Ch. 4
Ch. 4
Ch. 4
1 - Act Vs Ordinance
Any person, forum, office, authority who is vested with the power to make or formulate a law in the country
is known as “Legislature” or “Law Maker”. In Pakistan at Federal Level there are two lawmakers.
➢ Parliament (National Assembly and Senate)
➢ President
1.1 - Act
“Any law made/ formulated by the parliament.”
1.2 - Ordinance
“Any law made / formulated by the President in the absence of parliament.”
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2.2.1 - Section 3
For Income Tax Matters, the Ordinance 2001 shall apply notwithstanding anything to the contrary contained
in any other law.
2.2.2 - Section 54
Exemption and tax provision in other laws not applicable unless provided in this Ordinance.
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4 - SEC-80 Person
The following shall be treated as persons:
a) An individual
b) a company or association of persons incorporated, formed, organised, or established in Pakistan or
elsewhere
c) the Federal Government, a foreign government, a political sub-Division of a foreign government, or
public international organisation
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4.2 - “Firm”
The relation between persons who have agreed to share the profits of a business carried on by all or any
of them acting for all.
4.3 - “Company”
i. a company as defined in the Companies Act, 2017
ii. a body corporate formed by or under any law in force in Pakistan
iii. a modaraba
iv. a body incorporated by or under the law of a country outside Pakistan relating to incorporation of
companies
v. a co-operative society, a finance society or any other society
vi. a non-profit organization
vii. a trust, an entity or a body of persons established or constituted by or under any law for the time
being in force
viii. a foreign association, whether incorporated or not, which the Board has, by general or special order,
declared to be a company for the purposes of this Ordinance
ix. a Provincial Government
x. a Local Government in Pakistan
➢ is not a small and medium enterprise as defined in Income Tax Ordinance, 2001.
“Non-Profit Organization” means any person other than an individual which is:
i. established for religious, educational, charitable, welfare purpose for general public or development
purposes, or for the promotion of an amateur sport.
ii. formed and registered under any law as a non- profit organization.
iii. approved by the Commissioner for specified period, on an application made by such person in the
prescribed form and manner, accompanied by the prescribed documents and, on requisition, such
other documents as may be required by the Commissioner.
iv. and none of the assets of such person are available for private benefit to any other person.
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➢ Being a citizen of Pakistan is not present in any other country for more than 182 days during the tax
year or who is not a resident tax payer of any other country.
➢ any amount treated as income under any provision of Income Tax Ordinance, 2001 (Loan received
in cash) and
8.1 - Rates of Tax for Individuals Salaried Where the income of an individual chargeable under
the head “salary” exceeds 75% of his taxable income.
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1 Up to Rs. 600,000 0%
2 Rs. 600,001 to Rs. 1,200,000 2.5% exceeding 600,000
3 Rs. 1,200,001 to Rs. 2,400,000 15,000 + 12.5% exceeding 1,200,000
4 Rs. 2,400,001 to Rs. 3,600,000 165,000 + 22.5% exceeding 2,400,000
5 Rs. 3,600,001 to Rs. 6,000,000 435,000 + 27.5% exceeding 3,600,000
6 Above 6,000,000 1,095,000 + 35% exceeding 6,000,000
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9 - COMMON RULES
Example:
Mr. Asad and Mr. Yasir are joint owners of a house and they have provided the following data:
Profit sharing ratio amongst Asad and Yasir 70:30
Rental income earned from house for Tax Year 2023 Rs.3,000,000
Required:
Calculate taxable income of Mr. Asad and Mr. Yasi?
“Common expenditure” means expenditure that is not clearly allocable to any particular class or
classes of income, such as general admin. Expenditure etc.”
