CHAPTER 4

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EXEMPTIONS AND
CONCESSIONS
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EXEMPTIONS AND CONCESSIONS
Sections 41 through 55 of the Income Tax Ordinance, 2001 (ITO) deal with the exemptions and
tax concessions available to a tax payer. The Second Schedule to the ITO specifies the incomes
or classes of incomes, persons or classes of persons which shall either be exempt from tax or
whose tax liability shall be reduced or upon whom certain provisions of the ITO shall not apply.
The incomes or classes of incomes, the persons or classes of persons specified in the Second
Schedule fall under any of the following categories: [53(1)]1.

1. Exempt from tax (i.e., the incomes specified in this part shall not be included in total income
of the persons). [Part-I]

2. Liable to tax at the rates lower than the rates specified in the First Schedule. [Part-ll]

3. Enjoy reduction in tax lability. [Part-Ill]

4. Exempt from the operation of any specified provision of the Income Tax Ordinance, 2001.
[Part-IV]
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AMENDMENT IN SECOND
SCHEDULE
The FBR may make any amendment in the Second Schedule. However, all amendments made
during the financial year shall be placed before the National Assembly. Amendments made by
the Federal Government may fall under any of the following natures:

1. Adding a new Clause.

2. Adding condition to a Clause.

3. Omitting a Clause

4. Omitting any condition to a Clause

5. Making any change in a Clause or condition in a Clause.

The amendments in the Second Schedule may be enforced from any date, whether present,
pastor future. Further, if the law so directs, an exempt income may be added in taxable income
for rate purposes only.
 CONDITIONS
z FOR APPROVAL OF
AMENDMENTS

The FBR may, from time to time, make amendments in the Second Schedule subject to the following conditions:

1. FBR has obtained approval of the Federal Minister-in-charge, pursuant to the approval of the Economic Coordination
Committee of the Cabinet

2. The circumstances exist needing immediate action for the purposes of

 National security

 Natural disaster

 National food security in emergency situations

 Protection of national economic interests in situations arising out of abnormal fluctuation in international commodity
prices

 Implementation of bilateral and multilateral agreements

 granting an exemption from any tax imposed under the Income Tax Ordinance, 2001to any international financial
institution or financial institution owned by a foreign Government, operating under an agreement or memorandum of
understanding (MOU)or any other arrangement with the Government of Pakistan.
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Life of Exemption Notifications [53(4)]

Exemption Notifications issued u/s 53(2) of the Income Tax Ordinance, 2001 may, for
the purpose of their life, be divided into two categories, namely;

Notifications Issued Till 30-06-2015: These notifications shall remain effective till
rescinded by a notification issued for this purpose

Notifications Issued On or After 01-07-2015: Such notification shall, if not earlier

rescinded, stand rescinded on the expiry of the financial year in which it was issued.
Such notifications shall be deemed to have been in force w.e.f. 01-07-2016 and, if not
earlier rescinded, shall continue to be in force till 30-06-2018.

Notifications Issued On or After 01-07-2016: All such notifications which were

issued and placed before the National Assembly shall continue to be in force till 30-06-
2018, if not earlier rescinded by the Federal Government or the National Assembly.
 zEXEMPTION FROM TOTAL INCOME

Certain incomes and persons are exempt from the levy of income tax under certain sections of the Income
Tax Ordinance, 2001. Further, Part- of the Second Schedule also contains certain incomes, classes of
incomes, persons or classes of persons specified which are fully exempt from tax, Coming pages contain a
brief discussion of all those incomes, persons, etc., which are exempt from tax. The conditions and
limitations applicable to those exemptions, if any, are also discussed at their appropriate places.

AGRICULTURAL INCOME [41]

Where a taxpayer has an agricultural income it shall be exempt from tax. Agricultural Income means an
income, which satisfies the following conditions:

1. The income is derived from land. The income may be in the form of rent or revenue

2. The land from which the income is derived is situated in Pakistan

3. The land is used for agricultural purposes.

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Examples of Agricultural Income

The following are some of the examples of agricultural income:

1. Income arising from the forests grown and maintained by persons (e.g., Changa
Manga forest).

2. Amount received from cattle owners for allowing the cattle to graze on above
stated forests.

3. Profit on sale of standing crops.

4. Profit on sale of the produce raised after harvesting by the cultivator or the owner
of an5.agricultural land.

5. Compensation from insurance company in respect of the loss or damage

occurred to the agricultural produce or crop due to the natural calamities

6. Income from growing flowers.

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Examples of Non-Agricultural Income
1. Income from spontaneous forests.

2. Income from sale of fruits and flowers growing on land spontaneously.

3. Income from sale of grass and weeds of spontaneous growth.

4. Profit of a merchant from purchase and resale of agricultural produce or the growing crop.

5. Interest received by a moneylender in the form of agricultural produce.

6. Income from sale of agricultural produce received as remuneration for services rendered in
connection with the agricultural land or agricultural produce.

7. Dividend paid by a company out of its agricultural income.

8. Income from fisheries. Income from poultry farming, Income from a manufacturing process
undertaken in connection with the agricultural produce.

9. Royalty income of mines. Income from cattle or sheep farming. Income from stud farms. Income
from supply of water for agricultural purposes.
 AGRICULTURAL PRODUCE USED AS
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RAW MATERIALS

Where a cultivator or receiver of rent-in-kind uses the agricultural produce as raw

materials in his business, then the income chargeable to tax under the head
"Income from Business” shall be computed as below:

Total income

Less: Market value of the agricultural produce utilized in business as raw material

NOTE : Only the market value of the agricultural produce is deducted. No further
deduction shall be made in respect of any expenditure incurred by the taxpayer
as cultivator or as a receiver of rent-in kind.
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Continue….
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Example 4.2
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DIPLOMATIC AND UNITED NATIONS
EXEMPTIONS

The income of an individual entitled to privileges under any of the following

laws shall be exempt from tax

1. Diplomatic and Consular Privileges Act, 1972.

2. United Nations (Privileges and Immunities) Act, 1948.

The exemption shall be restricted to such extent as has been provided in

those Acts.
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PENSION OF UNITED NATIONS'
EMPLOYEES [42(3)]
Pension received by a Pakistani shall be exempt from tax if:

1. The pension is by virtue of his employment in United Nations or its specialized agencies(including
International Court of Justice).

