Chapter III

9/29/20
CONTENETS
Ø TAXABLE INCOME
Ø INCOME IN KIND
Ø DIVIDEND INCOME
Ø STOCK OPTIONS
Ø NON TAXABLE INCOME
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LEARNING OUTCOMES
OBJECTIVE
ØTax On Natural Persons
ØTax calculation and exemptions
• Identify the list of non-deductible personal expense items
ØTaxable and non-taxable income
• List the taxable receipts and their tax treatment
• Identify receipts from employment subject to tax
• Identify taxable elements in rental income
• Understand tax treatment of dividend income
• Understand tax implications of stock options
• Identify the non-taxable receipts 3
1. TAXABLE INCOME
Taxable Income is the aggregate of all the income
earned by a natural or legal person in a tax year and
which has been identified as taxable by the Income Tax
Law.
As per the Income Tax Law, the following income is
taxable i.e. the person earning/ receiving this income is
required to calculate and pay income tax on it:
1. Salaries, wages, fees, commissions and bonus
payments
2. All income derived from business, industry,
construction and other economic activities.
3. Royalties, rewards, prizes, winning from lotteries,
bakhshishis, gratuities etc. 4
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1. TAXABLE INCOME…
Example:
§ An Afghan businessman runs a small shop selling car
parts. During the tax year, the owner decided to pay
Badar, one of the employees, an extra amount of
Afs.5,600 in excess of his regular salary.
§ Thiswas to reward Badar for his excellent performance
during the year.
4. Income from discovery and extraction of any
minerals, petroleum, or any other resources physically
situated in Afghanistan.
5. Capital gains from sale or exchange of movable and
immovable property or intangible assets. 5
6. Profit share from partnership. Partners of a
partnership must recognize the partnership’s income or
loss as it accrues under the partnership’s method of
accounting.
Example:
§ Abdul and Qayyum are Afghan residents, who have a 70:30 profit
sharing ratio in a partnership business.
§ The business earned a profit of Afs.870,000 in the tax year.
7. Income or in-kind (see section 2) benefit received

from labour, capital or economic activity.
8. Income from renting or leasing immovable property
used for commercial, industrial, residential or other
economic activities. 6
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9. Interest from loans, profit on deposits and income
from investments.
10. Dividends received from resident companies
operating in Afghanistan. (See Section 3)
11. Stock options. (See Section 4)
2. INCOME IN KIND
A receipt i.e. income received does not necessarily have
to be in the form of currency, coin, or money to be
subject to taxation.
ØIncome received as asset:
If a payment for a product or service is made by transferring the
ownership of an asset as consideration, then the fair market value
of the asset received as compensation, is treated as the taxable
income amount for the recipient.
Example:
§ Bashir has been running his barber shop for more than 5 years and
normally always accepts cash payments for the services provided.
However a regular customer, unable to make a cash payment
offered to pay his charges by giving Bashir his watch.
§ The watch was worth Afs.1,200 in the market as at that date. 8
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2. INCOME IN KIND…
ØIncome received as Debt Instrument:
If a taxpayer receives a debt instrument or note in
exchange for goods or services provided, the face
value of the debt instrument or note will be assumed
to be equal to the fair market value of the good or
service sold.
The same principle applies in finance lease

