Tax Practices

1 PRINCIPLES OF TAXATION OF INDIVIDUALS

Section overview

n Taxation of individuals – classification

n Principle of taxation of individuals
n Taxation of certain individuals

1.1 Taxation of individuals - classification

In order to calculate the taxable income and tax liability, individuals are broadly categorized as:
(i) Salaried individuals – Salary income exceeds 75% of the taxable income (See section 2.4)
(ii) Non-Salaried Individuals – Either no salary income or salary income is less than 75% of the
taxable income. It is explained in section 2.4 of this Chapter.
a) Tax rates for salaried individual
Where the income of an individual chargeable under the head “salary” exceeds 75% of his
taxable income, the rates of tax to be applied shall be as set out in the following table, namely:—

Sr. No. Taxable Income Rate of Tax

Where the taxable income does not

1. 0%
exceed Rs. 600,000

Where taxable income exceeds Rs. 2.5% of the amount exceeding Rs. 600,000
2. 600,000 but does not exceed Rs.
1,200,000

Where taxable income exceeds Rs. Rs. 15,000 plus 12.5% of the amount
3. 1,200,000 but does not exceed Rs. exceeding Rs. 1,200,000
2,400,000

Where taxable income exceeds Rs. Rs. 165,000 plus 22.5% of the amount
4. 2,400,000 but does not exceed Rs. exceeding Rs. 2,400,000
3,600,000

Where taxable income exceeds Rs. Rs. 435,000 plus 27.5% of the amount
5. 3,600,000 but does not exceed Rs. exceeding Rs. 3,600,000
6,000,000

Where taxable income exceeds Rs. Rs. 1,095,000 plus 35% of the amount
6.
6,000,000 exceeding Rs. 6,000,000

1.2 Principle of taxation of individuals

Section 86 of the Ordinance deals with the taxation of individuals and the said section stipulates
that taxable income and tax liability of each individual shall be determined separately.

1.3 Taxation of certain individuals

Deceased individual:
Although the section 86 of the Ordinance states that every person shall be charged to tax
separately, however, there are certain exceptions to this general provision.

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 Chapter 12: Taxation of individual and association of persons

Section 87 of the Ordinance deals with the taxation of income of a deceased individual:
Legal representative is a person who in law represents the estate of a deceased person. Any
person to whom the estate of the deceased person passes on his death or who intermeddles with
such estate is also treated as legal representative.
q Legal representative is liable for:
(i) any tax that the deceased would have become liable for if he had not died; and
(ii) any tax payable in respect of the income of deceased’s estate.
q Liability of the legal representative shall be limited to the extent to which deceased estate is
capable of meeting the liability.
q Any proceedings taken against the deceased before his death shall be treated as taken
against the legal representative and may be continued against him from the stage at which
the proceedings stood on the date of deceased death.
q Any proceedings which could have been taken against the deceased if he had survived may
be taken against the legal representative.
The aforesaid provision of law clearly states that the income of a deceased person is taxable in the
hands of its legal representative and the said representative is liable to pay tax on such income to
the extent of estate of the said deceased person capable for meeting the tax liability.

Authors (Sec 89)

According to section 89 of the Ordinance, where the time taken by an author of a literary or artistic
work to complete the work exceeds twenty-four months, the author may elect to treat any lump
sum amount received by him in a tax year on account of royalties as having been received in that
tax year and the preceding two tax years in equal proportions.
Income of a minor child (Sec 91)

Definition: Sec 2(33), Minor child

“Minor child” means an individual who is under the age of eighteen years at the end of a
tax year.

Section 91 of the Ordinance states the procedure for levy of tax on the income of a minor child in
the following manner:
q Any income of a minor child for a tax year chargeable under the head "Income from
Business" shall be chargeable to tax as the income of the parent of the child with the
highest taxable income for that year.
q The above provisions shall not apply to the income of a minor child from a business
acquired by the child through an inheritance.

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Tax Practices

2. ASSOCIATION OF PERSONS (AOP) AND ITS TAXATION

SECTION OVERVIEW
n Association of persons
n Basic principles for taxation of AOP
n Individual as a member of AOP
n Tax rates for non-salaried individuals and AOP

2.1 Association of persons

“Association of persons” includes a firm, a Hindu undivided family, any artificial juridical person
and anybody of persons formed under a foreign law, but does not include a company.
Sec 2(32), “member” in relation to an association of persons, includes a partner in a firm;
“Firm” means 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.

