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0003 Haider Ali Patel

VIEWS: 20 PAGES: 80

									Income Tax Bar Association Karachi




  WORKSHOP ON INCOME TAX

       Hotel Sheraton, Karachi
        29 – 30 August, 2005
 Income Tax Bar
   Association
     Karachi
                    BUSINESS & OTHER
                    INCOME TAXATION
  Workshop
on Income Tax
                              By


                       Haider Ali Patel

  Hotel Sheraton
29-30 August 2005

                                          2
                                CONTENTS
 Income Tax Bar     Business & Other Income Taxation
   Association

                    
     Karachi
                        Income from Business
                       Speculation business
                       Deductions – General
  Workshop
on Income Tax
                       Deductions – Special provisions
                       Property Income, Capital Gains
                         & other Income
                       Apportionment of Expenditure
                       Method of Accounting
  Hotel Sheraton       Minimum tax / Retail tax
29-30 August 2005

                                                          3
                    INCOME FROM BUSINESS                          Section 18

 Income Tax Bar     INCOME FROM BUSINESS
   Association
     Karachi        SCOPE

                    The following incomes are chargeable to tax under the
                    head Income from Business –
                    (a)     Profit and gains of any business carried on by
  Workshop
on Income Tax               a person at any time during the year
                    (b)     Any income derived from any trade, profession
                            or similar association from the sale of goods or
                            provision of services to its members.
                    (c )    Any income from hire or lease of tangible
                            movable property
  Hotel Sheraton
29-30 August 2005

                                                                               4
                    INCOME FROM BUSINESS                       Section 18

 Income Tax Bar     INCOME FROM BUSINESS
   Association
     Karachi        SCOPE

                    (d)   The Fair Market Value of any benefit or
                          perquisite whether convertible into money or
                          not, derived by a person in the course of or by
  Workshop                virtue of      past, present or prospective
on Income Tax             business relationship.
                    (e)   Any management fee derived by a
                          management company including Modaraba
                          Management Company.


  Hotel Sheraton
29-30 August 2005

                                                                            5
                    INCOME FROM BUSINESS                     Section 18

 Income Tax Bar     INCOME FROM BUSINESS
   Association
     Karachi        SCOPE

                    The term “BUSINESS” has been defined in Section
                    2(9) of the Ordinance as follows –

  Workshop              (9)   “business”     includes  any    trade,
on Income Tax                 commerce, manufacture, profession,
                              vocation or adventure or concern in
                              the nature of trade, commerce,
                              manufacture, profession or vocation,
                              but does not include employment

  Hotel Sheraton
29-30 August 2005

                                                                       6
                    INCOME FROM BUSINESS                        Section 18

 Income Tax Bar     INCOME FROM BUSINESS
   Association
     Karachi        SCOPE

                    The term business has been defined by Kanga and
                    Palkhiwala in the following manner –

  Workshop                  The word use in this clause are wide, but
on Income Tax               underlying each of them is the fundamental
                            idea of the continuous exercise of an activity,
                            in the words of S.R. Das J. the word
                            “Business” connotes some real, substantive
                            and systematic or organized course of activity
                            or conduct with a set purpose”
  Hotel Sheraton
29-30 August 2005

                                                                          7
                    INCOME FROM BUSINESS                            Section 18

 Income Tax Bar     INCOME FROM BUSINESS
   Association
     Karachi        SCOPE

                    The Courts in Pakistan have also dilated upon the
                    term “Business” and in one of the reported cases of
                    CIT Vs. Habib Insurance Company Limited reported
  Workshop          as 19 Tax 229 the Hon. Karachi High Court have
on Income Tax       observed –
                         In order to constitute a business there must be a
                         continuous exercise of activity for the purpose of
                         gain. This element of continuity is essential to
                         constitute a business of investment.. The reason
                         for this condition is that in modern society
                         people no longer hold their savings in gold or
  Hotel Sheraton         cash but are encouraged to invest their savings
29-30 August 2005
                         in property and securities, yet a man        who
                                                                              8
                    INCOME FROM BUSINESS                                  Section 18

 Income Tax Bar     INCOME FROM BUSINESS
   Association
     Karachi        SCOPE
                       invests his savings in buying a property would not be said
                       to the carrying on a business if he lets out the property on
                       rent, nor would a person who has purchase shares out of
                       his savings be said to carry on business merely because
                       he derives income from his investments. If, however, he
  Workshop             regularly buys and sells property or shares, so as to make
on Income Tax          profit out of the fluctuations in the prices of property of
                       shares, then it would be said that he was carrying on the
                       business or investment; there is thus a fundamental
                       distinction between the business of investment, and the
                       purchase and sale of investments by a person. As
                       pointed out by Lord Wright, in the definition quoted, even
                       occasional speculation in shares does not amount to
                       carrying on a business; therefore, a person, who buys
  Hotel Sheraton       property or shares and retains them for a long period of
29-30 August 2005      time, would not be considered to be carrying on the
                       business or investment.
                                                                                      9
                    INCOME FROM BUSINESS                             Section 18

 Income Tax Bar     INCOME FROM BUSINESS
   Association
     Karachi        SCOPE
                    Profit on debt derived by a person whose main business is
                    to derive such income, would be chargeable to tax as
                    income from business and not as income from other
                    sources
  Workshop
on Income Tax       Income from lease of an asset to another person by a
                    schedule bank, investment bank, development finance
                    institution, modaraba or leasing company whether owned
                    by it or not, is chargeable as income from business

                    Income received by a banking company or NBFI
                    representing distribution by a mutual fund out of its income
                    from profit on debt would be chargeable as income from
  Hotel Sheraton    business and not under income from other sources.
29-30 August 2005

                                                                               10
                    INCOME FROM BUSINESS                       Section 18

 Income Tax Bar     INCOME FROM BUSINESS
   Association
     Karachi        SCOPE

                    It should be noted that the scope of income provided
                    in section 18 is not inclusive neither an omnibus
                    clause has been provided therefore, income fallowing
  Workshop          under the scope as discussed above will only be
on Income Tax       taxable as income from business


                    Any income falling outside the scope of business
                    income would either be taxed under any other specific
                    head of income or under the head income from other
                    sources
  Hotel Sheraton
29-30 August 2005

