in Pakistan.

Geographical Source of Income (Another aspect of Residential Status)

(Equally important at foundation and final level)
Geographically income may be categorized as Pakistan or Foreign source. The detail and rules for Pakistan
and foreign source income is given below.

Salary:
If services are provided in Pakistan (wherever salary is received in the world)
Salary is paid by or on behalf of FG, PG or by a Local Authority (whether services provided outside
Pakistan)

Rental Income:
From lease of or sale of immovable property

Business Income:
Resident Person:
Income derived from a business carried out in Pakistan
Non-Resident Person:
a. Permanent Establishment
b. Sales of like goods by NR as deals by his PE
c. Any business connection in Pakistan
d. Gain on disposal of an asset relates to a business from which income is Pk source.

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Capital Gains:
Gain on disposal of shares in a resident company

Others:
Any other income if paid by a resident person or born by a PE of NR person

Profit on Debt/ Fee for Technical Services/ Royalty:

It is paid by a resident person. (except: if it is paid in respect of such business, which is carried outside
Pakistan)
It is borne by the PE of non-resident.

Dividend:
If it is paid by a resident company

EXCEPTION: (Foreign Source Income Exempt for Resident)

The normal rule is that if a person is resident, his Pakistan and foreign source income shall be taxable but under the
following situations the foreign source income of RESIDENT person shall be exempt (Pakistan source income will
be taxable).
i.
ii.
iii.
iv.

Returning Expatriate
Short Term Resident
Foreign Source Salary
Tax Treaty

Returning expatriate
Non-resident for last 4 years
National of Pakistan
An individual
Income
Exemptions:
His Foreign source income for current and next year shall be exempt.
Illustration :Mr. Ahmed came in Pakistan from Saudi Arabia in May 2012 and remains in Pakistan. He was
not resident in the last 10 years. The detail of his income is as follows:
Tax Year
2012
2013
2014
2015

Pakistan Income
500,000
500,000
500,000
500,000

Foreign Income
300,000
300,000
300,000
300,000

Taxable Income:
Tax Year
2012
2013
2014
2015

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Taxable Income
500,000
500,000
500,000
800,000

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Comment
Non-Resident
Resident but returning expatriate
Resident but returning expatriate
Resident and both are taxed

Taxation TY - 2015

Short Term Resident

An individual
i.
Who is a resident individual solely by reason of the individuals employment; and
ii.
Who is present in Pakistan for a period or periods not exceeding three years
Exemption:
His foreign source income for this stay is exempt but following income is taxable:
i.
Any income derived from a business of the person established in Pakistan; or
ii.
Any foreign-source income brought into or received in Pakistan

Foreign Salary
Under the following two circumstances foreign salary of resident is exempt:
1) Where a citizen of Pakistan leaves Pakistan during a tax year and remains abroad during that tax year.
2) The individual has paid foreign income tax in respect of the salary.
Payment of Tax means if tax has been withheld from the salary by the individuals employer and paid to the
revenue authority of the foreign country in which the employment was exercised.

Tax Treaty

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Under income tax treaty between two countries the income of a resident person may be exempt. Chapter

2/3

TAX YEAR
Issues:
a. Definition and explanations of tax years
b. How to change tax year (normal to special, special to normal and special to special)
c. Determination of tax year.
There are three types of tax years
1) Normal
2) Special
3) Transitional
i.

Normal tax year

The tax year shall be a period of twelve months ending on the 30th day of June.

ii.

Special Tax Year

Where a persons income yearis different from the normal tax year.
Special Tax years
X Limited
Y Limited
K Limited

iii.

1st Oct. 2010 30 Sep. 2011

1st Jan. 2010 31 Dec. 2010
1st April 2010 31 March 2011

Transitional Tax Year

Where the tax year of a person changes (as a result of an order), the period between the end of the last tax year
prior to change and the date on which the changed tax year commences shall be treated as a separate tax year
and this is known as thetransitional tax year.

Change of Tax Year

A person can change its tax year, from normal to special and vice versa, and from one special to another special, with the prior
approval of Commissioner.
Normal
Special

special
another special

Application should be submitted giving brief reason of change.

Commissioner may approve the change of tax year.

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Chapter 3/1
INCOME
Summary of Classes of Income
Heads of income S11 Total income means:
(a) Salary;
(S 12 -14)
(b) Income from Property;
(S 15-16)
(c) Income from Business;
(S 18-36)
(d) Capital Gains; and
(S 37-38)
(e) Income from Other Sources. (S 39-40)
Illustration: - (Total Income)
Mr. A
Individual : Resident
Tax year : 20X5
Computation of Taxable Income

Note:-

Income under NTR (Normal Tax Regime) and FTR shall be computed separately. The above
discussion is about NTR income.

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Brief Introduction of Heads of Income

Basic Rule for the computation of total income
Heads of Income
Salary
Income from Property

Business Income
Capital Gains
Income from Other
Sources

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Income
Taxable

Deductions
No expenditure is allowed
except professional fee
1) Signing Amount
Repair
2) Un-Adjustable amount
Collection Charges
3) Rent
from
immoveable Insurance Premium
property.
Local Taxes
4) Forfeited deposit, against sale
Ground Rent
of immovable property.
Profit on Debt
Legal charges to defend
the title of property
Bad debts
1) Non-speculative income
Sections 20 to 36
2) Speculative income
1) u/s 37
Cost of purchase and
2) u/s 38
disposal (separate rules or
sec. 38)
Income which is not taxed under
Cost of purchase and
any above head.
disposal

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Taxable
Total Income

Income Deductions

Income Deductions
Sale price Cost
Sale price Cost

Taxation TY - 2015