TAX YEAR 2021-22 AVY Ct LO YE July 2021 A Text Book of INCOME TAX LAW ADC, B.Com (Hons.), BS (Commerce, Acc. & Fin,), BBA Dr. Zulifqar Ahmad Bowra Prof. Rifat Iqbal Qazi Shahzad Ehtesham Scanned with CamScannerTAX YEAR 2021-22 Modified Upto July 2021 DR. ZULIFQAR AHMAD BOWRA . QAZI SHAHZAD EHTESHAM AZEEM ACADEMY Publisher & Booksellers. 22-Urdu Bazar Lahore. Ph: 042-37231448, Fax: 042-37232129 Website: www.azeemgroups.com E-mail: info@azeemgroups.com Scanned with CamScannerCONTENTS Page No. Cra ‘i ag chapter #1 | INTRODUCTION To INCOME TAX LAW 01-10 4 chapter #2 | DEFINITIONS UNDER THE INCOME TAX ORDINANCE 11-44 Chapter#3 | EXEMPTIONS UNDER THE INCOME TAX ORDINANCE | 45 - 70 Chapter # 10 | CAPITAL GAINS chapter #4 | COMPUTATION OF INCOME TAX 71-90 Chapter #5 | INCOME FROM SALARY 91-126 Chapter #6 | INCOME FROM PROPERTY 127 - 142 Chapter #7 | CAPITAL AND REVENUE 143 - 152 chapter #8 | DEPRECIATION & AMORTIZATION 153 = 160 Chapter #9 | INCOME FROM BUSINESS 161 - 180 181-194 INCOME FROM OTHER SOURCES FINAL TAX REGIME & MINIMUM TAX Chapter # 11 Chapter # 12 Chapter # 13 | SET OFF AND CARRY FORWARD OF LOSSES 195 - 208 209 - 218 219 - 228 Chapter #14 | PENALTIES, OFFENCES AND PROSECUTIONS 229 - 240 Chapter # 15 | RETURNS AND ASSESSMENTS 241-250 Chapter # 16 | PAYMENT OF TAX 251 - 269 Chapter # 17 | ADMINISTRATION (INCOME TAX AUTHORITIES) 271 ~ 292 Chapter # 18 | APPEALS 293 - 302 Chapter # 19 | TAX ACCOUNTING 303 - 306 [Chapter # 20 | PRACTICAL PROBLEMS 307 - 406 | we REVISIONAL QUESTIONS 407 - 412 A, i (ae ve UP-TO-DATE PAPERS 413 - 72] Scanned with CamScannerA Text Book of Income Tay Lay INTRODUCTION TO INCOME TAX LAW_— SOS NEED FOR: Tax has always been a maj ‘or source of revenue for every government, Income tay et vy/impose to generate revenue, necessary tg i ces, whit e governments levy! u essa ee ir pol aire and administrative oblizations. Eee regulations discharge their pol an by the states now a day, are not the resul a ey iscussion of beam Re Goes Earned amended or modified according to the budgetary or debate. The: requirements of the governments. E LAWS: ‘ORY OF INCOME TAX _ HIST! rhe syllabus of Income Tax Law emphasizes or focuses on those provisions, rules id ees ‘whieh are only, related to the tax matters of oariae ee it is ea discuss those parts-of history of income tax laws es to the niles revailing/prevailed in Pakistan and are considered as milestones of its taxation structure, preva "a A brief review of such laws is as under. Income Tax Act 186 Pakistan came into existence on 14" August 1947. Before this, it was a part of undivided India or Sub-continent. In sub-continent (Undivided India), the concept of tax on incomes of the people was introduced by promulgating the Income Tax Act 1860 in July 1860 on the English lines under British regime. Income Tax Act 1869: In 1869, the law named Income Tax Act II proposed different rates of tax on different types of incomes of a person. Income Tax Act 1886: The Income Tax Act 1886 gave the proper definition of agricultural income and declared such income exempt from tax. The law also introduced the concept of concession in the amount of tax against the payment of life insurance premium to promote the culture of investment and saving. Income Tax Act 1918: In the “Income Tax Act 1918", a . a distinction’ between “Taxable Income” and “Total Income” was introduced and this distinction is still prevailing in our law. All India Committee: _ All India Commitice was set up in 1921 to investigate the deficiencies of the taxation structure of country at that point of time. Scanned with CamScannerChapter-1: Introduction to Income Tax Law 3 Income Tax Act 1922: In the light of suggestions gi i i stions given by the All India Comimittee in its Income Tax Act 1922 was introduced. The Act provided the complete iat assessment and method of fixing the tax rates according to the need of government. INCOME TAX LAWS IN PAKISTAN: When Pakistan came into, being, the government of Pakistan promulgated the Income Tax Act 1922, as amended up to the date for regulating the taxation system in Pakistan. Applicability of the Income Tax Aet 1922: The provisions of the Act were’extended to the whole parts of Pakistan except the specified areas. y . so Taxation Inquiry Committee: ‘A “Taxation Inquiry Committee” was formed in 1 officials and the representatives of trade and commerce. 958 which was consisting of Recommendations of the Committee: mitted a report after keen analysis of prevailing dations. Some of the recommendations were ent of Income Tax Act 1922. “Taxation Inquiry Committee” subt tax system and suggested some recommen ‘accommodated which resulted in the amendm ‘Abolishment of Super Tax: In. 1959, super tax imposed on except registered firms and companies. ‘the incomes of all the persons was abolished Slab Rate as a Percentage of Income: In 1959, the rates of each slab were expressed considering the recommendations of “Taxation Inquiry Committee”. asa percentage of income Change in Financial Year: Before 1960, the financial year was considered fiom 1” April to 31 1960, it was changed from 1“ July to 30" June. Introduction of Income Tax Committee: - In 1961, CBR introduced an “Income Tax Committee”.. Main purpose of introduction of such committee was to make recommendations for simplification of the Income Tax Act 1922 and procedure of taxation. Self Assessment Scheme: Before 1965, an assessment offic determine the tax liability of the person introduced. ** March but in er was authorized to assess the income and but in 1965, “Self Assessment Scheme” was Scanned with CamScannerBook of Income Tax Lay Income Tax Ordinance 1979: sn the context of the Income Tax Agy FIL 1979, lots of amendments were MEE I oticated law and difficulties we Fee amenudnents the ACC DE ‘view, the government promulgated 4 192; Asaresult of s ing, these difficaltics "Ordinance 1979” through, the Finaneg arose in its working, a “phe Income Tax a concepts of the repealed Act, sg cme tnx law name s bas ° new income tax law pare and ineluded all the vr the last 57 years is not rendered Ordinance on June 28 re ease kaw Dulle UP or of 167 Sections, 14 Chapters and at the benefit of the whole o we the es ene ‘Tax Ordinane' : useless, The “ Schedules. was consiste National Tay Reform Commi formed a National Tax Reform Commission, jt ee ernment fo! iol F In 1985, the Federal Govern Natiorial Assembly, high government officials of Senate a . mission was to suggest way al was cons lists. Major purpose of such as on i 'Y and and renowned industrial : sh reset of ax laws in Pakistan, xd of member means to improve the & Tax Survey 19-2000: ; e-Tax Survey 1999-2000: ce — 1999-2000, under the Income Tax Ordinance 1979, an income tax survey was In 1999-: a ion sl ¢ the suggestions and ailing taxation structure and to procure 7 ted to analyze the prevailing taxal ‘conducted to analy i recommendations Irom surveyors. Tax Amnesty Schemes: Many tax amnesty schemes were introduced under the Income Tax Ordinance 1979. These’ schemes were introduced to provide a‘chance to black money holders, so that they can change their black money into white money. Income Tax Ordinance 2001: After 22. y modernize the law namely, ‘ars’ of the promulga tion of the Income Tax Ordinance 1979, to tion system, the government of Pakistan introduced a new income tax “The Income Tax Ordinance 2001” which was promulgated on September 13, 2001. It was published in the Extraordinary Gazette of Pakistan at pages bearing Nos, 969 to 1217, Short Title of the Ordinance: Under Section 1, the Ordinance Specifies that “The Income Tax Ordinance 2001” Shall be the short title of the law. Applicability of the Ordin Under Section 1. the Ordinance extended to the whole ance: sallhe specifies that the Income sha Parts of Pakistan, x Ordinance 200! Scanned with CamScannerChapter-1: Introduction to Income Tax Law Date of the Enforcement of the Ordinance: Scction 1 of the Ordinance, empowers the Federal Government to notify the dat from which the Income Tax Ordinance 2001 shall come into force. The Federal Government in its notification No. $.R.O. 381(1)/2002, dated 15" June, 2002, announced that the Income Tax Ordinance, 2001 shall come into force on the first day of July, 2002. Status of the Ordinance: According to Section 3, “The Income Tax Ordinance, 2001” overrides other laws enforceable in Pakistan. It means, in case of any contradiction between the provisions of the Income Tax Ordinance 2001 and any other law of the country; the provisions of the Income Tax Ordinance 2001 shall prevail. Purpose of the Ordinance: The preamble of the Ordinance specifies the object of law. It specifies that the Income Tax Ordinance 2001 is promulgated to, consolidate and to amend law relating income tax and provide for matters ancillary to and'connected with the income tax. [http//nubpages.com/hub/Income-Tax-Law-in-PK] : SCOPE OF INCOME TAX LAW * The scope of Income Tax Law in Pakistan can be discussed from following two aspects: Scope Sources of Extent of Income Tax Income Tax Law Ordinance SOURCES OF INCOME TAX LAW IN PAKISTAN The Income Tax Law in Pakistan is governed by the following, which are also called the sources or components of the law. . (1) ‘Income Tax Ordinance 2001 (Amended in 2009): Income Tax Ordinance 2001 consists of 241 Sections, 13 Chapters and 12 Schedules. The whole taxation structure of the country revolves / rotates around the Ordinance. The taxation matters like computation of tax liability, payment of. tax, imposition of penalties, procedure of appeals and the refund of tax, have been explained in the Ordinance. . Scanned with CamScanner4 A Text Book of Income Tax Law The detail of the chapters and schedules in the Ordinance is as under: Chapter No. ; __ Chapter Title rT 7. Preliminary —————— | oR | Charge of Tax i 91065 Lay. on Taxable Income Vv 66 to 79. “| Common Rules Vv 8010 98C | Provisions Governing Persons Vl 9910 100A _ | Special Industries Vi 101 to 107 _| International vi 108 to 112_| Anti-Avoidance {oN 113 