                                                                        11
                    INCOME FROM BUSINESS                     Section 21

 Income Tax Bar     DEDUCTION - GENERAL
   Association
     Karachi        EXPENDITURE ALLOWED

                    The general principal of claiming deduction in
                    computing income chargeable under the head
  Workshop          Income from Business is that deduction shall be
on Income Tax       allowed for any expenditure incurred by the person
                    in the year wholly and exclusively for the
                    purpose of business



  Hotel Sheraton
29-30 August 2005

                                                                     12
                    INCOME FROM BUSINESS                             Section 21

 Income Tax Bar     DEDUCTION - GENERAL
   Association
     Karachi        EXPENDITURE ALLOWED
                    The term wholly and exclusively has been dealt with by the
                    appellate forums in several cases. The basic principle
                    which establishes from these judgements is that it should
                    be proved that the expense has been incurred for the
  Workshop
                    purpose of business. In a reported case of CIT Vs. Dalmia
on Income Tax
                    Cement Limited reported as 20 Tax 15, The Honourable
                    Karachi High Court held that the legal expenses incurred in
                    defending the employees of the company who were
                    prosecuted on the charge of selling cement in the black
                    market were wholly and exclusively for the purpose of
                    business since the expenses were incurred to retain the
                    goodwill of the company and the employees, which was
  Hotel Sheraton
29-30 August 2005
                    essential to successfully carry on the business

                                                                              13
                    INCOME FROM BUSINESS                         Section 21

 Income Tax Bar     DEDUCTION - GENERAL
   Association
     Karachi        EXPENDITURE ALLOWED
                    Capital expenditure will not be allowed as a deduction
                    instead a depreciation or amortization expense will be
                    allowed
  Workshop
on Income Tax       Pre-commencement expenditure will not be allowed as a
                    deduction instead amortization expense will be allowed

                    In order to encourage mergers, it has been specifically
                    provided that expenditure incurred by an amalgamated
                    company on legal and financial advisory services and
                    other administrative cost relating to planning and
  Hotel Sheraton    implementation of amalgamation shall be allowed as a
29-30 August 2005   deduction
                                                                          14
                    INCOME FROM BUSINESS                           Section 21

 Income Tax Bar     DEDUCTION - GENERAL
   Association
     Karachi        EXPENDITURE NOT ALLOWED
                    Any salary, rent, brokerage or commission, profit on debt,
                    payment to non-resident, payment for services or fee paid
                    by the person will not be allowed as a deductible expense
  Workshop          unless the payer has paid or deducted and paid the tax
on Income Tax
                    required to be deducted

                    Any expenditure paid or payable by an employer to an
                    employee on account of perquisites and allowances where
                    the aggregate of perquisites and allowances exceeds 50%
  Hotel Sheraton    of the employees salary for the tax year
29-30 August 2005

                                                                             15
                    INCOME FROM BUSINESS                                   Section 21

 Income Tax Bar     DEDUCTION - GENERAL
   Association
     Karachi        EXPENDITURE NOT ALLOWED
                    Any expenditure paid or payable under a single account head
                    which in aggregate exceeds Rs.50,000 made other than by a
                    cross bank cheque or bank draft except the following –

  Workshop             •    Expenditure not exceeding ten thousand rupees
on Income Tax          •    Freight charges/Travel fare to an airlines or railway or a
                            goods carriage company
                       •    Postage
                       •    Utilities
                       •    Payment of taxes, duties, fee, fines or any other statutory
                            obligation

  Hotel Sheraton    The Board has further clarified that this provision would not affect
29-30 August 2005   purchases and other manufacturing or trading account expenses

                                                                                       16
                    INCOME FROM BUSINESS                       Section 21

 Income Tax Bar     DEDUCTION - GENERAL
   Association
     Karachi        EXPENDITURE NOT ALLOWED
                    Any salary paid or payable exceeding Rs.10,000 per
                    month other than by a cross cheque or a direct
                    transfer of funds to the employee`s bank account
  Workshop          accept for payments for –
on Income Tax
                        •   Piece or job, wages or direct wages, being
                            trading/manufacturing account expenses

                    Certain other expenses listed in clause (a) to (n) of
                    Section 21 of the Ordinance are also not allowed as a
                    deduction in computing income from business
  Hotel Sheraton
29-30 August 2005

                                                                        17
                    INCOME FROM BUSINESS                                   Section 22

 Income Tax Bar     DEDUCTION – SPECIAL PROVISIONS
   Association
     Karachi        DEPRECIATION
                    The deduction for depreciation under the Income Tax Ordinance,
                    2001 is also restricted to certain specified tangible assets,
                    hereinafter referred to as “depreciable assets” that:

  Workshop           •   Are Owned by the person claiming the deduction for
on Income Tax            depreciation

                     •   Have a normal useful life of more than one year

                     •   Are likely to loose value as a result of wear and tear, or
                         obsolescence

                     •   Are wholly or partly used by the person, during the
  Hotel Sheraton         corresponding tax year, in deriving income from business
29-30 August 2005

                                                                                   18
                    INCOME FROM BUSINESS                               Section 22

 Income Tax Bar     DEDUCTION – SPECIAL PROVISIONS
   Association
     Karachi        DEPRECIATION
                    “Depreciable assets” are:
                          •   Any tangible movable property e.g., furniture,
                              fixtures, computers, technical or professional books,
  Workshop                    ships, motor vehicles, aircrafts, machinery and
on Income Tax                 plant
                          •   Immovable property (other than unimproved land)
                              e.g., buildings
                          •   Structural improvement to immoveable property
                    Structural improvements to immoveable property include any
                    building, road, driveway, car park, railway line, pipeline,
  Hotel Sheraton    bridge, tunnel, airport, runway, canal, dock, wharf, retaining
29-30 August 2005
                    wall, fence, power lines, water or sewerage pipes, drainage,
                    landscaping or dam                                           19
                    INCOME FROM BUSINESS                            Section 22

 Income Tax Bar     DEDUCTION – SPECIAL PROVISIONS
   Association
     Karachi        DEPRECIATION
                    Depreciation method prescribed under the Income Tax
                    Ordinance, 2001, for calculating the deduction for
                    depreciation is the commonly known “Diminishing Balance
                    or Written Down Value Method”.
  Workshop
on Income Tax       Under this method, the deduction for depreciation in the
                    first year is calculated by applying “standard depreciation
                    rate” on the cost of depreciable asset as reduced by the
                    deduction for admissible “initial allowance”, if any.