transactions where the lessor receives a debt
instrument or note in exchange for making available
the leased asset to the lessee.
Example:
Bushra sold her car that she had bought for Afs.800,000
to Aiman in exchange for a five-year debt note with a
face value of Afs.1,000,000 and bearing an interest rate
of 5%.
The note has the following payment schedule:
Year One Afs. 230,974.80
Year Two Afs. 230,974.80
Year Three. Afs. 230,974.80
Year Four Afs. 230,974.80
Year Five Afs. 230,974.80
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Example…
The payments are amortized as follows:
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If the interest rate on the debt or note is substantially
above or below market, the fair market value of the note
shall be determined by looking at what the appropriate
interest rate on the note should have been if the interest
rate according to the market was used. This is assessed
based on all the relevant facts and circumstances.
Continuing with the example above:
Upon audit and based on a review of the facts and circumstances,
the Afghanistan Revenue Department determined that in the
transaction between Bushra and Aiman, Bushra would only have
been entitled to an interest rate of 2% on the debt note, as per the
market rate. As the true market interest rate is lower than 5%, the
actual present value of the note was higher than its face value of
Afs.1,000,000 on the date of transfer.
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The true value of the note is assessed as Afs.1,088,690
and the associated amortization worked out as follows:
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3. DIVIDEND INCOME
Dividend income received by a person is normally treated as
taxable income.
This covers any distribution by a company in cash or in the
form of property/ benefit provided to shareholders,
including:
§ Any tangible or intangible assets
§ Shares in the company
§ Discounts on any purchases from the company
§ Loans
§ Use of any property of the company.

A dividend will become taxable on the shareholders even if
it is not formally declared.
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3. DIVIDEND INCOME…
Example:
A.
§ Kalim is the sole shareholder of an Afghan corporation that
offers car rental services.
§ In 1387, the company earned profits of Afs.140,000 profit but it
was later identified that the amount did not include deemed
income from the car rental services availed by Kalim’s family.
§ Kalim’s family used the car rental services thrice during the year
and did not pay for them, although the rent charges amounted to
Afs.34,000.
B.
If in the example above the Afghan corporation only had
Afs.20,000 of earnings for the year.
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The distribution must be made out to the recipient in
the capacity of a shareholder.
If the distribution is provided for any other reason
unrelated to the person’s capacity as a shareholder,
then the distribution will not be treated as a dividend.
Example:
§ Qaiser is a shareholder of ‘Built-it’ Construction Corporation. His
place of residence along-with that of his neighbors is damaged
by an earthquake.
§ ‘Built-it’ Corporation agrees to re-build the residential area as an
act of charity. It would have cost Qaiser Afs.870,000 to re-build
his residence himself.
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§ Taxable Value of the Dividend:
Where a benefit is provided to a shareholder in a form
other than cash, the market value of the transfer is
treated as the Taxable value of the dividend.
§ Assets: Any tangible or intangible assets or shares in
the company provided to a shareholder at less than the
market value will lead to the recognition of a dividend
pay-out.
The taxable amount value will be calculated as:
Dividend = Market value of the asset – Cash paid by shareholder
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Example:
§ Ahmad is a shareholder of ABC Mart.
§ The company sells grocery products to the public and the
shareholders are allowed to buy goods from the store for 40% of
their market value. This reduces the value of the goods to lesser
than the original cost as well.
§ For the year 1387, Ahmad buys goods with market value of
Afs.20,000 from the store and makes payment of only Afs.8,000.
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Loans: If loans are offered to the company’s shareholders
at terms that are more favorable than those offered in
commercial loans in an arms-length transaction, then the
savings made by the shareholder will be treated as
dividends.
The taxable amount is calculated as follows:
Dividend = Interest payable as per commercial terms – Interest

paid on favorable terms
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Example:
§ Qadir is
a shareholder as well as an employee of an
Afghan corporation limited.
§ In the capacity of a
shareholder, Qadir has taken a loan
of Afs.100,000 from the company at a per annum interest
rate of 0.5% and is required to pay it back within a year.
§ If Qadir had
taken this loan from a commercial bank, he
would have had to pay interest at the rate of 3%.
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Use of Company Property: If a shareholder is allowed to
use the company property on terms more favorable than
those at which the property is made available to the
general public i.e. free of any charge or at a discounted
rate, then the use of the company property will be treated
as a dividend.
The taxable amount will be calculated as follows:
Dividend = Charges applied on general public – Charges paid by