Different heads of income for common expenditures are as follows:
a. Income from Property
b. Income from speculation business-PSI
c. Income from speculation business -FSI
d. Income from non-speculation business-PSI
e. Income from non-speculation business -FSI
f. Capital gains-PSI
g. Capital gains -FSI
h. Income from other sources-PSI
i. Income from other sources-FSI
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Example:
M/s Zee Khan (ZK) purchased old construction machinery from M/s Rauf Construction (RC), an associated
company. The cost of that machine is Rs.1,500,000 in the books of RC whereas net book value of the said
machine is Rs.950,000. One of the machine dealers in market the company that the value of the said old
machine in the market is Rs.750,000. Both companies are interested to know that what would be the fair
market value of that machine.
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Example
M/s Ittefaq Steel Ltd. claimed deduction of following finance charges against the income of preceding years:
Year Amount of Finance Charges
2016 1,500,000
2017 750,000
2018 850,000
The aforesaid mark-up remained payable to the bank and could not be paid due to adverse liquidity position
of the company. On 15 May 2019, the bank agreed to waive off mark up to the extent of Rs.2,500,000 under
a rescheduling agreement. The company interested to know that
Required:
What is the tax exposure on such waiver of mark up and in case said amount is taxable then how the said
sum is added to preceding years income?
Solution:
Rs.2,500,000 of mark-up will be taxable in tax year 2019.
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Practice Questions
Q-1
What are various deductible allowances which are deducted to arrive at taxable income?
(ICAP Question Bank)
Q-2
What is the difference between a public company and a private company within the meaning of the
Income Tax Ordinance, 2001? (ICAP Question Bank)
Q-3
Explain the following as specified in the Income Tax Ordinance, 2001.
➢ Industrial Undertaking
➢ Fair Market Value
➢ Apportionment of deductions
➢ Receipt of Income (ICAP Question Bank)
Q-3
Determine the residential status in view of the provisions of Income Tax Ordinance, 2001 and the stated
rules, of the following persons for the tax year ended June 30, 2023 under the given circumstances.
(i) Mr. Mubeen came to Pakistan for the first time on a special assignment from his company on April
01,2023 and left the country on September 30, 2023.
(ii) Mr. Rana, who had never travelled abroad in his life, got a job in Canada. He went to Canada on
December 29, 2022 to assume his responsibilities as a CFO. In June 2023, his company sent him to
India on a training workshop. On June 30, 2023 on his way back to Canada he had to stay in Karachi
for a whole day in transit.
(iii) Mr. Baber, a Federal Government employee was posted to the Pakistan mission in Geneva from July
01, 2021 to June 30, 2023.
(iv) Mr. Francis, a sugar dealer in Brazil, came to Pakistan on July 31,2022. During his visit he stayed at
Lahore for 60 days and spent the rest of the days in Karachi. He left the country on January 31, 2022.
Assume that the Commissioner has granted him permission to use calendar year as a special tax
year. (ICAP Question Bank)
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Q-3
Jean Francois, a French designer, often visits to Pakistan for promotion of his products. During his last visit
he stayed in Pakistan from 10 July 20X8 to 25 February 20X9.
Determine the residential status of Jean Francois for tax year 20X9, assuming that the Commissioner has
granted him permission to use calendar year as special tax year. (Aut.19, Q-3 (a))
Q-4
Briefly discuss the difference between a public company and a private company, within the meaning of
Income Tax Ordinance, 2001. (Spr.19, Q-5 (a))
Q-5
Kaleem Limited (KL) is a listed company and its accounting year ends on 30 June. KL is now considering
to change its accounting year from 30 June to 30 September.
Under the provisions of the Income Tax Ordinance, 2001:
(a) Briefly describe Normal, Special and Transitional Tax Year.
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(b) State the requirements regarding change in tax year from normal to special. (Aut.18, Q-2)
Q-6
On 1 December 20X7 Bruce Lee was appointed by a Chinese company as a Technical Director for Pakistan.