                    This is one of the departures or changes as compared to
                    the corresponding provisions of the repealed Income Tax
  Hotel Sheraton    Ordinance, 1979 whereby both depreciation and initial
29-30 August 2005
                    allowance were simultaneously calculated on the cost.
                                                                              20
                    INCOME FROM BUSINESS                        Section 22

 Income Tax Bar     DEDUCTION – SPECIAL PROVISIONS
   Association
     Karachi        DEPRECIATION
                    Written down value for the purposes of calculating
                    depreciation in the following years of a depreciable
                    asset is the cost of a depreciable asset as reduced by
  Workshop             •   Aggregate depreciation and initial allowance
on Income Tax              deductions actually allowed against the income
                           from business in respect of that depreciable
                           asset in the preceding years

                       •   Aggregate depreciation attributable to fair
                           proportional use of the depreciable asset for
                           purposes other than deriving income from
  Hotel Sheraton
29-30 August 2005          business

                                                                         21
                    INCOME FROM BUSINESS                             Section 22

 Income Tax Bar
                    DEDUCTION – SPECIAL PROVISIONS
   Association
     Karachi
                    DEPRECIATION
                    Cost of depreciable asset, generally comprises of the :
                    •   Amount paid to own the asset, such as purchase
                        price, expenditure incurred to produce or create, etc
  Workshop
on Income Tax
                    •   Amount paid to bring the asset to its present location
                        and condition fit for its intended use, such as
                        incidental expenditure incurred in acquiring,
                        transporting, altering, improving, renewing, installing,
                        etc
                    •   The fair market value of any non-cash benefit given

  Hotel Sheraton    •   Debt incurred to pay the amount or to provide a non-
29-30 August 2005       cash benefit
                                                                              22
                    INCOME FROM BUSINESS                       Section 22

 Income Tax Bar
                    DEDUCTION – SPECIAL PROVISIONS
   Association
     Karachi

                    The restriction on cost of passenger vehicle transport
                    not plying for hire has been removed on assets
                    acquired on or after July 1, 2005
  Workshop
on Income Tax
                    Where a depreciable assets used in Pakistan is
                    exported or transferred outside Pakistan the person
                    shall be treated as having disposed of the assets at
                    the time of the export or transfer for a consideration
                    equal to the cost of the asset

                    In other words, the entire depreciation expense
  Hotel Sheraton    allowed on such assets would be re-captured
29-30 August 2005

                                                                        23
                    INCOME FROM BUSINESS                     Section 23

 Income Tax Bar
                    DEDUCTION – SPECIAL PROVISIONS
   Association
     Karachi
                    INITIAL ALLOWANCE

                    Initial Allowance of 50% of the „cost‟ of “eligible
                    depreciable assets” is allowed as deduction against
                    the chargeable income from business in the tax year
  Workshop          in which such asset is used for the first time or
on Income Tax       commercial production is commenced, whichever is
                    later




  Hotel Sheraton
29-30 August 2005

                                                                     24
                    INCOME FROM BUSINESS                          Section 23

 Income Tax Bar
                    DEDUCTION – SPECIAL PROVISIONS
   Association
     Karachi
                    INITIAL ALLOWANCE

                    “Eligible depreciable assets” for the purposes of
                    initial allowance are all „depreciable assets‟ except the
                    following:
  Workshop
on Income Tax
                       •   Plant or Machinery, which is previously used in
                           Pakistan
                       •   Furniture, including fittings
                       •   Road transport vehicle, which is not plying for
                           hire

  Hotel Sheraton
                       •   Any plant or machinery where the entire cost of
29-30 August 2005
                           the asset is allowed as a deduction in the year
                           of acquisition
                                                                           25
                    INCOME FROM BUSINESS                        Section 23

 Income Tax Bar
                    DEDUCTION – SPECIAL PROVISIONS
   Association
     Karachi
                    INITIAL ALLOWANCE


                    Rate of initial allowance is 50% of the „cost‟ for all
                    eligible depreciable assets.
  Workshop
on Income Tax       This is one of the departures or changes as compared
                    to the corresponding provisions of the repealed
                    Income Tax Ordinance, 1979 whereby multiple rates
                    of initial allowance were available.


  Hotel Sheraton
29-30 August 2005

                                                                        26
                    INCOME FROM BUSINESS                        Section 24

 Income Tax Bar
                    DEDUCTION – SPECIAL PROVISIONS
   Association
     Karachi
                    INTANGIBLE

                    Amortization deduction is allowed only while
                    computing income from business and is restricted to
                    intangible assets, that -
  Workshop
on Income Tax          •   are owned by the person claiming the
                           deduction for amortization

                       •   Have a normal useful life of more than one
                           year

                       •   Are wholly or partly used by the person, during
  Hotel Sheraton           the corresponding tax year, in deriving
29-30 August 2005
                           income from business chargeable to tax
                                                                         27
                    INCOME FROM BUSINESS                          Section 24

 Income Tax Bar
                    DEDUCTION – SPECIAL PROVISIONS
   Association
     Karachi
                    INTANGIBLE
                    Intangible Assets are:
                    •    Any patent, invention, design or model, secret
                         formula or process, copyright, trade mark,
  Workshop               scientific or technical knowledge, computer
on Income Tax            software, motion picture film, export quota,
                         franchise, license, intellectual property or other
                         like property or right

                    •    Contractual rights

                    •    Any expenditure that provides an advantage or
                         benefit for a period of more than one year (other
  Hotel Sheraton         than expenditure incurred to acquire a
29-30 August 2005
                         depreciable asset or unimproved land)
                                                                          28
                    INCOME FROM BUSINESS                           Section 24

 Income Tax Bar
                    DEDUCTION – SPECIAL PROVISIONS
   Association
     Karachi
                    INTANGIBLE
                    Amortization method for calculating the deduction for
                    amortization is the commonly known “Straight Line
                    Method”.
  Workshop          Under this method, the annual deduction for
on Income Tax
                    amortization is calculated by equally distributing the
                    cost of specified intangible asset over its normal useful
                    life in whole years i.e., cost of the specified intangible
                    asset divided by normal useful life in whole years.