the shareholder
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Example:
§ Kulsoom owns 50% share in a car rental company. The
company normally charges a rent of Afs.5,000 per day to
any customer willing to rent a car for a full 12 hour day
and half of the value for a half day rent.
§ Kulsoom rents a car for 2 full days but as the
shareholder, she pays rent of only Afs.1,000 per day.
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4. STOCK OPTIONS
The taxation of stock options depends on whether the
stock option is issued as compensation for services or for
property.
A. Stock options issued as compensation:
§ Some companies offer their stock options to their
employees by way of compensating them for their work
or as a reward for performance.
§ These stock options are not subject to tax till the time
they are exercised.
§ The corporation thatoffers the stock option as
compensation is not permitted to claim a deduction until
the employee recognizes the income associated with
exercising the stock option. 23
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4. STOCK OPTIONS…
Example:
§ Jabbar hasbeen working for ABC Ltd for more than two
decades. As part of his remuneration package, he is
allowed to purchase the company’s stock at a price
which is lower than the market value of the company’s
stock.
§ On 15 Qaws 1387, Jabbar exercised this option and
purchased 100 shares of ABC Ltd.’s stock for Afs.70 per
share, when the market value of the shares on the day
was quoted at Afs.98 per share.
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4. STOCK OPTIONS…
B. Stock options issued for property:
§ In some cases, the optionsare offered in the form of a
capital purchase transaction.
§ The taxconsequences of stock options that are issued
for property are held “open” until the option is
exercised or lapsed.
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4. STOCK OPTIONS…
Example:
A:
§ Akhtar, an Afghan resident owns a car which he purchased for
Afs.120,000.
§ Akhtar is now selling the car and his friend Rayan wants to purchase
the car but he does not have the money to purchase it immediately.
§ Akhtar offers Rayan an option to purchase the car at any time
during the next twelve months for a price of Afs.100,000 but
requests an immediate payment of Afs.10,000 for this option.
§ Within the allotted time Rayan purchases the car by paying the
agreed upon price of Afs.100,000.
B: The facts are the same as in Example A, except that Rayan does
not exercise the option. 26
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5. NON-TAXABLE INCOME
The following receipts are not subject to income tax as
per the law and are not included in the tax computation or
return of the natural persons:
Grants, gifts and awards
§ These are normally offered by the state, foreign
governments, international organizations or non-profit
organizations for contributions by individuals for
science, art, literature, social progress and international
understanding.
§ Although grants, giftsand awards are given in special
circumstances or in recognition of unusual service or
accomplishment but annual bonuses, overtime and
other benefits given on a non-selective basis to 27
employees, are still taxable income for the recipient.
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5. NON-TAXABLE INCOME…
Example:
Identify which of the following awards or payments will
be treated as Non Taxable and which will be included in
the tax return of the recipient as Taxable Income:
§ Red Cross donated US$500 to a family, who lost their house
in an earth quake.
§ The Government awards a doctor with a gold medal as
recognition of the efforts he has made in providing
medical care to people residing in regions that are not
easily accessible.
§ Lighten-up
Ltd. pays Afs.7,000 to Khadim for having
made the highest number of insurance sales in the
month. 28
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Scholarship/ fellowship:
§ Amounts paid as scholarship or other grants for the
purpose of training: scientific, technical or/and for
professional capacity building are not taxable on the
recipient.
§ This includes travel funds and living expense funds as
well as reimbursement for tuition fees, cost of books,
supplies and other expenses.
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Example:
Identify which of the following receipts will be treated as
Taxable or Non-Taxable income:
I. Hadi receives a scholarship from the Government,
which covers his travel, hotel, bills, lodging, tuition
fees, books, medical costs, etc., plus an allowance for
clothing, food, and personal expenses of Afs.9,000 per
month.
II. Naima receives Afs.10,000 as recognition of her work
as a sales person and her organization also decides to
sponsor her Marketing degree education. This will
cost the organization Afs.74,000.
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Insurance/ Compensation Receipts:
§ Payment received from an insurance company as a result
of loss, misfortune, sickness, etc. against which the
recipient was insured, is not taxable. This is regardless of
whether the individual paid the premium or not.
§ Like-wise compensation paid for personal injuries,
sickness, restitution of reputation or other harm inflicted
on a person is not taxable.
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Example:
§ Kashif andAbid are two employees of Wound-it Ltd.
While working in the factory one day they both
sustained injuries due to an accident in the production
process.
§ Each received Afs.250,000 as insurance payment by the
company. It was identified that while Kashif had always
paid monthly premiums towards the company’s
insurance policy; Abid had never paid the premium for
insurance coverage.
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Insurance received by a beneficiary upon the death of an
insured person is not taxable income of the beneficiary.
Example:
§ Wound-it
Ltd has a life insurance policy in place for its
employees.
§ Asper the terms of the policy, the beneficiary of a
deceased employee will be entitled to receive a monthly
income of Afs.5,000.
§ Post
the accident, Abid passes away and his wife
becomes entitled to receive the monthly insurance
amounts. 33
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Proceeds of borrowings:
Receipts which are proceeds of borrowing are not
taxable.
Example:
Haider took Afs 50,000 from his bank against a promissory note.
Capital receipts for stock or bonds:

