TAXATION – CAF 6

INCOME TAX
CHAPTER 11 – LOSSES, DEDUCTIBLE ALLOWANCES, TAX CREDITS AND EXEMPTIONS
REFERENCE TOPIC DESCRIPTION EXPLANATION
LOSSES
Chapter III Part VIII Losses ➢ Loss: Where total deductions exceeds income under a head of income [Sec 11]
Sec 56 to 59B ➢ Pakistan source losses dealt under sections 56 to 59B (Chapter III Part VIII)
[Q5, Q10] ➢ Foreign source losses dealt under section 104
➢ Following are sections dealt with losses:
i. Sec 56: Set-off of losses
ii. Sec 56A: Set-off of losses of companies operating hotels
iii. Sec 57: Carry forward of business losses
iv. Sec 57A: Set-off of business loss consequent to amalgamation
v. Sec 58: Carry forward of speculation business losses
vi. Sec 59: Carry forward of capital losses
vii. Sec 59A: Limitations on set off and carry forward of losses
viii. Sec 59AA: Group Taxation
ix. Sec 59B: Group relief
x. Sec 37A(5): Capital loss on sale of securities
xi. Sec 38: Losses in capital assets other than securities
xii. Sec 104: Foreign losses
Sec 12 (4) Loss under Salary ➢ No loss on salary arises as no deductions are allowed against salary income
Sec 56 Loss under income from property ➢ Loss under the head “income from property” can be set-off against other heads except for salary
➢ Loss under “income from property” cannot be c/f
Sec 56 Loss under income from business ➢ Business loss:
Sec 57 i. Loss under the head “income from business” can be set-off against any other head except “salary”
Sec 58 (Q3) ii. Where loss under “income from business” and also other head, then loss under “income from business” set off last
iii. Un-adjusted loss other than loss us 22, 23, 23B and 24 c/f to 6 subsequent tax years and set off only against business income
iv. Loss us 22, 23 and 24:
- Where taxable income > = Rs 10mn: loss set off against 50% of balance income after adjustment under point iii.
- Where taxable income < Rs 10mn: loss set off against 100% of balance income after adjustment under point iii.
v. Unadjusted depreciation and amortization not set-off c/f until completely set-off
vi. In case business loss for more than one year, business loss of earliest year set off first
vii. Depreciation and amortization deductions accounted for last

Example 1 Example 2 Example 3

Tax year 1 Rs in mn Tax year 1 Rs in mn Tax year 1 Rs in mn
Sales 50 Sales 50 Sales 50
Business deductions 30 Business deductions 30 Business deductions 80
Ded. us 22,23,23A,23B,24 40 Ded. us 22,23,23A,23B,24 40 Ded. us 22,23,23A,23B,24 0
Loss for the year (20) Loss for the year (20) Loss for the year (30)

Tax year 2 Tax year 2 Tax year 2

Sales 70 Sales 45 Sales 70
Total deductions 40 Total deductions 40 Business deductions 20
Business income 30 Business income 5 Ded. us 22,23,23A,23B,24 80
B/f loss us 22,23,23A,23B,24 (20) B/f loss us 22,23,23A,23B,24 shall be set Loss for the year (30)
Loss set-off 50% of bal. income 15 off against 100% of business income B/f loss us 22,23,23A,23B,24
Taxable income after loss 15 Taxable income after loss (15)
Balance loss cf to TY 3 (5) Balance loss cf to TY 3 (15) To be continued ………………..
 Tax year 3
Sales 90
Total deductions 40
Business income for the year 50
Set off of business loss TY 1 (30)
Balance income 20
50% of balance income 10
Loss for TY 2 set off 10
Taxable income TY 3 after loss 10
Loss us 22-24 for TY 2 cf (20)

➢ Speculation loss:
i. Speculation loss set off against other speculation business
ii. Un-adjusted speculation loss c/f to 6 succeeding tax years
iii. In case speculation loss for more than one year, speculation loss of earliest year set off first
Sec 38 Loss under disposal of capital assets Filter 1: Losses not deducted / recognized:
Sec 59 i. No loss shall be deducted where capital gain is not chargeable to tax on such asset
ii. No loss shall be recognized on the disposal of the following capital assets, namely:
a. a painting, sculpture, drawing or other work of art ;
b. jewelry;
c. a rare manuscript, folio or book;
d. a postage stamp or first day cover;
e. a coin or medallion; or
f. an antique.
Filter 2: Scope:
i. Capital loss only set off against capital gain
ii. Un-adjusted capital loss c/f to 6 succeeding tax years
iii. In case capital loss for more than one year, capital loss of earliest year set off first