                    The maximum normal useful life of a specified
  Hotel Sheraton    intangible asset, where it is more than ten years or
29-30 August 2005   cannot be ascertained is taken as ten years
                                                                            29
                    INCOME FROM BUSINESS                            Section 25

 Income Tax Bar
                    DEDUCTION – SPECIAL PROVISIONS
   Association
     Karachi
                    PRE-COMMENCEMENT EXPENDITURE

                    pre-commencement expenditures are expenditures
                    incurred before the commencement of business
                    wholly and exclusively to derive income chargeable to
  Workshop          tax like, cost of feasibility studies, construction of
on Income Tax
                    prototypes, trial production activities, etc.


                    Any    expenditure     incurred     in   acquiring   land,
                    depreciable asset or specified intangible asset cannot
                    be claimed as pre-commencement expenditure
  Hotel Sheraton
29-30 August 2005

                                                                             30
                    INCOME FROM BUSINESS                        Section 25

 Income Tax Bar
                    DEDUCTION – SPECIAL PROVISIONS
   Association
     Karachi
                    PRE-COMMENCEMENT EXPENDITURE

                    Amortization method for calculating the deduction for
                    amortization is the commonly known “Straight Line
                    Method”
  Workshop
on Income Tax       Under this method, the annual deduction for
                    amortization of pre-commencement expenditure is
                    calculated on a straight-line basis at the rate of 20%
                    per annum

                    In other words the specified pre-commencement
                    expenditure is amortized over a period of five years
  Hotel Sheraton
29-30 August 2005

                                                                         31
                    INCOME FROM BUSINESS                         Section 26

 Income Tax Bar
                    DEDUCTION – SPECIAL PROVISIONS
   Association
     Karachi
                    SCIENTIFIC RESEARCH EXPENDITUREPRE
                    A deduction is allowed on account of scientific
                    research expenditure incurred in Pakistan in a tax
                    year wholly and exclusively for the purpose of deriving
                    income from business chargeable to tax
  Workshop
on Income Tax
                    “scientific research expenditure” means any
                    expenditure incurred by a person on scientific
                    research undertaken in Pakistan for the purposes of
                    developing the person‟s business, including any
                    contribution to a scientific research institution to
                    undertake scientific research for the purposes of the
  Hotel Sheraton    person‟s business
29-30 August 2005

                                                                          32
                    INCOME FROM BUSINESS                        Section 26

 Income Tax Bar
                    DEDUCTION – SPECIAL PROVISIONS
   Association
     Karachi        SCIENTIFIC RESEARCH EXPENDITUREPRE

                    other than expenditure incurred –
                     (a)   in the acquisition of any depreciable asset or
                           intangible
  Workshop
on Income Tax        (b)   in the acquisition of immovable property; or
                     (c)   for the purpose of ascertaining the existence,
                           location, extent or quality of a natural deposit

                           “scientific research institution” means any
                           institution certified by the Central Board of
  Hotel Sheraton           Revenue as conducting scientific research in
29-30 August 2005
                           Pakistan
                                                                          33
                    INCOME FROM BUSINESS                              Section 27

 Income Tax Bar
                    DEDUCTION – SPECIAL PROVISIONS
   Association
     Karachi
                    EMPLOYEE TRAINING AND FACILITY
                    A person shall be allowed a deduction for any expenditure
                    (other than capital expenditure) incurred in a tax year in
                    respect of–
                    (a)   any educational institution or hospital in Pakistan
  Workshop
on Income Tax
                          established for the benefit of the person‟s
                          employees and their dependents
                    (b)   any institute in Pakistan established for the training
                          of industrial workers recognized, aided, or run by the
                          Federal Government or a Provincial Government or a
                          local authority
  Hotel Sheraton    (c)   the training of any person, being a citizen of Pakistan,
29-30 August 2005         in connection with a scheme approved by the Central
                          Board of Revenue for the purposes of this section
                                                                               34
                    INCOME FROM BUSINESS                           Section 29

 Income Tax Bar
                    DEDUCTION – SPECIAL PROVISIONS
   Association
     Karachi
                    BAD DEBTS

                    A person shall be allowed a deduction for a bad debt in
                    a tax year if the following conditions are satisfied,
                    namely:-
  Workshop
on Income Tax       (a)   The amount of the debt was –

                          (i)    previously included in the person‟s income
                                 from business chargeable to tax

                          (ii)   in respect of money lent by a financial
                                 institution in deriving income from
  Hotel Sheraton
29-30 August 2005
                                 business chargeable to tax;

                                                                           35
                    INCOME FROM BUSINESS                           Section 29

 Income Tax Bar
                    DEDUCTION – SPECIAL PROVISIONS
   Association
     Karachi
                    BAD DEBTS

                    (b)   the debt or part of the debt is written off in the
                          accounts of the person in the tax year

  Workshop
on Income Tax       (c)   there are reasonable grounds for believing
                          that the debt is irrecoverable




  Hotel Sheraton
29-30 August 2005

                                                                           36
                    INCOME FROM BUSINESS                         Section 29

 Income Tax Bar
                    DEDUCTION – SPECIAL PROVISIONS
   Association
     Karachi
                    BAD DEBTS

                    It has been generally observed that the tax authorities
                    are interpreting the condition set-out in (c) above very
                    rigorously and are not allowing bad debts even where
  Workshop
on Income Tax       debts have been written off.