to 113B | Minimum Tax Xx 114 t0.206A | Procedure XI 207 to 231 | Administration. XII 231A to 236) | Transitional Advance Tax Provisions XIII 23710241 __ | Miscellaneous (SCHEDULES) Schedule No. Subject / Topic First Rates of Tax Second Exemptions and Tax: Concessions. Third Depreciation and Amortization Fourth Rules for Insurance Business Fifth Rules for Exploration and Production of Petroleum and Mineral Deposits Sixth Rules Relating to Provident. Superannuation and Gratuity Fund Seventh Rules for the Computation of the Profits and Gains of a Banking , Company and Tax Payable Thereon Eighth Rules for the Computation of Capital Gains on Listed Securities Ninth Rules of Computing Tas ofa Trader on Prolits & Gains US 99A(1 & 2) Tenth Rules for Persons Not Appearing in ATL __| Eleventh Rule for Computation of Profit and Gains of Builders and Developers Twelfth Advance Tax on Imports (Section, 148) Scanned with CamScannerChapter-1: Introduction to Income Tax Law’ - a (2) Rules Framed by Board: Section 237 of the Income Tax Ordinance authorizes the Federal Board of Revenue to fiame rules for carrying out the purpose of the Ordinance and for the ascertainment and determination of any income to be included in the total income ofa taxpayer. The latest rules were published on July 1, 2002 in the Extraordinary Gazette of Pakistan at Pages 1819 to 1966 namely Income 7 Rules The Income Tax Rules, at present, contains the following chapters: Chapter No. Sections Chapter Title 1 T'to2 Preliminary I 3 to 13 Determination of income att 14 Persons IV 15 to 16 Taxation of foreign source income of residents | v 17 to 19G Taxation of non-residents VI 20 to'27 Transfer pricing VI-A 27A.1027Q__ | Documents and country-by-country reporting : requirements VII 28 to 33 Records and books of accounts Vu 341039. | Returns, employer’s certificates, wealth statement : and statement to be filed by certain persons VII-A 390A to 39F | Banking companies reporting requirements IX. 40 to 66 Certificates, statements and procedure for payment of advance tax x , 67 to 72 Prescribed forms xr’ 73 to 75 Furnishing of documents, service of documents, forms and notices XI 16 to 78 Appeals XIll 79 to 83 National tax number certificate XIV 841090 | Registration of income tax practitioners XV Dito 121} Provident, Superannuation and Gratuity Funds XVI 122 to 210 Income Tax Recovery Rules XVII 211 10 2208 _ | Non-profit Organizations XVII? | 221 to 223°. | Tax clearance cert XIX 224 to 232 Misvellaneous Scanned with CamScanner8 AT. Book of Income Tax Lay Q) — Notific mid i uctions: Section 53 exempt any of the Income Tax Ordinance authorizes the Fi of income or the income of any class of persons ~make any other moditicati (4) Income Tax Case Laws: Different types of disputes may arise while explaining the Procedures, terms and definitions laid down in the Ordinance. In that situation, the concerned parties may take help from the cases of the courts, already decided, on such disputes / issues, Therefore, the cases which have been already decided by the courts are also an important component oF source of income tax law in Pakistan, (5) Finance Act: Finance Act is a. regular source of making change to update the In in Pakistan according to the requirements of time. It is an annual Act restricted to a particular fiscal year. This Act prescribes the maximum i Hot liable to tax, fixes the rates of tax and makes suitable amendnients in in line with the economic environment of the country, - EXTENT OF INCOME TAX ORDINANCE, 2001 The li Income Tax Ord + 2001, applies to the whole of Pal stan, The definition of word “Pakistan” has been Provided in Article 12) of the Constitution of Pakistan 1973. The following territories have been included therein: (a) Provinces of Balochistan, the North-West Frontier Province, Punjab and Sind. come Tax Law. and its scope is income, Which is bringing the law (b). Islamabad Capital lertitory, (c) Federally Administered Tribal Areas (FATA), (States and territories ac as are Ssion or otherwise, Article 246 of the Constitution of Pakistan states that: (a) Tribal Areas Means the areas in Pakistan which, commencing day, were Tribal Areas, and includes: The Tribal Areas of Balochistan and the North-West Frontier Province; and or may be included in Pakistan, whether by immediately before the Scanned with CamScannerChapter-1: Introduction to Income Tax Taw 9 a Se (b) Provincially Administered Tribal Areas means: (i) The districts of Chitral, Dir and Swat (which includes Kalam), Malakand protected area, the Tribal Area adjoining Mansehra district and the former State of Amb; and (ii). Zob district, Loralai district (excluding Bhuke Tehsil), Dalbandin Tehsil of Chagai district and Marri and Bugti Tribal territories of Sibi district. (c) Federally Administered Tribal Areas include: (i) ° Tribal Areas adjoining Peshawar district; (ii) Tribal Areas adjoining Kohat district; (iii) Tribal Areas adjoining Banu district; \ (iy) Tribal Areas adjoining Dera Ismail Khan district; (v) Bajaur Agency; (vi). Mohammand Agency; (vii) Kyber Agency; . (viii) Kurram Agency; (x) North Waziristan Agency; (x) South Waziristan Agency; (xi) Orakzai Agency. The Parliament may admit into the Federation new states or areas by legislation on such terms and conditions as it think fit. : No Act of Parliament shall apply to any Federally Administered Tribal Areas, or to any part thereof, unless the President so directs, and no Act of Parliament or a Provincial Assembly shall apply to Provincially Administered Tribal Areas, or to any part thereof, unless the Governor of the Province in which the Tribal Area is situated, with the approval of the President, so directs. The President may, at any time, by order direct that the whole or any part ofa Tribal Area shall cease to be a Tribal Area, and such order may contain such incidental and consequential provisions as appear to the President to be necessary and proper. Scanned with CamScannerA Text Book of, Income Tax Law eS : - EXERCISE he 1. 2 3 4. 5. Write a brief note on the history of income tax laws in sub-continent, What do you know about the income tax laws in Pakistan, explain, Discuss the sources or components of income tax law in Pakistan. Explain the extent of Income Tax Ordinance, 2001. Discuss the scope of Income Tax Law in Pakistan. $oood Scanned with CamScanner >2 DEFINITIONS UNDER THE INCOME TAX ORDINANCE NEED FOR DEFINITIONS DEFINITION UNDER SECTION 2 DEFINITIONS UNDER OTHER SECTIONS: AGRICULTURAL INCOME U/S 41(2) RESIDENT INDIVIDUAL U/S 82 RESIDENT COMPANY U/S 83 RESIDENT AOP U/S 84 ASSOCIATES U/S 85 ADDITIONAL NOTES Scanned with CamScannerA Text Book of Income Tax Law DEFINITIONS UNDER . INCOME TAX ORDINANCE ____ INCOME TAX ORDINANCE 12 NEED FOR: . : Every subject regarding any Jaw always contains / consists of a bic terms or phrases which are specifically meant only for the relevant subject. : i i Income Tax Law also assigns specific meanings to certain terms which of its understanding and explanation. It is worth. dictionary meanings whereas « ‘Tax Ordinance and over-rule ; * : Similarly, ome 1 are exclusively used for the purpose. of its understa mentioning that some of the terms retain their ordinary / others give the definite meaning for the purpose of Income the dictionary meanings. A.comprehensive understanding of these terms is necessary to follow the subject more easily. For this purpose, Income Tax Ordinance defines the following terms under * different sections. ee i ACCUMULATED PROFITS: 4 [Section 2(1)) (i) Any amount transferred to reserve fund by an organization out of its profits. (ii) All the profits of the company kept in whatever shape; whether capitalized or not upto the date these are distributed. (iii) In case of liquidation of company or trust, its all profits upto the date of liquidation, Explanation: Many business organizations do not. distributx their all profits’ among the shareholders. They keep a part of profits as reserve to méct the unseen or unexpected expenditures and events of the future. The undistributed profit and reserve of business are © known as accumulated profits in Income Tax Ordinance. It must be noted that the amount not distributed or kept as reserve may ultimately be distributed among the shareholders or . owners if it remains unused in case non-happening of unexpected expenditure or event. ACTIVE TAX PAYER LIST: [Section 2(1A)] ae Active taxpayers List means a list instituted by FBR w/s 181A. It also includes the list issued by the AJK Central Board of Revenue of Gilgit-Baltistan Council Board of Revenue. AMALGAMATION: [Section 2(1B)] A merger of one or more companies or institutions shall be termed as amalgamation if the following conditions are satisfied: (i) The merger should be of banking companies, non-banking financial institutions, insurance companies, companies owning and managing industrial undertakings or companies engaged in providing services and not being trading companies. Scanned with CamScannerChapter-2: Definitions Under the Income Tax Ordinance 13 ii) At least c i (ii) At le bie a a companies being merged should either be a public a ompany incorporate any ' Companies Act 2017. y porated under any law other than the (ii) As a result of the amalgamation the assets and. liabilities of th amalgamating company or companies become the assets and liabilities ¥ the amalgamated company, : abit of The assets of amalgamating company should not become the assets of amalgamated company by purchase of such assets or by distribution of such assets is the amalgamated company after winding-up of amalgamating company. : Note: Amalgamating company is a company that is being merged with another company and amalgamated company is a company with which the amalgamating company / companies are being merged or which is formed as a result of the merger. ‘ APPELATE TRIBUNAL: . [Section 2(2)] Appellate Tribunal means the Appellate Tribunal Inland Revenue established Under Section 130 of the Ordinance. Explanation: In case of any dispute