2.2 Basic principles for taxation of AOP

q An association of persons is considered a separate entity from its members (partners).
Accordingly, the AOP is liable to tax separately from the members of the association.
q An AOP is treated as tax resident for a tax year if the control and management of its affairs
is situated wholly or partly in Pakistan at any time during that tax year.
q A resident AOP is taxable on its worldwide income.
q If the AOP has paid tax for a tax year, the amount received by a member of the association
in the capacity as member out of the income of the association shall be exempt from tax.
However, such share of member is included in income of the member for determination of
tax rate i.e. for rate purpose (discussed below in detail).
q If at least one of the members of an AOP is a company, the share of such company or
companies shall be excluded for the purpose of computing the total income of the AOP and
the company or companies shall be taxed separately at the rates applicable to the
companies, according to their share.
q The AOP is entitled to set off and carry forward its losses as per normal procedure. However,
share of loss from AOP is neither adjustable against the income of its members nor it is
considered for rate purpose.
q Where a change occurs in the constitution of a firm during a tax year, the firm’s income is
apportioned amongst the members on a time basis.
q The responsibility for filing the tax return of a firm for any tax year rests with the persons who
are members in the firm on the date the firm is required to file its tax return.

q Where a firm dissolves or discontinues carrying on business, any tax payable by the firm is
recoverable from any person who was a member in the firm at the time of dissolution or
discontinuance of business. Tax payable can also be recovered from legal heirs of the
deceased partners.

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 Chapter 12: Taxation of individual and association of persons

2.3 Individual as a member of AOP

If, for a tax year, an individual has taxable income besides exempt share of profit from AOP, then
the amount of tax payable on the taxable income of the individual shall be computed in accordance
with the following formula:
(A/B) x C
Where
A is the amount of tax that would be assessed to the individual for the year if the amount or
amounts exempt from tax (i.e. share of profit from AOP) were chargeable to tax
B is the taxable income of the individual for the year if the amount or amounts exempt from tax
under (i.e. share of profit from AOP) were chargeable to tax; and
C is the individual‘s actual taxable income for the year
Key points for solving AOP numerical
Following points should be kept in mind when solving AOP numerical:
• Any profit on debt, brokerage, commission, salary or other remuneration paid by an
association of persons to a member of the association is not allowed as an expense; hence
it should be added back to the taxable income of AOP.
• FBR has clarified that it is the profit before tax of AOP that will be included in the taxable
income of its members for rate purpose.
• Share of loss from AOP is neither adjustable against income of its members nor it is
considered for rate purpose.
• If an AOP has any income that falls under final tax regime (FTR) then members share from
such income shall not be added in the taxable income of the member. Section 4(4) read
with Section 169(2) clearly states that income falling under FTR is not to be included in any
taxable income.
• If AOP has any exempt income, the share received in the capacity as member out of the
income of association shall remain exempt.

2.4 Tax rates for non-salaried individuals and AOP

Sr. No. Taxable Income (Rs.) Rate of Tax
Where the taxable income does
1. 0%
not exceed Rs.600,000
Where the taxable income
2. exceeds Rs.600,000 but does not
7.5% of the amount exceeding Rs.600,000
exceed Rs. 800,000
Where taxable income exceeds Rs. 15,000 plus 15% of the amount
3. Rs. 800,000 but does not exceed exceeding Rs. 800,000
Rs. 1,200,000

Where taxable income exceeds Rs. 75,000 plus 20% of the amount
4. Rs. 1,200,000 but does not exceeding Rs, 1,200,000
exceed Rs. 2,400,000

Where taxable income exceeds Rs. 315,000 plus 25% of the amount
5. Rs. 2,400,000 but does not exceeding Rs. 2,400,000
exceed Rs. 3,000,000
Where taxable income exceeds
Rs. 465,000 plus 30% of the amount
6. Rs. 3,000,000 but does not
exceeding Rs. 3,000,000
exceed Rs. 4,000,000
Where taxable income exceeds
Rs. 765,000 plus 35% of the amount
7. Rs. 4,000,000 but does not
exceeding Rs. 4,000,000
exceed Rs. 6,000,000