                    The appellate forum and courts have however,
                    interpreted this condition liberally and held that
                    provisions can also be allowed provided they are
  Hotel Sheraton    ascertained and quantified on reasonable basis.
29-30 August 2005

                                                                          37
                    INCOME FROM BUSINESS                           Section 29

 Income Tax Bar
                    DEDUCTION – SPECIAL PROVISIONS
   Association
     Karachi
                    BAD DEBTS

                    In case a bad debt is allowed in a year and
                    subsequently the debt is recover it is to be offered for
                    tax in the year in which recovery take place
  Workshop
on Income Tax




  Hotel Sheraton
29-30 August 2005

                                                                           38
                    INCOME FROM BUSINESS                      Section 29A

 Income Tax Bar
                    DEDUCTION – SPECIAL PROVISIONS
   Association
     Karachi
                    PROVISION FOR CONSUMER LOANS

                    Banking Companies, Non-Banking Financial Institution
                    and House Building Finance Corporation can claim a
                    deduction upto 3% of income arising from consumer
  Workshop          loans for creation of a reserve to offset debt out of
on Income Tax
                    such loans


                    Where the actual bad debts out of consumer loans
                    exceed the 3% ceiling the balance can be carried
                    forward for off setting against the reserve for the
  Hotel Sheraton
29-30 August 2005   following years

                                                                       39
                    INCOME FROM BUSINESS                          Section 28

 Income Tax Bar
                    DEDUCTION – SPECIAL PROVISIONS
   Association
     Karachi
                    PROFIT ON DEBT, FINANCIAL COST AND LEASE PAYMENTS


                    Profit on debt incurred on a debt utilized for business,
                    lease rental paid for an assets used for business and
  Workshop          profit paid to depositors by commercial banks have
on Income Tax
                    been specifically stated as allowable deduction




  Hotel Sheraton
29-30 August 2005

                                                                          40
                    INCOME FROM BUSINESS                        Section 28

 Income Tax Bar
                    SPECULATION BUSINESS
   Association
     Karachi

                    It has been provided that where a person carries on
                    speculation business than such business shall be
                    treated as distinct and separate from any other
                    business carried on by that person
  Workshop
on Income Tax
                    Speculation business has been defined as follows –

                         any business in which a contract for the
                         purchase and sale of any commodity
                         (including stock and shares) is periodically or
                         ultimately settled otherwise than by the actual
  Hotel Sheraton         delivery or transfer of the commodity
29-30 August 2005

                                                                         41
                    INCOME FROM BUSINESS                             Section 28

 Income Tax Bar
                    SPECULATION BUSINESS
   Association
     Karachi
                    However a speculative transaction under the following
                    circumstances will not be considered speculation business

                    (a)   a contract in respect of raw materials or merchandise
  Workshop                is entered into by a person to guard against     loss
on Income Tax
                          through future price fluctuations for fulfilling   its
                          obligation

                    (b)   a contract in respect of stocks and shares is entered
                          into by a dealer or investor to guard against loss
  Hotel Sheraton          through price fluctuations
29-30 August 2005

                                                                              42
                    INCOME FROM BUSINESS                              Section 28

 Income Tax Bar
                    SPECULATION BUSINESS
   Association
     Karachi
                    (c)   a contract entered into by a member of a forward
                          market or stock exchange in the course of any
                          transaction in the nature of jobbing arbitrage to guard
                          against loss in the ordinary course of the person‟s
  Workshop
on Income Tax             business




  Hotel Sheraton
29-30 August 2005

                                                                               43
                    INCOME FROM PROPERTY                          Section 15

 Income Tax Bar     SCOPE
   Association
     Karachi
                    “Income from property” comprises of

                    rent received or receivable by the owner for a tax year

  Workshop          amounts not adjustable against the rent received from
on Income Tax       the tenant

                    subsequent recovery of irrecoverable unpaid rent
                    earlier allowed as deduction

                    unpaid liability in respect of a deduction for an
  Hotel Sheraton
                    expenditure earlier allowed on payable basis, if not paid
29-30 August 2005   within three years.

                                                                              44
                    INCOME FROM PROPERTY                            Section 15

 Income Tax Bar     SCOPE
   Association
     Karachi        Rent is the amount received or receivable by the owner of
                    land or a building as consideration for the use or
                    occupation of, or the right to use or occupy, the land or
                    building; and any forfeited deposit received under a
                    contract for the sale of land or a building
  Workshop
on Income Tax       However the following will not be considered as rent
                    the rent of a building let out together with plant and
                    machinery is specifically excluded and is chargeable under
                    the head “income from Other Sources”
                    any amount included in the rent for the provision of
                    amenities, utilities or any other service connected with the
  Hotel Sheraton    renting of the building is specifically excluded and is
29-30 August 2005
                    chargeable under the head “income from Other Sources”
                                                                             45
                    INCOME FROM PROPERTY                         Section 15

 Income Tax Bar     FAIR MARKET VALUE
   Association
     Karachi        Where the rent received or receivable is less than the
                    fair market rent of the property, the owner will be
                    treated as having derived the fair market rent for the
                    period the property is let on rent in the tax year

  Workshop          Ownership of land or building has a direct nexus with
on Income Tax
                    “income from property”. This means that any amount
                    received or receivable as consideration for the use or
                    occupation, or the right to use or occupy, any land or
                    building which is owned by the taxpayer is chargeable
                    under this head of income. While similar consideration
                    for any land or building not owned by the taxpayer falls
  Hotel Sheraton    under the head “income from Other Sources” e.g., sub-
29-30 August 2005   letting
                                                                         46
                    INCOME FROM PROPERTY                          Section 16

 Income Tax Bar     AMOUNT NOT ADJUSTABLE AGAINST THE RENT
   Association
     Karachi
                    Amount not adjustable against the rent received by the
                    owner of a building, from a tenant is treated as rent
                    chargeable to tax in the tax year in which it was
  Workshop
                    received and the following nine years in equal
on Income Tax       proportion i.e. one-tenth of the amount is treated as rent
                    received from the building for ten years commencing
                    from the year in which it was received



  Hotel Sheraton
29-30 August 2005

                                                                           47
                    INCOME FROM PROPERTY                          Section 16

 Income Tax Bar     AMOUNT NOT ADJUSTABLE AGAINST THE RENT
   Association
     Karachi
                    In case the amount not adjustable against the rent is
                    refunded to the tenant on termination of the tenancy
                    before the expiry of ten years and
  Workshop
on Income Tax       •    no further similar amount is received from the
                         succeeding tenant or the land or building is not
                         further let out, no portion of the amount is treated
                         as rent received for inclusion in the chargeable
                         income of the tax year in which it is refunded and
  Hotel Sheraton         in any subsequent tax years
29-30 August 2005