between the taxpayer and tax department, the taxpayer can file an appeal to the Commissioner (Appeals): If the taxpayer or tax department is not satisfied with the decision of the Commissioner (Appeals) then another appeal can be made to “Appellate Tribunal”. The decision of the Tribunal on’point of fact is final. However, in case of point of law, the matter may be referred to High Court. Features: Fi (i) Itis the highest judicial authority in tax matters. (i) It consists of both judicial and accountant members. (iii) Its members are appointed by the Federal Government. APPROVED GRATUITY FUND: Gratuity means a lump sum compensation of past services and performance: Gratuity the employer which has a sound commercial purpose of enabling the emplo; his employees and increasing their efficiency. * According to Income Tax Ordinance 2001, the term gratui (i) Which is maintained by the continuous contribution of the employer. (ii) The amount of fund is paid to the employ (iii) The amount of fund is paid to the employees at the (iv) In case of death of an employee, the amount of fund is paid t [Section 2(3)] payment by the employer to his employees in | is a voluntary contribution by yer to retain ty fund means a fund: ees on lump sum basis. time of retirement. his family. Scanned with CamScanneree of income Tax ay 4° : + Part-III of Sixth Schedule . Approval (Unde! val of gratuity 1 ° approval none to get gratuity fund approved: (). The application is submitted to the Commissioner. (ii) 90% or more employees of the organization should be working in Pakistan, fund is demanded to avail certain benefits Attached wi, nt APPROVED PENSION FUND: [Section 286) Approved Pension Fund means Pension Fund approved by Securities mmission of Pakistan (SECP) under Voluntary Pension System Rules, 2005, at nee by a Pension Fund Manager registered with the SECP under Vol Pension System Rules, 2005. : APPROVED EMPLOYMENT PENSION OR ANNUITY SCHEME: [Section 2D) Approved. Employment Pension or Annuity Scheme means any employmen, related retirement scheme approved under this Ordinance, which makes Periodica! . payment to a beneficiary i.., pension or annuity such as approved superannuation fund, public sector pension scheme and employees old-age benefit scheme. APPROVED SUPERANNUATION FUND: [Section 2(4)] It means a fund maintained by government and private organizations to provide the benéfit of retirement or invalidity (disability) to theiremployees. luntary According to Income Tax Ordinance 2001, superannuation fund means a fund: (i) Which is maintained by the continuous contribution of the employer. ' (i) The amount of fund is paid to the employees on annuity basis. (ii) The amount is paid to the employees at the time of retirement or in case of disability (invalidity). : (iv)_ In case of death of an employee, the amount of fund is paid to his family. Approval (Under Part-II of Sixth Schedule): _, Approval of superannuation fund is demanded to avail certain benefits attached with approval. In order to get superannuation fund approved: (i) The application is submitted to the Commissioner. Gi) 90% or more employees of the organization should be working in Pakistan. ASSESSMENT; f [Section 2] Assegsmer e : : taxpayer in et Means a complete scrutiny of the information provided by the the cognate espe sm” Of income. It includes re-assessment and emended assessment at expressions shall be construed accordingly. Scanned with CamScanner: Definitior Chapter: Under the Income Tax Ordinance 15 ASSESSMENT YEAR: [Section 2(5A)] In simple meaning assessment year is Sods A ass year is a period in which tax is charg on the incomes earned by a taxpayer, ax is charged or collected om “aia sment year means the assessment year as defined in Repealed Ordinance (i) Period of 12 months starting from July 1 following the income’ year. | (i) It includes any such period which is deemed under the provisions of Income Tax Ordinance to be an assessment yc ir in respect of any income year. Explanation: . (i) Assessment year is always ahead of income year. (ii) Period of assessment year is fixed by law and remains so irrespective of accounting period adopted by a taxpayer. (ii) An income year may start from any date but assessment year always starts from July 1 next following the end of income year. Illustration: Income year Assessment year 01-01-1996 — 31-12-1997 } 01-07-1998 — 30-06-1999 01-04-1999 — 31-03-2000 | 01-07-2000 — 30-06-2001 Note: The concept of assessment year prevailed in our income tax lay up to year 2001. According to Income TaxOrdinance 2001, the term “Tax Year” is used instead of the “Income Year” and the “Assessment Year”. ASSET MOVE: ‘Asset move’ means the transfer of an offshore asset to an unspecified jurisdiction by or on behalf of a.person who owns, possesses, controls or is the beneficial owner of such offshore asset for the purpose of tax evasion. : ASSOCIATION OF PERSONS: According to Income ,Tax Ordinance 2001, the term ass includes: (i) Firm (As defined in Partnership Act 1932). (ii) Hindu undivided family (The family having common mess, property, common funds and common worship etc.) (iii). Artificial judicial person (Punjab University & WAPDA etc.) (iv) Any body of persons formed under a foreign law. Note: A company is not included in the term of association of persons [Section 2(5C)] [Section 2(6) & 80] sociation of persons common Scanned with CamScannerA Text Book of Income Tax Law 16 AGRICULTURAL INCOME: [Section 41@)) According to Income Tax Ordinance agricultural income means the income: (i) Derived from land. i (i) Land is situated in Pakistan. (iii) Land is used for agricultural purposes. Illustrations: : (i) Ifa person grows trees and crops on his land and derives income therefrom then such income shall be agriculture income. : (ii) “If a person derives income from spontaneous growth of plants on his land then such income shall not be treated as agriculture income. (iii) Ifa person owns land ina foreign country and derives any income from it then the income shall not be considered as agriculture income. Types / Sources of Agriculture Income: (i) Income derived from land by agriculture. (ii) Rent or revenue derived from agriculture land. (iii) Income derived from the sale of produce by a cultivator. . : (iv) Income derived from such land by the performance of process employed by a cultivator to render the produce fit for market. . (v) Income derived from any building, in the immediate vicinity of agriculture land, occupied by the cultivator due to his connection with the land and is required for agricultural purposes (as dwelling house or storé room). : Examples of Agriculture Income: (i) __ Income derived by the lesser of agriculture land by way of rent. (ii) Income derived by the lessee of agriculture land by cultivation. (ii) Income from growing tea.” : (iv) Income from cultivation of tobacco, wheat and sugarcane etc. ° (v) Income from sale of honey and its products, : vi) i i il ¢ ) ee received from insurance company against destruction of. crop. Vi i % ( it) ce paid for renewal of lease of land used for agriculture process. (viii) Land revenue assigned to Zamindar. ix) Am i i (ix) ‘ount received for allowing the cattle to graze on agricultural land. (x). Income from growing flowers, Ta: = Agri i x Treatment = Agricultural income is totally exempt in Pakistan. ae arene Scanned with CamScannerChapter-2: Defi Examples of Non-i (i). Profit’ of a merchant from purchase and res; growing crop. (ii) Interest received by a moneylender in the form of agricultural produce. (iii) Income from a flour or sugar mill. us Under the Income Tax Ordinance al iculture Income: * ‘ale of agricultural produce or the (iv) Income from poultty farming. (v)_ Income from supply of water for agricultural purposes, (vi) Rent received on land let out for car parking. (vii) Rent received on land used for Sunday Bazar, (viii) Amount received by selling the soil of land, ‘(ix) Income from the sale of grass of spontaneous growth, (x). Dividend received from a company out of its agricultural income. Partl ultural and Partly Non cultural Income Where a person / cultivator-uses agricultural produce raised / purchased in a manufacturing process as raw material, the income derived from such process shall bé divided into two types (i.e.,) agricultural income and non-agricultural income. In above situation, income derived from growing of crops or agricultural produce is agricultural income and the income earned from manufacturing process is taxable as non-agricultural income under the head “Income from Business”, For example, income received by growing fruits or sugarcane is agricultural income and the income received by applying the process of making jams from fruits and sugar from sugarcane is non- agricultural income. : BANKING COMPANY: [Section 2(7)] According to Income Tax Ordinance 2001, a banking company means and includes: (i) A company as defined in Banking Companies Ordinance 1962. (ii) Any body corporate which is incorporated under any law for. the time being in force in Pakistan to transact the business of banking. Explanation: According to Banking Companies Ordinance 1962, “Banking means accepting, for the purpose of tending and investing, the deposits of money from the public, repayable on demand or withdrawable by cheque, bank draft or otherwise”. For Example: : MCB, Habib Bank Ltd. and United Bank Ltd: ete. Tax Treatment: The banking company pays tax @ 35% on its profit (Tax year 2021). Scanned with CamScannerA A Text Book of Income Tax Lay BOARD: oa tem deral Board of Revenue (previously named Central Board of Revenve eaablshed under CBR Act, 1924) established under Federal Board of Revenue Act, 2007. = [Section 2(8) Features: : : (i) FBR is the highest executive authority of tax matters in Pakistan. (ii) It consists of minimum seven members (presently twelve) appointed by the Federal Government. . “ Gii) The main objective of its formation is the tax collection in the country. BONUS SHARES: [Section 2(9) Bonus