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Tax Practices

The following examples will explain the salaried and non-salaried status and tax liability of four
individual having salary and other taxable income:
Individuals Mr. A Mr. B Mr. C Mr. D
Taxable Salary 900,000 100,000 600,000 900,000
Taxable Other income 100,000 1,000,000 400,000 250,000
Total Taxable Income 1,000,000 1,100,000 1,000,000 1,150,000
Percentage of Salary to
taxable Income 90% 9.09% 60% 78.26%
Status Salaried Non-Salaried Non-Salaried Salaried
Tax liability 10,000 60,000 45,000 13,750
The above examples shows that the taxable income of Mr D is higher than Mr. B and Mr. C but even
though his tax liability is low due to his status as salaried case.

Exercise
Associated Consultants is a joint venture (JV) of Mr. Ghulam Rasool and Consultancy Enterprises, a
sole proprietorship of Mr. Ahsan. The JV is not registered with registrar of firms. The proportion of
interest of the members in the JV is 70:30 between Mr. Ghulam Rasool and Mr. Ahsan respectively.
The JV is engaged in the providing of accounting, taxation and other services to different
departments. During the year, total Income of the JV under the normal tax regime was
Rs.2,000,000 against the total revenue of Rs.30,000,000. It is worth mentioning that Mr. Ahsan
earned following income during the year:
Salary from Joint Venture = Rs. 450,000
Profit on debt from joint venture = Rs. 400 000
Compute the taxable income and tax liability of the Joint Venture for tax year 2024 (Ignore the
minimum tax provision.)

Answer
Profit as per accounts 2,000,000
Add Inadmissible deductions
Salary paid to members 450,000
Profit on debt paid to members 400 000
Taxable income 2,850,000
Tax on taxable income (Rs. 2,850,000) of JV i.e. Rs. 315,000 + 25% on income
427,500
exceeding Rs. 2.4m
Share of members out of profits of JV
Nature of income Mr.Ghulam Rasool Mr.Ahsan Total
Share in Profit 70% 30% 100%
Salary received - 450,000 450,000
Profit on debt received - 400,000 400,000
600,000
1,400,000
Balance Share (30% x 2,000,000
(70% x 2,000,000)
2,000,000)
Income in hands of members of AOP 1,400,000 1,450,000 2,850,000

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 Chapter 12: Taxation of individual and association of persons

Exercise:
Mr. Rizwan and Mr. Wajahat are two lawyers and working together as a firm in the name and style
of “Rizwan Wajahat Associates”. During the year, the firm has earned aggregate profit of Rs.
300,000. The aforesaid profit includes following deductions:
Salaries to Partners
§ Mr.Rizwan Rs. 100,000
§ Mr.Wajahat Rs. 150,000
Expenses on which tax has not been deducted Rs. 40,000
Payments exceeding Rs. 50,000
[made otherwise than crossed cheques] Rs.60,000
Profit on debt to Rizwan Rs. 50,000
Both partners have equal sharing in the firm. Mr. Rizwan has no other income. Mr. Wajahat is also
running a business of printing and advertising services. He earned income of Rs. 150,000 from the
said business.
Required:
a) Determine the tax liability of the firm, and its members for the tax year 2024.
b) Assume that the income of Mr Wajahat is Rs.1,000,000/- then what would be his taxable
income and tax lability?

Answer
Tax liability of the Firm
For the Tax Year 2024
Particulars Amount (Rs)
Profit as per accounts 300,000
Add
Partners salaries (100,000+150,000) 250,000
Inadmissible expenses due to non-deduction of tax 40,000
Payments otherwise than banking channel (within Rs.250,000) -
Profit on debt payable to a partner 50,000
Total taxable income 640,000
Tax liability i.e7.5% on sum exceeding Rs. 600,000 ( 3,000)
Profit after tax deduction of AOP 637,000
Distribution of taxable income
Particulars Mr. Rizwan Mr. Wajahat Total
Share in Profit 50% 50% 100%
Salaries paid to partners 100,000 150,000 250,000
Profit on debt 50,000 - 50,000
Balance share after tax 170,000 170,000 340,000
(50% x (50% x
3400,000) 3400,000)
Income in hands of members of AOP 320,000 320,000 640,000

Note: In the absence of information Minimum Tax liability u/s 113 has not been considered.