                                                                          48
                    INCOME FROM PROPERTY                        Section 16

 Income Tax Bar     AMOUNT NOT ADJUSTABLE AGAINST THE RENT
   Association

                    •
     Karachi
                        a further similar amount is received from the
                        succeeding tenant, the amount received from the
                        succeeding tenant as reduced by such portion of
  Workshop
                        the amount already treated as rent received from
on Income Tax           the preceding tenant, is treated as rent chargeable
                        to tax in the tax year in which further similar
                        amount is received and the following nine years in
                        equal proportion


  Hotel Sheraton
29-30 August 2005

                                                                         49
                    INCOME FROM PROPERTY                         Section 17

 Income Tax Bar     ADMISSIBLE DEDUCTIONS
   Association
     Karachi
                    Basis of deduction for expenditures is either:

                    • Actually paid during the tax year
  Workshop
                    • Payable for the corresponding tax year
on Income Tax
                    • Repairs  allowance equal to one-fifth of the rent of
                     the building chargeable to tax. This is a fixed
                     allowance admissible against the rent irrespective of
                     the amount if any, expended on the repairs of the
                     building, previously repair allowance was allowed on
  Hotel Sheraton
                     the basis of ALV
29-30 August 2005

                                                                         50
                    INCOME FROM PROPERTY                       Section 17

 Income Tax Bar     ADMISSIBLE DEDUCTIONS
   Association
     Karachi
                    • Premium paid or payable
                    • Local rate, tax, charge or cess paid or payable in
                     respect of the land or building
  Workshop
on Income Tax
                    • Ground rent paid or payable in respect of the land
                     or building;




  Hotel Sheraton
29-30 August 2005

                                                                       51
                    INCOME FROM PROPERTY                          Section 17

 Income Tax Bar     ADMISSIBLE DEDUCTIONS
   Association
     Karachi
                    • Profit (interest / mark-up) paid or payable on money
                     borrowed, including by way of mortgage, to acquire,
                     construct, renovate, extend or reconstruct the land or
  Workshop
                     building
on Income Tax
                    • Share in rent or share towards appreciation in value
                     of land or building paid or payable to House Building
                     Finance Corporation or a scheduled bank


  Hotel Sheraton
                    • Profit (interest / mark-up) paid on a property subject
29-30 August 2005    to mortgage or other capital charge
                                                                           52
                    INCOME FROM PROPERTY                          Section 17

 Income Tax Bar     ADMISSIBLE DEDUCTIONS
   Association
     Karachi
                    • Collection   charges on account of expenditure (not
                     exceeding six percent of the rent chargeable to tax)
                     paid or payable for the purpose of collecting the rent
  Workshop           due
on Income Tax

                    • Legal   charges i.e. expenditure for legal services
                     acquired to defend the title to the land or building or
                     any suit in a court connected with the land or building
                     in a court
  Hotel Sheraton
29-30 August 2005

                                                                           53
                    INCOME FROM PROPERTY                      Section 17

 Income Tax Bar     ADMISSIBLE DEDUCTIONS
   Association
     Karachi

                    Irrecoverable unpaid rent of the land or building
                    subject to the conditions that –

                       •   The tenancy was bonafide
  Workshop
on Income Tax
                       •   The defaulting tenant has vacated or steps
                           have been taken to compel the tenant to
                           vacate the land or building

                       •   The defaulting tenant is not in occupation of
                           any other land or building owned by the same
  Hotel Sheraton           person
29-30 August 2005

                                                                      54
                    INCOME FROM PROPERTY                        Section 17

 Income Tax Bar     ADMISSIBLE DEDUCTIONS
   Association
     Karachi
                       All reasonable steps have been taken to institute
                        legal proceedings for the recovery of the unpaid
                        rent or there are reasonable grounds to believe
                        that legal proceedings would be useless
  Workshop
on Income Tax          The amount of irrecoverable unpaid rent was
                        included in the chargeable income under the
                        head “income from property” of the relevant tax
                        year in which the rent was due and tax thereon
                        was duly paid

  Hotel Sheraton
29-30 August 2005

                                                                            55
                    INCOME FROM PROPERTY                        Section 17

 Income Tax Bar     INADMISSIBLE DEDUCTIONS
   Association
     Karachi
                    Expenditure other than those mentioned above.


                    The expenditure allowed under this section are
  Workshop          subject to the restriction contain in section 21 which
on Income Tax       lays down certain restriction on allowability of
                    expenses in computing income under the head
                    “Income from Business”



  Hotel Sheraton
29-30 August 2005

                                                                         56
                    INCOME FROM PROPERTY                          Section 15

 Income Tax Bar     FUNDAMENTAL CHANGES
   Association
     Karachi
                    VIZ-A-VIZ THE REPEALED ORDINANCE
                    Fundamental changes as compared to the
                    corresponding provisions of the repealed Income Tax
                    Ordinance, 1979 are:

  Workshop           •   the concept of computing the “income from
on Income Tax            property” on the basis of Annual Value, which was
                         the sum for which the property might reasonably be
                         expected to let from year to year, is done away
                         with. Now the “income from property” shall be
                         computed on the basis of actual rent received or
                         receivable for the period the land or building
                         remained in the use or occupation of, or the tenant
  Hotel Sheraton         had the right to use or occupy the premises
29-30 August 2005

                                                                           57
                    INCOME FROM PROPERTY                         Section 15

 Income Tax Bar     FUNDAMENTAL CHANGES
   Association
     Karachi
                    VIZ-A-VIZ THE REPEALED ORDINANCE

                     •   in consequence:

                         -   the concept of vacancy allowance, a deduction
  Workshop                   for the period the property remained vacant, is
on Income Tax                also done away with

                         -   no notional income chargeable to tax in
                             respect of any land or building against which
                             no rent is received or receivable by the owner