shares are such shares that are issued by a company to its existing shareholders without receiving any amount from them. It is one of the modes of divideng distribution. For tax purposes ‘bonus shares’ includes bonus units in a unit trust. BUSINESS: {Section 2(10)} According to Income Tax Ordinance 2001, the term business includes; (i) Trade: Trade means selling of goods for the purpose of making profit which-a trader has purchased or manufactured. (ii) Manufacturing: It means to work upon something by hands or machine as to Convert it into something different from what it was before. conversion of wooden piece into 4 chair ete. (iii) Commerce: It includes all the institutions and activities which are helpful in transferring good from the place of production to the ultimate consumer. e.g., transportation, banking insurance and advertising etc. (iv) Profession or Vocation: _ Services rendered on the basis of manual skill or specialized knowledge an experience in a particular field is known as profession or vocation. e.g., doctors engineers, accountants and carpenters etc. (vy) Concern: Any regulated system of the management of an organization which has @ adequate degree of trade, commerce or manufacturing, Scanned with CamScannerChapter-2: Definitions Under the Income Tax Ordinance 49 (vi) Adventure: Any transaction is termed as in the nature of trade if some clements of trade are present therein. Note: The term “Business” does not include employment. CAPITAL ASSETS: [Section 2(11) & 37(5)] Capital assets mean property of any kind held by ‘a’ person whether or not connected with his business or profession but does not include the following: (i) Any stock in trade including consumable store or raw material held for the purpose of business except shares and stocks. Examples: (a) Stock of different products / items kept by the owner of departmental store for the purpose of sale is not capital asset. (b) Shares held by a dealer of shares for the purpose of sale are his capital asset. (i) Any asset for which depreciation can be claimed. \ (iii) Any asset on which amortization is allowed. _ (iv) Any movable property like utensils, wearing apparels and furniture etc, for the personal use of a person or any member of his family. Examples of Capital Assets: (i) Painting or work of art. (ii) Antique jewellery. (iii) Collection of coins as hobby. (iv) A rare manuscript. 0 (v) Share in partnership business. (vi) Musharika certificates. (vii) Modaraba certificates. (viii) Term finance certificates (TFC’s). (ix). Participation term certificates (PTC’s). (x) Leasehold rights. Note: If a person holds any property even on the behalf of othe executor or liquidator or administrator etc. shall be his capital asset. ir persons as trustee or Scanned with CamScanner20 A Text Book of Income Tax Law 2(11A)] CHARITABLE PURPOSE: 7 - [Se The term “Charitable Purpose” includes: (i) Relief of the poor; (ii) Education facility; (ili), Medical relief and . (iv) Advancement of any other object of general public utility. Explanation: : ; Under Section 61 of Income Tax Ordinance 2001, a.tax credit / relief is provided to.a taxpayer for donations made for charitable purpose. Therefore, this term has been inserted in Income Tax Ordinance to understand the concept of charitable purpose. CHIEF COMMISSIONER: [Section 2(11B)) It means a person appoinied as Chief Commissioner Inland Revenue U/S 208, It includes a Regional Commissioner of Income Tax and a Director General of Income Tax and Sales Tax. COMPANY: [Section 2(12) & 80] According to the Income Tax Ordinance 2001, company means: (i) A company as defined in Companies Act 2017. (ii) A body corporate formed under any law in force in Pakistan. (iii) A Modaraba registered under Modaraba Companies Ordinance 1980. (iv) A body corporate incorporated under the law of a country outside Pakistan relating to incorporation of companies. fe (v)_ A cooperative society or a'finance society or any other society. (vi) A non-profit organization. (vii) A trust or a body of persons established under any’ law for the time being in force. » (Vili) A foreign association declared by Federal Board of Revenue as company. (ix) A provincial government of Pakistan. (x) A local authority in Pakistan, (xi) A small company [Section 2(59A)]. Explanation: According to Companies Act 2017, “It i advantage of havi i a an incorporated association enjoys the rool feat re a number of members who contribute money to a common poche nits Se undertakings. The interest or share of each member can be Sed, sold and transferred without the consent of other members”. Scanned with CamScannerChapter-2: Definitions Under the Income Tax Ordinance 21 A company is a creation of ‘ owners/shareholders in its aes ah The assets posses mee entity apart from its the company are its own. Likewise, it has se s ieee and liabilities owed by shareholders for the purpose of income tax. A a aries) oy lepae ora is the shareholders pays tax on the dividends feet eee eee an ones forms of organization (sole tradership and partnership), the cae pie ent legal entity and therefore they are not considered separate for income tax purposes. Tax'Treatment: According to tax year 2021: (i) A public company or private company pays tax @ 29% on its profit. (i) A banking company pays tax @ 35% on its profit. (iii) A small company pays tax @ 22% on its profit. COMMISSIONER: |: : [Section 2(13)}” Commissioner means a person appointed by the Board as.a Commissioner Inland Revenue U/S 208, and includes any other authority vested with all or any, of the powers ‘and functions of the Commissioner. COMMISSIONER (APPEALS): [Section 2(13A)] “Commissioner. (Appeals) means a person appointed by the Board as a Commissioner Inland Revenue (Appeals) U/S 208 to hear the appeals filed by taxpayers against the order of the Commissioner. ~ =e . CONSUMER GOODS: at [Section 2(13AB)] © Consumer goods means such goods that are consumed by the end.consumer rather than used in the production of other goods. CO-OPERATIVE SOCIETY: ~ [Section 2(14)] “Co-operative society” means a society registered under the Co-operative Societies Act, 1925 or under any .other law for the time being in force in Pakistan for the registration of co-operative societies. Explanation: : : According to Cooperative Society Act, 1925 “Cooperative society is formed for -the promotion of thrift, self help and mutual aid among agriculturists and other persons with common economic: needs so as to bring about better living, better business and better methods of production and for that purpose. to consolidate sources”. DEBT: “Debt” means any amount owing or (creditors) and the amounts owing under promissory securities, bonds or other financial instruments. Explanation: , Finance works as lifeblood for any business activity. The need for finance may be met by the owner from his own resources or by taking loan from outsiders under different agreements. So any amount taken as loan and payable by the business is considered as debt. [Section 2(15)] payable, including accounts payable notes, bills of exchange, debentures, Scanned with CamScannerA Text Book of Income Tax 1, 22 DEPRECIABLE ASSET: [Scetion 2(17) & 23 sense, depreciable asset means an asset which loses its value because op ay In general use or wear and tear. i fax Ordinance, “Depreciable Assets” means any tangible Income Tax Ordinance, “ mis any piece Pamevable property (other than unimproved land) or structural improvemen, movable or i Lk to immovable property owned by a person provided that it: (i) has a normal useful life exceeding one year. (ii) is likely to lose value as a result of normal wear and tear, or obsolescence; and; (iii) is used wholly or partly in deriving income from business chargeable tax, For Example: Plant, ship, aircraft; vehicles, building, machines, furniture and fittings etc. DIVIDEND: [Section 2(19)] Any payment or distribution by the company to the shareholders or Modaraba certificate holders as a reward or return on their investment out of earned profit is called dividend. According to income tax ordinance 2001, the following distributions made by the company are considered as dividend: (i) __ Distribution to shareholders out of current year profit, (ii) Distribution to the shareholders out of accumulated profit. (ii) Distribution to the shareholders out of share premium received by a company. (iv) Distribution to the shareholders in form of debentures or debenture stock out of accumulated profit. (¥) Distribution to the shareholders at the time of liquidation to the extent of accumulated profit. (vi) Distribution to the shareholders at tl the time of reduction of capital to the extent of accumulated profit, (vii) Distribution to the shareh folders by a private company or trust in form of loan and advance out of a iccumulated profit. (viii) Remittance of profit (afier tax) by a branch of foreign company operating in Pakistan : Note: It is not neve: sary that dividend must be worth. Paid in cash, it can be paid in money's Scanned with CamScanneree A HY Ordinance ptlonst yadvanee by ap Yc a (Any | by & private company to ity shareholders where fendi the main business of company, Here lending of money is ii) Any dividend, which is adjusted against the tide f ' treated as dividend, Halnst the amount of loan previously paid and rT Any distribution to the shareholder iil) Any d shareholders who are not entitled to participate i 8 assets of the c i eae surplus assets of the company in the event of its liquidation, lea (iv) Remittance of profit (after tax) by a branch of fore! engaged in petroleum exploration and production, ELIGIBLE PERSO : [Section 2(19A)} This term has: be n defined for the purpose of Voluntary Pension System Rules, 2005, It means an individual who fulfills the following conditions shall be considered as eligible person: , ign company in Pakistan (i) He isacitizen of Pakistan, (ii) He holds a valid National Tax Number (NTN) or Computerized National Identify d (CNIC) or National Identify Card for overseas