He has provided you the following details:
Arrival in Pakistan 15 December 20X7
Joined office in Pakistan 20 December 20X7
Visit to Dubai on an official trip 21-30 March 20X8
Visit to South Korea for vacations 12-21 April 20X8
Visit to northern areas of Pakistan for personal trip 4-9 June 20X8
In view of the provisions of the Income tax Ordinance, 2001 and related Rules thereunder, comment on the
residential status of Bruce Lee for the tax year 20X8. (Spr.18, Q-3 (c))
Q-7
Under the provisions of Income Tax Ordinance, 2001 and rules made thereunder:
Discuss the residential status for tax year 2017 in each of the following situations:
(a) On 21 September 2016 Asif proceeded to Dubai to join his new job. Due to certain professional
issues with his employer in Dubai, he resigned on 1 May 2017 and came back to Pakistan. On 16
May 2017 he got a new job in Pakistan which he continued till 30 June 2017.
(b) Sami Associates is an association of persons and provides accounting services in Dubai. On 2
January 2017, the entire management and control of its affairs was shifted from Karachi to Dubai.
(Aut.17, Q-2 (a))
Q-8
Differentiate between the terms ‘Tax evasion’ and ‘Tax avoidance’. Give one example in each case.
(Aut.17, Q-8 (b))
Q-9
Under the provisions of the Income Tax Ordinance, 2001 describe the following:
(a) Meaning of the term ‘Associates’.
(b) Circumstances in which a member of an association of persons and the association may be regarded
as associates.
(c) Situation in which members of an association of persons may not be regarded as associates.
(Aut.16, Q-3 (b))
Q-10
Under the provisions of the Income Tax Ordinance, 2001 explain the following:
(a) Special tax year
(b) Transitional tax year (Spr.16, Q-3)
Q-11
Under the provisions of the Income Tax Ordinance, 2001 compute taxable gain or loss, under the correct
head of income, in each of the following cases. Also identify, giving reasons, whether the company is a
public or private company for tax purposes:
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(a) Ashiq has 5,000 shares in Rumi (Pvt.) Limited (RPL). 52% of the shares of RPL are held by Delta
Plc. which is owned by the British Government. Ashiq inherited these shares from his father on 1
January 2014. His father had purchased these shares on 31 May 2012 at a price of Rs.250 per share.
The market value of these shares at the time of inheritance was Rs.300 per share.
(b) On 30 June 2015 Ashiq sold 2,500 shares in RPL at a price of Rs.325 per share when the break-up
value of RPL was Rs.350 per share.
(c) What would be your answer in (i) above, if 40% of the shares of RPL were held by the Provincial
Government, 48% by the British Government and 12% by individual investors.
(Aut.15, Q-4 (b))
A-4
Under the provisions of Income Tax Ordinance, 2001 an individual is considered as resident if he stayed
183 days (in aggregate) or more in the current tax year.
In the given scenario Mr. Mohsin stayed only 181 days in Pakistan in the tax year 2018, so, Mr. Mohsin is
not a resident for the tax year 2018.
A-5
Private Company
A company that is not a public company.
Public Company
➢ a company in which not less than fifty per cent of the shares are held by the Federal Government or
Provincial Government
➢ a company in which not less than fifty per cent of the shares are held by a foreign Government, or a
foreign company owned by a foreign Government
➢ a company whose shares were traded on a registered stock exchange in Pakistan at any time in the
tax year and which remained listed on that exchange at the end of that year
➢ a unit trust whose units are widely available to the public and any other trust as defined in the Trusts
Act, 1882
A-6
(a) Normal tax year
Normal tax year is a period of twelve months ending on the 30th day of June and is denoted by the calendar
year in which the said date falls.
Special tax year
Where a person’s income year is different from the normal tax year, or where, by an order, a person has
been allowed by the Commissioner to use a twelve months’ period different from normal tax year,
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such income year or such period shall be that person’s special tax year and shall be denoted by the
calendar year relevant to the normal tax year in which the closing date of the special tax year falls.