  Hotel Sheraton
29-30 August 2005

                                                                          58
                    INCOME FROM PROPERTY                         Section 15

 Income Tax Bar     FUNDAMENTAL CHANGES
   Association
     Karachi
                    VIZ-A-VIZ THE REPEALED ORDINANCE

                    •   rent of land is now chargeable under the head
                        “income from property”, which was previously
  Workshop              chargeable under the head “income from other
on Income Tax           sources”


                    •   forfeited deposit under a contract for the sale of
                        land or a building is also now chargeable under the
                        head “income from property”
  Hotel Sheraton
29-30 August 2005

                                                                         59
                    INCOME FROM PROPERTY                          Section 15

 Income Tax Bar     FUNDAMENTAL CHANGES
   Association
     Karachi
                    VIZ-A-VIZ THE REPEALED ORDINANCE

                    •   deductions allowed in computing income from
                        property can now be claimed either on the basis of
  Workshop              actually paid during the tax year or on the basis of
on Income Tax           payable for the corresponding tax year


                    •   liabilities in respect of deductions allowed on
                        payable basis are to be included in chargeable
                        income, if not paid within three years.
  Hotel Sheraton
29-30 August 2005

                                                                          60
                    CAPITAL GAIN                                 Section 15

 Income Tax Bar     SCOPE
   Association
     Karachi
                    Gain on disposal of a Capital Asset is chargeable to tax
                    under the head Capital Gains
                    Capital asset has been defined to mean property of
                    any kind held by a person, whether or not connected
  Workshop          with a business, but does not include –
on Income Tax
                    (a)   any stock-in-trade (not being stocks and
                          shares), consumable stores or raw materials held
                          for the purpose of business;
                    (b)   any property with respect to which the person is
                          entitled to a depreciation deduction under
  Hotel Sheraton          section 22 or amortization deduction under
29-30 August 2005
                          section 24; .
                                                                         61
                    CAPITAL GAIN                                    Section 15

 Income Tax Bar     SCOPE
   Association
     Karachi        (c)   any immovable property; [or] ;

                    (d)   any movable property held for personal use by
                          the person or any member of the person‟s family
                          dependent on the person except for the
  Workshop                following -
on Income Tax
                          •   A painting, sculpture, drawing or other work
                              of art;
                          •   jewellery;
                          •   a rare manuscript, folio or book;
                          •   a postage stamp or first day cover;
  Hotel Sheraton          •   a coin or medallion; or
29-30 August 2005
                          •   an antique.
                                                                             62
                    CAPITAL GAIN                                  Section 37

 Income Tax Bar     SCOPE
   Association
     Karachi
                    Capital Gain is the difference between the
                    consideration received by the person on disposal of the
                    assets and the cost at acquisition

  Workshop          If the capital asset becomes the property of the person
on Income Tax
                    by way of –

                    (a)   under a gift, bequest or will;

                    (b)   by succession, inheritance or devolution; .
  Hotel Sheraton
29-30 August 2005

                                                                          63
                    CAPITAL GAIN                             Section 37

 Income Tax Bar     SCOPE
   Association
     Karachi        (c)   a distribution of assets on dissolution of an
                          association of persons

                    (d)   on distribution of assets on liquidation of a
  Workshop                company .
on Income Tax

                    The fair market value of asset on the date of the
                    transfer would be regarded as the cost.



  Hotel Sheraton
29-30 August 2005

                                                                     64
                    INCOME FROM OTHER SOURCES Section 37
 Income Tax Bar     SCOPE
   Association
     Karachi        Income not taxable under any head of income and not
                    exempt under the Ordinance is chargeable to tax as
                    “income from other sources”

                    The following sources of income have specifically been
  Workshop
                    included in the scope of “Income from other sources” –
on Income Tax
                    (a)    Dividend
                    (b)    royalty
                    (c)    profit on debt
                    (d)    ground rent
  Hotel Sheraton
29-30 August 2005   (e)    rent from the sub-lease of land or a building

                                                                           65
                    INCOME FROM OTHER SOURCES Section 37
 Income Tax Bar     SCOPE
   Association
     Karachi        (f)    income from the lease of any building together
                           with plant or machinery

                    (fa)   income from provision of amenities, utilities or
  Workshop                 any other service connected with renting of
on Income Tax              building

                    (g)    any annuity or pension

                    (h)    any prize bond, or winnings from a raffle, lottery
                           prize on winning a quiz, prize offered by
  Hotel Sheraton
                           companies for promotion of sale] or cross-word
29-30 August 2005          puzzle
                                                                          66
                    INCOME FROM OTHER SOURCES Section 37
 Income Tax Bar     SCOPE
   Association
     Karachi
                    (i)   any other amount received as consideration for
                          the provision, use or exploitation of property,
                          including from the grant of a right to explore for,
                          or exploit, natural resources;
  Workshop
on Income Tax
                    (j)   the fair market value of any benefit, whether
                          convertible to money or not, received in
                          connection with the provision, use or exploitation
                          of property

  Hotel Sheraton
29-30 August 2005

                                                                          67
                    INCOME FROM OTHER SOURCES Section 37
 Income Tax Bar     SCOPE
   Association
     Karachi
                    (k)   any   amount     received   by   a   person   as
                          consideration for vacating the possession of a
                          building or part thereof, reduced by any amount
                          paid by the person to acquire possession of
  Workshop
on Income Tax             such building or part thereof

                    (l)   Any amount received by a person from
                          Approved Income Payment Plan or approved
                          Annuity Plan under Voluntary Pension System
                          Rules, 2005
  Hotel Sheraton
29-30 August 2005

                                                                        68
                    INCOME FROM OTHER SOURCES Section 37
 Income Tax Bar     SCOPE
   Association
     Karachi
                    (m)   Any Amount (other than advance payment for
                          the supply of goods or services) received as
                          loan, advance, deposit, for issuance of shares
                          or gift by a person from another person (other
  Workshop
on Income Tax             than banking company or financial institution)
                          otherwise than by a cross cheque or through a
                          banking channel from a person holding NTN.