Pakistanis issued by the National Data and Registration Authority. Note: The tax credit available for the contribution made to approved pension or annuity scheme and approved persion find under the Voluntary Pension System Rule! 2005, should not be more than the limit specified in Section 63 of the Income Tax Ordinance. EMPLOYEE: . [Si gcd in employment or renders ction 2(20)] vices under any individual enga ployee means employment agreement, EMPLOYER: [Section 2(21)] Employer means any person who engages and remunerates an employee EMPLOYMENT: [Section 2(22)] Under the Income Tax Ordinance 2001, employment includes: (a) ‘The holding or acting, in any public offic (b) A position due to which the holder is entitled to a fixed or ascertainable remuneration; or (c) A directorship or any other office involved in the management ofa company. Explanation: services are covered tion or reward is ‘aww, the person whose rendered According to Income ‘Tax ‘ sd as an employee and his remunera under “Employment” is conside Known as salary income, Scanned with CamScanner24 A Text Book of Income Tax Law MOVING CO [Section 2(22A)} Itemeans consumer goods Which are supplied in retail marketing as per daily demand of a consumer exchiding durable goods. ‘OR OFFSHORE DIGITAL SERVIC [Section 2(221)} It means any consideration for providing or rendering services by a non-resident person for online advertising, ‘Online advertising’ includes digital advertising space, designing, creating, hosting or maintenance of websites, digital or cyber space for websites, advertising, e-mails, online computing, blogs, online content and online data, providing any facility or service for uploading, storing or distribution of digital content including digital text, digital audio or digital video, online collection or processing of data related to users in Pakistan, any facility for online sale of goods or services or any other line facility, FBR REFUND SETTLEMENT COMPANY LIMITED: [Section 2(22C)] It means a company with this name as incorporated under the Companies Act, 2017 for the purpose of settlement of income tax refund claims including payment by way of issuing refund bones under section 171A. FEE FOR TECHNICAL SERVICES: : [Section 2(23)] Fee for technical services means any consideration, whether periodical or lump sum, for rendering of any managerial, technical or consultancy: services including the services of technical or other personnel, but does not include: (a) Consideration for services rendered in relation to a. construction, assembly or like project undertaken by the recipient; or (b) Consideration which would be income of the recipient chargeable under the head “Salary”. FINANCIAL INSTITUTION: [Section 2(24)] Financial Institution means an institution as defined under the Companies Act 2017. According to Companies Ordinance “Financial Institution” includes: (a) A company or an institution whether established under any special enactment and operating within or outside Pakistan which transacts the business of banking or any associated or ancillary business through its branche: (b) A modaraba, leasing company, in 7 ‘ ‘stment bank, venture capital company, financing company, housing finance company, a non-banking financt company; and (c) Such other institutions or companies authorized by law to undertake an} similar business,'as the Federal Government may specify for the purpose. Scanned with CamScannerChapter: Definitions Under the Income Tas Ordinance 28 25 FINANCE SOCIETY: [Section 2(25)] ‘ According to Income Tax Ordi i ‘dinance 2001, finance society means a society which: (i) Accepts or receives deposits. : (i) Advances loans out of accepted deposits or received money. (iii) Makes-investment in various types of business. Note: A cooperative society engaged in above-mentioned activities is. also considered as finance society. FIRM: [Section 2(26)] Firm means a firm as defined in Section 80 of the Income Tax Ordinance. Explanation: ‘According to Section 4 of Partnership Act 1932, “The relation between persons who have agreed to share the profits of business carried on by all or any one of them acting forall”. FOREIGN SOURCE INCOME: [Section 2(27)] “Foreign Source Income” means foreign-source income as defined in Section 101(16) of the Income Tax Ordinance. According to Section 101(16), an amount shall be foreign-source income to the extent to which it is not Pakistan-source income Q IMPUTABLE INCOME: [Section 2(28A)] oan amount subject to final tax means the income, amount not been subject to final tax. [Section 2(29)| Imputable income in relation t Which would have resulted in the same tay, had this INCOME: According to Income Tax Ordinance 200] the term income means and includes: (Any income, profit or gain, derived trom whatever the source, chargeable to tax under Section 11 of the ordinance in following heads: (a) Income from salary (Section 12) (b) Income from property (Section 15). (c) Income from business (Section 18). (d) Capital gain (Section 37). (ec) Income from other sources (Section 39). (ii) Any loss from such income, profit or gain. Scanned with CamScanner26 A Text Book of Income Tax Law (iii) Any amount which is subject to collection or deduction of tax on: (a) «Imports. (b) Dividends. (c)_ Any payment received on supply of goods and services. (d) Exports. (ce) Winnings and prizes. (Transports from their owners. (g) Bonus shares. : : Explanation: The custom authorities collect tax at prescribed rates from the importers on the value of imports. The tax is also’ deducted on amount received from the sale of goods and services or on prizes and winnings under the law. Moreover, the owners of motor vehicles also pay advance tax on their motor vehicles. (iv) Any amount received or receivable which is deemed to be income under any provision of the Income Tax Ordinance. INDUSTRIAL UNDERTAKING: tae [Section 2(29C)] Industrial undertaking means an organization which fulfills the following conditions: (1) Itis set up in Pakistan; . (2) It employs; (i) Ten (10) or more persons in Pakistan and uses electrical energy or any other form of energy which is mechanically transmitted; (ii) Twenty (20) or more persons in Pakistan and does not-use electrical energy or any other form of energy which is mechanically transmitted and; (3) tis engaged in; - (i) Manufacturing or in any process which substantially changes the original condition of material; (ii). Ship-building; (iii) Generation, conversion, transmission or the distribution of electrical energy, or the supply of hydraulic power; or (iv) Working of any mine, oil well or any other source of mineral deposits. (4) From 01-07-2020, a resident company engaged in hotel business in Pakistan. (5) Telecommunication Companies operating. under the license of Pakistan Telecommunication Authority (PTA), Note: The van declare organizatit ; Board can declare any other organization as industrial undertaking even it oes not fulfill.the above mentioned requirements. Scanned with CamScanner27 Intangible means asset oF expenditure of following ee race aed advantage ot benefit for a period of more than one year, # types which provides an (i) Patents: (ii) Invention (iii), Trade mark (iv) Computer software (v) Franchise (vi) Motion picture film (vii) Design or model (viii) Secret formula or process (ix) Contractual rights ; : (x) Copyright and rights of the same kinds. Note: Any expenditure to acquire depreciable asset or unimprove included in the definition of intangible. LOCAL GOVERNMENT: [Section 2(31A)] Local Government shall have the same meanings as defined in the Punjab Local Government Act, 2019, the. Sindh Local Government Act, 2013, the Khyber Pakihtunkhwa Local Government Act, 2013, and the Balochistan Local Government Act, 2010. Explanation: ‘After the new devolution plan was announced and implemented in 2001, there was a need to ‘add the newly established forms .of local government. ¢.g.. district government, city governments etc, in the definition as these have replaced the Municipal corporations and developme ‘Authorilies. Local Government will now replace Local # Authority. Keeping in view this requirement this clause was inserted in the law through Finance Act, 2007. IRIS: [Section 230AC)] Iris means a web based computer program inland revenue taxes and laws administered by the Board. d land shall not be for operation and management of KIBOR: [Section 2(30AB)] KIBOR means Karachi Interbank Offered Rate applicable on the first day of each quarter of the financial year. LIAISON OFFICE: [Section 2(30C)] ffice, if it undertakes activities of: A place of business shall be treated as a liaison o| the possibility of trading (i) Anexploratory of preparatory nature to investigate with, or in, Pakistan. (ii) Exploring the possibility of joint collaboration and export promotion. Scanned with CamScannerWy A Text Book of Income Tax Lay, z mislare yet to be sarmlicd o (iil) Promoting products where such products are yet to be supplied oF sold jg iii) Pron eer fons ben-ean enre ae technical and finaneial collaborations between its principal ang iv) Promoting vica ( axpayers in Pakistan, (vx) Provision of technical advice and assista we [Section 2¢39) ee in relation to an AOP, includes a partner in a firm. ree in the firm is a person who contributes his are of capital in Partnership bi oad acts as an agent on the behalf of other partners of the business. After Kelling the status of partner, he is considered as owner of the business, MINOR CHILD: | [Section 2(33)) “Minor Child” means an individual who is under the age of 18 years at the end of a tax year. Explanation: 7 According to Section 3 of Majority Act 1875, a person under the age of 18 Years, is a minor. Every person who has completed the age of 18 years becomes a maj provided that he is not in the legal custody of a guardian. According to Contract Acta minor is unable to judge good or bad for himself so that no obligation can be imposed on minor. Moreover law also protects a minor from contractual