Sec 37A (5) Loss on disposal of securities ➢ Loss:

R 13D, 13F i. Loss on securities set off only against gain on other securities
ii. Un-adjusted loss on securities c/f to 3 succeeding tax years [The Finance Supplementary (Second Amendment) Act, 2019]
➢ Capital loss adjustment on securities is not admissible in following cases (not apply to banking company / insurance company):
i. Wash sales: Capital loss on specific security is preceded / followed in 1 month purchase of same security
ii. Cross trade: Reshuffle of securities b/w two accounts of same investor or two related brokerage houses without actually selling to
outsider to realize capital losses
iii. Tax swap sale: Capital loss on specific security is followed by purchase of another similar security

Sec 56 Loss under income from other ➢ Loss under the head “income from other sources” set-off against any other head except “salary”
sources ➢ Loss under “income from other sources” cannot be c/f

Sec 59A Limitations on set-off and c/f ➢ Loss of AOP set-off and c/f against AOP
➢ Loss of AOP not set-off and c/f against member
➢ Loss of predecessor not set-off and c/f against succeeding person in business (other than inheritance)
➢ Losses assessed or determined under sec 120, 121 or 122 shall be c/f

Sec 104 Foreign losses ➢ Foreign loss: where deductions exceeds income under a foreign head of income
➢ Foreign losses cannot be set-off / adjusted against Pakistan source incomes
➢ Un-adjusted foreign loss c/f to 6 succeeding tax years and set-off against same income under that head
➢ In case foreign loss for more than one year, foreign loss of earliest year set off first
➢ For apportionment of deductions, speculation business treated as a separate head of income
 DEDUCTIBLE ALLOWANCES

Chapter III Part IX Deductible allowances ➢ Sec 60: Zakat

Sec 60 to 60D (Already covered in Ch. 4) ➢ Sec 60A: WWF
➢ Sec 60B: WPPF
➢ Sec 60D: Educational expenses

TAX CREDITS

Sec 103 Tax Credits ➢ Tax Credit: Reduction in tax liability

Chapter III Part X ➢ Order of tax credit:
Sec 61 to 65E i. Foreign tax credit us 103,
ii. tax credits us 61 – 65G, and
iii. advance tax us 147 and Credit for tax collected/ deducted us 168

➢ Sec 61: Charitable donations

➢ Sec 62: Omitted
➢ Sec 62A: Omitted
➢ Sec 63: Contribution to Approved Pension Fund
➢ Sec 64B: Employment generation by manufacturers
➢ Sec 64D: Tax credit for point of sale machine
➢ Sec 65: Miscellaneous provisions
➢ Sec 65B: Investment
➢ Sec 65E: Industrial undertakings established before July 1, 2011
➢ Sec 65F: Tax credit for certain persons
➢ Sec 65G: Tax credit for specified industrial undertakings

Sec 103 Foreign tax credit ➢ Resident taxpayer

➢ Derives foreign source income chargeable to tax
➢ On which foreign income tax has been paid

➢ Tax credit formula:

Lesser of –
i. Foreign income tax paid
ii. Pakistan tax payable

➢ If foreign income under more than one head, tax credit apply separately to each head
➢ If foreign income from speculation business treated as separate business
➢ Not be refunded, c/b or c/f
➢ Credit is allowed where foreign income tax is paid within two years of the end of the tax year in which income is derived
➢ “Pakistan tax payable”: Average rate of Pakistan income tax * net foreign source income
➢ “Average rate of Pakistan income tax” Tax liability / taxable income
➢ “Foreign income tax” includes foreign income tax
➢ “Net foreign source income” taxable foreign source income – deduction under that income (specific & apportioned)
Sec 61 Charitable Donations Condition:
➢ Where any sum paid or property given as donation, voluntary contribution or subscription to –
i. Board of education / university in Pakistan established by Federal /Provincial law
ii. Educational institution / hospital / relief fund in Pakistan established or run by FG, PG or LG
iii. Any NPO or person eligible for tax credit us 100C
iv. Entities, organizations and funds mentioned in the 13th Schedule (Names of institutions are mentioned)
➢ if given in kind, FMV of property at the time it is given
➢ Cash amount considered if paid by crossed cheque
➢ Available for Individual, AOP & Co.