§ A person shall apply in writing to the Commissioner for change in tax year from normal to special.
§ The Commissioner should grant permission only if he is satisfied that the company has a compelling
need to use special tax year.
§ While giving the permission, the Commissioner may impose such conditions as he may deem fit.
A-7
Under the provisions of Income Tax Ordinance, 2001 an individual is considered as resident if he stayed
183 days (in aggregate) or more in the current tax year.
In the given scenario, Mr. Bruce Lee is not a resident for the tax year 2018 as he was present for less than
183 days in Pakistan i-e 178 days as follows:
Months Days
December 2017 (15-12-17 is also included) 17
January 2018 31
February 2018 28
March 2018 31
April 2018 30
May 2018 31
June 2018 30
198
Less: Number of days visited to Dubai – March (10)
Less: Number of days visited to South Korea – April (10)
178
A-8
Under the provisions of Income Tax Ordinance, 2001 an individual is considered as resident if he stayed
183 days (in aggregate) or more in the current tax year.
(a) (i) The number of days Asif spent in Pakistan during tax year 2017 is 144 as shown below:
Month Days
July 2016 31
August 2016 31
September 2016 21
May 2017 31
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June 2017 30
Total 144
Asif is a non- resident person as his total stay in tax year 2017 is less than 183 days.
(b) An AOP is treated as a resident if the management and control of its affairs is situated in Pakistan at
any time during the year. Hence Sami Associates would be considered a resident irrespective of the
fact that its entire management and control of affairs was subsequently shifted from Karachi to Dubai.
A-9
Tax avoidance
It is generally the legal exploitation of the tax regime to one's own advantage, to attempt to reduce the
amount of tax that is payable by means that are within the law whilst making a full disclosure of the material
information to the tax authorities. Examples of tax avoidance involve using tax deductions, changing one's
business structure through incorporation or establishing an offshore company in a tax haven.
Tax evasion
It is the general term for efforts by individuals, firms, trusts and other entities to evade the payment of taxes
by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true
state of their affairs to the tax authorities to reduce their tax liability, and includes, in particular, dishonest
tax reporting (such as under declaring income, profits or gains; or overstating deductions).
A-10
( a) Associates:
Two persons are associate where the relationship between the two is such that one may reasonably
be expected to act in accordance with the intentions of the other, or both persons may reasonably
be expected to act in accordance with the intentions of a third person.
(b) Circumstances in which a member of an association of persons and the association may be
regarded as associates:
Where the member, either alone or together with an associate or associates under another
application of section 85 of the Income Tax Ordinance, 2001, controls fifty per cent or more of the
rights to income or capital of the association.
(c) Situation in which members of an association of persons may not be regarded as
associates:
Members of an association of persons may not be regarded as associates where the Commissioner
is satisfied that neither person may reasonably be expected to act in accordance with the intentions
of the other.
A-11
(a) Special tax year:
Where a person’s income year is different from the normal tax year, or where, by an order, a person
has been allowed by the Commissioner Inland Revenue to use a twelve months’ period different from
normal tax year, such income year or such period shall be that person’s special tax year and shall
be denoted by the calendar year relevant to normal tax year in which the closing date of the special
tax year falls.
The Board has authority to prescribe any special tax year in respect of any class of taxpayers.
( b) Transitional tax year:
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Where the tax year of a person changes as a result of an order by the Commissioner of inland
revenue either from the normal tax year to special tax year or vice versa, the period between the end
of the last tax year prior to change and the date on which the changed tax year commences shall be
treated as a ‘transitional tax year’.
A-12
Reason for identifying the type of company:
In this case, RPL falls within the definition of a public company for tax purposes as more than 50% of RPL’s
shares are held by a foreign company (Delta Plc.) which in turn is owned by foreign Government (UK).
Reason for identifying the type of company:
In this case, RPL is not a public company for tax purposes as less than 50% of its shares are held by both
the Provincial Government and the foreign Government (UK).
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