liability. MODARABA: [Section 284), Modaraba means a modaraba as defined in the Modaraba Companies and Modarabas (Flotation and Control) Ordinance, 1980. Explanation: “Modaraba” means a business in which a person participates with his money and another with his efforts or skill or both his efforts and skills, . : MODARABA CERTIFICATE: [Section 2(35)} “Modaraba Certificate” means d modaraba certificate‘as defined in the Modaraba Companies and Modarabas (Flotation and Control) Ordinance, 1980, / . Explanation: “Modaraba Certificate” means a certificate of definite denomination issued to the subscriber of the modaraba acknowledging receipt of money subscribed by him. NCCPL: [Section 2(35AA)] “NCCPL” means the National Clearing Company of Pakistan Limited incorporated under the Companies Ordinance, 1984 and licensed as “Clearing House” by the SECP or any subsidiary of NCCPI, notified by the Board, Explanation: Here “clearing house” established or arranged to be dealing in securities or settlemer means an institution by whatever name or designation established by a Stock Exchange for the registration of nt of trading in future contracts. Scanned with CamScannerChapter 2: Definitions Under the Income Tax Ordinance 29 KON-PROFIT ORGANIZATION: “Non-profit Organization” means any pei [Section 2(36) . i a , lon” means any person other than an individual, which is: (a) Established for religious, educational, charitable, welfare : general public or for the promotion of an amateur ae are Purpos! pb) Formed and registered by er . (b) A ne fd istered by or under any law as a non-profit organization; (c)_ Approved by the Commissioner for specified period icati by such person in the prescribed form and ae eile ee es ” ci yy income tax law; (@) None of the assets of such person should be used for the priva ri aa any other person. er or Tax Treatment = Totally Exempt RESIDENT PERSON: NON: Le ‘4 : : [Section 2(37)] . ‘Non-resident person” means a non-resident person as defined in Section 81 of the Income Tax Ordinance. According to Section 81, a person shall be a non-resident erson for a tax year if the person is not a resident person for that year. NON-RESIDENT TAXPAYER: [Section 2(38)] “Non-resident taxpayer” means a téxpayer who is a non-resident person under section 2(37) of the Income Tax Ordinance. . OFFICER OF INLAND REVENUE: [Section 2(38A)] Officer of Inland Revenue (Previously termed as “Taxation Officer”) means any Additional Conimissioner Inland Revenue, Deputy Commissioner Inland Revenue, Assistant Commissioner Inland Revenue, Inland Revenue Officer, Inland Revenue Audit Officer, District Taxation Officer. Inland Revenue Assistant Director Audit or any other officer appointed by the Board for the purposes of this Ordinance. Explanation: ‘Any officer appointed by FBR with any designation for the purpose of income tax is an officer.of Inland Revenue. Generally, he is subordinate to Commissioner of income tax. However, if he is vested with the powers and functions of the commissioner then he shall be a subordinate to Regional Cornmissioner of Income Tax. OFFSHORE ASSET: ‘Offshore Asset’ includes any mov: or income derived, or any expenditure incurre: OFFSHORE ENABLER: [Section 2(38AB)] ‘Offshore Enabler’ means 2° person who owns, possesses, controls, or is ihe beneficial owner of an-offshore asset and does not declare, or under declares or provides inaccurate particulars of such asset to the CIR. OFFSHORE EVADER: “Offshore Evader’ includes any person who en to plan, design, arrange, or manage a transaction oF asset, which has resulted or may result in tax evasion. able or immovable asset held, any gain, profit, .d outside Pakistan by a person. [Section 2(38AC)] ables, assists, or advises any person declaration relating to an oftshore Scanned with CamScanner [Section 238AA)] ”7” 30 A Text Book of Income Tax 1, ns [Secti PAKISTAN SOURCE INCOME: : i yen 2a The Pakistan Source income includes the income which a eee irrespective of the fact. that where it is actually. 1% ceived or paid. Sang applicable conditions in this regard are discussed below: (i) Salary Income: ean / (a) A salary received by a person from an employment exercised in Pakistan (place of payment is immaterial). a ; / id f Federal Government, a Provincia, Salary paid by or on behalf of the nent, a oe Semis ora local authority in Pakistan (place of working is immaterial) (ii) Business Income: : ; : ; (a) Business, income of a resident person from any business a on in Pakistan. ;, (b) Business income derived by a non-resident person from . permaneny establishment in Pakistan. 7 (ii) Dividend Income: . Any dividend paid by a resident company. (iv) Profit on Debt: : : ; (a) Profit on debt paid by a resident person from a business carried on in Pakistan, (b) Profit on debt paid by a non-resident person from his permanent establishment in Pakistan. (v) Royalty Income: Any royalty paid by a resident person for the services utilized in a business carried on in Pakistan. ‘ - (vi) Rental Income: Rental income from the lease of immovable Property or a right to explore natural tesources in Pakistan, (vii) Pension or Annui Any pension or ansiuity paid by a.resident or by a permanent establishment of non-resident, (viii) Technical Services: __ Any technical fee paid by a resident person for a business carried on in Pakistan or paid by the permanent establishment of non-resident, (ix) Capital Gain: Any gain receiv Explanation: ed from the disposal of shares in resident company. Permanent establishment me; : ne ans a place of business vit ic business activities or functions wi : atoll in she holly or partly carried out or performed by a person. Scanned with CamScannerpeRMAD it cludes: @ @ 0) () (g) Definitions Under the Income Tax Ordinance ENT ESTABLISHMENT: : “Permanent establishment” in relation to a person, [Section 2(41) pusiness through which the business of the person 5 : means a fixed place of is wholly or partly carried on, and A place of management, branch, offi iciting soli orders, warehouse, permanent sales exhibition or sales outlet, other than a liaison office except wt i s( ‘Xcept where the office engages in the negotiati of contracts (other than contracts of purchase); = 2 ice, factory or workshop. premises for A mine, oil or gas well, quarry or any other place of extraction of natural resources, including, an agricultural, pastoral or forestry property; A building site, a Construction, assembly or installation project, or supervisory activities connected with such site or project but only where such site, project and its connected supervisory activities continue for a period or periods aggregating more than ninety days within any twelve-months period; The furnishing of services, including consultancy services, by any person through employees or other personnel engaged by the person for such purpose; An agent acting in Pakistan on the behalf of a person other than an agent of independent status acting in the ordinary course of business as such, if the agent: (i) _ has and habitually exercises an authority to conclude contracts on the behalf of other person or habitually concludes contracts or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the person and these contracts are: (a) in the name of the person. (b) for the transfer of the ownership of or for the granting of the right to use property owned by that enterprise or that the enterprise has the right to use. (c) for the provision of services by that person. (ii) has no such authority, but habitually maintains a stock-in-trade or ‘other merchandise from which the agent regularly delivers goods or merchandise on the behalf of other person; or stantial equipment installed, or other asset or property capable of ty giving rise to income. ‘A fixed place of business that is used or maintained by a person if the person te of a person carries on business at that places ‘or at another place in Pakistan and: (i) that place or other place constitutes a permanent establishment of the person or an associate of the person under this sub-clause. (ii) business carried on by the person or an ass ciate of the person at the same place or at more than one place constitute complementary functions that are part of a cohesive business operation. Scanned with CamScanner32 A Text Book of Income Tax Lay [Section 2(42) & 89] PERSON: alt Under the Income Tax Ordinance 2001, the term person includes: (i) Anindividual (Salaried and non-salaried), (ii) A company (Private and public). 7 = (iii) An association of persons (Firm and Hindu undivided family etc.). (iv) The federal government. (v) A foreign government. (vi) A political subdivision of foreign government. (vii) A public international organization (WWF, WHO and UNICEF etc.). ' [Section 2(444)} PRINCIPAL OFFICER: According to Income Tax Ordinance 2001, the following persons connected with the management of a company or association of persons or any other organization shall be called principal officers for the purpose of income tax. (i) Managing director (ii) Manager (iii) Secretary (iv). Agent (v) Accountant (vi) Any other person upon whom a notice has been served by the Commissioner to act as principal officer. Explanation: It is very difficult for tax authorities to contact every member of big organizations like joint stock company or association of persons to collect necessary tax information, To solve this problem, the authorized tax authority selects a person from the management of the said organizations to receive necessary information on the behalf. of tax department, This selected person is called principal officer. PRIVATE COMPANY: [Section 2(45)} Private company means a company which is not a public company. Explanation: (a) A company in which at least 50% of the shares are not held by the Federal Government. (b) It is not listed at the stock exchange at the end of tax year, (c) A unit trust whose units are not Widely available to the general public. Tax Treatment: A private company pays tax @ 29% on its profit (Tax year 2021). Scanned