Components of Income Tax

1- Income Tax Ordinance, 2001

2- Income Tax Rules 2001.
3- Annual Finance Act.
4- Notices
5- Legal matters & decision of the Courts i.e High court & Supreme court

1-Income Tax ordinance

Income tax ordinance overall general and specific provisions regarding taxation, exemption and other
tax related matters for Individuals, AOPs and Companies.

2-Income Tax Rules 2001

Income Tax rules contains 232 rules in total which includes following guidelines:

a- Calculation of taxable income

b- Tax payable and other charges payable
c- Procedure regarding filing of income tax returns
d- Calculation of penalties, default surcharge

3-Annual Finance Act.

Ministry of Govt. of Pakistan presents Finance Bill in the National Assembly during the budget session
in every year.

4-Notices/Notifications

It includes notifications, SROs & circulars which provide information regarding changes in taxation i.e
changes tax rates, exemptions, and provide guidance to taxpayers

5-Legal matters & decisions of Courts

This part includes case laws in which judiciary hear the disputes of the tax payers and the tax
department and decide the matters in accordance with the Law.

There are four Appellate authorities in Pakistan for the tax purposes:

a- Commissioner Inland Revenue (CIR)

b- Appellate Tribunal Inland Revenue.
c- High Court.
d- Supreme Court.

Income Tax Authorities (Sec-207) for imposition of tax and recovery income tax under the Law

1- Board.
2- Chief Commissioner Inland Revenue.
3- Commissioner Inland Revenue.
 4- Commissioner Inland Revenue (Appeals).
5-
6- Officer of Inland Revenue i.e
a- Additional Commissioner Inland Revenue
b- Deputy Commissioner Inland Revenue.
c- Assistant Commissioner Inland Revenue.
d- Inland Revenue Officer.
e- Inland Revenue Audit Officer and any other officer.
f- District Taxation officer Inland Revenue
g- Assistant Director Audit.

7- Special Audit Panel

8- Superintendent Inland Revenue.
9- Inspector Inland Revenue.
10- Auditor Inland Revenue.

Tax Year
In income tax ordinance 2001, there are three types of Tax years in Pakistan:

a- Normal Tax Year: period of twelve months ended on 30th June every year.
b- Special Tax Year: a special tax year is implemented on the basis of different income tax years
from normal tax years, commissioner and Board allowed and prescribed the person to adopt
special tax year.
c- Transitional Tax Year: This is period during the change of tax year from normal tax year to
special tax year or from special tax year to normal tax year.

Computation of Taxable Income

The taxable Income is calculated in the following four forms:

a- Normal tax.
b- Minimum tax. This tax assures that certain portion of tax is paid by taxpayer. Following are
sections in which the incomes treated as minimum tax under the income tax ordinance 2001:
1- Tax collected from imports (sec-148 & 148-8A).
2- Sale of Goods (sec-153)
3- Income of non- resident from contracts (sec-152-1A & 1AA)
4- Commission and brokerage (sec-233)
5- Rental Income from scientific and commercial equipment (236-Q).

c- Income subject to separate charge. This income is subject to separate charge on gross basis
and not form part of total income or taxable income. Following sections of the income tax
ordinance govern the taxation of such income: (Sec-5, 5A, 6,7,7A,7B, 7C, 7D and 8)
1- Dividend
2- Tax on return on investment
 3- Royalty/ Fee for technical services to Non. Residnt
4- Shipping Income of non. Resident & resident
5- Air Transport income
6- Tax on profit on debt for individual and company except when profit on debt increase to
Rs.36 million.
7- Tax on Developers and Builders.

Following rules are applied on this Income:

1- Tax imposed is final tax.
2- not chargeable to tax under any any head of income in computing taxable income
3- deduction for any expenditure incurred in deriving such income, is not allowed.
Such income is not reduced by any Deductible allowances and set off any loss.

d- Final tax. Income subject to deduction / collection of tax at source. Following rules are applied
on FTR Income:
4- not chargeable to tax under any any head of income in computing taxable income
5- deduction for any expenditure incurred in deriving such income, is not allowed.
6- Such income is not reduced by any Deductible allowances and set off any loss.

Components of Income
i- Salary Income
ii- Income from Business
iii- Income from property
iv- Capital Gain Income
v- Income from other Source

Total Income
Total income inclusive of:
a- All Five components of Income for the tax year including FTR & separate block of Income
b- Income exempts from Tax under any of the provisions of the income tax ordinance 2001.