  Hotel Sheraton
29-30 August 2005

                                                                       69
                    INCOME FROM OTHER SOURCES Section 37
 Income Tax Bar     SCOPE
   Association
     Karachi        Expenditure paid in deriving income chargeable under
                    this head is allowable as a deduction in computing
                    income from other sources

                    Apart from the above the following specific deductions
  Workshop          have been specified –
on Income Tax
                          Any Zakat paid at the time of payment of
                           profit on debt

                          In computing income from lease of building
                           alongwith plant and machinery deduction
  Hotel Sheraton           shall be allowed for admissible normal and
29-30 August 2005          initial depreciation
                                                                         70
                    APPORTIONMENT OF DEDUCTION                   Section 67

 Income Tax Bar
   Association
                    A special provision has been inserted which requires
     Karachi        apportionment of expenditure where the expenses
                    relates to –

                    (a) The derivation of more than one head of
  Workshop              income
on Income Tax
                    (b) The derivation of income taxable under normal
                        law and the taxable under final tax regime

                    (c) The derivation of income chargeable to tax and
                        for some other purpose
  Hotel Sheraton
29-30 August 2005

                                                                         71
                    APPORTIONMENT OF DEDUCTION                     Rule 13

 Income Tax Bar      The Rules framed for the purpose of apportionment of
   Association       expenditure provide that –
     Karachi

                     (a)   Where an expense relates to a particular class
                           of income it shall be allocated to that class of
                           income
  Workshop           (b)   Common       expenses     including    financial
on Income Tax              expenses are to be allocated on the basis of the
                           gross receipts of a particular class of income
                           and total gross receipt from all classes of
                           income
                     In case the gross revenues comprise of gross sales,
                     net gain, brokerage, commission and other income
  Hotel Sheraton     than while allocating the expenses instead of gross
29-30 August 2005
                     sales the gross profit should be taken as revenue.
                                                                         72
                    APPORTIONMENT OF DEDUCTION                        Rule 13

 Income Tax Bar
   Association
                    The allocation of expenditure is required to be certified
     Karachi        by a Chartered Accountant or Cost and Management
                    Accountant where the assessee is required to submit
                    audited accounts. Such certified working would be
                    accepted unless significant variation is found.
  Workshop
on Income Tax
                    Where audited accounts are not required the
                    allocation made on the basis as discussed above
                    would be accepted unless variation is found.



  Hotel Sheraton
29-30 August 2005

                                                                           73
                    APPORTIONMENT OF DEDUCTION                   Rule 13

 Income Tax Bar     For the purpose of apportionment classes of income
   Association      have been defined to mean –
     Karachi

                    (a)   Each head of income listed in Section 11
                          bifurcated between Pakistan source and foreign
                          source
  Workshop
on Income Tax       (b)   Income exempt from tax

                    (c)   Income taxable under final tax regime,
                          dividends, certain payments to non-resident,
                          shipping and air transport income of non-
                          resident person
  Hotel Sheraton
29-30 August 2005

                                                                      74
                    METHOD OF ACCOUNTING                        Section 32

 Income Tax Bar
   Association
     Karachi        Income chargeable to tax is required to be computed in
                    accordance with the method of accounting regularly
                    employed


  Workshop          Income from business derived by a company is
on Income Tax       required on an accrual basis

                    Other assessee‟s have an option either account for
                    income on a cash or accrual basis


  Hotel Sheraton
29-30 August 2005

                                                                        75
                    METHOD OF ACCOUNTING                            Section 33

 Income Tax Bar
                    CASH OR ACCRUAL BASIS ACCOUNTING
   Association
     Karachi        Under the cash method income is to be recorded on a
                    receipt basis and expenses are to be recorded or
                    capitalized when paid

                    Under the accrual method income is to be recorded when
  Workshop          it is due to the person and expenses are deducted or
on Income Tax       capitalized when they are payable

                    An amount is treated as due to a person when a person
                    become entitled to receive it no matter when it is received

                    An amount is payable by person when all the events that
                    determine liability and the liability can be determine with
  Hotel Sheraton
29-30 August 2005
                    reasonable accuracy

                                                                             76
                    METHOD OF ACCOUNTING                        Section 35

 Income Tax Bar
   Association
     Karachi


                    Stock-in-trade disposed by the person in a year is the
                    difference between the opening stock plus purchases
  Workshop          less closing stock
on Income Tax




  Hotel Sheraton
29-30 August 2005

                                                                         77
                    MINIMUM TAX                                     Section 113

 Income Tax Bar
   Association
                    Applies only to resident Companies, where -
     Karachi
                    •No tax is payable due to-
                        -   sustaining of loss,
                        -   setting off of losses of prior years,
  Workshop              -   exemption from tax,
on Income Tax           -   application of credits and rebates,
                        -   claiming of allowances or deductions

                    •   allowed under the Ordinance or any other law      for
                        the time being in force

  Hotel Sheraton    •   Tax payable is less than 0.5% of the amount
29-30 August 2005       representing the person`s turnover from all sources
                                                                                78
                    MINIMUM TAX                                 Section 113

 Income Tax Bar     Turnover has been defined as follows -
   Association
     Karachi
                       • the gross receipts, exclusive of sales tax and
                          Federal Excise duty or any trade discounts
                          shown on invoices or bills, derived from the sale
                          of goods;
  Workshop             • the gross fees for the rendering of  services or
on Income Tax
                         giving benefits, including     commissions;
                       •   the gross receipts from the execution of
                           contracts
                       •   the company‟s share of the amounts stated
                           above of any association of persons of which
  Hotel Sheraton           the company is a member.
29-30 August 2005

                                                                         79
                    MINIMUM TAX                                Section 113

 Income Tax Bar
   Association       Retailers being an individual or association of
     Karachi         person having turnover upto Rs.5,000,000 per tax
                     year can opt for payment of a final tax of 0.75% on
                     their turnover
                     Retailers whose turnover exceeds Rs.5,000,000 for
  Workshop
                     a tax year dealing in textile fabrics and apparels,
on Income Tax
                     ready made garments, fashion wear, leather goods,
                     footwear, carpets, surgical goods and sports goods
                     can opt for payment of final tax at the rate of 1% of
                     the turnover

                     The 1% tax would be treated as part of the sales tax
  Hotel Sheraton
29-30 August 2005
                     recovered on such turnover at 3% of the declared
                     value
                                                                        80

								
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