with CamScannerch ford: Definitions Under the Income Tay Onin "nee PROFIT ON DED a.) Ht means any profit, yield, interest [Neethon 2¢44)] : B eat, service fee or athe inanner in respect oF any of the Following fervice fee or uther charue payable in any (i) Money borrowed (ii) Debt incurred (including: a deposit, elalin ar otter similar right (iii) Credit facility, which has not been utilized we) Note: Any payment as return on capital shall not he taken as profit an debt Explanation: Debt means any amount owed oF owing, It means any amount payable under . C. exc : « ad ee eee promissory note, bills of exchange, debentures, bonds or another financial teat puBLIC COMPANY: ay Under income tax law a public company means (a) A company whose at least 50% shares are held by the Federal Government or Provincial Government. — (b) A company in which at least 50% of the shares Government, or a foreign company owned by Fore (c) _ Itis listed at the stock [Section 2(47)} held by a Foreign jovernment. exchange at the end of tax year, (d)_ A unit trust whose units are widely available to the public and any other public trust. Explanation: ~W Listed company means a company whose shares are traded at a registered stock hange in Pakistan during the tax year, (ii) Unit trust mea so that the entitlements of the beneficiar the number of units held. ex s any trust under which ben interests are divided into units sto income or capital are determined by Tax Treatment: tax @ 29% on its profit (Tax year 2021) NT TRUST (REIT): [Section 2(47A)] P scheme as defined in the A public company pay REAL ESTAT “Real Estate Investment Trust (RETT)” means @ Rh Real Estate Investment Trust Regulations, 2015. REAL ESTATE INVESTMENT TRUST MANAGEMENT COMP VY (REITMC): [Section 2(47B)| “Real Estate Investment st Management ‘Company (REITMC)" means MC as defined under the Real Estate Investment “Trust Regulations, 2015. RENTAL REI HEM. . [Section 47C)| Its means a rental RE! Regulation, 2015. > scheme as defined under the Real Estate Investinent Trust Scanned with CamScannerA Text Book of Income Tax ty, a Section 2(50) & RESIDENT COMPANY: rn Lis ia £43 A company shall be a resident company for a tax years TT t s the Jaw of Pakistan. ), if the control and managemen, anytime in the year. following conditio (i) Ifitis incorporated or formed under any Gi) _ In case of other company (foreign company of its affairs is situated wholly in Pakistan at (ii) Itis a provincial government of Pakistan. (iv) Itisa local authority in Pakistan. oe about the term control and management, it is necessary to itt rentite between the act of doing business and managing a business. For the puspere of locatin the place of control and management, the whereabouts or particulars of the brains (policy and decision makers) behind the business should be found out. Status Nature of Control & Management t Control & management wholly in Pakistan ~ 4 Resident . Control & management wholly outside Pakistan Non-resident Control & management partly in Pakistan Non-resident Iilustration: : : () A & Co. (Pvt.) Ltd. is doing business.of financial consultancy in Pakistan as well as Qatar. The management and control of its affairs is situated partly in Qatar and partly in Pakistan. . (ii) Sheikh Trading Company was incorporated in UAE. The management and control of its affairs is situated wholly in Pakistan during the tax-year. _ Solution: 7 @ A company shall be considered as resident if control and management of its affairs is situated wholly in Pakistan in the year. Therefore, A.& Co. having __ management and control of its affairs partly in Pakistan is a non-resident person. (ii) Sinve the management and control of affairs of Sheikh Trading Company was wholly situated in Pakistan during the relevant tax year, so it is a resident company irrespective of the fact that it was incorporated in UAE. RESIDENT IND) 2 ° y IVIDUAL: [Section 2(51) & 82] An individual shall i i ; . . 7 ~ the following conditions: be aresident in Pakistan in any tax year if he fulfils any one of @ He is in Pakistan : . ne 2 more: Stan for a period or periods amounting in all to 183 days ot (ii) He is in Pakistan for a period or ri fo 120 days or i Period or periods amounting in all ys “s to 121 more in tax year and 365 days or more in Preceding 4 tax years - (iii) He is an-employee or offici of the Feder: V ernment I ial inci 4 ; pa l deral_ or. Provincial Gove nt Scanned with CamScannerChapter-2: Definitions Under the Income Tax Ordinance 35 Explanat In case of point (i), it is not necessary that the stay of an individual should be continuous and at one place. Moreover, the Purpose of stay in Pakistan is also immaterial In case of point (iii), the visit of an individual i rial. sit of an individual in Pakistan duri : ; not necessary. in Pakistan during the tax year is Stay Required in a Tax Year in Pakistan Status ee : 7 “Non-resident 1-182 days : Non-resident 183 days or more 7 Resident - Government employee posted abroad Resident (Stay in Pakistan for certain days — Not required) Illustration: @-. Mr. Shahid has been working as an Information Analyst in the Ministry of Foreign Affairs. On 1.10.2020, he was posted to Pakistan Embassy in England for three years. . (i) "Mr. John was sent to Pakistan on a special assignment by his foreign company on. 1.3.2021. He left Pakistan on 31.8.2021. (iii) ‘ Mr. Mubeen came to Pakistan for the first time on a special assignment from his company on 1.12.2020 and left the country on 30,6.2021. Solution: . 7 () — Being an employee of Federal Government Mr. Shahid. would be treated as a resident person irrespective of number of days he stays in Pakistan. (ii) The stay.of Mr. John during the relevant tax year is 122 days (31 +30 +31 +30). Since his’stay in Pakistan is less than 183 days, he is a non-resident person for tax purposes. (iii) An individual is resident of Pakistan for tax purpose if his stay in a tax year is 183 days or more. Physical stay of Mr. Mubeen in Pakistan in the tax year 2021 is 212 days (31 +31 +28 +31 +30 +31 + 30) and therefore he is a yesident person. RESIDENT ASSOCIATION OF PERSONS: : [Section 84] An association of persons shall be resident of Pakistan for any tax year if the control and management of its affairs is situated wholly or partly in Pakistan at anytime in the tax year, . 7 ao Explanation: An association of persons (AOP) shall be a resident even its partial control is vill only be a non-resident if its situated in Pakistan, It means an association of persons W control and management is wholly situated outside the Pakistan. Moreover, the residential status of the members of AOP is immaterial in this regard. Scanned with CamScannerent Wholly in Pakistan akistan Control & manay ment partly in P. jIy outside Paki Control & many Control & management whol eeu as well as in Saudi Arabia, The ? ip ti i iness in Paki i) “A partnership firm, doing business 1) ws wel as in S ' 7 Senna control of i fairs is situated partly in Pakistan. , . (ii) AE & Saif Training Center (ASTC) is a partnership concen. providing training ty professionals. in Pakistan, UAB and S di Ar bia, Up (0 31.7.2020. the management and control of its alTairs was s uated partly in Pak an. However, with effect from 1.8.2020, the entire management and control of the affairs of the concern Was ed to Dubai. Non-resident Solution: (i) An Association of Pet + management of its affairs Therefore, the firm having mana Dy istan is a resident person. ] (ii) ASTC. being a partnership firm, is a resident person because an AOP shall be g resident person for a tax year if the control and’ management of its affairs js situated wholly or partly in Pakistan‘at any time in the year, : RESIDENT PERSON: [Section 2(52) & 81] year if the person is: rson (AOP) shall be considered as resident if control ang irs is situated wholly or partly in Pakistan in the year, agement: and control of its affairs partly jp ident person for a t A person shall be a (a) A resident individual, resident company or resident AOP for the year; or (b) The Federal Government. RESIDENT TA. YER: [Section 2(83)] “Resident Taxpayer” means a taxpayer who is a resident person. ROYALTY: [Section 2(54)] “Royalty” means any amount paid or payable, whether periodical or a lump sum, as consideration for: (a) The use of, or right to use any patent, invention, design or model, secret formula or process, trademark or other similar property; (b) The use of, or right to use any copyright of a literary, artistic or scientific work, including films or videotapes for use in connection with television o tapes in connection with radio broadcasting, but. shall not inclué consideration for the sale, distribution or exhibition of cinematograph films The receipt of, or right to receive, any visual images or sounds, ot bob transmitted by satellite. cable, optic fiber or similar technology in connectist with television, radio or interr . (c) roadeasting: — Scanned with CamScannerDefinitions Under the Incon pply perience or skill; Chapte! ax Ordinance 37 industrial, commercial or scientific knowledge (4) The use ig sc 7 (c) The use of or right to use any industrial, commercial or scientific equipment; ae : ; i ent, w Oa eee : a that is ancillary and subsidiary to, and is shed as a means of enabling the application or nj 3 property or right as mentioned above; eee iareeaean ase (g) The disposal of any property or right referred above. SALARY! . [Section 2(55)} “Salary” means salary as defined in Section 12 of the Ordinance. According t Section 12, salary means any amount received by an employee from any amet whether of a revenue or capital nature, including any pay, wage, leave pay. payment in Jjeu of leave, overtime payment, bonus, commission, fee, gratuity, any perquisite or other remuneration provided to an employee, whether convertible to money or not. SMALL COMPANY: [Section 2(59A)] “Small Company” means a company registered on or after 1-7-2005 under the Companies Ordinance, 1984 / Companies Act 2017, which: (@) _ has paid up