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Tax Practices

Computation of individual tax liability

Tax liability of Mr. Rizwan
As Mr. Rizwan has no other source of income, therefore, his income is not chargeable to tax any
further.
Tax liability of Mr. Wajahat (Advertising Income Rs.150,000)

Share from AOP (Exempt, but included for rate purpose) Rs. 320,000
Add: Income from printing and advertising income Rs. 150,000
Total Rs.470,000
Tax on income Rs. Nil

Note:
As income of Wajahat is below Rs. 600,000 even after addition of AOP share, therefore, no tax shall
be payable.
(b) Tax liability of Mr. Wajahat (Advertising Income Rs.1,000,000)

Share from AOP (Exempt, but included for rate purpose) Rs. 320,000
Add: Income from printing and advertising income Rs. 1,000,000
Taxable Income including share from AOP Rs. 1,320,000
Tax on Taxable Income (Non-Salaried Case)
15,000 + 15% x (1,320,000-800,000) = Rs. 93,000
Tax on taxable income (Excluding share from AOP)
(93,000 / 1,320,000 x 1,000,000) 70,455

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 Chapter 12: Taxation of individual and association of persons

3 INCOME SPLITTING AND TAX LIABILITY IN CERTAIN CASES

Section overview

n Transfers of assets (Section 90)

n Change in constitution of an AOP (Section 98A)
n Discontinuance of business or dissolution of an AOP (Section 98B)
n Succession to business otherwise than on death (Section 98C)

3.1 Transfers of assets (Section 90)

Tax in relation to property income is generally payable by the person who owns the property.
However, in certain cases, transfer of rented property may be considered as a tax avoidance
measure. To avoid such practice, relevant provisions provided in the Income Tax Ordinance, 2001
are as follows:
q Where any property is transferred to another person but asset remains the property of
transferor, rental income of such property will be treated as income of the transferor
q In case of revocable transfer, property income is treated as income of the transferor.
However, the said rule will not apply in case transfer is irrevocable during the lifetime of the
transferee and transferor drives no direct or indirect benefit from the income
q Where property is transferred by a person to his spouse or minor child (other than a married
daughter) or to another person for the benefit of spouse or minor child, property income will
be treated as income of the transferor. However, in case transfer is for
(a) Adequate consideration
(b) In connection with an agreement to live apart
Property income will not be treated as income of the transferor.
q If the property has been acquired by the transferee with funds provided by the transferor,
the transfer will not be considered as made for adequate consideration. The transfer will also
not be accepted if it is not evidenced by registration or mutation, wherever required.

3.2 Change in constitution of an AOP (Section 98A)

Where a change occurs in the constitution of a firm during a tax year, the firm’s income is
apportioned for rate purposes amongst the partners on a time basis (Sec-98A). The responsibility
for filing the tax return in this case rests with the persons who are partners in the firm on the date
the firm is required to file its tax return.

3.3 Discontinuance of business or dissolution of an AOP (Section 98B)

Where an AOP dissolves or discontinues carrying on business, any tax payable by the firm is
recoverable from any person who was a partner in the firm at the time of dissolution or
discontinuance of business. Tax payable can also be recovered from legal heirs of the deceased
partners.

3.4 Succession to business otherwise than on death (Section 98C)

q Where a person carrying on any business or profession has been succeeded in any tax year
by any other person (hereafter in this section referred to as the “predecessor” and
“successor” respectively), otherwise than on the death of the predecessor, and the
successor continues to carry on that business or profession:
(a) the predecessor shall be liable to pay tax in respect of the income of the tax year in
which the succession took place upto the date of succession and of the tax year or
years preceding that year; and

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Tax Practices

(b) the successor shall be liable to pay tax in respect of the income of such tax year after
the date of succession.
q Notwithstanding anything mentioned above, where the predecessor cannot be found, the
tax liability in respect of the tax year in which the succession took place upto the date of
succession and of the tax year or years preceding that year shall be that of the successor in
like manner and to the same extent as it would have been that of the predecessor, and all
the provisions of this Ordinance shall, so far as may be, apply accordingly.
q Where any tax payable under this section in respect of such business or profession cannot
be recovered from the predecessor, it shall be recoverable from the successor, who shall be
entitled to recover it from the predecessor.

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