Calculation of Taxable income

Taxable income is calculated as follows:

Total Income other than exempt Income xxx

Less: Separate Block / FTR Income (xxx)

Less: deductible Allowances (Note-) (xxx)

Taxable income xxx

Note-1 Deductible Allowances includes the followings:

a- Zakat (Sec-60)
b- WWF (Sec-60-A)
c- WPPF (Sec-60-B)
d- Profit on Debt (Sec-60-C)
e- Education expenses (Sec-60-D)

Taxation of Components of Income

1- Salary Income
Salary income is taxed on receipt basis. Following sections includes for the taxation of salary
income:
a- Receipt of income (sec-69)
b- Amount/ perquisite treated received (sec.12-5).
c- Salary paid by private companies (sec-110 & 12-7,8).
d- Pakistan source salary (sec-101-(1)).
e- Exempt Salary (sec-51 (2), 51 (1), 50).
f- Deduction allowed against salary (sec-12(4)).
g- Termination of employment (sec-12 (6)).
h- Tax paid by the employer (sec-12 (3)).
i- Withholding tax on salary (sec-149).
j- Withholding statement of filing (Rule-43,44).
k- Perquisites (sec-13).
l- Interest Free Loan (sec-13 (7), (8), (14)).
m- Hiring of property (sec-15 (5)).
n- Services to employees (sec-13 (11), (13)).
o- Gratuity / Pension (Part-I 2nd Schedule)
p- Provident Fund (Sixth Schedule).
q- Salary of foreign Officials (sec.43).
r- Exemption under international Agreements (sec-44(2)).
s- Tax Credit: Tax credit includes the followings:
i- Foreign Tax Credit
ii- Tax credit under sections:
a- Charitable Donations (sec-61)
b- Investment in shares / life insurance (sec-62).
c- Contribution to Approved pension fund (sec-63).
d- Tax credit in second schedule.
t- Employee share scheme.
 2- Business Income
Income from business divided in TWO parts
A- Non. speculation business income (local + Foreign). (sec-2 (9)).
B- Income from speculation business (local + foreign). (sec-19)

Income from business for Resident & Non. Resident person (sub-101 (2)(3)).

A- Taxation of Income from Business (Non. Speculation Business)

Determination of different sources of income:

1- Import. In case of importer, taxable income, withholding tax & tax liability is calculated
as follows.

a- Commercial Importer
Withholding tax deducted @ 1%, 2% or 5.5% falls in Normal Tax Regime.
b- As a Manufacturer:
Withholding tax on Raw Material @ 1% & 2% (part-I and II of 12th schedule) falls in
NTR Income, and withholding tax on raw Material @ 5.5% (part-III of 12th schedule )
falls in Minimum Tax.

NOTE- (Assessed value on which withholding tax is applied is = (Custom Assessed value + Duties +
FED + Sales Tax)

2- Sales of Goods: In case of sales of goods, taxable income, withholding tax & tax liability
is calculated as follows.
a- Local Manufacturer
Withholding Tax deducted @ 4%, 4.5% & 0.25% (for fast moving consumer Goods)
falls in NTR in case of INDIVIDUAL & AOP (Non. prescribed withholding agent) & in
case of Company, always falls in NTR INCOME but in case of prescribed withholding
agent, withholding tax deducted in case of INDIVIDUAL & AOP, falls in MTR Income.
b- Local Trader
Withholding Tax deducted @ 4%, 4.5% & 0.25% (for fast moving consumer Goods)
falls in NTR in case of INDIVIDUAL & AOP (if non. prescribed withholding agent) & in
case of Public Listed Company, always falls in NTR INCOME and Companies other
than Listed companies, if withholding agent is Prescribed, then Falls in MTR,
otherwise falls NTR income but in case of prescribed withholding agent, withholding
tax deducted in case of INDIVIDUAL & AOP, then falls in MTR Income.

3- Services: In case of sales of goods, taxable income, withholding tax & tax liability is
calculated as follows. Withholding tax rate for Individual & AOP is 10% and 8% for
Company.
a- Services inside PAKISTAN
Withholding tax deducted by Prescribed person shall be falls in MTR (minimum tax
regime) for all i.e Company, Induvial & AOP. But in case, withholding tax deducted
by No. prescribed person then Treatment of tax deducted will be s NTR income.
 b-Services Outside Pakistan
Tax Treatment for Individual, AOP and Company is as followa:
A- If proceeds NOT brought in Pak through Banking channel, falls in NTR tax
income.
B- If 80% proceeds brought through banking channel, 100% Tax Credit u/s 65-F
will be allowed i.e exempt from tax.
C- May be opted for FTR @ 1% of proceeds u/s 154-A.
4- Contract
a- Inside Pakistan
Withholding tax deducted by Prescribed person shall be falls in MTR (minimum
tax regime) in case INDIVIDUAL & AOP and Other than Public listed company.
Withholding tax deducted by Non. Prescribed persons for Individual & AOP and
Public listed Company, will falls in NTR Income.

b- Outside Pakistan
Income may be OPTED as NTR or FTR @ 1% U/S 154-A.

5- Export of Goods
Tax rate is 1% . Option may be opted to be taxed under FTR income or NTR income.