➢ Tax Credit:
Tax assessed (after foreign tax credit) / taxable income * C
C is the lesser of –
i. Amount of donation (FMV at the time given, if given in kind)
ii. Individual or AOP [30% of taxable income], Company [20% of taxable income] [15%, 10% in case of donations to associates]

Sec 62 Investment in shares and insurance Omitted

Sec 62A Investment in health insurance Omitted

Sec 63 Contribution to an approved Pension ➢ An eligible person

Sec 2(19A) Fund ➢ in respect of any contribution or premium paid to approved pension fund under Voluntary Pension System Rules, 2005, provided
person is deriving income from “Salary” or “Business”
➢ “Eligible person” means an individual who holds a valid NTN or CNIC or NIC Overseas Pakistanis issued by NADRA

➢ Tax Credit:
Tax assessed (after foreign tax credit) / taxable income * C
C is the lesser of –
i. Amount of premium or contribution
ii. 20% of taxable income
iii. Total contribution allowed not exceed 50% of preceding years taxable income (PTI)
➢ Transfer of existing balance of approved schemes to their individual pension accounts not qualify for tax credit

Sec 64C Tax credit for persons employing Omitted

fresh graduates

Sec 64D Tax credit for point of sale machine ➢ Any person
- who is required to integrate with Board’s computerized system
- for real time reporting of sale or receipt shall be
- entitled to tax credit in respect of the amount invested in purchase of point of sale machine

➢ Tax Credit:
The amount of tax credit allowed
for a tax year in which PoS machine is installed, integrated and configured with the Board’s computerized system
shall be lesser of—
a. amount actually invested in purchase of point of sale machine; or
b. Rs 150,000 per machine

➢ Point of sale (PoS) machine means a machine

meant for processing and recording the sale transactions for goods or services,
either in cash or through credit and debit cards or online payments in an internet enabled environment
Sec 65 Miscellaneous provisions relating to ➢ In case member of an AOP is entitled to a tax credit
tax credits - Amount of tax assessed that would be assessed as if amount exempt us 92 is chargeable to tax (sec 61, 62, 63 & 64)
- Taxable income of the individual for the year as if amount derived exempt us 92 chargeable to tax (sec 61, 62, 63 & 64)
➢ Any tax credit not credited not be refunded, c/f or c/b
➢ Amount of excess credit in case of member of AOP, may be claimed by AOP
Provided member and association agree in writing and such agreement must be furnished with AOP’s return
➢ Sec 169 (2)(d) and sec 113(1)(d) not applicable in sections 65B, 65D or 65E
Sec 65F Tax credit for certain persons ➢ Following persons or incomes shall be allowed a tax credit equal to 100% of the tax payable under any provisions of this Ordinance
including minimum, alternate corporate tax and final taxes for the period, to the extent, upon fulfillment of conditions and subject to
(Q7) limitations detailed as under:-
a. persons engaged in coal mining projects in Sindh supplying coal exclusively to power generation projects;
b. a startup as defined in clause (62A) of section 2 for the tax year in which the startup is certified by the Pakistan Software Export
Board and the next following two tax years; and
c. Omitted
➢ The tax credit shall be available subject to fulfillment of the following conditions, where applicable, namely:-
a) return has been filed;
b) withholding tax statements for the relevant tax year have been filed in respect of those provisions of the Ordinance, where
the person is a withholding agent; and
c) sales tax returns for the tax periods corresponding to relevant tax year have been filed if the person is required to file Sales
Tax Return under any of the Federal or Provincial sales tax laws.
Sec 65G Tax credit for specified industrial (1) When making certain eligible capital investments specified in (2), the eligible taxpayers defined in (3) shall be allowed to take an
undertakings investment tax credit of 25% of the eligible investment amount, against tax payable under the provisions of this Ordinance including
minimum and final taxes. The tax credit not fully adjusted during the year of investment shall be carried forward to the subsequent
tax year subject to the condition that it may be carried forward for a period not exceeding two years.
(2) For the purposes of this section, the eligible investment means investment made in purchase and installation of new machinery,
buildings, equipment, hardware and software, except self-created software and used capital goods.
(3) For the purpose of this section, eligible person means —
a. green field industrial undertaking as defined in 2 (27A) engaged in —
(i) the manufacture of goods or materials or the subjection of goods or materials to any process which substantially changes their
original condition; or
(ii) ship building:
Provided that the person incorporated between the 30th day of June, 2019 and the 30th day of June, 2024 and the person is not
formed by the splitting up or reconstitution of an undertaking already in existence or by transfer of machinery, plant or building
from an undertaking established in Pakistan prior to commencement of the new business and is not part of an expansion project;
and
b. industrial undertaking set up by the 30th day of June 2023 and engaged in the manufacture of plant, machinery, equipment and
items with dedicated use (no multiple uses) for generation of renewable energy from sources like solar and wind, for a period of
five years beginning from the date such industrial undertaking is set up.
Sec 2(27A) Greenfield industrial undertaking “greenfield industrial undertaking” means –
a. a new industrial undertaking which is –
i. setup on land which has not previously been utilized for any commercial, industrial or manufacturing activity and is free from
constraints imposed by any prior work;
ii. built without demolishing, revamping, renovating, upgrading, remodeling or modifying any existing structure, facility or plant;
iii. not formed by the splitting up or reconstitution of an undertaking already in existence or by transfer of machinery, plant or
building from an undertaking established in Pakistan prior to commencement of the new business and is not part of an expansion
project;
iv. using any process or technology that has not earlier been used in Pakistan and is so approved by the Engineering Development
Board; and
b. is approved by the Commissioner on an application made in the prescribed form and manner, accompanied by the prescribed
documents and, such other documents as may be required by the Commissioner:
Provided that this definition shall be applicable from the 1st July, 2019 and onwards.
 EXEMPT INCOMES