capital plus undistributed reserves not exceeding Rs 30 million; (ji) has employees not exceeding 250 at any time during the year; (ii) has annual turnover not exceeding Rs. 250 million; and (iv) is not formed by the splitting up or the reconstitution of company already in existence. Tax Treatment: ‘A small company pays tax @ 22% on its profit (Tax year 2021). SPECIAL JUDGE: [Section 2(59B)] According to Income‘Tax Ordinance, a special judge means a person appointed as such by the Federal Government under section 203 of the snares SPECULATION BUSINESS: ” [Section 2(61)] “Speculation Business” means any business in which a contract for the purchase and sale of any commodity (including stocks and shares) is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity, but does not include a business in which: (a) A contract in respect of raw material or merchandise is entered into by a person in the course of a manufacturing or mercantile business 10 guard against loss through future price fluctuations for the purpose of fulfilling the person’s other contracts for the actual delivery of the goods to be manufactured or merchandise to be sold; Scanned with CamScanner38 A Text Book of Income Tax Lay, (b) A contract in respect of stocks and shares is entered into by a dealer oy investor therein to guard against loss in the person’s holding of stocks and shares through price fluctuations; or (©) A contract is entered into by a member of forward market or stock exchange _in the course of any transaction in the nature of jobbing or arbitrage to guarg against any loss which may arise in the ordinary course of the person’s business as such member. : Explanation: . “Jobbing” is the function of a “Jobber” who works at the stock exchange for the buying and selling of securities, bonds or shares. “Arbitrage” is the practice in which a person buys goods, securities, bonds, shares or foreign money, etc. from a place at low price for the purpose of selling them at another place where the price is higher, STOCK FUND: [Section 2(61A)} me Or a mutual fund where the shares in companies, to the extent of More “Stock fund’ means a-collective investment sche! investable funds are invested by way of equity than seventy per cent (70%) of the investment. STOCK-IN-TRADE: [Section 2(62) & 35) Stock-in-trade means anything produced, manufactured, purchased or otherwise acquired for manufacture, sale or exchange and any material or supply to be consumed in the production or manufacturing process, but does not include stocks or shares. TAX: [Section 2(63)] According to Income Tax Ordinance the term tax includes: () Income Tax: Itis an annual tax charged on the income of people. i) Default Surcharge / Additional Tax: Tf an individual or a company fails to p: Ordinance, they shall be liable for additional tay (iii) Penalty any amount of tax, required under the @ 12% p.a. along with actual tax, Itis a monetary punishment t Presents Wrong statements and books (iv) Fee and Others: ‘© @ person (taxpayer) who conceals his income or of accounts ete. _ Any fee or amount paid or payable under any provision of the Income Tax Ordinance. Scanned with CamScannerefinitions Under the Income chapter: Tax Ordina INCOME: TAXABLE “Taxable Income” me: 39 2064) & 9} 9 of the Ordinance, 8 taxable income as defined in Section sable income of a person for a tax Desi ye Sa mt ci area zero) under Income ‘Tax Example: Total income Less: Deductible allowane me Zakat paid under Zakat and Ushr Ordinance XXX Donation (Under Clause 61 Part I Second Schedule) XX Contribution in workers welfare fund / participation fund Xxx Profit on debt used for acquisition of house or construction of anew house ioe (v) Tution fee or education expenses of children XXX XXX Taxable income , ee, TAXPAYER: | : [Section 2(66)] According to Income Tax Ordinance 2001, a taxpayer means: (i) © A person whose income is chargeable to tax. (ii) Representative of such person. (iii) A person responsible to deduct or collect tax on the behalf of government under the income tax law. : (iv) Any person who is required to furnish the return of total income or pays tax under the law. Few examples of the persons who are required to furnish the return under the Ordinance are as under: ’ (i) Every company: (i) Every person (other than a company) whose taxable income for the year exceeds the basic exemption. (ii)_A non-profit organization or an approved welfare institution. TAX YEAR: The term tax year was discussed as previous year in Incom! sO year under Income Tax Ordinance 1979. According to Income T 001, the term tax year includes. [Section 2(68)] ¢ Tax Act 1922 and as ‘ax Ordinance Scanned with CamScanneray 40 A Text Book of Income Tax Lay (i) Normal Tax Year: 1a period of 12: months ending on 30" day of June. e.g., Normal tax year is (i) 01-07-2019 — 30-06-2020 (ii) 01-07-2020 — 30-06-2021 (ii) Special Tax Year: Special tax year is a perio A person is allowed to have special (a) Where a person has a tax year unt from the normal tax year. (b) Where the Commissioner has. allowed a person to use d of 12 months which is different from normal tax year, | tax year under the following cases. der the Income Tax Ordinance different special tax year on his application. For Example: : The tax year of Sugar or cotton textile mills starts on 1 October of a year to 30 September of next year and the tax year of a person exporting rice starts on 1* January of a year to 31 December of the same year etc. (iii) Transitional Tax Year: When a person changes his normal tax year for a special tax year and vice versa then the period between the end of last year prior to the change and the date on which the changed tax year starts as a fax year is termed as transitional tax year. Illustration: (i) Previous normal tax year: July 1, 2020— June 30, 2021 (ii) Special tax year as approved by the Commissioner: October. 1, 2021 — September 30, 2022 (iii) Transitional tax year: ' July 1, 2021 — September 30, 2021 TOTAL INCOME: [Section 2(69)] The total income of a person for a tax : ¢ year shall be the sum or aggregate of all the following heads of income mentioned in Section 11 of the Income Tax Ordinance 2001. (i) _ Income from salary. (Section 12) (ii) Income from property. (Section 15) (iii) Income from business. (Section 18) (iv) Capital gain, (Section 37) (v) Income from other sources, (Section 39) Scanned with CamScanner2 Definitions Under the Income Lav Ordinance rRUST: i TRUS . / [Section 2(70) & Hoy rust” means an obligation annexe chapter? anes out lated by the owner for the «Lt the ownership of pi mm n obi ship of property tha atthe confidence reposed in and aeeepted by the owner or deh ieee penelit of another or of another and the owner, TURNOVER: [Section 2(70A) & 113(3)] (a) The gross receipts, exclusive of Si and Federal bxei trade discounts shown on invoices, or bills, devived from the and also excluding any amount tiken as deemed incon final discharge of the tax liability on which tay is alre (b) The gross fee for rendering the s commissions; except covered by final discharge of tax liability for which tax is separately paid or payable; duty or any (c) The gross receipts from the execution of contracts; except covered by final discharge of tax liability for which tax is separately paid or payable; and association of (a) The company’s share of the amounts stated above of any persons of which the company is a member, WHISTLEBLOWER: [Section 2(75)] “Whistleblower” means a person who reports concealment or evasion of sales tax and tax fraud leading to detection or collection of taxes, fraud, corruption or misconduct, to.the competent authority having power to take action against the person or a sales authority committing fraud, corruption, misconduct, or involved in concealment or evasion of taxes. ASSOCIATI Two persons shall be associates where the relationship between the two is such that one acts according to the instructions of other or both persons act according to the [Scetion 85] instructions of a third person. ¢.g., ive. (a) An individual and his close r (b) Members of an association of persons. (c)_ A trust and a person who gets benefits under the trust. alone or together with an associate or (@) A company and a shareholder, ‘either ts to dividends or associates, controls 50% or more voting power or righ rights to capital in the company. : Explanation: ns an ancestor, a descendent of the Relative in relation to an individua me: grandparents, an adopted child or a spouse of individual Scanned with CamScanner42 A Text Book of Income Tax 1g, ADDITIONAL NOTES (Section 81.44) RESIDENTIAL STATUS: a o t! Determination of residential statu: s a eained on ihe oe of income tax because income of a person chargeable {0 iF Bean elas Sis of residential status and not on nationality ay oe ms Lad cai oupowes while income (both) of a resident person are taken into account for Non, resident person pays tax only on income. F e oe eee aX, the Income Ta 2001 introduces es OF PI 7 ON thei, residential status: ‘(Non-resident person [Section 237] [Section 2(38)] [Section 2(50 & 83)] [Section 251 & 82)] [Section 2(52 & 81)] [Section 2(53)] [Section 84] s of a person i an source of d the following ¢ (ii) Non-resident taxpayer (iii) Resident company (iv) Resident individual (v) Resident person (vi) Resident taxpayer (vii) Resident association of persons Mlastration: : (a) Earned and received in Pakistan. (b) Eamed and received abroad. 2 (c) Earned outside Pakistan but received in Pakistan. (@) _ Eamed in Pakistan but received abroad. . Answer the following questions by taking into consideration the choices giy above: ib Which one is Pakistan source income and foreign source income. 2; Which income is taxable for a non-resident individual in Pakistan. Solution: : : 1 2 and (4) are Pakistan source incomes where as (b).and (c) are foreign sou 2. (a)and (d) - SPECIAL TAX YEAR: The Board has speci as specified the “i . ‘ : 7 taxpayers or incomes in the official Gaza certain special tmx years for i Scanned with CamScanner