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1- Income Property
Gross rental income comprises
a- Higher of actual or Fair Market Value.
b- Forfeited deposit.
c- Any obligation paid by tenant.
d- 1/10th of the non. Adjustable advance.
e- Non. Refundable amount paid at the time of rent agreement.
Followings sections of the income tax ordiance 2001 are applied for Rental income of
property:
1- Deduction at Source (sec-155)
2- Property Income when considered Pakistani source (sec-101(9)).
3- Treatment of Property in Dispute (125).
4- Treatment of non. adjustable amount (sec-16).
5- Foreign source property income (sec.103, 104).
6- Income of joint Owners (sec-66).
7- Treatment of loss for property Income (sec-56).
8- Deduction admissible for Company.
9- Exemptions of Property Income (sec-100C, 90,).

Taxability for Rental income

Income from property is taxable for Individual under Normal tax regime. Tax rate for
company is 29% and Slab rates are applied for Individual & AOP.
Income Tax Notices under the Income Tax Ordinance, 2001.

Notices related to Registration our annual income tax filing:

1- Section 181 deals with Form of registration filed for modification.

2- Section 116 (2) deals with Filing of Annual Wealth statement and section 116(3)
deals with filing of Revised Wealth statement for the any tax year.
3- Section 114 (1) deals with filing of Annual Income Tax Returns for the Tax Year.
4- Section 119(1), (3) / 114 deals with application for extension in time for filing of
Income Tax Returns.
5- Section 114(6) deals with application for revision of return of Income.
6- Notice u/s 120(3) (Notice to complete deficiencies in Return of Income).
7-

In Case of Individual / AOP/ Companies:

Following are Audit and Assessment related Notices:

1- Order u/s 120 (Order to make Self-assessment)

2- Notice u/s 122 (5A) (Order to amend original assessment prejudicial to Revenue).
3- Notice u/s 122 (9) (Notice to amend assessment).
4- Notice 221(2) (Notice to for rectification of mistake in assessment Order)
5- Notice u/s 176(1) (Notice to obtain information or evidence).
6- Notice u/s 177 (1) / 214-D (Notice to call for record / documents / books of
accounts).
7- Notice u/s 177 (Notice to close Audit).
8- Notice u/s 122 (1) (Order to amend Self or Best judgement or Provisional
assessment).
9- 122(3) (Order to amend Self-assessment on Revision of Return of Income)
10- Notice u/s 177 (6) (Notice on issues arising out of Audit).
11- Notice u/s 111(1) (Notice to explain Income/ Asset).

Advance Tax Notices & Filing of withholding tax statements:

1- Notice u/s 165(1) (Statement of withholding taxes filed voluntarily).

2- Notice u/s 149 (Statement of withholding taxes filed voluntarily).
3- Statement of withholding statement shall be filed on Quarterly basis.
4- Notice u/s 147 (Intimation /Estimate of Advance Tax).
5- Notice u/s 122-B (1) (2) (Application for revision of exemption order).
6- Notice u/s 159(1) deals with application for reduce rate of withholding on supplies /
services).

After the above mention notices, following Recovery Tax notices are issued:

a- Notice u/s 137(2) (Notice to pay tax payable).

b- Notices u/s 161 (1A) (Notice to pay tax not deducted / collected).
c- Notices u/s 162 (1) (Notice to recover tax not deducted / collected from payee).
d- Notice for explanation under Rule 44 (4) of the Income Tax Rules 2002.
e- Notice u/s 138 (1) (Notice to pay overdue tax payable).

Notices for Penalty / default surcharge against Non-Compliance:

a- Notice u/s 182(2) (Notice to impose penalty for concealment / furnishing inaccurate
particulars of Income).
b- Notice u/s 182(2) (Notice to impose penalty u/s 182 for failure to comply with
notice u/s 177).
c- Notice u/s 182(2) (Notice to impose penalty u/s 182 for failure to comply / furnish
statement with notice u/s 165).
d- Notice u/s 4 (Notice to charge default surcharge for failure to pay WWF).
e- Notice u/s 205/ 160 (Notice to charge default surcharge for failure to collect /
deduct tax at source)
f- Notice u/s 182(2) (Notice to impose penalty u/s 182 for failure to comply with
notice u/s 114(4)).

Application for Refund of tax paid in excess:

a- Application u/s 170 (for refund of excess tax paid).

b- Order u/s 170 (4) (Order to grant / refuse refund of tax paid in excess on
application).

Appeals / Notices / related Correspondence

1- An appeal shall be field when any person is dissatisfied with any Order passed by the
Commissioner, DCIR OR any other Officer u/s 120, 121, 143, 144, 162, 170, 182,
2065 or 161 of the Income Tax ordinances 2001.
2- After issuing Order under the above-mentioned Notices of the income tax
ordinance, 2001, by the Commissioner, Deputy Commissioner Inland Revenue
(DCIR), an application shall be filed Online u/s 127 of the income tax Ordinance
2001, along with supporting evidences to defend the case, to Commissioner
(Appeals) within 30 days of issuing Order Notice u/s 122(1)/122 (4).
3- An application for stay of grant for imposing tax / recovery of tax, Commissioner
(appeals) may grant stay for 30 days after providing an opportunity of being heard to
the taxpayer.