Sec 41 - 55 Exemptions and tax concessions ➢ Sec 41. Agricultural income

➢ Sec 42. Diplomatic and United Nations Exemptions
➢ Sec 43. Foreign government officials
➢ Sec 44. Exemptions under international agreements
➢ Sec 44A: Exemption under Foreign Investment (Promotion and Protection) Act, 2022
➢ Sec 45. President’s honours
➢ Sec 46. Profit on debt
➢ Sec 47. Scholarships
➢ Sec 48. Support payments under an agreement to live apart
➢ Sec 49. Federal Government, Provincial Government and Local Government income
➢ Sec 50. Foreign-source income of short-term resident individuals
➢ Sec 51. Foreign-source income of returning expatriates
➢ Sec 53. Exemptions and tax concessions in the Second Schedule
➢ Sec 54. Exemptions and tax provisions in other laws
➢ Sec 55. Limitation of exemption

Sec 41 Agricultural income ➢ Exempt from tax under Income Tax Ordinance, 2001

(Q2, Q9) ➢ “Agricultural income” means

a) Rent / revenue by a person from land used for agricultural purposes in Pakistan
b) Following incomes (produce) from land in Pakistan
i. Agriculture
ii. Performance of process to render produce fit for market by cultivator/ receiver of rent-in-kind
iii. Sale by cultivator / receiver of rent-in-kind of produce on which no process performed except above
c) Following income from building derived by a person, subject to the conditions that
i. Building owned and occupied by cultivator or receiver of rent or revenue
ii. Building is on land or in immediate vicinity of the land and
iii. Building is required as dwelling house, store house or other out building

Rule 11 Agricultural produce as raw materials ➢ A cultivator or receiver of rent in kind of agricultural produce uses produce as raw material in a business chargeable to tax
➢ The market value (MV) of agricultural produce allowed as deduction
(Q2) ➢ Market value of the produce shall be –
i. Where produce is sold in raw state or after performance of process, MV it is used in business
ii. In other cases: cultivation expenses + land rent paid
➢ No deduction other than MV shall be allowed