2. The salary income of the person from such employment was exempt from tax under the Income Tax
Ordinance.

EMPLOYEE OF A FOREIGN GOVERNMENT [43]

The salary income of an employee of a foreign government is exempt from tax if the following conditions
are fulfilled:

3. The employee is not a citizen of Pakistan

4. The person performs such services as are being performed by the employees of the Government of
Pakistan in foreign countries

5. The foreign government also grants a similar tax exemption to the employees of Government of
Pakistan performing services in that country,
 EXEMPTIONS
z UNDER
INTERNATIONAL AGREEMENTS [44
Exemption as a Result of a Tax Treaty [44(1)]

A Pakistan-source income shall be exempt from tax if it cannot be taxed in Pakistan due to the tax treaty
entered into by the Government of Pakistan.

Salary Income of an Individual Performing Services under an Aid Agreement [44(2)]

The salary income of an individual shall be exempt from tax if the following conditions are fulfilled:

1. The person is not a citizen of Pakistan.

2. He is performing services under an Aid Agreement between the Federal Government and a foreign
government or public international organization.

3. The person is either not a resident or is resident only due to his service under the Aid Agreement.

4. The person is a citizen of that country with which the Aid Agreement has been entered into.

5. The salary is being paid to the person out of the funds or grants released as aid to Pakistan.
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Income of Contractor, Consultant or
Expert [44(3)]
Income of a contractor, consultant or expert shall be exempt from tax if the following conditions are
satisfied:

1. The person is not a citizen of Pakistan

2. He is engaged on a project in Pakistan being undertaken under a bilateral or multilateral

technical assistance agreement between the Federal Government and a foreign government
or public international organization.

3. The project is being financed out of the funds available in accordance with the agreement.

4. The person is either a non-resident or is resident only due to his engagement in respect of the
project under the agreement.

5. The person received income out of the funds of the grant available according to the agreement
 z
ALLOWANCES ATTACHED TO
HONOURS, AWARDS, Etc. [45]
Any allowance attached to any Honour, Award or Medal and any monetary award granted by the President
of Pakistan is exempt from tax.

PROFIT ON DEBT [46]

Any profit on debt received by a non-resident person shall be exempt from tax if the following conditions are
satisfied:

1. The profit is received on a security issued by a resident person.

2. The recipient and the payer of the profit are not associates of each other.

3. The security (e.g., debentures, etc.) was widely issued outside Pakistan for raising a loan there from to
be used in the business in Pakistan

4. The profit has been paid outside Pakistan.5.The security is approved by Board for the purpose of this
exemption.
 z SCHOLARSHIPS [47]

The amount of any scholarship granted to a person shall be exempt from tax. However, where it is paid (directly or indirectly)
by an associate then this exemption shall not be available

SUPPORT PAYMENT TO LIVE APART [48]

Any amount received by a spouse shall be exempt from tax if it is received as a support paymentunder an agreement to live
apart.

INCOME OF GOVERNMENTS [49]

1. The Federal government.

2. A Provincial Government

3. A Local Government in Pakistan.

However, any "Business Income" of a Provincial Government or a Local Government in Pakistan shall be taxable if it is
derived from such business which is carried on outside its respective jurisdictional area. [49(2)]
 zINCOME OF GOVERNMENTS [49]

Any payment received by the Government (i.e., Federal, Provincial or Local) shall not be liable to any collection or
deduction of advance tax. But where the business income of a Provincial Government or a Local Government is taxable,
then advance tax may be deducted or collected from such income. [49(3)]

This exemption (i.e., exemption u/s 49) shall not be available in case of corporation, company, regulatory authority,
development authority, other body or institution, whether:

1. It is established by or under a Federal law or a Provincial law or an existing law

2. It is set up, owned and controlled (directly or indirectly) by the Federal Government or a Provincial Government. [49(4)]

Notes:

The above-mentioned provision shall be applicable regardless of the ultimate destination of the income of corporation,
company, regulatory body, institution, etc.

Income from sale of spectrum licenses and renewal thereof by Pakistan Telecommunication Authority on behalf of the
Federal Government after 01-03-2014 shall be treated as income of the Federal Government and not of the Pakistan
Telecommunication Authority.
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INCOME OF SHORT-TERM
RESIDENTS
The foreign-source income of a person shall be exempt from tax if the following
conditions are met:

1. The person is an individual. The nationality of the person is immaterial.

2. The person is resident only due to his employment in Pakistan; and3.The

person is in Pakistan for a period which is not more than three years.

However, the following incomes of such person shall not be exempt from tax:

3. Any income derived from his business established in Pakistan.

4. Any foreign-source income brought into or received in Pakistan.

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INCOME OF RETURNING
EXPATRIATES [51]
Foreign-source income of a Pakistani settling back in Pakistan is exempt for two years
starting from the year in which he became resident if [51(1)]

1. The income accrues or arises outside Pakistan

2. The person was not resident in any of the four years immediately preceding the year in
which he became resident.

Note: Salary income of a Pakistani shall be exempt from tax if the person: [51(2)]

3. Left Pakistan during the tax year

4. Remained abroad during the tax year

5. Earned "Salary" income from outside Pakistan during the tax year.