Taxation Management

for
BS Business Studies
[BSAT, BSAF, BS Commerce & BS E-Commerce]
By
Dr. Muhammad Akram
Associate Professor HCC
 Scope of Income Tax Laws
1. Territorial limits to which Income Tax Laws applies
2. The Components f Income Tax Laws in Pakistan
1. Territorial limits to which Income Tax Laws applies
a. Provinces of Baluchistan, KPK, Punjab & Sindh
b. Federal Capital
c. States and territories as may be included in Pakistan,
whether by accession or otherwise
2. The Components f Income Tax Laws in Pakistan
a. Income Tax Ordinance 2001 (as amended)
b. Rules framed by Board
c. Notifications, Circulars and Orders
d. Income Tax Case Law
e. Finance Acts or Ordinances
a. Income Tax Ordinance 2001 (as amended)
a. Basic Constituent of Tax Law in Pakistan
b. Whole taxation structure is build on it
c. Procedure of Taxation has been provided in it [payment of tax,
collection of tax, penalties, assessment, refund, appeals etc]
d. Consists of 13 chapters
e. Each chapter deals in particular topic and further divided
into parts
f. Total sections are 242
g. Also consists of 14 schedules
h. Changes are made through finance act or finance
ordinance every year.
b. Income Tax Rules
a. Framed by FBR for guidance of personnel & taxpayers
b. Section 237 of Income Tax Ordinance 2001 empowers FBR
for this task
c. Examples of rules are [rates of depreciation, registration of firms,
submission of returns, forms of appeals]
d. Latest Rules issued were “Income Tax Rules 2002”
c. Notifications, Circulars & Orders
a. Issued by FBR & Govt for guidance of personnel & for
modification in tax law [exempt income or any other change]
b. Section 53 of Income Tax Ordinance 2001 empowers Govt
for this task
c. Govt must place all such changes before National
Assembly for approval
d. Income Tax Case Law
a. Decisions of courts provide correct interpretation of tax
laws
b. Such decisions of tax case laws are component of tax laws
c. Thousands of cases, regarding the interpretation of tax
laws and the definitions of terms, used in the Ordinance,
have been decided by the courts.
e. Finance Acts or Ordinances
a. Annual Law for budgetary or social requirements
b. Usually prescribes, the maximum income not taxable,
rates of tax for next year, principles of taxations,
computation of tax,.
c. Changes in Income tax Ordinance 2001 are brought
through this legislation.
d. Difference in Act and Ordinance
 Definitions
Necessity of tax terms
Section 2 of Income Tax Ordinance 2001

Active Taxpayers List (ATL)

 What it is?
 How online filing status is verified?
 What are the consequences of filing status other
than “Active”
 How Filing Status “Inactive” can be changed to
“Active”
Appellate Tribunal [Inland Revenue]
What it is?
Inland Revenue means
Point of Fact
Point of Law
Composition
Approved Gratuity Fund
Approved Employment Pension Scheme
Approved Superannuation Fund
What they are?
Approved means?
Consequences of unapproved
You to tell your boss, the benefits of approved
 Benefit of Funds Recognition
WHEN RECOGNIZED BY THE TAX AUTHORITIES WHEN NOT RECOGNIZED BY AUTHORITIES
Gross Profit 100 Gross Profit 100
Total expenses Total expenses
(excluding contribution to FBR approved funds) 40 (excluding contribution to) 40

Contribution to FBR approved funds 10 Contribution to FBR unapproved funds 10 ----

Net Profit for Tax Purposes 50 Net Profit for Tax Purposes 60
Income Tax @ 30% = 1.5 Million Rupees Income Tax @ 30 %= 1.8 Million Rupees
Excess Tax Burden in case of non-recognition = ????
Assessment
Association of Persons
First to learn the term “Person”
Person
Under Income Tax Ordinance 2001, Section 2(42) and 80, a person
includes the following