Sec 42 Diplomatic and United Nations ➢ Income of individual entitled to privileges under Diplomatic and Consular Privileges Act, 1972 exempt to the extent provided in Act
Exemptions ➢ Income of individual entitled to privileges under United Nations (Privileges and immunities) Act, 1948 exempt to the extent provided
in Act
➢ Pension received by citizen of Pakistan by virtue of former employment in UN or its specialized agencies provided salary was also
exempt

Sec 43 Foreign government officials ➢ Salary of foreign government employee shall be exempt if –
i. Employee is the citizen of foreign country and not a citizen of Pakistan
ii. Similar services performed by FG employees in foreign countries ; and
iii. Foreign govt. grant similar exemption to FG employees performing similar services in such foreign country
Sec 44 Exemptions under international ➢ Exemption under international tax treaty
agreements ➢ Salary by individual (not Pakistani citizen) exempt as provided in an Aid agreement b/w FG and foreign govt. or PIO where –
i. Individual is non-resident or resident by reason of services under Aid Agreement
ii. Individual is a citizen of that foreign country
iii. Salary is paid by foreign govt. or PIO out of funds or grants released as aid to Pakistan
➢ Income by person engaged as contractor, consultant, or expert on a Project in Pakistan as provided in bilateral or multilateral
agreement b/w FG and foreign govt. or PIO where –
i. Project is financed out of grant funds in accordance with agreement
ii. Person is non-resident or resident by reason of services under the Agreement
iii. Income is paid out of funds of the grant in pursuance of the agreement
➢ FG may in respect of an official development assistance financed loans and grants-in-aid exempt income of any person on a case to
case basis through a notification in the official Gazette.
Sec 44A Exemption under Foreign Investment (1) Taxes on income (including capital gains), advance tax, withholding taxes, minimum and final taxes shall, for the period and to the
(Promotion and Protection) Act, 2022 extent provided in the Second and Third Schedules to the Foreign Investment (Promotion and Protection) Act, 2022 in respect of qualified
investment as specified at Sr. No.1 of the First Schedule to the said Act or investors, be exempt or subject to tax at the rate and in the
manner specified under the said Act.

(2) All investors and shareholders of the qualified investment, their associates and companies specified in the Second and Third Schedules
to the said Act including third party lenders on account of any loan shall also be exempt from taxes and other provisions of this Ordinance
or subject to tax at the rate and in the manner specified under the said Act for the period and to the extent provided in the Second and
Third Schedules to the said Act.

(3) Provisions relating to Anti-Avoidance, for the period and to the extent specified in the said Act including sections 106, 106A, 108, 109
and 109A, shall not apply to the persons and amounts mentioned in sub-sections (1) and (2).

(4) Rates of depreciation, initial allowance and pre-commencement expenditure under sections 22, 23 and 25 as on the 20th day of
March, 2022 shall continue to be applicable for thirty years as provided in the Third Schedule to the said Act in respect of persons
mentioned in sub-sections (1) and (2).

(5) For the purpose of this section, the terms defined under the Second and Third Schedules to the said Act shall apply mutatis mutandis
to this Ordinance.
Sec 45 President’s honours ➢ Any allowance awarded to a person by the President of Pakistan
➢ Any monetary award granted to a person by the President of Pakistan
Sec 46 Profit on debt ➢ Profit received by non-resident person
➢ securities issued by resident person, where –
(Q6) i. Persons are not associates
ii. Security widely issued outside Pakistan for raising loan outside Pakistan
iii. Loan use in business carried on in Pakistan
iv. Profit paid outside Pakistan
v. Security is approved by Board for this purpose
Sec 47 Scholarships ➢ Scholarship granted to meet cost of person’s education
Q8 ➢ Other than where paid directly or indirectly by an associate
Sec 48 Support payments under an ➢ Received by a spouse as support payment
agreement to live apart ➢ Under an agreement to live apart
(Q1, Q4)
Sec 49 Federal Government, Provincial ➢ Income of FG
Government and Local Government ➢ Income or PG and LG, other than business income from business carried on outside its jurisdictional area
income ➢ FG, PG or LG not liable to withholding tax
➢ Exemption under this section not available to corporations / authorities etc. established /owned / controlled / directly / indirectly by
Federal / Provincial law / existing law / Government regardless of ultimate destination of income as laid down in Article 165A
Provided spectrum licenses income treated as income of the FG and not of PTA
Sec 50 Foreign source income of short term Already covered in Chapter 5
resident individual