Receipts from the issue of stock or sale of corporate
bonds are not taxable income.
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Example:
§ Javier Ltd. has
been operating in Kabul since 1374.
However after having recently faced a slump, the
company is in dire need of funds to sustain the business.
§ The company’s management opted for raising equity and
debt both to generate the necessary funds.
§ In Hamal 1387, the company issues shares of stock at a par
value of Afs.1,000 per share and is able to sell 20,000
shares within the same month.
§ In the month of Qaws, the company sells bonds
redeemable in 10 years at Afs. 5,000 each with interest
payable annually at a rate of 2%. It manages to sell 2,000
such bonds. 35
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Example...
Important: If the bonds are sold for more than their face value, then
the extra income generated by the company (called premium) will be
treated as taxable income.
§ So if Javier Ltd sold the bonds for Afs.8,000 each instead of their face
value of Afs.5,000, then Afs.3,000 per bond sold will be taxable
income.
§ Subsequently if the bonds are sold for less than their redeemable
value, the discount in the value is treated as a deductible expense.
§ In either case of Premium or Discount, the amount shall be allocated
over the term (period of years from date of issue to date of
redemption) of the bond.
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Example...
§ So if Javier Ltd had sold 2,000 bonds for Afs.8,000 instead of Afs.5,000
and the bonds are redeemable in 10 years, then the following
working will apply:
§ Non-taxable receipt = 2,000 x Afs.5,000 (face value) =
Afs.10,000,000 Taxable Premium = 2,000 x Afs.3,000 (excess
receipt) = Afs.6,000,000
§ The Afs.6,000,000 taxable income will now be recognized over the 10
years of the bond term, so Javier Ltd will include Afs.600,000 as
taxable income in its return for the next 10 years.
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Assets acquired through mergers:
D
Assets acquired through mergers are not taxable at the corporate or

shareholder level if any one of the following requirements are satisfied:
§ The transaction qualifies as a “merger” under Afghanistan’s 1955