1. An individual
2. A company
3. An Association of Person,
4. The Federal Government, a foreign government, a political sub division of a
foreign government, or a public international organization.
Trace the category of person
1. National Bank of Pakistan
2. Fauji Fertilizer Company-FFC
3. University of Okara
4. WASA
5. PTA
6. Punjab Revenue Authority
7. National Highway Authority
8. FBR
9. Akhuwat Foundation
10. Indus Hospital
11. Mr/Miss CR
12. Uzair and Fahad Chartered Accountants Firm.
Association of Person (AoP)
Association of Person includes a
1. Firm
2. Hindu Undivided Family (HUF)
3. Any body of persons formed under a foreign law
4. Any artificial judicial person, however it does not include a company
Agricultural Income
Why the agricultural income definition to study
Conditions for agricultural income
1. Derived from land
2. Land is situated in Pakistan
3. Human effort is necessary to generate this income
Types of agricultural income
1. Rent or Revenue
2. Income derived from such land by agriculture
3. Income from such land by the performance of a process to product fit for
market
4. Income from sale of produce
5. Income from an building required for agricultural purposes
Examples
Partly Agricultural income
• Board
• Company
• Filer
• Foreign Source Income
• Pakistan Source Income
• KIBOR – Karachi Interbank Offered Rate
• IRIS - Integrated Resource Information System
• Principal Officer
• Public Company
• Speculation Business
• Tax
• Taxable Income
• Taxpayer
• Whistle Blower
• Likewise applied definitions
 Difference between
Total Income & Taxable Income
Head Total Income Exempt Taxable
Income
Basic salary 400,000 -- 400,000

Conveyance allowance 100,000 -- 100,000

Medical Allowance 120,000 40000 80000

Agricultural income 500,000 500,000 0

11,20,000 580,000
Tax Year
Tax year is a period of time for which tax is to be calculated regrading
a person (quote example)

The tax year may be of three types

1. Normal Tax Year
It is a period of twelve months ending on 30th June and is known by the
Calendar Year in which the ending date falls.
2. Special Tax Year
In case of any person or class of persons, the Board may specify a period of
twelve months as Tax Year
3. Transitional Tax Year
Fractional period arises as a result of change over i.e. (from normal tax year
to special or vice versa)
Total Income / Sources of Income
• Income from Salary (Section 12)
• Income from Property (Section 15)
• Income from Business (Section 18)
• Income from Capital Gains (Section 37)
• Income from other sources (Section 39)
Resident and Non-Resident
It must be noted

• Dwelling place or nationality immaterial, term only for tax purposes

• Resident and Non-Resident status associated with a particular period
• Period of Stay matters, purpose of stay is immaterial
• Federal Govt is treated as Resident
Resident Individual
An individual will be a resident in Pakistan in any tax year if fulfils
any one of the following conditions

1. Period(s) of stay in Pakistan amounting, in all, to 183 days or more

2. Employee of Government, but posted abroad
3. A citizen of Pakistan who is
• not present in any other country for more than 182 days in year, or
• Who is not a resident tax payer of any other country.
Resident Company
A Company will be a resident in Pakistan in any tax year if fulfils any
one of the following conditions

1. Incorporation under any law of Pakistan

2. Management and control of the company is situated wholly in Pakistan at
any time in the year,
3. It is a provincial Govt.
Resident AoP
An AoP will be a resident in Pakistan in any tax year if fulfils following
condition

1. Management and control of the AoP is situated partially in Pakistan at any

time in the year,
Reasons for making difference

1. Incidence of Tax
2. Rates of Tax
 Chapter 02

EXEMPTIONS
 Exemptions
1. Agricultural Income
2. Pensions
3. Encashment of leave preparatory to retirement
4. Amount of gratuity or commutation of pension
5. Special allowances
6. Perquisites received by employee
7. Medical and hospital charges
8. Medical allowance
9. Woman Enterprise
Amount of Gratuity or commutation of pension

Approval Status Tax Treatment

Approved by Commissioner Inland Revenue Full amount of Gratuity is Exempt

Approved by the Board Exempt up to Rs 300,000

Unapproved Gratuity a) 50% of the amount received OR

b) Rs 75,000
Whichever is less, will be exempt
 Taxation of Medical Allowance
Demonstration Rs.
Basic Salary of Mr. Ali Rs. 12,00,000
Medical Allowance Rs. 150,000 per annum
Calculate taxable income
Solution
Basic Salary [totally taxable] 12,00,000
Medical Allowance [exempt up 10% of BS] = Rs. 150,000
Exempt Portion: [12,00,000x10%] = 120,000
30,000
Taxable income 12,30,000