Sec 51 Foreign source income of returning Already covered in Chapter 5

expatriates
Sec 53 Exemptions and tax concessions in ➢ The income or classes of income, persons or classes of persons, specified in Second Schedule shall be –
Second Schedule i. exempt from tax, subject to the conditions and extent specified
ii. chargeable to tax at reduced rates, as specified
iii. allowed reduction in tax liability, subject to the conditions and extent specified
iv. exempted from any operation, subject to the conditions and extent specified

➢ The FG or Board with the approval of the Federal Minister-in-charge may, from time to time,
- pursuant to the approval of the Economic Coordination Committee of the Cabinet
➢ where circumstances exist to take immediate action for –
i. national security
ii. natural disaster
iii. national food security in emergency situations
iv. protection of national economic interests in situations arising out of abnormal fluctuation in international commodity prices
v. implementation of bilateral and multilateral agreements
vi. granting an exemption from any tax, a reduction in the rate of tax imposed, a reduction in tax liability, an exemption from the
operation of any provision to any –
a. international financial institution
b. foreign Government owned financial institution operating under an agreement
c. memorandum of understanding or any other arrangement with the Government of Pakistan
➢ by notification in the official Gazette, make such amendment in the Second Schedule by –
(a) adding any clause or condition therein;
(b) omitting any clause or condition therein; or
(c) making any change in any clause or condition therein
➢ FG place before NA all amendments in Second Schedule in a financial year

Sec 54 Exemptions and tax provisions in No provision in any other law for –
other laws i. Exemption
ii. Reduction in tax rate
iii. Reduction in tax liability
iv. Exemption from operation under ITO 2001
Unless also provided in ITO 2001
Sec 55 Limitation of exemption Exemption provided under ITO 2001 is limited to the original recipient
2nd Schedule Part I – Exemptions from total income Salary exemptions: (Chapter 5)
(Important exemptions) ➢ Clause (4): Salary income of seafarer (Omitted)
➢ Clause (5): Allowances to persons working outside Pakistan
➢ Clause (8) (9): Pension
➢ Clause (12): Commutation of Pension
➢ Clause (13): Gratuity
➢ Clause (19): Leave encashment
➢ Clause (22) (23): Provident Fund
➢ Clause (24): Benevolent Fund
➢ Clause (25): Superannuation Fund
➢ Clause (26): Worker’s Profit Participation Fund
➢ Clause (39): Special allowance or benefit (Omitted)
➢ Clause (53A): Certain benefits without marginal cost
➢ Clause (139): Medical allowance and facility
Clause 61, PI, 2nd Sch. Amount paid as donation Omitted
Clause 91, PI, 2nd Sch. Income of textbook Board Omitted
Clause 98, PI, 2nd Sch. Income derived by Sports Board Omitted
Clause 102A, PI, 2nd Sch. Subsidy granted to a person by Omitted
Federal Government
Clause 133, PI, 2nd Sch. Export of IT Services Omitted
Clause 136, PI, 2nd Sch. Income of special purpose vehicle Omitted
Clause 143, PI, 2nd Sch. Profit and gains derived by a start–up Omitted
Clause 3(a)(b), PII, 2nd Sch. Income from services rendered and Omitted
construction contracts outside
Pakistan
Clause 2, PIII, 2nd Sch. Full time teacher or researcher Already covered in Chapter 5
Clause 6, PIII, 2nd Sch. Bahbood saving certificates The tax payable on profit on debt in respect of any amount paid as yield or profit on investment in Bahbood Savings Certificate or
Clause 103, PIV, 2nd Sch. Pensioners Benefit Account and Shuhada Family Welfare Account shall not exceed 5% of such profit under normal tax regime.
Clause 19, PIII, 2nd Sch. Woman enterprises The tax payable by woman enterprises on profit and gains derived from business chargeable to tax under the head “Income from Business”
shall be reduced by 25%.
Q 11
Explanation.—For the purpose of this clause a woman enterprise means a startup established on or after first day of July 2021 as sole
proprietorship concern owned by a woman or an AOP all of whose members are women or a company whose 100% shareholding is held
or owned by women:
Provided that benefit of this clause shall not be available to a business that is formed by the transfer or reconstitution or reconstruction
or splitting up of an existing business.