Commercial Code or any successor law to the extent that the
shareholders exchange stock of the merged corporations for stock of
the surviving corporation. This is normally termed as a Paper for
Paper Take-over.
§ An Afghan resident may transfer stock or other property to an Afghan
corporation or limited liability company provided that after the
exchange, the Afghan resident owns 5% or more of the stock of the
corporation. For this purpose, stock shall be measured by both voting
power and value.
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Example 1:
§ Company A and Company B merge to form a new
Company C.
§ Company Cacquires the cash, assets and liabilities of
both Company A and B.
§ The existingshareholders of Company A and B are
offered and they accept the new shareholding in
Company C. Each shareholder is offered 1 share of
Company C in exchange for 1 share of Company A or B.
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Example 2:
§ Aarashand Badih are Afghan residents and have been
running their individual businesses selling artifacts in
Kabul.
§ They decided to merge their businesses together to form
a corporation, with each individual contributing the
following:
§ Aarashcontributes Afs.150,000,000 to the corporation and
gets 64% shareholding of the company.
§ Badih contributeshis inventory worth Afs.84,000,000 and
gets the remaining 36% shareholding.
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Example 2 Continuation…
§ Some years later, Aarash decides to transfer some land he
owns to the company.
§ Both Aarashand Badih agree that in exchange for the
land, Aarash should get an increased interest of 3% in the
company, with the associated voting power and value.
§ Asa result, post the transfer of the land worth
Afs.14,000,000, Aarash becomes the 67% shareholder of
the company and Badih’s shareholding goes down to 33%.
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Expropriation of property by creditors or loan repayments
§ When creditors take over the property pledged by the debtors, the
transfer of movable or immovable assets is treated as a tax-free
transfer.
§ Money received by the lender from the borrower in repayment of a
loan is not income and is not subject to income tax.
§ Finance lease payments made by the lessee to the lessor, which
represent the principal amount of investment in the cost of the leased
asset is also non-taxable income of the lessor.
Inherited assets
§ The value of an asset acquired through gift, bequest or inheritance is
excluded from income. However if such an asset, post inheritance is
rented out or sold, the income arising from it will be taxable.
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Interest on State issued bonds
Interest on bonds issued by the State or by municipalities of
Afghanistan is non-taxable income, whether received by an individual
(Afghan or alien), a corporation, or a limited liability company,
(Afghan or foreign).
Inventory used for personal purposes by trader:
Personal use of the goods produced or manufactured by a taxpayer,
including food and fuel is not treated as a deemed sale and therefore
has no tax implications. This includes personal use by members of the
taxpayer’s household.
State pension
Pension paid to retired natural persons by the Government of
Afghanistan is not taxable.
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Example:
Mr. Amjad received the following income in the tax year 1387:
§ Salary of Afs.77,000 from XYZ Orient Ltd. which rents out cars and
heavy bikes. He also received commissions of Afs.2,500 from the
company.
§ Amjad already has a 2% shareholding in the company. During the
year, Amjad took Afs.7,000 loan on beneficial terms from the
company, paying an interest rate of 0.5%. The same loan if obtained
from a bank, would have required a 3٪ interest payment.
§ As part of his remuneration package, Amjad is allowed to purchase
further company stock at a price lower than the daily market value of
the company’s stock.
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Example…
§ On 15 Qaws,1387, Amjad exercised this option and purchased a 100
shares of XYZ Orient Ltd.’s stock for Afs.70 per share, when the market
value of the shares that day was quoted at Afs.98 per share.
§ Amjad also utilizes the company’s car. While the company normally
charges a rent of Afs.5,000 per day to external customers, Amajd paid
only Afs.1,000 per day for 2 full days use of a company’s car.
Other information
§ During the year, Amjad let out a portion of his property for a per
annum rent of Afs.6,000.
§ He had also applied for talent hunt scholarship being operated by a
semi government department of Afghanistan. Amajd received a total
sum of Afs.5,000 from the scheme.
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§ On 12 Qaws, Amjad had an accident and as a result
received Afs.4,500 for medical treatment from the
insurance company.
Required:
Calculate Amjad’s total taxable amount for the tax year
1387.
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9/29/20

7. Income or in-kind (see section 2) benefit received

The same principle applies in finance lease

§ Use of any property of the company.

Dividend = Market value of the asset – Cash paid by shareholder

Dividend = Interest payable as per commercial terms – Interest

Dividend = Charges applied on general public – Charges paid by

Capital receipts for stock or bonds:

Assets acquired through mergers are not taxable at the corporate or

§ The transaction qualifies as a “merger” under Afghanistan’s 1955

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